world bank document...2001/03/26 · document of the world bank report no: 21856 co project...

Document ofThe World Bank

Report No: 21856 CO

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$35.47 MILLION

TO THE

REPUBLIC OF COLOMBIA

FORA

PUBLIC FINANCIAL MANAGEMENT PROJECT II

February 26, 2001

Poverty Reduction and Economic Management UnitColombia, Mexico, Republica Bolivariana de Venezuela CMULatin America and the Caribbean Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 02/25/2001)

Currency Unit = Colombian Pesos (Pesos)I Colombian Peso = US50,000443

US$I = 2,556 Colombian Pesos

FISCAL YEARJanuary I December 31

ABBREVIATIONS AND ACRONYMS

ASYCUDA - UNCTAD's Automated System for Customs DataBPIN - Banco de Proyectos de Inversi6n Nacional (National Investment Projects Bank)CAS - Country Assistance StrategyCGN - Contador General de la Naci6n (National Accountant General)CGR - Contraloria General de la Republica (Comptroller General of the Republic)COCOR - Comite de Coordinacion (Project Coordination Committee)COMEX - Automated System for Processing Imports and ExportsCUN - Cuerita Unica de la Nacion (Unique National Account)DNP - Departamento Nacional de la Planeacion (National Planning Department)DIAN - Direcci6n de Impuestos y Aduanas Nacionales (Directorate of National Taxes

and Customs)DIN Direcci6n de Impuestos (Directorate of Taxes)DAN - Direcci6n de Aduanas (Directorate of Customs)DANE - Departamento Administrativo Nacional de Estadisticas (National Statistics

Department)ESW - Economic and Sector WorkGDP - Gross Domestic ProductGOC - Government of ColombiaGTZ - German Technical Assistance AgencyIBRD - Intemational Bank for Reconstruction and DevelopmentICB - Intemational Competitive BiddingIDA - Intemational Development AssociationIDB - Inter-American Development BankIMF - International Monetary FundLACI - Loan Accounting Change InitiativeLCR - Latin America and Caribbean RegionMHCP - Ministerio de Hacienda y Credito Pablico (Ministry of Finance and Public

Credit)MIS - Management Information SystemMSA - Management Services AgreementNBF - Not Bank FinancedNCB - National Competitive BiddingNDP - National Development PlanNPV - Net Present ValueOSI - Oficina de Servicios Informaticos (Office of Informatic Services)PAD - Project Appraisal DocumentPCD - Project Concept DocumentPEM - Public Expenditure ManagemnentPFMP - Public Financial Management ProjectPMU - Project Management UnitPMR - Project Management ReportPOA - Programa Operativo Annual (Annual Operational Program)RA - Revenue AdministrationSLAT - Sistema Informatico de Administracion TributariaSICAT - Sytem for Selection of Cases for Tax AuditSINERGIA - Sistema Nacional de Evaluaci6n de Gesti6n y ResultadosSIPAC - System for Recovery of Tax ArrearsSOE - Statement of ExpensesSIIF - Sistema Integrado de Informaci6n Financiera

(Integrated Financial Management Information System)TOR - Terms of ReferenceVAT - Value Added Tax

Vice President: David de FerrantiCountry Manager/Director: Olivier Lafourcade

Sector Manager/Director: Ernesto MayTask Team Leader/Task Manager: Jit Bahadur S. Gill

COLOMBIAPUBLIC FINANCIAL MANAGEMENT PROJECT II

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 11

C. Project Description Summary

1. Project components 112. Key policy and institutional reforms supported by the project 153. Benefits and target population 154. Institutional and implementation arrangements 15

D. Project Rationale

1. Project alternatives considered and reasons for rejection 192. Major related projects financed by the Bank and other development agencies 203. Lessons learned and reflected in proposed project design 204. Indications of borrower commitment and ownership 215. Value added of Bank support in this project 21

E. Summary Project Analysis

I. Economic 212. Financial 213. Technical 224. Institutional 225. Environmental 256. Social 257. Safeguard Policies 26

F. Sustainability and Risks

1. Sustainability 272. Critical risks 273. Possible controversial aspects 28

G. Main Conditions

1. Effectiveness Condition 292. Other 29

H. Readiness for Implementation 29

I. Compliance with Bank Policies 30

Annexes

Annex 1: Project Design Summary 31Annex 2: Detailed Project Description 38Annex 3: Estimated Project Costs 47Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 48Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Sunnary 50Annex 6: Procurement and Disbursement Arrangements 52Annex 7: Project Processing Schedule 60Annex 8: Docunents in the Project File 61Annex 9: Staternent of Loans and Credits 62Annex 10: Country at a Glance 64Annex 11: Plan de lmplementacion para Fortalecimiento de la Administracion Financiera del 66

Proyecto

MAP(S)

COLOMBIA

PUBLIC FINANCIAL MANAGEMENT PROJECT II

Project Appraisal Document

Latin America and Caribbean RegionLCSPS

Date: February 26, 2001 Team Leader: Jit Bahadur S. GillCountry Manager/Director: Olivier Lafourcade Sector Manager/Director: Emesto MayProject ID: P040109 Sector(s): BF - Public Financial Management, BI -

Institutional Development, BY - Other Public SectorManagement

Lending Instrument: Specific Investment Loan (SU,) Theme(s): Public SectorPoverty Targeted Intervention: N

Project Financing Data[Xl Loan [ ICredit 1 Grant [ lGuarantee [] Other:

For Loans/Credits/Others:Amount (US$m): 35.47

Proposed Terms: Fixed-Spread Loan (FSL)Grace period (years): 5 Years to maturity: 17Commitment fee: 0.85% for the first 4years, 0.75% thereafter.Front end fee on Bank loan: 1.00%Financing Plan: Source Local Foreign TotalBORROWER 23.41 0.35 23.76IBRD 1.56 33.91 35.47

Total: 24.97 34.26 59.23Borrower: REPUBLIC OF COLOMBIAResponsible agency: MINISTRY OF FINANCE AND PUBLIC CREDIT; DNPMinistry of Finance and Public CreditAddress: Bogota, ColombiaContact Person: Mr. Federico Renjifo, Vice MinisterTel: 571-350-1204/1205 Fax: 571-209-6242, 571-286-4156 Email:

Other Agency(ies):Departamento Nacional de Planeaci6n - Subdirecci6n General

Address: Bogota, ColombiaContact Person: Mr. Tomas Gonzales, Sub-DirectorTel: 571- 341-9868 Fax: 571-334-0221 Email:Estimated disbursements (Bank FYIUS$M:

FY , 2001 2002 2003 2004 2005Annual 2.50 14.40 8.85 5.69 4.03

Cumulative 2.50 16.90 25.75 31.44 35.47

Project implementation period: 05/01/01 to 04/30/06Expected effectiveness date: 05/01/2001 Expected closing date: 10/31/2006

OPADFP...M.duX

A. Project Development Objective

1. Project development objective: (see Annex 1)

a. Strengthen the institutional capacity of the Direcci6n de Impuestos y Aduanas Nacionales (Directorateof National Taxes and Customs- DIAN) to foster voluntary compliance; collect revenues efficiently,effectively and equitably; and combat tax evasion and smuggling, so as to enable it to mobilize adequatetax revenues to finance public expenditures.

b. Strengthen public expenditure management at the central government level, to facilitate achievement offiscal and national development objectives, improve cost effectiveness of public services, and increasetransparency and accountability.

2. Key performance indicators: (see Annex 1)

a. Revenue Administration

* Improvement in the effectiveness of the DIAN as indicated by:* 5% increase per annum in the proportion of total tax declarations filed voluntarily and on time.* 5% increase per annum in the proportion of total tax revenues paid voluntarily and on time.* 0.5% decrease annually in the Value Added Tax (VAT) compliance gap.* 1% decrease annually in Income Tax and Business Profit Tax compliance gap.* i% decrease annually in the ratio of contraband to total imports.

* Improvement in the efficiency of the DIAN as indicated by 1% decrease per annum in the ratio ofthe annual recurrent budget of the DLAN to total revenue collected by it.

* Improvement in the perception of taxpayers, traders and other stakeholders regarding theefficiency, effectiveness, and integrity of the DIAN as indicated by annual surveys.

b. Public Expenditure Management

* Increased accountability of public entities for achievement of performance objectives, spending ofpublic resources, and procurement of goods and services, as indicated by results of evaluationsdone through the Sistema Nacional de Evaluaci6n de Gesti6n y Resultados ((National System forEvaluation of Management and Results - SINERGIA).

* Increased value for money in public procurement and contracting in pilot agencies.* Increased transparency and enhanced civil society capacity to monitor public sector performance,

as indicated by the quantity, quality and timeliness of information, pertaining to public sectorperformance and expenditures, available to the public.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex I)Document number: R-99201 Date of latest CAS discussion: 11/18/99

The Bank's Country Assistance Strategy has the objective of supporting poverty reduction, socialdevelopment and sustainable growth. To address these objectives it targets six areas of strategicimportance: (i) promoting peace and development; (ii) promoting rural development; (iii) developing humancapital; (iv) attaining public sector responsiveness and efficiency; (v) improving infrastructure services; and(v) ensuring sustainable development. These objectives have been reaffirmed in the latest CAS Updatediscussed by the Board on November 18, 1999.

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The Public Financial Management Project - H (PFMP-II) would support the goal of attaining publicsector responsiveness and efficiency by building on the improvements made in Revenue Administration andPublic Expenditure Management at the national level, through the ongoing Public Financial ManagementProject (PFMP) financed by the Bank (Project ID: CO-PE-6889, closing on March 31, 2001). Thisfollow-on project would further enhance the ability of the DIAN to collect adequate revenues on asustainable basis, thereby assisting the government to reduce the fiscal deficit and better respond to thesocio-economic needs of the public. At the same time, the project would support continuing institutionalreforms and capacity building in public expenditure management, thus enabling the government to bettermanage the difficult fiscal situation; achieve national development objectives; and increase thecost-effectiveness of public sector operations.

2. Main sector issues and Government strategy:

I. Macroeconomic Issues

Macro-Economic Performance: Following the sharpest recession in its history, the Colombian economyhas recently begun to show signs of recuperation, with GDP growing at an estimated 3% (annualized) in2000, a balanced current account, and a fiscal deficit that has been reduced to 3.6 percent of GDP.Economic performance had deteriorated sharply in the late 1990s, affecting nearly all areas of the economy:(i) GDP fell by an unprecedented 4.3% in 1999; (ii) the fiscal accounts of the non-financial public sector,which were roughly balanced in the early 1990s, showed a deficit of 4.6 percent of GDP in 1998, whichrose to 6.4% percent of GDP in 1999; and (iii) the current account of the balance of payments reached adeficit of 5.7 percent of GDP in 1998, although it fell to 1. I percent of GDP in 1999 as a result of a sharpdecline in imports and an increase in oil revenues. Economic decline has been accompanied by a steep risein unemployment, which in urban areas now stands at about 20 percent. Restoring medium term fiscalsustainability is essential if Colombia's efforts at poverty reduction and more rapid and sustainablemedium-term growth are to be realized. It is also crucial for nursing a fragile financial sector back tohealth.

In addition to a deteriorating domestic economy, Colombia's external environment also worsenedsubstantially throughout 1998 and into 1999. The country was hit by severe shocks: (i) a trade shockin 1998 due to the drop in oil and coffee prices, estimated at 1.5 percent of GDP; and (ii) events ininternational credit markets which increased the cost of borrowing and decreased the availability ofexternal finance for both the public and private sectors. With the virtual closing of international creditmarkets to developing economies and the skyrocketing cost of external credit, Colombian authoritieshad to turn to the domestic market to finance a growing deficit, putting pressure on domestic interestrates that resulted in a marked increase in the debt burden of the private sector. Repeated pressureagainst the peso trading band ensued, causing the Central Bank to initially react by further increasinginterest rates, followed by a devaluation of the peso. Pressure on the currency continued, however,leading to the eventual abandonment of the trading band for the peso and the floating of the currency.

