Document of The World Bank Report No.: 43357 PROJECT PERFORMANCE ASSESSMENT REPORT COLOMBIA STRUCTURAL FISCAL ADJUSTMENT PROJECT (TF-26673; FSLT-70920) FIRST PROGRAMMATIC FISCAL AND INSTITUTIONAL ADJUSTMENT LOAN (LOAN NO. 7163-CO) SECOND PROGRAMMATIC FISCAL AND INSTITUTIONAL STRUCTURAL ADJUSTMENT LOAN (LOAN NO. 72010-CO) THIRD PROGRAMMATIC FISCAL AND INSTITUTIONAL STRUCTURAL ADJUSTMENT LOAN (TF-53133; FSLT-72800) April 22,2008 Country Evaluation and Regional Relations Independent Evaluation Group (World Bank) Currency Equivalents (annual averages) Currency Unit = Pesos (COP) 1996 US$1.oo 1,036.69 1997 US$1.oo 1,140.96 1998 US$1.oo 1,426.04 1999 US$1.oo 1,756.23 2000 US$1.oo 2,087.90 200 1 US$1.oo 2,299.63 2002 US$1.oo 2,504.24 2003 US$1.oo 2,877.65 2004 US$1.oo 2,628.61 2005 US$l.OO 2,320.83 2006 US$1.oo 2,361.14 Abbreviations and Acronyms CAS Country Assistance Strategy FIAL Programmatic Fiscal and Institutional Adjustment Loan GDP Gross Domestic Product ICR ImplementationCompletion Report IDB Inter-AmericanDevelopment Bank IEG Independent Evaluation Group (Formerly OED) IEGWB Independent Evaluation Group (World Bank) IMF InternationalMonetary Fund ISS Institute o f Social Security PPAR Project Performance Assessment Report RUT Registro Unico Fiscal SFAL Structural Fiscal Adjustment Program VAT Value Added Tax Fiscal Year Government: January 1 - December 3 1 Director-General, Independent Evaluation : Mr. Vinod Thomas Director, IEGWB : Ms. Cheryl Gray Senior Manager, IEGCR : Mr. Ali M. Khadr Task Manager, IEGCR : Ms. Helena Tang 1 1 IEGWB Mission: Enhancing development effectiveness through excellence and independence in evaluation. I About this Report The Independent Evaluation Group assesses the programs and activities of the World Bank for two purposes: first, to ensure the integrity of the Bank's self-evaluationprocess and to verify that the Banks work is producing the expected results, and second, to help develop improved directions, policies, and proceduresthrough the disseminationof lessons drawn from experience. As part of this work, IEGWB annually assesses about 25 percent of the Banks lending operations through field work. In selecting operations for assessment, preference is given to those that are innovative, large, or complex; those that are relevant to upcoming studies or country evaluations;those for which Executive Directors or Bank management have requested assessments; and those that are likely to generate important lessons. To prepare a Project Performance Assessment Report (PPAR), IEGWB staff examine project files and other documents, interview operational staff, visit the borrowing country to discuss the operation with the government, and other in-country stakeholders, and interview Bank staff and other donor agency staff both at headquarters and in local offices as appropriate. Each PPAR is subject to internal IEGWB peer review, Panel review, and management approval. Once cleared internally, the PPAR is commented on by the responsible Bank department. IEGWB incorporates the comments as relevant. The completed PPAR is then sent to the borrower for review; the borrowers' comments are attached to the document that is sent to the Bank's Board of Executive Directors. Afler an assessment report has been sent to the Board, it is disclosed to the public. About the IEGWB Rating System IEGWBs use of multiple evaluation methods offers both rigor and a necessary level of flexibility to adapt to lending instrument, project design, or sectoral approach. IEGWB evaluators all apply the same basic method to arrive at their project ratings. Following is the definition and rating scale used for each evaluation criterion (additional information is available on the IEGWB website: http://worldbank.org/ieg). Outcome: The extent to which the operation's major relevant objectives were achieved, or are expected to be achieved, efficiently. The rating has three dimensions: relevance, efficacy, and efficiency. Relevance includes relevance of objectives and relevance of design. Relevance of objectives is the extent to which the project's objectives are consistent with the country's current development priorities and with current Bank country and sectoral assistance strategies and corporate goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sector Strategy Papers, Operational Policies). Relevance of design is the extent to which the project's design is consistent with the stated objectives. Efficacy is the extent to which the project's objectives were achieved, or are expected to be achieved, taking into account their relative importance. Efficiency is the extent to which the project achieved, or is expected to achieve, a return higher than the opportunity cost of capital and benefits at least cost compared to alternatives. The efficiency dimension generally is not applied to adjustment operations. Possible ratings for Outcome: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Risk to Development Outcome: The risk, at the time of evaluation, that development outcomes (or expected outcomes) will not be maintained (or realized). Possible ratings for Risk to Development Outcome: High Significant, Moderate, Negligible to Low, Not Evaluable. Bank Performance: The extent to which services provided by the Bank ensured quality at entry of the operation and supported effective implementation through appropriate supervision (including ensuring adequate transition arrangements for regular operation of supported activities afler loanlcredit closing, toward the achievement of development outcomes. The rating has two dimensions: quality at entry and quality of supervision. Possible ratings for Bank Performance: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Borrower Performance: The extent to which the borrower (including the government and implementing agency or agencies) ensured quality of preparation and implementation, and complied with covenants and agreements, toward the achievement of development outcomes. The rating has two dimensions: government performance and implementing agency(ies) performance. Possible ratings for Borrower Performance: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. ... 111 Contents PRINCIPAL RATINGS .................................................................................................................... V KEY STAFF RESPONSIBLE ............................................ .......................................................... ..VI1 PREFACE ............................................ ....IX ............................................................ ........................... SUMMARY ..................................................................................................................................... XI INTRODUCTION ............................................................................................................................. 1 1. THE ECONOMIC BACKGROUND OF THE FISCAL OPERATIONS ...............................3 A. The Economic Environment ............................................................................... 3 B. Relations with the IMF.................................................................................... .....6 C. The Main Issues ............................................................................... .................... 7 2. THE STRUCTURAL FISCAL ADJUSTMENT LOAN ........................................................ 9 A. The Loan............................................................................................................... 9 B. Objectives............................................................................................................. 9 C. Components.................................. ..................................................................... 10 D. Assessment of the Operation........................................................................... 17 E. Comparison with Ratings of ICR and ICR Reviews .................................... ...19 3. THE PROGRAMMATIC FISCAL AND INSTITUTIONAL ADJUSTMENT LOAN PROGRAM .................................................................................................................................... 21 A. The Program and its Objectives....................................................................... 21 B. Revenue Rigidities and Tax Reform ............................................... .................22 C. Public Administration........................................................................................ 26 D. Overall FlAL Rating ........................................................................................... 32 E. FlAL Rating by Loan .......................................................................................... 34 4. THE COMBINED OUTCOMES OF THE FISCAL OPERATIONS AND THEIR RISK TO DEVELOPMENT OUTCOMES ...................................................................................................... 37 A. Overall Risks ...................................................................................................... 38 B. The Risks of the Non-financial Public Sector Balances ............... ..........,......39 C. Central Administration Risks: Taxes and Expenditures ............ ................... 41 D. The Risks of Debt and Interest Expenditures................................................. 41 iv E. ...................................... 43 Fiscal Commitment, Public Debt and Overall Risks F. Summary and Overall Rating of the Combined Fiscal Operations .............. 44 5. LESSONS......................................................................................................................... 47 STATISTICAL ANNEX .................................................................................................................. 49 ANNEX A. BASIC DATA SHEET ................................................................................................. 53 ANNEX B. LIST OF PERSONS MET .......................................................................................... 59 Tables Table 1. Change in the Balance of the Non-Financial Public Sector, 2001-2002 (percent of GDP) ............10 Table 2. Summary of Ratings for the SFAL by Component ............................................................................................ 17 Table 3. Summary of Ratings for the SFAL Program ............... ...................... 19 Table 4. Summary of Ratings for the Components of the FlAL Program ........................................................................ 31 Table 5. FlAL Rating by Loan ............ Table 6. Sources of Improvement in the Non-Financial Public Sector Fiscal Position 2001-2005.................................. 40 Table 7. Fiscal Balances .. .... .............. .......49 Table 8. Operations of the Central Government.............................................................................................................. 50 Table 9. Operations of the Central Administration............ ......... ......51 Figures Figure 1. Balance of Paymen Figure 2. GDP In Real Term Figure 3. Exchange Rates ... Figure 4. Fiscal Balances of Figure 5. Rate of Growth of GDP minus 2.5% ............................................................................... ...................... 13 Figure 6. Tax Revenues, pe Figure 7. Key Fiscal Trends ............................................................................................................................................. 38 Figure 8. Terms of trade adjustment % of GDP ... .39 Figure 9. Gross Capital Formation % of GDP ................................................................................................................. 40 Figure 10. Central Administration: Comparative Trends .... ........ 41 Figure 11, Debt of the Non-Financial Public Sector, % of GDP ...................................................................................... 42 Figure 12. Central National Government: External And Internal Debt...... ..............,42 Figure 13. Central Administration Interest Payments ...................................................................................................... 43 V Principal Ratings ICR* ICR Review* PPAR Structural Fiscal Adjustment Project Outcome Satisfactory Moderately Satisfactory Moderately Unsatisfactory Institutional Modest Modest Development Impact" Sustainability Likely Non-evaluable I Risk to Development Outcome -- High Bank Performance Satisfactory Satisfactory Moderately Unsatisfactory Borrower Performance Satisfactory Satisfactory Moderately Unsatisfactory ICR* ICR Review* PPA R*** First Programmatic Fiscal And Institutional Adjustment Loan Outcome Satisfactory Moderately Satisfactory Moderately Unsatisfactory Institutional -_- Substantial Modest Development Impact** Sustainability Likely Likely Risk to Development Outcome _- -_ High Bank Performance Satisfactory Satisfactory Moderately Unsatisfactory Borrower performance Satisfactory Satisfactory Moderately Unsatisfactory ICR* ICR Review* PPAR*** Second Programmatic Fiscal And Institutional Adjustment Loan Outcome Satisfactory Moderately Satisfactory Moderately Unsatisfactory Institutional Modest Modest Development Impact" Sustainability Likely Likely Risk to Development Outcome -- -- High Bank Performance Satisfactory Satisfactory Moderately Unsatisfactory Borrower performance Satisfactory Satisfactory Moderately Unsatisfactory vi lCR* ICR Review* PPA R*** Third Programmatic Fiscal And Institutional Adjustment Loan Outcome Satisfactory Moderately Unsatisfactory Moderately Unsatisfactory Institutional Substantial Modest Development Impact** Sustainability Likely Likely Risk to Development Outcome I - High Bank Performance Satisfactory Unsatisfactory Moderately Unsatisfactory Borrower Performance Satisfactory Unsatisfactory Moderately Unsatisfactory * The Implementation Completion Report (ICR) is a self-evaluation by the responsible Bank department. The ICR Review is an intermediate IEGWB product that seeks to independently verify the findings of the ICR. "As of July 1,2006, Institutional Development Impact is assessed as part of the Outcome rating. "*As of July 1, 2006, Sustainability has been replaced by Risk to Development Outcome. As the scales are different, the ratings are not directly comparable. vii Key Staff Responsible Project Task Manager/Leader Sector Manager/ Country Director Sector Director Structural Fiscal Adjustment Project Vicente Fretes-Cibils and Mauricio Carrizosa Olivier La Fourcade Marcelo Guigale Completion David M. Gould Ernest0 May Isabel M. Guerrero ~ First Programmatic Fiscal And Institutional Adjustment Loan Appraisal Fernando Rojas Ronald Myers Isabel M. Guerrero Completion Fernando Rojas Ronald Myers Isabel M. Guerrero Second Programmatic Fiscal And Institutional Adjustment Loan Appraisal Mario Sangines Ronald E. Myers Isabel M. Guerrero Completion Mario Sangines Ronald E. Myers Isabel M. Guerrero Third Programmatic Fiscal And Institutional Adjustment Loan Appraisal Mario Sangines Ronald E. Myers Isabel M. Guerrero Completion Mario Sangines Ronald E. Myers Isabel M. Guerrero ix Preface This i s the Project Performance Assessment Report (PPAR) for four structural adjustment lending operations to Colombia from 2001 to 2005: The Structural Fiscal Adjustment Loan (P073572, TF-26673; FSLT-70920) was approved December 18,2001 for $US400 million equivalent. The first tranche amounting to $US160 million was released December 20,2001 and the second tranche o f $US180 million equivalent was released October 18,2002, almost seven months from the planned March 3 1,2002 release date. The third tranche o f $US60 million equivalent was finally released on February 11, 2003 and the project closed on February 2 1,2003 with a delay o f two months. The First Programmatic Fiscal and InstitutionalAdjustment Loan (PO8083 1; L/C 7163-CO) was approved on March 18,2003 and released on March 20,2003 in the amount o f $US300 million. The loan was closed on April 30,2003. The Second Programmatic Fiscal and InstitutionalAdjustment Loan (P083905; L/C 72010) in the amount o f $US150 million was approved on November 20, 2003 and became effective on November 24,2003. The loan closed on the original date o f February 25,2004 and was fully disbursed. The Third ProgrammaticFiscal and InstitutionalAdjustment Loan (P084762; TF-53133; FSLT-72800) was approved March 22,2005 and became effective on April 26,2005. The loan was fblly disbursed amounting to $US 100 million and closed based on the original date o f June 30,2005. This PPAR i s based on relevant Bank and Fund documents and on interviews with Bank staff. An Independent Evaluation Group (IEG) mission visited Colombia in October 2006 to discuss performance with officials who implementedthe projects, representative donors, and staff o f the Bank resident mission. Their cooperation and assistance in preparing the report i s gratefully acknowledged. Comments from the Bank’s Regional Management have been incorporated in the report. The draft PPAR was sent to the Government o f Colombia for comments following standard IEG procedures but no comments were received. This report was prepared by Mr. Manuel Hinds (consultant), under the supervision o f Ms. Helena Tang (Task Manager). Mr. Roderick de Asis provided administrative support. xi Summary 1 . Attached i s the Project Performance Assessment Report (PPAR) on four loans to the Republic o f Colombia: the Structural Fiscal Loan (SFAL) for US$400 and a programmatic series o f three loans pertaining to the Fiscal Adjustment Loan (FIAL) Program, which was intended to add up to US$900 million in four loans but eventually added up to US$550 million in three loans. The four operations were part o f the Bank effort to help the Republic o f Colombia to attain fiscal sustainability inthe long term. It i s for this reason that they are reviewed in the same report. 2. The Colombian fiscal situation deteriorated sharply during the mid-1990s after having been managed reasonably well for several decades. As the fiscal deficit increased to levels o f over 3 percent o f GDP, the total gross stock o f public debt reached 50 percent o f Gross Domestic Product (GDP) by 2000, almost double the level in the early 1990s. A financial sector crisis then forced the government to issue more debt to re-capitalize the ailing financial institutions. Inthose years, it seemed that the country was on an unsustainable fiscal path. 3. In 1999, the then incoming Pastrana administration formulated a three-year stabilization program, supported by the IMF, and requested that the Bank take the lead in identifying and supporting the implementation o f key structural reforms to help bring Colombia’s fiscal accounts onto a sustainable path in the medium- and long-term. The Bank responded with the Structural Fiscal Adjustment Loan (SFAL). 