The World Bank Equitable and Green Path Development Policy Financing II (P180927) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD460 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$700 MILLION TO THE REPUBLIC OF COLOMBIA FOR THE SECOND EQUITABLE AND GREEN PATH DEVELOPMENT POLICY FINANCING January 23, 2025 Poverty And Equity Global Practice Latin America and Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . The World Bank Equitable and Green Path Development Policy Financing II (P180927) Republic of Colombia GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 20, 2024) Currency Unit COP 4,378.48 = US$1.00 ABBREVIATIONS AND ACRONYMS ANH Agencia Nacional de Hidrocarburos IMF International Monetary Fund (National Hydrocarbon Agency) ASA Advisory Services and Analytics LAC Latin America and Caribbean countries CACs Credit and savings cooperatives LTS Long Term Strategy CCE Public Procurement Agency MADR Ministry of Agriculture and Rural Development CCDR Country Climate and Development MADS Ministry of Environment and Sustainable Report Development CPF Country Partnership Framework MHCP Ministry of Finance and Public Credit CSCs Shared Services Centers MME Ministry of Energy and Mines DANE National Statistics Office in Colombia MRE Ministry of Foreign Affairs DIAN Direccion Nacional de Impuestos MSMEs Micro, Small & Medium Enterprises (National Tax Directorate) DPF Development Policy Financing NDC National Determined Contribution ESG Environmental, Social, and Governance NDP National Development Plan FDI Foreign Direct Investment PAs Prior Actions FEPC Fondo de Estabilización de Precios de PDO Proposed Development Objective Combustibles (Fuel Prices Stabilization Fund) FOMMUR Development Fund for Rural Women PFM Public financial management GDP Gross Domestic Product RSH Registro Social de Hogares (Social Household Registry) GoC Government of Colombia RUI Registro Universal de Ingresos (Universal Income Registry ) GHG Greenhouse Gas SCD Systematic Country Diagnostic IBRD International Bank for Reconstruction WB World Bank and Development FDI Foreign Direct Investment WBG World Bank Group . Regional Vice President: Carlos Felipe Jaramillo Country Director: Mark Roland Thomas Regional Director: Oscar Calvo-Gonzalez Practice Manager (s): Carlos Rodriguez Castelan, Shireen Mahdi Task Team Leader (s): Maria Eugenia Davalos, Fernando Mauro Giuliano The World Bank Equitable and Green Path Development Policy Financing II (P180927) REPUBLIC OF COLOMBIA EQUITABLE AND GREEN PATH DEVELOPMENT POLICY FINANCING II TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3 1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................6 2. MACROECONOMIC POLICY FRAMEWORK....................................................................................7 2.1. RECENT ECONOMIC DEVELOPMENTS ........................................................................................... 8 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .......................................................... 9 2.3. IMF RELATIONS ............................................................................................................................ 12 3. GOVERNMENT PROGRAM ........................................................................................................ 12 4. PROPOSED OPERATION ............................................................................................................ 13 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 13 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 14 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 25 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 26 5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 26 5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 26 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ................................. 26 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 27 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 29 6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 29 ANNEX 1: Policy and Result Framework ............................................................................................ 31 ANNEX 2: Paris Alignment Assessment .............................................................................................. 37 ANNEX 3: Operation Specific Annex .................................................................................................. 42 ANNEX 4: Required Accompanying Documentation .......................................................................... 54 Page 1 The Colombia Equitable and Green Path Development Policy Financing 2 was prepared by an IBRD team led by María Eugenia Dávalos, Fernando Giuliano, and Paola Buitrago Hernandez. The team includes: Patricia De Narvaez Cano, Claudia Croce, Jeannette Estupinan, Olga Fonseca, Desiree Gonzalez, Eva M. Gutierrez, Laura Juliana Higuera Ardila , Ana Elena Khouri, Raquel Alejandra Letelier, Manuel Luengo, Manjola Malo, Rocio M. Malpica, Dahiana Merizalde, Carlos Alberto Molina Prieto, Juan Manuel Monroy, Kevin McCall, Ivonne Astrid Moreno, Rafael Muñoz, Martin Oswald, Maryan Porras Barrera, Marcela Portocarrero, Juan Camilo Sanchez, Luz Stella Rodriguez, Paula Rossiasco, Juan Camilo Sanchez, Jeremy Veillard, Maria Vizeu Pinheiro. Additional colleagues provided important contributions and guidance in the process. The team is appreciative of the excellent collaboration with the Government of Colombia during the identification of this operation. The team acknowledges the leadership of the Ministry of Finance and Public Credit (MHCP) and the Department of National Planning. The World Bank Equitable and Green Path Development Policy Financing II (P180927) @#&OPS~Doctype~OPS^dynamics@paddpfbasicinformation#doctemplate SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Operation ID Programmatic If programmatic, position in series P180927 Yes 2nd in a series of 2 Proposed Development Objective(s) The development objective of the proposed operation is to support measures that (i) promote more equitable and green fiscal policies, (ii) establish the institutional framework to increase access to productive assets for vulnerable groups, and (iii) establish non-price incentives to promote climate action. @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate Organizations Borrower: Republic of Colombia Contact Title Telephone No. Email Implementing Agency: Ministry of Finance and Public Credit, National Planning Department (DNP) Contact Title Telephone No. Email Luz Stella Campillo Deputy Director 576013811700 luz.campillo@minhacienda.gov.co Multilateral and Bilateral Financing Natalia Bargans Deputy Director of Credit 576013815000 nbargans@dnp.gov.co @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? Yes SUMMARY Page 3 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Total Financing 700.00 DETAILS World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 700.00 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Poverty and Equity Macroeconomics, Trade and Investment CLIMATE Climate Change and Disaster Screening No @#&OPS~Doctype~OPS^dynamics@padoverallrisk#doctemplate OVERALL RISK RATING Overall Risk ⚫ Moderate Page 4 The World Bank Equitable and Green Path Development Policy Financing II (P180927) . Results Indicator name Baseline Target Results Indicator #1: Percentage of total (non-oil) fiscal revenues paid 4.1% [2022] 4.8% [2025] by those at the top income decile in income taxes Result Indicator #2: Percentage of poor and vulnerable people with 51.9% [2023] 62% [2025] georeferenced information in the household social registry Results Indicator #3: Revenues raised from taxes on sweetened beverages and ultra-processed foods as a percent of Gross Domestic 0% [2023] 0.2% [2025] Product (GDP) Results indicator #4: Fiscal carbon savings (related to carbon taxation and gasoline subsidy reduction) as a percent of GDP1 0% of GDP [2022] 2% of GDP [2025] Results Indicator #5: Placement of women by public employment services (cumulated value) 382,000 [2021] 2,201,0002 [2025] Results Indicator #6: Number of productive initiatives submitted by women’s organizations that receive financing and technical support 0 [2023] 900 [2025] from the Development Fund for Rural Women (FOMMUR).3 Results Indicator #7: Number of municipalities in which ethnic and 0 [2022] 10 [2024] peasant communities are enabled as cadastral implementors Results Indicator #8: Venezuelan migrants with a regular migratory status4 that grants them access to public services and benefits 1,999,408 [2023] 2,540,000 [2025] (Number) Results Indicator #9: Percentage of CACs that aligned their bylaws to 0 [2022] 50 [2025] service Micro, Small & Medium Enterprises (MSMEs) Results Indicator #10: Percentage of supervised entities participating in the open finance scheme that have implemented all provisions 0 [2022] 100 [2025] contained in the External Circular 004/245 Results Indicator #11: Total number of hectares under PES and 516,874 [2022] 700,000 [2025] other conservation incentives (hectares) Results Indicator #12: Flaring efficiency6 0.0064 [2022] 0.0059 [2025] Results Indicator #13: Percentage of Collective Investment Funds integrating ESG factors in their investment decision-making 0% [2022] 100% [2025] processes and reporting requirements . 1 Fiscal Carbon Savings (FCS) in year t with respect to year 2022 (as a share of GDP), is defined as: FCS (t, 2022) = [Revenue raised by carbon taxes (t) + Fuel Subsidies (t)]/GDP(t) –[Revenue raised by carbon taxes (2022) + Fuel Subsidies (2022)]/GDP(2022). For 2022 this is trivially equal to 0%. 2 Baseline refers to annual placements in year 2021. Target reflects the cumulated value of job placements during the 2021-2025 period. 3 Baseline and target reflect expected number of productive initiatives submitted by women’s organizations and/or women individ ually, supported in the first wave of FOMMUR’s implementation (under the Fund’s four financing lines). 4 Refers to persons registered in the regularization mechanism Estatuto Temporal de Protección para Migrantes Venezolanos (ETPV) and who have been authorized a Temporary Protection Permit TPP (Estatus de Proteccion Temporal). 5 The total number of supervised entities for which the provisions of External Circular 004/24 are applicable will be known once the SFC completes a diagnostic of the market (before August 1, 2024). 6 Flaring efficiency calculated using the formula: (barrel of oil- equivalent of gas flared) / (barrels of oil-equivalent produced). Page 5 The World Bank Equitable and Green Path Development Policy Financing II (P180927) IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA 1. INTRODUCTION AND COUNTRY CONTEXT 1. The Equitable and Green Path Development Policy Financing (DPF), proposed at $700 million, aims to catalyze reforms to foster (i) equitable and green fiscal policies, (ii) an institutional framework enhancing access to productive assets for vulnerable groups, and (iii) non-price incentives to promote climate action. This DPF is the second in a two-part programmatic series. In Colombia, where the fiscal system has a small impact on income distribution7, the program seeks to enhance fiscal policy’s alignment with the country’s goal of promoting equity. Deep-seated inequities are also rooted in institutional structures that consistently restrict access to opportunities for certain population groups, perpetuating disparities and social exclusion if left unaddressed. As such, the program promotes reforms in the country’s institutional framework towards increased equality of opportunity, starting with equity in access to productive assets. Finally, the government has set ambitious climate goals for 2050, aiming for net zero greenhouse gas emissions. Achieving this will require combining government policies, including fiscal measures and appropriate economic incentives, to drive climate action. 2. Solid economic fundamentals and strong macroeconomic policy institutions characterize Colombia. These institutions are anchored to a modern inflation-targeting regime to ensure central bank independence and price stability, a flexible exchange rate system that enhances economic resilience, and a rules-based fiscal framework including a structural primary balance fiscal rule and a medium-term fiscal framework to promote fiscal discipline and sustainability. This robust policy framework, combined with prudent macroeconomic management, has provided a stable foundation for managing external and domestic shocks effectively. 3. Yet income inequality in Colombia ranks among the world’s highest. Colombia exhibits the highest income inequality among OECD countries and ranks second highest among 18 Latin American and Caribbean countries (LAC).8 Official measures indicate a rise in inequality from 2019 to 2020 due to the COVID-19 shock, and while it slightly declined by 2022, it remains elevated.9 Poverty reduction has resumed post-pandemic, yet extreme poverty stagnates nationally and surges in rural areas. Certain groups, such as women, rural populations, Afro- Colombians, indigenous people, and Venezuelan migrants, endure persistently lower economic opportunities and higher poverty rates, with limited social mobility exacerbated by disparities in education and job access. Inequities have several drivers, including unequal access to productive assets (such as human capital, land, and finance),10 a fiscal system that does not redistributive enough through its taxes and spending, labor market barriers and regulations that limit economic opportunities, and an institutional framework that is not conducive to closing gaps between groups and territories.11 7 Baquero, Davalos, and Monroy (2023). 8 This is according to 2019 data from the World Bank Equity Lab. 9 Inequality, as officially measured, increased from 0.526 (2019) to 0.544 (2020) with the COVID-19 shock, and while it declined to 0.523 in 2021, it remains high. The 2022 figure is not yet comparable to years prior to 2021 due to methodological changes. 10 Analysis from the ongoing Poverty and Equity Assessment (forthcoming). 11 World Bank (2021). Building an Equitable Society in Colombia. Washington DC. Page 6 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 4. Climate-related hazards and climate change may exacerbate poverty and impede growth.12 The country faces significant risks from rising temperatures, increased rainfall variability, and the intensification of extreme weather events such as floods and droughts due to climate change. Colombia has embraced the climate agenda by mainstreaming climate action in its latest National Development Plan, operationalizing its National Determined Contribution (NDC) targets, including a 51 percent reduction in greenhouse gas emissions by 2030. Meeting ambitious climate targets requires a comprehensive approach, with a combination of price signals, payment incentives, sectoral regulations, and efficient frameworks to develop green capital markets. 5. The proposed operation builds on initiatives supported in the first phase of this series and directly advances the government's objectives for a more equitable and greener Colombia. The program aligns closely with the government’s policy agenda, particularly the principles of equity and sustainability in the National Development Plan 2022-2026 (NDP 2022-2026). This includes initiatives for a greener, equitable fiscal system, such as better- targeted social programs and phasing out regressive fuel subsidies. Additionally, measures aim to narrow inequalities in the productive capacity of marginalized groups to foster a more inclusive private sector through financial inclusion and incentivize cleaner production systems. These reforms align with the Country Partnership Framework (CPF) FY24-FY27 for Colombia presented to the Board on February 13, 202313, emphasizing equitable development, sustainable economic transformation, and resilience to climate change. 6. The proposed operation also aligns with the World Bank Group (WBG)'s vision, strategies, and priorities, supporting the WBG Corporate Scorecard, the WBG's Gender Strategy, and the Green, Resilient, and Inclusive Development (GRID) approach. By promoting decarbonization, bolstering public finances, and fostering inclusivity, the DPF contributes to Colombia's journey towards a more equitable, resilient, and sustainable future while also addressing global challenges like the energy transition. 2. MACROECONOMIC POLICY FRAMEWORK 7. The macroeconomic policy framework is adequate for this operation. Notwithstanding domestic and external risks, Colombia has solid fundamentals and strong macroeconomic policy institutions founded on inflation targeting, a flexible exchange rate, and rules-based fiscal policy. Fiscal reforms in 2021 and 2022, the establishment of an autonomous fiscal council, and a strengthened fiscal rule with the introduction of a debt anchor provide a framework for reducing the public deficit and debt-to-GDP ratios and rebuilding fiscal buffers. The Central Bank maintains a prudent monetary policy stance, and the government is committed to adhering to the fiscal rule, keeping its track record of compliance. Foreign Direct Investment (FDI) remains strong, and foreign exchange reserves are ample. Long average maturity (10.3 years) and duration (5.9 years) of central government debt mitigate the transmission of shocks to debt and debt service payments. Proactive supervision and adequate capital and liquidity buffers are expected to help the financial sector absorb potential shocks from external financial stress and increases in risky credit portfolios. World Bank (2021). Building an Equitable Society in Colombia. Washington DC. ducted for the CCDR “suggests that, when damage to physical capital and productivity is considered, climate change will reduc e GDP by between at least 1.5 percent and 2.5 percent by 2050 in the absence of investments in adaptation. Poor and vulnerable populations will be affected disproportionately, with household consumption falling more among the rural than the urban population, and wage losses twice as high for informal than for formal workers.” 13 It supports reforms towards each of the CPF’s high-level outcomes of (i) equitable territorial development and social inclusion; 2) sustainable and inclusive transformation of the economy; and 3) strengthened resilience to climate change and low carbon transitions. Page 7 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 2.1. RECENT ECONOMIC DEVELOPMENTS 8. Colombia’s economy is growing moderately, driven by consumption and investment growth. After averaging 9.0 percent in 2021-22, GDP grew by 0.6 percent in 2023 and 1.7 percent (y-o-y) in the first three quarters of 2024. Declining inflation and a less contractive monetary policy stance supported resilient private consumption and some improvements in investment, albeit still at low levels. The health, education, public administration, agriculture, and entertainment sectors have been driving growth and a mild increase in employment. Still, economic activity lost momentum in the second half of 2024 as required spending cuts to meet fiscal targets lessened the contribution of the public sector to growth. With a weak performance in commerce and manufacturing, employment and unemployment rates worsened slightly over the last six months. Labor force participation declined somewhat and more so for women than for men. 9. As inflation falls and economic activity moderates, the Central Bank is gradually reducing the policy rate. Inflation fell from 13.3 percent in March 2023 to 5.4 percent in October 2024, supported by falling food prices and the appreciation of the peso. At 5.1 percent, inflation expectations for 2024 remain above the Central Bank target band (2-4 percent) in the face of persistent price inertia in services and a high level of indexation. The monetary policy rate is 9.75 percent, reflecting a cumulative 350-bp reduction since its peak. The Central Bank maintains its cautious easing cycle in light of tighter global financial conditions and heightened fiscal risks at home. 10. The banking sector remains resilient, and soundness indicators are well anchored. Post-pandemic loose financial conditions and a credit history amnesty to non-performing debtors led to a sizeable credit portfolio expansion. Due to monetary policy tightening and prudential measures implemented by the financial market regulator, real credit has been gradually contracting, declining by 4.3 percent year on year as of September 2024. Non-performing loans peaked in April 2024 and have stabilized since then at around 5.1 percent, following trends in consumption loans. Although credit quality deterioration persists in some smaller segments, banking institutions’ solvency and provision indicators remain well above regulatory levels, with the capital adequacy ratio at 18.1 percent. 11. The current account deficit (CAD) has narrowed from an annual 4.8 percent of GDP in 2023Q2 to 1.9 percent of GDP in 2024Q2 as the economy decelerated in 2023. Imports fell 9.0 percent (12-month rolling year), while exports contracted 3.9 percent, as higher exports of services were partially offset by lower commodity prices. Primary payments also fell but remained high at 5.8 percent of GDP due to rising non- portfolio interest payments. Remittances continued to grow strongly, while unusually high FDI inflows to the oil and mining sectors (reportedly aimed at covering increased tax liabilities from the 2022 tax reform) are normalizing. Portfolio investment inflows remained low at 0.7 percent of GDP. The Central Bank completed a reserves accumulation program in September (US$1.5 billion), setting international reserves at US$63 billion, equivalent to nine months of projected imports. 12. Fiscal accounts underperformed in 2024 due to lower-than-anticipated tax collection and ambitious spending plans on education, health, and social programs. An 8.2 percent (y-o-y) fall in revenues as of September 2024, equivalent to 1.1 percent of GDP, was largely explained by weak corporate income tax receipts from oil and mining, partially due to court reversals of parts of the 2022 tax reform. These add to overly optimistic assumptions on tax administration efficiency gains and contingent revenues from tax disputes. The government responded with spending cuts of 1.7 percent of GDP across current and capital expenditures, yet further cuts will be needed to meet fiscal targets in 2024. In this context, EMBIG spreads rose to 322 bps by Page 8 The World Bank Equitable and Green Path Development Policy Financing II (P180927) early December from 300 bps one year ago, among the highest in the region, but remain below November 2022 levels. Central government debt reached 58.2 percent of GDP in June. Table 1. Colombia: Key Macroeconomic Indicators, 2020–2027* Est. Proj. Proj. Proj. Proj. 2020 2021 2022 2023 2024 2025 2026 2027 Real sector (percent change) Real GDP -7.2 10.8 7.3 0.6 1.7 3.0 2.9 2.9 Contributions: Private Consumption -3.5 10.5 7.9 0.6 0.6 1.7 2.0 2.2 Government Consumption -0.1 1.7 0.1 0.3 0.0 0.0 0.0 0.0 Investment -4.5 2.2 3.0 -5.3 2.3 1.4 0.8 0.8 Exports -3.4 1.9 1.6 0.5 0.5 0.6 0.6 0.7 Imports 4.6 -5.3 -5.3 3.9 -1.4 -0.7 -0.6 -0.8 Unemployment rate (nat. def. -- percent) 16.5 13.8 11.2 10.2 - - - - GDP deflator 1.5 7.8 14.9 6.3 5.7 3.9 3.8 3.4 CPI (average) 2.5 3.5 10.2 11.7 6.9 3.9 3.1 3.0 Fiscal accounts (Central Gov. --percent of GDP) Revenues** 15.3 16.1 16.2 18.8 17.1 17.8 18.1 18.0 Expenditures 23.1 23.1 21.5 23.1 22.8 22.8 22.4 21.7 Fiscal balance -7.8 -7.0 -5.3 -4.3 -5.6 -4.9 -4.3 -3.7 Gross debt 65.0 63.0 60.8 56.7 55.6 55.8 56.1 55.8 Fiscal accounts (General Gov. --percent of GDP) Revenues 26.0 26.6 27.6 32.4 28.8 28.8 28.8 27.9 Expenditures 33.2 33.7 34.1 35.3 33.5 33.2 32.4 31.2 Fiscal balance -7.2 -7.1 -6.5 -2.9 -4.7 -4.3 -3.6 -3.2 Gross debt*** 67.2 65.7 64.6 60.3 59.4 58.6 58.1 55.8 Selected monetary accounts (percent change) Base money 20.5 9.6 6.4 0.0 … … … … Credit to private sector 2.2 10.9 17.5 2.5 … … … … Policy interest rate (end-of-period) 1.75 2.5 12.0 13.0 … … … … External sector (percent of GDP) Current account balance -3.4 -5.6 -6.1 -2.5 -2.3 -2.7 -2.7 -2.6 Exports GNFS 14.1 16.0 21.2 18.8 17.4 16.0 15.3 15.2 Imports GNFS 19.0 22.3 25.9 21.0 19.9 18.6 18.0 17.5 Foreign direct investment (net) -2.1 -2.0 -4.0 -4.4 -2.4 -2.4 -2.3 -2.3 Gross reserves (US$ billion, eop) 59.0 58.6 57.3 59.0 60.4 61.1 61.8 62.5 In months of next year's imports 12.3 7.8 8.2 9.0 8.9 8.9 8.7 8.5 As % of short-term external debt 267 237 192 181.2 … … … … External debt 57.1 53.9 53.1 53.7 … … … … Terms of trade (% change) -4.9 15.6 13.8 -5.1 … … … … Exchange rate (COP/US$, average) 3,693 3,746 4,256 4326.0 … … … … Memo items Nominal GDP (US$ million, current) 270,348 318,367 345,330 363,494 413,984 454,341 481,899 507,543 Nominal GDP (COP billion, current) 998,471 1,192,634 1,469,791 1,572,458 1,690,586 1,809,009 1,932,165 2,055,333 Oil production (hundred thousand barrels/day) 781 736 754 777 780 780 782 782 Oil price (crude oil average, US$/barrel) 42 70 100 83 80 73 72 76 * Estimates and projections presented in this section have been elaborated based on information available up to November, 2024. ** In 2019 includes extraordinary Ecopetrol dividend. *** Gross debt is unconsolidated debt and it includes Ecopetrol. Source: Colombian autorities and WB staff estimates and projections. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 13. The economy is projected to expand by 1.7 percent in 2024 and slightly above the 2.9 percent potential growth rate in subsequent years. The recovery is expected to be driven by private consumption, robust export growth, and a steady increase in private investment, supported by easing inflation and declining interest rates. On the supply side, commerce and manufacturing activities are projected to stabilize. Inflation is projected to remain above its four percent upper target bound in 2024, falling within the target band in 2025, with the Central Bank progressively easing monetary tightening. The current account deficit is projected to widen in 2025, as economic activity accelerates and imports rebound, and to stabilize at 2.6 percent of GDP by 2027, with solid Page 9 The World Bank Equitable and Green Path Development Policy Financing II (P180927) exports (especially in services) and moderate growth in imports and primary payments. FDI inflows are projected to remain solid, providing the bulk of external financing needs. Colombia’s financial sector is not expected to be a source of significant risk in the forecast horizon. 14. The central government fiscal deficit is projected to increase to 5.6 percent of GDP in 2024 and gradually decline in subsequent years. A fall in revenues from corporate taxes and growing interest liabilities will lead to a rise in the fiscal deficit in 2024 despite efforts to reduce fuel subsidies. Further spending cuts to offset revenue underperformance and comply with the fiscal rule are expected to come from spending under-execution. The fiscal deficit is expected to fall to 4.9 percent of GDP in 2025. Still, the outlook faces considerable uncertainty since Congress rejected the 2025 budget proposal, forcing the government to enact it by decree; if a parallel financing law is not approved, the government will incorporate spending cuts to compensate for the foregone revenues. Going forward, given the prevalence of rigid expenditures, fiscal consolidation is expected to be driven by further reductions in fuel subsidies (expected to phase out entirely in the forecast horizon), lower interest payments as interest rates normalize, and low capital expenditures (that could affect long-term growth potential). Table 2. Balance of Payments financing requirements and sources, 2020-2027 (US$ million) * Est. Proj. Proj. Proj. Proj. 2020 2021 2022 2023 2024 2025 2026 2027 Financing requirements 49,216 55,774 63,142 51,732 57,469 64,390 69,512 71,303 Current account deficit 9,267 17,949 21,185 9,130 9,432 11,835 12,967 13,017 External debt amortization 35,621 37,171 41,386 40,884 46,641 51,839 55,875 57,545 Medium and long term 14,601 15,117 19,298 16,587 19,439 21,916 24,455 24,555 o/w Multilateral and Bilateral institutions 825 974 1,153 1,601 1,207 1,226 1,251 1,269 Short term 22,932 22,054 22,088 24,297 27,203 29,923 31,419 32,990 Gross reserve accumulation 4,328 654 571 1,718 1,395 716 670 741 Financing sources 49,216 55,774 63,142 51,732 57,469 64,390 69,512 71,303 FDI (net) 5,725 6,381 13,799 15,970 9,542 10,480 10,951 11,403 o/w inward (net) 7,459 9,561 17,183 17,145 13,262 15,155 15,795 16,764 External debt disbursements 52,823 52,913 53,019 51,487 57,137 62,102 67,228 69,016 Medium and long term 30,769 30,825 28,722 24,284 27,214 30,683 34,238 34,377 o/w Multilateral and Bilateral institutions 10,300 4,942 3,081 5,100 5,715 6,443 7,190 7,219 Short term 22,054 22,088 24,297 27,203 29,923 31,419 32,990 34,640 Other capital flows (net) -9,333 -3,520 -3,676 -15,724 -9,210 -8,192 -8,667 -9,116 Memo items Remittances (net) 6,660 8,218 9,013 9,687 11,238 11,253 11,267 11,281 Financing requirements (percent of GDP) 18.2 17.5 18.3 14.2 14.2 14.5 14.7 14.3 * Estimates and projections presented in this section have been elaborated based on information available up to November, 2024. Source: Central Bank of Colombia and WB staff estimates and projections. 15. General government debt is sustainable in the baseline scenario, falling to 58.2 percent of GDP by 2029 (Figure 1). Debt service costs are projected to gradually increase from 6 percent of GDP in 2023 to stabilize around 10 percent by 2027. Standard sensitivity analyses show that a one-standard-deviation shock to the exchange rate would increase public debt levels by about 0.9 percent of GDP relative to the baseline. Meanwhile, a one-standard-deviation lower economic growth14 would increase public debt levels to a peak of 72.5 percent of GDP in 2026, gradually declining to 71.2 percent of GDP by 2029.15 A combined macro-financial shock would raise public debt to 76.8 percent of GDP in 2029.16 However, if the debt-to-GDP ratio increases, the fiscal rule’s requirement for structural primary balance adjustment provides an automatic fiscal policy response to mitigate such shocks. 14 Equivalent to a decline in output of 1.7 percent in 2025 and 2026. 15 A primary balance shock (which considers a deterioration of half of the 10-year historical standard deviation) would shift the debt trajectory up by 2 percent of GDP by the end of the forecasting horizon. 16 Standard shocks applied to interest rate, exchange rate and GDP growth rate simultaneously. Page 10 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 16. External debt is expected to gradually decline to 47.8 percent by 2029 from an estimated 54 percent of GDP in December 2023. This decline will be driven by higher GDP growth despite financing requirements exceeding 14 percent of GDP through 2028 due to high principal payments (especially by the public sector). Colombia’s fiscal rule and a diversified foreign investor base mitigate refinancing risks. In stress tests, an exchange rate shock17 or a combined macro-financial shock18 would increase external debt to a peak of 76 percent in 2025 and 52.3 percent in 2029, respectively, maintaining a declining trajectory over the medium term. Table 3. Colombia: Key Fiscal Indicators for the Central Government, 2020-2027 (percent of GDP)* Est. Proj. Proj. Proj. Proj. 2020 2021 2022 2023 2024 2025 2026 2027 Total revenues ** 15.3 16.1 16.2 18.8 17.1 17.8 18.1 18.0 Tax revenues 13.1 13.6 14.4 16.7 15.4 16.3 16.4 16.5 Net income tax and profits 6.2 6.2 6.6 9.0 7.9 8.5 8.5 8.5 Value-added tax 5.4 5.8 6.2 6.0 5.6 5.7 5.8 5.9 International trade 0.3 0.4 0.4 0.3 0.3 0.3 0.3 0.3 Financial transactions tax 0.7 0.8 0.8 0.9 0.9 0.9 0.9 0.9 Other taxes** 0.5 0.4 0.4 0.5 0.7 0.9 0.9 0.9 Non-tax revenues 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Capital revenues *** 2.0 2.4 1.7 2.0 1.7 1.4 1.6 1.4 o/w Ecopetrol dividends 0.7 0.1 1.1 1.4 0.7 0.5 0.3 0.4 Total expenditures 23.1 23.1 21.5 23.1 22.8 22.8 22.4 21.7 Current expenditures 19.5 19.5 18.0 19.7 19.9 20.0 19.5 18.7 Wages and salaries 2.4 2.2 1.9 2.1 2.1 2.1 2.1 2.1 Goods and services 1.2 1.4 0.7 0.7 0.6 0.6 0.6 0.6 Interest 2.8 3.3 4.3 3.9 4.7 4.7 4.1 3.8 Current transfers **** 13.6 13.1 11.1 13.0 12.4 12.5 12.7 12.3 of which: trasfers to FPEC … … 1.2 1.7 1.2 0.7 0.3 0.0 Other -0.5 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 Capital expenditures 3.6 3.5 3.5 3.4 2.9 2.8 2.9 3.0 Fixed capital formation 2.2 2.4 2.7 2.6 2.1 2.0 2.0 2.1 Capital transfers 1.3 1.1 0.8 0.8 0.8 0.8 0.9 0.9 Primary balance -5.0 -3.6 -1.0 -0.3 -0.9 -0.2 -0.2 0.0 Overall fiscal balance *** -7.8 -7.0 -5.3 -4.3 -5.6 -4.9 -4.3 -3.7 Structural fiscal balance^ Financing needs and end-year deposits 13.7 10.2 8.8 7.3 8.6 7.8 7.3 7.3 Overall fiscal deficit 7.8 7.0 5.3 4.3 5.6 4.9 4.3 3.7 Amortizations 1.1 1.6 1.6 1.7 1.5 2.4 2.4 3.0 Arrears, judicial claims and other 1.5 0.7 0.4 0.0 0.1 0.1 0.2 0.2 Stock of deposits at the end of the year 3.3 0.9 1.5 1.4 1.3 0.4 0.4 0.4 Financing sources and previous year deposits 13.7 10.2 8.8 7.3 8.6 7.8 7.3 7.3 Domestic 3.4 3.5 5.8 2.7 3.8 3.4 4.2 4.5 Use of saving to capitalize FOME 1.3 1.1 … … … … … … "Titulos de Solidaridad" 1.0 … … … … … … … External 5.9 3.9 2.2 3.3 3.4 3.1 2.8 2.4 Stock of deposits at the end of the previous year 2.1 2.7 0.7 1.4 1.3 1.2 0.3 0.4 Memo items Oil related revenues (in percent of GDP) 1.0 0.5 1.7 2.4 0.8 0.8 0.6 0.6 Gross debt (in percent of GDP) 65.0 63.0 60.8 56.7 55.6 55.8 56.1 55.8 Nominal GDP (COP billion, current) 998,471 1,192,634 1,469,791 1,572,458 1,690,586 1,809,009 1,932,165 2,055,333 * Estimates and projections presented in this section have been elaborated based on information available up to November, 2024. ** It includes the surcharge on the oil and coal sector, wealth, health and carbon taxes, which will become effective starting in 2023. *** In 2021, this includes privatization receipts from the sale of participation in ISA. **** In 2022, it includes transfers to the Fuel Price Stabilization Fund. Source: MHCP and WB staff estimates and projections. 17 One-time real depreciation of 30 percent occurs in 2025. 18 Permanent 1/4 standard deviation applied to real interest rate, growth rate, and current account balance. Page 11 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 17. Risks to the outlook are tilted to the downside, with heightened uncertainty around fiscal consolidation. Fiscal slippages in the short-run or prolonged uncertainty over medium-term sustainability could increase financing costs and slow the pace of interest rate normalization. Persistent inflation and policy uncertainty in other sectors could also affect private investment. Over the short run, the government is likely to continue under-executing the budget to meet the fiscal rule targets in 2024. The 2025 budget may also require additional cuts, given the persistent inclusion of contingent revenues in fiscal programming that have proved elusive to materialize. Over the medium term, fiscal sustainability risks include a transfer system reform that allocates substantial additional resources to subnational governments with a call for clarity on fiscal sustainability, expenditure responsibilities, and institutional capacity. Colombia’s historical macroeconomic stability and track record in complying with the fiscal rule since its inception in 2011, including by the current administration, are strong mitigating factors. In addition, spikes in armed violence could further exacerbate regional disparities. On the external side, negative terms of trade shocks or tighter external financial conditions could limit growth and intensify fiscal risks. Climate change remains a continuous concern, posing risks to GDP growth, external and fiscal sustainability, and the most vulnerable populations, as Colombia is highly exposed to physical and transition risks. Figure 1. Debt Sustainability Analysis (General Figure 2. External Debt Sustainability Analysis Government debt, percent of GDP) (External debt, percent of GDP) SoSource: WB Staff projections. SoSource: WB Staff projections. 2.3. IMF RELATIONS 18. Colombia has access to a Flexible Credit Line (FCL) set to expire in April 2026. In an Assessment Letter provided for this operation, International Monetary Fund (IMF) staff highlighted that macroeconomic imbalances continued to narrow in 2024 and that continued implementation of prudent policies will allow Colombia to continue its transition to a more sustainable path. The letter states that although risks to the outlook are tilted to the downside, adequate buffers and very strong policy frameworks continue to support Colombia’s resilience and capacity to respond to shocks. The IMF and World Bank technical teams hold periodic meetings on macroeconomic analysis, diagnostics, and forecasting. The Assessment Letter is reproduced in Annex 4. 3. GOVERNMENT PROGRAM 19. The Government’s NDP 2022-2026 seeks to address inequalities and exclusion, foster the peace process, and chart a course toward environmentally sustainable development. With a strong commitment to equity Page 12 The World Bank Equitable and Green Path Development Policy Financing II (P180927) and sustainability, the plan centers on people as the core of development. The NDP 2022-2026 has five pillars, or “transformations”: (i) territorial planning around water resources and environmental justice, (ii) human security and social justice to guarantee the development of opportunities and wellbeing, (iii) human right to food to promote access to adequate nutrition, (iv) internationalization, productive economy for life and climate action focused on productive and clean activities, and (v) regional convergence to guarantee that people from different territories have equal access to opportunities. The proposed reform program supported by the DPF series aids in implementing various aspects of the NDP. 4. PROPOSED OPERATION 20. The development objective of the proposed operation is to support measures that (i) promote more equitable and green fiscal policies, (ii) establish the institutional framework to increase access to productive assets for vulnerable groups, and (iii) establish non-price incentives to promote climate action. Through these reforms, this operation aims to tackle some of the drivers of inequalities in Colombia (focusing specifically on increasing the redistributive impact of the fiscal system and on promoting the accumulation of land and financial assets among vulnerable groups) and on advancing the climate agenda. In the second phase, the focus shifts to reducing fuel subsidies and strengthening the social protection system, particularly improving instruments for better targeting and responsiveness to shocks that can also lead to fiscal savings. The first pillar focuses on fiscal policy measures. In the program’s first phase, these measures increased revenue while enhancing the progressivity of income taxation and introducing taxes that promote decarbonization and healthier lifestyles, all without compromising the efficiency of the tax system. The second pillar supports an institutional framework aimed at the productive inclusion of vulnerable groups by promoting their access to land and financial assets. The third pillar establishes non-price incentives to promote climate action, focusing on preserving strategic ecosystems, supporting cleaner energy production, and the mobilization of private capital. In this second operation, the series' results framework has been enhanced to reflect changes in the institutional context and to align it with the government’s program better and the WB revamped scorecard. 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 21. The proposed DPF supports key components of the Government’s strategy that aim to set Colombia’s development trajectory on a more inclusive and sustainable pathway . The Program highlights policy reforms in areas critical to the country’s development, as is the case for a stronger social protection system (aligned with the “human security and social justice” transformation) and promoting productive and social inclusion through tackling inequalities based on exogenous circumstances, including gender, race, ethnicity, and location, among others (aligned with Chapter VII of the NDP on differentiated actors for change). It also emphasizes promoting a more inclusive and greener private sector while tackling the impact of climate change, which is one of the Government’s priorities reflected in the NDP’s “productive and clean activities” transformation. 22. Lessons learned in the implementation of previous development policy operations and Advisory Services and Analytics (ASAs), including advancing the equity and green agendas, have been reflected in the design of this operation. The experience of previous DPFs, including the first phase of this operation and previous standalone Equitable and Green Recovery Development Policy Financing (P176788), provides the following lessons that have been incorporated in the proposed operation: (i) a transversal development objective such as equity calls for cross-cutting reforms and thus for the participation and coordination of cross-sectoral teams Page 13 The World Bank Equitable and Green Path Development Policy Financing II (P180927) from the government and the WBG; (ii) the program needs to be based on strong policy dialogue and technical assistance, as well as on strong analytical underpinnings (see Annex 4); (iii) the program needs to be discussed with the Government thoroughly, reflecting the importance of country ownership and commitment to achieve the program’s objectives. The 2021 Equity Flagship, the 2022 Public Finance Review, the 2022 Systematic Country Diagnostic, and the 2023 Country Climate Development Report provide the analytical underpinning supporting the measures backed by this operation. 23. This operation is aligned with the goals of the Paris Agreement. First, the DPF reform program is consistent with Colombia’s climate commitments, including the National Determined Contribution (NDC), Long Term Strategy (LTS), and key Country Climate and Development Report (CCDR) findings. The operation supports NDC and LTS achievement by energy efficiency measures in the gas & oil sector (NDC sectoral measure 2) and increasing the domestic carbon price, contributing to the fulfillment of Colombia’s GHG emission mitigation targets. In addition, the operation aligns with the CCDR recommendation of pursuing additional sources to finance climate action by promoting the Environmental, Social, and Governance (ESG) and climate-risk considerations in the portfolio labeling of investment funds. Moreover, the operation supports the conservation and restoration of ecosystems to promote biodiversity and carbon capture (NDC sectoral measure 24) by providing payments to environmental services. Second, regarding mitigation goals, none of the prior actions are likely to have a significant impact on GHG emissions or create persistent barriers to transition to a low- carbon development pathway. Some of the reforms supported focus on regulatory and institutional improvements and, as such, are not associated with increased GHG emissions. Furthermore, Prior Actions (PAs) 2 (reduction of fuel subsidies), 6 (payment for environmental services), 7 (addressing fugitive methane from the oil & gas sector), and 8 (integrating climate into investment policy) are expected to contribute to climate mitigation goals positively. Third, regarding adaptation and resilience goals, risks from climate hazards are not likely to have an adverse effect on the prior actions’ contribution to the PDO. In addition, some of these (6, 8) are expected to contribute to resilience goals positively. In conclusion, all prior actions of the proposed DPL program align with the Paris Agreement's adaptation goals. A detailed review is presented in Annex 2. The overall objective of the operation also aligns with the target of the new WBG Scorecard FY24-30 on millions of hectares of healthy terrestrial ecosystems globally. 24. Aside from promoting equitable and green development policies, this DPF reform program promotes interventions that address binding constraints to private solutions and enable private capital. With respect to addressing binding constraints to private solutions, the following reforms are Maximize Finance for Development (MFD) enabling: PA3, which supports access to finance for women entrepreneurs, and PA8, which supports the inclusion of ESG and climate-related factors within the investment policy and investment decision- making of collective investment funds. In addition, PA3 is a private capital enabling (PCE) intervention, tracked by the non-monetary Results Indicator 6. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Pillar 1: More equitable and green fiscal policies 25. Pillar 1 of the DPF series focuses on revenue and spending measures that enhance the fiscal system’s impact on equity and green agendas while generating fiscal savings. The first operation supported reforms on the taxation side to increase the progressivity of the personal income tax, expand the carbon tax, and introduce taxes on sweetened beverages and ultra-processed foods. These reforms are advancing well in their Page 14 The World Bank Equitable and Green Path Development Policy Financing II (P180927) implementation. Building on this progress, this DPF focuses on more equitable and green public spending with improvements in the targeting system of social programs, including in times of shocks, and a reduction in gasoline subsidies. Beyond the supported reforms, the broader government agenda is advancing further by adopting the regulatory framework and redesigning social assistance programs (new program Renta Ciudadana), including more adaptive transfers and additional reforms to reduce regressive fuel subsidies. Prior Action 1: The Republic of Colombia has issued a decree to regulate the Universal Income Registry as the single digital instrument for targeting social policies and programs, which will facilitate rapid adaptation of benefits at times of shock, as evidenced by Decree No. 0875 of 2024, published in the Official Gazette on July 8, 2024. 26. Rationale. Transfers and subsidies reach the vulnerable in Colombia, but a significant share of the spending leaks to high-income individuals.19 For more than two decades, the System of Identification of Potential Beneficiaries (Sisbén) has been the main instrument for targeting social programs in Colombia. 20 Starting in 2017, the Government of Colombia (GoC) initiated a process to modernize Sisbén and to transition from a static household registry to an integrated dynamic social registry, including the launch of the Registro Social de Hogares (RSH) as the umbrella strategy to target social benefits and make policy spending decisions.21 However, remaining challenges persist, often resulting in inclusion and exclusion errors from social programs and limiting the efficacy and swiftness of responses in times of emergency and shocks, including climate-related shocks. 22 For cash transfers, leakages reflect inclusion errors (people who should not receive benefits given their income levels still do) in the Sisbén scoring system. If transfers were limited to individuals with incomes below the median, 40 percent of cash transfer expenditures could be redirected to poorer beneficiaries, amounting to 0.15 percent of GDP. 23 For utility subsidies, leakages reflect targeting based on outdated proxies for household income, with a fiscal gain (reduction in spending) from improving targeting that can reach 0.5 percent of GDP. 24 To address these challenges, the GoC created the Registro Universal de Ingresos (RUI) 25 as the unique instrument to target social benefits and services in Colombia. 27. Substance. The supported Prior Action regulates the RUI, a transformational instrument allowing the country to improve benefits’ targeting and nominal monitoring of benefit allocation. The RUI seeks to be updated to include information on the living conditions and income levels of all households in the country to improve the targeting of taxes, social programs, and subsidies. The theRUI and its interaction with the RSH will facilitate data exchanges and interoperability between government agencies and ministries, including data from the Direccion Impuestos Nacionales (DIAN) that up to now had not been cross-referenced with Sisbén. Significantly, the interoperability between the RUI, georeferenced household information, and disaster risk 19 World Bank (2021) and Colombia Systematic Country Diagnostic Update (2022). 20 As of March 2023, Sisbén contained validated information for more than 32,5 million people (12,4 million households) and more than 29 social programs use it to target their benefits. 21 The fourth comprehensive census sweep (Sisbén IV) was finalized in December 2020, aiming to significantly improve the quality, timeliness, and interoperability of the social registry. Also, building on the lessons learned from the COVID-19 pandemic and the need to have data from a larger set of households to allocate emergency benefits, in June 2020, the GoC launched the RSH. It was officially launched by Decree 890 of 2022. The RSH includes information of 100% of Colombia’s population (and regular migrants) and gathers data from data collected from households and administrative records Mainly, from two main sources: (i) households’ data collected as of now on Sisbén, and (ii) administrative data records from ministries and agencies, including the Registraduria Nacional and Migracion Colombia. The RSH includes data from 32 national agencies and from 1,832 subnational databases (DNP, November 2023). 22 Additional challenges include difficulties in collecting information about households’ income, outdated information about oth er socio-economic characteristics of individuals and households, high logistical costs to collect households’ data via census sweeps, issues linking individuals to households, among others. These challenges limit delivering more equitable and responsive social spending. 23 This refers to estimates using recent flagship programs Más Familias en Acción and Jovenes en Acción. 