Although general extemal conditions have improved, due to the heightened internal conflict in the country,the deep recession highlighting structural problems of the Colombian economy and the removal ofColombia's investment-grade status by three major credit rating companies, extemal financing has becomeincreasingly limited and costly. Table I and Table 2 provide the fiscal accounts of the Combined PublicSector and the Central Administration, respectively from 1996 to 2002.

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Government Strategy: The Government has made reducing the fiscal deficit one of its key macroeconomicobjectives. During the first year of its administration, the present Government took several measures toenhance revenues and reduce expenditures, including instituting measures to fight tax evasion andsmuggling, increasing gasoline surcharges, and widening the VAT base and improving tax collection.However, due to the outlays needed to rebuild the areas affected by a devastating earthquake that hit thecountry in January 1999, shore-up an ailing financial sector, and fund additional relief to mortgage holders,the deficit continued its increase in 1999 to 6.4% of GDP. In order to consolidate its stabilization program,the Government, towards the end of 1999, requested a three-year Extended Fund Facility from the IMF,aimed at supporting its efforts to restore growth, further reduce inflation and achieve a sustainable externalposition. The stabilization program calls for a sharp reduction of the Non-financial Public Sector deficit to3.6% of GDP in 2000 and to 2.6% in 2001, and is underpinned by strong tax enforcement, bettermanagement of resources under the fiscal decentralization system and economic recovery. Therestructuring of the financial sector is another of the Govermnent's major objectives, and a number ofmeasures have been taken to help re-capitalize viable private entities, restructure public banks and restoretheir solvency in preparation for their divestment, and to alleviate the debt burden of mortgage holders.

The success of the fiscal policy initiatives mentioned above depends, to a considerable extent, on the abilityof the public sector entities, engaged in revenue administration and public expenditure management at thenational level, to translate the policy into results. These are the focus of this project.

Table 1: Combined Public Sector (% of GDP)

1996 1997 1998 1999 2000' 2001' 2002'

Total Revenue 27.0 27.4 26.7 27.3 28.8 28.7 28.1

Tax Revenue3 16.8 17.7 17.5 16.8 17.5 19.5 19.5

Non-tax Revenue 10.1 9.8 9.2 10.4 11.3 9.2 8.6

Total Expenditure & Net Lending 29.8 31.4 30.7 33.2 32.3 31.3 29.9

Current Expenditure 20.6 21.8 22.7 24.4 24.8 23.9 23.4

Wages and Salaries 6.6 6.7 7.0 7.7 7.6 7.3 7.0

Goods and Services 3.5 3.7 3.5 3.6 3.5 3.2 3.0

Interest 2.7 2.6 3.3 3.8 4.4 4.6 4.5

Transfers and Other 7.8 8.9 8.9 9.4 9.4 8.8 8.6

Capital Expenditure 9.1 9.6 7.9 8.6 7.5 7.5 6.6

Net Lending 0.0 0.0 0.0 0.1 0.0 0.0 0.0

Non-financial Public Sector -3.0 -3.9 -4.6 -6.4 -3.6 -2.6 -1.8Balance

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Table 2: Central Administration (% of GDP)

1996 1997 1998 1999 2000' 2001' 2002'

Total Revenue 11.8 12.6 11.9 11.9 13.2 14.7 14.4

Tax Revenue 10.1 10.8 10.5 10.0 11.3 13.1 12.9

Tax on Income and Profits 3.8 4.4 4.3 4.2 4.6 5.3 5.0

Taxes on Goods and Services 5.3 5.3 5.0 4.9 5.0 5.7 5.8

Value Added Tax 4.7 4.8 4.5 4.4 4.6 5.2 5.3

Gasoline Tax 0.6 0.5 0.5 0.5 0.5 0.5 0.5

Taxes on International Trade 0.9 1.0 1.2 0.9 1.0 1.2 1.2

Financial Transactions Tax 0.0 0.0 0.0 0.0 0.6 0.8 0.8

Stamp Duty and other Taxes 0.0 0.1 0.0 0.0 0.1 0.0 0.0

Non-tax Revenue and Transfers 1.7 1.8 1.4 1.9 1.9 1.7 1.4

Total Expenditure & Net Lending 16.8 1 16.3 17.2 19.4 19.2 18.9 18.1

Current Expenditure 11.8 12.0 13.9 15.0 16.1 15.5 15.1

Wages and Salaries 2.5 2.5 2.7 2.9 3.1 3.0 2.9

Goods and Services 1.3 1.6 1.4 1.43 1.4 1.3 1.3

Interest 1.1 1.2 1.9 2.1 2.7 3.2 3.2

Transfers and Other 7.0 6.9 8.3 8.7 8.9 8.1 7.8

Capital Expenditure 4.46 3.6 3.42 3.8 2.5 3.0 2.7

Net Lending 0.4 0.2 0.2 0.6 0.5 0.4 0.3

Overall Balance -5.0 -3.47 -5.4 -7.4 -6.0 -4.1 -3.7

Source: DNP.1. Projected; 2. Excludes proceeds of the financial transaction tax in 1999 from revenue and expenditure.Note: Some totals in Table I and Table 2 may not add up due to statistical discrepancies or rounding off.

II. Revenue Administration Issues

Revenue administration is the responsibility the DIAN, which collects Income Tax, VAT, Customs Duty,Transactions Tax and Stamp Duty. It also monitors foreign exchange transactions. The total revenuecollected in 1999 was 15,554 billion Pesos, which amounted to 10.0% of GDP. Trends in tax collectionfrom 1996 to 1999 show that total tax revenues at the central level have fluctuated between 10.0% to10.8% of GDP. Tax revenues are projected to increase to 12.9% by 2002. The DMAN manages about1,040,000 taxpayers and processes approximately 3.85 million tax and customs declarations annually. Ithas eight Regional Directorates and forty three local offices. There are also four Special Administrations:Large Tax Payers Administration, Bogota, Legal Entities Administration, Bogota, Customs Directorate,Bogota, and Eldorado Airport, Bogota. The staff strength is about 6,800.

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Since 1994, with the assistance of the Bank's Public Financial Management Project (PFMP), the GTZ andthe IDB, the DIAN has undertaken significant capacity building initiatives. These are summarized inAnnex 2. Institutional and organizational deficiencies that still need to be addressed are discussed below.

(i) Organization and Management:

While major efforts have been made to strengthen the organization and management of the DIAN in the lastten years, many weaknesses remain. There is a history of instability at top management levels, with rippleeffects down the line. Accountability systems do not fully match the high degree of autonomy enjoyed bythe DIAN. Formal planning, budgeting, evaluation and monitoring systems exist, but there is a need toincrease their credibility and effectiveness. Communication, coordination, control and supervisionmechanisms need improvement. The remuneration structure has become non-competitive with the privatesector, affecting D"AN's ability to recruit and retain staff with appropriate skills. This poses a particularlysevere problem in the context of the introduction of sophisticated infonration systems that require higherlevel technical skills. The administrative career is too rigid and promotion avenues are limited, causingfrustration amongst staff. Recently, improvements have been made in the design of the administrativecareer to strengthen the link between promotion and professional qualifications. However, institutionalarrangements for the transparent implementation of the new system are yet to be implemented. Businessprocesses need to be streamlined to increase operational efficiency and reduce the risk of corruption.Internal control and anti-corruption systems are still weak. There is a need to develop a corporateinformation management strategy and imnprove the capacity of the central Informiatics Unit, to manage,maintain, safeguard and continually update the information infrastructure. Also, management ofnotifications, correspondence and paper records requires improvement. Relationships with external actors,such as the legislature, the judiciary, the Prosecutor General, commercial banks collecting taxes, taxpayers,business, industry and professional associations, other government departments and foreign taxadministrations, need to be strengthened to increase the DIAN's ability to enhance the positive effect ofenvironmental influences on its performance and reduce their negative impact. Finally, considerablemanagement training is required at different levels of the organization.

(i) Voluntary Compliance:

The DLAN has made serious efforts to facilitate voluntary compliance. There is, however, a need to extendsome of the recent initiatives and intensify efforts to create a tax compliance culture. The system forelectronic filing of tax returns, introduced in 1999, needs to be expanded to cover medium and smalltaxpayers. Also, the functionality of the system has to be enhanced to provide additional electronicservices, such as payment of taxes and submission of claims for tax refunds. To further reduce compliancecosts, integrated taxpayer assistance units, dealing with both tax and customs matters, need to beestablished. The Office of the Taxpayer Ombudsman, created recently needs to be made operational toprovide quick redress to taxpayers' problems. The quality of taxpayer education materials and interactivetools requires to be enhanced. Complementing these efforts to raise compliance in the near term, a longerterm initiative to build a stronger social consensus in favor of tax compliance needs to be undertaken, byreaching out to future taxpayers while they are still in schools and colleges.

(iii) Routine Processing of Tax Declarations and Payments:

While the DIAN now possesses a complete suite of systems to manage tax declarations and paymentinformation, some of the older systems, namely the Unique Taxpayer Register and the system foraccounting of tax and customs receipts need to be updated. Also, a second generation version of thesystem for control of refunds and credits needs to be developed to enhance its functionality. Finally, a

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system for assessing taxes payable by small and medium taxpayers, covered under a special tax regime, isrequired.

(iv) Routine Processing of Cargo, Customs Declarations and Payments:

The routine processing of cargo, customs declarations and payments has various deficiencies. Although anew system for processing customs declarations (COMEX) has been commissioned on a pilot basis, as yet,it covers only regular import transactions. Additional modules to deal with imports under special regimes,goods in transit and exports have yet to be developed. Thereafter, the system needs to be extended to othercustoms locations in the country. Due to a lack of a national level communication network for transfer ofcustoms information, there are significant delays in transmission of data regarding customs operationsbetween border posts and head quarters and amongst border posts. Further, most customs declarationprocessing stations are not linked electronically to ports, warehouses and banks. This createsdiscontinuities in information flows related to different stages of cargo processing, causing controlweaknesses. The process of valuation and classification of goods and assessment of customs duties needssignificant improvements. The physical infrastructure at customs posts, including weigh-bridges andclosed circuit TV systems, requires enhancement. Also, customs facilities need to be reconfigured tominimize the interaction between customs staff and clients, which increases the risk of corruption. Finally,the monitoring and control of private bonded warehouses is weak.

(v) Enforcement:

The extemal environment of the DTAN has become very difficult. The opening up of the economy hasincreased the complexity of business transactions that need to be dealt with, while creating additionalavenues for tax evasion. Taxpayers and customs users have become more sophisticated. The narcoticstrade has also contributed to the growth of the informal sector.