4. The fiscal situation did not improve during the implementation o f the SFAL. When the Uribe Administration took power in 2002, it devised a new program to deal with the fiscal problems and requested help from the Bank. This led to the design o f the FIAL programmatic series. According to the program document presented to the Board o f Directors in February 2003, “the series would support short- and medium-termreforms with twofold objectives: first, to help attain the substantial fiscal adjustment required to ensure macroeconomic stability and ease the significant fiscal rigidities that make the implementation o f public policy extremely difficult; and second, to improve the provision o f public services and establish the institutional basis for higher efficiency and accountability in public expenditures”. The series was planned as four single-tranche loans, amounting to about US$900 million in total. Decisions about whether and when the subsequent loans would go forward depended on the progress o f the reform program. The Government cancelled the fourth FIAL before it was designed. 5. The performance o f the Colombian economy improved drastically almost as soon as the first FIAL was approved, largely because the country experienced a significantly positive turn in the terms o f trade (mainly through the increase in oil prices). The improved overall economic performance o f the country had a favorable impact on the fiscal situation through several channels-including the increase in the royalties received by the government from i t s oil exploitation facilities; the buoyancy o f the tax system, which tended to collect more with the same effort in good times than in bad times; and the reduction o f the burden o f the dollar- denominated debt that resulted from the appreciation o f the peso which accompanied the improvement in the terms o f trade. 6. The crucial question when evaluatingthe performance o f the fiscal operations in Colombia is whether (and to what extent) the fiscal condition o f the country improved xii independently o f the improved overall economic performance o f the country. Stated in another way, the question i s whether a reversal o f the exogenous conditions since the early 2000s would not have resulted in a fiscal crisis similar to the one which prompted the design o f the fiscal operations. These questions cannot be answered in a definitive way. Yet, it is possible to look at the different aspects o f fiscal performance to ascertain whether they are likely to be sustainable if the exogenous variables that influence the Colombian economy so deeply were to deteriorate. 7. The first objective o f the operation which was to help the borrower improve the underlying fiscal situation-was not accomplished. Although the deficit o f the combined public sector went down fiom 3.2 percent in 2001 to 1.5 percent in 2006, most, if not all, o f this improvement can be traced directly to the improved terms o f trade condition, particularly to the increased income that the government received from the state-owned oil company (Ecopetrol). The underlying fiscal deficit situation did not improve since the beginning o f the Bank-Support operations. The reduction o f expenditure rigidities that negatively affect the fiscal system was not accomplished, either. In fact, the rigidity in the expenditure structure worsened during the implementation o f the loans-in part as a result o f measures that were taken under the loans. 8. The second objective o f the operation was to help the borrower improve the provision o f public services and establishing the institutional basis for higher efficiency and accountability inpublic expenditures. Some satisfactory results were achieved, but the overall outcomes were mixed. 9. The ratings presented in the report are lower than those in the I C R Review for earlier outcomes, and Bank and borrower performance. The ICRs rated the three areas o f all the operations satisfactory. This PPAR considers that it would not be appropriate to rate as satisfactory a series o f operations that failed to meet its main objectives and, in some cases, established conditions that contradicted the achievement o f objectives. For the SFAL and the FIAL series, this PPAR rates all the three dimensions moderately unsatisfactory. 10. The main lessons learned from this review are: First, as noted in IEG’s I C R Review o f FIAL 1 11, project design needs to be clearly aligned with its development objectives i norder to attain the latter. Even if the structural deficit o f the central administration i s “highly sensitive and political” as the I C R states, the magnitudes o f these structural rigidities were such that they must be addressed if progress is to be made in achieving the substantialfiscal adjustment that i s required for sustained macroeconomic stability. Second, loans with large numbers o f objectives and conditions, and involving too many institutions relative to the management capacity o f the Government and the Bank itself, overtax the implementation capacity o f both the Bank and the borrower and result in poor execution. Third, the inclusion o f objectives o f widely different levels o f priority and weak connection with the ultimate goals o f the operations tends to obscure the degree o f attainment o f the latter. Fourth, success depends on the borrower’s ownership o f the objectives o f the loan. Cheryl W. Gray Acting Director-General Evaluation 1 Introduction 1 1. This i s the Project Performance Assessment Report (PPAR) o f four loans extended t o Colombia t o help the government improve i t s fiscal performance and i t s institutional efficiency: the Structural Fiscal Adjustment Program (SFAL), and a series o f three loans called the Programmatic Fiscal and Institutional Adjustment Loans, I to I11 (FIALS). Although the SFAL was an independent operation, it served as a stepping- stone for the design o f the more ambitious program that framed the FIAL series. For this reason, this report evaluates the outcomes o f three processes: the SFAL, the F I A L s and the fiscal operations as a whole. 12. Both the SFAL and the FIAL program loans were extremely complex operations, with multiple and quite disparate objectives. These objectives differed in terms o f their subject matter, the institutions involved, and their relative importance. Moreover, the conditions o f these loans spread to several administratively unconnected institutions, and were drafted in many cases in a highly legalistic fashion that created chains o f events passing from one loan to the next. For example, sequential operations included conditions that entailed, variously, the preparation, the presentation to Congress, the approval by Congress, and the regulation o f different laws. In some instances, these chains were interrupted by the failure o f Congress t o do what the program intended it t o do, which prompted the re-definition o f conditions in several areas for the FIAL operating at the time and those following it. Eventually, the government decided that the problem o f defining and redefining these multiple objectives, and the burden o f tracking them through scores o f institutions, was too taxing for the expected benefits and cancelled the fourth FIAL before it was designed. 13. The complexity o f the loans poses a problem for their evaluation, too. This may become too mechanical and disjointed if it focuses too closely o n the disperse conditions o f the loans, to the point o f becoming almost unreadable in the discussion o f the laws (identified with numbers) that should have been drafted, proposed, approved or regulated in each o f the versions o f the FIALs. T o address this problem, this PPAR takes a more general view: (a) looking at the F I A L s as one single operation; and (b) focusing o n the general objectives o f the operations and evaluating the degree to which they were attained and the extent o f the Bank’s contribution t o such attainment. Since each o f the FIALs contained two components, 10 sub-components and 4 to 5 activities per sub- component, tracking them would entail reviewing 30 sub-components and 150 activities for these loans. O f course, the discussion cannot obviate the details o f the operations, but the emphasis i s on the forest, not the trees; o n the overall path, not o n each o f its stations. A detailed description o f the operations and a chronicle o f the evolution o f each o f their components, sub-components and conditions i s contained in the loans’ ICRs. The IEG mission found this description satisfactory. 14. All the issues directly related with the attainment o f the ultimate objective o f the operations-improving fiscal performance-are discussed in one chapter (chapter 4). These issues are the outcomes o f public debt management in the SFAL as well as the overall fiscal commitment in the FIAL loans, and the macroeconomic framework in both the SFAL and the FIAL loans. 2 15. Accordingly, the report contains five chapters and one statistical annex. Chapter 1 summarizes the economic background o f the fiscal operations, from the approval o f the SFAL to late 2006, one year after the closure o f the FIAL series. Chapters 2 and 3 discuss the SFAL and the FIAL series in detail. Chapter 4 deals with the fundamental objective o f the fiscal operations as a whole: improving fiscal performance. Chapter 5 discusses the lessons that can be extracted from these operations. 16. Note on ratings. This report rates highly unsatisfactory those components or activities that had outcomes that directly contradicted the objectives o f the rated loans, by outcome or by design. For example, it rates highly unsatisfactory the outcome o f a component o f the SFAL which aimed at reducing current and general expenditures by 4 and 19 percent, respectively, in real terms, but resulted instead in an increase in those expenditures by 4 and 16 percent, respectively, also in real terms. Also, the report rates highly unsatisfactory the components that aimed at attaining goals that contradicted the objectives o f the loans. These included two components, one in the SFAL and one in the FIALs, which increased the rigidity o f the fiscal system by design, although reducing such rigidity was one o f the main objectives o f the loans. Another example is the structural reform o f taxes, which actually increased the distortions that the loans had aimed at ameliorating. The report rates unsatisfactory those components that did not meet their objectives but did not contradict the objectives o f the loan in their design or their outcomes. 1. The Economic Background o f the Fiscal Operations A. The Economic Environment 1.1 The Colombian fiscal situation deteriorated sharply during the mid-1990s after having been managed reasonably well for several decades. During the 1990s, central government expenditures grew from 9.3 to 20.1 percent o f Gross Domestic Product (GDP) while revenues increased much less, from 11.0 to 13.3 percent o f GDP, notwithstanding at least eight tax reforms that the government enacted during the period. As a result, total gross stock o f public debt reached 50 percent o f GDP by 2000, almost double the level in the early 1990s. The situation worsened with the recession that unfolded in 1998-99, which resulted in the first contraction o f real GDP in over seventy years (real GDP f e l l by 3.7 percent in 1999 and remained below i t s 1998 level until 2001). A financial sector crisis exploded at that time which, though mainly affecting the state-owned banks, forced the government to issue more debt to re-capitalize the ailing institutions. In those years, it seemed that the country was on an unsustainable fiscal path. 1.2 In 1999, the then incoming Pastrana administration formulated a three-year stabilization program and requested support from the Bank to deal with the financial crisis (the program was also supported by an IMF Extended Fund Facility (EFF). The Bank responded with the Financial Sector Adjustment Loan (EUR 482 million) approved in November 1999. In 2000, the government requested that the Bank take the lead in identifying and supporting the implementation o f key structural reforms to: (a) complement the stabilization effort under the IMF program; and (b) help bring Colombia’s fiscal accounts onto a sustainable path in the medium- and long-term. The Bank responded with the Structural Fiscal Adjustment Loan (SFAL). 1.3 The downturn had revealed critical structural weaknesses in the government accounts-notably, the encroachment o f entitlements in favor o f politically powerful sectors, unbridled sub-national spending, the deterioration in quantity and quality o f social services, and the substitution o f current for capital expenditures. The SFAL focused its objectives and conditionality on these issues. 1.4 As discussed in more detail in chapter 2, the fiscal situation did not improve during the implementation o f the SFAL. The fiscal deficit actually increased substantially, from 3.5 percent to 4.2 percent o f GDP. Also, the substitution o f current for capital expenditures continued unabated4urrent expenditures expanded by one percent o f GDP while capital expenditures declined by 0.6 percent o f GDP. Moreover, the transfers to local governments remained a crucial problem, the pension liabilities remained a heavy burden on the government, and the efficiency o f social security did not improve. 1.5 As the fiscal situation deteriorated during the implementation o f the SFAL, fiscal issues became more central to the government’s and the Bank’s programs. The 2002 Country Assistance Strategy (CAS) included macro-fiscal adjustment as one o f the activities that needed to be carried out to meet one o f the main CAS objectives- 4 achieving fast and sustainable growth. The CAS listed actions o n three fronts as a means t o attain this objective: a major reduction in the size o f the state, a “growth-friendly” tax reform, and better debt management. I t was in this context that the opportunity t o design and implement a programmatic series o f loans presented itself. 1.6 The Uribe Administration, which took power in 2002, devised a new program to deal with the fiscal problems and requested help from the Bank. This led t o the design o f the FIAL programmatic series o f loans. According to the program document presented t o the Board o f Directors in February 2003, “the series would support short- and medium- term reforms with two-fold objectives: first, to help attain the substantial fiscal adjustment required to ensure macroeconomic stability and ease the significant fiscal rigidities that make the implementation o f public policy extremely difficult; and second, to improve the provision o f public services and establish the institutional basis for higher efficiency and accountability in public expenditure. The program would consist o f four single-tranche loans, adding to a notional amount o f US$900 m i l l i o n in total. Decisions about whether and when the subsequent loans would go forward will depend o n the progress o f the reform program.” 1.7 The performance o f the Colombian economy improved drastically almost as soon as the F I A L s were approved, mainly because several o f the exogenous factors that had deteriorated during the crisis turned around and improved remarkably after 2002. These exogenous factors were the following. The international prices o f commodities, which had declined rapidly in the late 1990s and early 2000s, improved rapidly after 2002, leading to a rapid increase in exports, particularly o f oil. The international crisis o f 1997-98 eventually faded away, reversing the dramatic fall in capital inflows that had taken place in the previous years. A s the current account improved and capital inflows returned to positive values, the peso appreciated in real and nominal terms, reducing the burden o f the external debt denominated in dollars. 1.8 Figure 1 shows the behavior o f the balance o f payments before, during, and after the crisis. As i s clear in the figure, the country was forced to adjust from 1996 to 1999 to a dramatic fall in capital inflows which was equivalent to about 8 percent o f GDP. The adjustment had to be done through a compression o f the current account o f almost the same magnitude. This, however, was not sufficient, so that in 1998 and 1999 Colombia experienced overall balance o f payments deficits, which led to losses in international reserves. This situation improved in the most recent years, as the prices o f commodities (including oil) went up, and as capital inflows resumed, allowing Colombia to widen its current account deficits again. The combination o f the current account deficits and the capital inflows has been such that it has allowed Colombia to run balance o f payments surpluses, which in turn led to a rapid increase in international reserves. 5 Figure 1. Balance of Payments Balance of payments 46 of GDP , 6% 4% n 2% ; - - C N R R E N T ACCOUNT, N.I.E. -OVERALL BALANCE -8- CAPITAL ACCOUNl d 0% -2% 4% -6% Source: International Financial Statistics, IMF. 1.9 Figure 2 shows how the economy reacted to these external events. After having declined in 1999, real GDP grew rapidly inthe subsequent years, although by 2005 its level relative to 1997 still lagged behind that o f the average in Latin America and well behind comparable leading countries such as Mexico and Chile. Figure 2. GDP In Real Terms GDP in real terms = constant 2000 dollars, 1997 = 1 1.35 2 1.3 / 1.25 1.2 1.15 t C h l l e -Colombia *Latin America &Caribbean 1.1 -B-Mexico 1.05 1 I 0.95 0.9 4 I 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: World Development Indicators, Wodd Bank. 1.10 Figure 3 shows how the improvement in the balance o f payments also led to a rapid appreciation o f the currency that started in mid-2003. This in turn opened the space for domestic interest rates to fall, and reduced the burden o f the external debt. 6 Figure 3. Exchange Rates i 3,500 Exchange rates 1.4 - . 1.3 3,000 u H 1.2 5 8 h 2,500 1.1 8 J I E 3 e 2,000 1.0 (6 1 Fg U 0.9 B= -Pesos I$ c ; 1,500 1; +Real Effective Exchange Rate 0.8 m - 8 U $ g l’ooo 500 0.7 u 0.6 s 1 U 0.5 0 , , I I , I I I I I , , , , , , , , , , ,Lo., Source: International Financial Statistics, IMF. 1.11 The improved overall economic performance o f the country had a favorable impact on the fiscal situation through several channels-including the buoyancy o f the tax system, which tends to collect more with the same effort in good times than in bad times; the reduction o f the burden o f the debt; and lower domestic and international interest rates, which further reduced the debt service. B. Relations with the IMF 1.12 As noted before (see pp.1.2) the IMF supported the initial Pastrana 1999-2002 plan with an EFF inthe amount o f SDRl.957 billion (approximately US$2.7 billion). A Stand-By Arrangement (SBA) in the amount o f SDR 1.55 billion followed this operation for a period o f 24 months from December 2002. Then, the IMF approved a new precautionary SBA (not intended to be disbursed) in the amount o f SDR405 million. The country exited from formal Fund support at the end o f this arrangement. 