Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 34792-CO

IMPLEMENTATION COMPLETION REPORT(TF-53133 FSLT-72800)

ON A

LOAN

IN THE AMOUNT OF US$100 MILLION

TO THE REPUBLIC OF

COLOMBIA

FOR A

PROGRAMMATIC FISCAL AND INSTITUTIONAL STRUCTURAL ADJUSTMENT LOAN III

December 28, 2005

Poverty Reduction and Economic Management UnitMexico and Colombia Country Management UnitLatin America and the 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.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 21, 2005)

Currency Unit = Colombian Pesos 100 = US$ 0.04

US$ 1 = 2,283.10 Colombian Pesos

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMSCAS Country Assistance StrategyCFAA Country Financial Accountability AssessmentCGN Contaduría General de la Nación (Accountant General’s Office)CONFIS Consejo Superior de Política Fiscal (Superior Council of Fiscal Policy)CONPES Consejo Nacional de Política Económica y Social (National Council of

Economic and Social Policy)CPAR Country Procurement Assessment ReportCSR Commission for State ReformDAFP Departamento Administrativo de la Función Pública (Public Service

Administrative Department)DIAN Dirección de Impuestos y Aduanas Nacionales (National Directorate

of Taxes and Customs)DNP Departamento Nacional de Planeación (National Planning Department)FIAL Programmatic Fiscal and Institutional Adjustment LoanFNR Fondo Nacional de Regalías (National

Royalty Fund)FRL Fiscal Responsibility LawGDP Gross Domestic ProductIBRD International Bank for Reconstruction and DevelopmentICBF Instituto Colombiano de Bienestar Familiar (Colombian

Family Welfare Institute)IDB Inter-American Development BankIDF Institutional Development FacilityIMF International Monetary FundISS Instituto de Seguridad Social (Social Security Institute)IVA Impuesto al Valor Agregado (Value-added tax)LIL Learning and Innovation LoanMAFP Modernización de la Administración Financiera Pública (Public Financial

Management Project)MDGs Millennium Development GoalsMHCP Ministerio de Hacienda y Crédito Público (Ministry of Finance and

Public Credit)MIJ Ministerio del Interior y Justicia (Ministry of Interior and Justice)MTEF Medium Term Expenditure FrameworkMTFF Medium Term Fiscal FrameworkNFPS Non-Financial Public SectorOBC Organic Budget Code

PHRD Policy and Human Resources DevelopmentPLaRSSAL Programmatic Labor Reform and Social Sector Adjustment LoanPRAP Programa de Renovación de la Administración Pública (Public

Administration Renovation Program)SENA Servicio Nacional de Aprendizaje (National Training Service)SIIF Sistema Integrado de Información Financiera (Integrated Financial

Information System)SINERGIA Sistema Nacional de Evaluación de Resultados (Evaluation System for

Public Management)TAL Technical Assistance LoanVAT Value-added Tax

Vice President: Pamela CoxCountry Director Isabel M. GuerreroSector Manager Ronald E. Myers

Task Team Leader/Task Manager: Mario F. Sangines

COLOMBIAPROGRAMMATIC FISCAL AND INSTITUTIONAL STRUCTURAL ADJUSTMENT LOAN III

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 165. Major Factors Affecting Implementation and Outcome 286. Sustainability 297. Bank and Borrower Performance 308. Lessons Learned 329. Partner Comments 3310. Additional Information 59Annex 1. Key Performance Indicators/Log Frame Matrix 60Annex 2. Project Costs and Financing 62Annex 3. Economic Costs and Benefits 63Annex 4. Bank Inputs 64Annex 5. Ratings for Achievement of Objectives/Outputs of Components 65Annex 6. Ratings of Bank and Borrower Performance 66Annex 7. List of Supporting Documents 67

Project ID: P084762 Project Name: PROGRAMMATIC FISCAL AND INSTITUTIONAL STRUCTURAL ADJUSTMENT LOAN III

Team Leader: Mario Francisco Sangines TL Unit: LCSPSICR Type: Core ICR Report Date: December 28, 2005

1. Project DataName: PROGRAMMATIC FISCAL AND

INSTITUTIONAL STRUCTURAL ADJUSTMENT LOAN III

L/C/TF Number: TF-53133; FSLT-72800

Country/Department: COLOMBIA Region: Latin America and the Caribbean Region

Sector/subsector: Central government administration (60%); Sub-national government administration (20%); Law and justice (10%); General education sector (10%)

Theme: Administrative and civil service reform (P); Debt management and fiscal substainability (P); Tax policy and administration (S); Public expenditure, financial management and procurement (S); Law reform (S)

KEY DATES Original Revised/ActualPCD: 10/05/2004 Effective: 04/26/2005 04/26/2005

Appraisal: 11/09/2004 MTR:Approval: 03/22/2005 Closing: 06/30/2005 06/30/2005

Borrower/Implementing Agency: REPUBLIC OF COLOMBIA/MINISTRY OF FINANCE AND PUBLIC CREDITOther Partners:

STAFF Current At AppraisalVice President: Pamela Cox David De FerrantiCountry Director: Isabel M. Guerrero Isabel M. GuerreroSector Manager: Ronald E. Myers Ronald E. MyersTeam Leader at ICR: Mario Sangines Mario SanginesICR Primary Author: Hernan Pfluecker

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:This is the final ICR for the programmatic series of Fiscal and Institutional Adjustment Loans originally envisioned in the 2002-2006 CAS as four loans totaling $900 million. Following the third loan in the series, approved in March 2005 for $100 million and a cumulative total of $550 million, the Government and the Bank agreed to suspend the program. As stated in the CAS Progress Report (CAS PR) of September 9, 2005 "During the CPPR and CAS PR discussions, the Government and Bank agreed that the reforms needed to trigger FIAL IV were not likely to be in place by FY06, and decided to redirect funds earmarked for FIAL IV to operations where reforms were moving more quickly." Although there is the possibility that FIAL IV might yet be brought back into the Bank's pipeline after FY06, there are no ongoing discussions regarding this fourth operation nor has it been included in the CAS PR for FY06 or FY07. These facts led to the decision to submit a complete ICR for the entire FIAL program at this time. Should FIAL IV be prepared and approved, a revised final ICR would be prepared afterwards which would replace the overall program assessment presented here.

The objectives and design of the programmatic series of Fiscal and Institutional Adjustment Loans (FIAL) need to be assessed within the context of: (i) an incoming administration with an ambitious program and an overwhelming popular mandate, having won the elections with over 50% of the vote in the first round; (ii) structural fiscal imbalances stemming from a highly distorted tax system and major rigidities in public expenditure; (iii) an economy barely recovering from the 1999-2000 recession, the first in recent history; and (iv) a track record of incomplete and/or postponed fiscal reforms by previous administrations.

Within this context, the FIAL program was designed as the main vehicle to channel Bank support for Colombia’s fiscal and institutional agenda. The main elements of the program had its origins in “The 100 Points of Alvaro Uribe Vélez” document, in which the then-candidate set forth a set of priority actions including tax and institutional reform measures designed to render the public sector more efficient and to reduce inflexibilities in the budget process. The Bank’s involvement began with the 2002 policy notes exercise (these have been published as a book by the World Bank: “Colombia: The Economic Foundations of Peace,” 2003), which provided a stage for close and intensive interaction with the incoming administration and helped establish the basic strategies for fiscal and institutional reform. Program design also benefited from close coordination with the Colombia team of the IMF, which in turn guaranteed full consistency between the FIAL program and the Fund’s Stand-By Agreement that began in December 2002.

The program’s development objectives were twofold: first, to promote reforms addressing fiscal rigidities needed to attain the substantial fiscal adjustment required for sustainable macroeconomic stability; and second, to improve the provision of public services and establish the institutional basis for greater efficiency and accountability in public expenditures. The program had the following specific objectives:

Increase tax revenue and reduce distortions in the tax systemlModernize tax administrationlImprove budget management with modern tools and legal reformslDevelop incentives for efficiency gains in sub-national entitieslPrevent massive losses to the State from judicial claimslStrengthen the public sector procurement systemlReduce losses and generate revenues through improved asset managementlImprove performance through management contracts for government agencieslPromote the development of a sound fiscal responsibility legal frameworkl

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Support a coherent and comprehensive reform implementation processl

Project design was unquestionably ambitious. The government program brought in by the new administration was quite broad and comprehensive, making it a challenge to fully implement even with the abundant political capital of the Uribe administration. Substantial analytical work from within and outside Colombia further enriched it, and the FIAL program’s design was a conflux of both these elements. Most key actors (including the Bank) felt that the Uribe government provided the opportunity to overcome the frustration of years of unfinished fiscal reforms.

3.2 Revised Objective:The FIAL’s development objective did not change during the life of the program. The statement of specific objectives, however, was made more detailed in the later stages of the program to add information on their underlying strategies. The following table compares the original specific objectives with the revised specific objectives:

Comparison between original specific objectives (FIAL I PD) With revised specific objectives (FIAL III PD)

Original Revised or Added [none] The macroeconomic framework of the Republic of Colombia is

consistent with the objectives of the Reform Program. Increase tax revenue and reduce distortions in the tax system

Promote policy reforms to increase tax revenues and reduce distortions in the tax system, including a broadening of the tax base, a reduction of exemptions, and simplification of the overall pol icy framework

Modernize tax administration Modernize tax administration through actions to improve information flows, auditing capacity, and overall institutional performance.

Improve budget management with modern tools and legal reforms

Improve budget management with modern tools including, inter alia, a new legal framework that promotes a unified vision of the budget, introduces medium-term budgeting tools, and reduces inflexibilities in expenditures

Develop incentives for efficiency gains in sub-national entities

Develop incentives for efficiency gains in sub-national entities, primarily through the implementation of a scheme for royalty transfers based on performance, as well as capitation transfers

Prevent massive losses to the State from judicial claims

Prevent losses from judicial claims through improvement of the regulatory framework and institutional strengthening of the entities in charge of legal defenses

Strengthen the public sector procurement system

Strengthen the public sector procurement system, including its legal framework and the establishment of a regulatory entity

Reduce losse s and generate revenues through improved asset management

Reduce losses and generate revenues through improved management of public sector physical assets, primarily real estate

Improve performance through management contracts for government agencies

Introduce performance criteria in the public sector through the implementation of management contracts with selected agencies

Promote the development of a sound fiscal responsibility legal framework

Promote the development of a sound legal framework, based upon a new law which would govern fiscal aggregates and establish more modern instruments for fiscal management

Support a coherent and comprehensive reform implementation process

Support a coherent, comprehensive reform implementation process

3.3 Original Components:The components of the FIAL Program were aligned with critical areas of action of the Government’s

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Reform Program, and each responded to one of the specific objectives detailed above. Grouped into four categories (Overall Fiscal Commitment, Revenue Rigidities and Tax Reform, Expenditure Rigidities and Institutional Reform, and Fiscal Responsibility) the components’ objectives and commitments are as follow:

Overall Fiscal Commitment

The objective of this component was to establish a macroeconomic framework consistent with the objectives of the Reform Program. The key expected result at the end of FIAL was a gradual reduction in the overall non-financial public sector deficit in 2004 and 2005.

As with all Bank-supported SAL’s or DPL’s, the FIAL program had to be implemented within in a sound macroeconomic environment. In December 2002, Colombia entered into a Stand-By Agreement with the IMF which established the initial benchmarks for fiscal performance that were included in the FIAL policy matrix under this component. The original FIAL matrix included a moving dollar and peso deficit target consistent with the IMF agreement for the first loan, as well as budget execution levels consistent with the approved budgets and tentative deficit targets for the following loans in the program. These deficit targets were meant to be adjusted as the program progressed.

Loan Overall Fiscal Commitment Original Key Policy Actions

First The Government has attained, for the period covered by any three continuous months among the twelve months preceding withdrawals from the Loan Account, an overall deficit of the Combined Public Sector of no more than US$1,352,000,000 equivalent to P$3,874,000,000,000.

Second The execution of the 2003 Budget through the end of the most recent quarter will be in line with overall deficit limits in the approved budget.

Third The execution of the 2003 Budget through the end of the most recent quarter will be in line with overall deficit limits in the approved budget, and the overall deficit of the non-financial public sector in the approved budget for 2004 will not exceed [2.2] percent of GDP.

Fourth The execution of the 2004 Budget through the end of the most recent quarter will be in line with overall deficit limits in the approved budget, and the overall deficit of the non-financial public sector in the approved budget for 2005 will not exceed [1.1] percent of GDP.

Revenue rigidities and tax reform

Tax reform. The objective of this component was to increase tax revenues, improve tax neutrality and equity, and reduce tax expenditure. The key expected results at the end of FIAL were: (i) VAT tax base expanded to cover additional goods and services; (ii) phased elimination of income tax exemptions during 2003-2005 effectively applied according to schedule, i.e., reduced to 70% in 2003, 50% in 2004, 20% in 2005 and 0% in 2006.

The objectives of this component were centered on Tax Reform Law 788-2002, which was approved in December 2002. This Law combined some of the key elements of tax policy modernization. Specifically it: (i) eliminated exemptions and expanded the base of the Value Added Tax; (ii) established a new ceiling on wage exemptions under the personal income tax, and reduced incentives for untaxed employee compensation; and (iii) phased out corporate income tax exemptions for capital gains from sales of stock, mutual funds and real estate, as well as from profits of previously privileged corporate firms.

The initial FIAL policy matrix was designed to support enactment of the Law through the first FIAL loan,

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proceeding with the issuance of its regulations and by-laws for the second loan, and finally its phased implementation in the final two loans.

Loan Tax Reform

Original Key Policy Actions First Borrower has enacted tax reform law (Law 788 of 2002), including:

• Reduction of exemptions and expansion of the tax base for the VAT • Reduction of the wage tax exemption from 30% to 25% with a ceiling in the amount of Col$ 16 million in monthly wages and reduction of tax exemptions, tax credit and non-taxed income for the personal income tax • The phasing out of the corporate income tax exemption for capital gains from sales of stock, mutual funds and real estate, and as well as for profits from corporations previously exempted.

Second Government has issued the necessary legislation to regulate the application of Tax reform Law.

Third The reforms to taxes specified for 2004 in Law 788-2002 are being implemented, including: • The VAT coverage has increased to 51% of GDP • Exemptions to income tax have been reduced according to the phasing out schedule defined in Articles 12 and 14 of Law 788 of 2002.

Fourth • Income tax surcharge has been reduced to 5% • The reforms to taxes specified for 2005 in Law 788-2002 are being implemented, including:

o Goods and services that were taxed at 7% in the Law 788-2002 are being taxed at 10% starting in 2005

o Goods and services newly included in the base of the VAT will be taxed at a rate of at least 2%

o Non-taxed and exempted goods and services specified in Law will also be taxed at a rate of at least 2%

o Exemptions to income tax reduced as scheduled in Law 788-2002.

Tax administration. The objective of this component was to increase tax revenues, strengthen tax equity, and reduce tax expenditure and opportunities for corruption. This component’s key expected results were: (i) substantial increase in reporting of interest income; (ii) collections from firms previously exempted from the corporate income tax increased to 75% of their potential revenue; (iii) administration cost per peso collected reduced by at least 10%; (iv) administration efficiency improved according to standard indicators like 1% annual decrease in the ratio of recurrent expenditures of DIAN to total revenue collected by it.

At the time FIAL was initially prepared, tax administration was an area of major weakness in Colombia. Tax yields were substantially lower than their potential; e.g., VAT and income taxes were each only collecting little over 5 percent of GDP. There were several important areas in which improvements were needed, including: (i) the relationship with the banking system in order to standardize information flows and reduce the period during which collections held; (ii) coverage of individuals’ interest income withholdings; (iii) tax auditing planning and coordination within DIAN; and (iv) collection of tax arrears. Furthermore, information management at DIAN was inefficient and lacked integration, the administrative costs of tax collection were too high, and the customs administration had excessive clearance times. Therefore, tax administration reforms targeted by the FIAL loans included measures aimed to overcome these weaknesses.

The sequencing of actions contained in the original policy matrix responded primarily to DIAN’s modernization plan, which was supported through the Bank-funded Second Public Financial Management

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Technical Assistance Loan (PFMP II, or MAFP II in Spanish).

Loan Tax Administration

Original Key Policy Actions First The Ministry of Finance, through DIAN, has enacted new rules for tax administration

including: • Daily interest payments higher than Col$900 are subject to withholding at the source • Obligation of financial institutions to report information on taxpayers’ accounts that are credited with annual interest of at least Col$5 million, and/or have total annual deposits equal or higher than Col$50 million • Establish a list of collectable tax debts on December 31 of 2002 • Elaborate a plan and set up a schedule to collect at least 20 percent of these collectable debts • Establish indicators of customs clearance time and procedures to select shipments for inspection based on a risk-management system for the customs offices of Bogotá and Medellín.

Second • The DIAN publishes regularly: o Semi-annual revenue indicators o Annual results of surveys of taxpayer’s satisfaction o Indicators of collection costs disaggregated by type of tax and of taxpayer

• The DIAN has: o Developed and implemented a cross reference system with financial institutions to

monitoring the interest reported by taxpayers o Audited at least 50% of large taxpayers affected by the new taxes o Established and published indicators of the cost and time required for compliance by

the taxpayer o Established unified accounts between customs and domestic taxes for large

taxpayers beginning in 2003. Third • All taxpayers that receive VAT refunds have unified the taxpayer current account for

VAT, income tax and customs in 2004 • The Import & Export module for integrated domestic tax and customs systems is in operation • Collections from firms previously exempted from the corporate income tax have increased to at least 75 percent of their estimated corporate income tax potential revenue • 100% of large contributors have unified accounts and are submitting electronic income tax returns by the end of 2003 • The DIAN has renegotiated agreements with banks with regard to submission of information in standard form and incentives for prompt processing of data and turning over funds.