Even though the performance of the DTAN in tackling tax evasion shows steady improvement in recentyears, enforcement continues to be a relatively weak area. There are various reasons for this. The DIANreceives voluminous tax related information from third parties. However, there are major deficiencies inthe classification, dissemination and effective use of this information. A system to improve management ofexternal information relating to taxes is under development This needs to be extended to cover informationrelating to customs and foreign exchange violations. The DTAN does not have adequate systems andorganizational arrangements to collect covert intelligence about tax evasion and smuggling. While the newsystem for selection of cases for tax audit (SICAT), developed under the PFMP, has shown encouragingresults, its functionality and risk analysis capacity needs to be enhanced. Similar improvements are neededin the system for selection of customs cases for audit (SIFARO). The monitoring and evaluation of auditperformance are weak. There is inadequate follow up of cases in the post-audit stages, such as objections,appeals and payment of additional tax liabilities. As a result, a high proportion of cases (40.2% in 1997)are decided against the DIAN leading to a major reduction in assessed tax liabilities (53.2% or 149,330rnillion pesos in 1997) [Source: Colombia: Medidas para Aumentar las Eficacia de la Administraci6n deImpuestos, March 1998, IMF]. There is inadequate coordination between the audit (Fiscalizaci6n),assessment (Liquidaci6n) and legal (Juridicas) branches of the DIAN. Second order improvements in thefumctionality of the tax recovery system (SIPAC) and the system for monitoring filing of returns andpayment of taxes need to be done. Lastly, as the final outcome of enforcement actions depends ondecisions at the appellate stage, the DLAN's capacity to effectively represent cases before appellateauthorities needs to be strengthened.

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(vi) Policy and Legal Framework of Revenue Administrafion

Since 1990 there have been five Tax Reforms (Law 49 of 1990, Law 6 of 1992, Law 223 of 1995, Law383 of 1997 and Law 488 of 1998). In addition, in 1995, through Law 218 of 1995 a series of income taxexemptions were granted to attract investment to a region affected by natural disaster. A new CustomsStatute was decreed in 1999 and became effective in July 2000. A new tax reform package was passed byCongress in 2000. These tax reforms have mainly focused on increasing tax collections through wideningof the tax base, levying temporary surcharges and encouraging the declaration of concealed transactionsand income. They have also sought to modify the powers of the DIAN as well as administrativeprocedures, to facilitate compliance and enforcement. The frequent amendments to the tax laws have,however, increased their complexity. Also, the concessions granted to encourage disclosure of past taxevasion have had the unintended effect of discouraging voluntary compliance by building expectations ofmore such concessions in the future. In addition, weaknesses continue to exist in certain procedural andenforcement provisions of the tax and customs statutes. There is, thus, a need to carry out a systematicreview of the tax structure and tax laws with a view to optimizing the tax burden, reducing distortions,lowering compliance costs by simplifying procedures, and strengthening enforcement. The costs andbenefits of measures to induce declaration of evaded taxes also need to be properly evaluated.

Government Strategy: The government is seeking to support the modernization of the DLAN through amulti-pronged strategy. On the legislative side, Law 488 of 1998 was passed to increase revenuecollections and make major organizational changes in the DLN. In 1998, the government agreed with theIDB on the implementation of an Action Plan to reform tax and customs administration, in the context ofstructural adjustment loan: Programa Inter-Americano de Reforma de las Finanzas Pziblicas (Loan No.11 66-OC-CO). Budgetary allocations amounting to a total of about US$12 million, spread over 4 years,are being made to the DIAN for the purpose of implementation of the Action Plan. Meanwhile, thegovernment has continued to support modernization of the DIAN through the PFMP. It is relying on thePFMP-II to carry the process further.

UIL Public Expenditure Management Issues

During the last decade, various steps have been taken to strengthen public expenditure management.Extensive assistance to improve institutional capacity in this area was provided to the Ministry of Financeand Public Credit (Ministerio de Hacienda and Credito Publico - MHCP); the National PlanningDepartment (Departamento Nacional de Planeaci6n - DNP); the Office of the National Accountant General(Contador General de la Naci6n) and the Comptroller General of the Republic (Contraloria General de laRepublica - CGR) by the PFMP, as discussed in Annex 2.

As in the case of revenue administration, however, the process of institutional strengthening in publicexpenditure management also needs to be continued, so as to complete some of the reforms initiated by thePFMP and to deal with other weaknesses that were not covered by that project. The main areas requiringattention are discussed below:

(i) Macro-programming, Formulation and Monitoring of the Budget:

The following deficiencies continue to reduce the effectiveness of the processes of macro-programming andbudget formulation:* There is a lack of clarity about the role of national, regional and local governments. In many cases,

ministries and agencies at the national level continue to perform, and budget for, functions that havebeen devolved to local and state authorities. There is also a need to clarify the roles and responsibilities

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of entities that participate in different stages of expenditure management at the national governmentlevel, i.e. the MHCP, DNP, CGR, CGN and the sector ministries. For instance, the DNP spends aconsiderable amount of its time on technical and financial evaluation of programs and projectsproposed by sector ministries because the ministries do not provide it with the results of suchevaluations. Also, agencies monitoring public spending impose multiple reporting requirements on lineagencies, often calling for the same information. Besides increasing the compliance overload of theagencies, this leads to proliferation of mutually inconsistent information that affects the quality ofprogramming and budgeting decisions.

* In recent years, there has been constant pressure to increase public expenditures. Many factors havecontributed to this trend, including decentralization, the need to improve income distribution, efforts toenhance the credibility and legitimacy of the state, increased involvement of citizens in public decisionmaking and an aversion amongst most politicians to saying no. Thus, in the last decade, fiscal resultsof the central government have changed from a surplus of 0.5% of GDP in 1990, to an estimateddeficit of 6.4% of GDP in 1999. Total gross public expenditure for all programs increased from 24%of GDP in 1990 to 31% in 1998.

* Partly due to political incentives and partly due to deficiencies in tools to accurately forecast economictrends, revenues and expenditures, there is a tendency to overestimate revenues and underestimatecosts. The consequent relaxation of the budget constraint allows low priority prograns and projects tobe included in the budget. The situation is worsened by the inadequacy of systems to evaluateprograms and projects and by deficiencies in the capacity of the sector ministries to carry out suchevaluations effectively. The MHCP and DNP also suffer from lack of reliable information about perunit cost of inputs and outputs of different sectors. This affects their ability to properly evaluatebudget requests.

3 Due to unrealistic budget estimates as well as macro-economic shocks, the government has been unableto execute a significant portion of budgeted expenditures due to non-availability of resources. Untilrecently, unexecuted spending commitments and unpaid bills were automatically rolled over to thefollowing year and were financed out of that year's revenues. The effect was to reduce the government's ability to properly match public expenditures to strategic priorities of a particular year. The problemwas particularly felt at the time of change of government. For a significant part of its tern anincoming government continued to spend money based on the priorities of the previous one. Fiscalarrears have more than tripled from 1.0% of GDP in 1990 to 3.3% in 1999 and are a major concern ofthe current government. To begin to tackle this problem, the budget law of 2000 provides thatcommitments carried over to the next year be subtracted from the budget appropriations of theconcerned entity for that year.

* Constitutionally mandated transfers to territorial entities have increased from 29% of total revenues in1990 to 39% in 1998 and are targeted to increase to 38.1% in 2000. Mineral royalties are alsoearmarked. These entitlements, when combined with mandatory expenditures on salaries and debtservice, cover close to 85% of the national budget. As a result, the degrees of freedom available to theCentral government to implement its policy priorities through changes in expenditure patterns areextremely limited.

* The DNP is in charge of formulation of the National Development Plan and the budget for capitalexpenditures. The MHCP is responsible for the preparing the recurrent budget. This division ofresponsibilities has led to problems in integration of investment and recurrent expenditures, although,recently, efforts have been made to improve coordination between these two entities as well as with theCGR, through an inter-institutional agreement.

* The norms for formulation and execution of the budget need to be consolidated and streamlined.

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(iU) Budget Execution, Treasury, Public Credit and Accounting:

Current deficiencies in the field of budget execution, treasury, public credit and accounting are thefollowing:

* As mentioned above, when actual revenue collections do not come up to expectations, the govemmenthas to frequently resort to cash-flow driven cuts in expenditure. In effecting these cuts, it suffers fromthe same information deficiencies that affect decisions at the planning and budget formnulation stage.As such, budget cuts are often made in an arbitrary manner without full knowledge of their economiuccosts.

* The Integrated Financial Management Information System (SIIF) developed with the assistance of thePFMP needs to be extended to the regional offices of central government entities. The functionality ofthe system needs to be enhanced based on user feedback Also, to increase the coverage of the budgetby the system, a modified version of the system needs to be developed for implementation indecentralized entities that receive funds from the national budget. Further, in order to eliminate theproliferation of accounting systems used by different projects funded by extemal donors and increasecontrol over funds executed by these projects, a new module of the SIIF needs to be developed thatwould allow both the execution of project funds through the system as also compliance with reportingrequirements of donors.

o The Treasury manages various investment portfolios. However, its current portfolio managementsystem is inadequate and needs to enhanced to improve control of investment transactions and optimizereturns on investment.

* The debt management system of the Directorate of Public Credit (DPC) also needs to be replaced.While the system has adequate information about extemal debt, it suffers from various deficiencies,including the inability to connect with the SIIF and the lack of the functionality to allow debt serviceand cash flow projections.

* In the area of accounting, there is a need to improve the quality of accounting information generated bypublic entities, especially those not covered by the SIIF; strengthen the informnation systems of theOffice of the CGN to improve its capacity to consolidate accounting information pertaining to thenational, decentralized, and territorial levels; and provide additional training to public officials in theevolving accounting norms and practices.

(iii) Evaluation of Results of Public EXpenditure:

Colombia has pioneered a comprehensive National System for Evaluation of Results of Public SectorPerformance (SINERGIA) to institutionalize systematic evaluation of government policies, programs,projects and entities. While considerable progress has been made, given the major paradigm shift beingpursued, not surprisingly, progress has been slow. The uncertainty of budgeted funds remains a majorimpediment in enforcing compliance with agreed performance targets. Further, performance is still notlinked to specific incentives or penalties. The current version of the information system supportingSINERGIA also needs to be improved. At present it monitors performance only with respect to investmentexpenditures. It needs to be extended to cover recurrent expenditures as well. Further, the system needs tobe extended to public enterprises and territorial entities. Furthermore there is a need to systematicallyanalyze and design incentives faced by public sector managers in executing the budget, so as to developinsights that would help promote achievement of organizational objectives. Efficiency standards fordifferent sectors need to be developed. In addition, it is important to improve the dissemination of publicpolicy objectives, performance evaluation and budgetary results of public entities to civil society and thepublic, to improve transparency and accountability.

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(iv) Government Procurement and Contracting:

One of the areas that was not included in the PFMP, but has a major impact on the results of publicexpenditure is govermment procurement and contracting. A draft Country Procurement Assessment Report(CPAR, September 2000) highlights the strengths and weaknesses of the Colombian legal andadministrative framework for public procurement and makes specific recommendations for itsstrengthening. The legal framework, consisting of Law 80 of 1993 and around 80 regulatory decrees andother laws, over-regulates public procurement and has introduced opportunities for corruption.Over-regulation and the high concern with corruption has in turn led to an environment of mutual distrustbetween the government and those doing business with it. There is a lack of institutional leadership in thearea that makes it difficult to develop and improve the putlic procurement framework on an ongoing basis.Also, there is no system to monitor and evaluate procurement practices. Finally, the government is yet todevelop a capacity for disseminating procurement opportunities, bidding documents and contract awards tothe public via the internet, or to carry out procurement transactions on-line.

Government Strategy: The government is taking various steps, in addition to those mentioned above toimprove public expenditure management. A number of major reforms have been undertaken including aFiscal Responsibility Law to reduce the level of recurrent expenditures at the local and departmental level,a bill to amend the constitution to freeze, in real per capita terms, future transfers to local governments, anda law authorizing lottery and gaming activities to contribute resources to pension and health insurancefunds. In addition, the Government plans to submit to Congress legislation which aims to complete thereform of social security, including the elimination of several special regimes and an increase in theretirement age. With regard to public procurement, before the CPAR was completed, the Governmentsubmitted to Congress a bill amending Law 80. The proposed bill would, however, benefit from furtherimprovements, which the Government is inclined to make. The DNP is promoting a series of meetings withthe parties concemed to review the bill and propose changes. At the operational level, the governnentproposes to use the resources provided by this project, to continue improvements in national publicexpenditure management and deal with the capacity deficiencies discussed above. For strengtheningfinancial management capacity at the territorial level, the government is being assisted by the IDB.