1.13 Colombia experienced difficulties in meeting IMF conditions under the EFF as the fiscal situation kept on deteriorating up to the end o f 2002 (while the SFAL was in effect). Then, as the external economic conditions o f the country rapidly improved, Colombia was able to meet practically all the fiscal conditions o f the two SBAs that went from the end of 2002 to the end o f 2006. Figure 4 shows how the fiscal performance o f the broadest definition o f government (the combinedpublic sector) consistently equaled or exceeded I R F targets from 2003 onwards. T h i s was fully satisfactory from the point o f view o f the IMF. The figure, however, also shows that most o f the improvement was due to: (a) increased contributions o f Ecopetrol, the state-owned oil company, which experienced a boom inthose years as a result o f the high oil prices; and (b) limited implementation capacity o f the local and regional governments, which produced surpluses in these years. Without Ecopetrol, the 2006 deficit would have been 5.2 percent o f GDP, just a little lower than the 2001 deficit that motivated the operations; if the surpluses o f the local governments were excluded, the 2006 fiscal deficit was worse than that o f 200 1. 7 Figure 4. Fiscal Balances of Combined Public Sector, Targets and Actual Outcomes I I M F targets, actual and actual without exogenous incomes -1.0% -2.0% -7.0% - I -8.0% ’ 1 Source: Ministry of Finance; Banco de la Republica; and Fund staff estimates. C. The Main Issues 1.14 Notwithstanding IMF satisfaction with the fiscal outcomes from end-2002 t o end- 2006 (which is in line with the short-term nature o f IMF activities), the high reliance o f the fiscal outcomes on the profits o f Ecopetrol and the circumstantial surpluses produced by the local governments poses serious issues from the Bank’s long-term point o f view, as the purpose o f the reviewed operations was precisely t o improve the fiscal situation structurally. Without these two circumstantial events, the country would have had a deficit larger than that o f 2001. 1.15 The high contribution o f Ecopetrol’s profits to the reduction o f the combined public sector deficit raises particular concerns because they are likely to go down as the reserves o f the company will be depleted in the near future unless the company invests heavily in further exploration. The resources for such investment would have to come from those that have been going to reduce the fiscal deficit. Alternatively, as analyzed in a recent paper by the IMF, the country could classify the company as commercially run and remove it from the country’s financial indicators, targets and accounts. This, o f course, would increase the measurement o f the combined public sector deficit instantaneously. 1.16 These concerns are even more important because other exogenous factors also contributed to the improvement in the fiscal balance. As is very common for countries that depend o n commodities, all macroeconomic variables improve when their prices increase. For instance, fiscal collections go up as a result o f the economic boom 1 See The Fiscal Risk o f Public Enterprises: Analysis o f Isagen and Ecopetrol, in Colombia Selected Issues, November 2006, IMF Country Report No. 06/40 1. 8 generated by the high commodity prices, and the currency appreciates which reduces domestic interest rates and the burden o f the external debt. By the same token, a reversal in the behavior o f these exogenous variables would lead to increased difficulty in collecting taxes; to an increase in the burden o f the debt; and to higher interest rates, which would raise debt servicing needs. 1.17 Thus, the crucial question when evaluating the performance o f fiscal operations in Colombia i s whether (and to what extent) the fiscal condition o f the country has improved independently o f the improved overall economic performance o f the country and o f the windfall o i l price boom-as was clearly the overall objective o f the evaluated operations. In other words, the question is whether a reversal o f the exogenous conditions that have improved since the early 2000s would not result in a fiscal crisis similar to the one that prompted the design o f the fiscal operations. 1.18 These questions cannot be answered in a definitive way. Yet, it is possible t o look at the different aspects o f fiscal perfonnance to ascertain whether they are likely to be sustainable if the exogenous variables that influence the Colombian economy so deeply were to deteriorate. The next three chapters deal with this issue: chapters 2 and 3 review the implementation o f the fiscal loans, while chapter 4 examines the main changes in the fiscal situation o f the country that took place from 2001 t o 2005. 9 2. The Structural Fiscal Adjustment Loan 2.1 The 1999 Country Assistance Strategy Progress Report (CAS-PR) noted that the performance o f the Colombian economy had deteriorated sharply during the two years since the presentation o f the last full CAS, particularly in terms o f economic growth and fiscal stability. Controlling the fiscal deficit was very difficult because o f the substantial rigidities that existed in the fiscal system. Worst among them was the rigidity o f the transfers to local and regional governments, which were fixed as a percent o f fiscal revenues, reducing the government’s ability to save part o f those revenues. The sharp increase in the fiscal deficit that was taking place in those years was largely attributed to t h i s rigidity. The fiscal situation negatively affected the CAS objectives in two crucial dimensions. First, the fiscal deficits generated substantial instability, which in turn affected the economy’s ability to grow and allocate its resources efficiently. Second, the composition o f public expenditure was shifting, with current expenditures increasing while public sector investment was declining fast. As a result, restoring the fiscal balance was deemed crucial for the success o f Colombia’s efforts to recover growth and reduce poverty. This set the policy framework for the SFAL, which would help the Colombian government to reduce the fiscal deficit by reducing the rigidity o f the transfers to the local and regional governments, as well as by improving the financial management of some educational and social security institutions. A. TheLoan 2.2 The SFAL was a US$400 million fixed-spread loan, with a maturity o f 13.5 years. The loan was programmed for disbursements in three tranches over a 14-month period, with the disbursement o f each tranche being tied to the implementation o f the fiscal reform program. It was approved o n November 16,2001. The following subsections discuss the attainment o f each o f i t s components. B. Objectives 2.3 According to the Report and Recommendation o f the President, the SFAL “was the Bank’s response to the government’s demonstrated commitment to reaching an inflection point in Colombia’s fiscal accounts path, an essential first step toward achieving full fiscal sustainability, economic growth, and poverty reduction.” The program supported by the SFAL aimed at improving the country’s fiscal outlook by focusing on a core set o f policies. This policy package involved: Macroeconomic framework. Improve the country’s macroeconomic situation and particularly the fiscal situation. Containment o f expenditures. Help the fiscal adjustment by reducing current and general expenditures in real terms. Transfers to local governments. Rationalize the system o f transfers t o local governments, and impose more market- driven and more binding budget constraints o n their finances; Public health efficiency. Establish mechanisms to arrest the exploding cost o f inefficiency in the provision o f public health services; 10 Pension liabilities. Halt the accumulation o f pension-related contingent liabilities; I S S Reform. Advance the reorganization o f the Social Security Institution to make it financially viable; and Public Debt. Set up a better system for managing public debt. Education. Carry out some institutional improvements in the provision o f education at the local and regional levels. C. Components 2.4 The loan had seven components to meet these objectives. The following subsections review them briefly. Macroeconomic Framework 2.5 As shown in Table 1, the fiscal situation deteriorated during the implementation o f the SFAL: (a) the fiscal deficit increased from 3.5 percent to 4.2 percent o f GDP; and (b) current expenditures continued to increase while capital expenditures continued to fall, both as a percent o f GDP. Table 1. Change in the Balance of the Non-Financial Public Sector, 2001-2002 (percent of GDP) Difference 2001 2002 2002-01 ~~~~ ~ ~ Total revenue 29.5% 29.5% 0.0% Current revenue 29.5% 29.5% 0.0% Tax revenue 19.2% 19.1% -0.1% Total expenditure and net lending 33.2% 33.5% 0.3% Current expenditure 24.9% 25.9% 1.O% Capital expenditure 8.2% 7.6% -0.6% Net lending 0.1 % 0.1% 0.0% Statistical discrepancy 0.2% -0.1 % -0.3% Non-financial public sector balance -3.5% -4.2% -0.7% Source: Ministry of Finance; Banco de la Republica; and Fund staff estimates. 2.6 The fiscal balance was substantially worse than in 2001, when the loan was approved to improve it, and much worse than the targets established in the Bank and the IMF programs. While the Bank did not establish an explicit fiscal deficit target in the conditionality o f the loan, paragraph 53 referred to a set o f projections contained in Table 1 o f the President’s Report as the expected outcomes o f the program that the loan was to support. In that table, the target fiscal deficit was 3.1 percent o f GDP. The target under the then existing IMF’s EFF was 2.8 percent. This means that the fiscal deficit in 2002 was 1.1 percent o f GDP worse than the expected outcome contained in the Bank’s President’s Report, 1.4 percent o f GDP worse than the IMF’s target, and 0.7 percent o f GDP worse than in 2001. 11 2.7 The I C R rated this component as satisfactory, justifying this rating with the following arguments: “During the program period Colombia encountered several economic challenges. It faced issues o f contagion resulting from economic problems in Venezuela, the largest market for Colombia’s nontraditional exports; the worsening o f market sentiment toward Latin America; and slow economic recovery in the United States, Colombia’s main trading partner. Internally it faced increasing security costs at the same time as it was undergoinga political transition. In light o f these issues and i t s efforts to maintain a stable economy, despite a significant deterioration in its fiscal deficit in 2002, the macroeconomic framework is evaluated as having been consistent with the objectives o f the program.” 2.8 IEG’s I C R review concurred with the I C R in rating this aspect o f the loan “satisfactory”, noting that the rate o f growth o f the economy had improved, that inflation had declined and that “the fiscal deficit grew in 2002, contrary to the program’s objectives, but then it fell in 2003.” 2.9 There were indeed improvements (albeit rather modest ones) in the rate o f growth o f the economy (which rose from 1.5 to 1.9 percent) and inflation (which f e l l from 7.9 to 6.4 percent) between 2001 and 2002. Despite these improvements, tax collection fell by 0.1 percent o f GDP while current expenditures increased by one percent o f GDP, worsening the fiscal deficit, which was a problem that the loan had aimed at ameliorating. Moreover, while the deficit improved one year later, in 2003, this happened under the FIAL program, reviewed in the next chapter and, as noted there, it did so mainly because the country’s external conditions improved. 2.10 This report rates the achievement o f the objective o f this component negligible, as the government did not only fail to advance in the attainment o f i t s objectives but in fact experienced a setback. Setbacks can be understandable but cannot be considered satisfactory. In terms o f achievement o f objectives, the report rates the component negligible. Public Sector Reform (Expenditure Control) 2.1 1 This component was aimed at addressing the lack o f control over government expenditures (rather than public sector reform in general), which was one o f the main causes o f the fiscal deterioration that prevailed at the time o f the SFAL design. Under the loan, the government undertook commitments to reduce and rationalize such spending in two main categories: current and general expenditures. 2.12 Current expenditures. The government committed itself to reduce these expenditures by more than 4 percent in real terms from 2001 to 2002 in the approved budget for central government current expenditure. The approved budget complied with this restriction (as did spending levels at the time o f the second tranche release in 2002). However, final spending by year-end was a 4 percent increase over FY2001 spending levels in real terms. Thus, the difference between the commitment and the outcome was 8 percent in real terms. 2.13 General expenditures. The commitment was to reduce these expenditures by 19 percent in real terms. As with current expenditures, the government reduced the 12 budgetary appropriations by the agreed amount. However, also as in the case o f current expenditures, these expenditures actually increased during the implementation o f the budget, by 16 percent in real terms, making for a difference between goal and achievement o f 35 percent in real terms. 2.14 The ICR rated this component as moderately satisfactory and the IEG’s ICR Review unsatisfactory. This report rates the outcome o f this component as highly unsatisfactory because, rather than reducing the current and the general expenditures in real terms, the government increased them by the amounts it was supposed to reduce them. In terms o f achievement o f objectives, the report rates the component as negligible. Intergovernmental Fiscal Relations 2.15 Intergovernmental fiscal relations became a serious problem during the 1990s. According to the 1991 Constitution, the central administration should transfer some o f i t s revenues to territorial governments to support spending, especially on health and education. The constitution stated that the transfers should rise in line with the growth in current revenues, worsening a fiscal rigidity problem that was already substantial in Colombia. The problem, however, went beyond rigidity. The local and regional governments overspent and asked for complementary funds, which were routinely granted even if they were substantial. 2.16 The loan objectives in this respect were the following. e Intergovernmental transfers. Fix in real terms the rate o f growth o f fiscal transfers to the regional and local governments for 2002 and thereafter. e Local taxation. Reform the tax system o f territorial entities (Estatuto de Ingresos Territoriales) to increase sub-national tax revenues by more than 20 percent in i t s first year o f application. e Local and regional borrowing. Issue and implement a decree to regulate debt and borrowing o f territorial entities that would contribute to halting unsustainable borrowing, limiting bailouts, and eliminating discretion in the treatment o f debt. 2.17 Intergovernmental transfers. This objective was attained. A constitutional reform created what was called a “transition period” fiom 2002 to 2008. During that period, transfers in real terms would grow at 2 percent per year fiom 2002 to 2005, and at 2.5 percent per year from 2006 to 2008. According to the amendment, transfers would increase in line with the central administration’s current revenue again from 2009 on. 2.18 The reform, however, worsened the rigidity o f the fiscal budget. Prior to the reform, these transfers increased and decreased with revenues. With the new provision, they would always grow at a fixed rate during the period o f effectiveness o f the Constitutional reform. Thus, rigidity would remain a crucial problem. Only one year later, the FIAL documents would call rigidity “the key constraint to effective public 13 policy”.2 In fact, fiscal flexibility was sacrificed in exchange for: (a) predictability (the real rate o f growth o f transfers was both a floor and a ceiling); and (b) a potential long- term gain that would be obtained by fixing the rate o f growth o f transfers at a rate lower than the average rate o f growth o f fiscal revenues or GDP. 2.19 Over the last 30 years, the rate o f growth o f GDP did tend to be higher than 2.5 percent-it averaged 3.5 percent (Figure 5). If this average rate were to be maintained in the future, the r u l e would result in a reduction in the share o f GDP being transferred to the territorial authorities. Yet, there are three problems with this reasoning. First, the rigidity could cause serious fiscal problems in the years when GDP grows by less than 2.5 percent. There were 10 such years since 1975 and, in one o f them (1999), the difference in the rates o f growth was almost 7 percent. Being forced to increase transfers in a year o f GDP decline would worsen the problems o f fiscal adjustment, particularly in a country where fiscal rigidity i s already a serious problem and where, by 2005, transfers had reached 4.9 percent o f GDP, and about 40 percent o f public expenditure was carried out at the decentralized level. Second, while over the last 30 years the economy’s rate o f growth was higher than 2.5 percent, in the last 10 years it was only 2.2 percent, and if this average growth rate were to prevail in the future, the share o f GDP transferred to territorial authorities would increase. In any case, establishing a fixed rate o f growth for the transfers to the local and territorial entities clearly increased the rigidity o f the system and created a problem that the Bank i s now urging the government to remove. The 2005 Country Economic Memorandum identifies the growth o f these transfers in real terms as one o f the main fiscal problems and recommends keeping them constant to facilitate fiscal a d j ~ s t m e n t . ~ Figure 5. Rate of Growth of GDP minus 2.5% W n o r b pm4d.d hthruh d 2.6% Snra d D . l r f . n ... ^ ...................................... ............. - ................ ._ -1% 1 i I I I Source: World Economic Indicators, World Bank. Program document presentedto the Executive Directors on the FIAL program, Report No. 25476-C0, gage 7. Colombia Country Economic Memorandum, The Foundationsfor Competitiveness, November 8,2005, Report No. 32035-C0, pp. 127. 14 2.20 In actuality, the rates o f growth o f GDP and fiscal revenues had exceeded 2.5 percent in real terms since 2003, which had resulted in a decline in the ratio o f local and regional transfers t o GDP and to fiscal revenues since that year. The government i s planning to propose t o the National Assembly t o turn the 2001 Constitutional reform permanent when its life ends in 2009. 2.21 In sum, the Constitutional reform that the FIAL supported helped t o introduce order in the process o f transfers, as fixing their rate o f growth in real terms in practice eliminated the budget adjustments that were at the root o f the still faster growth o f these expenditures in the years prior to the reform. The problem i s that the reform actually increased the system’s rigidity: under the current Constitutional provision the government would not be able to stop or even reduce the real rate o f growth o f transfers if the country gets into a slump. If the situation that prevailed from 1998 t o 2002 were to prevail again, the transfers to the local and regional governments would increase by 10.4 percent in real terms while GDP would have increased by only 2.0 percent over the 4 years. Given that one o f the objectives o f the loan was t o reduce the rigidities o f the Colombian fiscal system, and particularly their effect o n the country’s ability to adjust in critical circumstances, this was a highly unsatisfactory outcome. In terms o f achievement o f the objectives, the report rates the component negligible. 2.22 Local taxation and debt. The two other objectives o f the intergovernmental fiscal relations component were attained: sub-national tax revenues increased by more than 20 percent, and debt management o f territorial authorities has improved. In fact, as discussed later, the territorial authorities are in fiscal surplus nowadays, although to a large extent this is due to the lack o f implementation capacity. 2.23 Although the government attained its stated objective, the reform increased the country’s fiscal rigidity, an already severe problem, the solution o f which became the main objective o f the FIAL program. This report therefore rates t h i s component as highly unsatisfactory. The achievement o f objectives was negligible. Health 2.24 The government’s main commitments with respect to health services were to: (a) reduce inefficient supply-side subsidies; and (b) limit the fiscal costs to the national government while improving service. According to the matrix o f policy actions o f the loan, the Ministry o f Health, the Department o f National Planning, and the Ministry o f Finance would define and approve a national public hospital restructuring policy and an implementation program for the next five years, and would begin the implementation o f the first phase, including the selection o f at least 10 departments. Additionally, the government would sign contracts with at least three sub-national governments to finance the restructuring o f public hospitals. 2.25 Under the SFAL, the government implemented the National Hospital Restructuring Policy. The pilot phase o f the program in 2002 covered more than 10 departments and 15 percent o f the total hospital budget. The program included specific targets for cost reduction and productivity increases, which, according to the ICR, generated more than 5 percent in fiscal savings per month. 15 2.26 This report confirms the I C R rating o f satisfactory for this component. The achievement o f objectives was substantial. Institute of Social Security (ISS) Reform 2.27 At the time o f approval o f the SFAL, the ISS was not financially viable. The government had initiated a restructuring plan for the health aspects o f ISS, including negotiating with ISS unions about labor costs and benefits, and had implemented the first phase, including renegotiation o f 50 percent or more o f ISS's total outstanding debt to health service providers, and reduction o f at least 30 percent o f the waiting list for elective surgeries (as o f June 30,2001). The government and the ISS had reached an agreement to generate annual savings in ISS's total costs over a 10-year period which would, in the opinion o f the Bank, make ISS financially and economically viable. The plan, however, did not work and the ISS remains as unviable as it was in 2001. 2.28 The I C R rated this component as unsatisfactory. This report confirms this rating. It rates the achievement o f objectives negligible. Pensions 2.29 The condition o f Colombia's pension system constituted a major risk to fiscal sustainability over the medium and long term at the time o f loan design. The pension system was technically insolvent and the annual imbalances in the public sector worker regimes were increasing. The estimated net present value o f pension system liabilities amounted to about 200 percent o f GDP in 2000-up from an estimated 150 percent o f GDP in 1997. Moreover, the Treasury's transfers to finance the deficits for public sector worker regimes increased from about 0.8 percent o f GDP in 1991 to 1.3 percent o f GDP in 1995 and to 2.3 percent o f GDP in 2000. The causes o f the current pension system insolvency and liquidity problems included too-generous benefits, benefit guarantees, perverse incentives for reserve management, and a Constitutional Court ruling expanding pension benefits. 2.30 This component had three objectives: 0 Improving social security system control through the creation o f a new social security department; this i s estimated to generate fiscal savings o f around $100 million in 200 1. 0 Concentrating transfers o f the public sector pension regimes into a single agency which i s estimated to generate savings o f around $10 million per month on average. 0 Enacting a series o f parametric reforms that would make the pension system more equitable and sustainable. 2.3 1 Regarding the first two objectives, the government created the Social Security Economic Regulation Agency (Direcci6n de Regulaci6n Econ6mica de l a Seguridad Social, DRESS) to serve as a counterpart and advisor to the Ministry o f Social Protection (Ministerio de Protecci6n Social, MPS) in managing and tracking pension and social security expenditures. The activities o f DRESS include the tracking, validation, and the calculation o f actuarial pension benefits, and the pension payments o f the National Public 16 Pension Fund (Fondo de Pensiones Publicas del Nivel Nacional, FOPEP). Ongoing controls and enhanced administration generated significant fiscal savings in the areas o f pensions, health, and workers compensation (estimated at US$300 million in 200 1). 2.32 Regarding the third objective, the Congress also passed a pension reform law in December 2002. With these reforms in place, new entrants into the system will not generate increases in the actuarial deficit, although this deficit s t i l l exists and further reform or financing i s required to overcome this. The government enacted further reforms after the closing o f the loan. These reforms, enacted from 2002 to 2005, together with demographic trends, are expected to reduce payments o f pension benefits by 1 percentage point o f GDP by 2015. 2.33 This report concurs with the ICR in rating this component satisfactory. It rates the achievement o f objectives substantial. Public Debt 2.34 As noted in the Introduction to this report, the analysis o f the overall fiscal commitment and public debt sustainability i s contained in chapter 4 for the SFAL and the FIAL operations. Regarding the specific objectives o f SFAL in this respect, the government would develop new portfolio and funding strategies, integrating fiscal projections with portfolio analysis, with the ultimate aim o f reducing the central government’s debt exposure. The government carried out these activities to the satisfaction o f the Bank. 2.35 This report concurs with the ICR in rating this component satisfactory. It rates the achievement o f objectives modest. Education 2.36 With the passing o f Law 715 o f 2001,the government created a framework to certify the adequacy o f management in the provision o f education services at the local and regional levels. The law allowed all municipalities that are capitals o f departments or have a population o f more than 100,000 inhabitants to receive certification. These represented more than 40 percent o f the country’s school enrollment. Performance monitoring mechanisms were also established with these municipalities to monitor quality o f service provision. 2.37 This report confirms the ICR rating, satisfactory. It rates the achievement o f objectives modest. Summary and Comparison with ICR And ICR Review Ratings 2.38 Table 2 summarizes the ratings o f the components in this PPAR and compares them with those o f the ICR and the IEG’s ICR Review. 17 Table 2. Summary of Ratings for the SFAL by Component COMPONENTS ICR RATINGS IEG REVIEW REASONS FOR DISAGREEMENT The fiscal deficit and the current expenditures, basic Macro Highly Satisfactory Satisfactory determinants of the macro framework Unsatisfactory framework, deteriorated sharply during the life of the loan Expenditures increased in real Containment of Moderately Unsatisfactory Highly terms instead of declining, as expenditures Satisfactory Unsatisfactory was the loan’s condition. The measure suDDorted bv the loan increased the rigiditybf the Transfers to Highly fiscal system, which, according local Satisfactory Unsatisfactory to the Bank and the IMF, was governments and is one of the worst fiscal problems. Health efficiency Satisfactory Satisfactory Satisfactory ISS Reform Unsatisfactory Unsatisfactory Unsatisfactory Pensions Satisfactory Satisfactory Satisfactory Public Debt Satisfactory Not rated Satisfactory Education Satisfactow Satisfactow Satisfactow Source: World Bank D. Assessment o f the Operation 2.39 Quality at entry. The quality at entry was deficient because the design o f the loan introduced a budgetary rigidity (the rates o f growth o f the intergovernmental transfers in real terms) among the most important activities that it supported. Just one year later the Bank was branding budgetary rigidities as the worst obstacle t o public policy making. 2.40 Relevance. The overall objectives o f the operation were relevant to the problems o f Colombia and fully consistent with the CAS, although the design o f the operation, as noted above, served to worsen a key weakness o f the fiscal system. 2.41 Outcomes. According to the ICR, “the S F A L assisted the government in two important ways. First, it helped the government to begin a process o f slowing the growth o f fiscal imbalances. The proceeds from the loan helped to reduce the cost o f borrowing and t o lengthen the debt maturity by providing a confidence-building signal t o international markets, all o f which gave the government fiscal space for protecting social sector expenditures and implementing difficult structural measures. Second, the SFAL promoted reforms in the provision o f public services that improved incentive structures and provided substantial efficiency gains. As a result, the fiscal rigidities facing the Colombian government were reduced and the fiscal situation i s gradually stabilizing- important first steps in putting Colombia o n a sustainable path.” 18 2.42 This report does not take such a sanguine view o f the operation. Certainly, several components o f varying importance had satisfactory results. However, the government failed in two o f the fundamental ones. First, it established a rule for intergovernmental transfers that increased fiscal rigidity, which only months later was identified by the FIAL program as one o f the worst fiscal problems o f the country. Second, it failed in the key stabilizing condition: reducing current expenditures by 4 percent and general expenditures by 15 percent (both in real terms). Rather than falling by the promised results, these expenditures increased by almost the same magnitudes in real terms. Moreover, the government was unable to reverse the trend in the composition o f expenditures, which was increasing current expenditures at the expense o f capital ones; in fact, current expenditures increased while the capital ones declined. A s a result o f all these factors, the outcomes contradicted the objectives o f the loan and the overall fiscal situation worsened instead o f improving. 2.43 Institutional development was substantial in pension reform but negligible in the rest o f the operation. While pension reform was a crucial component o f fiscal reform, i t s institutional development f e l l short o f what was needed in the other areas o f the loan to meet the loan objectives-to help the government take an essential first step toward achieving full fiscal sustainability, economic growth, and poverty reduction. 2.44 The ratings by component show that four o f the eight had a satisfactory outcome. Yet, the components that had a more direct bearing o n the ultimate objectives o f the loan were rated highly unsatisfactory: (a) improving the fiscal balance by (b) reducing current and general expenditures in real terms and by (c) reducing the rigidity o f the fiscal system. Since (a) the fiscal balance deteriorated while (b) current and general expenditures increased substantially in real terms and (c) fiscal rigidity increased, the rating o f the operation o n the basis o f its most important objectives would be highly unsatisfactory. Given that the project included other components and that four o f them were completed satisfactorily, this report rates the SFAL moderately unsatisfactory. 2.45 Risk to development outcome. The loan did not meet i t s objectives during i t s lifetime. It i s not likely t o meet them afterwards because i t s risk to development outcome i s substantial in four dimensions. First, given that the deficit worsened rather than improved, the fiscal measures supported by the loan lacked viability in the long term. Second, the fiscal deterioration that took place during the l i f e o f the loan showed a l o w level o f ownership and commitment by the government to the objectives o f the loan. Third, the institutional setting did not improve in terms o f i t s ability to support the loan objectives during and after loan implementation. Fourth, as discussed in Chapter 4, the capacity o f the country to respond effectively to a worsening o f economic conditions, such as those that originated the loan, did not improve as a result o f the loan. For these reasons this report rates the risk to development high. 2.46 Bank performance. The supervision o f the loan was satisfactory in the sense that the staff did its best to help the borrower to meet the objectives o f the loan. This did not fully compensate for the fact that the design o f the loan, which included as part o f the conditionality a reform that worsened one o f the main fiscal problems o f the country. For this reason the Bank performance i s rated moderately unsatisfactory. 19 2.47 Borrower performance. Given the poor performance o n reducing expenditures, a central objective in improving the fiscal outlook, the borrower performance i s rated moderately unsatisfactory. E. Comparison with Ratings of ICR and ICR Reviews 2.48 Table 3 summarizes the differences between the ratings o f the ICR, IEG's ICR Review and t h i s PPAR, as well as the reasons for disagreement. Table 3. Summary of Ratings for the SFAL Program ICR IEG REVIEW PPAR REASONS FOR DISAGREEMENT RATINGS The fiscal situation worsened during the implementationof the loan for reasons attributable to the borrower. The government aimed at reducing real current expenditures by 4 percent but Moderately Moderately instead they increased by 4 percent, Outcome satisfactory Unsatisfactory making for an 8 percent difference with the target. General expenditures were to be reduced by 19 percent but instead they increased by 16 percent, both figures in real terms. Moreover, the loan increased fiscal rigidity of the country. Evaluation included in risk Institutional Modest Modest to development, development which was rated high Evaluation included in risk Sustainability Likely Unlikely to development, which was rated high The capacity of the country to respond Risk to effectively to a worsening of the development High economic conditions, such as the one outcome that originated the loan, did not improve as a result of the loan. The Bank included as one of the Bank Moderately conditions of the loan a reform that performance Satisfactory Unsatisfactory worsened one of the main problems of the system. The borrower had a satisfactory performance in 4 of the 8 components. Yet, Its fiscal situation Moderately Borrower Satisfactory Satisfactory deteriorated substantially and the loan performance Unsatisfactory worsened one of the main fiscal problems of the country: expenditures ~ "_ " rigidity. ......... Quality of Unsatisfactory Not rated ICR Source: World Bank 21 3. The Programmatic Fiscal and Institutional Adjustment Loan Program A. T h e Program and its Objectives 3.1 The Board o f Directors approved the FIAL program on February 2003 to support the program o f reforms proposed by the new Uribe administration. The program would support a series o f up to four loans, with a notional envelope o f up to US$900 million in total. The loans were h l l y consistent with the 2003 CAS. In reality, the program supported only three loans, for a total o f US$550 million (US$300 million equivalent for FIAL I ,approved on March 18,2003; US$150 million equivalent for FIAL 1 1, approved on November 24,2003; and US$lOO million equivalent for FIAL 1 11, approved on April 23,2005). The first loan was released on March 20,2003; the second o n November 24, 2003 and the third on April 25,2005. The last loan was closed on June 30,2005. 3.2 The Letter o f Development Policy described the overall objectives o f the program as twofold: “first, to promote reforms addressing fiscal rigidities necessary to attain the substantial fiscal adjustment underlying sustainable macroeconomic stability; and second, to improve the provision o f public services and establish the institutional basis for higher efficiency and accountability in public expenditure. The emphasis o f the reform program would gradually shift, f i o m tax and fiscal responsibility at the beginning, to expenditure and public sector reform towards the second and third years o f the program.” 