24 WB (2021b). 25 In Article 70 of Law 2294 of 2023, National Development Plan. Page 15 The World Bank Equitable and Green Path Development Policy Financing II (P180927) management data under the RSH advances the agenda of an adaptive social protection system.26 It will help build household resilience and support the swift identification and provision of social protection and other types of assistance after a climate-related shock occurs. 28. Expected results. In the period of this operation, the strengthening of the social protection system toward a more equitable fiscal system, particularly its targeting and ability to respond to shocks, will be measured by the percentage of poor and vulnerable people (as classified by Sisben) with georeferenced information in the household social registry, which will feed into the RUI and improve targeting and allow a rapid response in the presence of shocks.16 The RUI pilot phase is ongoing and is expected to be used for designing, targeting, monitoring, and evaluating social programs and subsidies by the end of 2026. 27 The Prior Action aligns with the World Bank Group Corporate Scorecard.28 Enabling better-targeted social programs and systems and improving their responsiveness to climate-related shocks promotes a more equitable and green fiscal system. Prior Action 2: The Republic of Colombia has reduced overall gasoline subsidies to decrease greenhouse gas emissions and increase efficiency in public spending, as evidenced by the MME Resolutions No. 40392, 40436, 40499, 40545, 40639, 40767, published in the Official Gazette on June 2, 2023, June 30, 2023, August 4, 2023, September 1, 2023, November 3, 2023, and December 29, 2023, respectively. 29. Rationale. Fuel subsidies have been a constant feature of the Colombian economy since the late 1990s. The government implemented a retail fuel pricing formula and financing mechanism called Fondo de Estabilización de Precios de Combustible (FEPC) in 2007, with the objective to smooth international fuel price fluctuations in domestic markets. The FEPC incurred an average annual fiscal cost of 0.2 percent of GDP between its inception and 2019. The formula was suspended in 2020 amidst the COVID-19 pandemic, leading to a significant increase in subsidies for gasoline and diesel, reaching 2.6 percent of GDP in 2022. Fuel subsidies disproportionately benefit higher-income individuals who consume more fuel. Colombia’s Medium Term Fiscal Framework 2023 shows that 54.6 percent of the subsidies delivered by the FECP benefit 20 percent of the richest households. 29 In the context of a fiscal rule that has become binding, any additional pro-poor spending needs to be met with expenditure cuts and/or new tax hikes. Fuel subsidies are an excellent candidate as they also promote higher fuel consumption, increasing greenhouse gas emissions and undermining Colombia’s ambitious pledge in its Nationally Determined Contribution to reduce greenhouse gas emissions by 51 percent by 2030 with respect to projected baseline emissions. 30. Substance. Consistent with its strong commitment to climate action and determination to reduce fuel subsidies, the Colombian government has continuously increased the gasoline price since taking office in August 2022. In line with the proposed trigger for the first operation in this series and considering the timeframe of this second operation, six resolutions from the Ministry of Energy and Mines (MME) increased the price of gasoline from COP 7,279 in May 2023 to COP 10,304.70 in January 2024, a 41 percent increase. This compares to a 4.2 percent inflation measured by the consumer price index in the same period. It is estimated the measures had a negligible effect on inflation while at the same time reducing the fiscal burden of energy subsidies and its pro- 26 World Bank (2023). Adaptive Social Protection in Colombia: What is the distributional impact of shocks and how can the social protection system better respond? An application of the Social Protection Stress Test Tool. 27 Together with the IDB, the bank has been providing technical advice for the implementation of the RUI, in the form of just in time TA as well as knowledge sharing with other countries and regions. 28 Specifically, indicators on “Millions of people benefitting from strengthened capacity to prevent, detect, and respond to health emergencies” and “Millions of people using digitally enabled services”. 29https://www.minhacienda.gov.co/webcenter/ShowProperty?nodeId=%2FConexionContent%2FWCC_CLUSTER- 223865%2F%2FidcPrimaryFile&revision=latestreleased Page 16 The World Bank Equitable and Green Path Development Policy Financing II (P180927) rich bias. These measures are also in line with the recommendations of the Country Climate Development Report (WB, 2023). The government has advanced further along this agenda by recently eliminating fuel subsidies for large consumers while holding consultations to reduce overall diesel subsidies. 31. Expected results. The reduction in gasoline subsidies is expected to reduce the FEPC deficit substantially. Together with the introduction of a carbon tax supported by the first operation in these series, both measures are expected to result in 2 percentage points of GDP in fiscal savings linked to increases in the carbon price. 30 Both measures create space for the planned increase in cash transfer programs and climate-smart investments while promoting a reduction in fossil fuel consumption through the price system. This measure promotes a more equitable and green fiscal system by supporting the removal of fuel subsidies and opening space for the repurposing of resources. Pillar 2: Establishing the institutional framework to increase access to productive assets for vulnerable groups 32. Pillar 2 of the DPF series establishes the institutional framework to increase vulnerable groups’ access to productive assets, which will promote their productive and social inclusion. DPF1 supported measures to promote the productive and social inclusion of vulnerable groups, such as migrants, women, ethnic groups, and small firms, by reducing gaps in their access to assets (education, land, housing) and services (care, services for survivors of gender-based violence). This second operation advances these reform areas, including financial inclusion of underserved groups and migrants’ integration. The implementation of some reforms under this pillar is progressing but slower than expected, particularly for the gender and participatory cadaster agendas, mainly due to the recent transition of the gender and inclusion agenda to the newly established Ministry of Equity and Equality. Prior Action 3: The Republic of Colombia has established the implementation rules and allocated budget across financing lines of the Development Fund for Rural Women (“Fommur”) to support productive initiatives proposed by rural women and rural women’s associations, particularly low-income women, as evidenced by the MADR Resolution No. 295 of 2023, published in the Official Gazette on August 28, 2023, and Resolution No. 58 of 2024, published in the Official Gazette on March 6, 2024. 33. Rationale. Colombia has made important progress in promoting gender equality, including strengthening its institutional framework. However, significant gender disparities remain among rural, indigenous, and Afro- descendant women, which limit their productive potential. Limited quality jobs are available in rural areas, and gender disparities have widened, particularly in how unpaid care and domestic work constrain rural women’s access to jobs or opportunities for education.31 In rural areas, only 27.2 percent of the employed population are women, although they represent 45.9 percent of the rural population of working age (age 15+).32, 33 Rural women also experience limited access to financing, as observed by low credit approval rates, particularly in 30 This refers to the sum of the revenue collected by carbon taxes and the reduction in the FEPC deficit. 31 Of the time reported to work-related activities, rural women spend the most hours on unpaid work (8:33 hours, equivalent to 59 percent of total daily work hours), mainly on care and domestic tasks in the household and/or family farm (e.g., tending to livestock, water and wood collection). Among their urban counterparts, this figure is lower, 7:31 hours), and among rural men, it is only 3 hours. Source: DANE. Time Use Survey (ENUT), 2020-2021; World Bank. 2021. Building an Equitable Society in Colombia. World Bank, Washington, DC. 32 DANE – Gran Encuesta Integrada de Hogares, 2021. 33 More broadly, the share of rural women who participate in the labor force is 40.4 percent, compared to 79.6 percent among rural men and 56 percent among urban women DANE. Principales Indicadores del Mercado Nacional – October, 2023. Page 17 The World Bank Equitable and Green Path Development Policy Financing II (P180927) microcredit and credit for commercial purposes (11.6 percent for both types of products).34 Yet, the economic empowerment of rural women has also been shown to impact social norms and enhance food security positively.35 The FOMMUR36, under MADR’s leadership, was created to provide financial, technical, and advisory services to productive initiatives led by rural women’s organizations and/or women individually. Its design recognizes that bundled services -e.g., capital combined with business training and advisory services- improve the performance of women-led businesses.37 Initiatives related to family agriculture and the care economy (e.g., unpaid care and domestic activities in rural households) are eligible for FOMMUR financing. The implementation of FOMMUR was limited by the absence of an operational framework as well as budget allocation. 34. Substance. Building on the measures supported in the first operation (DPF1) centered on facilitating women’s productive inclusion, this prior action supports measures that enhance the framework towards the economic empowerment of rural women by providing access to finance and business skills as productive assets. This prior action supports measures that establish FOMMUR’s operation rules, which, among others, seek to prioritize low-income women38 and rural territories identified as historically excluded. 39 This PA also supports the distribution of resources across FOMMUR’s financing lines, which comprise resources from MADR and FOMMUR’s administrator (Fondo Mujer Libre Productiva). Each of FOMMUR’s four financing lines targets initiatives submitted by different types of applicants.40 In its first phase, FOMMUR received a budget allocation of COP 22,811 million and opened a call for proposals through lines 1 and 3 directed at women’s organizations and women individually, respectively. Under Line 1, Fommur’s financing would cover up to 90 percent of the value of selected productive initiatives.41 Line 3 prioritizes financing for rural women involved in green jobs, such as harvesting the piangüa mollusk and contributing to the conservation and restoration of mangrove forests, which is crucial for building coastal resilience in the Colombian Pacific.42 MADR has carried out a series of consultation and outreach efforts to socialize FOMMUR and attract applicants, involving women’s organizations and in target territories and dissemination through the national registry of rural women.43 35. Expected results. This prior action is expected to increase women’s economic empowerment in the short to medium term by expanding rural women’s access to financial and technical resources – to advance their productive activities and access to markets.44 Beneficiaries will improve their productive, marketing, managerial, and associative capacities. This measure is aligned and will contribute to the new WBG Gender Strategy 2024- 30 strategic objective of ‘expanding and enabling economic opportunities’ for women. It also informs the Corporate Scorecard Indicator on people benefiting from greater gender equality, as well as aligning with that of people and businesses using financial services. Progress will be measured through the number of productive 34 Ot the total applications for microcredit submitted by rural women, the approval rate is 11.6 percent. The same rate is observed in the case of credit approval for commercial purposes. DANE (2023). Nota Estadística – Situación de las Mujeres Rurales en Colombia. 35 FAO, IFAD, WFP & UN Women (2021). Global End-term Evaluation of the Joint Programme on Accelerating Progress towards the Economic Empowerment of Rural Women in Ethiopia, Guatemala, Kyrgyzstan, Liberia, Nepal, Niger, and Rwanda from 2014 to 2020. 36 Created under Law 731 of 2002 (Rural Women Law). 37 World Bank (2018). “An Operational Guide to Women’s Entrepreneurship Programs in the World Bank. ” World Bank, Washington D.C. 38 As per FOMMUR’s rules, priority is given to rural women classified as Sisben A, B or C. 39 Selected municipalities identified through a prioritization exercise, and located in Amazonas, Antioquia, Archipiélago de San Andrés, Bolívar, Caquetá, Casanare, Cesar, Chocó, Guaviare, La Guajira, Nariño, Sucre, Tolima, and Valle del Cauca. 40 Namely, organizations of rural women, municipalities (in the prioritized territories), rural women individually (who, through their activity, contribute to protect and/or restore mangroves), and applicants in need of technical support only. 41 Terms of reference can be found at: https://fondomujer.gov.co/wp-content/uploads/2024/03/Terminos-de-Referencia-beneficiarias-Linea-No-1- FOMMUR.pdf. 42 See full details of the conservation incentives in the TOR for Line 3: https://fondomujer.gov.co/wp-content/uploads/2024/03/Terminos-de- Referencia-beneficiarias-Linea-No-3-FOMMUR.pdf 43 Sistema de Información de la Mujer Rural (SIMUR). 44 World Bank (2021). Building an Equitable Society in Colombia. World Bank, Washington, DC. Page 18 The World Bank Equitable and Green Path Development Policy Financing II (P180927) initiatives submitted by women’s organizations that receive financial and technical support under FOMMUR, which is in its first implementation phase. In the long term, addressing gender disparities in assets to propel entrepreneurship and labor force participation can increase the economic growth potential of the country.45 Prior Action 4: The Republic of Colombia has established the procedure for the recognition of stateless persons and their subsequent naturalization, as evidenced by the MRE Resolution 10434 of December 28 of 2023, published in the Official Gazette on December 28, 2023. 36. Rationale. As of 2023, nearly 2.9 million46 Venezuelan migrants and refugees had relocated to Colombia, leading the country to adjust its laws to address their needs and ensure the protection of their rights. Aligned with global standards, the policy changes gradually introduced broader and more permanent inclusion measures, along with a temporary provision granting citizenship to children born in Colombia to Venezuelan parents.47 Because of the limited application of ius soli,48 dependent upon the regular residence of foreign parents in Colombia, children born to irregular migrants, migrants in transit, or migrants who can’t pass on their nationality to their children are at risk of statelessness. Law 212649, issued in 2021 to establish a national framework for migration management (until then centered mostly on Colombian emigration), included guidelines on statelessness and naturalization. To come into effect, the guidelines on the right to citizenship, the recognition of stateless persons, and the route to naturalization needed supplementary regulation. 37. Substance. This prior action builds on measures supported in DPF1 focused on facilitating social and economic integration of migrant populations. The supported policy establishes the procedures and the entities responsible for recognizing stateless persons in Colombia and their subsequent naturalization (i.e., acquiring Colombian citizenship), guaranteeing their rights and access to social services, the labor market, and other productive assets. Notably, the resolution includes provisions for differential treatment for minors to ensure the protection of their rights, as well as a principle of family unity when granting recognition of statelessness and nationality. The new regulation provides stateless individuals, who are some of the most vulnerable and marginalized groups globally, with a lawful pathway that ensures their rights to obtain identity papers, access social services, participate in the formal job market, utilize financial services, and engage with various goods and markets, as well as the right to a nationality. As such, the government of Colombia transitioned from a limited, ad-hoc, short-term solution to guarantee the rights of children born to Venezuelan parents to an inclusive, permanent, long-term solution that guarantees the rights of all stateless persons in the country. 38. Expected results. Specifically, formally recognizing the statelessness status is expected to protect stateless persons’ fundamental rights and improve their access to basic services towards the accumulation of assets while giving them a route to naturalization. This will guarantee their right to nationality and the associated rights, facilitating their access to productive assets and promoting economic and social inclusion. In Colombia, 45 According to World Bank (2021), closing gender gaps in labor force participation and education would increase Colombia’s GDP per capita by an estimated 14 percent by 2050. 46 Migración Colombia, August 2023. 47 Colombia has ratified the 1951 Geneva Convention relating to the Status of Refugees and the 1984 Cartagena Declaration of Refugees, the 1954 Convention Relating to the Status of Stateless Persons, the 1961 Convention on the Reduction of Statelessness, the 2016 Global Compact for Safe, Orderly and the 2016 Regular Migration, the Global Compact on Refugees. The policies and regulations put forth by the government to respond to mixed migration from Venezuela are aligned with the principles of these international frameworks. 48 Jus soli, meaning 'right of the soil', refers to the right of anyone born in the territory of a state to nationality or citizenship, also commonly referred to as birthright citizenship. 49 The issuance of Law 2136 of 2021 established the guiding principles for an integral migration policy, giving a more substantive and long-term legal basis to its migration policies and governance. Page 19 The World Bank Equitable and Green Path Development Policy Financing II (P180927) regularization efforts are associated with improved labor market indicators among regular migrants compared to other migrants, such as higher earnings, increased likelihood of formal employment, and derived access to assets and services for them and their beneficiaries.50 The results align with the WBG Corporate Scorecard results indicator on millions of displaced people and people in host communities provided with services and livelihoods. Prior Action 5: The Republic of Colombia has issued rules and instructions for the implementation of the Open Finance framework, including the treatment of financial consumers’ data, the technical and security standards for accessing personal data, and information disclosure requirements to strengthen competition, inclusion, and efficiency in the provision of financial services, as evidenced by the SFC External Circular No. 004 of February 7, 2024, published in the MHCP’s Bulletin No. 702 of February 9, 2024 39. Rationale. Open Finance frameworks allow the sharing and leveraging of customer-permissioned data by financial institutions with third-party developers and firms to build applications and services, including those that provide real-time payments, greater financial transparency options for account holders, marketing, and cross-selling opportunities. Successful implementation of an Open Finance framework has the potential to foster financial inclusion through: (i) increasing competition and efficiency, thus lowering barriers of entry and increasing product diversity; (ii) allowing the creation of new products (including credit products) by new entrants (e.g., fintechs) tailored to banked but underserved segments of the population. The Colombia Systematic Country Diagnostic (SCD) (2022) identifies the competition in financial markets and fintech development as a key policy priority, given its important spillovers to other development challenges, including social inclusion. Vulnerable groups, such as low-income individuals and rural communities, benefit disproportionately from Open Finance frameworks by gaining access to affordable credit, digital financial services, and tools for better financial management. Accompanied by an adequate regulatory framework, Open Finance is expected to yield positive distributional and poverty reduction long-term effects from better-targeted and inclusive financial services to underserved groups (WB, 2022). 51 40. Substance. Open Finance is poised to revolutionize Colombia's financial sector by fostering a more competitive and inclusive environment. The Prior Action supports the issuance of key secondary regulation stemming from Decree 1297/2022, supported by DPF1 of this series, which created a legal framework for the implementation of Open Finance in Colombia.52 The External Circular supported in this operation is the first of such secondary regulation, mandating instructions for: i) the definition of technical, security, and other standards needed for the adoption of an open finance scheme, ii) the treatment of financial consumer data under conditions of security, interoperability and transparency, in compliance with habeas data and data protection, and iii) information disclosure requirements, to be adapted to open finance schemes. Supervised entities participating in the open finance scheme have been given 6 months to 2 years since the enactment of the External Circular to comply with its different provisions. The External Circular will be followed by additional secondary regulation with instructions for particular use cases (such as payment initiation, account aggregation, financial portability, etc.), reporting requirements, and governance requirements, which will consider the expansion of the reform to an Open Data framework for financial inclusion, as per Art. 89 of the NDP Law. 53 Collectively, these regulations are essential steps toward effectively implementing an Open Finance framework 50 According to data from the Migration Pulse survey (WB and UNHCR, 2023), migrants granted a permit to stay (PEP or PPT) have on average higher total income and higher hourly income. They are more likely to have a written contract, and to contribute to pension funds. 51 World bank (2022), Fintech and the Future of Finance – Overview (English). Washington, D.C.: WBG 52 The participation by financial institutions in the open finance framework defined in Decree 1297/2022 is voluntary. 53 Which will require the issuance of a new Decree by MHCP, expected for the second semester of 2024. Page 20 The World Bank Equitable and Green Path Development Policy Financing II (P180927) that encourages financial inclusion. 54 41. Expected results. Open Finance lowers barriers to entry for innovative fintech companies, encouraging a diverse range of financial products and services tailored to the needs of underserved populations, as has been the case with money market platforms in Africa or digital financial services across the world (WB, 2022). This increased competition drives financial institutions to enhance their offerings and reduce costs, ultimately providing more affordable and accessible financial solutions. This reform is a necessary and crucial step towards promoting open finance. Considering the long-term nature of this reform and that the collection of information on the adoption of the scheme has yet to start,55 the expected result that can be defined at this stage is that, by end-2025, 100% of the supervised entities that are participants of the open finance scheme are compliant with the provisions of External Circular 004/2024 and that the SFC is reporting on a regular basis key indicators on the adoption of the scheme. Pillar 3: Establish non-price incentives to promote climate action 42. Pillar 3 of the DPF series focuses on measures that provide incentives beyond prices to promote climate action by public and private stakeholders. Complementing the climate actions in Pillar 1, the first operation supported draft legislation promoting activities that reduce greenhouse gas emissions and issuing required criteria for labeling thematic bonds, including green and sustainable. This agenda has moved forward through gas flaring efficiency regulation and regulation of thematic bonds for collective investment funds, all supported under the second operation. The decree regulating an emission trading system marked as a tentative trigger for the second operation, is delayed given the technical complexities of designing a sound system. The greenhouse gas mitigation agenda progressed on several fronts, including advance payments for environmental service provision, a measure supported by this second operation. Prior Action 6: The Republic of Colombia has issued a decree to regulate the Payments for Environmental Services for Peace to victims of the conflict and other economic incentives to communities for the preservation, restoration, and sustainable use of strategic areas and ecosystems, as evidenced by Decree No. 1998 of 2023, published in the Official Gazette on November 21, 2023. 