3. Sector issues to be addressed by the project and strategic choices:

The project will support the government's efforts to improve the fiscal situation and strengthen theinstitutions that develop and implement revenue and expenditure policies.

In the area of revenue administration, the project would address the aforesaid institutional deficiencies, bysupporting activities aimed at improving the organization and managernent of the DIAN; promotingvoluntary compliance; increasing institutional capacity to handle routine work flows as well as enforce tax,customs and foreign exchange laws effectively; and enhancing the policy and legal framework for revenueadministration. Strategic choices made in developing project activities for revenue administration includethe adoption of a well-rounded approach that not only deals with weaknesses in technical functions, butalso with deficiencies in organization and management; giving greater emphasis to strengthening of customsadministration to enable it to catch up with the tax administration; and ensuring complementarity betweenproject initiatives and actions being taken by the DIAN under the Action Plan agreed with the IDB.

In the field of public expenditure management, the project would complement and supplement assistancebeing provided under the PFMP. While recognizing that political considerations and macro-economicconditions will always have an important impact on public spending decisions, the project would seek to

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enhance the quality of these decisions by improving the relevant norms, analytical tools and informationsystems. The project would also improve the control of the government over actual spending by extendingthe coverage of the SIIF; improve the management of investment and public credit portfolios; andstrengthen accounting. Further, it would seek to institutionalize the incipient emphasis on results bystrengthening the national evaluation system and facilitating dissemination of information relating to theobjectives, achievements, performance evaluation and expenditures of the public sector to the public.Finally, the project would assist in improving procurement and contracting practices to increasetransparency and value for money. In designing the public expenditure management component of theproject, strategic choices have been made in selecting a small number of high value added activities, thatwould have an immediate benefit for practitioners in this complex field. Also in order to keep the projectwithin manageable limits, and given the IDB's involvement in improving financial management capacity atthe territorial level, the scope of the project has been limited to the national government level.

C. Project Description Summary

1. Project components (see Amnex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project would provide consulting services, training and goods to support activities under threecomponents: Revenue Administration, Public Expenditure Management and Project Management.

a. Revenue Administration: US$36.02 miffion

Sub-component 1: Strengthening Organization and Management of the DIAN: $13.64 million: Thissub-component would support activities aimed at strengthening critical areas of the organization andmanagement of the DIAN, including strategic planning and management, personnel management andprofessional development, prevention and control of corruption, information management, managemnent ofnotifications, official correspondence and archives, and change management.

Sub-component 2: Facilitating Voluntary Compliance: $6.50 million: This sub-component would helppromote voluntary compliance by supporting the setting up of Integrated Taxpayers Education andAssistance Centers; training external stakeholders in tax and customs policy and procedures; expanding thereach and scope of electronic interaction between the DLAN and its clients; making the Office of theTaxpayer Ombudsman fully operational; and fostering a tax compliance culture

Sub-component 3: Improvng the Effectiveness of the DIAN in Managing Routine Processing of TaxDeclarations and Payments; $ 1.23 million: This sub-component would assist in increasing theefficiency and productivity of routine tax administration operations by supporting the updating andenhancement of systems for registration of taxpayers, accounting of revenue collections and control ofrefinds and credits. It would also help develop and implement a system for assessment of small andmedium enterprises covered under a special tax regime.

Sub-component 4: Improving the Effectiveness of the DIAN in Managing Routine Processing ofCargo, Customs Declarations and Payments: $9.61 million: This sub-component would support theimprovement of routine customs operations, such as cargo processing, processing of customs declarationsand payments, release of merchandise, monitoring and control of warehouses and sale of confiscated goods.It would also assist in enhancing the taxpayer current account to include customs transactions.

Sub-component 5: Strengthening the Capacity of the DIAN in Enforcement Operations. $4.57million. This sub-component would support the building up of the enforcement capacity of the DIAN by

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strengthening economic studies, management of external information, intelligence operations, risk analysis,audits, investigation and inspections, monitoring of filing of declarations and payments, control of VATinvoices, recovery of tax arrears and legal and appellate functions.

Sub-component 6: Improving Policy and Legal Framework of Revenue Administration: $0.45 million:This sub-component would support the review and revision of tax and customs policy, laws andregulations, and strengthen the ability of the DIAN to participate in international tax treaty negotiations.

b. Public Expenditure Management: US$ 18.51 million

Sub-component 1: Improving Macro-programming and Formulation and Monitoring of the Budget:$6.09 milion: This sub-component would (a) assist in clarifying and adjusting the roles andresponsibilities of different entities that participate in the programming, budgeting, execution andevaluation of public expenditures; (b) develop, enhance and implement models and information systems for(i) medium term and long term macro-economic projections and simulations, (ii) evaluation of expenditureand revenue policies to assist in decisions regarding reformns in the fiscal structure, (iii) generation ofconsolidated economic, fiscal and budgetary accounts of the public sector, (iv) classification of budgetexecution information contained in the SIIF according to economic categories, and (v) monitoring of publicsector finances, to improve macro-programming; (c) develop, improve and implement methodologies andsystems for (i) analysis of budget programming, (ii) quantification of expenditures earmarked by differentlaws and development of options for reforms aimed at reducing earmarking, (iii) projection of revenues,with interfaces with information systems of the DIAN, (iv) calculation of unit costs of inputs and outputs,initially for the Transport Sector and the Judicial Branch and, subsequently, for the Education and HealthSectors, (v) formulation and monitoring of the investment budget of the central government (vi) analysis ofpublic policies, programs and projects, (vii) projection of cash flows of the non-financial public sector, and(viii) financial monitoring of the budget; (d) improve interfaces between the information systems of theBudget Directorate of the MHCP and those of the sector ministries, to improve budget formulation andmonitoring; and (e) implement existing inter-institutional agreements between the MHCP, DNP and CGRto reduce the costs of monitoring of budgetary expenditures, by identifying shared information needs,eliminating duplicate reports, establishing primary sources of information and developing systems toprovide access to these sources.

Sub-component 2: Strengthening of Budget Execution, Treasury, Public Credit and Accounting:$9.70 million: This sub-component would provide assistance to (a) extend and enhance the IntegratedFinancial Management System (Sistema Integrada de Informaci6n Financiera - SIIF) by (i) implementing itin 145 regional offices of central government entities; (ii) developing a modified version of the system fordecentralized entities partially funded by the central budget and implementing the system in I I majorentities that spend about 12% of the national budget; (iii) enhancing the functionality of the system inaccordance with user feedback and increasing its capacity to include additional users; and (iv) developing amodule of the system to allow execution and accounting of externally funded projects through the system;(b) develop and implement a system to improve the capacity of the Treasury to better manage itsinvestment portfolios; (c) develop and implement a new system for management of the public debtportfolio; and (d) improve the quality of accounting information in public entities by (i) enhancingmechanisms for the registration and reconciliation of accounting records covering income, debttransactions, expenditures and physical assets; (ii) supporting dissemination, advisory services and trainingto improve accounting practices; and (iii) strengthening the information systems of the Office of theAccountant General of the Nation, to capture and integrate accounting information at the national,decentralized, and territorial levels.

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Sub-component 3: Improving the Evaluation of Results of Public Expenditure: $ 0.73 million: Thissub-component would support (a) the enhancement the National System for Evaluation of Results of PublicSector Performance (SINERGIA) by (i) improving the evaluation system to, inter alia, include recurrentexpenditures in the evaluation process; (ii) developing new modules for strategic evaluations of differentsectors and evaluation of performance of territorial and decentralized entities; (iii) developing andimplementing an incentive model linked to public policy outcomes in two pilot ministries, namely theMinistry of Foreign Trade and the Ministry of Economic Development; and (iv) updating the informationsystem supporting SINERGIA; (b) development of a systematic methodology for identification of inputsand outputs of different sectors to establish efficiency standards pertaining to delivery of public policyoutcomes for each sector; and (c) design and implementation of dissemination strategies to provideinformation to the public on performance targets for different policies, programs, projects and public sectorentities, evaluation of the actual results achieved and the amount of money spent in the process.

Sub-component 4: Strengthening Public Procurement and Contracting: $ 1.99 million:This sub-component would provide assistance to (a) develop legislation and regulations to supportmodifications to the Procurernent and Contracting Law (Law 80) with a view to improve the legalframework for public procurement; (b) design and implement institutional arrangements, including thepossibility of establishing a national body, for developing and regulating public procurement andcontracting policy; standardizing and disseminating procedures, bidding documents and contracts; andassisting central and territorial entities in procurement and contracting matters on an ongoing basis; (c)develop and implement a system for monitoring and evaluation of procurement and contracting practices inthe public sector, piloting the system in two central level entities, one decentralized entity and two territorialentities; (d) design and implement an internet based public procurement information system aimed atdisseminating all information regarding procurement notices, bidding documents and contract awards tointerested parties and the public, thereby setting the basis for online public procurement; and (e) carryingout a survey to determine procurement training needs and developing a pedagogical system aimed atproviding public sector personnel with learning tools relating to the conceptual, technical, legal andprocedural aspects of public procurement and contracting.

c. ProjectManagement: $ 4.35 million

This component will finance consulting services, equipment and training for the staff of the two ProjectManagement Units, one at the MHCP and the other at the DNP; communication of project objectives andactivities to stakeholder; and surveys to collect data on key performance indicators and obtain stakeholderfeedback

Indicative Bank- % ofcomponent Sector costs % of financing .ank-

._____________W (USWM) Total l US$M) fiancingA. Revenue Administration Institutional 36.02 60.8 21.70 61.2

DevelopmentPublic Expenditure Management Institutional 18.51 31.3 11.15 31.4

DevelopmentProject Management Public Financial 4.35 7.3 2.62 7.4

Management

Total Project Costs 58.88 99.4 35.47 100.0

Front-end fee 0.35 0.6 0.00 0.0Total Financing Required 59.23 100.0 35.47 100.0

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2. Key policy and insfitutional reforms supported by the project:

In Revenue Administration, the project would seek to (a) strengthen organization and managementcapacity to increase operational effectiveness; (b) create a more favorable environment for voluntarycompliance; (c) implement second generation reforms in tax admninistration; (d) overcome institutionaldeficiencies in the ability of the customs administration to collect trade taxes with minimal interruptionof trade flows; (e) strengthen enforcement capacity and (f) improve policy, laws and regulationsrelating to taxes and customs, to broaden the tax base, reduce distortions, increase equity, simplifyprocedures and facilitate enforcement.

In Public Expenditure Management, the project would aim to (a) strengthen planning and budgetformulation by clarifying institutional roles and responsibilities at different levels of government andamong institutions involved in budget planning, improving budgeting norms and enhancing the qualityof information and tools required for strategic expenditure decisions; (b) improve budget execution byextending the coverage and capacity of the SIIF to a wider set of public entities, enhancing investmentand debt management capacity and improving accounting of public expenditures; (c) sharpen the focuson results by improving evaluation capacity, initiating the process of linking incentives to performanceand facilitating monitoring of public sector performance by civil society; and (d) improve governmentprocurement and contracting by revising the relevant normnative and institutional framework,streamlining processes and implementing modernized infornation systems.