Fourth • Collections per customs inspection increased by at least 30 percent in real terms in 2004 compared to 2002. • Administration cost reduced by at least 10% in real terms in 2004 compared to the collections of 2002. • At least 20 monthly tax audits have been performed jointly by the customs and the internal taxes units of DIAN

Expenditure rigidities and institutional reform

Budget management. The objective of this component was to transform the budget into a more effective tool for sound fiscal policy and improved service delivery. The key expected result was a budget that would include targets and performance indicators for at least six sector ministries in accordance with a

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medium term budget plan like a medium term expenditure framework.

At the time of the program’s preparation, the Colombian budget system had been abundantly studied. Most studies coincided in that it had a number of important weaknesses that affected both control over the aggregate levels of expenditure as well as their composition. In terms of aggregate expenditure controls, budget allocations were actual authorizations to commit by spending agencies, which led to large accumulations of arrears in years when revenues fell below expected levels (which occurred quite often). In terms of the composition of expenditure, budget rigidity derived from high levels of both “structural” expenditures (such as pensions, debt service, and transfers) and law-based permanent earmarks basically left fiscal authorities with no room to maneuver.

The modernization of the budget system to correct these deficiencies and introduce a medium-term expenditure horizon had to rely on a number of different instruments. Although diagnoses were abundant, the Government lacked an official budget reform strategy, which needed be prepared and approved as a CONPES document (CONPES documents are policy documents that are officially reviewed and approved by the cabinet). Although some improvements could be achieved through a reform of the Organic Budget Code, establishing the Ministry of Finance's firm control over budget aggregates required a Constitutional amendment. While “forward budgeting," which also added to the inter-temporal budget rigidity, also needed to be brought under control, and something had to be done regarding legally-mandated permanent entitlements and earmarks, the highly sensitive and political nature of the issue called for a special high-level commission to initially study them and present a recommendation.

Technical aspects of budgeting, such as revising budget classifications and the introduction of the medium-term perspective, were also to be supported by the loan. Finally, an exercise in performance-based budgeting was to be phased in during the last loan of the FIAL program.

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Loan Budget Management

Original Key Policy Actions First Congress has approved constitutional reform that gives power to the Executive Branch to

control and manage the budget within fiscal targets. Second • Government has issued a CONPES document approving the Budget reform strategy.

• Government has developed and published a medium term fiscal framework (MTFF) consistent with the Annual Financial Plan and the requirements of the Fiscal Responsibility Law.

• The Superior Council of Fiscal Policy (CONFIS) has issued a resolution regulating the criteria for the approval of “vigencias futuras” according to the Annual Financial Plan.

• Government has established a high level Special Commission to comprehensively review expenditure entitlements and earmarked revenues, and to recommend changes when needed.

• Government has approved a Constitutional reform that restores budget powers to the Executive Branch, or Government has submitted to Congress amendments to the Organic Budget Law permitting greater flexibility in annual spending within present constitutional framework.

Third • An information campaign on the budget has been launched to provide information for different target audiences such as ministries, auditing agencies, and civil society.

• Government has issued regulations that require: o a model of budget classification that meets international standards, o new budget reporting standards, o coordination to ensure consistency of current and capital expenditures.

• Government has initiated performance management pilots in two ministries by clarifying objectives, setting targets and devising simple performance indicators.

Fourth • The 2006 budget is prepared within a medium term perspective including the new accounting and budget classification model and integration of current and capital expenditures.

• Government has extended performance management pilots to at least six ministries clarifying objectives, setting targets and devising simple performance indicators.

Development of incentives for efficiency gains. The objective of this component was to help ensure that spending for service delivery was realized with efficiency, effectiveness and within budget limits. This was aimed at advancing the elimination of rigidities in the fiscal transfer system and at improving its management. The key expected results were: (i) government was to have effectively transformed supply-based transfer for education into a demand-based capitalization transfer; (ii) sub-national governments were to have fully assumed responsibility for delivering education services as reflected in indicators such as capacity to reallocate teachers, enforce teachers’ attendance and other teacher performance indicators, co-financing commitments, and publication of local or regional improvement goals in standardized national tests.

The Colombian decentralization process initiated in the 1980’s has had a limited impact on the quality of public service delivery and local accountability in the use of resources. It also contributed to increased public spending, along with the blurring of responsibilities between the central and local governments in some sectors. The Uribe Government undertook to change this condition over the long-term through the progressive implementation of results-based management in the public administration and improved targeting, efficiency and effectiveness of the royalty transfer system (royalties are variable transfers to local governments primarily based on their oil production). The Government sought to enhance the efficiency of royalty transfers for education spending by setting capacity standards for sub-national governments thereby helping to define requirements for additional resources, followed by an overhaul of the royalty transfer

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system.

Since the royalty transfer system is established by the Constitution, a Constitutional amendment would be required to overhaul it completely. Furthermore, Law 715 had been passed in 2001 to establish efficiency criteria in the education sector. Therefore, this component of FIAL was structured around a Constitutional amendment through Referendum and the application of Law 715. The Referendum was scheduled for late 2003 and would contain a specific question to reform the royalty system.

Loan Development of Incentives for Efficiency Gains

Original Key Policy Actions First The Government has enacted a law to enable constitutional referendum for transfer of

royalties for educational services Second • Borrower has submitted to popular vote the provision of the Referendum that reallocates

royalty transfers for educational services. • Government has established eligibility requirements for sub-national governments to

access additional resources for education at sub-national levels. Eligibility requirements include, among others, restructuring of sub-national Secretary of Education, enhanced capacity for human resources management, and co-financing of education expenditures at competent sub-national level.

Third Government is fully applying Law 715-2002 on capitation transfer and is auditing and applying sanctions to sub national governments that commit fraud with respect to number of students enrolled

Fourth No action proposed on this phase

Legal defense of the State. The objective of this component was to improve the State's capacity to respond to legal claims and to diminish their fiscal cost. The key expected result for this component was a reduction in the present value of judicial contingency debt vis-à-vis 2003.

Litigation against the State has had a substantial fiscal impact in Colombia. It was estimated that by 2006, the State’s legal liabilities would amount to approximately 2 percent of GDP. This prospect was aggravated by the fact that the State cannot meet all compensatory payments on time. Moreover, an extremely high rate of penalty interest applies, “snowballing” the State’s liabilities. Two of the important factors involved were: (i) the weak capacity of the State to defend itself in court, and (ii) the existing legal framework encouraged the State to take a back-seat to demands and claims from individuals, accompanied by passivity in pursuing actions against public servants responsible for these claims and judgments.

Within this context, the Government tried to introduce enforceable legal provisions that would: (i) minimize errors and weaknesses in the execution of the public sector’s decisions and contracts; and (ii) require a more proactive approach to strengthen the state’s capacity to defend itself and protect its interests. The FIAL loans supported this process by supporting the design and implementation of an official legal defense policy paper, the strengthening (by Law) of the relevant areas of the Ministry of Interior and Justice, and the development of an information system that would enable effective and efficient management of the caseload.

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Loan

Legal Defense of the State Original Key Policy Actions

First • Borrower has promulgated Law 790 of 2002 that grants authority to central government for strengthening the “Dirección de Defensa Judicial del Ministerio del Interior y de Justicia” with the purpose of: o limiting the state’s civil liability through improved policy formulation and

coordination, o seeking indemnification from borrower’s civil servants who act with gross

negligence and bad faith, o professionalizing judicial defense of the state.

Second Borrower has issued a CONPES document establishing the new policy for legal defense of

the state, including legal reform if necessary. Third Government has established a public monitoring, information and reporting system that

includes performance and result indicators and expected fiscal impact for the legal defense of the state.

Fourth Government is implementing the new policy for legal defense of the state and is publishing semi-annual reports on performance and results indicators, including expected fiscal impact, of the legal protection policy.

Strengthening public sector procurement. The objective of this component was to ensure that government purchases were transparent and efficient. The key expected results were: (i) the country’s legal framework for procurement reformed following guidelines agreed between the Government and the Bank, including guidelines such as measures to enhance transparency and objectivity, assignment of monitoring and evaluation responsibility in procurement policy to a competent agency; (ii) advances in coverage of e-procurement.

Preparatory studies for this component, including the Bank’s CPAR, indicated that public contracts in Colombia were affected by an unclear division between the private and public sectors and by an inadequate legal framework that had overlaps and omissions. These were exacerbated by the legacy of traditional State patronage systems which protected both buyers and vendors from being held accountable and provided opportunities for corruption. In addition, no central agency was in charge of promoting reforms or even of introducing the use of modern information technology.

The Government’s program, as supported by the FIAL, contained the following key elements: issuance of Decree 2170, through which some measures to improve transparency and to implement some international “best practices” in contracts were implemented; the establishment of a regulatory entity in charge of monitoring public sector procurement and issuing regulations; and the reform of the procurement bill (Law 80) to simplify the legal framework, ensure accountability, and promote more value-for-money in procurement processes.

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Loan Strengthening Public Sector Procurement

Original Key Policy Actions of FIAL First • Government has issued Decree 2170 (September 30, 2002) that strengthens transparency

and objectivity in public sector procurement. • Bill of Law 018/2002 modifying current public sector procurement legal framework

being in consideration by the Congress.

Second • Government issued CONPES document that: o dictates the principles that apply to government procurement, o recommends the creation of a new agency or the assignment to an existing agency of

public sector procurement responsibilities, o defines a strategy for developing and implementing e -procurement.

• Government has proposed to Congress modifications to the legal bill amending Law 80 that incorporate the CONPES recommendations, emphasizing: o common principles for public sector procurement; o introduction of economic considerations into the procurement process; o institutional framework for public sector procurement.

Third The Government Agency responsible for monitoring, evaluating, and establishing common

guidelines in public sector procurement matters, started its operation. Fourth Government has issued the regulatory decrees for the implementation of the new procurement

legal framework.

Asset management. The objective of this component was to maximize the economic and social return of the State’s assets; generate revenues by liquidating those not directly linked to service delivery, reduce replacement and restoration costs, and eliminate opportunities for corruption. The key expected results at the end of the program were: (i) the State was to have institutionalized mechanisms to monitor, evaluate, maintain and dispose of public assets; and (ii) the State was to have received accumulated revenues for asset management equivalent to at least US$70 million.

Diagnostic work revealed the existence of a substantial body of idle public sector assets which contributed to inefficiencies in resource use. Many were not properly titled or adequately registered in institutional inventories; others were sub-utilized or misused, generating unnecessary costs. Numerous institutions spent a substantial portion of their budgets on property maintenance and leasing. At the time of the FIAL’s preparation, the State’s asset management suffered from: (i) unclear legal status and economic value, incomplete registration, and irregular control over properties and other public assets; and (ii) the existing legal framework's failure to recognize market principles and to provide a clear basis for managerial discretion.

The Government adopted a strategy to improve asset management through: (i) short-term policy actions to develop a framework for public asset management; and (ii) medium-term policy actions to develop a more flexible approach, e.g., concessions, leasing, privatization, and outsourcing. Through these reforms it was expected that assets worth approximately US$1 billion would be registered and prevented from further deterioration, with a beneficial fiscal impact.

The FIAL program originally envisioned support to this area through a combination of efforts including the creation of a regulatory body for asset management, the preparation and approval of a CONPES document, the enactment of legislation to enable more modern asset management practices, an updated asset inventory, and the generation of revenue through the short-term asset liquidation program.

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Loan Asset Management Original Key Policy Actions

First Government has created a Commission for Asset Management charged with preparation of draft government policy, defined the scope of work and an operational plan to define accounting systems and inventories in public agencies.

Second • Government has issued CONPES document that defines basic principles and establishes strategic plan for Asset Management.

• Short term Asset Management program has produced revenues or savings equivalent to at least 27,000 million Colombian pesos of 2002.

Third • Government has submitted to congress law reform proposal to authorize and facilitate

new asset management. • Titling has been regularized for at least 100 real estate assets • Short term Asset Management program has produced cumulative revenues or savings for

at least 51,000 million Colombian pesos of 2002.

Fourth • Asset registration, including updated valuation, has been completed for 100% of the assets listed by the “Contaduría Nacional”.

• Asset management program has produced cumulative revenues for at least 175,000 million Colombian pesos of 2002.

• Inventory of government assets is completed and published for all ministries

Management contracts for government agencies. The objective of this component was to enhance the efficiency and financial self-sufficiency of government agencies. The key expected result at program-end was that participating agencies would perform better and reach results according to indicators such as reduced dependency on fiscal transfers, higher coverage, and increased customer satisfaction.

Through the decentralization process and the implementation of other actions over the past 50 years, over one hundred independent agencies had been created, many with the expectation of becoming self-financing entities. In fact, however, many of these agencies either created additional pressures for transfers from the central government or had complex financial relationships with it. The new administration aimed to convert many of these agencies into results-based, self-sustaining institutions. To this end, its first step was to design and implement management contracts specifying performance, revenue and balance targets for some pilot agencies, which were then to be replicated in other agencies.

The FIAL loans supported measures related to the identification of two government agencies for the pilot exercise and signing management contracts, evaluating their outcomes, publishing the results, and continuing with the expansion of the model to other agencies. The two agencies that were identified as pilots were ICBF (the family welfare institute) and SENA (the technical training institute).

Loan Management Contracts for Government Agencies

Original Key Policy Actions First Government has selected two government agencies for pilot management contracts 2003-

2006 Second Central government has signed management pilot contracts with two government agencies. Third Government has published, monitored and adjusted performance and results indicators for

two government agencies. Fourth Government has adjusted and extended management contracts to at least 6 government

agencies.

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Management of the public sector reform process. The objective of this component was to promote policy and technical coordination for the successful application of reforms within a framework of strengthened governance, accountability and policy sustainability. The key expected result was a reform process widely consulted within public and private sectors and implemented on schedule.

A complex, comprehensive reform program such as the one initiated by the Uribe Government requires close and continuous supervision, coordination and evaluation to ensure continuity and high quality in its implementation, as well as to be able to respond to changing circumstances. It was also understood from the outset that recurrent evaluation of the program’s progress and subsequent impact was crucial to provide the feedback necessary to amend the strategies as needed.

To these ends, the Government established systematic management mechanisms of the reform process that included: (i) coordination to gain the acceptance and support of political actors; (ii) technical coordination for professional leadership and guidance of the processes; (iii) communication and outreach to obtain the support of the population and the public servants; and (iv) monitoring and evaluation for informed decision-making at political and technical levels.

The FIAL program initially structured its support to this component through the definition of the overall public sector modernization strategy, the establishment of highly capable technical teams, and an ongoing monitoring and evaluation process for FIAL-supported reforms.

Loan Management of the Public Sector Reform Process

Original Key Policy Actions First • Government has:

o published its strategy of state reform, o established a high level commission for state reform and a task team for technical

coordination; o formed task teams in each participating agency with coordination mechanism with

DNP, and o developed a concept for public marketing of public sector reform.

Second • Government has issued CONPES documenting the policy on state reform

• Government has developed a system for monitoring and evaluation of state reform and has announced monitoring indicators for public sector reform progress in the web page of the DNP and other means.

Third Base line and progress indicators for monitoring progress and final goals of the reform are

applied to the reforms achieved during 2003 and are disseminated countrywide. Fourth Base line and progress indicators for monitoring progress and final goals of the reform are

applied to the reforms achieved during 2004 and are disseminated countrywide.

Fiscal Responsibility

The objective of this component was to help reduce fiscal imbalances. The key expected results were that: (i) the Government was to have enacted measures for signaling and disclosing fiscal targets; and (ii) the Central Government was collecting and publishing reliable fiscal sustainability data for the 50 largest sub-national governments according to indicators defined in the proposed bill for a fiscal responsibility law and Law 617 of 2000.

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During the Pastrana administration, a draft bill for fiscal responsibility was prepared, and its discussion continued into the Uribe administration which in turn submitted it to Congress. Among the key principles of this new law were the establishment of a medium-term fiscal framework, guidelines for ensuring debt sustainability, definition of macroeconomic targets and transparency measures such as the publication of tax expenditures and improved fiscal reports to Congress. This effort was undertaken in tandem with other initiatives carried out through the Ministry of Finance to collect and publish financial information from sub-national governments.

Loan Original Key Policy Actions of FIAL First The borrower has submitted to Congress the bill od the Law for Fiscal Responsibility. Second • Government has approved the Fiscal Responsibility Law, that contains, at a minimum,

rules for: o setting fiscal targets linked to debt sustainability and primary balance for the NFPS; o annual reports of fiscal results to Congress, including floating debt; o publication of the financial plan that will include, among others, information on

floating and contingency debt; o the obligation to include the fiscal impact and source of financing within any law

that creates new tax expenditures.

Third • Government has: o disclosed fiscal targets for 2004 in accordance with the new law of fiscal

responsibility; o submitted reports to Congress of fiscal results of 2003.

Fourth • Government has:

o disclosed fiscal targets for 2005 in accordance with the new law of fiscal responsibility;

o submitted reports to congress of fiscal results of 2004.