43. Rationale. Deforestation is the main driver of greenhouse gases in Colombia, and it increased significantly after the signing of the Peace Agreement in 2016: deforestation rates grew from 51,000 ha/year on average (2000-2015) to 174,000 ha/year (2016-2022). Both the SCD Update (WB, 2022) and the Colombia CCDR (WB, 2023) 56 placed halting deforestation as a country priority, given its link to rural development and the peace 54 The implementation of the Open Finance framework will be done in observance with national data privacy legislation and cybersecurity regulation. Specifically, data protection and privacy in Colombia are governed by general application frameworks (Law 1581/2012 on data protection and Law 1712/2014 on transparency and access to public databases), and sector-specific laws and regulations (Law 1266/2008 on financial and monetary obligations data- amended by Law 2157/2021-, SFC External Circulars No. 007 of 2018 and No. 033 of 2020 on information security and cyber security). Generally, the legal framework for data protection and privacy is robust and comprehensive, aligned with the 1995 EU Directive. Moreover, implementation of the Open Finance framework in Colombia is being supported by WB TA to the SFC (mandated to issue secondary regulation for implementation of Decree 1297/22), and the URF (mandated for implementation of Art. 89 of the National Development Plan regarding an open data framework with objectives of financial inclusion). 55 The SFC is conducting a diagnostic to identify the universe of supervised entities for which External Circular 004/24 is applicable. Once this diagnostic is completed (before August 1, 2024), the SFC will require participant entities to provide – on a quarterly basis – key information to measure the adoption of the open finance scheme. The list of information that will be required is still under construction. 56 “Sustainable production and restoration in deforestation hotspots along the agricultural frontier and in environmentally stra tegic areas will need to be scaled up and give value to standing forests. Supporting the economic and social development of rural communities, and closing the agricultural frontier, would benefit from scaled‑up incentive programs such as payments for environmental services”. Page 21 The World Bank Equitable and Green Path Development Policy Financing II (P180927) agenda, as well as creating opportunities for rural communities, including payments of environmental services. Payments for Environmental Services are a central part of the incentive structure that Colombia has put in place to promote sustainable production and restoration in environmentally strategic areas57and are part of the actions towards meeting the NDC targets that include the reduction of deforestation by 2030 to 50,000 ha. Significant progress has been made in establishing PES programs,58 including mandating the prioritization of areas and strategic ecosystems with land-use conflicts and illegal crops in those areas of importance for peacebuilding.59 With past legislation establishing measures to contribute to the repairment of victims of the conflict and, more recently, PES as a measure of repairment, 60 PES for Peace is now subject to regulation. 44. Substance. Expanding its PES programs, Decree 1998 (2023) regulates Payment for Environmental Services for Peace and other conservation incentives in areas of the public domain with strategic ecosystems occupied by victims of the conflict, regardless of whether they are landowners, tenants, or good faith occupants. PES for Peace is defined as an economic incentive, in cash or kind, that recognizes these victims as beneficiaries of activities of conservation and restoration either implemented by stakeholders responsible for repairing the victims under the Special Jurisdiction for Peace (JEP) or by the victims themselves. The Decree also defines other conservation incentives as economic incentives to communities with territorial and cultural roots in areas of public domain with strategic ecosystems for the preservation and/or restoration actions (e.g., trainings, educational activities, institutional strengthening) carried out by these communities, subject to the execution of voluntary agreements. The strategic ecosystems supported by the measure specifically refer to, among others, wetlands, paramos, forests, and mangroves. The Decree establishes the sources of funding, beneficiaries, and destination of the incentives, as well as the lists of those actions of preservation and restoration allowed under the incentives. The prior action advances efforts in DPF1, namely legislation to reduce greenhouse gas emissions in productive activities. 45. Expected results. This Decree is expected to contribute to the implementation of both the NDC commitments towards climate mitigation as well as the Peace Agreement by promoting measures to repair victims of the conflict and contributing to the restoration and preservation of strategic ecosystems, ensuring the universal right to a healthy environment and the provision of key environmental services. In cash or kind, payments to the communities will provide additional economic resources for their livelihoods and the conservation of their territories. The impact will be measured by the expansion of PES programs, namely the number of hectares covered by PES and other conservation measures. It thus informs the Corporate Scorecard Indicator on terrestrial areas under enhanced conservation and management. Prior Action 7: The Republic of Colombia has adopted the technical criteria and the reporting and auditing processes to monitor and address inefficiencies in fugitive methane from the oil and gas sector and to reduce emissions occurring during the oil and gas production process, as evidenced by the ANH Resolution 10981 of 2023, published in the Official Gazette on November 1, 2023. 57 Colombia, under its National Constitution (articles 79 and 80), has the duty to protect the diversity and integrity of its environment, conserve areas of ecological importance, and to plan the use of its natural resources to guarantee their sustainable development. 58 Decree-Law 870 of 2017, established PES as an economic incentive that recognizes conservation and restauration efforts of landowners, tenants, and good faith occupants, through the establishment of voluntary agreements. Since the launch of Decree 870 (2017) more than 600,000 ha have been included under PES projects, especially in areas of high deforestation (such us the Amazon) and in Paramo ecosystems. Only in 2023, approximately US$18 million were invested in PES projects benefiting 10,933 families in 18 departments and 152 municipalities covering 66,177 hectares, of those 1807 ha under restoration measures. 59 Constitutional Court Sentence C-644 of 2017. 60 Law 1957 of 2019 and Law 2294 of 2023 in its article 224. Page 22 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 46. Rationale. Eliminating routine gas flaring is a central part of efforts toward decarbonization.61 As part of measures to fulfill its NDC commitments of reducing greenhouse gas (GHG) emissions, Colombia is striving to reduce fugitive emissions across the oil and gas sector.62 Between 2012 and 2022, Colombia managed to cut its flare gas volumes by 75 percent, reducing the associated CO2 emissions from about 2.5 million tonnes (2012) to 0.6 million tonnes (2022).63 Following the launch of the Global Methane Pledge (GMP)64 at COP26 (2021), Colombia’s government was among the first to issue regulations targeting fugitive methane emissions in the oil and gas sector along with other emissions (gas flaring and venting). 65 Yet, further regulations were needed to precisely assess flaring destruction efficiency- determining the volumes of gas/methane escaping unflared into the atmosphere – and for its monitoring and evaluation.66 In the absence of these, the objective of increasing flaring efficiency would be difficult to achieve given the lack of information and implementation guidance, with significant negative environmental impacts: fugitive methane and venting lead to a direct release of methane into the atmosphere, which is significantly more harmful than CO2. 47. Substance. The supported prior action has flaring destruction efficiency as a core objective, supporting the goal of reducing methane emissions. The Resolution advances institutional changes by mandating the technical criteria and the auditing and reporting processes to be followed by the operating companies in charge of the exploration and exploitation of hydrocarbons, for the evaluation of the minimum range of efficiency of the flares, and for reporting of results of the process of measuring the destruction efficiency of the flares in production. The prior action advances efforts in DPF1, namely legislation to reduce greenhouse gas emissions in productive activities. 48. Expected results. By providing incentives to operating companies for the effective reduction of gas/methane escaping unflared into the atmosphere through more stringent monitoring, auditing, and reporting, the prior action is expected to contribute to reducing emissions occurring during the oil and gas production process (fugitive methane, flaring, and venting of natural gas). Progress within the timeframe of this operation will be calculated through flaring efficiency (i.e., gas flared per barrel-equivalent of oil and gas produced) as a proxy indicator for similar performance in fugitive methane reduction.67 Prior Action 8: The Republic of Colombia has issued instructions to collective investment fund management companies to integrate environmental, social, governance, and climate-related risks in their investment policy and information disclosure mechanisms to facilitate the mobilization of green investment for sustainable growth and low-carbon development, as evidenced by the SFC External Circular No. 005 of 2024, published in the MHCP Bulletin No. 706 of March 21, 2024. 61 Gas Flaring in Colombia, NDC Partnership. https://ndcpartnership.org/knowledge-portal/good-practice-database/gas-flaring- colombia#:~:text=Colombia%20has%20made%20significant%20advancements,declined%20by%20almost%2070%20percent. 62 https://flaringventingregulations.worldbank.org/colombia 63 This promising performance on gas flaring also serves as a good proxy for the oil & gas sector’s methane emissions, where Colombia has put regulations and enforcement activities in motion to establish a similar track record. 64 https://www.globalmethanepledge.org/ 65 In sum, MME Resolution 40066 in February 2022, ANH Resolution 948 and MME Resolution 40317. 66 Contrary to the general industry assumption that flaring efficiency lies at 98% (98% of the gas directed towards flaring actually gets torched – the remaining 2% escape as methane which, over a 20-year time horizon, is 80x more harmful to the climate than CO2), recent research estimates that it might be significantly lower (90-95% depending on the specific circumstances). Based on Colombia’s 2022 flare gas volumes of 0.24 billion m3 this could mean that gas/methane escaping unflared into the atmosphere is likely not only 5 million m3 (98% flaring efficiency) but could be as high as 24 million m3 (90% flaring efficiency). 67 Discipline in reducing flaring is strongly indicative for good performance in the other production related emissions and therefore lends itself as a reliable proxy indicator, as methane emissions cannot easily be measured reliably and consistently at this stage. Page 23 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 49. Rationale. A supportive regulatory environment is essential for mobilizing capital towards climate finance and enhancing the financial sector’s role in managing ESG risks, including climate-related ones. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommends countries adopt a framework for consistent, comparable, and decision-useful disclosure of firms’ exposures to climate-related risks and opportunities. Increasing access to greener capital markets can be key in powering the Colombian economy's broad-based and climate-friendly growth. For instance, in the European Union, the adoption of stringent ESG criteria has significantly boosted green investments, with the green bond market growing exponentially, reaching over €300 billion in issuances. Similarly, mandatory climate risk disclosures in Australia have enhanced the transparency and accountability of investments, leading to more resilient financial markets. The green and sustainable private bond market in Colombia has experienced steady growth in the past years, reaching issuances for COP 2.23 trillion between 2020 and 2023, primarily led by the banking sector, and with growing diversity in terms of geography and projects financed. As the market continues to grow, including through sustainable collective investment funds, it is critical to ensure transparency and integrity of the green finance market and mitigate the risk of greenwashing for financial instruments to contribute to and be aligned with the country’s climate objectives. 50. Substance. This measure mandates collective investment funds (CIFs) to include ESG and climate-related factors in their investment policy and thus integrate them into their investment decision-making process. It also mandates (CIFs) the inclusion of ESG and climate-related factors in the supporting documentation of their investment portfolios to provide clear justification for labeling such portfolios as sustainable. In addition, the External Circular mandates CIFs to disclose materialized ESG risks and ESG portfolio performance in the periodic reports of their investment portfolios. The External Circular is part of the SFC’s plan to regulate thematic instruments, issuers, and investors, following its Roadmap for Greening of the Financial Sector68, which various DPF operations, including DPF1 of this series, have supported.69 51. Expected results. Introducing an adequate regulatory framework for CIFs with green and sustainable labeling is expected to strengthen the relationship between issuers and investors and the protection, transparency, trust, and integrity of the green finance market. The long-term expected impact of this measure is to reduce the risk that investments are not used for their intended purpose, including the risk of greenwashing, and to increase private sector low-carbon and climate-resilient investment, contributing to Colombia’s climate change objectives and commitments. As a necessary step towards these ultimate goals, the supported action will increase the number of CIFs integrating ESG factors in their investment decision-making processes and CIFs including ESG factors in their reporting requirements. The External Circular established a transition period of 9 months for implementing the respective requirements. Therefore, the expected result for end-2025 is that all 215 CIFs in the markets will comply with the External Circular. 68 Published in August 2022. Available at https://www.superfinanciera.gov.co/inicio/industrias-supervisadas/finanzas-sostenibles/superfinanciera- presento-su-hoja-de-ruta-para-incorporar-en-el-sistema-financiero-colombiano-los-riesgos-y-oportunidades-relacionados-con-asuntos- ambientales--10111958 69 For example, regulation for pension funds (both mandatory and voluntary) and insurance companies were supported by the Equitable and Green Recovery DPF (P176788), while regulation on thematic bonds was supported by DPF1 of this series. Page 24 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 52. The proposed operation is aligned with the CPF for Colombia (FY24-27) presented to the Board on February 13, 2024, and the SCD Update (2022). Beyond the alignment with the corporate goals, the DPF specifically supports CPF Objectives 1 (improve access to quality services for all), 2 (improve land titling and administration), 4 (strengthen institutional capacity in national/subnational governments), 5 (deepen financial intermediation and inclusion), 6 (improve productivity and innovation), 7 (develop resilient and low-carbon infrastructure), and 8 (mobilize and deploy climate finance). The operation also aligns with three of the four themes of the Colombia Systematic Country Diagnostic (2022): Equity, Peace, and Climate, and two of its priorities (implement the rural development measures under the 2016 peace accord and halt deforestation), which informed the latest CPF. The supported reforms are aligned with the Global Crisis Reform Framework Pillars. It is aligned with Pillar 1 by scaling up social protection to protect the vulnerable, with Pillar 2 by promoting gender equality and employment programs, with Pillar 3 by strengthening resilience through adaptive social protection programs and macro stability, and with Pillar 4 by investing in climate-smart policies and incentives. 53. The program is also aligned with corporate priorities. The overall objective of the operation aligns with the new WBG vision indicators on the number of countries with high inequality, global greenhouse gas emissions, and millions of hectares of healthy terrestrial ecosystems globally, as reflected in the new WBG Scorecard FY24- 30. Several prior actions also speak to the WBG results indicators. The DPF is also aligned with the new 2024- 2030 World Bank Gender Strategy (which places increased emphasis on climate action), particularly with the strategic objectives of expanding and enabling economic opportunities and engaging women as leaders. The DPF is also aligned with the Green, Resilient, and Inclusive Development (GRID) approach: (i) Green, by promoting the path towards decarbonization and a green financial sector; (ii) Resilient, investing in solid public finances and a better response to shocks from the social protection system; and (iii) Inclusive, to ensure that Colombia builds a more equitable society, through increased economic opportunities for women and vulnerable population groups. Finally, it supports the Global Challenge on Energy Transition Efficiency and Access. 54. This operation complements others by the World Bank (WB). It provides continuity to WB support to promote a more equitable and green society. Previous DPFs have supported measures such as reducing income inequalities, building resilience, and promoting gender equality (Equitable & Green Recovery DPF, P176788), as well as building Colombian competitiveness with a strong gender lens (Competitiveness and Recovery DPF, P175801). Additionally, there have been efforts to protect and integrate Venezuelan migrants (Social and Economic Integration of Migrants DPF, P176505) and accelerate climate action (Colombia Green and Resilient DPO, P180033). The proposed operation also aligns with IPF and ASA that is ongoing or under preparation, related to improving equity and migrant access to services, empowering rural women, creating a market for environmental services, and enabling ESG.70 70The following lists Prior Actions’ alignment with the rest of the country portfolio: PA#1 with the ASA - Colombia Poverty and Equity Assessment (P500643) and ASA - Support to DNP for Institutional Adaptations to Enhance Social Inclusion (P500562); PA#3 with ASA - Promoting Gender Equality in Colombia (P179611) and IPF (pipeline) - Colombia Sustainable Development Family Farming (P180676); PA#4 with IPF - Resilient and Inclusive Housing Project (P172535) and P4R – Program for improved access to effective Health Services for the Vulnerable Population and Enhance Health System Resilient (P180534); PA#6 with ASA - Colombia Green Regional Growth and Convergence (P500657) and IPF - Sustainable Low-Carbon Development in Orinoquia region Project (P160680); and PA#8 with the Colombia - Building a Sustainable and Modern Financial Sector (P177687). Page 25 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 55. The operation preparation builds on government consultations and dialogue with development partners. The Government has engaged in consultations on the measures supported by this DPF. All legal reform projects and policy documents were made publicly available for open consultation. For example, the development of Fommur’s implementation framework and the terms of reference for the calls for proposals underwent extensive territorial consultations convened by MADR with organizations of rural, indigenous, and ethnic women to socialize the prioritization criteria. It has also been established that a minimum of three representatives of women’s rural and ethnic organizations -nominated by rural organizations themselves- should be members of Fommur’s Steering Committee. Beyond this, relevant government institutions were consulted under the leadership of the DNP, a crucial step given the transversal nature of the DPF’s objectives. This operation also complements efforts by other development partners, such as the Inter-American Development Bank (IADB) and KFW Development Bank, who have advanced complementary operations focused on the equity agenda, particularly with regard to gender. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 56. This series, which emphasizes reducing inequalities, expects the supported policy actions to positively influence equitable outcomes in both the short and long term, as outlined in Annex 3. In the short term, Pillar 1 might slightly disadvantage the poor, but it promises significant benefits in the medium to long term. Once the RUI is fully implemented, the improved targeting of social spending will likely yield positive effects on equity. The gasoline subsidy is pro-rich (i.e., the absolute subsidy incidence rises with higher income levels). Microsimulations at the household level suggest that eliminating this subsidy could slightly increase poverty initially without markedly affecting inequality. However, redirecting the fiscal savings to compensatory measures, such as additional support for low-income families, could decrease both poverty and inequality, especially as the Renta Ciudadana program is defined and implemented. Pillar 2 aims to facilitate access to land and financial assets among vulnerable groups—identified by gender, ethnicity, migration status, and urban or rural residency—and is expected to be beneficial for equitable distribution in both the short and long term. Lastly, Pillar 3 is projected to have favorable social and distributive effects. It focuses on preserving ecosystems crucial for peacebuilding, which aids in sustainable economic development for communities affected by armed conflict, who are often impoverished. Additionally, initiatives promoting cleaner energy and green investment mobilization are expected to mitigate the disproportionate impact of climate change on the most vulnerable populations. 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS 57. No significant negative impacts on Colombia’s environment, forests, or other natural resources are expected from the policies supported under this operation. Any potential negative effects on the environment resulting from these PAs will be managed through the nation’s environmental framework.71 Prior Actions 2, 6, 7, and 8 71 Colombia has a comprehensive environmental regulatory and planning framework for environmental management. The Ministry of Environment and Sustainable Development (MADS) is the national regulatory entity in charge of formulating, implementing, and enforcing environmental policies Page 26 The World Bank Equitable and Green Path Development Policy Financing II (P180927) are expected to positively affect the environment and support the country’s actions toward its NDC commitment. PA 2 deals with measures aiming to lower overall fuel subsidies and is expected to promote lower fuel consumption, leading toward GHG emissions reduction and enhancing air quality in the long run. PA 6, which expands PES programs, is expected to promote sustainable production and restoration in environmentally strategic areas, as well as reduce the share of GHG emissions and improve air quality in the long term. PA 7 addresses methane emissions from the oil and gas sector, focusing on flaring inefficiencies, with expected positive impacts on the environment by aiming to curtail the release of methane into the atmosphere, contributing to efforts to reduce GHG and improve air quality. PA 8 aims to incorporate environmental and climate-related aspects into the sustainable portfolio, boosting the market's integrity for green finance. This is expected to enhance funding for environmental and conservation projects. PAs 1, 3, 4, and 5 are expected to have neutral effects on the environment, as reflected in Annex 3. 