3. Benefits and target population:

The project would improve the ability of the Government of Colombia to collect due taxes to financepublic expenditures. At the same time, it would benefit taxpayers, traders, brokers, clearing agents, taxlawyers and accountants, by simplifying tax and customs procedures, providing additional taxpayerassistance services and reducing compliance costs. Improvements in public expenditure managementwould enable the government to allocate public funds to priority areas; maintain macro-economicstability; and enhance the cost effectiveness of its operations. Greater emphasis on results,strengthened evaluation mechanisms and increased information availability to civil society would helpimprove accountability in the public sector and the quality of public services. Improvements in publicprocurement and contracting would benefit suppliers of goods and services to the government, byleveling the playing fields and increasing the transparency of the associated decision-making processes.It would also increase the value for money derived by the public. At the organization level, the projectwould benefit the DJAN, the MHCP, the DNP and the CGN by providing them with technicalassistance, information systems, equipment and training, thus enabling them to better perform theirfumctions.

4. Institutional and implementation arrangements:

A. Project Management:

Since project activities relate to multiple, autonomous organizations, it would be very important toensure effective coordination. For this purpose a high level Project Coordination Committee (Comitede Coodinaci6n - COCOR) consisting of the Vice Minister, MHCP as Chairman; the Sub-Director,DNP; and the Director General, DIAN will be set up to provide leadership and oversight to the project.A senior, highly qualified professional will be recruited to act as the Secretary of the COCOR. In thiscapacity he will assist the COCOR in implementing and coordinating the activities of the project aswhole. The COCOR will review the progress of the project, resolve implementation problems and

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bottlenecks, approve the "Programa Operativo Anual" (POAs) and project budgets and reallocate fundsbetween components and activities as needed. The COCOR will meet at least once every three months.

The project management arrangements will broadly follow the arrangements that have beensuccessfully employed for the ongoing Public Financial Management Project (PFMP). Projectactivities will be divided into two clusters. Cluster 1, covering activities related to the MHCP, DLANand CGN will be managed by Project Management Unit -MHCP (PMU-MHP) and cluster 2, coveringactivities related to the DNP, will be managed by Project Management Unit - DNP (PMU-DNP).

PMU-MHCP will consist of the following staff:

* Secretary of the Coordination Committee, responsible for overseeing the activities of thePMU-MHCP, in addition to assisting the COCOR in implementing and coordinating the project.

* Technical Coordinator - DLAN, responsible for executing activities related to revenue administration,in close coordination with the management and staff of the DIAN.

* Technical Coordinator - Public Expenditure Management, responsible for executing activitiespertaining to expenditure management in collaboration with the management and staff of the MHCP,CGN and DNP.

3 Technical Coordinator - SIIF, responsible for the enhancement and expansion of the SIIF. He willwork closely with the Technical Coordinator -Public Expenditure Management.

3 Project Administrator, responsible for developing the Annual Operational Program (ProgramaOperativo Anual - POA); managing procurement, accounting, financial reporting, disbursements,audits and project reporting.

3 Procurement Team consisting of a Procurement Officer and an Informatics Specialist, responsible forcanrying out the selection and recruitment of consultants and the procurement of goods and otherservices required for the project in accordance with the relevant Bank Guidelines. The team will workclosely with the procurement specialists at the UNDP who would, inter alia, ensure adherence to BankGuidelines, invite bids, finalize contracts, clear goods through customs and make payments to suppliersand consultants.

* Financial Management Specialist/Accountant, responsible for accounting, disbursements, financialreporting, auditing and adherence to Bank guidelines for project financial management. The FinancialManagement Specialist will also assist the PMU-DNP as needed and will be responsible forconsolidating the accounts of both the PMUs into comprehensive project accounts. He/she will alsocoordinate disbursement and accounting activities with the UNDP.

* Two Secretaries.

PMU- DNP will consist of the following staff:

* Technical Coordinator/ Project Administrator, responsible for coordinating public expendituremanagement activities within the DNP and with the MHCO and CGN, developing the Annual Programof Operations (Programa Operativo Anual -POA); managing procurement, accounting, financialreporting, disbursements, audits and project reporting.

* Project Officer, who would assist the Technical Coordinator! Project Administrator in the discharge ofhis/ her functions.

* Financial Management Specialist, responsible for disbursements, financial reporting, auditing andadherence to Bank guidelines for project financial management. He/she will also coordinatedisbursement and accounting activities with the UNDPand the PMU-MHCP.

* Accountant.

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* Secretary.

To ensure coordination at the technical level, two Technical Coordination Committees (TCCs) wouldbe established. The Technical Coordination Committee - DIAN will be headed by the DirectorGeneral, DIAN and will have the Director of Taxes, the Director of Customs, the Secretary General,DIAN, Secretary General - Institutional Development, the Head of the Office of Information Systems,the Secretary of the COCOR and the Technical Coordinator - DIAN (Member-Secretary). ThisCommittee will deal with technical issues related to the implementation of project activities in theDLAN.

The Technical Coordination Committee - Public Expenditure Management will consist of theDirectors of Macro-programming, Budget, Treasury and Public Credit, MHCP; Heads of theMacro-programming, Public Investment and Finance, Evaluation Units of the DNP; representatives ofthe Fiscal Council (Consejo Fiscal- CONFIS), the Office of the National Accountant General and theOffice of the Comptroller General of the Republic; the Secretary of the COCOR, the TechnicalCoordinator/ Project Administrator - DNP, the Technical Coordinator - SIIF and the TechnicalCoordinator - PEM, MHCP (Member- Secretary).

As with the ongoing PFMP, in order to ensure smooth flow of project funds and timely and efficientexecution of procurement contracts, GOC will engage UNDP under a Management Service Agreement.Since UNDP cannot enter into a competitive selection process as required by IBRD guidelines, theadministrative fees paid to it would be financed out of counterpart funds.

B. Financial Management Arrangements:

a. Accounting and FinancialReporting : While the PMUs in charge of the project have gainedexperience in project accounting through the execution of the ongoing Public Financial ManagementProject since 1994, the current financial management system needs to be reinforced and expanded inline with the new financial management requirements of the Bank. In compliance with the conditionsoutlined in the Bank's Project Financial Management Manual (February 1999), a FinancialManagement Specialist carried out the required project financial management assessment to determinethe capacity of the PMUs to observe present Bank financial management standards during projectimplementation (see Annex 6). An Action Plan to deal with observed deficiencies was agreed withproject management. A follow up visit by a Financial Management Specialist and the progress madeby the PMUs in meeting the requirements of the Action Plan indicate that the project meets the Bank'sminimum financial management standards. A revised Action Plan has been prepared to furtherstrengthen project financial management capacity. An Action Plan to enable the PMUs to produceProject Management Reports will be implemented within six months of effectiveness.

Within the GOC counterpart contribution, there is an amount of US$8.5 million which will be shown inthe national budget as the investment budget of the DIAN and not of the project. This amount willfinance some of the activities included in the Revenue Administration component of the project, whichwill be directly executed by the DIAN, in line with the Action Plan agreed with the IDB. Since thefunds will be spent in accordance with the National Budgetary and Procurement laws, specialarrangements for monitoring of these funds have been agreed. These are: (i) the monitoring of theactivities and the expenditures incurred will be carried out ex-post by the PMU and Bank supervisionmissions; (ii) the DIAN will submit quarterly reports showing the scope of activities carried out,categories of expenditure, physical progress achieved and the impact of such activities; and (iii) on thatbasis, the PMU financial specialist will consolidate the information and prepare all the required reports

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for the IBRD, national authorities and audit.

b. Procurement: The PMU-MHCP will have a procurement team consisting of a ProcurementOfficer and an Informatics Specialist, who would look after procurement and contracting activitiesrelated to the project. In the PMU-DNP this function will be performed by the Technical Coordinator!Project Administrator and the Project Officer. UNDP will be hired through counterpart funds toprovide procurement management support and will work closely with the PMUs.

Procurement of goods under the proposed project will be carried out in accordance with the latestversion of Bank's "Guidelines for Procurement under IBRD Loans and IDA Credits". Procurement ofinformation systems would be carried out using the Bank's Standard Bidding Documents for theSupply and Installation of Information Systems. Consultants will be recruited in accordance with thelatest version of "Guidelines: Use of Consultants by World Bank Borrowers and the World Bank asExecuting Agency". A procurement capacity assessment has been carried out, with procurement riskbeing rated as "average". Procurement methods and thresholds for prior review have been agreed(Annex 6).

c. Monitoring and Evaluation Arrangements: The project would be implemented on the basisof an annual work program called "Programa Operativo Anual" (POA). The POA is being used by theongoing project. The POA for each calendar year would be submitted to the Bank by the precedingOctober 31 for approval. The POA would contain details of activities to be executed during the yearand the resources required, source of financing, time table, performance indicators and institutionalresponsibility for each activity. Further, in keeping with Bank financial management guidelines,(OP/BP) 10.2., project management reports (PMRs) would be submitted. The PMRs would compriseof financial reports, progress reports, and procurement reports. The format of these reports will closelyfollow the guidelines in the Project Financial Management Manual (IBRD, February 1999). Thereports will reflect all project financing and expenditures, including those expenditures that are financedoutside of the PMU. It was agreed, that the PMUs will prepare quarterly PMRs, to be consolidated bythe PMU - MHCP for review by the COCOR and the Bank. The project would be supervised by theBank on an ongoing basis, with at least two field supervision missions each year. A mid-term reviewof the project would be carried out in the third year of project implementation.

d. Auditing Arrangements: The Comptroller General of the Republic (CGR) by law conductsthe audits of public sector programs, including IBRD projects. Accordingly, this project would also beaudited by the CGR. Audits of accounts and the financial statements of the project, including aseparate opinion on Statements of Expenditures, would follow accounting and auditing proceduressatisfactory to the Bank. All supporting records would be maintained at least one year after thecompletion of the project. A consolidated audit report would be submitted to the Bank no later thanfour months after the end of each fiscal year. The audit would cover project expenditures until suchtime as the loan has been closed. To ensure timely submission of the audit reports to the Bank, theCGR will be asked to submit within six months after loan effectiveness its report on the review ofProject Internal Controls. Arrangements will also be made with the CGR to ensure its involvement inproject audit early in the fiscal year, thus, enabling it to complete the audit process in a timely manner.The use of Bank guidelines on project audits and the terms of reference of Auditors will be agreedbefore negotiations.

e. Disbursement Arrangements: GOC will sign Management Service Agreements (MSAs) withUNDP, similar to the MSAs currently in place under the on-going project, to manage both loan andcounterpart funds. The MSAs would have the advantages of allowing the project a more predictable

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access to funds due to budgetary regulations governing this type of agreement. UNDP also has ampleexperience in international procurement and has tax exemption status. Under the MSA arrangement,IBRD will make disbursement directly to the General Account of the UNDP in New York. Paymentswill be made out of this account by UNDP in dollars or in local currency. The PMUs would still havefull responsibility for the financial management, monitoring and reporting of the project and forpreparing all aspects of the processes related to the procurement. UNDP will act as an intemal auditorby guaranteeing that all procurement rules and guidelines are followed. It will also review all contractsexecuted under the project from the legal point view. UNDP will sign all contracts and pay thebeneficiaries of the contracts. It will transfer all goods purchased to the executing agencies. In thefuture, GOC may engage another agency to perform the functions that would initially be performed bythe UNDP, subject to the agreement of the Bank and under terms and conditions satisfactory to it.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

Revenue Administration: One of the alternatives proposed in the early stages of project design was tolimit this component to investments in Information Technology. This would have had the advantage offocused project interventions, precise outputs and easier project implementation. However, this alternativewas rejected, because it would not have resulted in sustainable improvements in the DIAN's performance.While IT investments are important, it is equally important to address non-IT institutional deficiencies inorganization, management and operations. Therefore, an integrated modernization strategy, including bothIT and non-IT interventions, was developed after a comprehensive institutional and organizationaldiagnosis.