3.4 Revised Components:The overall structure of components and their individual objectives were not changed during program implementation. However, changing circumstances (particularly the defeat of the 2003 Referendum and delays in the approval of key legislation) required adjustments to the specific policy actions within each component. Some of these, such as budget reform or incentives for efficiency gains, were clearly weakened by these circumstances and although a “Plan B” was in place, the desired structural effects were not achieved. Others, such as tax reform, were actually strengthened during implementation as a new Law (Law 863), which was not originally forecast, was approved and accelerated the tax exemption phase-out process.

The changes in policy actions undergone in each component are as follow:

Overall fiscal commitment. As was expected at the outset, the actual deficit targets were adjusted as the program progressed, keeping them either in line with or below the targets in the IMF SBA. Some definitional changes were made, such as adopting the concept of combined public sector for deficit measurement. In FIAL III, the measurement of the fiscal stance was further strengthened by requiring that the overall public sector debt to GDP ratio be below 47%; the original matrix did not incorporate a debt/GDP target.

Tax reform. The Government’s tax reform strategy evolved over time, and was reflected in changes in the policy content of this component. Law 788, which was the single tax policy reform initiative envisioned at

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the outset, was later complemented by a second law (Law 863). The failure of the Referendum in late 2003 (which had expenditure-containment measures), the Constitutional restriction on reducing public sector wages, and the rejection by the Constitutional Court of the 2% VAT on basic foodstuffs and services (discussed later in this report), forced the Government to submit the bill to Congress that later became Law 863. While this law contained some highly desirable elements such as the acceleration of the tax exemption phase-out schedule, it also introduced some undesirable quick-revenue items such as a 0.1% increase in the financial transactions tax.

Tax administration. This component underwent a conceptual shift in the way progress was measured. Originally, the FIAL program measured progress in terms such as the deployment of systems, unification of taxpayer accounts, or a particular number of audits. For the third loan, the Bank and the Government jointly decided that these elements, while important, did not provide an adequate picture of the actual overall improvement in tax administration. These indicators were replaced by two internationally-accepted measurements of tax administration capacity: (i) administrative cost per peso collected; and (ii) an estimate of tax evasion as a percentage of GDP.

Budget management. The Government’s budget reform agenda suffered two major setbacks early in the program: (i) the rejection of a Constitutional amendment by the Senate that would have given the executive branch greater control over public expenditure; and (ii) the rejection of the 2003 Referendum, which contained expenditure-control measures. While the Government subsequently attempted to introduce reforms within the Constitution through a new Organic Budget Code, this effort was also rejected by Congress. The lack of structural progress in the budget system constituted one of the reasons why the FIAL program did not progress into its fourth and final loan.

Development of incentives for efficiency gains. After the failed Referendum to authorize the permanent reallocation of royalty transfers for educational services, the Government restructured the National Royalty Commission, facilitating the allocation of some additional funds for educational purposes. The FIAL Policy Matrix was amended to support this alternative solution.

Legal Defense of the State. Although there were no major adjustments to the policy actions of this component, greater comprehension of the complexity of the issue as the program progressed required a reassessment of what was achievable in the short term. For example, it became evident that a real reduction in the value of liabilities during the life of the FIAL program could not be achieved; the effect of strengthening legal defense on the actual balance sheet would only be evident in the longer term.

Strengthening public sector procurement. The policy content of this component was affected by delays (and eventual non-consideration by Congress) of the reforms to the procurement law (Law 80). However, some key elements such as the creation of a normative body and improvements in accountability and transparency were achieved via presidential decree and reflected in the program matrix. The failure to pass the reforms to Law 80 also constituted one of the reasons for discontinuing the FIAL program.

Asset management. As was decided during the Bank’s internal review process of FIAL II, the focus of the policy actions in asset management shifted from quantitative, revenue-generation targets to institutional development targets. In addition, some new elements were introduced such as reforms to the procurement bill related to asset management, which were presented to Congress but did not pass.

Management contracts for government agencies. There were no changes in this component.

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Management of the public sector reform process. There were no changes in this component.

Fiscal Responsibility. As the program progressed, it was decided that given the successful implementation of the Fiscal Responsibility Law supported by FIAL II, there was no need to continue introducing policy actions in this regard throughout the rest of the FIAL program. The conditions originally stipulated for FIAL III and IV, which related to the publication of information and compliance with the Medium Term Fiscal Framework, were therefore dropped in an effort to simplify the program matrix.

3.5 Quality at Entry:Quality at entry is rated Satisfactory, given the statement of development objectives. The elements of the program are critical inputs to achieve fiscal sustainability and institutional development, the reform agenda - though admittedly ambitious - was developed in a highly collaborative manner between Bank and Government, and capitalized successfully on a significant stock of analytical work. Each component had a logical sequence and generally began with the formalization of the Government’s strategy in a CONPES document, followed by the necessary legal reforms, and finally their implementation.

However, questions have been raised during the internal Bank review process of the FIAL (in particular during the preparation of FIAL III) regarding its comprehensiveness as a fiscal adjustment program, since it is clear that FIAL does not cover all of the areas that have an effect on fiscal balances. As stated in the FIAL I MOP, “The program to be supported by the (…) FIAL is, nevertheless, not intended to deal exhaustively and conclusively with all areas where action could improve Colombia’s fiscal outlook. Rather, it is conceived as a first-step package that focuses on a core set of critical policies of fiscal reform that can sufficiently strengthen and consolidate public finances.” Furthermore, FIAL followed on the Bank’s Structural Fiscal Adjustment Loan (SFAL) of 2001-2002, which supported reforms in sub-national transfers through the creation of the single Sistema General de Participaciones, helped regulate borrowing in decentralized entities, and promoted a discussion around social security reform. This context suggests that FIAL was appropriately designed, building upon the achievements of previous Bank-supported programs while admittedly focusing on a core set of areas which were understood to be necessary, but not sufficient, to achieve fiscal adjustment.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The FIAL program had a two-fold development objective: first, to promote reforms addressing fiscal rigidities needed to attain the substantial fiscal adjustment required for sustainable macroeconomic stability; and second, to improve the provision of public services and establish the institutional basis for greater efficiency and accountability in public expenditures.

Regarding the first objective, the program achieved mixed results. On the revenue side, tax reform measures proceeded largely as planned and produced good results, as is illustrated in the following sections. Tax administration results are also good, and progress in reducing tax evasion and increasing administrative efficiency of DIAN is moving along at a fast pace. On the expenditure side, however, much less has been achieved. Any substantial modification to the way public expenditure is managed involves Constitutional reform, and both attempts supported by the FIAL program failed. Some external factors (such as the devaluation of the dollar, high oil prices and surpluses at the sub-national level) helped buoy the overall fiscal stance in recent years and lifted some pressure from the need for structural expenditure reform. Nonetheless, the Colombian budget remains very rigid and continued efforts will be required to truly transform it into a flexible fiscal policy instrument.

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As regards the second objective, the program has influenced quality in service delivery in at least three areas: education, as it has promoted a more efficient use and allocation of royalty transfers to sub-national entities for education; and family welfare and technical education, as it supported performance contracts with the two corresponding entities, establishing service delivery and revenue generation benchmarks. In terms of setting the institutional basis for efficiency and accountability in public expenditures, the overall package of expenditure reforms except budget reform (asset management, procurement, incentives for efficiency gains, and management contracts with government agencies) produced a significant impact on efficiency and accountability, albeit from different angles and varying degrees of depth.

The discontinuation of the program after the third loan has clearly adversely influenced the achievement of the objectives set out at the beginning of the reform process. Elements not yet achieved but that remain in the government’s agenda, such as the new procurement law and Organic Budget Code, would bring the program much closer to full achievement of objectives. Furthermore, substantial results expected shortly in areas such as asset management and tax administration are obviously not part of this assessment, and would also bring the program closer to full success.

Given this assessment, the overall achievement of objectives is rated as Moderately Satisfactory.

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Key Reform Measures Implemented under FIAL Policy Area FIAL 1 FIAL 2 FIAL 3

Overall fiscal commitment

A fiscal adjustment program was put in place and the overall deficit of the Combined Public Sector did not exceed US$ 1,352,000,000 for any 3 continuous months among the 12 months preceding withdrawals from the Loan Account

The execution of the National Central Government Budget for the year 2003, prior to disbursements under the second loan, had not exceeded 75% of the overall deficit limit in said budget

The execution of the 2004 Budget of the National Central Government through the end of the third quarter was in line with the overall deficit limits in the approved budget. The overall deficit of the Combined Pubic Sector through the third quarter of 2004 was consistent with an annual deficit of 2.3% of the GDP for said year. The overall debt to GDP ratio was below 47% of GDP

Tax Reform Government enacted the Tax Reform Law 788 of 2002

Government issued 18 Decrees to regulate the application of the Law 788 / 2002.

The new Tax Reform Law 863, which accelerates the phase-out of exemptions, was enacted on December 2003

Tax Administration • DIAN renegotiated service rates with its providers reducing its operational cost.

• 15 Decrees were issued to regulate fiscal evasion, fraud, and to clarify and facilitate the application of the Tax Code

• DIAN developed and implemented software to cross reference information with financial institutions to ensure proper monitoring of taxpayer statements

• DIAN increased its audit capacity to the taxpayers and audited 50% of large taxpayers

• DIAN established and published indicators of the cost and time required for filing compliance by taxpayers

• DIAN established procedures to carry integrated tax and custom audits (over 80 integrated audits were carried out)

• The DIAN administrative did not exceed 0.96% of DIAN tax collections

• Improvements in tax administration produced al least 0.3% of GDP from 2003-2004

Budget Management A constitutional reform giving the Executive Branch the authority to control and manage the budget was presented to and approved by Congress in first round

• CONPES approved the terms of the budgetary reform

• The Government submitted the Bill of Law for the 2004 Budget Law to Congress incorporating a medium-term fiscal outlook; the calculation of tax expenditures and contingent liabilities, and a presentation by functions that integrates current and capital expenditures

The Bill of Law with the new Organic Budget Code was submitted to Congress

Development of incentives for efficiency gains

The Government enacted a law to enable Constitutional Referendum for transfer royalties to educational services

• The Government submitted to Referendum a constitutional amendment to transfer royalties to educational services

• The Ministry of Education issued Decree 277 2003 establishing priority and eligibility criteria to use funds originating from Law 21/1982 for investments in educational services

The Government restructured the National Royalty Fund and allocated funds to sustain places created for new students

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Key Reform Measures Implemented under FIAL – Continuation Policy Area FIAL 1 FIAL 2 FIAL 3

Defending the State against the extraordinary growth of legal claims

• Law 790-2002 was enacted granting the Central Government authority to strengthen the Dirección de Defensa Judicial del Ministerio del Interior y Justicia.

• A CONPES policy document was prepared on based on an initial diagnosis of the prevailing situation.

• A CONPES document establishing the basic policies underlying the defense of the State, was approved

• An Action Plan based on the CONPES document was put in place

An inventory of the legal was prepared and some policies geared to resolving claims via mediation procedures were issued

Strengthening public sector procurement

• Decree 2170/2002 which regulates the application of the Law 80 (Procurement Law) was issued

• A CONPES document defining the legal and institutional requirements to strengthen the public procurement system was prepared

• A Bill of Law (18/2002) to amend the Law 80 has been submitted t o the Congress

• The CONPES document was approved

• Bill of Law (18/2002) was modified to incorporate the CONPES document’s recommendations was submitted to Congress

The Government created the Inter -sector Commission for Public Contracting that will act as the agency responsible for: establishing common guidelines and for monitoring and evaluating public sector procurement

Asset management • Government created the Inter-sector Commission for Asset Management.

• A CONPES document which defines the basic sector policies was prepared

• The CONPES document was approved.

• An inventory of the State infrastructure asset was initiated

• The Inter -sector Commission for Asset Management and its Technical Secretariat are in operation

• A public assets information system is being implemented

Management contracts for government agencies

A management model has been designed and two public institutions were selected to sign contracts for a 2003-2006 pilot program

The MHCP and DNP signed the pilot Management Agreements with SENA and IC BF

In 2004, SENA and ICBF were in full compliance with their Management Agreements

Management of public sector reform process

• The State Reform strategy was published

• A High-level Commission for State Reform was created

• DNP created a Coordination and Monitoring Unit for the reform process

• Each participating agency formed a reform task team coordinated with DNP

• A concept for public marketing of the public sector reform was developed

• A CONPES document establishing the overall reform strategy and recommending the design of productivity and effectiveness indicators for the public sector was approved

• Systematic monitoring and reporting of the reform progress was put in place

• Baseline and a subset of progress indicators are being applied

• A systematic monitoring and reporting of the reform progress is in place

Fiscal responsibility A draft Fiscal Responsibility Law was submitted to the Congress

The Fiscal Responsibility Law (Law 819) was enacted.

A Medium-Term Fiscal Framework (MTFF) is in place

4.2 Outputs by components:In the following section, a review of the outputs of each component and the degree to which the specific objectives were achieved will be presented. However, it must be noted that the FIAL, as many programmatic DPL’s, moved ahead with Board presentation of each loan only when the policy actions specified in the matrix were achieved. Therefore, by definition, all components managed to achieve their stated policy actions, so the degree of success needs to be gauged more subjectively in relation to the program’s overall objectives.

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Fiscal Commitment.Overall fiscal commitment. The achievement of the objective of this component was Satisfactory.

Colombia’s fiscal performance throughout the duration of the FIAL program was satisfactory. All agreed targets were met; with the exception of 2003 when the deficit target of the consolidated public sector was raised mid-year by 0.3% of GDP to 2.8%. In contrast, 2004 closed with a substantially lower deficit than was originally forecast; the year closed with a consolidated public sector deficit of 1.3% of GDP, well below the target of 2.5%. This was due primarily to the large surpluses run by the sub-national governments in response to regulations restricting public expenditure, since the deficit of the central national government actually increased in respect to 2003 (although it was still below the 2002 level). The following table shows the fiscal balances as calculated for the first three years of the present Government.

Fiscal Balance as a GDP % Year 2002 Year 2003 Year 2004 Non-Financial Public Sector -3.8% -2.5% -1.4% * Central National Government -6.1% -5.0% -5.5% * Decentralized Sector 2.3% 2.5% 4.1% Ø Social Security System 1.2% 0.7% 1.6% Ø Public Enterprises at national level 0.4% 1.2% 0.9% Ø Public Enterprises at local level 0.3% 0.2% 0.5% Ø Region and local governments 0.4% 0.3% 1.1%

BANREP Quasi-fiscal balance 0.8% 0.6% 0.5% FOGAFIN Balance 0.3% 0.3% 0.3% Financial restructuring cost -0.6% -0.5% -0.4% Statistic discrepancies -0.3% -0.6% -0.3% Consolidated Public Sector Totals -3.6% -2.7% -1.3% Source: CONFIS

A reduction in the debt of the non-financial public sector as a percentage of GDP to below 47% was included as part of the benchmarks of this component in FIAL III. The debt overhang had more than doubled between 1997 and 2002 to over 54% of GDP, one of the highest in the region. A level below 47% was achieved in 2004, although the reduction was at least partly due to the appreciation of the Peso (the Government estimates that 50% of the reduction in the debt/GDP ratio was due to the exchange rate effect).

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Evolution of Colombian Public Debt

0%

10%

20%

30%

40%

50%

60%

1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Per

cent

age

of G

DP

0%

50%

100%

150%

200%

250%

300%

Per

cent

age

of E

xpor

ts

NFPS Debt as % of GDP External Debt as % of exports

Source: "Colombia´s economic and fiscal sustainability report"

Revenue rigidities and tax reform.Tax Reform. The achievement of the objective of this component is rated Satisfactory.

The package of reforms supported by this component of FIAL were both effective in increasing revenue as well as aligned with good international practices of tax policy, which call for things such as broad tax bases with few exemptions and simple rate structures. However, some distortionary revenue-generating measures (such as an increase of the financial transactions tax) were also carried out during this period, but these are meant to be temporary. It also should be noted that the Constitutional Court reversed one of the important elements of the first tax reform of FIAL (Law 788) which called for a reduced-rate VAT to be applied to basic foodstuffs and services.

The tax policy reforms that were supported by FIAL were contained in Laws 788 and 863 and include the following:

The VAT was expanded and its application simplified, covering some goods previously exempted. lThis provided a uniform tax rate on certain goods previously affected by a range of rates. It improved some procedures for tax collection and retention in the source, and adjusted the simplified regime to avert some abuses and misuses.The yield of the personal income tax was increased by reductions in wage tax exemptions and lthresholds on monthly wages, as well as in exemptions for personal credits. Exemptions to personal capital gains on stock sales were also eliminated.The yield of the corporate income tax was increased by the progressive elimination of exemptions for lcapital gains from sales of assets, as well as the privileges of some corporations that were exempted from profit taxes. In addition, rules of access to the “simplified” lower-rate regime for small businesses were better enforced.The financial transactions tax was programmed to be phased out by 2008.l

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Sub-national tax revenue was enhanced through an adjustment of the alcohol tax in departments and ldistricts, as well as to the tax surcharge rate for transfer to sub-national governments.