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 58. Overall, Integrated Fiduciary Risk is considered low. Colombia’s PFM system reveals strengths that reliably support the transparent management of budget resources. The identified weaknesses are being addressed through a reform plan and do not pose risks to achieving the PDO. The internal control environment over FOREX at the Citibank NY/Central Bank does not pose risks to achieving the PDO. No specific audit of the deposit of the credit proceeds will be required, and no additional fiduciary arrangements are considered necessary. 59. Public financial management (PFM). Colombia's PFM system reasonably aligns with good international practices at the national government level.72 The budget is comprehensive, well documented, implemented as planned, and published annually on time. The National Planning Department follows a multiyear approach, maintaining a Medium-Term Fiscal and Expenditure Framework since 2003, yet these mechanisms still need to be incorporated into the budget process. Nonetheless, the budget reflects a mostly well-functioning policy- based system. Execution of budgeted expenditures suggests an overall credible budget that is published in a timely fashion73 and accessible on the MHCP’s website. 60. Fiscal transparency is generally aligned with good practices. The only exceptions are inconsistent budget classification systems, the ongoing transition to public sector international accounting standards, and a lack of disclosure of internally available information on macroeconomic scenarios, long-term projections, and public corporations. The government has committed to addressing these weaknesses through a comprehensive reform plan.74 Revenue and expenditure controls are comprehensive. Records and controls on cash flows, balances, and public debt support have sound management and provide public institutions with the tools for predicting funding to execute their budgets in an orderly manner. and regulations to ensure environmental protection and sustainable development. Through the Decree 1076 of 2015, the MADS sets out the activities subject to environmental licensing. Together with the National Environmental Licensing Authority (ANLA by the acronyms in Spanish) and the Regional Autonomous Corporations (CARs by the acronyms in Spanish), they are responsible for the environmental licensing and permitting process for projects/investments at the national and regional level. The MADS, ANLA and CARs have the adequate institutional capacity to manage environmental management and related licensing/permitting. In terms of capacity and enforcement, Colombia is ranked above average in the region in various environmental performance indexes. 72 World Bank (2016): Public Expenditure and Financial Accountability Assessment of Colombia’s Public Financial Management Systems. 73 Government of Colombia (2023): Decree 2295 of December 29, 2023. 74 Government of Colombia (2020): Documento CONPES No. 4008. Política nacional de información para la gestión financiera Pública, and Government of Colombia (2019): Plan Nacional de Desarrollo 2018-2022; the Pact for Colombia, Pact for equity, included the proposal to reengineer the Public Financial Management. Decree 224 of 2021, created the Intersectoral Commission for Public Financial Management Information and establishes its integrated action plan. Page 27 The World Bank Equitable and Green Path Development Policy Financing II (P180927) 61. Consolidated public accounts are prepared within six months after the fiscal year's end and include full information on revenues, expenditures, financial assets, and liabilities. The Accountant General issues year- end accrual-based financial statements that are presented to the Controller General for audit purposes by May 15 of each year. Controller General auditing policies and procedures provide for the application of financial compliance and perform procedures consistent with national government auditing standards. Audit reports are submitted to Congress and the President before July 1 of the following fiscal year. 62. Public Procurement. In Colombia, significant progress has been achieved in enhancing procurement systems, guided by Law 1150 of 2007 and recent regulations like Decree 1510 of 2013. The Public Procurement Agency, Colombia Compra Eficiente (CCE), leads reforms, prioritizing strategic procurement management, universal adoption of SECOPII, and professionalization. Mandated by Law 2022 of 2020, CCE has implemented Standard Bidding Documents (SBD) across sectors, resulting in an average of 16 bids per activity and 3.9% savings. Competitive procurement methods have increased competition, with tenders attracting 17% more bidders. Open contracting reforms have seen a 46% rise in bidders and a 64% increase in awarded value in local government procurement, notably benefiting SMEs. Transactional electronic procurement system adoption surged to 94.5%, while broader reforms led to 99% utilization of SECOP II in 2022, with bids per procedure rising from 1.6 to 5.7. However, challenging procurement decisions remain limited to the judiciary, which, despite its independence, may lack efficiency. Enhancing procurement performance in the country could be achieved by strengthening monitoring mechanisms and allocating additional resources towards professionalization75. 63. Foreign Exchange Control Environment. Fiduciary due diligence was conducted to cover the government bank account at Citibank N.Y used for depositing the proceeds of Development Policy Lending operations and the overall foreign exchange control environment of the Central Bank. The audit report of the Consolidated Financial Statements of Citigroup Inc. and Subsidiaries for 2023-2022 had an unmodified opinion, and the effectiveness of Citigroup Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2023, was confirmed. The 2023 financial statements of the Central Bank were prepared following International Financial Reporting Standards, and the audit was carried out per International Standards on Auditing by an independent, internationally recognized audit firm acceptable to the WB. The unmodified opinion did not reveal any significant issues related to the internal control environment. The fiduciary due diligence, therefore, concluded that the internal FOREX control environment does not pose risks to the development objectives of this operation. 64. The proposed loan will follow the World Bank’s standard disbursement procedures for development policy support. Upon approval of the operation, the effectiveness of the Financing Agreement, and the submission of a signed withdrawal application, the loan proceeds will be disbursed into the government’s bank account at Citibank in New York. The account is denominated in US dollars, is controlled by the National Treasury, and is part of the government’s foreign exchange reserves. An equivalent amount in Colombian pesos will then be transferred into the Treasury Single Account of the Ministry of Finance and Public Credit (MHCP), thus becoming available to finance budgeted expenditures. The Borrower shall, within thirty (30) days after the withdrawal of the Loan, report to the Bank: (a) the exact sum received into the forex account in the Citibank N.Y./Central Bank; (b) the details of the account to which the Colombian Pesos equivalent of the Loan proceeds have been credited; and (c) the record that an equivalent amount has been accounted for in the Borrower’s budget management systems. This confirmation will include the applied exchange rate and the transfer date. 75 A PEFA assessment is currently in progress in Colombia, aimed at updating Procurement Performance and Monitoring. This initiative will include recommendations for further enhancements to the public procurement system. Page 28 The World Bank Equitable and Green Path Development Policy Financing II (P180927) The financial support provided under this operation is not intended to finance goods or services on the “Excluded Expenditures” list. If any portion of the credit is used to finance ineligible expenditures as defined in the current General Conditions applicable to DPFs, the Bank shall require the borrower to refund the amount, and such payments made for excluded expenditures will be canceled. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 65. The MHCP and the National Planning Department are responsible for collecting and monitoring information related to program implementation and progress toward achieving results for this DPF. The MHCP and the National Planning Department are further responsible for coordinating with the agencies involved in the reform program supported by this DPF. The MHCP and the National Planning Department have long- standing experience collecting and monitoring information in the context of DPFs. Monitoring and evaluation of the operation will also be carried out through ongoing policy dialogue and technical assistance programs. 66. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as Prior Actions or tranche release conditions under a World Bank Development Policy Financing may submit complaints to the responsible country authorities, appropriate local/national grievance mechanisms, or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Project-affected communities and individuals may submit their complaints to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred or could occur as a result of the Bank's non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted at any time after concerns have been brought directly to the World Bank’s attention and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, please visit https://accountability.worldbank.org. 6. SUMMARY OF RISKS AND MITIGATION 67. The overall risk level for this DPF is assessed as Moderate. This is based on a moderate rating for macroeconomic risk, political and governance risk, sector strategies and policies, and a low rating for all other risks. The exception is the risk of Institutional Capacity for Implementation and Sustainability, which is assessed as Substantial. First, the complexity of institutional and coordination arrangements poses implementation risks due to the large number of agencies and stakeholders involved. Second, related risks arise from monitoring and evaluation (M&E) arrangements, as they require extensive coordination across multiple line ministries and agencies. To mitigate these risks, the World Bank and the coordinating agency (DNP) collaborate closely to ensure strong coordination and effective monitoring during both the preparation and implementation stages. Finally, although continued efforts are needed to close macroeconomic imbalances, the probability that the government’s budget were to become insufficient to support the objectives of this operation is moderate. Page 29 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Table 4: Summary Risk Ratings @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate Risk Categories Rating 1. Political and Governance ⚫ Moderate 2. Macroeconomic ⚫ Moderate 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Low 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Low 7. Environment and Social ⚫ Low 8. Stakeholders ⚫ Low 9. Other ⚫ Overall ⚫ Moderate . Page 30 The World Bank Equitable and Green Path Development Policy Financing II (P180927) ANNEX 1: Policy and Result Framework Prior Actions and Triggers Results Prior Actions Triggers Prior Actions Indicator name Baseline Target Under DPF 1 Under DPF 1 Under DPF 2 Pillar 1- More equitable and green fiscal policies Prior Action 1: The Republic of Colombia has increased the Results Indicator #1: 4.1% [2022] 4.8% [2025] progressivity of the personal income Percentage of total tax by: (i) reducing the cap on (non-oil) fiscal exemptions and deductions for revenues paid by personal income tax; (ii) homogenizing those at the top taxation of dividends received by income decile in individuals and other personal income; income taxes and (iii) introducing a tax on personal wealth, as evidenced by Law No. 2277 of 2022, published in the Official Gazette on December 13, 2022. Trigger 1: Introduction and implementation of a new system of adaptive social assistance transfers equipped to prevent, mitigate, and adapt in the face of shocks Trigger 2: Creation of the Prior Action 1: The Republic of Colombia Universal Income Registry has issued a decree to regulate the Result Indicator #2: 51.9% [2023] 62% [2025] (RUI) as an additional tool Universal Income Registry as the single Percentage of poor to target social policies digital instrument for targeting social and vulnerable people and programs and as a key policies and programs, which will facilitate with georeferenced component of the rapid adaptation of benefits at times of information in the Integrated Social Registry shock, as evidenced by Decree No. 0875 of household social (RSH) 2024, published in the Official Gazette on registry July 8, 2024. Page 31 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Prior Action 2: The Republic of Results Indicator #3: Colombia has introduced taxes on Revenues raised from 0% [2023] 0.2% [2025] sweetened beverages and ultra- taxes on sweetened processed foods (products with a high beverages and ultra- content of sugar, sodium, and saturated processed foods as a fat) to promote healthier nutrition percent of GDP habits and contribute to health gains, as evidenced by Law No. 2277 of 2022, published in the Official Gazette on December 13, 2022. Prior Action 3: The Republic of Colombia Trigger 3: The government Prior Action 2: The Republic of Colombia Results indicator #4: 0% of GDP [2022] 2% of GDP [2025] has expanded its carbon tax to has reduced subsidies for has reduced overall gasoline subsidies to Fiscal carbon savings incentivize economy-wide greenhouse gasoline and diesel decrease greenhouse gas emissions and (related to carbon gas emissions reductions by increasing increase efficiency in public spending, as taxation and gasoline the coverage and level of the tax and evidenced by the MME Resolutions Nos. subsidy reduction) as limiting the use of offsets, as evidenced 40392, 40436, 40499, 40545, 40639, 40767, a percent of GDP76 by Law No. 2277 of 2022, published in published in the Official Gazette on June 2, the Official Gazette on December 13, 2023, June 30, 2023, August 4, 2023, 2022. September 1, 2023, November 3, 2023, and December 29, 2023, respectively. Pillar 2- Establishing the institutional framework to increase access to productive assets for vulnerable groups Prior Action 4- Gender: The Republic of Trigger 4: Regulations for Prior Action 3: The Republic of Colombia has Results Indicator #5: 382,000 [2021] 2,201,00078 Colombia, through the DNP, has: (i) the functioning of the established the implementation rules and Placement of [2025] approved the Gender Equality Policy National Care System allocated budget across financing lines of the women by public and the accompanying Action Plan that Development Fund for Rural Women employment assigns responsibilities, budget and Trigger 5: Modification of (“Fommur”) to support productive initiatives services (cumulated timeline for the implementation of Law 731/2002 that proposed by rural women and rural women’s value) specific actions that promote women’s promotes gender equality associations, particularly low-income economic inclusion, as evidenced by in rural areas through women, as evidenced by the MADR CONPES document No. 4080 of April 18, initiatives to title women’s Resolution No. 295 of 2023, published in the 2022; (ii) created the National Care land and improve access Official Gazette on August 28, 2023, and Results Indicator #6: System to recognize, reduce and to economic opportunities Resolution No. 58 of 2024, published in the Number of redistribute paid and unpaid care work Official Gazette on March 6, 2024. 0 [2023] 900 [2025] productive initiatives and to coordinate policies of care 76 Fiscal Carbon Savings (FCS) in year t with respect to year 2022 (as a share of GDP), is defined as: FCS (t, 2022) = [Revenue raised by carbon taxes (t) + Fuel Subsidies (t)]/GDP(t) –[Revenue raised by carbon taxes (2022) + Fuel Subsidies (2022)]/GDP(2022). For 2022 this is trivially equal to 0%. 78 Baseline refers to annual placements in year 2021. Target reflects the cumulated value of job placements during the 2021-2025 period. Page 32 The World Bank Equitable and Green Path Development Policy Financing II (P180927) provision, as evidenced by Law No. 2281 submitted by of 2023, published in the Official Gazette women’s on January 4, 2023; and (iii) organizations that strengthened the response system to receive financing support to survivors of gender-based and technical violence by establishing shelter houses support from for victims of domestic violence offering FOMMUR.77 comprehensive care, as evidenced by CONPES document No. 4080 of April 18, 2022, and Law No. 2215 of 2022, published in the Official Gazette on June 23, 2022. Prior Action 5- Ethnic groups: The Trigger 6: Regulations that Results Indicator #7: 0 [2022] 10 [2024] Republic of Colombia has taken adopt the guidelines for Number of measures to encourage the carrying out the cadaster municipalities in establishment and strengthening of in collective territories of which ethnic and ethnic (indigenous and afro- ethnic communities peasant communities descendants) and peasant communities are enabled as as cadastral organizations with enabled cadastral authority to implement a participatory implementors. cadaster, as evidenced by: (i) Resolution No. 338 of March 9, 2023, by the IGAC; and (ii) Chapter II, Section V, Articles 32 and 33 of the National Development Plan draft law (NDP 2022-2026) submitted to Congress on February 6, 2023 for approval, and published on Congress' official website: Congreso de la República. Prior Action 6- Migrants: The Republic Trigger 7: Regulations for Prior Action 4: The Republic of Colombia Results Indicator #8: of Colombia has: (i) outlined a 10-year the implementation of the has established the procedure for the Venezuelan migrants 1,999,408 [2023] 2,540,000 [2025] intersectoral government strategy for Integral Migratory Policy recognition of stateless persons and their with a regular the integration of Venezuelan migrants (Política Integral subsequent naturalization, as evidenced by migratory status79 to harness their contribution to Migratoria), as outlined by the MRE Resolution No. 10434 of 2023, that grants them 77 Baseline and target reflect expected number of productive initiatives submitted by women’s organizations and/or women individually, supported in the first wave of FOMMUR’s implementation (under the Fund’s four financing lines). 79 Refers to persons registered in the regularization mechanism Estatuto Temporal de Protección para Migrantes Venezolanos (ETPV) and who have been authorized a Temporary Protection Permit TPP (Estatus de Proteccion Temporal). Page 33 The World Bank Equitable and Green Path Development Policy Financing II (P180927) development, as evidenced by CONPES Law 2136 of 2021, published in the Official Gazette on access to public document No. 4100 of July 11, 2022; (ii) Colombia’s endorsement December 28, 2023. services and benefits. through the MEN and Migración of the Los Angeles (Number)80 Colombia, issued regulation to Declaration on Migration recognize the Temporary Protection and Protection (2022) Permit (TPP) as a valid identification document for Venezuelan migrants for the homologation of higher education titles, to increase access to services and economic opportunities for migrants, as evidenced by Resolutions Nos. 014448 of July 25, 2022, and 4278 of December 30, 2022; and (iii) through the MVCT sets the conditions for access to the family housing subsidy for the migrant population, as evidenced by Decree No. 1104 of June 29, 2022. Prior Action 7: The Republic of Trigger 8: Regulations Prior Action 5: The Republic of Colombia Results Indicator #9: 0% [2022] 50% [2025] Colombia has: (i) through the Financial introducing a segmented has issued rules and instructions for the Percentage of CACs Regulation Unit of the MHCP, regulated regulatory framework for implementation of the Open Finance that aligned their the association of small businesses CACs, introducing framework, including the treatment of bylaws to service (MSMEs) to the credit and savings incentives for sector financial consumers’ data, the technical and MSMEs cooperatives (CACs) aiming to expand growth and consolidation security standards for accessing personal their access to credit, as evidenced by data, and information disclosure Decree No. 627 of April 27, 2023; and (ii) Trigger 9: Circular of the requirements to strengthen competition, through its MHCP issued a regulatory Financial Superintendence inclusion, and efficiency in the provision of framework for Open Finance, to of Colombia (SFC) on financial services, as evidenced by the SFC Results Indicator #10: 0% [2022] 100% [2025] strengthen competition, inclusion, and implementation of Decree External Circular No. 004 of February 7, Percentage of efficiency in the provision of financial 1297/2022 provisions, 2024, published in the MHCP’s Bulletin No. supervised entities services, as evidenced by Decree No. including (i) governance, ii) 702 of February 9, 2024. participating in the 1297 of July 25, 2022. security standards, iii) open finance scheme architecture standards, that have and iv) standards for implemented all payment initiation provisions contained in the External 80 Increase expected: 27.4%. Page 34 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Circular 004/2481 Pillar 3- Establish non-price incentives to promote climate action Prior Action 8: The Republic of Trigger 10: Decree Prior Action 6: The Republic of Colombia Colombia, through the DNP and MHCP regulating the Emissions has issued a decree to regulate the has submitted to Congress draft Trading System (Programa Payments for Environmental Services for Results Indicator legislation to promote an economic Nacional de Cupos Peace to victims of the conflict and other #11: Total number of 516,874 [2022] 700,000 [2025] transformation via productive activities Transables de Emisiones) economic incentives to communities for the hectares under PES that reduce greenhouse gas emissions, preservation, restoration, and sustainable and other as evidenced by Chapter V of the use of strategic areas and ecosystems, as conservation National Development Plan draft law evidenced by Decree No. 1998 of 2023, incentives (NDP 2022-2026) submitted to published in the Official Gazette on Congress on February 6, 2023 for November 21, 2023. approval and published on Congress' Trigger 11: Resolution on Prior Action 7: The Republic of Colombia official website: Congreso de la gas flaring efficiency, has adopted the technical criteria and the República. to update Resolution reporting and auditing processes to monitor Results Indicator 0.0064 [2022] 0.0059 [2025] 40066 covering gas flaring and address inefficiencies in fugitive #12: Flaring and venting methane from the oil and gas sector and to efficiency82 reduce emissions occurring during the oil and gas production process, as evidenced by the ANH Resolution No. 10981 of 2023, published in the Official Gazette on November 1, 2023. Prior Action 9: The Republic of Trigger 12: The Financial Prior Action 8: The Republic of Colombia Results Indicator #13: 0% [2022] 100% [2025] Colombia, through its SFC has Superintendence of has issued instructions to collective Percentage of established the required criteria for Colombia (SFC) issues a investment fund management companies to Collective Investment thematic bonds (including green and Circular to regulate integrate environmental, social, Funds integrating sustainable bonds), to ensure thematic collective governance, and climate-related risks in ESG factors in their transparency and integrity of the market investment funds their investment policy and information investment decision- for green finance, reduce the risk of disclosure mechanisms to facilitate the making processes and greenwashing, and create the mobilization of green investment for reporting conditions for the development of sustainable growth and low-carbon requirements 81 The total number of supervised entities for which the provisions of External Circular 004/24 are applicable will be known once the SFC completes a diagnostic of the market (before August 1, 2024). 82 Flaring efficiency calculated using the formula: (barrel of oil- equivalent of gas flared) / (barrels of oil-equivalent produced). Page 35 The World Bank Equitable and Green Path Development Policy Financing II (P180927) instruments that mobilize green development, as evidenced by the SFC investment for sustainable growth and External Circular No. 005 of 2024, published low-carbon development, as evidenced in the MHCP’s Bulletin No. 706 of March 21, by Circular Externa No. 020 of July 29, 2024. 