3.3 Regarding the first objective, the same letter stated that: “The fundamental issue that constrains the implementation o f financial policy in Colombia i s the inability o f the government to access the necessary budgetary resources to attend policy priorities. Fiscal rigidities, in the broad sense, incorporate a number o f concepts that cover areas such as tax policy and administration, budget management, civil service, judicial decisions, and administrative processes such as public procurement and contracting and asset management. The common thread that connects these diverse areas is that they all generate an entrenched expenditure that i s difficult to reduce, produce excessive costs derived from fundamental inefficiencies, and/or prevent a revenue source from reaching i t s full potential.” 3.4 Among the most important types o f fiscal rigidities, the letter mentions the legal and financial expenditures that create permanent rigidities in public spending. 3.5 The program would attain these objectives through a multiplicity o f sub- components. The following sections review the specific objectives o f these and their outcomes. At the end o f the chapter there are two rating sections: the first rates the entire FIAL series as a whole and the second each o f the FIAL loans. The macroeconomic framework and the overall fiscal commitment o f the FIAL series are rated in chapter 4 Section E. 22 B. Revenue Rigidities and Tax Reform 3.6 O n the tax side, the objectives o f the program were: (a) increasing collection; and (b) doing so while eliminating the main rigidities that introduced inefficiencies in taxation, which included prominently innumerable exemptions t o income tax and Value Added Tax (VAT) as well as the multiple VAT rates applied t o different activities. At the time o f the FIAL design, the government had added a new distortion t o the tax system: the tax on financial transactions, which is a classic example o f a distorting tax (it is easy to evade by distorting behavior in an inefficient way, as people can avoid paying it by avoiding the use o f the financial system, which reduces financial intermediation, which in turn reduces the overall efficiency o f the economy). 3.7 The tax component o f the FIAL aimed at reducing these rigidities and inefficiencies with three sub-components, which are briefly reviewed in the following subsections. Rut (Registro Unico Fiscal, Or Tax Registryl 3.8 The FIAL program supported the establishment o f the RUT. The RUT would identify each taxpayer with a unique number, which then would become an instrument o f tax compliance control because it would be used in all transactions carried out in the country. A number similar to the RUT already existed in Colombia; the program supported its substitution with the more flexible RUT, which had more digits and could convey more information. This condition was met. The PPAR rates the achievement o f the objective o f this sub-component substantial, and the outcome satisfactory. New Laws and Regulations 3.9 This sub-component relied o n the enactment o f two laws (Laws 788 and 863), which were duly enacted, formally complying with the conditions in this respect. Yet, their enactment did not produce the expected results, in such a way that the formal compliance did not mean compliance in substance. 3.10 L a w 788. The most important objective o f the enactment o f Tax Reform L a w 788 in December 2002 was the elimination o f exemptions and the expansion o f the tax base for the Value Added Tax (VAT).4 Certainly, some o f these exemptions were eliminated and the variety o f VAT rates was reduced. Yet, four years later, the IMF Stand-By document for 2006 states the following: 3.1 1 “The authorities will submit legislation by August 2006 to reform the tax system, which i s highly complex and distortionary with 9 VAT rates and the highest top income tax rate in the region at 38.5 percent (structural benchmark). K e y elements o f the authorities’ proposals would include reducing the number o f VAT rates, and broadening the base; lowering the top income tax rate and curtailing exemptions and deductions, and Other objectives included: (i) establishing a new ceiling on the wage exemption for personal income tax, and reducing incentives for non-taxed compensation to employees; and (ii) phasing out the corporate income tax exemption for capital gains from sales o f stock, mutual funds and real estate and for profits from previously privileged corporate forms, contracts, funds or bonds. 23 possibly reducing the minimum threshold o f income subject to tax; and diminishing the distorting effects o f the financial transactions tax (FTT) by lowering the rate (currently 0.4 percent) or by making FTT payments deductible from the income tax. They are also considering a proposal to retain the tax on wealth (which was set to expire), with the revenues to be earmarked for additional military spending. The staff urged the authorities to also trim the so-called para-fiscal taxes (small payroll taxes earmarked to fund various social programs), which raise non-wage labor costs and deter formal sector employment. The authorities were sympathetic to this view but saw little political support for progress in this area.” 3.12 The problems mentioned in this paragraph are very similar to those that the FIALs had supposedly resolved.’ 3.13 L a w 863. O n December 29,2003, Congress passed L a w 863, which made further improvements in tax policy, but also introduced new distortions to the tax system. Regarding this Law, the 2005 Country Economic Memorandum says the following: 3.14 “Although most o f the reforms enacted in 2003 were desirable, two were not. Overriding L a w 788 o f 2002, which specified that the 10 percent surcharge under the corporate income tax would be reduced to 5 percent in 2005, L a w 863 (Article 7) instead extended the 10 percent surcharge for 2005 and 2006. This policy change i s undesirable since the base tax rate o f 35 percent i s already high by international standards. This discourages capital formation, including foreign direct investment, and encourages transfer pricing schemes and other manipulations by multinational f i r m s thereby reducing Colombian tax revenues. A preferable approach would be to expand the corporate income tax base by eliminating more exemptions. Law 863 also raised the tax rate o f the financial transactions tax from 0.3 percent to 0.4 percent o f the transactions.”6 3.15 In sum, the government complied with the formal conditions by enacting the two laws mentioned in the sub-component. Yet, one o f the laws l e f t in place most o f the distortions present in the tax legislation and the other actually worsened the deficiencies o f the system by increasing the tax on financial transactions. That is, removing distortions was the ultimate objective o f this component but instead they became worse. The PPAR rates the achievement o f the objective o f this sub-component negligible, and the outcome highly unsatisfactory. Improving Tax Administration 3.16 The actions contained in the original policy matrix in this dimension were taken from the modernization plan o f the National Tax and Customs Office at the Ministry o f Finance (DIAN, i t s acronym in Spanish), which was supported through the Bank-funded Second Public Financial Management Technical Assistance Loan (PFMP 1 1 , or M A F P I1 in Spanish). These plans included the design and installation o f a model o f income 5 In spite o f the intentions expressed by the IMF report, the government requested and obtained in 2006 an extension o f the l i f e o f the financial transactions tax. Colombia Country Economic Memorandum, The Foundations for Competitiveness, November 8,2005, Report No. 32035-C0, pp. 133. 24 control called MUISCA in Spanish as well as many other activities aimed at improving DIAN’s ability to track i t s customers. The plan was implemented successfully. 3.17 One o f the measures that the tax authorities mentioned as most effective in improving the collection o f the VAT and the income tax, however, raises an important issue o f fiscal equity. Such measure i s the devolution o f 2 points o f the VAT when the purchases that originate the tax are made with credit or debit cards. Having the payments made with such cards greatly increases the tax administration’s ability to compare income tax and expenditures information to guide tax inspections. Yet, the measure discriminates against the people who do not have access to credit or debit cards, which tend to be the poor and the people living faraway from the banking system. In a country with 27 percent o f the population living in rural areas, 18 percent living under $2 per day, only 2 percent paying income tax, and a ratio o f total deposits to GDP o f 26 percent, the number o f people paying 2 points o f VAT more than the rest o f the population just because they do not have access to credit or debit cards would seem to be sub~tantial.~ This is a major distortion that was introduced with the 2003 reforms, which biases the VAT against the poor and those without banking services. 3.18 This report considers that the equity issue in the collection o f taxes negatively affects the otherwise satisfactory structural improvement o f tax administration. For this reason, this report rates the outcome o f the Tax Administration sub-component moderately satisfactory, while it rates the achievement o f objectives substantial. f Revenue Rigidities and Tax Reform Summary o 3.19 There are three aspects to taxation performance. First, there are the structural problems that the FIAL addressed, mainly related to the large number o f tax rates and exemptions that characterize the Colombian system. These structural problems s t i l l exist and, according to the IMF and the Bank’s Country Economic Memorandum, they are s t i l l substantial-they are, in fact, the main problems in today’s tax legislation and administration. Some o f these problems actually became worse as a result o f laws enacted under the FIAL program. Second, there were substantial advances in tax administration, which were attained with the support o f PFMP 1 1. 3.20 The third aspect i s revenue performance since the beginning o f the FIALs. The central government made a serious effort to increase tax revenues since the early 199Os, with very good results: tax revenues rose from 10.3 to 14.9 percent o f GDP in the last t e n years (Figure 6). ’There are only 1.4 million registered income tax payers in a country with 50 million inhabitants. Only 70 percent o f the registered people make some payment. Sources o f data: poverty and rural population from World Development Indicators (World Bank); ratio o f deposits to GDP from International Financial Statistics (IMF); income tax payers from DIAN. 25 Figure 6. Tax Revenues, percent of GDP Tax revenues, VOof GDP 14% + y = 0 . 0 0 4 1 ~ 0.0977 R' = 0.7951 12% 10% -Total B -Income taxes 2 8% -Tax on Banking Transactions +VAT 8! 6% -Linear (Total) 4% Source: Ministty of Finance; Banco de la RepDblica; and Fund staff estimates. 3.2 1 This improvement could be attributed to several factors-including improvements in the tax structure, in tax administration, and in overall economic performance.* The I C R presents a decomposition o f the growth o f tax revenues into the effects o f each o f the four tax laws that were modified during the period, in such a way that nothing i s left to allow for the improvement in tax administration. There i s no way, however, t o prove that this decomposition corresponds to reality. In the opinion o f the IEG mission, based o n several indicators provided by the DIAN, i t seems that the increase in the tax collection as a percent o f GDP i s due mainly to improvements in tax administration. This cannot be proved, either. Thus, this component was evaluated based o n the following facts: Tax collection increased very rapidly which, discarding an effect o f tax buoyancy, may have been caused by improvements in tax administration, or in the structure o f the taxes. Regarding these two possibilities, there was a very rapid improvement in tax administration and a highly unsatisfactory progress in the structural reform o f the taxes themselves. 3.22 Based on these facts, and considering that one o f the main objectives o f the program was the reduction or elimination o f tax rigidities, this report rates the outcome o f the revenue rigidities sub-component unsatisfactory, and the achievement o f the objective o f this sub-component modest. The I C R rated this component satisfactory. IEG's I C R Review o f FIAL 1 11, the only review that rates the components o f the FIALs, rates the 8 It i s well known that there i s buoyancy in tax systems, which results in increases in collection as a percent o f GDP when GDP or income per capita increases. In the case o f Colombia, for example, this can be seen in the behavior o f income taxes paid by Ecopetrol, the profits o f which increased from 2.3 to 3.6 percent o f GDP from 2002 to 2005. At a maximum rate o f 35 percent, the income taxes paid by this corporation would have increased fiom 0.8 to 1.2 percent o f GDP, making for a difference o f 0.4 percent o f GDP. 26 achievement o f the objective for tax administration high and in tax structural reforms modest, mostly for the same reasons cited in this report. C. Public Administration 3.23 The backbone o f the public sector reform process was the Programa de R e n o v a c i h de l a Administracih Phblica (PRAP), led by the National Planning Department (DNP), and based upon Presidential Directive 10 o f October 2002. This program had so-called “vertical” reforms, which were basically sector or entity-specific institutional restructuring actions seeking to reduce excess public sector employment and enhance the quality and cost-effectiveness o f public services; and “horizontal” reforms, which encompassed cross-sector issues o f public administration, such as asset management, procurement, and others. During the second semester o f 2002, the government agreed with the multilateral banks that the public sector reform process would be supported by structural adjustment loans from both the Bank and the Inter- American Development Bank (IDB). The Bank focused o n the achievement o f efficiency gains in the “horizontal” elements o f the reform process.’ T h e IDB, o n the other hand, focused its adjustment lending o n the “vertical” elements o f reform, and some horizontal elements not covered by the Bank. The following subsections summarize the sub- components o f the Public Administration component. Improving the Budget 3.24 The Colombian budgeting system was plagued by numerous structural problems at the time o f the FIAL design. The program documents identified as the worst o f these the rigidities created by earmarked revenues, which eliminated the fiscal space needed to accommodate revenue shocks or changes in expenditure priorities. Budgetary allocations actually authorized spending agencies to commit resources.1o This led to large accumulations o f arrears in years when revenues fell below expected levels (which occurred quite often). In terms o f the composition o f expenditure, budget rigidity derived from high levels o f both “structural” expenditures (such as pensions, debt service, and transfers) and law-based permanent earmarks basically l e f t fiscal authorities with no room to maneuver. Since eliminating these rigidities was the main component o f the loan, this was the main sub-component o f the program. 3.25 T o address this problem, the FIAL aimed at persuading Congress to enact: (a) a constitutional reform giving the Executive Branch the necessary powers to manage the Program document for a proposed second programmatic fiscal and institutional adjustment loan to the Republic o f Colombia, Report No. 27068-C0, October 23,2003, paragraph 21. lo The FIAL documents identified other problems in this sub-component. They included: (i) a budget structure that i s incompatible with economic, functional, or performance analyses; (ii) a Ministry o f Finance with limited authority to regulate public expenditure aggregates; (iii) complex institutional arrangements that in effect divide the budget process into separate current expenditure and investment processes; (iv) budgeting definitions that do not fall under internationally accepted standards; (v) a lack o f instruments to develop a medium-term vision o f fiscal policy; and (vi) a lack o f substantial evaluation o f public expenditure results, among others. See program document for a proposed second programmatic fiscal and institutional adjustment loan to the Republic o f Colombia, Report No. 27068-C0, October 23, 2003, paragraphs 2-3. 27 budget within fiscal targets; and (b) amendments to the organic budget law, which would turn these powers effective. 3.26 Congress passed neither the constitutional reform nor the amendments to the organic budget law. The component then focused on a series o f less ambitious actions, which resulted in some improvements in the budgeting methodology." Yet, the main problems leading to budget inflexibility are still there. As noted by the third FIAL ICR, the lack o f structural progress in the budget system was one o f the reasons why the FIAL program did not progress into i t s fourth and final 10an.l~ 3.27 Moreover, as discussed in a subsequent subsection, the program contained a sub- component that aimed at earmarking the royalty revenues received by the government, contradicting the overall objective o f eliminating the rigidities affecting the budget. This report rates the outcome o f this component highly unsatisfactory, noting that it was fundamental to the success o f the program. Fiscal Responsibility 3.28 The key expected results o f this sub-component were: (i) enactment o f measures by the Government for signaling and disclosing fiscal targets; and (ii) collection and publication o f reliable fiscal sustainability data by the Central Government for the 50 largest sub-national governments. The Government enacted L a w 8 19 in 2003. Among the key principles o f this new law were the establishment o f a medium-term fiscal framework, guidelines for ensuring debt sustainability, definition o f macroeconomic targets, and transparency measures such as the publication o f tax expenditures and improved fiscal reports to Congress. 