In 2004, the combined effect on revenue of these two laws was close to 1.6% of GDP. The following table summarizes the effects of the most important tax reform efforts since 2000:

Effect of the tax reform on collections (in million of Col$) Year 2000 Year 2001 Year 2002 Year 2003 Year 2004 Estimated total gross collections without reforms

19,295,107 21,211,718 22,842,674 25,904,617 29,453,036

Law 633/2000 effect 0 3,658,040 3,460,000 3,535,884 4,300,537 Democratic Security Tax effect 0 0 1,250,721 1,228,795 31,101 Law 788/2002 effect 0 0 0 1,633,233 2,120,949 Law 863/2003 effect 0 0 0 0 1,958,815 Reforms’ cumulative effect 0 3,658,040 4,710,721 6,397,912 8,411,403 Total gross collections 19,295,107 24,869,759 27,553,395 32,302,529 37,864,439

Values as a GDP percentage Estimated total gross collections without reforms

11.0% 11.2% 11.2% 11.2% 11.4%

Law 633/2000 effect 1.94% 1.7% 1.5% 1.67% Democratic Security Tax effect 0.6% 0.5% 0.01% Law 788/2002 effect 0.7% 0.8% Law 863/2003 effect 0.8% Reforms’ cumulative effect 1.9% 2.3% 2.8% 3.3% Total gross collections 11.0% 13.2% 13.5% 14.0% 14.7% Source: Economic Research Office, DIAN

Tax administration. The achievement of the objective of this component is considered Highly Satisfactory since the outcomes surpassed the original expectations.

The FIAL program capitalized on an ongoing and successful process of institutional modernization at DIAN, financed by the Bank’s MAFP II loan, for achieving the tax administration policy objectives. The FIAL initially focused on specific measures such as the reduction in thresholds for reporting interest income, integrated taxpayer current accounts, better information flows with banks, and joint tax/customs audits. However, these were only some elements of a large and comprehensive modernization effort centered on the implementation of an integrated information, service, and management system called MUISCA. The FIAL properly shifted its focus away from individual elements (each of which does not account for any substantial impact on tax collections) to target values for institutional efficiency and effectiveness.

The evolution of the indicators for institutional efficiency (cost of collection) and effectiveness (tax evasion) during the FIAL program are shown in the following tables. In terms of cost of collections, two scenarios are analyzed: with and without the effect of the tax reforms enacted during the period. Since the tax reforms raised revenue to a large extent without any additional effort from the tax administration, it is more accurate to assess efficiency gains by netting out the effect of the reforms. In both scenarios, the cost per 1,000 pesos collected drops significantly, and in the net-of-reforms scenario, the reduction is from 10.3 pesos in 2003 to 9.9 pesos in 2004 and to an estimated 9.3 pesos in 2005.

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Performance indicators – Cost of collections Year 2003 Year 2004 Year 2005 DIAN budget (thousand of millions of Col$) 330 360 363 Estimated values including tax reform effect Estimated total gross collection (thousand of millions of Col$)

32,303 37,864 40,392

Cost to collect Col$ 1000 10.2 9.5 9.0 Estimated values without tax reform effect Estimated total gross collection (thousand of millions of Col$)

32,200 36,215 39,086

Cost to collect Col$ 1000 10.3 9.9 9.3 Source: Economic Research Office, DIAN

In terms of measuring tax evasion, the absence of an updated and operational input-output matrix and general equilibrium model made it necessary to resort to other (admittedly less precise) techniques. Taking the VAT as the subject, a simple calculation based on potential and net revenue gave indicators of evasion as percentage of GDP, nominal peso value, and evasion rate. According to these figures prepared by DIAN’s Economic Research Department, the evasion rate dropped by 1.1% between 2002 and 2003, by 1.2% between 2003 and 2004, and by an estimated 1.8% between 2004 to 2005.

Performance indicators – VAT evasion Potential Revenue

Net Revenue Evasion

Year Col$

million Col$

million Col$

million %

GDP

Evasion rate

Col$ million per evasion point

2000 11,363,787 8,346,741 3,017,046 1.7% 29.5% 113,638 2001 13,629,453 10,058,035 3,571,418 1.9% 27.6% 136,295 2002 14,885,630 10,968,760 3,916,870 1.9% 26.4% 148,856 2003 17,109,885 13,127,530 3,982,355 1.7% 25.3% 171,099 2004 19,566,063 15,144,629 4,421,433 1.7% 24.1% 195,661

2005 (est) 22,168,969 17,491,826 4,677,142 1.7% 22.3% 221,690 Source: Economic Research Office, DIAN

Other outputs delivered with the support of this component include the following:

Continued deployment of the MUISCA system, an integrated platform covering tax and customs laudits, collections and control.Improvements to the audit and control systems which reduced customs clearance times, allowed for lcross-referencing taxpayers’ data with financial institutions’ information, integrated tax/custom audits, and reduced firms’ data reporting thresholds.Several on-line procedures simplified voluntary taxpayer compliance and increased the efficiency of ladministrative processes.A new mechanism to identify, locate and classify taxpayers, which improved the quality and coverage lof taxpayer information.

Expenditure rigidities and institutional reform Budget management. The achievement of the objectives of this component is rated Unsatisfactory.

The starting point of the underlying reform strategy of this component was a Constitutional reform to

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restore the authority of the executive branch (or more specifically, to the MHCP) to regulate expenditure aggregates. The Acuerdo Legislativo to carry this out was thrown out by the Senate in July 2003, a few months after the approval of FIAL I. A second attempt at Constitutional reform was made via the October 2003 Referendum, this time to reduce expenditure rigidities through major reforms in the pensions system, implementing a freeze on recurrent expenditures, especially wages, and shutting down certain public sector entities. This attempt failed as well.

As agreed with both the Bank and the IMF, the Government proceeded to submit to Congress a new version of the public sector’s budget code (Estatuto Orgánico de Presupuesto, or EOP) in December 2003. The bill contained important measures such as the redefinition of social expenditure, a revised budgetary classification, improved monitoring and evaluation, control of forward budgets, and a medium-term expenditure framework, among others. The EOP lingered in Congress for over a year, and was eventually “archived” (or dismissed without being approved) in early 2005.

Even without the above-mentioned structural reforms, the Ministry of Finance did manage to make some improvements to the quality of the budget. Furthermore, it is now working closely with the IMF on an executive decree that will make up at least some of the ground lost with the dismissal of the EOP bill. Among the improvements that have been observed so far are:

Improved transparency through a budget information portal in the MHCP’s websitelThe budget submitted to Congress now includes a comprehensive explanation of many of its functional, lfinancial and economic elements, as well as a debt sustainability analysis and an analysis of budgetary rigiditiesBudget preparation is now done on-line, reducing transaction costs for spending agencieslThe budget itself is of higher quality, as was shown by the fact that there were no budget amendments lin 2005

Development of incentives for efficiency gains. The achievement of the objective of this component is considered Moderately Satisfactory.

The central element for achieving a structural reform to the way royalty funds are managed was the 2003 Referendum, which contained a question proposing their explicit distribution for education (56%), sanitation (36%), a sub-national pension fund (7%), and the conservation of the Cauca river (1%). This measure was meant to counteract what was widely perceived as corrupt and inefficient use of these funds, often in poorly planned or otherwise inappropriate investment projects. Existing laws (especially Law 715) established efficiency and accountability standards for decentralized services, so by earmarking funds for these services, there was the expectation of improved value-for-money.

The failure of the Referendum prevented this rule to be hard-wired into the Constitution. Nevertheless, as an alternative measure, the Government decided to have DNP “absorb” the management of the National Royalties Fund, fostering a better planning environment and responsiveness to local priorities. This enabled the Government to reallocate funds to enroll approximately 30,000 new students in 2003 and some 12,000 more in 2004.

In 2005, the National Royalties Fund’s Advisory Council confirmed the continuation of the education coverage-expansion program for vulnerable populations using the Fund’s resources, which should help sustain the program. In addition, Law 715 establishes that the distribution of funds to schools has to respond to demand, so enrollment is being closely monitored and audited. This new process for funding education constitutes a real incentive to improve and expand the coverage of educational services.

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Legal Defense of the State. The achievement of the objective of this component is rated Satisfactory.

The initial absence of an adequate diagnosis of the issue was compensated by an improved understanding gained during implementation, which actually helped redirect the efforts of the reform program towards more comprehensive, longer term solutions. As it became evident that the effect of the reform program on contingent liabilities would not be seen in the short term, the focus was shifted towards strengthening the development of a judicial management system involving areas such as legal defense, legal counsel, reform of the legal framework and public procurement. Jointly with the deployment of an information system that for the first time captured the true magnitude of ongoing litigation against the State, these measures have made the public sector considerably better equipped to prevent, plan, and assign resources to litigation. The progress of the activities under a clearer strategy and the firm commitment shown by the Government to continue developing this area are justification for the component’s rating. Improved fiscal results in terms of reduced liabilities are expected in the medium term.

Specifically, the component has supported the delivery of the following products:

A database of judicial processes against and in favor of the public entities (JURISGOV information lsystem) which classifies different types of cases and provides a preliminary quantification of the associated contingent liabilities. The inventory now covers 183 of the 220 public entities and includes data on 9,745 cases involving COP 10,800,000 million where the State is the plaintiff, and 48,477 cases involving COP 57,100,000 million where the State is the defendant. Although the inventory is not complete and some aspects are not yet fully accurate, it provides very valuable information for policy and strategy design.Diagnostic reports have been prepared for contingent liabilities arising from contractual, lextra-contractual, and labor issues. Special directives have been issued governing the coordination of judicial defense of “high amount” lprocesses (over 2,000 minimum wages) against the State. In 2003, seven cases were carried out through this process, increasing to 1,587 in 2004. Mediation processes helped resolve 23% of the cases between public entities in 2003, and 43% in 2004. The improved understanding of the risks involving procurement processes led to the introduction of lsome proposed amendments to Law 80, which governs public procurement processes.

Strengthening public sector procurement. The achievement of the objective of this component is considered Unsatisfactory.

The central pillar of the procurement reform program was the passage of amendments to the procurement law (Law 80) which would include the substantive adjustment to procurement processes (such as elimination of so-called “special regimes,” simplification of procedures, introduction of economy considerations in procurement, etc.), as well as the creation of a normative body that would be in charge of issuing regulations and monitoring the application of the law. These amendments, as well as other improvements to the procurement process, were recommended by the Bank's Country Procurement Assessment Report (CPAR) of 2000 and its update of 2005. The bill submitted in October 2003 was not voted on by Congress, and although it has been re-submitted by the Government, prospects for its approval are uncertain.

Despite the problems with the approval of the bill, the Government created the “Inter-sector Commission for Public Contracting” by executive decree, which serves as the regulatory body for public procurement, albeit without the full scope of functions proposed in the law and without the institutional structure and

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sustainability that would be granted by it. Its functions are the coordination and oversight of the application of public procurement policies. The Commission began operations in February 2005 and has so far issued a “Good Practice Manual for Public Procurement” and provided advice to managers on avoiding contractual problems. It is also preparing standard bidding documents that incorporate many international good practices.

Asset management. The achievement of the objective of this component is rated Satisfactory.

This component, which benefits from technical assistance of an ongoing IDF grant, successfully accomplished the objectives of the three FIAL loans. The reform process is still ongoing and additional results are expected in the future, as the initial measures taken to improve the management of the basic infrastructure of public sector institutions have produced some promising results. A comprehensive asset database has been constructed as a first step of a long-term, comprehensive managerial strategy. The most relevant outputs so far are:

Creation of the “Inter-sector Commission for Assets Management” as regulatory body, with the lresponsibility of setting public asset management policy, designing and implementing the public asset registry, defining the criteria for uses and transfers of these assets, and establishing commercial practices to facilitate such transfers.Laws and regulations regarding asset management are very disperse; the complete legal framework for lasset management has been identified and its assessment and proposals for improvement are in process.A public asset information system is being developed. The current version of the database has linformation on 9,333 buildings, 2,271 of which have been inspected and its use and legal status verified. This covers about 40% of all the entities’ assets. Through December 2004, 770 properties were offered for sale in public auctions and 99 sold. As of December 2004, this component produced accumulative savings and incomes from transfers to lsub-national entities of COP 1,611 million, contributions to the National Development Plan of COP 5,369 million, transfers to the Central Government of COP 5,772 millions, concessions for COP 23,329 million, and sales for COP 40,900 million, totaling COP 76,900 million

Despite these promising results, there remain requirements for increasing transparency and accountability through the development of operations manuals, technical support to the participating agencies, further implementation of the assets information system, and completing and publishing inventories.

Management contracts for government agencies. The achievement of the objectives of this component was Moderately Satisfactory.

The outputs of this component were two performance contracts signed with two social-sector institutions: (i) the family welfare institute (ICBF); and (ii) the technical training institute (SENA). Signed on October 2003, both of these contracts were intended to provide the incentive of additional “fiscal space” in exchange for achieving targets in performance and revenue, as these entities generate their own. “Fiscal space”, in this case, meant granting them a higher level of expenditure authority over their own revenues.

The contracts were implemented, closed, and evaluated by both DNP and the entities themselves. Although neither of the two entities fully complied with their commitments and the incentive never materialized, representatives from ICBF and SENA have claimed that the contracts have helped the entities to better organize their planning processes and improve their internal monitoring and evaluation. While efficiency gains are claimed to have existed, they remain anecdotal. However, this mode of seeking improved performance in public sector entities has not been officially adopted as part of the Government’s strategy,

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and it is unclear at this stage if there will be an expansion of this pilot exercise sometime in the future.

Management of the public sector reform process. The achievement of the objective of this component was Satisfactory.

The component delivered its stated outputs, including the publication of baseline and progress indicators of the reform process in DNP’s website (Note 1.) Furthermore, there is evidence of good quality and comprehensiveness in the management of the reforms, positive Government commitment to ensure professional management of the process, good efforts of the DNP to monitor end evaluate the reform program, and positive contributions from the a multi-disciplinary team assembled to guide the effort. Among other specific results are the in-depth evaluations of individual reform efforts, such as legal defense of the state and public sector procurement.

Fiscal Responsibility. The achievement of the objective of this component is considered Satisfactory.

This component supported the delivery of the key element of the fiscal responsibility framework: a new Fiscal Responsibility Law (Law 819) was enacted on July 9, 2003. This law incorporated the good-practice elements that were discussed and agreed with the Bank’s technical team and which are described in the policy matrix. Among the specific outputs that have been observed through the implementation of this law since its enactment are the preparation, approval, and publication of the 2004 and 2005 versions of the Medium-Term Fiscal Framework (MTFF), establishing a basis for more coordinated, efficient, transparent and responsible fiscal performance by the national and sub-national governments. The MTFF has been widely disseminated and has been used by civil society and international organizations in their fiscal and macroeconomic assessments. The 2005 version incorporated a more comprehensive debt sustainability analysis.

_________________________________

(Note 1) These can be found at:http://www.dnp.gov.co/archivos/documentos/DEPP_Evaluacion_PRAP/Key_Expected_Result.PDFhttp://www.dnp.gov.co/archivos/documentos/DEPP_Evaluacion_PRAP/Key%20Expected%20Results.ziphttp://www.dnp.gov.co/archivos/documentos/DEPP_Reportes_Evaluacion/Reportes_de_evaluacion_N23.pdf

4.3 Net Present Value/Economic rate of return:Not applicable for this loan

4.4 Financial rate of return:Not applicable for this loan

4.5 Institutional development impact:FIAL’s overall institutional development impact has been mixed across components, but can be considered substantial overall.

At the macro-fiscal and revenue-generation levels, the project has had a high institutional impact. The Fiscal Responsibility Law was successfully implemented and the Ministry of Finance has developed an adequate and sustainable capacity to ensure its compliance in areas such as the preparation of the MTFF, improved debt sustainability analyses, and quantification of tax expenditures. Tax administration has undergone a major transformation with the support of FIAL and the Bank-financed MAFP II project, becoming a modern entity with state-of-the-art management systems, consistently showing good results in terms of efficiency and effectiveness indicators.

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In terms of expenditure and institutional reforms, the institutional development impact has been mixed, and it is this area where the suspension of the FIAL program has shown the greatest effect. Impact on the budgeting system has been negligible, given the failure of the constitutional and legal reforms that were to sustain its modernization. The procurement modernization component had more impact given the creation of the Inter-Sector Commission for Procurement, although the failure of the reforms to the procurement law has limited the substantive effect on procurement practices. Likewise, the management contracts for independent agencies have had some impact on the management practices at ICBF and SENA, but have failed to reach a level of institutionalization that could be considered permanent and substantial.

The components of legal defense of the State and asset management have produced a significant institutional impact. These areas have undergone massive process reengineering and the implementation of modern information systems which, coupled with the establishment of the adequate institutional framework, have enabled DNP and the Ministry of Interior and Justice to operate at a higher level.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:Defining “government” as the executive branch, there have been several external actors who have influenced the outcome of this program.

The implementation of the FIAL program involved congressional approval of a number of laws, some of which were passed while others were not. Congress passed three of the most important laws supported by FIAL: two tax reform laws (Laws 788 and 863) and the Fiscal Responsibility Law (Law 617), all of which retained the substance with which the bills were submitted to Congress. On the other hand, the Organic Budget Code and the new procurement law were not passed, so the scope of reforms in these two critical areas of FIAL has been narrowed down to those achievable through executive decree. The failure of these bills was one of the main reasons for ending the FIAL program after the third loan.

Another external actor that influenced program outcome was the Constitutional Court, which is responsible for carrying out the constitutional review of laws, decrees, and other regulations. In 2003, the Court struck down a key element of the first tax reform bill (Law 788), related to the expansion of the VAT base. The tax reform component of FIAL had as one of its objectives broadening the VAT base to include foodstuffs and some basic services at a lowered 2% rate; however, the Court considered that this violated the principles of progressive taxation enshrined in the Constitution and struck this measure down.