Public Expenditure Management: The initial strategy considered for this component was (a) to focus onextending the SIIF and (b) addressing expenditure management problems relating to the education andhealth sectors that account for a major proportion of public spending. Regarding the latter it was felt byGOC that deficiencies in information relating to physical inputs and outputs linked to expenditures in thesesectors made it very difficult to take well-considered budgetary decisions. After several rounds ofdiscussions with different agencies, a consensus emerged that a broader, more holistic approach dealingwith continuing deficiencies at different points of the expenditure cycle would yield more sustainableimprovements. Therefore a broader reform strategy was adopted covering macro-programning, budgetformulation and monitoring, budget execution, management of investment and debt portfolios, evaluation,and procurement and contracting. As regards the education and health sectors, discussions withcounterparts revealed the existence of serious sector-specific issues, such as private versus public provisionof education and health services, financing of health care and the performance of agencies engaged in healthinsurance and provision of health services. Such issues need to be dealt with in order to imnproveexpenditure outcomes in these sectors. It was felt that these were beyond the scope of this project andwould best be addressed through other sectoral reforms. However, to address issues related to budgetaryinformation pertaining to these sectors, they were included as pilot sectors for developmnent of informationrelating to per unit costs of inputs and outputs.

Adaptable Program Lending vs. Specific Investment Loan: In view of the institution building nature ofthe project, the alternative of designing the project as an Adaptable Program Lending (APL) operation wasalso discussed with the government. However, considering that the project is itself the second stage of theprocess of strengthening public financial management that began in 1994 and, on its completion, a modeminstitutional infrastructure for revenue administration and public expenditure management is expected to bein place, this option was not pursued. The government also indicated that it does not envisage the need for

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additional loans for public financial management after the end of this project.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

. T Latest SupervisionSector Issue Project (PSR) Ratings

(Bank4inanced projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)Public Financial Management, Tax Public Financial Management S SAdministration, National Evaluation -COSystemCapital markets, public debt, pension, Financial Markets Development S Sbanking TA - CO

Other development agenciesStrengthening of financial management IDB- Strengthening of thein regional entities Regional Information System -

FOSITTechnical Assistance in training and GTZdevelopment of organizational strategyof the DIAN

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

A number of lessons learned in the course of implementation of the PFMP and similar projects have beenincorporated in the project design. These include the following:

- A project dealing with fundamental reforms in Revenue Administration (RA) and Public ExpenditureManagement (PEM) can succeed only if it has strong borrower commitment. In order to achieve this,it has been ensured that the project addresses real Borrower needs in both the areas and is in line withthe Borrower's strategic priorities. Also, different agencies of the Borrower have been closely involvedin preparation of the project, so as to build ownership of the proposed reforms.

* While computerization is necessary to improve efficiency and effectiveness in RA and PEM, it is notsufficient. It is imperative to address underlying institutional weaknesses in order to achieve lastingresults. Therefore, a well-rounded institutional development approach has been adopted. Whilesupporting extensive information technology investments, the project would also deal with issuesrelating to the normative framework, incentives, human resources, organizational arrangements,management systems, business processes and training.

* In addressing institutional weaknesses, it is not enough to focus on formal rules of the game. Theinformal rules must be taken into account. Consequently, informal rules have been specificallyexamined while diagnosing both RA and PEM, and to the extent possible project interventions havebeen designed to address problems related to both formal and informal rules.

* In reforming organizations, it is important to take into account the environment in which they operate.Accordingly, enviromnental factors of both the RA and PEM have been examined in detail at thediagnostic stage and an attempt has been made to design project activities that would strengthen thepositive effects of the environment and reduce its negative influences on the targeted organizations.

* Institutional development is an iterative multi-year process. For this reason, the project has been

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designed to support second generation reforms, building on the progress made under the PFMP.* Competent leadership of the project is essential. The project leader should have adequate authority to

overcome inter-organizational hurdles and push reforms. For this purpose, the project will be headedby the Vice Minister, MHCP. It would also have a Secretary to the COCOR of sufficient stature tolead day to day implementation activities.

* Due to their regular responsibilities, it is very difficult for line managers and staff to devote adequateattention to longer term modernization activities. Yet their inputs are crucial to project success.Therefore, it is essential to create a dedicated group of individuals who are devoted full time toimplementation of project activities, but work closely with line staff. To address this need, ProjectManagement Units, consisting of consultants and regular employees, have been designed to coordinateproject activities with line agencies and facilitate implementation. Also a high level ProjectCoordination Committee and two Technical Coordination Committees have been created to ensuresmooth inter-institutional cooperation and an synchronized approach in activities involving more thanone organization.

4. Indications of borrower commitment and ownership:

Given the serious fiscal situation faced by Colombia, reforms in revenue administration and publicexpenditure management are amongst the top priorities of the government. This is reflected in the highpriority attached to the project in programming discussions with the Bank. The project has beenextensively discussed with the Borrower, it has been designed to address manifested needs and differentagencies of the Borrower have invested considerable time and effort in developing the project. Thegovernment's commitment to the project is also indicated by the provisions it has made for the project inthe FY 2001 national budget, in spite of the very tight fiscal situation.

5. Value added of Bank support in this project:

The Bank has been actively involved in supporting public financial management reforms in Colombia forthe last six years. In the process it has acquired considerable country specific knowledge of the issues thatneed to be dealt with. This, coupled with the its international and regional experience in similar projects,would help the Bank provide high quality assistance to the Borrower, enabling it to consolidate the reformsinitiated by the PFMP and dealing with deficiencies that remain to be addressed. Also, as has been theexperience with the PFMP, as a disinterested party focused on achieving the development objectives of theproject, the Bank would be able to help overcome inter-institutional boundaries and catalyze cooperationbetween different counterpart agencies in areas that require concerted action.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR = % (see Annex 4)* Cost effectivenessO Other (specify)Economic impact of project to be evaluated.

2. Financial (see Annex 4 and Annex 5):NPV=US$ rnillion; FRR = % (see Annex 4)

Fiscal Inpact:

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3. Technical:In order to identify issues in revenue administration and pin-point areas of project assistance, acomprehensive diagnosis of the DLN was carried out, based on "A Diagnositc Framework for RevenueAdministration ", Jit B. S. Gill, World Bank Tecnical Paper 472, 2000. First a preliminary examinationof the DIAN was conducted using Indicators of Nature and Scope of Operations; Indicators ofEffectiveness; and Indicators of Efficiency. Thereafter, a detailed institutional and organizational analysiswas carried out. Four major Inputs of the DLAN, namely its Environment, History, Resources, andOrganizational Strategy were examined. Thereafter, Transformation Processes, through with inputs areconverted into outputs were analyzed, with reference to both organization and management tasks as wellas technical tasks related to tax and customs administration. For each task the formal organizationalarrangements, the informal organization and the individuals performing the task were studied. Finally,Outputs at the individual, unit and organizational level were examined. In the whole analysis, the focuswas on finding out as to where and why different pieces of the DIAN's system do not fit each other, thuscausing performance problems. Once the causes of inadequate performance were identified, appropriateremedies were developed to deal with them.

Similarly, a detailed analysis of public expenditure management institutions in Colombia was carried out,following an enhanced version of the diagnostic methodology outlined in the Public Expenditure Handbook(The World Bank, 1998). In addition, reports produced by the Commission for the Rationalization ofPublic Expenditures and Finances (Comisi6n de Racionalizaci6n del Gasto y de las Finanzas Publicas)were used to supplement the diagnosis.

Both diagnoses were validated through consultations with concemed GOC managers and staff. Activitiesfinally included in the project were those that the clients identified to be high priority and doable. They takeinto account the current level of technological and functional sophistication of the DLAN, MHCP, DNP andCGN and their capacity to absorb planned project inputs. Project costs are based on best judgementestimates, guided by the implementation experience of the PFMP.

4. Institutional:

4.1 Executing agencies:

MHCP, DNP and DIAN

4.2 Project management:

As mentioned above, this project will broadly follow the project management arrangements that have beensuccessfully employed for the PFMP. The executing agencies for the project will be the DLN, for theRevenue Administration component, and the MHCPand the DNP, for the Public Expenditure Managementcomponent. The DIAN is an administratively autonomous entity closely linked with the MHCP, while theMHCP and DNP are part of the central government. Inter-agency coordination will be ensured through ahigh level Coordination Committee and two Technical Coordination Committees. The executing agencieswill be supported by two PMUs, that are currently managing the PFPM in the MHCP and DNP. ThePMUs will have the assistance of the UNDP for management of project funds and procurement processes.

The PFMP is broadly similar in magnitude and complexity to this project. The satisfactory implementationexperience of the PFMP indicates that the executing agencies have the capacity to execute the new projectwith equal success. While the range of project activities may appear to be very broad at first blush, it is

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important to note that these would actually be apportioned between various functional units. In the revenueadministration component, activities relating to organization and management would be led by theSecretary General and Secretary General (Institutional Development) of the DIAN; while those related totax administration, customs administration and informatics would be managed by the Directorate of Taxes,Directorate Customs and the office of Informatics Services, respectively. Similarly, in the publicexpenditure management component, the oversight of activities relating to macro-programming andformulation and monitoring of the budget would be shared between the Macro-programming Directorateand the Budget Directorate of the MHCP and the Investment Budget Unit of the DNP; the expansion of theSIIF would be managed by the existing SIIF unit in the MHCP, while the development of the systems formanagement of investment portfolios and debt management would be led by the Treasury and Public CreditDirectorate, respectively. Activities concerning accounting would be managed by the National AccountantGeneral's office. Further, activities relating to improvement of evaluation systems would be undertaken bythe Evaluation Unit of the DNP, while those related to improvements in public procurement and contractingby another team in the DNP. Consequently, the burden of implementing project activities would be evenlydistributed and would not excessively strain the institutional capacity of any one functional unit.

As the experience of the PFMP has shown, the quality of staff involved in implementation of projectactivities in various units of the DIAN, MIICP, DNP and CGN is, generally, very good. This wouldensure that there is constant client involvement in the design and implementation of project initiatives and inensuring that project outputs meet client needs. Frequent rotation of personnel at senior positions in theDIAN, MHCP and DNP is, however, expected to continue, as was the case during implementation of thePFMP. While this will no doubt have some impact on the pace of the project, it is not seen as a majorimpediment. During the irnplementation of the PFMP, it was noticed that officials replacing incumbentsare usually of the same high caliber. After an initial period of familiarization with the project, they tend tosupport it strongly on account of the improvements that the project can make to performance in theirrespective areas of responsibility. There has also been some rotation of staff in the PMU of the MHCP.This will be sought to be reduced through contracts extending over more than one year.

All the executing agencies and the PMUs have gained considerable knowledge and experience in publicfmancial management reform and Bank procedures during the implementation of the PFMP. UNDP alsohas experience with the PFMP and other Bank projects.