2022. Page 36 The World Bank Equitable and Green Path Development Policy Financing II (P180927) ANNEX 2: Paris Alignment Assessment Program Development Objective: The development objective of the proposed operation is to support measures that (i) promote more equitable and green fiscal policies, (ii) establish the institutional framework to increase access to productive assets for vulnerable groups, and (iii) establish non-price incentives to promote climate action. Taking into account our climate The DPF reform program is consistent with Colombia's climate commitments, analysis (e.g., Country Climate including the National Determined Contribution (NDC), Long Term Strategy (LTS), as and Development Reports or well as with key Country Climate and Development Report (CCDR) findings. The CCDRs), is the operation operation supports NDC and LTS achievement by energy efficiency measures in the consistent with the country's gas & oil sector (NDC sectoral measure 2) and increasing the domestic price of climate commitments, including, carbon, contributing to the fulfillment of Colombia’s GHG emission mitigation for instance, the NDC, NAP, LTS, targets. In addition, the operation aligns with the CCDR recommendation of pursuing and other relevant strategies? additional sources to finance climate action by promoting ESG and climate-risk considerations in the portfolio labeling of investment funds. Moreover, the operation supports the conservation and restoration of ecosystems to promote biodiversity and carbon capture (NDC sectoral measure 24) by providing payments to environmental services. Mitigation goals: assessing and reducing the risks PILLAR 1: MORE EQUITABLE AND GREEN FISCAL POLICIES Prior Action 1: Universal Income Registry Step M2.1: Is the prior action Answer: No Explanation: The prior action supports an improved mechanism for likely to cause a significant targeting social spending. It does not involve any activities that would cause a increase in GHG emissions? significant increase in GHG emissions. Conclusion for PA 1: The measure supported by the prior action is not likely to have any direct mitigation or emissions-generating impacts; consequently, it can be considered aligned with mitigation. Prior Action 2: Reduction of fuel subsidies Step M2.1: Is the prior action Answer: No. Explanation: This prior action increases the relative price of gasoline, likely to cause a significant promoting a reduction of gasoline consumption, thus mitigating GHG emissions from increase in GHG emissions? this source. Conclusion for PA 2: The measure supported by the prior action is likely to reduce GHG emissions from gasoline. The measure is aligned with mitigation. PILLAR 2: ESTABLISHING THE INSTITUTIONAL FRAMEWORK TO INCREASE ACCESS TO PRODUCTIVE ASSETS FOR VULNERABLE GROUPS Prior Action 3: Development Fund for Rural Women (FOMMUR) Page 37 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Step M2.1: Is the prior action Answer: No. Explanation: This prior action supports measures that enhance the likely to cause a significant framework towards increased economic empowerment of rural women by providing increase in GHG emissions? access to finance and business skills as productive assets. This focuses on enhancing rural women’s access to financial and technical resources for their productive activities. It does not involve any significant increase in GHG emissions. Conclusion for PA 3: The measure supported by the prior action is not likely to have any direct mitigation or emissions-generating impacts; consequently, it can be considered aligned with mitigation. Prior Action 4: Recognition of Statelessness Step M2.1: Is the prior action Answer: No. Explanation: This measure facilitates social and economic integration likely to cause a significant of migrant populations by establishing procedures and the entities responsible for increase in GHG emissions? the recognition of stateless persons in Colombia and their subsequent naturalization, which guarantees their rights and access to social services, the labor market, and other productive assets. Recognizing statelessness status. It does not involve any significant increase in GHG emissions. Conclusion for PA 4: The measure supported by the prior action is not likely to have any direct mitigation or emissions-generating impacts; consequently, it can be considered aligned with mitigation. Prior Action 5: Open Finance Answer: No. Explanation: The Prior Action supports the issuance of secondary Step M2.1: Is the prior action regulation for the implementation of Open Finance in Colombia, which is expected likely to cause a significant to promote financial inclusion through increased competition. It does not involve any increase in GHG emissions? significant increase in GHG emissions. Conclusion for PA 5: The measure supported by the prior action is not likely to have any direct mitigation or emissions-generating impacts. Consequently, it can be considered aligned with mitigation. Prior Action 6: Payment for Environmental Services Step M2.1: Is the prior action Answer: No. Explanation: The prior action expands existing payments for likely to cause a significant environmental services in the PES program to promote conservation, sustainable increase in GHG emissions? production, and restoration of ecosystems. It is expected to contribute to climate change mitigation in environmentally strategic areas. Conclusion for PA 6: The measure supported by the prior action is expected to contribute to reductions in GHG emissions through land use. It can thus be considered aligned with mitigation. PILLAR 3: ESTABLISH NON-PRICE INCENTIVES TO PROMOTE CLIMATE ACTION Prior Action 7: Gas flaring Step M2.1: Is the prior action Answer: No. Explanation: The prior action advanced the regulatory framework likely to cause a significant addressing and monitoring inefficiencies in fugitive methane from the oil & gas sector. increase in GHG emissions? As such, it is expected to reduce GHG emissions from the sector. Page 38 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Conclusion for PA7: The measure supported by the prior action is expected to have direct mitigation impacts. It can consequently be considered aligned on mitigation. Prior Action 8: ESG in Collective Investment Funds Step M2.1: Is the prior action Answer: No. Explanation: This measure instructs collective investment funds to likely to cause a significant include ESG and climate-related factors in their investment policy and the supporting increase in GHG emissions? documentation of their investment portfolios, with the objective of promoting ESG finance and avoiding greenwashing. It is expected to contribute to mitigating GHG emissions in the long term. Conclusion for PA 8: The measure supported by the prior action is expected to reduce GHG emissions in the long term and can be considered aligned with mitigation. Mitigation goals: All prior actions are aligned with mitigation. Adaptation and resilience goals: assessing and managing the risks PILLAR 1: MORE EQUITABLE AND GREEN FISCAL POLICIES Prior Action 1: Universal Income Registry Step A2: Are risks from climate Answer: No. Explanation: The impact of this prior action’s development is not hazards likely to have an adverse expected to be threatened by climate risks. On the contrary, it strengthens the social effect on the prior action’s assistance system to assist better the population vulnerable to climate shocks, contribution to the among other shocks. Development Objective(s)? Conclusion for Prior Action 1: The impact of this prior action is not expected to be threatened by climate risks. Prior Action 2: Reduction of fuel subsidies Step A2: Are risks from climate Answer: No. Explanation: The impact of this prior action’s development is not hazards likely to have an adverse expected to be threatened by climate risks. On the contrary, reducing gasoline effect on the prior action’s subsidies improves the country’s fiscal position and allows for a more effective fiscal contribution to the response to climate shocks. Development Objective(s)? Conclusion for Prior Action 2: The impact of this prior action on development is not expected to be threatened by climate risks. PILLAR 2: ESTABLISHING THE INSTITUTIONAL FRAMEWORK TO INCREASE ACCESS TO PRODUCTIVE ASSETS FOR VULNERABLE GROUPS Prior Action 3: Development Fund for Rural Women (FOMMUR) Page 39 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Step A2: Are risks from climate Answer: No. Explanation: The impact of this prior action’s development is not hazards likely to have an adverse expected to be threatened by climate risks. The contributions of this measure to effect on the prior action’s establishing an institutional framework to increase access to productive assets for contribution to the vulnerable goods are not contingent on climate shocks. Development Objective(s)? Conclusion for Prior Action 3: The impact of this prior action on development is not expected to be threatened by climate risks. Consequently, it can be considered aligned with adaptation. Prior Action 4: Recognition of Statelessness Answer: No. Explanation: The impact of this prior action’s development is not Step A2: Are risks from climate expected to be threatened by climate risks. On the contrary, the recognition of hazards likely to have an adverse statelessness will give migrants fundamental rights and improve their access to basic effect on the prior action’s services even in the face of climate shocks. contribution to the Development Objective(s)? Conclusion for Prior Action 4: The impact of this prior action on development is not expected to be threatened by climate risks. Consequently, it can be considered aligned with adaptation. Prior Action 5: Open Finance Step A2: Are risks from climate Answer: No. Explanation: The impact of this prior action’s development is not hazards likely to have an adverse expected to be threatened by climate risks. A framework for open finance will, on effect on the prior action’s the contrary, promote financial inclusion of the vulnerable, which can help contribution to the households better cope with shocks, including climate-related Development Objective(s)? Conclusion for Prior Action 5: The impact of this prior action on development is not expected to be threatened by climate risks. Consequently, it can be considered aligned with adaptation. PILLAR 3: ESTABLISH NON-PRICE INCENTIVES TO PROMOTE CLIMATE ACTION Prior Action 6: Payment for Environmental Services Step A2: Are risks from climate Answer: Yes. Explanation: Climate hazards, such as extreme weather events, hazards likely to have an adverse changes in precipitation patterns, or increased temperatures, can affect the viability effect on the prior action’s and sustainability of PES by altering the ecosystems that provide them. For example, contribution to the more frequent or intense flooding could undermine efforts to maintain forested Development Objective(s)? watersheds that contribute to water purification services. Similarly, prolonged droughts could affect reforestation projects aimed at carbon sequestration. These impacts could, in turn, affect the willingness to engage in PES schemes, as well as the overall effectiveness of such programs. Page 40 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Step A3: Does the design of the Answer: Yes. Explanation: The prior action extends an existing system that proved prior action reduce the risk from effective for increasing the surface area under conservation and restoration despite climate hazards to an acceptable an increase in the frequency and severity of climate shocks. In addition, to improve level, considering climate response to climate risks, considerations within the scheme include capacity building adaptation good practices for beneficiaries, including practices in conservation and restoration activities, applicable to the country among others. context? Conclusion for Prior Action 6: Although climate risks could undermine the development impact of this prior action, the program's design effectively reduces these risks to an acceptable level. Consequently, it can be considered aligned with adaptation. Prior Action 7: Gas flaring Step A2: Are risks from climate hazards likely to have an adverse Answer: No. Explanation: Climate hazards are not expected to impact the effect on the prior action’s implementation of technical guidelines and monitoring of gas flaring in the oil and contribution to the gas sector. Development Objective(s)? Conclusion for Prior Action 7: The impact of this prior action on development is not expected to be threatened by climate risks. Consequently, it can be considered aligned with adaptation. Prior Action 8: ESG in Collective Investment Funds Step A2: Are risks from climate Answer: No. Explanation: Climate hazards are not expected to impact the hazards likely to have an adverse development objective of this PA. This measure mandates collective investment effect on the prior action’s funds (CIFs) to include ESG and climate-related factors in their investment policy and contribution to the thus integrate them into their investment decision-making process. If anything, it Development Objective(s)? could increase the demand and desirability for ESG frameworks by collective investment fund investors. Conclusion for Prior Action 8: The impact of this prior action on development is not expected to be threatened by climate risks. Consequently, it can be considered aligned with adaptation. Adaptation and resilience: All prior actions are aligned on adaptation and resilience. The adaptation risks are low. OVERALL CONCLUSION OF PARIS ALIGNMENT ASSESSMENT: The operation is aligned with the goals of the Paris Agreement. Page 41 The World Bank Equitable and Green Path Development Policy Financing II (P180927) ANNEX 3: Operation Specific Annex Environment and Poverty/Social Analysis: Significant poverty, social Prior Actions Significant positive or negative environmental effects or distributional effects positive or negative Operation Pillar 1: Objective Neutral. The Universal Income Registry (RUI), as the unique Yes, positive poverty Prior action #1 targeting instrument for social policies and programs, is expected to reduction and have neutral impacts on the environment. distributional effects Positive. This PA, which aims to reduce overall gasoline subsidies Yes, mild negative and eliminate subsidies for large consumers of gasoline and diesel, is Prior action #2 poverty and expected to reduce the use of gasoline and, therefore, reduce GHG distributional effects emissions and improve air quality in the long term. Operation Pillar 2: Objective Neutral. Enhancing rural women’s access to financial and technical Yes, positive poverty Prior action #3 resources for their productive activities is expected to have neutral reduction and impacts on Colombia's environment. distributional effects Neutral. Recognizing the statelessness status is expected to cause Yes, positive Prior action #4 neutral impacts on the environment. distributional effects Neutral. Fostering financial inclusion through the implementation Yes, positive Prior action #5 of an Open Finance framework is expected to have neutral impacts distributional effects on Colombia's environment. Operation Pillar 3: Objective Positive. This PA, which expands PES programs, is expected to promote sustainable production and restoration in environmentally Yes, positive Prior action #6 strategic areas, as well as reduce the share of GHG emissions and distributional effects improve air quality in the long term. Positive. This PA is expected to have a positive impact on the Yes, positive Prior action #7 environment and natural resources as it is expected to reduce distributional effects methane emissions to the environment. Positive. Incorporating environmental (as part of the ESG) and climate-related aspects into the sustainable portfolio and investment Yes, positive Prior action #8 documents will boost the market's integrity for green finance and, distributional effects ultimately, is expected to enhance funding for environmental and conservation projects. Page 42 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Poverty, Social and Distributional Impacts: This PSIA analyzes the potential distributional impacts of the policies supported by the second series of this programmatic operation. The analysis has been informed by existing solid analytical foundations developed for Colombia, as well as by relevant academic literature. Among others, the analytical underpinnings include the microsimulation tool for fiscal incidence analysis developed by Baquero, Davalos, and Monroy (2023), the WB Colombia Country Climate Development Report (WB, 2023) and the WB Colombia Equity Flagship – Building an Equitable Society report (2021). In addition, the analysis draws on recent data from the Gran Encuesta Integrada de Hogares (GEIH), the Microenterprise Survey, the Migration Pulse Survey (the first nationally representative survey of Venezuelan migrants in Colombia), and relevant indicators presented in policy reports produced by various Government agencies. PILLAR 1: More equitable and green fiscal policies. Prior Action 1: Creation of the Universal Income Registry (RUI) This PA supports the creation of an improved and unique digital targeting instrument for social spending. It is expected to contribute to poverty and inequality reduction in the medium term when the instrument is scheduled to be fully operational. According to Baquero, Davalos & Monroy (2023), direct public transfers from social programs in Colombia are the most progressive fiscal interventions, although their equalizing effect is modest. Moreover, a significant share of spending is leaked to high-income individuals.83 For example, based on their socioeconomic profile, over 65 percent of Colombian households receiving subsidies should either be receiving a smaller subsidy or no subsidy at all. By interacting with the Registro Social de Hogares84 (RSH), the RUI will help differentiate between households that declare income and pay taxes and low-income and vulnerable households that require government support.85 Hence, it will allow better correct inclusion and exclusion errors from cash transfer programs and subsidies. As such, this reform is expected to increase the efficiency of social spending, lead to poverty reduction, and narrow inequality gaps across the country.86 The interoperability of databases will direct Colombia towards a more adaptive social protection system, facilitating rapid adaptation of benefits at times of shocks and reducing the risks of falling into poverty. The RSH-RUI interaction will allow for cross-referencing household data with data from the National Unit for Disaster Risk Management (UNGRD). This will translate into a better-informed Government response that anticipates benefits at the time of shocks. Colombia has a high incidence of rainfall variability and extreme events, with poor households more likely to experience climate shocks such as flooding, water scarcity, landslides, or extreme precipitation events.87 Estimates show that 55 percent of Colombians are not able to cope with the negative effects of natural disasters through their assets.88 83 World Bank (2021) and Colombia Systematic Country Diagnostic (2022). Based on their socioeconomic profile, over 65 percent of Colombian households receiving subsidies should either be receiving a smaller subsidy or no subsidy at all. 84 The RSH is an umbrella registry that includes information of 100% of Colombia’s population and regular migrants and gathers data from bo th Sisbén and administrative records receives information from 28 administrative databases from ministries and agencies at the national level and 1,832 databases at the sub-national level. 85 For instance, data from the Direccion Impuestos Nacionales (DIAN) that up to now had not been cross-referenced with Sisbén. 86 Longstanding inequality across regions overlaps with the large gaps in welfare between Afro-descendants and indigenous Colombians and the rest of the population. See further detail in the Colombia Equity Flagship (World Bank 2021). 87 Campos, Holm-Nielsen, Díaz, Rubiano, Costa, Ramírez, & Dickson (2012). “Analysis of Disaster Risk Management in Colombia: A Contribution to the Creation of Public Policies.” World Bank, Washington, DC. 88 Báez, Javier E., Alan Fuchs, and Carlos Rodríguez-Castelán. 2017. “Shaking Up Economic Progress: Aggregate Shocks in Latin America and the Caribbean.” World Bank, Washington, DC Page 43 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Simulations of the distributional impact of a climate-related hydrometeorological shock in the country suggest 53 thousand new poor and 38 thousand people unable to cover basic needs.89 Integration with geo-referenced data will feed the RUI with information about the spatial distribution of poor and vulnerable households. Prior Action 2: Reduction in overall gasoline subsidies Estimates of the potential distributional effects of reducing gasoline subsidies indicate a mild increase in poverty in the short run but with potential gains in poverty and inequality reduction in the medium term with adequate mitigation mechanisms. By underpricing fossil fuels, governments not only incentivize overuse but also perpetuate inefficient polluting technologies and entrench inequality.90 Reducing the overall gasoline subsidy in Colombia could lead to a mild increase in poverty. Still, at the same time, the policy will open the space91 for repurposing resources towards social spending and climate- smart investments. Repurposing of resources has the potential to increase the redistributive impact of the fiscal system while supporting the green transition. 92 While also slowing the clean energy transition, fuel subsidies in Colombia are also highly regressive as they vastly favor those in the upper tail of the income distribution. According to DANE (2024), vehicle fuels represent 1.23 percent of the consumption basket of poor households, whereas this share is 3.44 percent for households classified as high-income (richest quintile). Moreover, estimates from MHCP (2023) indicate that the top income quintile receives more than half of the overall int on direct FEPC subsidy (54.6 percent) compared to the 4.5 percent that goes to the lowest-income quintile, representing a 12-times higher difference between the top and bottom quintiles.93 The fiscal microsimulation tool developed by Baquero, Davalos & Monroy (2023) allows further analysis to assess the distributional impact of phasing out gasoline subsidies and potential mitigation measures.94 The model, built with the year 2021 as the base, shows that the gasoline (indirect) subsidy has low progressivity.95 In contrast, the Kakwani Coefficient is only 0.22, while coefficients for need-based transfers such as Ingreso Solidario or Familias en Acción are up to 0.87.96 In line with findings from the MHCP (2023), results from the model (Figure A1) indicate that, in terms of absolute incidence, the subsidy is regressive as most of the overall subsidy reaches the wealthiest households. In terms of relative incidence, the subsidy is progressive as the poorest receive a larger share of the subsidy as a proportion of their standard of living (pre-tax income). 89 World Bank (2023). Adaptive social protection in Colombia: What is the distributional impact of shocks and how can the social protection system better respond? An application of the Social Protection Stress Test Tool. Background note for the Colombia CCDR 2023. 90 Damania et. Al., (2023). Detox Development: Repurposing Environmentally Harmful Subsidies. Washington, DC: World Bank 91 Colombia’s fuel stabilization fund has recurrently registered net deficits, particularly during 2021 and 2022 when the deficits represented 1.0 and 2.5 percent of the GDP, respectively. 92 World Bank (2021). Colombia Equity Flagship. Building an equitable society in Colombia. 93 Ministerio de Hacienda y Crédito Público MHCP (2023). Marco Fiscal de Mediano Plazo 2023. Calculations correspond to a static general equilibrium model which accounts for the direct effect on gasoline and diesel consumption. 94 The model is built with 2021 household, socioeconomic and income data from the Integrated Household Survey (GEIH 2021). It uses the CEQ methodology and updates the socioeconomic status post-pandemic, the personal income tax law (supported under the first series) and introduces the new fiscal policy parameters such as the fuel subsidies. 95 The gasoline subsidy is calculated based on units consumed as identified in the National Household Budget Survey (ENPH 2016-2017). The value per gallon consumed is calculated as the annual average of the differential between the export parity prices and the producer price. 