In October 2003, President Uribe carried out a referendum to amend the Constitution to introduce a number of fiscal and political reforms, which did not pass. Although the percentage of votes in support of it was between 85-93% for all questions, the overall number of votes was just short of the threshold to render the results valid. This affected FIAL in two different ways: directly, because the component of incentives for efficiency gains counted on the approval of a referendum measure to redirect the use of royalty funds; and indirectly, because the government lost some momentum in its reform agenda and also had to implement “Plan B” measures that crowded out others that were the logical continuation of the reform process.

The Bank, as an external actor, generally exerted a positive influence by both keeping important issues on the table as well as providing technical value-added during the review of proposed new legislation. This was done through the participation of its regular staff as well as through a PHRD grant approved to support the preparation of FIAL III and FIAL IV.

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5.2 Factors generally subject to government control:The Government was fully committed to the FIAL reform agenda and attempted to do all within its grasp to push the reforms forward, often coming up with a “Plan B” when a particular process would stall due to an external actor. The Government also assigned a highly qualified technical team to monitor the reform process and carry out frequent interactions with the Bank to resolve technical issues. From this point of view, the government generally ensured that the factors under its control were positive influences on the momentum of the FIAL program.

However, there was a change in the relative weight of fiscal and institutional reforms as part of the government’s overall agenda towards the middle of the Uribe administration. Initiatives such as the amendment to allow presidential reelection and the bill dealing with the demobilization of illegal armed groups took up much of the political space. It must be noted, however, that a constitutional amendment to reform the pensions system, which was not part of the FIAL program, was passed in 2005.

5.3 Factors generally subject to implementing agency control:As a DPL, FIAL did not have an implementing agency per-se. The reforms dealing with tax reform and administration were led by the Directorate of Taxes and Customs (DIAN), those with macro-fiscal and budgetary issues by the Ministry of Finance, and those related to institutional reforms by the National Planning Department. All of these entities provided solid support to the reform process.

The component of incentives for efficiency gains, however, did suffer from insufficient follow-up at the technical level. The performance contracts with ICBF and SENA were meant to be studied, validated, and replicated elsewhere, but the process did not achieve its final stage.

5.4 Costs and financing:The FIAL Program was originally envisioned in the 2002-2006 CAS as four loans totaling $900 million. The first loan for $300 million and the second loan for $150 million became effective on March and November 2003, respectively. The third loan originally envisaged for $150 million was approved in March 2005 for $100 million and became effective on April 26, 2005. Following the third loan which brought cumulative disbursements under the program to a total of $550 million, the Government and the Bank agreed to suspend the program.

The “Management of the Public Sector Reform Process” component that was being supported by a US$ 790,000 PHRD Grant, was suspended in tandem with the decision to terminate the FIAL program. At the time of the PHRD cancellation, US$ 280,000 had been disbursed.

6. Sustainability

6.1 Rationale for sustainability rating:The sustainability of tax policy, tax administration, and fiscal responsibility reforms is highly likely. All have been established through an adequate mix of legal reforms and institutional strengthening efforts that have already stood the test of time and shown good results. The institutions which are in charge of their implementation (MHCP and DIAN) have shown a high degree of commitment and have established the proper institutional setting for their sustainability. The policy environment is ideal in the sense that they are key elements of the fiscal adjustment process that is at the forefront of the government’s agenda.

The sustainability of the asset management and legal defense of the State reforms is likely. New teams of highly skilled professionals have entered DNP and the Ministry of Interior and Justice to manage these relatively new areas in public administration. The legal frameworks have been adjusted accordingly, and both entities have assigned an adequate level of budgetary resources to ensure their future operation. The

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policy environment is encouraging given the drive to reduce contingent liabilities and improve efficiency in the use of public resources. Reforms to the royalty management framework are also considered likely as Law 715 has been tried and tested, and the incorporation of the Royalty Fund into DNP increases the possibility of their use being fully aligned with the government’s objectives.

Sustainability of reforms in the areas of budget reform and management contracts is highly unlikely. There is no real budget reform to speak of given the failure of the associated constitutional and legal reforms, and the improvements that have been observed in terms of revised classifications and more precise budget estimates are not necessarily sustainable. Finally, the attempt at implementing contracts as a mechanism for performance management has not been successful. Although the specific cases of ICBF and SENA have provided positive results, the scheme has not been adopted by DNP and is not being considered among the options for implementing government-wide results-based management in the future.

6.2 Transition arrangement to regular operations:Not applicable.

7. Bank and Borrower Performance

Bank7.1 Lending:Bank lending performance is rated Satisfactory. The design of the first loan, and hence the overall program, was carried out according to good practice, including a strong linkage with the country’s own public sector reform agenda and a substantial body of analytical work (including existing work, the Bank’s policy notes, and specially commissioned papers from leading specialists). The initial Bank team was structured under the seasoned co-task management of a lead public sector specialist and a lead economist and included staff and consultants with diverse specialties. Senior Bank officials, including the Country Director and a Sector Director, met with the highest government officials to review and refine the policy package. Project design, although ambitious, was proven adequate given the negligible changes that the program underwent through the third loan. Moreover, had two key pieces of legislation been approved as expected, it would have likely moved ahead unchanged through the fourth loan with very high ratings.

The Bank’s lending performance for the second and third loans was equally Satisfactory. The Bank based a senior public sector specialist as task manager in Colombia, making continued program preparation an ongoing and well articulated exercise with the counterparts. The task team made the necessary adjustments in the program as required by country circumstances, but was careful not to deviate from the substance of the development objectives. As noted by peer reviewers, Program Documents have been clear, thorough, and objective in presenting the progress of the program. The Bank appropriately reduced the size of the third FIAL and suspended preparation of a fourth operation to reflect the changing circumstances, On balance, however, the Bank’s support for a committed reformist government has helped achieve key results on the ground in tax collection, defense of the state, asset management, and overall fiscal responsibility. The remaining agenda, whose partial failures were due to factors largely outside the government’s control, on public expenditure and procurement will hopefully be overcome, through continued focus on these key issues which have been illuminated with the help of the FIAL program.

7.2 Supervision:Bank supervision performance is rated Highly Satisfactory. The FIAL program supported a wide and complex process of reforms that included long and short-term objectives and goals, and a diversity of issues to be addressed simultaneously. Many of these were critical for the success of the whole reform process. In addition, the reform process was developed within a highly politicized environment affecting many of the reform processes and especially those tied to legal reforms. All of these elements constituted substantial

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challenges to program supervision. The Bank team capably followed, understood and assessed the reform processes in all their aspects. It was also able to advise on international best practices and to coordinate with government officers measures to ensure the sustainability of reforms.

Overall, the Bank was an active participant and an effective technical facilitator during all of the program’s stages. The fact that the task manager was based in Colombia helped make the policy dialogue easier and well articulated with other elements, such as the MAFP II technical assistance loan. The Bank has also approved two grants to support the program (a PHRD grant for the preparation of FIAL III and IV, and an IDF grant for the modernization of asset management).

7.3 Overall Bank performance:Overall Bank performance is rated Satisfactory.

Borrower7.4 Preparation:Borrower participation in program preparation is considered Satisfactory.

Initial program preparation benefited from a constant and productive dialogue with high-profile members of the incoming Uribe administration, including the Minister of Finance and Public Credit and the Director of the National Planning Department. Project preparation was placed directly under the Vice-minister of Finance and the Deputy Director of DNP, who in turn involved the Director of the Public Sector Modernization Program for all areas related to institutional reform. Additionally, two high-caliber professionals were assigned by MHCP and DNP to serve as full-time coordinator/facilitators for all phases of project preparation and implementation. Given the fact that the program responded directly to the incoming government’s reform agenda, it was assigned a high level of priority by the Government and enjoyed a considerable level of client ownership and commitment.

Borrower participation in the preparation of the second and third operations was understandably not as intensive as for the first loan, but still benefited from the participation of the Vice-Minister of Finance and the Deputy Director of the National Planning Department. Technical teams became heavily involved though, in particular the DNP’s Department of Public Policy Evaluation, who took the leadership in monitoring and evaluating the program’s progress, therefore providing feedback to the design of the second and third loans.

7.5 Government implementation performance:Government implementation performance is rated as Satisfactory.

Although program implementation did not go as originally envisioned and was therefore halted after the third loan, responsibility should not be fully assigned to the Government. The failure of the Constitutional amendment attempt, the Referendum, and the proposals to amend the Organic Budget Code and the Procurement Law were mostly due to external factors. Authorities showed a consistent and unwavering commitment to implement these reforms and often came up with viable alternatives when they failed. Clearly, the workings of a complex democracy like Colombia, with abundant checks and balances, will not always produce all originally envisioned reform outcomes.

However, several people interviewed for this report consider that the negotiations with Congress could have been handled more effectively. For example, the procurement bill was initially given an “urgent” label when submitted to Congress, meaning that it had to be discussed and voted on under a fast-track process. This label was removed by the Government itself before it was approved, to make way for other legislation

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that became of higher priority. Despite arguments in favor of the big-picture validity of this particular action, the reform program did suffer a setback due to this.

7.6 Implementing Agency:Implementing Agency performance is rated Satisfactory.

All agencies involved (MHCP, DNP, DIAN, Ministry of Interior and Justice) provided top-notch technical teams to support program implementation, developed sound monitoring and evaluation mechanisms, and actively sought policy dialogue with and advice from Bank experts.

7.7 Overall Borrower performance:The Borrower performance was Satisfactory.

8. Lessons Learned

The initial program design was carried out before the new OP8.60 was approved, so it did not benefit from many of the updated guidelines and good practices that current DPL operations build upon. Given this fact and the experiences accumulated through program implementation, the following lessons have been learned:

A program with a high number of components faces particular risks. The FIAL program had a ltotal of 11 components in 4 broad groupings. Although the elements of FIAL do “make sense” together, the sheer breadth of topics, each with a specific reform plan, made the program particularly risky. The risks arise from several fronts: (i) the failure of a single component places the entire program at risk, since the assumption is that the program is a coherent “whole” that will lose integrity if parts are removed; (ii) transaction costs for the Bank can become unsustainably high, due to the need to deal with multiple implementing agencies, retain multi-sector competency in the supervising team, and achieve enough analytical depth in each of the sectors; and (iii) as program implementation moves along, it is easy for an observer to lose the grasp of the overall program’s coherence or raison d'être. In the case of FIAL, this happened as it was often considered to be a fiscal adjustment operation and therefore subject to different standards.

The number of policy actions should be kept reasonable. Related to the previous point, but lregardless of the conceptual breadth of the program, the number of disbursement conditions for each loan should be kept to 10 or below. High numbers of policy actions increase the risk of the program, add to transaction costs, and often do not add substance. A focus on results should be attempted. In the case of FIAL, that was done in the tax administration component, where the initial focus on a large set of specific actions (developing taxpayer registries, carrying out a particular number of audits, improving information quality, and more) was substituted later on by two results indicators (evasion and efficiency).

If possible, the passage of laws should be avoided in the policy matrix. This is certainly difficult, las many reforms depend upon the passage of laws by Congress. However, a careful assessment of the political economy of reforms needs to be made during program design to gauge the probability of bills being successfully passed by Congress. In cases where the assessment indicates a relatively low probability, the scope of the reform program should be narrowed to include only those elements under the Executive Branch’s control.

A coherent and comprehensive package of technical assistance needs to accompany the reform lprogram. FIAL benefited considerably from several sources of technical assistance, most notably the

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Bank-funded MAFP II loan, which supported reforms in tax administration, budgeting, procurement, and overall reform management. An IDF grant was approved for asset management, as was a PHRD grant to support program preparation. Other agencies, such as the IDB, also provided support to the public sector modernization program. Without this TA support, results would have not been satisfactory in certain investment-heavy components, such as tax administration.

Monitoring and evaluation arrangements must be ready up-front. Programs often include the ldevelopment of baseline indicators and monitoring arrangements during implementation. In the case of FIAL, work on a baseline took place after the program began and did not accurately capture the reality before the program began to have an effect. It is advisable for M&E arrangements, including baseline indicators, data sources, periodicity of evaluations, and impact hypotheses, to be fully defined or operational before program initiation.

Task management from the field adds significant value. The case of FIAL, as well as other lcomplex, multi-sector DPL’s that have their task managers in the field, demonstrates that close and constant interaction with the client improves the probability of a successful outcome. The country knowledge that resident TTL’s have adds value to all phases of the project cycle, and interaction with other donors that have related activities in the country is significantly facilitated.

9. Partner Comments

(a) Borrower/implementing agency:

Ministry of Finance and Public Credit Republic of Colombia

National Planning Department

PROGRAMMATIC FISCAL AND INSTITUTIONAL STRUCTURALADJUSTMENT LOAN III ( FIALIII)

IMPLEMENTATION COMPLETION REPORT(ICR)

DECEMBER 2005

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Introduction

The following document presents the assessment of the Government of Colombia of the results obtained with support of the three World Bank-financed Fiscal and Institutional Structural Adjustment Loans, which totaled US$550 million and ran between February 2003 and March 2005. Upon its initial design in late 2002, the FIAL program was structured into four loans totaling up to US$900 million; however, after the approval of the FIAL III loan, the Government agreed with the World Bank to suspend the program at that stage, given the difficulties in obtaining Congressional approval of two important pieces of legislation.

Overall, the Government of Colombia considers that the FIAL program was well inserted within the administration’s overall reform agenda. It supported several key reform initiatives led by the National Planning Department and the Ministry of Finance and Public Credit, producing important results in public sector modernization and fiscal management. Given its priority, the Government of Colombia assigned a highly qualified team of professionals to promote and monitor the reform process and serve as direct liaison to the World Bank team. This document was prepared by this team of professionals and presents the main results by each area of influence of the FIAL program.

Even though the program ended prematurely, the Government of Colombia considers that progress in the reform agenda supported by this program has been satisfactory. Major improvements in tax revenue have been achieved, both through tax reforms as well as improvements in tax administration. A new fiscal responsibility framework is in place, which gives us added guarantees of fiscal sustainability in the medium and long term. Significant institutional improvements have been made that should make public expenditure more efficient in the medium term, which are being implemented through the Public Administration Renovation Program (PRAP); these include a new asset management framework, major improvements to the way the State defends itself in judicial processes, modernization of the tools for monitoring and evaluation, and others.

Factors outside the Government’s control – in particular the non-approval of the Organic Budget Code and reforms to the Procurement Law by Congress – did constitute setbacks to the reform agenda. However, the Government remains committed to these and other reforms and is finding ways to take them as far as possible within the limitations of the current legal framework or continuing with attempts at legal reform. Important improvements to the budgeting system are being carried out through executive decree, and a bill to reform the procurement system has been re-submitted to Congress.

The Government considers that the partnership with the World Bank in this endeavor has been fruitful and has enriched the policy content of the reform process. In addition, we have benefited from several sources of technical assistance to implement the activities, including the Bank-funded MAFP II loan, PHRD and IDF grants, and operations with the Inter-American Development Bank and other lenders. This package of adjustment and investment lending has helped materialize the results we see today, and should be considered a good practice for providing support to countries undertaking reform programs such as this.

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1. Management of the Reform Process

Policy Objective: Support a Coherent and Comprehensive Reform Implementation

CONPES document 3248 of 2002 gathered the strategies that have been in application within the framework from the renovation of the public administration. It also defined the basic guidelines for action in other aspects of involvement of the PRAP. This document has become the cornerstone of the development of policy documents for the cross-sectional strategies outlined there, as well as the actions of the Program.

The application of reforms in the structure of the State is a natural and on going process, government after government. All the reforms, like the ones supported by the PRAP, have two noticeable components: the political coordination and the technical coordination of each intervention.

The political coordination of the PRAP stems from the Presidency of the Republic, which delegates in the DNP the responsibility to carry out the actions to materialize the proposed objectives. In addition, the Ministry of Finance and the DAFP are members of the directive committee of the PRAP. This way we can ensure that the objective of the Program is adequate.

Having reviewed the results expected at the end of the Program, it is possible to review some of the advances that the PRAP in its role of coordinator and guarantor of the conceptual and procedural coherence of the different strategies that compose it. In the matter of institutional strengthening and focalization of goods and services the PRAP advances from beginning of the present Government, the so-called vertical reforms, which have undergone its first phase with two important phases: in the first place, the implementation of immediate actions in Ministries and Administrative Departments within the framework of the extraordinary faculties given to the President and whose objective was to obtain a tangible improvement in the quality and quantity of the goods and services in charge of organizations that have social and fiscal impact, and simultaneously to break the unsustainable incremental tendency of operational expenses.

Secondly, until the 31 of January of 2004, within the framework of the Plan of Social Protection, the institutional redesign of the remaining organizations was undertaken, with the main objectives of to rethink the role of the State by sector, redesign internal organizations and institutional networks, rationalize personnel plants and to reduce the expenses of operation, looking for to generate savings to reassign resources in the provision of goods and services of the State.

At the moment the PRAP is executing the second phase of the vertical reforms of the State, which implies the intervention of a certain number of high-priority organizations by four-year period, as is defined in CONPES Document 3248 of 2003. The main target of this phase is to carry out managerial reforms with a medium and long term economic vision, under a concept of marginal productivity and balance of cost benefit.

As a complement to the actions of restructuring of the State, this Administration has designed and launched 12 reforms to make public sector management more efficient. These are called

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“cross-sectional reforms”. Following are the main results of some of these reforms. As part of the reform of public employment, the approval of the Law 909 of 2004 stands out. This law sets out regulations for public employment, civil service and the public sector management. The approval of this Law lays down an integral policy on public employment, geared to guarantee the entry, permanence and the retirement from employment exclusively based on merit, and introduces new elements of management of the human resource, such as temporary employment, the functional schemes of employment, the strategic plans for human resources and for the first time in the Colombian legal framework, the mandatory selection and evaluation of public managers based solely on technical grounds.