3.29 This report rates the outcome o f this component satisfactory and the achievement o f objectives substantial. Public Sector Assets Management 3.30 The government was unable to track or even identify the totality o f its assets at the time o f the design o f the FIAL program. The reforms carried out under the FIAL program were aimed at resolving this problem. The sub-component included the following activities: Institutional setting. The Technical Secretariat became responsible for the enactment o f policies, under the supervision o f a multi-sector commission created for the purpose. This setting i s in place since 2004. Legislation. The government introduced flexibility in the procedures needed to dispose o f the assets. This reform is s t i l l in process, with some pieces o f legislation s t i l l missing. Congress enacted an organic statute o f the budget, but this only puts together already existing regulations. 12 Source: ICR on a loan in the amount o f US$100 million to the Republic o f Colombia for a Programmatic Fiscal and Institutional Structural Adjustment Loan 1 11, Report No. 34792-C0, page 15. 28 0 Information systems. The system is already in place and the government i s testing it with 145 o f the 287 institutions o f the central government. 0 Asset management. The central government wants to sell or transfer most o f the assets to the territorial entities. Up to mid-2006, it had sold assets for $103 million, receiving 85 percent o f this amount in cash. The government estimates that the remaining assets have a value o f $2 billion, o f which $700 million can be sold. The plan is to sell these in a massive sale with the help o f an investment bank. 3.31 This report rates the outcome o f this component satisfactory and the achievement o f objectives modest. Public Sector Procurement 3.32 The L a w 80 o f 1993 established the main principles under which public sector procurement works in Colombia. It opened the possibility o f contracting out to the private sector the provision o f public services. The government had prepared a series o f legal reforms that would upgrade the system to international standards. These reforms were not approved by Congress. 3.33 The FIAL then supported improvements in the following aspects: Policy coordination. The government created an Inter-Sector Procurement Commission, with no staff, for this purpose. It has been working since 2004. Simplification of procedures. The government modified Law 80 to streamline the system and outsourced to the Chambers o f Commerce the registry o f participants. Information. The information about procurement i s now available in the Internet. The government i s developing a system to make procurement transactions in the Internet. 3.34 This report confirms the I C R rating o f unsatisfactory and the achievement o f objectives negligible. Management by Results (Creation of an Evaluation Office) 3.35 This component was aimed at creating mechanisms to monitor and evaluate the government’s activities and programs, which i s part o f a system o f management by results. The unit in charge o f these activities was created in the Planning Office. I t has a very small staff which designs and subcontracts the evaluations. Up to mid-2006, 19 sectors and 170 institutions had participated in three main kinds o f activities: Focalized evaluations. The Evaluation Unit has undertaken evaluation o f social policies as well as assessments o f proposals to change laws for the public administration. Follow up of the National Plan. 0 Evaluation of the activities of the Territorial governments. 3.36 This report rates the outcome o f this activity satisfactory and the achievement o f objectives substantial. 29 Defense of the State 3.37 The public sector neglected for many years its judicial processes, to the extent that suing the state became a low-risk, profitable activity. 3.38 The FIALs supported the following activities. Inventory. The Government was able to determine the number and nature o f the legal suits raised against it as well as the amounts o f money at risk. Realistic estimation o f the contingent liabilities. The Government created a statistical program with data provided from government lawyers which allows for a reasonable estimate o f these liabilities. Coordination. The system coordinates the management o f all cases involving amounts larger than 200,000 minimum salaries (the level o f the minimum salaries i s used as an index to compensate for inflation in Colombia). By mid-2006, the system was coordinating the management o f 99,000 cases. 3.39 The report rates the outcome o f this activity satisfactory and the achievement o f objectives modest. Management Contracts 3.40 The first experience with this component in FIAL I was badly designed and was a failure. The program began with two institutions that are under the Ministry o f Social Protection, I C B F (Instituto Colombiano de Bienestar Familiar, Colombian Institute for Family Welfare), which deals with family issues, and SENA (Servicio Nacional de Aprendizaje, National Training Service) which deals with workers’ training. The management contract with these institutions included some technical goals and, mainly, goals in terms o f collections o f the payroll taxes that workers must contribute to these institutions. According to the contract, the government would provide a subsidy if the institutions collected a certain amount. In actuality, even if the institutions failed to collect the specified amounts, the government would still provide the subsidy because, legally, it had to. That is, the contract and the incentives contained in i t were irrelevant. After this experience, the government wanted to eliminate this component in the subsequent F I A L s but the Bank insisted that i t was essential to have it. The component was retained and the subsequent experiences were quite negative because, as the government insisted, the mechanism does not work when the government has to provide the so-called incentives-budgetary allocations-even when the contracting institutions did not comply with their promises. 3.41 This report rates the outcome o f this activity unsatisfactory and the achievement o f objectives negligible. Development of Incentivesfor Efficiency Gains (Earmarking Royalties) 3.42 Notwithstanding its name, this component in actuality created a new dimension o f budget rigidity: earmarking to certain activities the royalties received by the government. Doing that required obtaining popular approval in the 2003 Referendum, which contained a question proposing their explicit distribution for education (56 percent), sanitation (36 percent), a sub-national pension find (7 percent), and the conservation o f the Cauca 30 River (1 percent). The failure o f the Referendum prevented this rule t o be hard-wired into the Constitution. 3.43 According to the arguments presented in the Bank’s FIAL program documents, this measure was meant to counteract what was widely perceived as corrupt and inefficient use o f royalties, often in poorly planned or otherwise inappropriate investment projects. Existing laws (especially L a w 715) had established standards for efficiency and accountability for decentralized services; by ear-marking funds for these services, the expectation was improving the value-for-money. 3.44 However, earmarking resources clearly contradicts the declared objectives o f the program, which i s eliminating rigidities. Moreover, it i s not clear that earmarked resources would be better managed or would lead to lower corruption than non- earmarked resources. 3.45 In fact, revenue earmarking is undesirable for several reasons. e First, it generates a system o f entitlements, which eliminates the incentives for efficiency because the beneficiaries o f the entitlement know that they will receive their funds independently o f their performance. e Second, the system o f entitlements establishes incentives to never achieve the expected results because, once these are achieved, the entitlements would disappear. e Third, it introduces rigidity, which in turn i s bad for two reasons: e It makes it very difficult to shift budgetary allocations to meet changed priorities, and, e I t makes it very difficult to adjust the overall magnitudes o f the budget t o accommodate macroeconomic developments. This problem becomes a very difficult problem when there are fiscal or economic setbacks that require immediate fiscal adjustments, such as those that prevailed when the fiscal operations started in Colombia. 3.46 In other words, in addition to introducing rigidities, earmarking resources tends to lower, rather than increase, accountability and efficiency since such re-sources f l o w regardless o f the efficiency o f their spending. Finally, in any case, reducing earmarking was one o f the main objectives o f the operation. 3.47 This report rates the outcome o f this sub-component highly unsatisfactory, not because the government lost the referendum, but because i t was, from the beginning, at odds with the objectives o f the loan. The report rates the achievement o f objectives negligible. f Public Administration Summary o 3.48 In s m a r y , the Public Administration component had 8 sub-components, o f which the outcomes o f 4 were satisfactory, 2 were unsatisfactory, and 2 were highly unsatisfactory. The highly unsatisfactory ratings are given to those components that were especially important for the attainment o f the program’s main objectives o f reduction o f budget rigidity and overall improvement o f efficiency. Averaging these ratings, this 31 report rates the outcome o f the Public Administration component moderately unsatisfactory. Summary of Components 3.49 Based on the previous analysis, Table 4 summarizes this PPAR’s ratings for all the components o f the FIAL program and compares them with the ratings provided by the ICR’s and IEG’s ICR reviews. The last column summarizes the reasons for the disagreement between this PPAR’s ratings and those o f the other documents. The rating o f the Overall Fiscal Commitment i s based on the analysis o f Chapter 4, Section E. Table 4. Summary of Ratings for the Components of the FIAL Program COMPONENTS ICR IEG’s ICR PPAR PPAR REASONS FOR DISAGREEMENT (OUTCOME) REVIEW (ACHIEVEMENT (OUTCOME) (ACHIEVEMENT OF OF OBJECTIVES) OBJECTIVES) Overall fiscal Satisfactory Substantial Modest Unsatisfactory The fiscal situation improved but mostly commitment because of the improvement in oil prices. The structural situation remains similar to that which prevailed during the crisis. Revenue rigidities Satisfactory Not rated Modest Moderately See below for subcomponents Unsatisfactory Tax Registry Satisfactory Not rated Substantial Satisfactory New laws I Satisfactory Modest Negligible Highly Rather than diminishing, the distortions Regulations Unsatisfactory of the system worsened. Tax admin. Highly High Substantial Moderately Supported specifically by a technical satisfactory satisfactory assistance loan Public Administration Satisfactory Modest ModewteIy The main components, specially the Unsatisfactory budget improvement and earmarking royalties, were highly unsatisfactory. Improving the Budget Unsatisfactory Negligible impact Negligible Highly There was no progress in this Unsatisfactory component, which was key for the operation. Fiscal Responsibility Satisfactory Substantial Substantial Satisfactory Asset Management Satisfactory Modest Modest Satisfactory Procurement Unsatisfactory Negligible Negligible Unsatisfactory Evaluation Office Not rated Not rated Substantial Satisfactory Defense of the State Satisfactory Modest Modest Satisfactory Management Moderately Not rated Negligible Unsatisfactory Failed from the first FIAL. The system Contracts satisfactory does not work when the government cannot credibly refuse to finance the contracting agency. Earmarking Royalties Moderately Substantial Negligible Highly The component aimed at increasing the satisfactory unsatisfactory fiscal rigidities. Source: World Bank 32 D. Overall FIAL Rating 3.50 This section rates the entire series o f FIAL loans, and compares the ratings with those contained in the ICRs and IEG’s FIAL I11Review (which in fact rated the entire FIAL series). The ICRs rated the individual loans, but they gave the same ratings to all the operations, as we are doing in this report. 3.51 Quality at entry. The quality at entry was unsatisfactory for several reasons. First, the program was overly complex and disjointed in i t s institutional implementation, to the point that it obscured the ultimate objectives o f the loans, taxed the government’s implementation capacity and discouraged the completion o f the series o f loans. Second, within this complexity, many o f the components aimed at attaining objectives that had little impact on the attainment o f the ultimate objective o f improving fiscal performance in a sustainable way. This was the case, for example, o f all the efforts invested in improving budget planning instruments, creating management contracts, creating an evaluation office and streamlining procurement procedures. All these activities were commendable. Yet, the borrower could meet all o f them and still-as it happened-fail t o improve the fiscal performance o f the country in a sustainable way. Third, the program contained a glaring contradiction: it supported the earmarking o f royalties while justifying the entire loan o n the argument that earmarking and other rigidities should be eliminated. 3.52 Relevance. The objectives o f the operations were consistent with the needs o f the country and with the CAS. However, as noted in the previous paragraph, many o f the objectives o f the individual loan components did not have a determining effect o n the attainment o f the ultimate objective o f the loan and, in one case (the earmarking o f royalties), the activity was in direct contradiction t o such objectives. IEG’s Review o f FIAL I11rated relevance as modest, noting that the operation did not address the most important sources o f budgetary rigidity, the earmarked expenditures. This PPAR agrees with the IEG’s I C R Review comment: “as the FIAL Program advanced, i t s relevance progressively declined.” 3.53 Outcomes. There is no doubt that the Colombian government obtained some satisfactory results in several o f the sub-components included in the FIAL program. Yet, it obtained unsatisfactory results in a few fundamental sub-components, which outweigh in importance the positive outcomes o f the other activities. This was true in the tax structure component-the main problems that the loans were supposed t o resolve are still there-and in the institutional component-the budgetary rigidities are s t i l l there and the loan worsened them. Regarding the institutional impact, this was substantial in several public sector components-fiscal responsibility, public sector assets management, the creation o f an evaluation office, and the defense o f the state. The institutional development o f the other four public sector activities-budgetary flexibility, management contracts, earmarking o f royalties, and procurement-was negligible. Tax administration experienced a substantial institutional development although this was mostly a result o f the accompanying technical assistance loan (PFMP 11). 33 3.54 Balancing these facts, as well as those stated in the next chapter regarding the main fiscal indicators, this report rates the FIAL series moderately unsatisfactory. This confirms the rating o f IEG’s I C R Review o f FIAL 1 11. That report based such rating on the moderate relevance o f the loan (it did not address the need to remove the country’s fiscal rigidities), and the fact that the trigger for the envisioned FIAL I V was not achieved. 3.55 R i s k s to development outcome. The probability that the moderately unsatisfactory outcome o f the F I A L s will improve in the future is very low. There are two dimensions to the FIALs’ risks to development outcome. e First, while the combined public sector deficit went down since the beginning o f the operations, it did so mainly because o f an improvement in commodity prices that could be reversed anytime. As a result, the country is at least as fiscally vulnerable to a reversal in i t s terms o f trade as it was when the operations were designed, aiming at reducing such vulnerability. e Second, the government did not and s t i l l does not own the fundamental objective o f the program: the elimination o f budgetary rigidities. 3.56 The government’s lack o f ownership o f the objective o f eliminating earmarking can be seen in the IMF Review o f the Stand-By arrangements with the Republic o f Colombia, issued in June 2006. The report summarizes the 2006 strategy o f the authorities regarding earmarking with the following words: 3.57 “Their strategy i s to concentrate first on reforms o f the tax code and intergovernmental transfers. They will continue with reforms o f the public enterprise sector and revenue earmarking, but see no need for another round o f pension reform at this stage.. . 3.58 The authorities are committed to implementingthe budget decree issued in December 2005, which includes provisions to evaluate earmarked revenues in the 2007 budget. Based on this evaluation, the government would develop legislation to phase out revenue earmarking that has achieved its objective and to limit the introduction o f new earmarking to a well-specified time peri~d.”’~ 3.59 That is, after the FIALs presented as their main objective the reduction o f budgetary rigidities, which prominently included earmarking, the government has not yet decided on i t s policy about earmarking, i s not ruling out the possibility o f issuing new earmarked expenditures, and i s considering the possibility o f eliminating only those that have achieved their objectives. This undermines the credibility o f the most important objective o f the FIALs, and shows that the government’s commitment to t h i s objective i s s t i l l lacking almost 4 years after the program was approved. 13 Colombia: Second Review Under the Stand-By Arrangement and Request for Rephasing o f Purchases- Staff Report. IMF country report No. 06/234. 