96 Progressive interventions have positive Kakwani coefficients (higher values indicate more progressivity), and regressive ones have negative coefficients. Page 44 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Figure A1. Distributive incidence of gasoline (indirect) subsidies – Base scenario 2021 Panel A. Absolute incidence Panel B. Relative incidence 35% 6% 5.3% 29.5% 30% 5% 25% 4% 20% 14.2% 3% 15% 10.7% 8.8% 2% 1.6% 10% 7.3% 1.2% 1.0% 5.7% 5.2% 5.7% 6.3% 6.6% 0.8% 0.7% 0.6% 0.6% 5% 1% 0.5% 0.5% 0% 0% Deciles - Gross market income plus pension Deciles - Gross market income plus pension Source: Baquero, Davalos & Monroy (2023). Estimates of the distributional effects of reducing gasoline subsidies indicate a mild increase in poverty in the short run. According to the Government’s strategy for phasing out the gasoline subsidies outlined in MHCP (2023), the Government started to reduce the subsidy in late 2022 (the local price of gasoline has increased since October 2022). By 2024, the FEPC is expected to register a net surplus position in the stabilization of fuel prices (by eliminating the subsidy).97 By nowcasting98 poverty rates and inequality for 2022 through 2024, simulations (Table A1) indicate a gradual decrease in the poverty-reduction impact of the phasing out of the subsidy (from 2022 to 2023). Eliminating the gasoline subsidy in 2024 will lead to a mild increase in poverty (0.7 percentage points in 2024) and will have very small effects on inequality. However, as indicated earlier, the progressivity of the gasoline subsidy is rather low (compared, for instance, to social transfer programs). Table A1. Estimates of the distributional impact of gasoline subsidies Year Poverty rate Gini With gasoline With gasoline Without Diff Without Diff adjustment adjustment (1) (2) - (1) (3) (4) – (3) (2) (4) 2022 37.2% 36.2% -0.9pp 0.504 0.502 -0.002 2023 35.7% 35.2% -0.5pp 0.501 0.500 -0.001 2024 37.9% 38.6% 0.7pp 0.502 0.504 0.002 * It is expected that by 2024, the FEPC will register a surplus in gasoline, a deficit in diesel, and an overall net surplus position of 0,5 billion COP. Note: Poverty rate and Gini coefficient with respect to consumable income (= disposable income – indirect taxes + indirect subsidies). Source: Own estimates based on Baquero, Davalos & Monroy (2023). 97 See details in Box 2.2. and figure 2.2.4 in MHCP (2023), p.p., 109. 98 The pre-fiscal income is uprated from the baseline year of the GEIH (2021), to the policy year (2022, 2023, and 2024, respectively) to each income source. It considers growth in the labor income by sector (primary, secondary, and tertiary) and by formal/informal level. In terms of non-labor income, capital, pensions, private and public transfers are considered. The main source of information for the growth point estimates is the GEIH collected annually. Income growth for 2024 was adjusted considering macroeconomic projections. The uprating methodology also accounts for CPI changes according to the reported estimates by DANE and the population growth projections based on the CNPV 2018. Those parameters are referenced respect to the baseline year (2021). Page 45 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Standard compensatory mechanisms (financed through repurposing of resources) may alleviate the potential mild negative poverty effects of this policy. One of the potential gains from reducing gasoline subsidies is increased efficiency in public spending. Simulating a scenario where fiscal savings of lowering the gasoline subsidy are allocated to low-income households through an additional transfer suggests poverty and inequality reductions (Table A2) and increased progressivity (Table A3). In this scenario, a cash transfer of COP 500,000 a month is allocated to households Sisben A or B totaling 1,083,333 households and a budget of COP 6.5 billion/year corresponding to fiscal savings from eliminating the gasoline subsidy. According to the microsimulation, the Kakwani progressivity index would increase from 0.222 in the 2021 without-reform scenario to 1.279 in the simulated scenario with cash transfers. As the Government is redesigning its social protection system with the new program Renta Ciudadana (RC), which will take effect throughout 2024, additional analysis will be needed. Table A2. Impacts on poverty and inequality from potential mitigation measures Poverty rate Inequality Scenario (Official line) (Gini) Baseline, 2021 40.1 0.505 Mitigation measure: fiscal savings from reducing gasoline subsidy 39.1 0.492 are transferred to poor households via cash transfer program Note: Poverty rate and Gini coefficient with respect to consumable income (= disposable income – indirect taxes + indirect subsidies). Source: Own estimates based on Baquero, Davalos & Monroy (2023). Table A3. Distributive incidence from mitigation measure to minimize negative impacts Kakwani Absolute incidence, by decile Relative incidence, by decile 1 2 9 10 1 2 9 10 Simulated cash transfer program 1.279 23.7% 9.4% 0.5% 0.1% 19.5% 5.1% 0.0% 0.0% Baseline, 2021 0.222 5.7% 5.2% 14.2% 29.5% 5.3% 1.6% 0.5% 0.5% Note: Progressive interventions have positive Kakwani coefficients, and regressive ones have negative coefficients. The higher the coefficient, the more progressive the policy. Source: Own estimates based on Baquero, Davalos & Monroy (2023). PILLAR 2: Establishing the institutional framework to enhance access to productive assets for vulnerable groups. Prior Action 3: Gender equality – Rural women This PA seeks to address Colombian rural women’s limited access to productive assets and increase their economic empowerment. Financing rural women’s productive initiatives, paired with advisory services, is expected to have positive impacts on poverty reduction and equity in the short to medium term. Rural women are key agents for achieving sustainable development, e.g., they are resilience builders against rural poverty, hunger, and malnutrition, and they are agents of change towards sustainable agrifood Page 46 The World Bank Equitable and Green Path Development Policy Financing II (P180927) systems.99 However, their productive capacity cannot be fully exploited if they do not have access to complementary markets, such as financing and credit, land and physical capital, and capacity-building and advisory services.100 Female entrepreneurs are more likely than men to be “necessity” entrepreneurs (i.e., entrepreneurship is the choice of last resort) as opposed to “opportunity” entrepreneurs.101 Evidence shows that bundled services -e.g., capital combined with business training and advisory services- are effective interventions in improving performance for women-led businesses.102 Evidence also shows that economic empowerment of rural women positively impacts social norms and strengthens food security.103 Yet, importantly, programs targeting women should also focus on addressing the time and mobility constraints they face. In a context of territorial inequality, rural, Indigenous, and Afro-descendant women in Colombia face large disadvantages in access to productive assets, and bundled services offered by Fommur can contribute to overcoming some of those. Colombian rural women have limited access to financing opportunities to further their productive initiatives. They experience low rates of credit approval, Figure A2. Approved credit applications among Figure A3. Main activity during last week rural populations, by type of credit and sex of the (population 15+) applicant 56.8 80 69.7 60 Rural women 65.0 64.1 49.8 70 Rural men 60 40 50 39.5 40.5 30.8 40 % % 21 30 20.6 17.6 20 20 11.6 8.8 8.6 11.614 8.2 7.5 10 0 0 Women Men Women Men Rural Urban Working Looking for a job Studying Domestic housework Source: DANE (2023). Nota Estadística – Situación de las Mujeres Source: Own estimates based on DANE, GEIH 2022. Category Rurales en Colombia. P.p. 82 ‘Other” is not displayed. particularly microcredit and credit for commercial purposes (Figure A2).104 In addition, most rural women in Colombia report ‘domestic housework’ as their main activity, while only a fifth report ‘working,’ indicating that domestic responsibilities limit their productive capacity (Figure A3). Only 27.2 percent of the employed rural population in the country are women, although they represent 45.9 percent of the rural population of working age.105 Quality employment is limited in rural areas, and there is a substantial gender gap in how family responsibilities limit rural women’s access to jobs.106 Of the time reported to work-related activities, rural women spend the most hours of their day on unpaid work (8:33 hours, 99 FAO (2018). Empowering rural women, Empowering agriculture. 100 See for instance Minniti and Naude, 2010; Flabbi, et al. 2019; Carranza, et al, 2018. 101 Global Entrepreneurship Monitor 2023. 102 World Bank (2018). “An Operational Guide to Women’s Entrepreneurship Programs in the World Bank. ” World Bank, Washington D.C. 103 FAO, IFAD, WFP & UN Women (2021). Global End-term Evaluation of the Joint Programme on Accelerating Progress towards the Economic Empowerment of Rural Women in Ethiopia, Guatemala, Kyrgyzstan, Liberia, Nepal, Niger, and Rwanda from 2014 to 2020. 104 Ot the total applications for microcredit submitted by rural women, the approval rate is 11.6 percent. The same rate is observed in the case of credit approval for commercial purposes. DANE (2023). Nota Estadística – Situación de las Mujeres Rurales en Colombia. 105 DANE – Gran Encuesta Integrada de Hogares, 2021. 106World Bank. 2021. Building an Equitable Society in Colombia. World Bank, Washington, DC. Page 47 The World Bank Equitable and Green Path Development Policy Financing II (P180927) equivalent to 59% of daily work hours), mainly on care and domestic tasks in the household and/or family farm (e.g., tending to livestock, water and wood collection). For rural men, this figure is only 3 hours.107 Recognizing these disparities, in the context of Fommur, activities related to family agriculture and the care economy (e.g., unpaid care and domestic activities in rural households) are considered eligible. Importantly, about half of the women in rural areas (49.6 percent) identify themselves as from an ethnic minority and mainly as either Indigenous or Afro-Colombian.108 Prior Action 4: Regularization of migrants and persons at risk of statelessness This PA is expected to have positive welfare impacts for persons at risk of statelessness in the short to medium run by facilitating their access to productive assets and services and promoting their social and economic integration. Employment and poverty rates are higher for migrants than non-migrants (Figure A4) due to their high level of informality and fewer fallback options through, for instance, access to social programs. Stateless persons are at even higher vulnerability as they are left without basic rights and official recognition. This poses a risk of falling into a cycle of deprivation and vulnerability as they may be unable to access basic rights and legal services (starting with identity documents). They are often at a higher risk of exploitation and abuse. They cannot confer a nationality on their children, and if the child is unable to obtain a nationality, they will also end up stateless, perpetuating statelessness across generations.109 This PA confers all stateless persons in the country with a legal route that enables them to access social services, formal labor markets and, better-quality employment, and assets such as financial services, markets, housing. Figure A4: poverty and employment indicators for migrants Panel A: Poverty rates Panel B: Employment indicators 80 69.2 62.4 60 53.1 54.956.5 65.6 65.9 50.8 70 61.3 60.8 50 60 40 50 43.4 41.7 40.3 38.2 36.5 34.9 30 25.8 40 19.8 30 20 13.7 11.2 20 10 10 0 0 2021 2022 2021 2022 Women Men Women Men Occupancy rate Unemployment rate Migrant from Venezuela National Migrant from venezuela Non-migrant 2019 2020 2021 Source Own estimates, based on GEIH-DANE. 107 DANE. Time Use Survey (ENUT), 2020-2021. 108 DANE, based on figures from the Population and Housing Census 2018. 109 UNFCR (2014). Global Action Plan to End Statelessness. 2014-2024; UNHCR (2023). Statelessness Around the World. Page 48 The World Bank Equitable and Green Path Development Policy Financing II (P180927) According to the Migration Pulse110 (MP) survey, a high percentage of Venezuelan migrants do not have access to essential services: 64% of the migrant population does not have access to healthcare services, and 28% of school-aged children and youth do not attend an educational institution (Figures A5). Most migrants access health services through the subsidized health system, which is closely linked to their substantial levels of informality. As migrants achieve formal job placement, both migrants and their beneficiaries would naturally have access to healthcare services through the contributory regime.111 The Colombian government's regularization policy has mitigated poor labor market indicators among migrants. The MP shows that the regularization program has been an effective mechanism to facilitate access to employment. For instance, regular migrants have a higher total income and higher hourly income than other migrants (Table A4). Table A4. Labor market indicators for different migrant groups Source: WB & UNHCR (2023). Pp. 17. Figure A5. Affiliation to the healthcare system among migrant population Source: WB & UNHCR (2023). Pp. 10 For young children, the supported reform represents increased opportunities for them to access early childhood education, with potential long-term gains in their human capital and productive capacity. Rude (2023) studies the impacts on enrollment in early childhood education after the Colombian Government introduced, in 2019, a policy that granted citizenship to children born in the context of the 110 The Migration Pulse is the first nationally representative survey of the Venezuelan migrants in Colombia, implemented in 2021 and 2022. Results are presented in: WB (2023). Barriers to the Integration of Venezuelan Migrants and Refugees in Colombia: Policy Lessons from the Migration Pulse Survey. 111 Ibid. Page 49 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Venezuelan refugee crises. Overall participation in early childhood services increased for migrant children younger than six. Parents’ educational choices might change when immigrant children’s future labor market opportunities improve. In addition, naturalized children might face less discrimination and increased possibilities to access the formal education system.112 Prior Action 5: Framework for Open Finance This PA introduces regulatory provisions on Open Finance, which are expected to increase financial inclusion and yield positive poverty and distributional effects in the long term. Open finance has the potential to advance financial inclusion through reduced entry barriers for consumers, as well as accessibility to tailor-made products and services.113 114 While implementation of these frameworks is still in the early stages worldwide, positive financial inclusion effects have already been documented, such as in India, where open banking principles implementation increased high volume-low value payment transactions, and improved digital infrastructures increased the use of digital payments and the entry of a range of competitors.115 At the same time, this ecosystem can bring risks such as cybersecurity risks, consumer protection risks, and security and operational risks. Proper regulation (e.g., data-protection regulations and consumer safeguards) is imperative to mitigate these potential risks.116 Figure A6. Financial products currently used by any Figure A7. Credit approval among informal household member. microenterprises by owner’s sex. 100 84% 11.2 70% 26.6 30.8 80 39.7 40.0 Man Women 52.1 68.5 69.3 % of Households 60 21% 40 6% 3% 2% 6% 6% 1% 0% 20 0 1 2 3 4 5 Urban Rural Total Income quintile Residency At least one financial product None Note: Financial products include checking accounts, savings accounts, Note: refers to businesses with up to ten people employed. certificate deposits, home loans, vehicle loans, investment loans, credit Source: Own estimates based on Microenterprise Survey cards, and Others. (DANE, 2019). Source: Own estimates based on GEIH 2022. Successful implementation of the Open Finance ecosystem has the potential to benefit excluded and underserved groups such as women, lower-income groups, rural populations, and MSMEs. About 40 112 Britta (2023). Ending statelessness for displaced children: Impact on early childhood education, ifo Working Paper, No. 401, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, Munich 113 Such as digital payments, credit, investment, and insurance. 114 WB (2022), Fintech and the Future of Finance – Overview (English). Washington, D.C.: WBG 115 Carrière-Swallow, Yan; Haksar, Vikram; and Patnam, Manasa. 2021 India’s Approach to Open Banking: Some Implications for Financial Inclusion; IMF Working Paper WP/21/52. 116 Plaitakis and Staschen, 2020. Open Banking: How to Design for Financial Inclusion. Washington DC: WBG; Herrera et. Al., 2023. Open finance in Latin America and the Caribbean: great opportunities, large challenges. Inter-American Development Bank. Washington, DC.; Medine and Plaitakis, Ariadne. 2023. Combining Open Finance and Data Protection for Low-Income Consumers. Washington, D.C.: CGAP Page 50 The World Bank Equitable and Green Path Development Policy Financing II (P180927) percent of Colombian households do not use any financial services, and the shares are as high as 69.3 percent among rural households and over 50 percent for households in the lowest income quintiles (Figure A6). Most micro-businesses in Colombia mostly use their own resources or family loans to finance entrepreneurial endeavors, and the shares are higher among female-owned microbusinesses (73 percent for women and 72 percent for men, respectively).117 Gender gaps are observed in terms of access to credit. While 70.4 percent of credit approval among informal female-owned micro-businesses comes from financial institutions, the share is 84.4 percent among male-owned (Figure A7). Access to credit for MSMEs is crucial for boosting employment generation; MSMEs with up to 100 employees contribute 79.1 percent of total employment and generate about 80 percent of the employment among the poor and vulnerable.118 (GEIH, 2019) PILLAR 3: Establish non-price incentives to promote climate action. Prior Action 6: Payments for Environmental Services (PES) for Peace Figure A8. Poverty incidence among armed conflict Measures to regulate and implement PES victims (official rates) for Peace are expected to have positive 60 distributional and environmental impacts 50.1 50.8 50 by supporting a sustainable economic 40 development path for armed conflict 30 26.2 victims. Armed conflict victims in Colombia 21.2 face a higher likelihood of living in poverty 20 and extreme poverty (Figure A8), and these 10 payments constitute a source for 0 Poverty Extreme Poverty Poverty Extreme Poverty empowering marginalized rural groups, encouraging the sustainable management Total Rural Forced displacement Total Victims National of their resources, and improving their quality of life. From an environmental Source: DANE-UARIV, GEIH-RUV, 2021-2022 perspective, PES for Peace has the potential to reduce deforestation in territories prioritized for peacebuilding.119 Systematic reviews of the impact of PES by Börner et al. (2020)120,121 and Samii et al. (2014) 122,123 find positive but modest effects on conservation, with large variation between countries and programs, and even within programs. Notably, evidence indicates that economic pressure on natural resources and non-compliance are major factors affecting the extent of the conservation impact. 117 Own calculations based on Microentrepreneur Survey, DANE (2019). Female/male TEA is defined as percentage of female 18-64 population who are either a nascent entrepreneur or owner-manager of a new business, divided by the equivalent percentage for their male counterparts. 118 DANE, GEIH 2019. 119 According to the NDP 2022-2026, at least 100 PES for Peace will be implemented in 300,000 additional ha. in territories prioritized for peace building. 120 Wunder, Börner, Ezzine-de-Blas, Feder and Pagiola. 2020. Payments for Environmental Services: Past Performance and Pending Potentials. Annual Review of Resource Economics, Vol. 12, Issue 1, pp. 209-234, 2020. 121 Covering 19 studies from 8 countries: Brazil, Mexico, Uganda, Peru, Ecuador, Cambodia, Costa Rica, and Bolivia. On average, they find a normalized effect size (Cohen’s d) on conservation of 0.2. 122 Samii, C., M. Lisiecki, P. Kulkarni, L. Paler, and L. Chavis. 2014. Effects of Payment for Environmental Services (PES) on Deforestation and Poverty in Low- and Middle-Income Countries: A Systematic Review. 123 Covering 11 evaluations in 4 countries (Costa Rica, Mexico, China, and Mozambique). On average, PES tended to reduce the annual rate of deforestation by 0.21 percentage points. Page 51 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Effects on poverty alleviation will be contingent on the specifics of the program and the social context. Global evidence on the impacts of PES suggests that biodiversity conservation and poverty alleviation policy goals can be either inherently conflicting or potentially complementary. While experimental evidence of the effect of PES on poverty is scarce, it points to considering context characteristics such as the value of the payment, ownership rights, local context, and project duration. Samii et al. (2014) find little evidence of the potential of PES programs to achieve both goals jointly. Yet, higher effects on poverty reduction were observed in programs where poorer households participated at higher rates.124 The meta- analysis by Liu et al. (2018) shows that the higher the transfer, the more favorable the livelihood impact.125,126 Voluntary participation, low transaction costs, and access to alternative income sources also increase the effectiveness of poverty.127 The meta-analysis by Jing et al. (2022) shows that private ownership-based PES schemes tend to be more effective in poverty reduction and environmental outcomes than community-based ones, and regional projects often outperform national ones.128 Longer PES duration has a more significant impact on poverty reduction, in part because of the time required to achieve changes in land-use behaviors.129 More recently, an evaluation of the long-run effects of PES in Mexico finds positive environmental and welfare impacts, as evidenced by reduced deforestation in protected areas and reduced vulnerability among participant households.130 Prior Action 7: Reduced fugitive methane from oil and gas production By advancing regulation to address fugitive methane from the oil and gas sectors, this PA is expected to have positive poverty, distributional, and social impacts from reduced GHG emissions, slow global warming, and improve the quality of life. Methane is second, after CO2, in its contribution to climate change, and at the same time, it has a shorter atmospheric lifetime and breaks into GHG faster than CO2. Therefore, reducing methane emissions is one of the most effective ways to slow the rate of climate change quickly.131 In the absence of adaptation measures, projected climate impacts -when accounting for damage to physical capital and productivity- will affect poverty and growth. Moreover, climate change will hit poor households harder than rich ones and rural households harder than urban ones, widening existing inequalities.132 Prior Action 8: Integration of ESG factors to facilitate Green Investment This PA seeks to increase funding for environmental and conservation projects. While also contributing to climate change commitments, this PA is expected to have positive poverty and distributional impacts in the long run. Contingent on the projects (and sectors) that investments will support, this PA creates conditions for mobilizing green investment for low-carbon development. These investments can reduce environmental collateral effects on the most vulnerable groups. Evidence suggests that under the 124 Covering 11 evaluations in 4 countries (Costa Rica, Mexico, China, and Mozambique). In Mozambique and China, the only two studies analyzing effects on welfare, participating households' incomes grew between 4 and 14 percent. 125 Liu and Kontoleon. 2018. “Meta-Analysis of Livelihood Impacts of Payments for Environmental Services Programmes in Developing Countries.” Ecological Economics 149 (C). 126 Covering 27 studies of 15 programs. 127 Ibid. 128 Jing, Shouwu, and Minzhe Du. 2022. “The Effects of Payment for Environmental Services on Environmental Improvement and Poverty Reduction: A Meta-Regression Analysis.” Processes 10 (6): 1089. 129 Ibid. 130 Alix-Garcia, J., Canavire-Bacarreza, G., Sims, K., and Velez-Ospina, C. 2024. Long run impacts of payment for environmental services in Mexico. Forthcoming. 131 Lorenzato, Tordo, van den Berg, Howells, and Sarmiento-Saher. 2022. Financing Solutions to Reduce Natural Gas Flaring and Methane Emissions. International Development in Focus. Washington, DC: WB. 132 WB (2021). Colombia Equity Flagship. Building an equitable society in Colombia. Page 52 The World Bank Equitable and Green Path Development Policy Financing II (P180927) assumption that Colombia implements the mitigation commitments in its NDC, sectors that account for a large share of total output and are expected to expand on the path toward decarbonization have the highest potential to lift many people out of poverty.133 However, for the distributional benefits of the low- carbon transition to fully materialize, policies must facilitate the transition of displaced workers to new job opportunities. 