In exercise of the extraordinary faculties granted by Congress in said Law, the Executive issued 7 decrees with strength of law, with which he regulated important aspects for the operation of civil service, among which stand out Decree-Law 770 of 2005 (general system of functions and requirements for the national level) in which criteria are incorporated to identify labor capabilities so that the access to the public service goes beyond the mere demonstration of academic titles; and Decree-Law 785 of 2005 (system of job nomenclature, classification and the functions and general requirements for the use of sub-national governments), through which the nomenclature of the employment of these organizations is purified and simplified without implying an increase in the wage bill.

With the expedition of these Decree-Laws, the National Commission of the Civil Service has been enabled to summon all the vacant or interim posts at the national and sub-national level, and begin a process in which all the positions of the State are filled based exclusively on merit.

To optimize investment and to modernize the information systems of the State, the Inter-sector Commission of Policies and Management of the Information - Coinfo- was created through Decree 3816 of 2003. It is an instance that seeks to articulate the initiatives in electronic government of the different sectors, and to generate economies of scale in the development and administration of the technologies of public information. Within the framework of this Commission, the guidelines of policy in the matter of standards of information, interoperability and sector maps of information have been defined; in 2004, 101 projects of information systems valued at over one billion pesos were evaluated.

These initiatives have generated an improvement in the international scope. For example, in “government availability on line”, which refers to the construction of a model for the measurement of services of the State in line with an index that assesses Internet sites, telecommunications infrastructure and the capacities of the human resource, the country moved up 13 places in the world-wide ranking of the UN (191 countries), jumping from place 57 in 2003 to 44 in 2004, being sixth in South and Central America.

As far as “electronic participation” (e-Participation), which refers to the involvement of citizens with electronic services, Colombia is in the “Top 10” among the 191 member countries of the UN, ascending 46 positions with respect to the 2003. The frequency in their consultations and the access to the electronic services expanded e-participation.

On the other hand, within the framework of the cross-sectional reform to regulatory and control entities, particularly in the case of the Commissions of Regulation, clear procedures have been implemented to guarantee the regulatory discipline and the accountability to the President. These measures were adopted by the executive by means of Decree 2696 of 2004, by which

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the conditions for public debate of regulatory resolutions of general character are established, as well as a special procedure for the tariff changes; in the case of the latter, regional public consultations were designed in which all interested parties will be able to participate (regulated entities and users).

The same decree defines the minimum expected content for the Commissions of Regulation to render accounts of their management during the previous period and an impact evaluation of regulation in sector dynamics every third year.

As far as the super-intendances, regarding public employment, decree 775 of 2005 and regulatory decree 2929 of 2005 were issued, through which a specific system of civil service for super-intendances of the national public administration is implemented. In this system the entrance by merit is established, guaranteeing quality human resource, procedures for the evaluation of the public servants with the institutional objectives as a frame of reference and, in addition, incentive systems are being considered to promote institutional initiative in proper management of the human resource.

Progress has also been achieved in the previous stages of consolidation of the institutional reforms for the Super-intendances; this has been the case of Superbancaria, Supervalores, and Supersalud.

Finally, a proposed bill of law is in discussion by different administrative sectors to establish a common legal regime for all the super-intendances, which would manage to integrate and to consolidate the model of inspection, monitoring and control of the State in the economy.

As resulting from CONPES 3248, it is established that a high-priority objective is to have updated information on the results and possible impacts of the interventions, for which a scheme of evaluation of the reform is being implemented, which mainly looks to determine the changes in productivity of the organizations that are part by the program, as well as the effectiveness of the reforms themselves in reaching the goals and generating end products for the State and society. Some of the impacts are expected to be seen in the medium to long term.

The main approach given to this scheme of evaluations is the construction of baselines that allow the measurement, on the one hand, of the performance of the actions carried out in pursuit of the stated objectives; and on the other, to identify the changes in those strategic aspects that have been modified by the reform of the State.

The actions carried out in this area have enabled the provision of tools of monitoring and evaluation to the PRAP which contribute to a better execution of the reforms and to the monitoring over time of the performance of the objectives and plans. These systems of monitoring and evaluation are made up, in general, by indicators related to the different levels of the reform: i) general mission, II) specific objectives, III) plans of action, IV) results.

As resulting from these evaluations, the PRAP will be able to take concrete and focused actions in the reforms of Legal Defense and Public Procurement. Soon the evaluation will be expanded to include a group of institutions involved in vertical reforms, as well as the reform of Management of Assets, Public Service reform, and the E-Government reform.

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The Evaluation of the reform of the Legal Defense of the State

This evaluation shows a base line composed of a set of 28 indicators related with all levels of the reform: general and specific objectives, action plans, and short and long term results. Both the base line and the preliminary result shown for this evaluation have been validated for the DNP and the Ministry of Interior and Justice (MIJ). From now on it is possible to monitoring the progress of the reform and take actions in those aspects in witch the results are poor, as well as bringing more effort in those aspect in witch the reform is strong an its showing a potential of good impact on the legal defense of the State.

Main conclusions and opportunities of the evaluation

Ø Is important to discriminate short and long term results: due to the time between the moment in which the incident occurs and the final verdict of the judge. However the action plans are fundamentals in the short term to get the reduction of the claims and pays for sentences and conciliations that is get only in the long term. Ø The trend in payments for legal claims and conciliations is still increasing: the evaluation insists in not use absolute criteria’s based only in the pays in the short term for the reasons exposed above Ø The increasing trend of the contingent passive could indicate wrongly that the reform is failing in the short termØ There is judicial dispersion among sector of the public administration as well as among entities inside specific sectors: there are sector and entities that on average show different levels of success on their legal defense. It is important to include these aspect on the implementation of the management modelsØ It’s required urgently a systematic plan of implementation in witch the MIJ gather the length and consequences of the activities needed to reach the goals in the agreed termsØ It is required a high degree of articulation between the MIJ and the Ministry of Finance

Finally the DNP is preparing a publications of the methodology used for these evaluations as well of the result. The base line of 28 indicator each one associated with an objective and an action plan, and presenting the most actual data of the reform is presented below:

Indicator name Unit of measure-

ment

Source Base line First Update

SecondUpdate

July 2005Update

I1 Value paid for sentences as % of public internal debt

% Budget Directorate - Division of Budgetary Consolidation and

CONFIS

0,176% 0,220% 0,220% 0,220%

I2 Growth of the payments of S&C with respect to the growth of the internal public debt of the central sector

% Budget Directorate - Division of Budgetary Consolidation and

CONFIS

1,494% 1,252% 1,252% 1,252%

I3 Value paid by S&C Million pesos

Budget Directorate - Division of Budgetary Consolidation

120,563.6 162,956.8 162,956.8 162,956.8

I4 Costs of delayed payments % Budget Directorate - Division of Budgetary Consolidation and

MIJ

ND ND ND ND

I5 Savings in lost cases at sentencing

% Information system of the MIJ ND ND ND ND

I6 Savings through conciliation of cases

% Information system of the MIJ ND ND ND ND

I7 Savings through cases won Million pesos

Information system of the MIJ ND ND ND ND

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I8 Precision of the estimation of contingencies of the MFMP regarding the obligations by S&C sentences

% Information system of MIJ and MFMP

ND ND ND ND

I9 Reliability of the budget estimates

% Budget Directorate - Division of Budgetary Consolidation and MIJ

ND ND ND ND

I10 Coordination budgeting and estimation contingencies

% Budget Directorate - Division of Budgetary Consolidation and

Direction of Public Credit, Division of Contingent Liabilities

24,6% 24,6% 24,6% 24,6%

I11 Correspondence of the base with the budget

% Budget Directorate - Division of Budgetary Consolidation and

MIJ

ND ND ND ND

I12 Number of labor demands generated by sector

Amount Information system of the MIJ In an attached

document

In an attached

document

In an attached

document

In an attach

ed document

I13 Percentage of cases won by labor demands by sector

% Information system of the MIJ In an attached

document

In an attached

document

In an attached

document

In an attach

ed document

I14 Number of contractual demands generated by sector

Amount Information system of the MIJ In an attached

document

In an attached

document

In an attached

document

In an attached

documentI15 Percentage of cases gained by

contractual demands by sector% Information system of the MIJ In an

attached document

In an attached

document

In an attached

document

In an attach

ed document

I16 Number of demands by extra-contractual responsibility generated by sector

Amount Information system of the MIJ In an attached

document

In an attached

document

In an attached

document

In an attached

document

I17 Percentage of gained cases demands by extra-contractual responsibility by sector

% Information system of the MIJ In an attached

document

In an attached

document

In an attached

document

In an attach

ed document

I18 Coverage of the MIJ database % DDJ, MIJ 83,18% 83,18% 83,18% 83,18%

I19 Coverage of the MIJ database % MIJ 70.8 70.8 70.8 70.8

I20 Level of jurisprudence systematization

Amount DDJ, MIJ 1 2 2 2

I21 Level of systematization of norms

Amount PRAP 21000 21000 39219 39219

I22 Level of application of medium an long term strategies in critical areas (labor, extra-contractual responsibility and hiring)

Amount DDJ MIJ 0 1 1 1

I23 Issuance of bulletins or administrative acts on the GJP

Amount MIJ 1 1 1 1

I24 Coverage of the training plan Amount MIJ 0 0 0 0I25 Average frequency of training

in organizationsAmount The Reform of the GJP, training

component0 0 0 0

I26 Deviation of the frequency of training

Amount The Reform of the GJP, training component

0 0 0 0

I27 Quality of the training plan Amount MIJ 0 0 0 0I28 Coverage of incentives

professional bodiesAmount MIJ 0 0 0 0

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It is important to say that due to the low degree of implementation of some of the action plans of the reform there are indicators without data at all. Nevertheless the DNP already counts with the route to obtain the data when ready.

The Evaluation of the Public Procurement reform

The objective of this evaluation was to estimate which of the characteristics of the procedures of procurement explain the efficiency on the final acquisitions of the public sector in Colombia. The study center its focus on the impact on:

Ø The difference between the prices of acquisition compared with the prices on the marketØ The relation between the differences on theses prices and the procedures used in the acquisition process.

To obtain these evaluation objectives the study has the following phases:

1. Identification and clarification of the typical procedures of the public procurement: based on the laws in force2. Data collection: due to the size of the public procurement the study takes data only of goods and service considered homogeneous or uniform. The evaluation design a survey based on sample extracted from the system of the Contraloría General to obtain the data required to the analysis taking into account the lack of information of the state systems 3. Definition of the reference prices and econometric analysis: first the evaluation make inquires on the market prices for the goods and services identified on the sample. Then the evaluation makes the econometric analysis to find the procedures that are impacting the final efficiencies of the procurements. 4. Recommendations and conclusions based on the analysis mentioned above

The evaluation of the procurement reform is an effort to monitoring the efficiency of the public procurement of homogenous goods and service. Nevertheless is clear for the DNP that the methodology, the sample and the survey are susceptible of get better. As well as the evaluation of the legal defense the DNP is preparing a document to be published soon with both, the methodology used and the results founded.

The impact of these measures is vital for the Government and very important for the State in so far as it begins to consolidate information tools and technical coordination of its actions of institutional change, and considering that until now there were no baselines or monitoring and evaluation indicators.

Other impacts:

- In order to consolidate a culture focused on management by results in the Colombian public administration, it is necessary to establish mechanisms that allow for the expansion and permanent development of capacities of monitoring and evaluation (M&E). For this, it is necessary to train government officials and academics in the design and use of different types from tools and methodologies of M&E. Sinergia organized the international seminar “Why evaluate public expenditure? International experiences and the Colombian case”, (September 2004), with the presence of international experts and members of the government, academy and civil society. This effort will be repeated year after year looking for the consolidation of

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capacities of M&E in the Colombian State.

- Regarding the introduction and modernization of the managerial instruments of the State of monitoring and evaluation of public management, we emphasize: i) introduction of mechanisms of programmatic classification of the investment budget and budgeting by results with the deployment of two pilots in capital cities (Pasto and Medellín), II) tool for programming and management of presidential goals -SIGOB- with which the citizen is able to make permanent monitoring and in real time to the results of the government, III) increase of the percentage of the investment budget that is evaluated, from 4,13% in 2002 to 17.8% in 2005 using minimum standards for the development of impact evaluations.

- Finally and as indirect impact of the FIAL, a line of work of evaluations of institutional developments in the Colombian State was developed within Sinergia. This area of Sinergia has been responsible for the elaboration of baselines for the reforms and of documents that standardize the methodologies and practices of evaluation of institutional development.

The integral reform of evaluation and management by results - of which these focused evaluations are part – took form with CONPES 3294 of June 2004, which established three objectives: (i) to contribute to the increase in efficiency and transparency in the process of allocation of resources; (II) to improve the impact of the policies, programs and public institutions; and (III) to promote the accountability of the public administration by strengthening the role of civil society. These objectives, altogether, contribute to improve the impact and efficiency of investment, increase transparency and orient public management towards results.

The National System of Evaluation was structured around three complementary components: i) Monitoring of Results, II) Focused Evaluations; and III) Dissemination of Results for accountability.

In order to establish a strong linkage between the results and the allocation of resources, the DNP implemented the programmatic classifications of the investment budgets of 2003, 2004 and 2005. Also, a budget of investment by results for use 2005 prepared jointly with the ministries and the agencies, promoting the integration of the National System of Evaluation to the budgetary process. As part of the monitoring that the DNP makes of the progress of the National Development Plan, a report of results from the President to Congress was elaborated, which compiles the main advances of the Government and a description of the sources, distribution and execution of the resources of investment of the Nation in each one of the objectives of the National Development Plan.

For the Government, these reports fulfill two purposes. On the one hand, they make effective the exercise of accountability to Congress, other institutions and civil society, facilitating the exercise of their responsibilities to oversee the Executive. On the other, they realize the principles and practice of a results-oriented public sector management based upon the comparison of the initial conditions, goals and achievements obtained by the Administration.

For the elaboration of these reports, the DNP in coordination with the Presidency of the Republic has implemented the System of Programming and Management by Objectives and Results - Sigob – in 57 organizations and five presidential programs. This technological platform, main source of information of Sinergia, has modernized the processes of information harvesting and strengthened the monitoring and control tasks, being a tool within reach of the citizenship that serves as base for accountability processes.

- 41 -

Regarding focused evaluations of programs and policies, the most important result is the increase in 13,7 points of the annual investment budget that is evaluated. The increase was from 4.13% in 2002 to 17.8% in 2005, reaching a 77% of the goal for the presidential period . At the end of the four-year period it is expected that 23.9% of the total of the investment budget of the Nation will be evaluated.

Contributing to this result have been the impact evaluations of the Families, Employment and Youth in Action, Older Adult, and mixed corporations of farming investigation programs, as well as the evaluation of the Program of Renovation of the Public Administration - PRAP -, which seeks to evaluate the gains in the productivity of the entities that have taken part, and the achievements of the reforms to modernize the practices of public management (cross-sectional).

With the purpose of showing the results the evaluations and the monitoring efforts, as well as to enliven social control, the Department launched a transparency and accountability strategy. Through this strategy, channels of information have been institutionalized, allowing for the distribution of 25 virtual reports of evaluation and 21 publications to government officials, international organizations, Congress, private sector, academics and NGO’s. Additionally, an outreach pilot exercise was designed and implemented based on the results of the Plan of Social Reactivation through 82 community and public interest radio stations in different zones of the country.

2. Legal Defense of the State

Policy Objective: Improve the capacity of the State to reduce and respond to legal claims and diminish to their fiscal cost.

Another of the cross-sectional components of the PRAP is Public Legal Management, which faces serious difficulties stemming from the lack of planning, deficiencies in coordination, insufficient evaluation, unequal competition with the external actors and the inadequacy of studies and analysis of information.

These difficulties have been reflected in a model of management that is reactive, characterized by the concentration of the efforts in projects and short-term goals, focused on litigation, spread thin according to the demand, and supported in a barely qualified, unmotivated and unrecognized human resource. All this has led to Public Legal Management being curative instead of preventive, and vulnerable to corruption.

The deficiency in information and reliable diagnoses led to the recommendation by CONPES to define a series of stages that are being undertaken as an indispensable step to enable the State to define goals that allow it to improve their legal defense capabilities and contribute to reducing the fiscal impact of the outcomes. The same cannot be said regarding a reduction in the number of demands, objective that does not depend exclusively on the government’s activities and that does not indicate its efficiency in this field either.

The policy objective is and continues being very clear. Nevertheless, although the components of the program aim at the achievement of the objective, once its execution began it was detected that it was not only necessary to advance to the components indicated in the

- 42 -

CONPES, but also focus on attacking the root causes of the litigation damage, for example, inflation and the uncertainty over the legal framework, deficient analysis of information, studies and investigation, etc. In summary, although the Document CONPES was on the mark given the moment it was prepared and the deficient information available at the time, the objectives of the program have been redirected beyond quantifying the processes in which the Nation is involved and the contingent liabilities that these generate. A program of Integral Legal Management has been undertaken, by means of which all the components of the CONPES document will work through four fronts, this is, judicial defense, legal counseling, the production of regulations and public procurement. However, it is premature to reasonably define a priori the fiscal impacts, considering that specific diagnostic elements were absent at the beginning, which would facilitate a realistic estimate of the lawsuits and sentences, as well as the causes for State responsibility.