34 3.60 Overall, the institutional development aimed at reducing the fiscal rigidities o f Colombia was negligible. Since the long-term outcomes o f the FIAL depend crucially from institutional factors, this report rates the risk o f development outcome as high. 3.61 Bank performance. The FIAL I11IEG’s I C R Review, which dealt with the entire FIAL series, rated the Bank’s performance unsatisfactory, justifying that rating with the following words: “Quality at Entry was unsatisfactory, with the project design inadequate to achieve the stated objectives. Although the objective was t o promote reforms addressing fiscal rigidities necessary t o attain substantial fiscal adjustment, the most important sources o f those rigidities were not addressed. And around half the project components were intended to produce outputs, rather than the outcomes that would reasonably be expected o f the last operation in a programmatic series. In fact, in the absence o f much o f the legal framework envisioned at the start o f the FIAL Program, i t is questionable whether the Bank should have continued with the program and undertaken FIAL 111.” This report adds that, in addition to the reasons provided by the IEG’s I C R Review, the quality at entry was unsatisfactory because it contained a component, earrnarking royalties, which was in direct contradiction t o the objectives o f the loan. However, it rates the Bank performance moderately unsatisfactory to reflect the fact that several other components, while less connected to the ultimate objectives o f the loan than those referred to by the IEG report, were satisfactorily accomplished. 3.62 Borrower performance. The government staff in charge o f implementation worked seriously o n the program and met most o f the conditions o f the loans. In this sense, the borrower’s performance was satisfactory. Yet, the main structural objectives o f the program were not attained and, as discussed in the next chapter, while tax revenues increased fast as a percent o f GDP , expenditures increased even faster, voiding the purpose o f the operations. Moreover, as noted by the IEG’s I C R Review o f FIAL 1 11, “During the period o f the FIAL Program, the balance o f the Central Administration averaged -5.4 percent o f GDP, which was partially offset by favorable cyclical developments. A structural deficit o f this magnitude was inimical wit the objective o f the FIAL Program.” For these reasons, the FIAL I11IEG’s I C R Review rated the operation unsatisfactory. This report upgrades this rating to moderately unsatisfactory to take into account the satisfactory completion o f other objectives which, although less connected to the ultimate objectives o f the operations than those referred to by the IEG’s report, were satisfactorily accomplished. E. FIAL Rating by Loan 3.63 As discussed in the Introduction, it is difficult t o split the evaluation o f the FIAL series into independent evaluations o f each loan because: (a) the program was conceived and largely implemented as an integral operation; (b) the components were the same in all loans, and (c) the reasoning underlying the ratings for the entire program i s valid for each o f the loans as well. L o w quality at entry and negligible institutional impact affected all the loans equally because they were imbedded in the project design. As shown in the next chapter, the third problem-the failure in attaining the ultimate objective o f improving fiscal performance in a sustainable way-cannot be attributed to any particular sub-period within the execution o f the FIAL series. Such performance failed to improve throughout the l i f e o f the program and for the same reasons. 35 3.64 The same can be said about the Bank's and the Borrower's performance. For these reasons, this report rates the FIAL as shown in Table 5. Table 5. FlAL Rating by Loan Institutional Risk to Bank Borrower Outcome Development Sustainability Development Performance Outcome PPAR FlAL I Moderately High Moderately Moderately Unsatisfactorv Unsatisfactorv Unsatisfactorv FIAL II Moderately High Moderately Moderately Unsatisfactory Unsatisfactory Unsatisfactory FlAL 111 Moderately High Moderately Moderately Unsatisfactory ......................................................... Unsatisfactory Unsatisfactory -............. ....... FIAL Moderately High Moderately Moderately Series Unsatisfactorv Unsatisfactorv Unsatisfactory ICR FlAL I Satisfactory Substantial Likely Satisfactory Satisfactory FlAL II Satisfactory Modest Likely Satisfactory Satisfactory FlAL 111 Satisfactory Substantial Likely Satisfactory Satisfactory ..... _....I I _. " ......... " .................... ~ .... .. IEG's ICR Review FlAL I Moderately Likely Modest Satisfactory Satisfactory Satisfactory FlAL II Moderately Modest Likely Satisfactory Satisfactory Satisfactory FlAL 111 Moderately Modest Likely Unsatisfactory Unsatisfactory and the Unsatisfactory series Source: World Bank 37 4. The Combined Outcomes o f the Fiscal Operations and their Risk to Development Outcomes 4.1 While the SFAL and the FIAL programs were different operations, actually they were parts o f one single effort to improve the borrower’s fiscal situation. The question that emerges after reviewing all the actions taken under both o f them is whether they, taken as a whole, succeeded in improving the overall fiscal situation o f Colombia in the main areas o f concern at the time o f approval o f the loans. 4.2 The elimination or the substantial reduction o f the fiscal rigidities, together with the improvement in the efficiency and accountability in public expenditure, were expected to produce concrete outcomes. These included the following. The fiscal benefits were expected to reach 2 points o f GDP by 2006. The primary surplus was expected to be 4 percent o f GDP. The NFPS deficit o f 4 percent o f GDP would be virtually eliminated by 2006. The ratio o f net public sector debt to GDP would remain at slightly above 50 percent by 2006. 4.3 This chapter discusses these points in more detail. It i s relevant not just for the evaluation o f the overall objectives o f the series o f loans, but also for the evaluation o f several loan components, including the outcomes o f public debt management in the SFAL as well as the overall fiscal commitment in the FIAL loans and the macroeconomic framework in both the SFAL and the FIAL loans. It i s also fundamental for the assessment o f the risk to development outcomes o f both operations. 4.4 In the discussion o f the fiscal outcomes and their risks, it i s important to keep in mind that the government o f Colombia distinguishes four aggregates o f the fiscal accounts: T h e central administration. This entity comprises all the ministries. This i s the measure that in most countries i s called the central government. T h e central government. This entity includes the central administration plus the social security and the decentralized agencies. T h e non-financial public sector. This measure includes the central government plus public sector enterprises and the regional and local entities. T h e combined public sector. This includes the non-financial public sector plus the profits o f the central bank, the profits o f FOGAFIN (Financial System Guarantee Fund), and the net cost o f the restructuring o f the financial system (the net cost o f the financial crisis). 4.5 The following discussion centers on the most commonly-used aggregates: the central administration, the non-financial public sector, and the combined public sector. 38 A. Overall Risks 4.6 Figure 7 shows the trends o f the main fiscal aggregates during the l i f e o f the fiscal operations. Notwithstanding improvements during 2001-2005, both extreme measures o f the public sector in terms o f their inclusiveness-the combined public sector and the central administration-were still in deficit at the end o f 2005, as was the primary balance14o f the latter. For 2006, the government i s projecting an improvement in the primary balance, which would decline from -1.2 percent in 2005 but would s t i l l be negative (-0.4 percent o f GDP). The projections do not foresee a change in the overall balance, which stood at -4.9 percent o f GDP. 4.7 The entity with the worst fiscal performance during the period o f review was the central administration, which not only had very large overall deficits in the last few years but also primary deficits. The combined public sector was in a better condition largely because of: (a) the profits from Ecopetrol, the government-owned o i l producer; and (b) the fiscal surpluses attained by the local and regional governments, which were due mainly to their limited implementation capacity. Figure 7. Key Fiscal Trends Key fiscal trends ~ .. ................ .... .......... I 1 6% I 4% 2% +Combined public sector (CPS) -Central administration fiscal balance L 0% +Ecopetrol operating surplus u c +Local and regional overal lbalance b! -2% +Primaly balance central adminlstratlon +CPS without Ecopetrol and local governments -4% surplus -6% Source: Ministty of Finance; Banco de la Repdblica; and Fund staff estimates. 4.8 The above picture i s not encouraging for the country's fiscal sustainability. Without Ecopetrol, the non-financial public sector deficit would have been 5.2 percent o f GDP in 2006, while the deficit o f the combined public sector would have been 6.3 percent o f GDP. These figures are worse than those prevailing in 2001 when the country was in a fiscal crisis (3.2 percent and 6.0 percent, respectively). Moreover, the primary balance o f the central administration i s s t i l l negative, meaning that the fundamental institution o f the public sector is s t i l l borrowing to pay interest. And all this i s happening l4The primary balance i s equal to the overall balance minus interest payments. Having this balance at zero or positive i s a fundamental condition for stability. 39 while the economy i s enjoying very favorable external circumstances. This can be seen in Figure 8, which shows the terms o f trade adjustment that i s used in the national accounts to convert exports in real terms into the country’s real capacity t o import. As can be seen in the figure, the Bank’s fiscal operations started when this magnitude was at i t s lowest since 1990, and they ended when it was at its highest since that date. The turnaround was on the order o f 6.5 percent o f GDP. Figure 8. Terms of trade adjustment % of GDP Terms of trade adjustment % of GDP 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Source: World Development Indicators, World Bank. 4.9 Thus, the fiscal situation is at least as risky as it was in 2001 in terms o f the magnitude o f the fiscal deficits, and the risk o f a negative turn in the external conditions seems to be much higher than in that year because the deviation o f the terms o f trade relative to their average i s much larger. Furthermore, it i s almost certain that the profits o f Ecopetrol are bound to decline as a percent o f GDP. These profits have increased in the last few years by virtue o f the o i l price boom, which more than compensated for the simultaneous fall in the company’s production in terms o f barrels. The decline in production is irreversible if no new reserves are discovered. Thus, the profits o f Ecopetrol can be maintained only in a world o f continuously increasing oil prices. If these prices do not increase and in the absence o f new reserves, this source o f public sector funding is likely to disappear. 4.10 Concerns about the sustainability o f the fiscal position o f the combined and the non-financial public sectors are not limited to these points. As will be discussed in the following section, the government has been able to reduce these deficits only at the cost o f reducing public sector investment. B. The R i s k s of the Non-financial Public Sector Balances 4.1 1 As can be seen in Table 6, the overall fiscal balance o f the widest measure o f the public sector, the combined public sector, improved by 3.2 percent o f GDP fiom 200 1 to 2005. While increased tax collection accounted for a gain o f 1.2 percent o f GDP (37.1 percent o f the total improvement), most o f the fiscal gain was attained through a reduction o f capital expenditure, which accounted for 2.3 percent o f GDP (70.5 percent o f the 40 improvement). As can also be seen in the table, the sustainability o f the second most- inclusive measure o f the fiscal operations, the non-financial public sector, also depends on keeping investment at its currently reduced levels. This contradicted one o f the key conditions o f the SFAL. Table 6. Sources of Improvement in the Non-Financial Public Sector Fiscal Position 2001-2005 Difference % of overall 2005-2001, improvement % of GDP Increased current expenditure -0.5% -14.4% Statistical discrepancy 0.1% 2.9% Reduced net lending 0.1% 2.9% Increased non-tax revenue 0.3% 9.4% Increased tax revenue 1.2% 37.1% Reduced capital expenditure 2.3% 70.5% Non-financial public sector balance 3.5% 107.8% Central bank profits and other financial -0.3% -7.8% Combined public sector balance 3.2% 100.0% Note: ltems that contributed to improving the fiscal situation have positive sign and vice versa. Source: of Finance; Banco de la Republica; and Fund staff estimates. 4.12 The decline in public sector investment would not necessarily be a negative development if the private sector were investing in sectors previously managed by the government; if public sector investment had been unnecessary; or if, being less efficient than that carried out by the private sector, it had been crowding out the latter inthe factor markets. Yet, there are two reasons to believe that none o f these conditions is prevailing in Colombia. First, the government was obviously worried about this trend because reversing it was one o f the objectives o f the fiscal operations. Second, the decline in public sector investment has taken place in a country where, as shown in Figure 9, overall gross capital formation has been well below the levels o f the Latin American region as a whole. T h i s level has been increasing fast in the last few years, but it is still much lower than in two comparable countries, Chile and Mexico. Figure 9. Gross Capital Formation % of GDP Source: World Development Indicators, W o r l d Bank. 41 C. Central Administration Risks: Taxes and Expenditures 4.13 Figure 10 shows that the improvement o f the country's basic tax collection was not a recent phenomenon. It has been improving since 1995 and even before at approximately 0.54 percentage points o f GDP per year. The problem i s that total expenditures, which started from a larger basis, have been expanding at a higher rate (0.65 percentage points o f GDP per year). As a result, the gap between total expenditures and tax revenues widened from 2.8 percent to 4.9 percent o f GDP in ten years. If this trend continues, non-tax revenues would have to increase continuously as a percent o f GDP to prevent the fiscal deficit from increasing. Or, in other words, the rate o f growth o f tax revenues is not enough to reduce or even maintain the central administration deficit.15 Hence, despite their satisfactory growth, tax collections have not been sufficient to support the rapid expansion o f expenditures. Figure 10. Central Administration: Comparative Trends . . .... .... .............. ..... .... . OnW .dmlnl.P.tla: .... n d MdO, .. ................ ..... ...... ......... ......... ............. and 111 - .............................. .................. ... ... .... ...., ....... . ... ............. ~ " . 0 ~ 6 ~ X * o > * ~ a k ' - 0 1161 0D I i g g E E : ; P g : E f f ; Source: Ministry of Finance; Banco de la RepDblica; and Fund staff estimates. D. The Risks of Debt and Interest Expenditures 4.14 The curves shown in Figure 11 provide an optimistic view o f the debt situation for three reasons: (a) the net debt o f the non-financial public sector (gross debt minus debt in any currency held by public sector institutions minus foreign currency held in the non- financial public sector) is much smaller than the gross one, mainly because many cash- generating institutions o f the public sector accumulated assets during the period; (b) this net debt is l o w by international standards; and, (c) it f e l l by about 12 percentage points o f GDP from 2002 to 2005. 15 n spite o f the trends shown in Figure The central administration has been able to keep its deficit constant i 8 only because its non-tax revenues have increased substantially during the last few years. 42 Figure 11. Debt of the Non-Financial Public Sector, % of GDP 70% 60% +Total net debt 50% -Total net debt at 2002 axchange rats 40% anw 2002 -Total g m s debt 30% - Total gm51 debt at 2 W 2 exchange ,at. an, 2002 . 20% 10% 0% Source: Ministry of Finance; Banco de la Republica; and Fund staff estimates. 4.15 There are two observations that should be made regarding this picture, however. First, the net debt concept may be deceivingly optimistic in terms o f reducing the burden o f the debt o f the public sector. For example, if the central government used the cash accumulated by other government institutions to service its own debt, or defaulted on the bonds it sold to them, the obligations o f these other institutions would revert back to the central government, as i s happening today with the pension liabilities. Or, if the central government used the resources o f ECOPETROL to pay i t s debts, or defaulted on the debt it sold to Ecopetrol, it would diminish Ecopetrol’s ability to invest, which in turn would revert in terms o f larger deficits as a result o f the company’s declining o i l production. 4.16 The second observation i s that, as shown in Figure 12, rather than diminishing, the total debt o f the central government remained constant as a percent o f GDP since 2002. In fact, the total debt would have increased by 5 percent o f GDP if the nominal exchange rate against the U S Dollar had remained constant at its 2002 level. In other words, if the currency were to depreciate back to that level as a result of, say, a decline in commodity prices, the debt o f the central government would be around 60 percent o f GDP . Figure 12. Central National Government: External And Internal Debt I Central National Government: External and Internal Debt 60% 50% &Internal debt central government -External debt central government a 40% W -Total debt central Dovernment L 9 30% -External debt central government with 2002 exchange rate aner 2002 - Total debt central government with 2002 exchange rate after 2002 20% 10% Source: Ministry of Finance; Banco de la Republica; and Fund staff estimates. 43 4.17 There was also sizeable substitution o f domestic for external debt in 2005 (Figure 12), when the government prepaid $3 billion in external debt while issuing a comparable amount in pesos in the domestic market. At the same time, there was an increase in the interest rates paid by the government. The increases in the interest rates o n 10-year U.S. treasury bonds had triggered a depreciation o f the peso o f about 8 percent vis-a-vis the U.S. dollar starting in February 2006, together with a fall in equity prices and a rise in yields on government securities. The Government expects that these developments will result in an increase in interest payments equivalent to one percent o f GDP in 2006 (Figure 13). Figure 13. Central Administration Interest Payments Central adrnlnlAratlon: Interest expenditures 1 4.5% 4.0% 3.596 3.0% 8 - 6 2.5% -8- f! -&- 2.0% 1.5% :-:: 0.0% 2001 2002 2003 2004 2W5 *st 2006 pmJ Source: Ministry of Finance; Banco de la Republica; and Fund staff estimates. E. Fiscal Commitment, Public Debt and Overall Risks 4.18 It is clear that the fiscal situation o f Colombia improved markedly during the years o f the fiscal operations. Yet, such improvements were mainly due t o exogenous improvements in the Colombian economy. As i s frequently the case, a country's economic variables become all positive when the prices o f commodities are high and capital inflows substantial; conversely, the country's economy becomes depressed when those prices and inflows decline. 