133 WB (2022): Employment Implications of a Competitive and Just Transition Towards a Less-Carbon Intensive Economy in Colombia. Background note for the Colombia CCDR 2023. Page 53 The World Bank Equitable and Green Path Development Policy Financing II (P180927) ANNEX 4: Required Accompanying Documentation Letter of Development Policy: Page 54 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 55 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 56 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 57 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 58 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 59 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 60 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Unofficial translation of the Letter of Development Policy Bogotá D.C., Mr. AJAY BANGA President World Bank Washington, D.C. Subject: Policy Letter. Supporting the Equitable and Green Development Agenda Phase 2 Dear President Banga, On behalf of the Government of Colombia, we are pleased to present the policy letter for support to the Equitable and Green Development Program Phase 2. Our vision as a country is to overcome inequality and exclusion, promote peace, and work towards environmentally sustainable development and productive transformation, reflected in the principles of the National Development Plan 2022 – 2026, “Colombia Potencia Mundial de la Vida”. Aligned with this credit operation, we are advancing the regulatory framework towards equitable and sustainable development, promoting a fiscal policy in line with these priorities, as well as policies that promote the productive and social inclusion of vulnerable groups and environmental sustainability. Macroeconomic Context In 2023, the Colombian economy registered an economic growth of 0.6% per year, consolidating the necessary process of macroeconomic adjustment, after two years of high growth and high levels of inflation134. On the production side, this growth was mainly explained by the performance of the financial activities, artistic activities and public administration sectors, which registered annual growth of 7.9%, 7.0% and 3.8%, respectively135. On the expenditure side, the annual contraction in domestic demand (- 4.0%) stood out, mainly explained by the unfavorable evolution of gross fixed capital formation136. In contrast, total real exports grew 3.4 percent in annual terms, driven by growth in services exports. Despite the economic slowdown observed in 2023, the labor market maintained a favorable performance. This was reflected in a lower unemployment rate and growth in employment above its historical average. Indeed, in 2023, the unemployment rate stood at 10.2%, the lowest since 2019 and 1 percentage point (pp) below what was observed in 2022. In turn, in 2023, the employed population recorded a growth of 3.4%, 1.5pp above the historical average between 2002 and 2019 (1.9%). 134 According to figures from the National Administrative Department of Statistics (DANE), in 2021 the Colombian economy registered a growth of 10.8% and an end-of-period inflation of 5.6%, while in 2022 there was a growth of 7.3% and inflation of 13.1% 135 These sectors contributed 1.2pp to total growth. 136 Gross fixed capital formation fell by 9.5%, mainly due to a 17.6% decrease in investment in machinery and equipment . Page 61 The World Bank Equitable and Green Path Development Policy Financing II (P180927) The adjustment of macroeconomic imbalances in 2023 was reflected in a correction of the current account deficit. Particularly, in 2023, the current account deficit stood at 2.5% of GDP, decreasing by 3.6pp compared to 2022. This correction was largely explained by the slowdown in domestic demand, which was reflected in a reduction of imports of goods and services, by 17.1% and 6.4%, respectively. Meanwhile, despite a challenging global economic context, non-traditional exports proved to137 be resilient and registered a growth of 0.1% in 2023, reaching an all-time high and contributing to the correction of the external deficit. Additionally, services exports grew 13.3% in 2023, 46.6% above pre- pandemic levels. Foreign direct investment (FDI) has shown favorable dynamism and has represented the main source of financing for the external deficit. In particular, in 2023, gross FDI stood at USD 17.147 billion, which represented 187.3% of the external financing needs of the economy (current account deficit). The sectors that showed the highest growth in their FDI during 2023 were mining and quarrying (177.6%) and manufacturing industries (103%). In response to the inflationary pressures observed at the global and local levels, the Central Bank initiated the monetary normalization process at the end of 2021 through sustained increases in the policy interest rate138. This, together with the dissipation of external shocks, the closing of the output gap, and the appreciation of the exchange rate, resulted in a sustained slowdown in inflation in 2023, which led it to close the year at 9.3%. The outlook for the behavior of the price level of the Colombian economy for the remainder of 2024 is favorable, and this has been reflected in recent inflation results. In particular, in May 2024, annual inflation stood at 7.2%, reducing by 6.1pp compared to the peak reached in March 2023 (13.3%). This has been supported by a significant correction in food prices, which has favored the adjustment of inflation for poor and vulnerable households. The downward trend in inflation is expected to continue, leading it to close at 5.3% at the end of 2024 and to be within the target range of the Bank of the Republic in 2025. By 2024, it is estimated that the Colombian economy is expected to grow by 1.7%, marking the beginning of a sustained path of economic recovery. This growth would take place in the context of a less contractionary monetary policy and a gradual correction in local inflation, which, together with the expected reduction in risk perception, would lead to more comfortable financial conditions. This would boost domestic demand, which would go from a decline of 4.0% in 2023 to 1.2% in 2024, mainly due to a better performance of fixed investment (2.2%). Continued dynamism in nontraditional exports and services coupled with an acceleration in investment should boost economic growth in 2024. In particular, the expected growth in 2024 (1.1%), especially of non-traditional exports and services, would consolidate the good performance that these have shown after the pandemic. In addition, it is expected that, with the execution of different mass transport works, the construction of tertiary roads, and the start of the construction phase of several 5G projects, together with a reduction in interest rates that would favor the financial closures of these projects in the award phase, fixed investment would show a recovery throughout the year139. From 2025 onwards, economic 137 These correspond to exports of goods other than coffee, petroleum and petroleum products, coal, ferronickel, bananas, flowers and gold. 138 Between September 2021 and November 2023, the policy interest rate increased by 11.5pp from 1.75% to 13.25%. 139 In 2024, fixed investment is expected to register an average positive quarterly growth of 1.7%, higher than that recorded in 2023 (-4.0%) Page 62 The World Bank Equitable and Green Path Development Policy Financing II (P180927) growth is expected to be steadily above 3%, driven mainly by reindustrialization and energy transition policies and higher public investment (especially in infrastructure). Regarding fiscal figures, during 2023, the process of fiscal consolidation continued, which reduced the deficit of the Central National Government to 4.3% of GDP, consistent with an overachievement of 0.2pp of GDP of the target set by the Fiscal Rule. Specifically, for 2023, the deficit of the Central National Government (CNG) decreased by 1.0pp of GDP compared to the deficit reached a year earlier as a result of higher revenues derived from the entry into force of the tax reforms of 2021 and 2022, the dynamism of economic activity, and the cycle of high commodity prices observed during 2022, as well as the increase in DIAN's management. These factors in revenues more than compensated for the increase in primary spending. Consequently, the CNG reached a primary deficit of 0.3% of GDP in 2023, which represents an improvement of 0.6pp compared to the deficit of 1.0% recorded the previous year. Likewise, the net debt of the CNG decreased from 57.9% of GDP in 2022 to 53.8% in 2023 (lower than the anchor defined by the Fiscal Rule). This is explained by the appreciation of the Colombian peso and its positive effect on the valuation of external debt in pesos. Finally, it is important to highlight that, throughout 2023, the national government continued with the process of adjustment in the price of liquid fuels, initiated in October 2022, which resulted in the closing of the gasoline differential gap in December 2023. This has contributed not only to equalizing local prices with international prices of regular motor gasoline but also to decreasing fiscal pressures derived from fuel subsidies as a whole, thus reaffirming the national government's commitment to the fiscal sustainability of the country. Regarding 2024, the latest version of the Financial Plan of the Ministry of Finance and Public Credit estimates that the fiscal deficit of the National Government will reach 5.6% of GDP, strictly complying with the targets established by the Fiscal Rule. This increase in the deficit, compared to 2023, is mainly due to a reduction in total revenues and an increase in interest expenses, which implies making a significant adjustment to primary spending to maintain the primary balance at levels consistent with the Fiscal Rule. This fiscal management exercise responds to a strategy that the national government outlined in its Medium-Term Fiscal Framework 2024 and follows four essential principles: i) the need to finance reforms and social and economic programs to achieve greater social justice; ii) the commitment to the sustainability of debt and public finances; iii) strict compliance with the Fiscal Rule; and iv) the preservation of macroeconomic stability. Finally, it is estimated that the net debt will stand at 55.3% of GDP at the end of the year, 1.4pp above what was observed in 2023. Thus, the level of debt remains far from the limit of 71% of GDP, leaving sufficient margin to respond to significant and unexpected debt shocks. Equity and Sustainable Development Achieving equity is a key objective of the government's social and economic development agenda. Although Colombia has made progress in strategies that strengthen equity and green public policies, there are still challenges to ensure a fairer and more sustainable society. In terms of equity, social policies have been implemented that focus on reducing poverty and inequality and improving access to basic services. At the same time, progress is being made toward equity between groups, including policies that expand access to services and opportunities, including for the migrant population. However, significant gaps persist in income distribution, with income inequality at high levels and in access to quality services for Page 63 The World Bank Equitable and Green Path Development Policy Financing II (P180927) certain population groups, such as Indigenous, Afro-descendant, and migrant communities. Regarding green policy, Colombia has made progress in implementing strategies to reduce greenhouse gas emissions and promote the transition to a low-carbon economy, such as the adoption of renewable energy and the promotion of sustainable transport. Despite this, there are areas for improvement for a sustainable productive transformation, and deforestation and pollution remain major challenges for the country. This letter summarizes the key elements of our agenda in promoting equity and green development. Through the program, we hope to increase the impact of fiscal policy, a central tool of our public policy, in furthering these development objectives. In addition, we seek to improve the empowerment of vulnerable groups, strengthening their access to economic assets and thus increasing their ability to benefit from and contribute to economic growth. Finally, we made progress toward the commitments we have made as a country to fight climate change. This credit operation supports the Government's agenda laid out in the National Development Plan 2022- 2026 and provides an appropriate tool to advance it and complement our ongoing efforts on other fronts. The Credit Program Although the Government of Colombia has been strongly showing its commitment to an equitable and green recovery, this operation, under the two (2) phase Programmatic Development Policy Loan (DPL) modality, is essential to contribute to the promotion of equitable and green fiscal policies, the establishment of the institutional framework to increase access to productive assets of vulnerable groups towards their productive inclusion and social, and the establishment of (non-fiscal) incentives to promote climate change mitigation. Thanks to IBRD's technical and financial support, Colombia has reaffirmed its commitment to the importance of advancing inclusive and environmentally sustainable economic growth. However, there are still planning, management, and financing needs that will have to be addressed in order to reduce challenges such as reducing the national poverty rate and inequality, as well as to achieve climate change commitments. Through this programmatic loan, Colombia remains committed to promoting strategic policy measures in three components that are aligned with our government agenda and the challenges facing the country. Each seeks to contribute to the Program's objectives and is in line with the country's fiscal policies, ensuring that an appropriate macroeconomic environment is maintained. Phase 2 of the loan advances the program's objectives and builds on gains in public policy from Phase 1. i. Equitable and Green Fiscal Policies. The program’s first component aims to promote fiscal policies that are fair and environmentally sustainable. The first phase of this credit supported efforts to distribute the tax burden more equitably among taxpayers, addressed public health concerns associated with overconsumption of sugars, disproportionately affecting vulnerable populations, and promoted incentives for environmental conservation. Significant progress was made, such as increasing the progressivity of individual taxes, taxing sugar-sweetened beverages to discourage consumption, and expanding the carbon tax. This second stage builds on these important advances and extends the scope of social spending to the most disadvantaged groups, relying on Page 64 The World Bank Equitable and Green Path Development Policy Financing II (P180927) the Universal Income Registry established as a priority in the National Development Plan and its interoperability with georeferenced registries and data, which will allow for a better response in the presence of shocks such as climate shocks. In addition, work is being done to reduce gasoline subsidies, which is in line with commitments to combat climate change and, in turn, allows for the release of fiscal resources to continue moving towards fair and sustainable development. ii. Establish the institutional framework to increase access to productive assets for vulnerable groups. The second component aims to strengthen the institutional framework that allows productive and social inclusion of vulnerable groups towards increasing their access to productive assets. Phase 1 of this operation reflected efforts on gender equality, such as: the economic inclusion of women; the creation of the National Care System, which sought to recognize, reduce, and redistribute both paid and unpaid care work; and the strengthening of the response system to survivors of gender-based violence. This component also addressed progress made in strengthening ethnic communities through the implementation of a participatory cadastre. Similarly, the program's matrix recognized the efforts made in the area of public policy to promote the inclusion of the Venezuelan migrant population, including their access to the recognition of higher education qualifications and housing rental subsidies. The program also supported regulations for access to credit lines by MSMEs. Phase 2 advances these efforts through measures that facilitate the productive inclusion of rural women and promote economic empowerment by providing access to financing for their ventures and entrepreneurial skills as productive assets; establishes the procedures and entities responsible for the recognition of stateless persons in Colombia and their subsequent naturalization, moving towards a long-term legal route that guarantees their rights and access to social services, the labor market and other productive assets; and advances efforts toward greater financial inclusion with the transformational changes of open finance. iii. Provide incentives outside of the price system to promote climate action. This component of the program supports green policy actions. Phase 1 included efforts to promote economic transformation, including by the private sector, through productive activities that reduce greenhouse gas emissions and the definition of criteria to guarantee the transparent and full issuance of green bonds, thereby creating conditions for the mobilization of green investment for sustainable growth and low-carbon development. In the same vein, Phase 2 follows up on these efforts, highlighting the protection of the environment and ecosystems as a key element of greenhouse gas reduction and aligned with efforts towards peace: in particular, it institutes Payments for Environmental Services for Peace and other incentives for conservation in areas occupied by victims of the conflict; and cleaner energy production by reducing fugitive emissions from oil and gas production processes. Finally, and aiming again at mobilizing private capital to support public policy objectives, it supports the inclusion of ESG and climate-related factors in the investment policy of collective investment funds towards, Among others, the integrity of the green finance market. With the information set forth in this policy letter, we hope to have informed you of our economic situation, as well as our short- and medium-term public policy agenda aimed at improving the conditions for equitable and green development, a process that we hope to continue consolidating over time with the technical and financial support of the IBRD. Page 65 The World Bank Equitable and Green Path Development Policy Financing II (P180927) We would like to take this opportunity to reiterate our appreciation to the World Bank for its ongoing support, which has been instrumental in achieving our strategic goals and objectives for comprehensive and sustainable development in Colombia. Yours sincerely, ALEXANDER LÓPEZ MAYA RICARDO BONILLA GONZÁLEZ General Director Minister National Planning Department Ministry of Finance and Public Credit Drafted by: Milton Guillermo Noreña Olivares, Subdirectorate of Credit and International Cooperation - DNP. Reviewed by: Martha Cecilia García Buitrago, Director of Public Investment Programming – DNP. Natalia Bargans Ballesteros, Deputy Director of Credit and International Cooperation – DNP. Yeimy Paola Molina Rojas, Deputy Director of Financing with Multilateral Organizations and Governments (E) – MHCP Diana Paola Salcedo Novoa, Director of Social Development (E) – DNP. Carolina Díaz Giraldo, Director of Environment and Sustainable Development – DNP. Approved: Alan Guillermo Asprilla Reyes, Deputy Director General of Investments, Monitoring and Evaluation – DNP. Mario Alejandro Valencia, Deputy Director General of Foresight and National Development – DNP. Page 66 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Fund Relation Note: Page 67 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 68 The World Bank Equitable and Green Path Development Policy Financing II (P180927) Page 69 The World Bank Equitable and Green Path Development Policy Financing II (P180927) DPF Prior Actions and Analytical Underpinnings PA Analytical Underpinnings Operation Pillar 1: More equitable and green fiscal policies WB. 2021. Building an Equitable Society in Colombia, documenting the distributional impact of the social protection system. /// Nuñez et al. 2020. The Distributive Impact of Taxes and Expenditures in Colombia, Policy Research Working Paper 9171, WB: #1 Washington, DC., presenting an analysis of the distributional impacts of taxes and expenditures in Colombia. /// Baquero, Juan Pablo; Davalos, Maria Eugenia; Monroy Barragan, Juan Manuel (2003) Revisiting the Distributive Impacts of Fiscal Policy in Colombia. Policy Research Working Paper 10520, WB: Washington, DC. Baquero, Juan Pablo; Davalos, Maria Eugenia; Monroy Barragan, Juan Manuel (2003) Revisiting the Distributive Impacts of Fiscal #2 Policy in Colombia. Policy Research Working Paper 10520, WB: Washington, DC, presenting an analysis of the distributional impacts of taxes and expenditures in Colombia, including subsidies. Operation Pillar 2: Establishing the institutional framework to increase access to productive assets for vulnerable groups WBG (2019). Colombia Gender Assessment documents progress and remaining challenges to achieve gender equality . /// WB (2021). Building an Equitable Society in Colombia, documenting inequalities between groups and policies to address them. /// #3 Colombia Systematic Country Diagnostic Update (P500038), showing that rural, Indigenous, and Afro-descendant women face the greatest disadvantages. /// National Statistics Office of Colombia (DANE) & MADR (2023). Situación de las Mujeres Rurales en Colombia, documenting gender inequalities in access to credit against rural women. WBG. 2018. Migration from Venezuela to Colombia: Short- and Medium-Term Impact and Response Strategy, documenting the negative effects of the migration crisis in the short term while presenting options to address these challenges and contributing to sustainable economic development in the medium to long term. WB: Colombia. /// DNP (2018). Estrategia para la atención de la migración desde Venezuela. CONPES Report No. 3950, establishing strategies and institutional support to respond to health, #4 education, ECD, work, housing, and security needs for Venezuelan migrants . /// Presidency of Colombia. 2020. Welcome, Integrate and Grow: Colombia’s policies regarding migration from Venezuela. Bogotá, Colombia, presents policy options for integrating the migrant population, emphasizing articulating a comprehensive institutional response through providing basic services. Striking a Balance: Toward a Comprehensive Housing Policy for a Post-COVID Colombia. Global Program for Resilient Housing/ Fedesarrollo and WB Colombia, 2021. Arquitectura financiera abierta en Colombia, Technical Document of Decree 1297/2022, Financial Regulation Unit (URF), Bogotá D.C., Colombia, May 2022, presenting the final regulatory project on Open Finance through which it seeks to strengthen competition, inclusion and efficiency in the provision of financial services. /// Colombia - Financial Sector Assessment Program: Technical Note – #5 Digital Financial Inclusion. Washington, D.C.: WBG/// WB (2022), Fintech and the Future of Finance - Overview (English). Washington, D.C.: WBG, covering selected aspects of financial inclusion in Colombia with a focus on digital payments and, to a lesser extent, other digital financial services. Operation Pillar 3: Establish non-price incentives to promote climate action WB. 2021. Building an Equitable Society in Colombia, documenting the distributional impact of climate change . /// WBG. 2023. #6 Colombia Country Climate and Development Report. CCDR Series; July 2023. © Washington, DC: WB, and the Colombia SCD Update (WB, 2022), including PES as a mechanism to halt deforestation. Gas Flaring in Colombia, NDC Partnership. https://ndcpartnership.org/knowledge-portal/good-practice-database/gas-flaring- #7 colombia#:~:text=Colombia%20has%20made%20significant%20advancements,declined%20by%20almost%2070%20percent. https://flaringventingregulations.worldbank.org/colombia, documenting the relevance and progress. Hoja de ruta para el enverdecimiento del sector financiero, Superintendencia Financiera de Colombia (SFC), Bogotá D.C., Colombia, August 2022, covering the role of the financial sector in climate change solutions, the financial risks arising from climate change, and the authorities’ strategy to address these issues. /// Taxonomía Verde de Colombia, Technical Document, Bogotá D.C., #8 Colombia, March 2022, establishing an identification framework to facilitate financial flows mobilization towards climate mitigation and adaptation objectives. /// WB (2021), Not-so-magical realism: A Climate Stress Test of the Colombian Banking System. EFI Insight-Finance. Washington, D.C.: WBG, identifying and assessing climate-related risks in the Colombian banking sector. Page 70