It must mentioned that the four elements that make up management - the legal counseling, production of regulations, procurement and the judicial defense - are disarticulated and are approached without suitable managerial tools. The adequate performance of the functions in this field is of paramount importance, not only because of the fiscal impact that can be caused by a deficient judicial defense that stems from inadequately prepared contracts, in challenged regulations or decisions made by mistaken legal advice, but also by the insecurity that it generates in the citizens.

Along these lines, the Administration has insisted on positioning the concept of “public legal management” and to approach it like a fundamental component of public management, therefore giving urgency to the design and adoption from a new model of management. This paradigm shift implies the need to articulate the traditional components of legal management; implement analysis, study and investigation and to apply modern managerial tools.

Against this background the government has worked over the last years, as more knowledge of the subject has been acquired. There is clear political will to confront it, the required regulatory framework has been established, the responsible entities have been empowered, there is greater coordination and those Programs and Projects that have been adopted have reported significant progress.

Regarding Legal Defense of the State, the project has the following objectives: to establish an integral policy that prevents patrimonial loss derived from anti-legal acts and to determine lines of action to optimize the defense of the interests of the State, through the design of prevention measures and the systemic restructuring, including institutional, human resources, normative and technological aspects.

Important advances have been reported in this front:

- Presidential Directive 02 of 2003 was issued: Order on alternative methods of conflict resolution between state entities. The intervention of the DDJN of the MIJ has allowed important savings by means of the public conciliation of conflicts between organizations. - CONPES 3250 document was issued: Lines of action for strengthening the Legal Defense of the Nation and for the valuation of contingent liabilities. - The Direction of Judicial Defense of the Nation of the Department of the Interior and of Justice has been well positioned and coordinates the litigious activities of the organizations of the APN, through the counselor’s, monitoring and directives. - By legal mandate, the Direction of Judicial Defense of the MIJ must coordinate the

- 43 -

judicial defense in the lawsuits against the Nation valued at over 2000 monthly minimum wages (763 million pesos).

The previous year the DDJN participated in the direction of more than 1,600 lawsuits, whose quantity added around 22 billion pesos as can be observed in the Graph that appears next.

- 44 -

Graph 2Conflicts greater to 2000 SMLMV

(30 most significant)

Source : Direction of Judicial Defense of the Nation , Ministry of Interior and Justice

- With the expedition of Presidential Directive 01 of 2004 which mandates reporting standards for litigious activity, the valuation of contingent liabilities and the adoption of the

- 45 -

Unique Format of Information, the DDJN has advanced a careful process of compilation and analysis of the information reported by the different organizations and has enabled the determination that the Nation faces nearly 77,000 lawsuits, of which it is the defendant in 65 thousand. The potential liability from these processes can add up to 100 billion pesos, detailed in the following graph.

Graph 3Potential Liability by Sector

(Million Pesos)

Source : Direction of Judicial Defense of the Nation , Ministry of Interior and Justice

The Project of Rationalization and Simplification of the Legal Framework, ordered through

- 46 -

Presidential Directive 1 of 2005, seeks the following objectives: the adoption of the policy and directives, promotion of legal security, elimination of duplicity and contradiction of norms generated by their continuous issuance without a previous analysis of normative coherence.

The project has several objectives; on the one hand, the elaboration of the normative inventory, which includes the identification of the laws and decrees; the inventory of the jurisprudence that affects the inventoried norms; the creation of sector-specific normative frameworks and the determination of their applicability; updating the Normative Unique System - SUIN, by means of the preparation of the Normative Unique Format - FUNOR and the preparation of unique, sector-specific and thematic regulatory decrees.

The normative inventory has been completed, and 39,219 emitted Official Gazettes in 118 years (from 1886 to December of 2004) have been analyzed. The polished information throws a total of 8,516 norms inventoried, released per decade, thus:

Table 1

Decades Number of inventoried Norms1886 to 1895 4491896 to 1905 4701906 to 1915 7161916 to 1925 9061926 to 1935 1.4221936 to 1945 1.6151946 to 1955 1.6061956 to 1965 1.3321966 to 1975 1.8361976 to 1985 2.3041986 to 1995 4.3961996 to 2004 3.79110 decades 20.843

Also, the inventory of jurisprudence moved ahead, from the sentences of the high Colombian courts (Supreme Court of Justice, Constitutional Court and Council of State) contained in the newspapers and official annals, as of 1992.

Table 2

Entity InventorySupreme Court of Justice and Advice of State

397 volumes of newspapers and annals

Constitutional court 12 years of jurisprudence On the other hand, and with the active participation of all the Sectors, the Normative Structure was designed and the Unique System of Normative Information - SUIN was developed, instrument of vital importance that will facilitate research by legal operators and public servants in general, as well as citizens, thereby enabling the open analysis of the relevance of the norm.

- 47 -

Finally, it must be mentioned that the product of greatest impact achieved through this Project will be the issuance of unique, sector-specific decrees, which will enable the reduction on the proliferation of regulations and the clarification of the current regulatory labyrinth.

Additionally, the development of the strategy has implied the generation of teamwork as well as a conscience in the administrative sectors over the importance of having a coherent and therefore reliable legal framework for the country.

As has been shown, important efforts have been made to combat the weaknesses of public legal management. Nevertheless, an integrated system is required which - under the guidance of efficient central, sector-specific and institutional instances of coordination, establishes policies that inform the labor of the legal operators in charge of the fronts of the GJP in the various public sector entities, provides useful criteria and expertise and follows up on this work. Along these lines, the “Models of Public Legal Management” project has begun, which will provide the design and implementation of models of legal management in its four fronts, legal counselor’s, regulatory production, procurement and judicial defense for the organizations in charge of the adoption of policies, evaluation and monitoring at national and sector-specific level and for all the implementing entities at the National Public Administration.

3. Public Procurement

Policy Objective: Ensure that government procurement is transparent and efficient.

In this component, the objectives were aligned with the recommendations made by the 2001 CPAR, which were in turn incorporated into CONPES document 3249 in 2003, as one of the main guidelines of public policy in the matter of procurement.

Given the various difficulties that arose in the agenda of discussion of the bill in Congress which prescribed the creation of the normative body, related to the need to give way to other high-priority initiatives such as the Constitutional reforms for re-election and pensions, the statutory law of electoral guarantees and the law of justice and peace among others, it became difficult to proceed and forced the search of other alternatives under the existing legal framework to create of a governing instance.

The guidelines that support the process of renovation of the Public Administration led by the present Government, and in particular, the process of reconstruction of the organizations that promotes the optimization of the functional structures of the organizations, went against the possibility of creating an independent normative body. In the understanding that procurement is a cross-sectional subject to the management of organizations, it was concluded that the best solution was that the governing instance had the character of an inter-sector commission for the coordination and superior direction of the policy in the matter of public procurement.

Thus, via Decree 3620 of 2004, a governing body for public procurement was created, with the responsibility to recommend decisions and guidelines to orient the procurement process and make it efficient and transparent.

The Government designated as members the Minister of Finance, the Director of the National Planning Department and a delegate from the President of the Republic; in addition it

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established that the role of technical secretariat would fall on the National Planning Department.

The Commission began its operation in the month of February 2005 and in carrying out its duties it has studied the desirability of legal amendments that are taking course at the moment in Congress, as well as of the decrees that have been issued during the present year.

In terms of designing instruments to make the procurement process more efficient, the Commission produced and distributed a Manual of Good Practices for Public Procurement Management, in which the main causes of potential liability have been defined and prevention mechanisms are described, based upon the existing knowledge of lawsuits against the State.

At the moment, it is working in the standardization of the bidding documents and terms of reference for procurement of supplies and works contract oversight.

In addition to the advances mentioned above, the following are important to mention as well: Support to the negotiating team of the Free Trade Agreement with the United States in the chapter of public procurement, Development of processes to standardize contractual documentation, , and costrucción of indicators to measure costs associated to the contractual processes.

4. Asset Management of the State

Policy Objective: Reduce losses and generate revenues through improved asset management

The objective of generating revenue and savings has been achieved in a 100% in line with the target established by the WB. Of the US$33 mm, that has been generated, 70% correspond to net income. As far as the elimination of opportunities for corruption, given the present regulatory framework, assets can only be sold at appraisal value, which is made by an external organization such as the Agustin Codazzi Geographic Institute, which is considered the ideal entity to carry this out with transparency and objectivity, value over which the sale has to be made, since the current regulatory framework (Procurement Law) does not allow the sale below this value.

The measures that have been accomplished have enabled the creation of a culture of management of assets and positioning of the program, which channels the necessary changes to the entities in the sale of assets.

The PROGA has established the institutional framework to give sustainability to the Program through the creation of an Inter-sector Commission of Management of Assets that guarantees and recommends the implementation of a series of policies formulated through its technical secretariat. This institutional framework has fostered a culture of efficiently managing assets efficiently and positioning the Program of Management of Assets, through its Technical Secretariat, as a coordinating unit of the normative aspects and of management of the public organizations of the central level. The institutional framework, which has trained and disseminated the Program as far as the as legal and commercial regulatory framework, has led to the generation of accumulated income and savings of up to US$33 million between 2003

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and 2005.

The policies and measures implemented in this first stage have always been supported through decrees that make them binding and sustainable in the long term, and the concepts issued by the PROGA for an efficient management have a strong legal support which has given PROGA and DNP credibility as a collaborator through its legal unit.

Additionally to what has been mentioned, the progress in PROGA has been the following:

The policy for the administration of assets, which regulates the processes of inventory, titling, acquisition, allocation, and efficient use of government assets. The efficient management of real estate by the entities of the central level of the State, has led to the generation of savings and income in the following ways:

Table 3

CONCEPTO MONTO PORCENTAJEVentas 44.138.565.403 56,31%

Ahorros por Transferencia bienes entre Entidades del Estado

841.465.205 1,07%Transferencias Programas Plan Nacioan de DesarrolloND 4.095.226.244 5,22%Rentas 29.033.889.679 37,04%

Ahorro por transferenia bienes inmuebles a Entidades Territoriales

281.966.945 0,36%TOTAL 78.391.113.475 100,00%

CUADRO RESUMEN BIENES INMUEBLES NIVEL CENTRAL

- 50 -

Graph 4.Income savings Program of Management of Assets

($ thousands of million pesos)

2535

175

48,560

0 0

2.396

6.000

2.000

0

20

40

60

80

100

120

140

160

180

200

Meta 2003 Avance 2003 Avance 2004 Meta Acum.2003-04

Meta Acum.2003-06

0

1000

2000

3000

4000

5000

6000

7000

Ahorros Inventarios

Through asset management, income and savings have taken place that add to $78.4 billion.Source: DNP Program of Renovation of the Public Administration

One of the most significant accomplishments in this area has been the generation, between January of 2003 and December of 2004, of $44 billion pesos originating from the sale of 117 buildings in 16 auctions, the sale by public bidding of 8 buildings, and exchanges of 26 buildings. Also, savings by $5.2 billion pesos by concept of reduced expenses of administration and maintenance of these assets and rents by $29 billion pesos have been generated. These results fulfill the goal of generation of income and/or savings by 130%. The generation of these income and/or savings has not required an investment on behalf of the Program of Management of Assets; rather, it has been the dissemination of good practices by PROGA to the organizations to manage idle real estate.

Additionally, the inventory of 2,396 real estate assets was made, achieving by 119% the goal fixed for period 2003-04, which was to register 2,000 buildings in the Information system of Management of Assets (graph 10).

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For achieving the objective of completing the inventories, an amount of $400 million pesos was invested, which have been covered with the results of the above-mentioned sales.

5. Tax Administration

Policy Objective: increase tax revenues, strengthen tax equity; reduce tax expenditure and opportunities for corruption.

The executive branch attempted, through various initiatives in 2002, 2003 and 2004, to broaden the VAT base to expand its coverage and reduce the distortions that are generated by the excluded goods and services. However, in 2002, after being approved by Congress, the inclusion in the VAT base of all the excluded and exempt goods and services at a 2% rate was declared unconstitutional by the Constitutional Court.

In 2003, a tax reform proposal of the government was markedly modified by Congress. The initial proposal had an important component in the matter of IVA that wound up being replaced by measures related to a wealth tax and an additional point in the financial transactions tax. In 2004 the government presented yet another initiative to improve the national tax system but Congress did not discuss it and the executive removed it from consideration.

In any case, the results obtained during the life of the program show that important objectives have been achieved.

Firstly, tax revenues, which were 11% of GDP in 2000 and 13.5% in 2002, reached 14.7% in 2004, as shown in Table 8.

This remarkable growth is attributable, on the one hand, to the effects of tax reforms approved by Congress during these years and, on the other, to improvements in the national tax administration. During 2000-2004 tax reforms generated additional revenue of nearly 3.3% of GDP, whereas the better performance of the tax administration contributed 0.4% of GDP.

One of the indicators traditionally used to evaluate the efficiency of the tax administrations (cost of collection) also shows a significant improvement, specially in 2004. In 2003 the administrative cost to collect $1000 was $10.2 and this relation diminished to $9.5 in 2004, fulfilling the expectations of the program.

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Cuadro 8

Concepto 2000 2001 2002 2003 2004

Total Recaudo Bruto 19.295.107 24.869.759 27.553.395 32.302.529 37.864.439Ley 633 de 2000 0 3.658.040 3.460.000 3.535.884 4.300.537

Impuesto Seguridad Democrática 0 0 1.250.721 1.228.795 31.101Ley 788 de 2002 0 0 0 1.633.233 2.120.949

Ley 863 de 2003 0 0 0 0 1.958.815Efecto Acumulado Reformas 0 3.658.040 4.710.721 6.397.912 8.411.403Total Recaudo sin Reformas 19.295.107 21.211.718 22.842.674 25.904.617 29.453.036

Total Recaudo Bruto 11,0% 13,2% 13,5% 14,0% 14,7%Ley 633 de 2000 0,0% 1,94% 1,7% 1,5% 1,67%

Impuesto Seguridad Democrática 0,6% 0,5%Ley 788 de 2002 0,7% 0,8%

Ley 863 de 2003 0,8%

Efecto Acumulado Reformas 0,0% 1,9% 2,3% 2,8% 3,3%

Total Recaudo sin Reformas 11,0% 11,2% 11,2% 11,2% 11,4%Mejoras Aculadas en Administración Tributaria 0,0% 0,2% 0,1% 0,2% 0,4%Elaboró: Oficina de Estudios Económicos DIAN

Estimación de la recaudación sin efectos de reformas tributariasIndicador de la gestión de la administración tributaria

Cifras en Millones de pesos

Cifras como proporción del PIB

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Indicadores de Desempeño de la Administración TributariaPosibles Compromisos ante Proyecto FIAL Banco Mundial

Miles de millones de pesos

Concepto Años 2003 2004 2005

Presupuesto DIAN (1) 330 360 363

Recaudación Bruta Total (2) 32.303 37.864 40.392

Costo para recaudar $1.000* 10,2 9,5 9,0

Recaudación Sin Últimas Reformas (3) 32.200 36.215 39.086

Costo para recaudar $1.000 sin reformas* 10,3 9,9 9,3

*: Valores expresados en pesos(1): Información suministrada por la Subsecretaría Financiera de la DIAN(2): En 2005 se incluyen $268 mil millones adicio nales po r elevar el indicador "Recaudación Neta de Reformas de 11,8% a 11,9%.

(3): En el 2004 se sustraen de la recaudación total los siguientes efectos con respecto al 2003: No aplicación del impuesto de seguridad democrática -0,5% del PIB Entrada en vigencia de normas en renta de la ley 788 0,3% del PIB

Efectos de la ley 863 0,8% del PIB Efecto total por cambio de legislación entre 2003 y 2004 =,6 del PIB En 2005 se resta de la recaudación total el mismo ef ecto neto de las reformas 0,6% del PIB

Elaboró: Oficina de Estudios Económicos DIAN

Cuadro 9

A very important indicator that complements the previous results is the VAT evasion. Between 2002 and 2004 this indicator dropped by more than two points, continuing with a clear and sustainable trend downward, that began in the year 2000 (see Table 10).

With respect to the reduction in tax expenditures and in spite of the difficulties in consolidating tax reform, the elimination of an important number of tax benefits in income tax was achieved, first through Law 788 of 2002 and Law 863 of 2003.

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AÑO RECAUDO RECAUDO EVASIÓN EVASIÓN/PIB TASA PUNTO POTENCIAL NETO EVASIÓN

2000 11.363.787 8.346.741 3.017.046 1,7% 29,5% 113.6382001 13.629.453 10.058.035 3.571.418 1,9% 27,6% 136.2952002 14.885.630 10.968.760 3.916.870 1,9% 26,4% 148.8562003 17.109.885 13.127.530 3.982.355 1,7% 25,3% 171.0992004 19.566.063 15.144.629 4.421.433 1,7% 24,1% 195.661

2005 (*) 22.168.969 17.491.826 4.677.142 1,7% 22,3% 221.690

Recaudo Potencial: MIP Nueva Base Cuentas Nacionales (1994)Cálculos: Base Gravable IVA - Oficina de Estudios Económicos - DIANRecaudo Efectivo: División de Mediciones Fisclaes- OEE - DIAN. Fecha de corte: Marzo 2005(*) Recaudo Neto proyectado para el año 2005

Estimación de la Evasión en el Impuesto al Valor Agregado(Millones de pesos)

Cuadro 10

The progress achieved in terms of reducing tax expenditures is totally sustainable, as it was introduced in the country’s tax legislation. The achievements in terms of control of evasion and increase in collections require, on the one hand, a new tax reform to replace some income of temporary nature, and on the other, to maintain or increase the level of taxpayer service and audits to ensure further reductions in tax evasion.