4.3 Procurement issues:

Regarding procurement under Bank projects, the CPAR states that while procurement problems have insome instances caused delays, a more frequent cause has been the lack of adequate and timely counterpartfunding. Bank financed projects are exempted from the national law on procurement (Law 80), therefore,procurement under those projects is carried out in accordance with the Bank Guidelines. By and large,implementing agencies consider procurement under Bank projects easier and more transparent than thatunder national procedures. There have been no instances of mis-procurement in the recent past. The mainprocurement related problems found in project implementation are due to: (i) limited knowledge of Bankpolicies and procedures and wrong interpretation of the Guidelines; (ii) lack of qualified and experiencedstaff, particularly among decentralized projects and new agencies; and (iii) lack of standard documents forNCB. Procurement and inspection agents are not used in Bank projects. However UNICEF, UNDP andIICA have been hired as project administrators because of their experience in the field and their ability toassist with the resolution of administrative problems primarily related to budget management. The generalrisk assessment is that while Public procurement in Colombia entails high risk both for the Government andfor those doing business with the Government, procurement under Bank projects, where the Guidelines arereasonably enforced, is apparently free of major risk and corruption.

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This project, as a part of its Public Expenditure Management Component, includes a subcomponent aimedat (i) improving the legal and the institutional framework for public procurement; (ii) developing publicprocurement information systems and (iii) developing and implementing a procurement training program.

A procurement capacity assessment of PMUs in the MHCP and the DNP was conducted and procurementrisk for the project was assessed as "average". Procurement activities will be handled by the PMUs inconjunction with the UNDP. In the PMU-MHCP, the Project Administrator has been trained inprocurement at the Bank. In addition, a Procurement Team consisting of a Procurement Officer and anInformatics Specialist has been created. In the PMU-DNP, procurement matters will be dealt with by theTechnical Coordinator/Project Administrator and the Project Officer. Additional training in Bankprocurement guidelines will be provided to PMU staff through the Project Launch Workshop andsubsequent courses.

4.4 Financial management issues:

According to the Country Financial Management Assessment (CFMA- September 1998), the generalframework for financial management at the country level is already in place, legislated for both the privateand the public sectors. The National Accounting Office (CGN) is the executing agency for governmentalaccounting and the controlling institutions in charge of monitoring compliance are the Superintendencies incharge of overseeing economic sectors as well as the CGR. Financial management in Colombia is based onArticle 334 of the Constitution. The CFMA indicates that overall Colombia does not lack laws andregulations concerning financial management or the practice of the accounting profession. The main issuesrelate to the fact that financial management needs to be more closely linked to service of national goals.The recommendations of the report focus on improving the financial management systems to facilitatecontrol of expenditures, allow centralized and decentralized monitoring of expenditures and permitperformance assessment and the establishment of a results-oriented public sector. It should be noted thatthe current Public Financial Management Project I has made inroads in meeting these objectives by theimplementation of the SIIF system, the strengthening of the CGN and the implementation of theSINERGIA. The follow on project will further strengthen these systems as detailed above.

According to the CFMA, the hurdle most encountered by Bank projects in the country is the frequentbudget cuts, along with inefficiencies in the flow of funds to the projects that affect project implementation.The use of UNDP as the fund executing agency in the project helps alleviate the flow of fund problemscaused by the bureaucratic process at the central level as the funds are committed in the annual budget anddeposited in the UNDP account. However, fiscal problems have led to smaller than planned budgetapprovals causing a shortage, sometimes, of both counterpart and loan funds. This issue will need carefulattention during the yearly budget approval process.

A financial management assessment of the current PMUs in the MHCP and DNP was conducted. ThePMUs were observed to have various strengths including, (a) ample experience of staff in projectmanagement, (b) defined organizational structures, (c) established culture and procedures with regard toplanning, budgeting and monitoring of activities, (d) knowledge of Bank guidelines and (e) experiencedextemal government auditors. Weaknesses detected included the need for documentation of policies andprocedures, a computerized integrated financial management/accounting system and quarterly projectmanagement reports. An Action Plan to deal with the observed deficiencies was agreed with projectmanagement. Since then, considerable progress has been made (see Annex 6). As a result, the rating forthe project has been raised to "4-B". A revised Action Plan has been agreed to further strengthen projectfinancial management.

All project funds will be managed directly by the UNDP. Project accounts will be maintained by the two

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PMUs and will be consolidated by PMU-MHCP. These will be audited by the CGR, who has the legalresponsibility in this regard. The reports of the CGR have been found to be generally satisfactory, in thecase of the PFMP. However, occasional delays, not always attributable to the CGR, have beenexperienced in receipt of audit reports. Remedial measures will be taken to reduce the delays, includingagreeing with the CGR to start audit activities early in the fiscal year concerned. Some additional trainingto PMU staff would be needed in the new financial management guidelines of the Bank. This will beprovided through the Project Launch Workshop and other courses.

5. Environmental: Environmental Category: C (Not Required)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The project is classified as Category C and has been cleared by LCSES on October 6, 2000.

5.2 What are the main features of the EMP and are they adequate?

Not applicable.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

Not applicable.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

Not applicable.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

Not applicable.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The project's main social development outcome is more responsive, accountable and transparentgovernance.

Stakeholders within the public sector who would benefit from the project include officials responsible foreconomic management, revenue collection, expenditure management and preparation and auditing ofnational accounts. These stakeholders would benefit from the improved norms, processes, systems andskills implemented through the project, that would help them take better decisions and implement themmore effectively. External stakeholders who would gain form the project consist of law abiding taxpayers;traders, brokers and clearing agents; tax lawyers and accountants; suppliers of goods and services to thegovernment; civil society organizations interested in strengthening citizen's voice in government affairs andin fighting corruption. Stakeholders who stand to lose from project initiatives would include corrupt publicofficials unable to earn rents due to reduced discretion, increased transparency and improvedaccountability; tax evaders and smugglers thwarted by improved enforcement capacity of the DIAN andcorrupt vendors affected by more transparent procurement procedures and greater competition.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Preparation Implementation

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Beneficiaries (Executing Agencies) IS, COL IS, COLBeneficiaries (Taxpayers) CON IS, CONIntermediary NGOs CONOther Donors COL COL

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

During project preparation taxpayers were consulted on issues related to voluntary compliance andinteraction with the DIAN. In the course of project implementation, it is planned to carry out surveys oftaxpayers, traders, brokers, clearing agents as well as their representative associations, to determine theimprovement in their perception regarding the efficiency, effectiveness, integrity and quality of service ofthe DIAN. Also surveys of civil society organizations and suppliers of goods and services to thegovernment would be carried out to measure improvements in transparency about the objectives, actualperformance, expenditure, procurement and contracting of public entities. Further, in developing revisedregulations for procurement and contracting, consultations with different stakeholders are planned.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomnes?

The project provides for various coordination, consultation and change management mechanisms to buildsupport for the reforms supported by it. It also makes provision for carrying out a sustainedcommunication campaign for this purpose. Stakeholder surveys would also be used both to measure theprogress made by the project as well as to fine-tune project interventions in line with the feedback received.Opposition from corrupt public officials, tax evaders, smugglers and corrupt vendors would be inevitable.To overcome it, the project would seek to build countervailing support for the proposed reforms amongstthe honest majority of stakeholders. At the same time, it would rely on the declared commitment of thegovernment to enforce tax laws effectively, empower civil society and combat corruption.

6.5 How will the project monitor performance in terms of social development outcomes?

Performance regarding social development outcomes would be monitored through surveys and supervision.

7. Safeguard Policies:7 Do any of the following safeguard policies apply to the proiect?

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes * NoNatural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes * NoCultural Property (OPN 11.03) 0 Yes * NoIndigenous Peoples (OD 4.20) 0 Yes 0 NoInvoluntary Resettlement (OD 4.30) 0 Yes * NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes * NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

Not applicable.

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F. Sustainability and Risks

1. Sustainability:

The critical factors on which the sustainability of project benefits would depend include: continuing publicdemand for improvements in quality of public services, particularly, in revenue administration, publicexpenditure management and public procurement and contracting; sustained commitment of the governmentat the political, managerial and technical levels to whole-heartedly implement project activities and supportthe updating and maintenance of project outputs after the project closes; the willingness of the governmentto base critical revenue enforcement and resource allocation decisions on the objective informationgenerated by different tools and systems provided by the project, rather than on purely politicalconsiderations; and the effectiveness with which change management strategies are implemented.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveCommitment to strengthening of revenue M The project would play a central role in enablingadministration and public expenditure the government to respond to the difficultmanagement at the political, managerial macro-economic and fiscal situation facing theand technical levels is not sustained. country. For this reason, continued support

from the political directorate is expected. Also.while designing the project, significant effort hasbeen made to make sure that it responds tocritical needs of different functional areas. Thiswould help secure continued commitment to itsimplementation at the operational level.

The government is unable to effect M Most institutional changes envisaged under theinstitutional changes required to project are within the purview of the Executivesuccessfully implement project outputs. branch. On account of the active involvement Af

the agencies covered by the projects and theirvarious operational units in project design,considerable ownership for the project has beenbuilt up. The process of participation andconsultation will continue throughout projectimplementation. Provision has also been madefor effectively communicating the objectives andbenefits of project initiatives to managers andstaff within the government and to externalstakeholders, so as to create a propitiousenvironment for institutional change.

Decisions relating to enforcement of tax M The risk that some decisions in revenueand customs laws and those relating to administration and public expenditureallocation and spending of public funds management would be based on politicalare based on political considerations and considerations cannot be ruled out. However, itnot on decision support systems developed is expected that the models, methodologies,under the project. information systems and skills provided by the

project would equip decision makers withobjective information with which to counterunreasonable political demands.

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From Components to OutputsManagers and staff of the DIAN, MHCP M Managers and staff of these agencies have beenand DNP do not take an active interest in actively involved in the implementation of thethe development, quality control and PFMP and the design of this project. They areimplementation of project initiatives. expected to remain engaged in the

implementation of the project as its outputswould have a major beneficial impact on thefunctioning of their respective organizations.

Coordination between MHCP, DNP, M Already these entities have experience inCGN CGR and other relevant agencies in coordinating project activities due to the PFMP.common activities is weak. Adequate coordination mechanisms have been

incorporated into the project design (theCOCOR and Technical CoordinationCommittees for each component). Coordinationwould also be facilitated by the Bank in thecourse of project supervision.

Adequate allocation for the project in the H Given the importance of the project to thenational budget is not made from year to critical area of fiscal management, the project isyear and counterpart funds are expected to receive high priority in budgetinadequate. allocations, as has been the case with the PFMP.

Nevertheless, given the tight fiscal situationbudget cuts for the project cannot be ruled out.The PMUs would need to be proactive inensuring that adequate budgetary provisions aremade for the project.

Management of project activities, finances M The PMUs have gained sufficient experience inand procurement and contracting actions project management and Bank procedures.is not effective. Effective project management would be ensured

through staffing of the PMUs with qualifiedindividuals and providing them with adequatetraining and coaching as needed. Theengagement of the UNDP for management ofproject funds and procurement would alsostrengthen project management.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

None.

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G. Main Loan Conditions

1. Effectiveness Condition

* The Secretary to the COCOR and other staff of PMUs, as indicated in Project Managementarrangements above, appointed.

* Management Services Agreement (MSA) signed with UNDP.* All actions under the revised Action Plan for Financial Management completed, including

implementation of the Integrated Project Management Information System.* Procurement documents for major contracts to be executed in the first six months of project execution

prepared.* Project Operational Manual finalized.

2. Other [classify according to covenant types used in the Legal Agreements.]

Not applicable.

H. Readiness for Implementation

O I . a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

Z 1. b) Not applicable.