4.19 In the late 1990s and early 2000s, when the fiscal crisis was at its worst, everything conspired against the fiscal health o f the country: the fall in commodity prices led to a fall in exports and GDP, and to a rapid depreciation o f the currency; in turn, currency depreciation raised the debt burden; and the combined situation, aggravated by adverse political events, reduced capital inflows and turned them into net outflows. Since 2002, commodity prices have gone up and, with them, the country's exports and GDP; the currency appreciated, leading to a fall in the premium o f peso over dollar interest rates and a decrease in the burden o f the external debt; and dollar interest rates went 44 down to record l o w levels. That is, all the exogenous factors are favorable. Any deterioration in such circumstances would worsen the fiscal situation o f the country again. The question is, has the country’s fiscal vulnerability to a crisis declined as a result o f the fiscal operations? 4.20 Given that the fiscal situation tends to deteriorate when there i s an economic downturn, it i s important to compare the 2005 situation with the one which prevailedjust before the fiscal crisis. In 1997, the year before the 1998 crisis, the deficit o f the core o f the public sector, the central administration, was 3.5 percent o f GDP. This deteriorated to 5.2 percent and 7.4 percent o f GDP in 1998 and 1999, respectively. If the fiscal deficit deteriorated at the same pace today, it would reach 6.5 percent in one year and 8.7 percent in two years, creating a situation that would be much worse than that which the country faced at the turn o f the century. The situation o f the broadest measure o f fiscal operations, the combined public sector, would deteriorate even faster if, as assumed, the country’s terms o f trade deteriorated as well, or if, as likely to happen regardless o f the behavior o f o i l prices, Ecopetrol reduced i t s contributions to the government as a result o f i t s investment needs. 4.21 It could be argued that the government would react more quickly this time to adjust expenditures to the lower level o f revenues; yet, as it has been extensively discussed in the previous chapters, the budget remains very rigid, in some areas more so than in 1998. 4.22 We can conclude that: First, the central administration i s not stronger than when the fiscal crisis started. Second, the burden o f the debt is heavier. In 1997, the ratio o f the central government debt to GDP was 20.2 percent o f GDP; in 2005, it was 55.4 percent. 4.23 That is, the fiscal improvement o f the central government is not likely to be sustained if there i s a downturn in the economic activity o f the country. 4.24 Given that the improvements in the non-financial public sector and the combined public sector largely depend on the prices o f o i l and on the limited implementation capacity o f the local and regional governments-two factors that can change in the future-it seems that their fiscal balances are also prone to deteriorate very rapidly in case o f a crisis. 4.25 For these reasons, and given that the objective o f the FIAL program was to improve the fiscal situation in a structural way, independently o f the circumstances, this report rates the Overall Fiscal Commitment o f the FIAL program unsatisfactory. In terms o f the achievement o f the objectives, the report rates the program modest. F. Summary and Overall Rating of the Combined Fiscal Operations 4.26 Insummary: The balance o f the non-financial public sector improved substantially, but mainly because o f declining investment, increasing royalties resulting from atypically 45 high o i l prices, and expenditure delays resulting from the lack o f implementation capacity at the regional levels. e The primary balance o f the central administration remained negative (-1.2 percent o f GDP in 2005). e Regardingthe public debt indicators, these improved as a result o f a reduction in the ratio o f external debt to GDP. Yet, such reduction was due to two major trends: e First, the currency appreciated in nominal and real terms. This, o f course, i s reversible. e Second, the government substituted domestic for external debt at the margin. This has increased the burden o f the interest payments. The government estimates that this would represent an increase equivalent to one percent o f GDP in 2006. e Also, as discussed in the previous chapters, the fiscal situation improved while the most important structural issues were not resolved. 4.27 For all these reasons, this report rates the improvements attained in the last few years as unsustainable in the face o f a crisis. Therefore, the risk to development outcomes i s rated as high for both operations. 4.28 These considerations apply not just to the operations as a whole but also to the macroeconomic framework and the over-all fiscal commitments o f the SFAL and the FIAL series. 47 5. Lessons 5.1 The lessons learned in these operations are not new to the Bank. First, as noted in IEG’s I C R Review o f FIAL 1 11, project design needs to be clearly aligned with development objectives to attain the latter, Even if the structural deficit o f the central administration i s “highly sensitive and political” as the I C R states, the magnitudes o f these structural rigidities were such that they must be addressed if progress i s to be made in achieving the substantial fiscal adjustment that is required for sustained macroeconomic stability. Second, loans with large numbers o f objectives and conditions, and involving too many institutions relative to the management capacity o f the Government and the Bank itself, overtax the implementation capacity o f both the Bank and the borrower and results in cumbersome execution. While there may be differences in opinion regarding what would be the maximum number o f tasks that i s practical to carry out under a loan, according to the opinions collected by the IEG mission in the country, practically all the people involved in the implementation o f this operation thought that the number o f objectives, conditions and participating institutions in these operations was excessive and felt that they overtaxed the Bank’s and the borrower’s implementation capacities and dispersed the energies o f reform. Just the FIALs had 10 sub-components, with an average o f four to five activities per sub-component that should be performed to meet the sub-component objectives. Given that there were 3 FIALs (there were originally 4 but one was dropped), this made for roughly 150 sub-activities, which required follow up, comments, discussions and recommendations. Third, the inclusion o f objectives o f widely different levels o f priority and weak connection with the ultimate goals o f the operations tends to obscure the degree o f attainment o f the latter. In the operations reviewed in this report, the impact on the fundamental goals o f the operations o f many o f the sub-components, activities and sub-activities was very tenuous. This mix o f highly important with much less important activities obscured the ultimate objectives o f the operation to the point that the government could comply with most o f the objectives o f the components and sub-components and s t i l l fail to comply with the fundamental objectives o f the loan. Fourth, success depends on the borrower’s ownership o f the objectives o f the loan. The reviewed operations met this condition at a very general level-the government wanted to improve i t s fiscal condition. Yet, the government did not actually share the objective o f reducing the rigidity o f the system. This was evident in several ways: A s noted in the IEG’s I C R Review o f the FIAL 111, these operations did not address the main rigidities-the ones related to the transfers to the local and regional governments-even if their President’s Report recognized their importance. The S F A L supported a reform that actually increased the rigidity o f the system. 48 9 The FIAL program also included an important reform that would worsen the rigidity o f the system, not just in terms o f quantities but also in terms o f their allocation: the plan to earmark the royalties received by the government. As noted in paragraph 3.59, “after the FIALs presented as their main objective the reduction o f budgetary rigidities, which included earmarking prominently, the government has not yet decided i t s policy about earmarking, is not ruling out the possibility o f issuing new earmarked expenditures and i s considering the possibility o f eliminating only those that have achieved their objectives. This undermines the credibility o f the most important objective o f the FIALs and shows that i t s commitment t o this objective is s t i l l lacking almost 4 years after the Program was approved.” Also, there was another sub-component, the management contracts, which the Bank insisted in including in the FIALs against the opinion o f the government. The lack o f ownership was one o f the reasons for the failure o f this sub-component. 49 Statistical Annex Table 7. Fiscal Balances ~ 2001 2002 2003 2004 2005 2006' Total revenue 29.5% 29.5% 30.0% 30.3% 31.O% 31.2% Current revenue 29.5% 29.5% 30.0% 30.3% 31.0% 31.2% Tax revenue 19.2% 19.1% 19.5% 19.6% 20.4% 20.9% Non-tax revenue 10.3% 10.4% 10.5% 10.7% 10.6% 10.2% Financial income 1.3% 0.9% 1.1% 1.5% 1.5% 1.5% Operating surplus of public 4.2% 4.0% 4.6% 3.4% 3.9% 3.8% enterprises Of which: Ecopetrol 2.5% 2.3% 2.9% 3.4% 3.6% 3.7% Other 4.8% 5.4% 4.8% 5.7% 5.2% 4.9% Total expenditure and net lending I/ 33.2% 33.5% 32.5% 31.5% 31.3% 32.7% Current expenditure 24.9% 25.9% 24.3% 25.9% 25.4% 26.3% Wages and salaries 7.5% 8.0% 7.3% 7.0% 7.1% 7.0% Goods and services 3.5% 3.4% 3.3% 4.4% 4.6% 4.4% Interest 5.0% 4.5% 4.7% 4.8% 4.0% 4.8% External 2.3% 2.1% 2.1% 1.9% 1.6% 1.5% Domestic 2.8% 2.4% 2.7% 2.8% 2.4% 3.4% Transfers to private sector 9.8% 9.8% 9.1% 7.8% 7.8% 7.9% Of which.from social security 6.5% 6.7% 6.9% 6.9% 6.8% 6.9% Other 21 -0.9% 0.2% -0.1% 1.9% 1.9% 2.1% Capital expenditure 8.2% 7.6% 8.2% 5.7% 5.9% 6.4% Fixed capital formacition (cash basis) 8.2% 7.4% 8.1% 5.6% 5.9% 6.3% Other (including floating debt) 31 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% Transfers 0.1% 0.2% 0.1% 0.1% 0.0% 0.0% Net lending 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% Statistical discrepancy 0.2% -0.1% -0.3% -0.3% 0.3% 0.0% Non-financial public sector balance -3.5% -4.2% -3.2% -1.5% 0.0% - I .5% Quasi-fiscal balance (BR cash profits) 0.7% 0.8% 0.6% 0.5% 0.2% 0.3% Fogafin balance 0.2% 0.3% 0.3% 0.3% 0.2% 0.1% Net cost of financial restructurina " 41 -0.7% -0.6% -0.4% -0.5% . ... -0.4% . .~ -0.4% .~ '/ The information on local governments has been significantly revised starting in 2004, leading to large changes in reported public investment and other non-tax revenues and other current spending. Expenditure reported on commitments basis. 3' Includes adjustments to put spending on commitment basis and the change in unpaid bills of selected non-financial public enterprises. 4' Interest payments on public banks restructuring bonds and mortgage debt relief related costs. * Projected Source: Ministry of Finance; Banco de la Repdblica; and Fund staff estimates. 50 Table 8. Operations of the Central Government Includes Central Administration, Social Security And Decentralized Agencies 2000 2001 2002 2003 2004 2005est 2006 p Total revenue 18.7% 20.3% 19.7% 20.8% 22.0% 22.0% 23.2% Current revenue 18.5% 20.3% 19.7% 20.7% 21.6% 21.7% 23.2% Tax revenue 14.6% 16.5% 16.4% 16.9% 17.7% 17.4% 18.5% Non-tax revenue 3.2% 3.0% 2.6% 3.2% 3.4% 3.2% 3.3% Property income 0.8% 1.1% 0.7% 0.9% 0.9% 1.2% 1.2% Other 2.4% 1.9% 1.8% 2.3% 2.6% 1.9% 2.1% Current transfer receipts 0.7% 0.8% 0.8% 0.6% 0.5% 1.2% 1.4% Local government 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 0.7% Local enterprises 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Local non-financial public sector 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% National enterprises 0.7% 0.7% 0.8% 0.6% 0.5% 0.5% 0.7% Private sector 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Capital revenue 0.2% 0.0% 0.0% 0.1% 0.4% 0.3% 0.0% Total expenditure and net 23.0% 25.1% 25.3% 24.5% 25.7% 24.6% 26.3% lending Current expenditure 19.1% 20.4% 22.0% 20.6% 21.8% 20.8% 22.3% Wages and salaries 3.4% 3.5% 3.4% 3.2% 3.0% 2.7% 2.9% Goods and services 2.2% 2.4% 2.2% 2.3% 2.3% 2.1% 2.4% Interest 3.0% 3.7% 3.5% 3.9% 3.8% 3.5% 4.2% External 1.2% 1.7% 1.7% 1.8% 1.6% 1.5% 1.3% Domestic 1.8% 1.9% 1.7% 2.1% 2.2% 2.0% 2.9% Transfers to 10.6% 11.7% 12.3% 11.7% 12.2% 12.4% 12.8% Local governments 3.0% 3.4% 4.0% 3.5% 3.4% 3.3% 3.3% Local enterprises 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Local non-financial public sector 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% National enterprises 0.0% 0.0% 0.2% 0.1% 0.1% 0.0% 0.0% Private sector 7.7% 8.3% 8.0% 8.1% 8.8% 9.1% 9.5% Other currency expenditure -0.1 Yo -0.9% 0.6% -0.5% 0.5% 0.0% 0.0% Capital expenditure 3.4% 4.2% 3.0% 3.5% 3.8% 3.9% 4.2% Fixed Capital Formation 1.6% 2.1% 1.9% 1.8% 2.1% 2.4% 2.7% Transfers to 1.8% 2.2% 1.1% 1.8% 1.7% 1.6% 1.5% Local governments 1.7% 1.9% 1.O% 1.6% 1.5% 1.5% 1.5% Local enterprises 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Local non-financial public sector 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% National enterprises 0.1% 0.2% 0.0% 0.1% 0.1% 0.0% 0.0% Private sector 0.1% 0.1% 0.0% 0.1% 0.1% 0.0% 0.0% Net lending 0.4% 0.5% 0.4% 0.4% 0.1% -0.1% -0.2% Overall Balance -4.3% -4.8% -5.6% -3.7% -3.7% -2.6% -3.1% 51 Table 9. Operations of the Central Administration 2001 2002 2003 2004 2005 est 2006 proj Total revenue 14.7% 15.0% 13.3% 15.5% 16.1% 17.4% Current revenue 14.7% 15.0% 13.3% 15.5% 16.1% 17.4% Tax revenue I / 13.2% 13.4% 12.1% 14.2% 14.9% 15.8% Net income tax and profits 5.3% 5.3% 4.5% 6.1% 6.1% 6.9% Goods and services 5.9% 5.8% 5.5% 6.2% 6.5% 6.6% VAT 5.3% 5.3% 5.1% 5.8% 6.1% 6.2% Gasoline 0.6% 0.5% 0.4% 0.4% 0.4% 0.4% Internationaltrade 1.1% 1.O% 0.8% 0.9% 1.O% 1.O% Financial transactions tax 0.8% 0.7% 0.6% 0.9% 0.8% 0.8% Stamp and other taxes 0.0% 0.7% 0.7% 0.2% 0.4% 0.5% Non-tax revenue 1.5% 1.6% 1.2% 1.2% 1.2% 1.6% Property 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% Other 1.2% 1.3% 1.O% 1.1% 1.1% 1.5% Total expenditure and net lending 20.4% 21.4% 17.8% 20.9% 21.O% 22.4% Current expenditure 15.8% 18.2% 14.7% 17.5% 17.9% 19.0% Wages and salaries 3.0% 3.0% 2.6% 2.8% 2.5% 2.6% Goods and services 1.5% 1.5% 1.3% 1.4% 1.5% 1.6% Interest 3.5% 3.5% 3.5% 3.8% 3.6% 4.6% External interest 1.6% 1.7% 1.6% 1.6% 1.5% 1.3% Domestic interest 1.9% 1.7% 1.8% 2.2% 2.1% 3.2% Other expenditure 2/ -0.9% 0.7% -0.5% 0.5% 0.0% 0.0% Current transfers 3/ 8.6% 9.5% 7.8% 9.1% 10.2% 10.2% Capital expenditure 3.8% 2.5% 2.7% 3.3% 3.0% 3.2% Fixed capital formation 2/ 1.3% 1.3% 1.O% 1.4% 1.1% I.8% Capital transfers 2.5% 1.2% 1.7% 1.9% 1.9% 1.5% Net lending 0.8% 0.6% 0.3% 0.1% 0.1% 0.2% Overall balance -5.7% -6.4% 4.5% -5.4% -4.8% -4.9% Memorandum Priman, balance -2.2% -2.9% -1 .O% -1.6% -1.2% -0.4% 53 Annex A. Basic Data Sheet STRUCTURALFISCAL ADJUSTMENT PROJECT (TF-26673; FSLT-70920) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 400 400 100% Loan amount 400 400 100% Cofinancing Cancellation Institutional performance Project Dates Original Actual Initiating memorandum 07/16/2001 09/17/2001 Negotiations 11/07/2001 11/07/2001 Board approval 12/18/2001 12/18/2001 Signing 12/19/2001 12/19/2001 Effectiveness 12/20/2001 12/20/2001 Closing date 02/2 1/2003 Mission Data Date No. of Staff Specializations Performance Rating Types of (monthlyear) persons days represented rating trend problems in field Identification/ Feb to Mar 12 T-rL (2); S Preparation 2001 Consultant (2); Program Asst. (1); Economists (Health, Pensions, Macro, Fiscal) (5); Decentralization (1) Apr 2001 11 TTL (2); S Consultant (2); Program Asst. (1); Economists (Health, Pensions, Macro, Fiscal) (5); Decentralization ANNEXA 54 Date No. of Staff Specializations Performance Rating Types of (monthlyear) persons days represented rating trend problems in field (1) meeting with counterparts I officials in Washington DC May 2001 12 TTL (2); S Consultant (2); Program Asst. (1); Economists (Health, Pensions, Macro, Fiscal) (5); Decentralization (1); Legal (1) July 2001 12 TTL (2); S Consultant (2); Program Asst. (1); Economists (Health, Pensions, Macro, Fiscal) (5); Decentralization (1); Legal (1) Appraisal Nov 2001 12 TTL (2); S Consultant (2); Program Asst. (1); Economists (Health, Pensions, Macro, Fiscal) (5); Decentralization (1); Legal (1) negotiations took lace in Bogota at the Bank's office Supervision Jan 2002 2 S Feb 2002 2 S Aug 2002 7 TTL (2); S Consultant (1); Health Sector/lSS (1); Social Security/lSS (1); Decentralization (1); Legal (1) Completion Sep 2003 1 (1) S 55 Annex A FIRST PROGRAMMATICFISCAL ADJUSTMENTLOAN AND INSTITUTIONAL (LOAN7167-CO) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 300 300 100% Loan amount 300 300 100% Cofinancing Cancellation Institutional performance Cumulative Estimated and Actual Disbursements FY02 Appraisal estimate (US$M) 300 Actual (US$M) 300 Actual as % of appraisal 100% Date of final disbursement: March 20, 2003 Project Dates Original Actual Initiating memorandum 11/22/2002 Negotiations 02/13/2003 02/13/2003 Board approval 07108/2003 03/18/2003 Signing 03/19/2003 Effectiveness 03/20/2003 Closing date --- 04/30/2003 ANNEXA 56 SECOND PROGRAMMATICFISCAL AND INSTITUTIONAL STRUCTURAL (LOAN LOAN ADJUSTMENT 72010-CO) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 150 150 100% Loan amount 150 150 100% Cofinancing Cancellation Institutional performance Cumulative Estimated and Actual Disbursements FY04 Appraisal estimate (US$M) 150 Actual (US$M) 150 Actual as % of appraisal 100% Date of final disbursement: November 24, 2003 Project Dates Original Actual Initiating memorandum 07/28/2003 08/12/2003 Negotiations 10/21/2003 10/21/2003 Board approval 11/20/2003 11/20/2003 Signing 02/20/2004 11/24/2003 Effectiveness 11/24/2003 11/24/2003 Closing date 02/24/2004 02/24/2004 57 Annex A