6. Tax Reform

Policy Objective : Increase tax revenues, improve tax neutrality and equity, reduce tax expenditures.

These objectives were achieved through the enactment of Laws 788 of 2002 and 863 of 2003, as well as by the expedition of its Regulatory Decrees, through which the actual application of the Laws takes place. The measures adopted in these Laws have reflected on a substantial increase in tax collection, while reducing well-known income tax breaks (mainly in relation to non-taxable income or occasional gain, as well as in exempt income) and by the expansion of the VAT base.

The increase in revenue is due to measures of a temporary nature included in these Laws, such as the 10% surtax on income tax (for years 2004 to 2006), the wealth tax of 0,3% (years 2004 to 2006), and the increase in the financial transactions tax from 0.3% to 0.4% (years 2004 to 2007).

Likewise, Laws 788 of 2002 and 863 of 2003 mandated control measures that have been very successful; among those we can highlight the reduction of the income and wealth threshold to pay income tax, the adoption of new Single (or Unified) Tax Registry - RUT, adjustment of the requirements to enroll in the simplified regime for sales tax, and the refund of two points of VAT to those people who purchase goods and services taxed at the general rate and at the of 7% rate (today 10%), using credit or debit cards.

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As complement to Laws 788 of 2002 and 863 of 2003, the National Government submitted to Congress a Project of Law of Social Financing in the second semester of 2004, which had the main objective of securing funds to fully finance the National Budget, in particular to meet pension payments. A tax on pensions was proposed, as well as to extend the VAT base to improve its structure, reducing the thresholds for the wealth tax, reduce to 32% the income tax rate beginning on 2008, and to adjust the treatment of the voluntary contributions to pension funds and AFC accounts.

Despite this, numerous problems and criticisms arose during the discussions prior to the first debate in Congress, which added to the little time available before the end of the fiscal year without progress in the proceedings, led the National Government to withdraw it from consideration. The Government began to analyze the possibility of submitting a Project that restructures national taxes, which are by Law under the responsibility of the National Direction of Taxes and Customs.

Table 11

CONCEPT / YEARS 2000 2001 2002 2003 2004

GENERAL RATE 16% 16% 16% 16% 16%EFFECTIVE COLLECTION/ GDP 4.8% 5.3% 5.4% 5.7% 6.1%RATE OF EVASION 29.5% 27.6% 26.4% 25.3% 24.1%COVERAGE OF TAXABLE BASE 42.5% 45.8% 45.8% 47.9% 52.2%PRODUCTIVITY OF THE VAT 0.30% 0.33% 0.34% 0.36% 0.38%

The modifications introduced in the matter of the national taxes by Laws 788 of 2002 and 863 of 2003 have been of vital importance not only for the control of the obligations on the part of the contributors, even making procedures before the DIAN easier, but also in relation to the fight against tax evasion, causing a significant increase in tax collections.

Concretely, the VAT base was expanded, and in 2004 it covered goods and services equivalent to 52.2% of GDP, year in which the exemptions were eliminated completely.

7. Budget Reform

Policy objective : Convert the budget into a more effective tool for sound fiscal policy and service delivery improvement.

The objective of the Reforms to the Colombian Budgetary System is to have a public budget that induces fiscal discipline to guarantee debt sustainability, while enabling a proper focalization of expenditures and its efficient execution, with the ultimate goal of improving social welfare, which coincides with the objective of this component.

The Presidential Message that accompanied the 2006 budget bill “budget to consolidate confidence, second stage”, includes the functional classification of the budget, an analysis of debt sustainability, budgetary execution, a report of tax exemptions, an estimation of contingent liabilities, sensitivity of the budget to macroeconomic assumptions, conversion

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between the budget and the financial plan and a chapter with different ways of presenting the budget figures: by functional classification, by economic classification, and by the three axes of the Uribe administration. It is hoped this will give greater transparency to the numbers.

Additionally, a study of the inflexibilities of the budget was begun, it is hoped that the programming of budget 2006 is done on-line, via Internet, and at the moment, the section on the Budget in the webpage of the Ministry of Finance and Public Credit is an instrument for the information campaign, being updated being and with information that allows civil society to access all relevant budgetary information.

Now that the “Dialogue on the Economic Constitution between Lawyers and Economists” has been carried out, the memoirs of the proceedings are being edited for their publication, and to open a path to interconnect the dynamics between the laws, their constitutionality, and the economic context.

No additions to the National Budget will be made this year. This has been made possible by a good initial programming, fiscal discipline and timely coordination with those responsible for ordering expenditures, all of which entails greater transparency and optimization of budgetary principles. Budgetary arrears are reduced when the budget is not increased.

For the fulfill achievement of the objective, the approval by Congress of the amendments to the Organic Statute of the Budget was necessary. Nevertheless, the bill 194 was “archived” this past May 31 in the Chamber of Representatives, without having made it to the Senate. Of the 4 required debates, only one was approved despite being in Congress from 16 December 2003 to 31 May 2005.

Aware of the need to reform the budget system and to partly offset the non-approval of the bill, the National Government is elaborating a draft Regulatory Decree. The draft Decree is being subject to a Legal review inside the Ministry of Finance, pending comments from other departments of the Ministry of Finance and Public Credit, DNP, State-owned Industrial and Commercial Companies, and the Legal Office of the Presidency of the Republic.

8. Overall Fiscal Commitment

Policy Objective : The macroeconomic framework of the Republic of Colombia is consistent with the objectives of the program.

The measures adopted under this component allowed an adequate adjustment of public finances. Having met the objectives, the process of fiscal adjustment was consolidated and the credibility of the Government to offer a stable and recovering economy, which has had repercussions in the productive sector, not only increasing the confidence of Colombians, but also making it more attractive to foreign investors.

The fiscal deficit has decreased in the last years, as shown in Table 12. Current projections suggest the observed fiscal deficit of the consolidated public sector in 2005 will be 1.6% and for 2006, around 2% of GDP, demonstrating the commitment of the Government to reach the objective of healthy public finances.

This led to a good performance of the economy: During the 2003 there was acceleration in the

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growth of the economy, which rose from 1.9% in 2002 to 4.1% in 2003. This growth is consistent with the potential growth of the economy in the long term. On the other hand, the economic growth in 2004 was of 4.1% and it is hoped that for 2005 the favorable conditions that occurred both in previous years will continue, contributing to the consolidation of the growth of internal demand, which combined with the favorable external factors related to demand and terms of trade, would allow that the economy to grow 4%.

The dynamics of growth have not created excessive pressures in the market of goods or in external financing. In the case of the market of goods, the inflation in 2004 was 5.5%, down one percentage point from 2003. Regarding external financing, the deficit of the current account was 1.1% of GDP during 2004, less than that observed in 2003 (1.5% of GDP). These factors suggest that the reactivation process can continue in a sustainable way. The reduction in the NFPS debt net of financial assets, which passed from 54.1% in 2002 to 51% in 2003 and to 46.6% of GDP in 2004, broke the increasing trend of previous years, which would have been a serious threat for the solvency of the Government had it not been reversed.

Table 12

Como % del PIB

Balances por Período 2002 2003 2004

1 Sector Público No Financiero -3,8 -2,5 -1,4Gobierno Nacional Central -6,1 -5,0 -5,5Sector Descentralizado 2,3 2,5 4,1Seguridad Social 1,2 0,7 1,6Empresas del nivel nacional 0,4 1,2 0,9Empresas del nivel local 0,3 0,2 0,5Regional y Local 0,4 0,3 1,1

2 Balance cuasifiscal del Banrep. 0,8 0,6 0,53 Balance de Fogafín 0,3 0,3 0,34 Costo de la Restructuración Financiera -0,6 -0,5 -0,45 Discrepancia Estadistica -0,3 -0,6 -0,3

SECTOR PUBLICO CONSOLIDADO -3,6 -2,7 -1,3

Fuente: CONFIS

In addition, and with the purpose of reducing one of the key fiscal risks, the Legislative Act 01 of 2005 was approved, which achieved important results:- It established 25 effective legal minimum wages as maximum amount for a pension beginning on July 31 2010.- It eliminated of the exceptional and special pensions regimes, with the exception of the armed force, beginning on July 31 2010.- It eliminated of 14th pension for the new pensioners, with exception of those receive an pension equal or less than three (3) effective monthly legal minimum wages, if it becomes effective before July 31 2011.- It accelerated the end of the transition regime of Law 100 to July 31 2010, with the

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exception of those workers who are in the regime and have contributed at least 750 weeks, for whom the current regime would be maintained until 2014.

9. Fiscal Responsibility

Policy Objective: Reduce fiscal imbalances.

With the purpose of contributing to national development, it became necessary to correct misalignments in public finances, and the fact that this goal was included in the program facilitated the work of the Government in this area, launching what still today continues being a fiscal priority: responsibility.

Law 819 of 2003, condition of the fiscal responsibility component, had a positive and significant impact on fiscal management as it became the fundamental regulatory framework for the reduction of imbalances, also allowing the establishment of clear guidelines for the institutions involved in the country’s fiscal management by engaging joint work, accountability to the Legislature, transparency and the dissemination of fiscal policies and other good practices for a realistic management of the national budget.

The final result obtained through the implementation of this component fulfilled the initial purpose: The Fiscal Responsibility Law established the obligation to establish fiscal targets linked to debt sustainability and the primary balance of the Non Financial Public Sector, and to present annual reports of fiscal results to Congress through the Medium-Term Fiscal Framework (MTFF). This report includes the macroeconomic balance of the previous year, the framework for the current year, the financial plan of the current year, the evaluation of the main activities of the public sector, an estimation of the cost of tax deductions and exemptions, the fiscal cost of the laws approved in the previous legislature, the value of contingent liabilities, the financial plan of the following year, a multi-annual macroeconomic program, the primary surplus target and a debt sensibility analysis. The MTFF is widely disseminated and is also published in the website of the Ministry of Finance and Public Credit for the benefit of all interested parties, including other branches of Government, civil society or the international community, in addition to Congress, which is the entity in charge of evaluating it and exerting political control.

In addition, sub-national debt has been reduced: as a percentage of GDP the internal sub-national debt dropped from 5.5% in 2000 to 4.1% in 2004, and the external debt from 3.5% to 1.9%.

(b) Cofinanciers:Not applicable.

(c) Other partners (NGOs/private sector):Not applicable.

10. Additional Information

Not applicable.

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Annex 1. Key Performance Indicators/Log Frame Matrix

FIAL III Program Indicators Component Indicator Latest Estimate

Value of goods and services covered by the VAT base as a percentage of GDP

The VAT base was expanded from 51% of GDP in 2003 to 54.3% of GDP in 2005 Tax Reform

Exemptions to the income tax All exemptions to the income tax were eliminated in 2004 Ratio between the base to which withholding at the source for interest income was applied and the total of Interest income Interest income reports

The implementation of the MUISCA system increased the control and flow of information between the Banks and DIAN. A 100% value is being reported since 2003.

Increase in tax revenue from firms previously exempt from the income tax, as a percentage of potential revenue

The elimination of exemptions to income tax and the reduction of firms reporting thresholds increased collections from 30% to 50% end 2004

DIAN Administrative cost for every COL$l.000 Collected The administrative cost of DIAN was reduced from COL$10.3 per each COL$1000 collected in 2003, to COL$ 9.3 in 2005

Tax Adminis-t ration.

Increases in tax collection attributable to improvements in the tax administration

An analysis undertaken by DIAN’s Office of Economic Studies reveals as a result of improvements in tax administration, tax collections as a percentage of GDP increased as follows: 0.1% in 2002; 0.2% in 2003; and 0.4% in 2004

Economic classification of the budget The 2004-05 Presidential messages submitted to Congress included economic and functional classifications of the budget

Improvements in the transparency and accountably of public expenditures via the availability of information on the public sector budget through the MHCP website

Budget execution is published and permanently updated on the MHCP website

Reduction in budgetary rigidities through the Organic Budget Code. The MHPC has the authority to control expenditure aggregates

The new Organic Budget Code was rejected by Congress. Rigidi ties were not substantially reduced

Budget Reform

Increased flexibility in the budget (2006 target: 0 51; 2009 target, 0.88)

No substantial increase in flexibility was observed

Medium Term Fiscal Framework (MTFF) The MTFF mandated by the Fiscal Responsibility Law includes reports on 2004 fiscal outcomes that show whether targets have been achieved, as well as a list of the fiscal costs of all tax measures approved in 2004. The 2006 financial plan has been presented, including targets and forecasts for 2007.

Fiscal Responsi-bility

Passage of the Fiscal Responsibility Law All required by-laws to make the Fiscal Responsibility Law fully operational have been published.

Incentives for efficiency gains

Variance of the cost per student enrolled The Ministry of Education reported that the global per capita cost of education totaled COL$ 1.06 million in 2005. According to the Ministry’s projections, these costs are expected to increase to COL$1.09 million in 2006 and COL$1.2 million in 2008

Good practice manuals in the 3 priority subjects (contractual, labor, and non-contractual responsibility subjects) have been prepared, published, and disseminated

1 of 3. The Public Contract Best Practice Manual has been issued and disseminated on the Public Sector.

Percentage of lawsuits responded to on time A 20% value has been reported at the end of 2004 Percentage of appeals presented on time A 20% value has been reported at the end of 2004

Legal Defense of the State

Reduction in payments for penalty interest in cases lost Not available Overall guiding principles are established for all procurement with public funds

The Inter -sector Commission for Public Contracting is preparing guidelines and standard bidding documents that could become effective in 2006.

National-level entitles (central and decentralized) that publish their procurement documents in the Unified Procurement Portal

A total of 162 public entities are publishing their respective procurement processes in the Unified Procurement Portal

Selection processes based on technical and economic aspects of bids (except consultants or specialized services where experience must be evaluated) Number of frequent ly used contracts for which standardized bidding documents exist

The Inter -sector Commission for Public Contracting is preparing guidelines and standard bidding documents that will address the technical and economic aspects of these types of selection processes

Entities using the Good Practices Manual in their everyday procurement The profit guarantee in favor of the contractor has been eliminated Transaction costs of the procurement process have been quantified

Public Procurement Reform

Monitoring of variations in transactions costs derived from ongoing reforms

No information was available at the time of this report

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FIAL III Program Indicators – Continuation Component Indicator Latest Estimate

Reported real estate assets A database providing information on 9,333 buildings is in place. A total of 2,271 of these buildings have been inspected and verified

Number of entities which have reported full information on real estate assets

50 out of 124 public entities at national level are actually reporting its assets

Institutional framework has been reformed The legal and institutional frameworks are being analyzed and a number of proposals for their improvement are currently being prepared

Asset Management

Revenues and savings over the 4-year period reach COL$175 billion

To March 2005 savings were reported to total COL$ 76,900 million

Percentage of the investment budget subject to management contracts in 2004

As of October 2004, the percentage of investment budget subject to management contracts was reported at 21%. (No new information is available).

Achievement of SENA revenue targets Management Contracts Achievement of ICBF revenue targets

Neither of the two entities fully complied with their commitments and therefore the incentives never materialized . Nonetheless, these entities did inform that the respective contracts helped to improve their planning and internal monitoring and evaluation are in the process of being.

Key reform indicators have been published on the web Yes Management of PS Reform

An implementation strategy has been Implemented An implementation strategy is in place

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Annex 2. Project Costs and Financing

Loan Amount Programmed Amount Disbursed FIAL I US$ 300’000,000 US$ 300’000,000 FIAL II US$ 150’000,000 US$ 150’000,000 FIAL III US$ 150’000,000 US$ 100’000,000 FIAL IV US$ 300’000,000 Not Executed

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Annex 3. Economic Costs and Benefits

Not Applicable

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation10/15/2004 Includes 25 consultants

interventions and 27 staff interventions

S S

Appraisal/Negotiation11/9/2004 Includes 1 consultant and 2

staff interventionsS S

2/18/2005

Supervision4/26/2005 Includes 5 consultants

interventions and 13 staff interventions

S S

ICRIncludes 3 consultants interventions

S S

Interventions for the three loans

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 86.48 454.03Appraisal/NegotiationSupervision 18.46 63.67ICR 24.44Total 104.94 542.15

Include staff weeks, and staff and consultants fees for the three loans

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

Boletin de Coyuntura Fiscal. CONFIS. August 23, 2005Evaluación de la Defensa Judicial del Estado Colombiano. DNP. July 2005Evaluación del Programa Empleo en Acción. DNP. October 2004Evaluación del Programa Red de Apoyo Social. DNP. November 2004Informe Presidencial al Congreso. 2004Informe Presidencial al Congreso. 2005Manual de Buenas Prácticas para la Gestión Contractual Pública. DNP. December 2004Reporte de Evaluación: Renovación de la Administración Pública. DNP March 2005Colombia’s Economical and Fiscal Sustainability. MHCP. April 2005Marco Fiscal Mediano Plazo. MHCP. June 2004Marco Fiscal Mediano Plazo. MHCP. June 2005Memorias de Hacienda 2004. MHCPColombia: Surpassing Expectations. Growth, Pensions and the Fiscal Deficit. MHCP. September 2005Informe Sobre la Viabilidad Fiscal de los Departamentos. Vigencia 2004. MHCP. Set of World Bank Documents including: CFAA, CAS, CPAR, PER, ICR issued between 1999 and 2005Laws and Decrees enacted by the Colombian Government between 2002 and 2005

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