El 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

1 4. The following items are lacking and are discussed under loan conditions (Section G):

Details of project activities and sub-activities, type of inputs needed, costs and sequencing and performanceindicators have been agreed. TORs for consultants to be engaged and specifications for goods to beprocured in the first six months of project implementation will be prepared before effectiveness. The samefor activities to be undertaken in the next six months would be prepared in draft outline and would befurther refined closer to the date for inviting bids. The Operational Manual for the project would beprepared as a condition of effectiveness. Since the Project Management Units would, essentially. be similarto those PFMP, they are substantially in place. Additional project staff required would be recruited beforeeffectiveness. Procurement and Financial Management Assessments of the PMUs have already beencarried out and remedial actions to overcome deficiencies found have been initiated. Thus, the project issubstantially ready for implementation.

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1. Compliance with Bank PaoiciS

t I. This project complies with aUl applicable Bank policies.U 2.The following exceptions m Bank policies are wcommneded ic approval. The project complics with

all other applicable Bank policies.

Jit bahAdur S &/J3 May Olivier LafoucadeToW L;Wor Moct91 anagwr -Country Manager

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Annex 1: Project Design SummaryCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT II

Key PerormanceHierarchy of O4ectives -. Indteators Monitoring & Evaluation Critical AssumpflOns

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Attaining public sector * Improved quality of * Annual evaluation of * Macro-economicresponsiveness and efficiency public services. public policies, stability.in the delivery of services programs, projects * Reduced internal

and agencies by the conflict.DNP.

* Service DeliverySurveys.

* Reports of theComptroller Generalof the Republic(CGR).

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Key Perfomt ance0iHierarchy oObjes00 0 t;iv ; ;indicator# S : *Moitoring &JEvaluation Critical Assufnptins

Project Development Outcome I Impact Project reports: (from Objective to Goal)Objective: Indicators:A. Strengthen the *Improvement in the * DIAN statistical * Continued demand forinstitutional capacity of the effectiveness of the DIAN as reports improvement in taxDirectorate of National Taxes indicated by: * DIAN statistical and customsand Customs (DIAN) to foster * 5% increase per reports. administration fromvoluntaiy compliance; collect annum in the * Measurement of the public and otheirevenues efficiently, proportion of total tax compliance gaps and stakeholders.effectively and equitably; and declarations filed contraband by the * Sustained comrnitmentcombat tax evasion and voluntarily and on Economic Studies Unit of the government tosmuggling, so as to enable it time. of the DIAN. the modernization ofto mobilize adequate tax * 5% increase per * DIAN budget. the DIAN.revenues to finance public annum in the * Stakeholders surveys.expenditures. proportion of total tax

revenues paidvoluntarily and ontime.

* 0.5% decreaseannually in the VATcompliance gap.

* 1% decrease annuallyin Income Tax andBusiness Profit Taxcompliance gap.

* 1% decrease annuallyin the ratio ofcontraband to totalimports.

* Improvement in theefficiency of the DIAN asindicated by 1% decreaseper annum in the ratio ofthe annual recurrentbudget of the DIAN to totalrevenue collected by it.

* Improvement in theperception of taxpayers,traders and otherstakeholders regarding theefficiency, effectiveness,and integrity of the DIANas indicated by annualsurveys.

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B. Strengthen public * Increased accountability of * Evaluation reports * Continuing demand forexpenditure management at public entities for generated by public expenditurethe central government level, achievement of SINERGIA. reform, transparencyto facilitate achievement of performance objectives, * Reports of the and accountability fromfiscal and national spending of public procurement and civil society and thedevelopment objectives, resources, and procurement contracting monitoring private sector.improve cost effectiveness of of goods and services, as system. * Sustained conmmitmentpublic services, and increase indicated by results of * Per unit costs data of for public expendituretransparency and evaluations done through selected sectors management reformsaccountability. the Sistema Nacional de (Transport, the amongst different

Evaluaci6n de Gestion y Judiciary, Education agencies, especially, theResultados ((National and Health). Ministry of Finance andSystem for Evaluation of * Surveys of civil society Public Credit (MHCP),Management and Results - and public officials. the National PlanningSINERGIA). * SINERGIA Reports Department (DNP), the

* Increased value for money * Reports of the CGR on National Accountantin public procurement and social control. General (CGN) and thecontracting in pilot Comptroller General ofagencies. the Republic (CGR).

* Increased transparency andenhanced civil societycapacity to monitor publicsector performance, asindicated by the quantity,quality and timeliness ofinformation, pertaining topublic sector performanceand expenditures, availableto the public.

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Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:A. Revenue Administration * Delivery of project * Annual Operational * Sustained

* Improved norms, outputs in accordance Plans (POAs). commitment tobusiness processes, with milestones * Project Management strengthening ofinformation systems and established in the Reports (PMRs). revenueinfrastructure for Project Implementation * Supervision Reports. administration at thestrategic planning and Plan (PIP), as updated * Mid Term Review political, managerialmanagement, personnel from time to time. * Surveys of taxpayers and and technical levels.management and * Improvement in the customs users and DIAN * Ability of theprofessional DIAN's capacity for officials. government to effectdevelopment, prevention strategic planning, * DIAN statistical reports. institutional changesand control of budgeting, personnel required tocorruption, information management and successfullymanagement and professional implement projectrecords management; development, prevention outputs.promoting voluntary for corruption,compliance; managing informationroutine processing of tax management anddeclarations and records management.payments; managing * ISO 9000 certificationroutine processing of for business processes ofcargo, customs the DIAN.declarations and * Increased taxpayerpayments; and satisfaction with servicesenforcement, provided by the DIAN toimplemented and promote voluntaryrelevant staff trained. compliance.

* Reduction in time taken* Policy and legal to process tax and

framework for tax and customs declaration andcustoms administration payments and clearsystematically reviewed cargo.and options for * Improved targeting ofimprovement presented cases for investigationto govemment. resulting in increased

audit productivity.* Reduction in time taken

to initiate action againstnon-filers, stop filersand taxpayers failing topay taxes on time.

* Improvements in taxpolicy and legalframework based onrecommendationsemerging from theirreview.

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B. Expenditure Management* Roles and

responsibilities of * Delivery of project * Annual Operational * Sustained commitmentdifferent agencies outputs in accordance Plans (POAs). to strengthening ofinvolved in public with milestones * Project Management public expenditureexpenditure established in the PIP, Reports (PMRs). management at themanagement (PEM) at as updated from time to * Project Supervision political, managerialthe national level time. Reports. and technical levels.revised. * Greater clarity in roles * Mid Term Review. * Ability of the

* Improved norms, and responsibilities of * Evaluation of sectors government to effectmodels, methodologies different entities and entities carried out institutional changesand information systems involved in PEM at the by DNP using required to successfullyto support decision central level. SINERGIA. implement projectmaking in the areas of * Increased user * SIIF reports. outputs.macro-programming, satisfaction regarding * Surveys of civil societybudget formulation, the utility of new norms, and public officials.budget execution, models, methodologiesinvestment and information systemsmanagement, debt in day to day PEMmanagement, evaluation activities.and public procurement * At least 900/O of theand contracting, central budget executedimplemented and on-line through therelevant staff trained. SIIF.

* Additional 145 regional * Improvement in theoffices of central coverage, quality andgovernment entities and timeliness of11 major descentralized information available toentities connected on the public regardingline to the SIIF. objectives, actual

* Information about performance,objectives, performance expenditure andtargets, actual procurement of publicperformance, entities.expenditure,procurement andcontracting of publicentities regularlyavailable to the public.

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Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)A. Revenue Administration USS36.02 million * Annual Operational * Active involvement of

Plans (POAs). relevant managers andA: Revenue Administration: * Project Management staff of the DIAN in the

Reports (PMRs). design, development,Sub-component 1: $13.64 million * Project Supervision quality control andStrengthening Organization Reports. implementation ofand Management of the * Mid Term Review. project initiatives.DIAN. * Consultant Outputs. * Effective coordination of

* Procurement documents. project acfivitiesSub-component 2: $ 6.50 million. * Disbursement Reports. between differentFacilitating Voluntary * Audit Reports. organizational units ofCompliance. the DIAN and between

$ 1.23 million the DIAN and theSub-component 3: MHCP and DNP inImproving the Effectiveness of areas of commonthe DIAN in Managing interest.Routine Processing of TaxDeclarations and Payments.

$ 9.61 million.Sub-component 4:Improving the Effectiveness ofthe DIAN in ManagingRoutine Processing of Cargo,Customs Declarations andPayments:

$ 4.57 millionSub-component 5:Strengthening the Capacity ofthe DIAN in EnforcementOperations.

$ 0.45 millionSub-component 6:Improving Policy and LegalFramework of RevenueAdministration.

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B. Expenditure Management USS 18.51 million * Annual * Active involvement ofOperational Plans relevant managers and

Sub-comnonent 1: (POAs). staff of the MHCP,Improving $ 6.09 million * Project DNP, CGN and CGR inMacro-programming and Management the design, development,Formulation and Monitoring Reports (PMRs). quality control andof the Budget. * Project implementation of

Supervision project initiatives.Sub-component 2: $11.47 million Reports. * Effective coordinationStrengthening of Budget * Mid Term Review. between MHCP, DNP,Execution, Treasury, Public * Consultant CGN CGR and otherCredit and Accounting. Outputs. relevant agencies in

* Procurement common activities.Sub-component 3: $ 0.73 million documents.Improving the Evaluation of * DisbursementResults of Public Expenditure. Reports.

* Audit Reports.Sub-component 4: $ 1.99 millionStrengthening PublicProcurement and Contracting.

C. Project Management $ 4.35 million * Annual Operational * Adequate allocation forPlans (POAs). the project in the

* Project Management. national budget fromReports (PMRs). year to year and

* Project Supervision. availability ofReports. counterpart funds.

* Mid Term Review. * Effective management* Consultant Outputs. of project activities,* Procurement docunents. finances and* Disbursement reports. procurement and- Audit Reports. contracting actions.

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Annex 2: Detailed Project DescriptionCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11

The Public Financial Management Project - II (PFMP-II) is a follow-on operation to the ongoing PublicFinancial Management Project (PFMP) financed by the Bank (Project ID: CO-PE-6889, closing on March31, 2001), which has supported reforms in revenue administration and public expenditure management atthe national level since 1994. In addition, the government has undertaken various parallel initiatives in boththese areas on its own. The IDB and GTZ have also provided assistance to the DIAN. The PFMP-IT seeksto consolidate and extend the results achieved so far; undertake second generation reforms in selected areas;and deal with deficiencies that have not yet been addressed. In order to put the project in perspective, theprogress made in different aspects of revenue administration and public expenditure management to date issummarized below.

A. Revenue Administration:

(i) Organization and Management of the DJAN:

In the last ten years, important initiatives have been taken to strengthen the organization and managementof revenue collection. In 1991, the Direcci6n de Impuestos (DIN) was converted into a SpecialAdministrative Unit with increased budgetary autonomy and a special regime concerning its staff. Similarchanges were made in the Customs administration, Direcci6n de Aduanas (DAN). In 1993, the DIN andthe DAN were merged to form the Direcci6n de Impuestos y Aduanas Nacionales (DTAN) to exploitpotential synergy between the two functions. This arrangement was partially modified in 1997 to createseparate Directorates for Customs and Taxes under a common Directorate General, while keepingcorporate and support functions unified. In 1998, under powers granted by Law 488 of 1998, the DIANwas designated as an essential public service, with its own legal personality and administrative autonomy.Its budgetary autonomy was increased by permitting it to retain proceeds of sale of confiscated goods aswell as of other services provided to clients. Adjustments in the organizational structure were made toreduce duplication of functions and jurisdictional conflicts. New human resource management policieswere instituted to ensure merit-based recruitment and promotion; facilitate inter-functional mobility; rewardperformance for team work, tax audit, tax collection and achievement of national level targets; improveperformance evaluation; encourage professional and managerial development; and strengthen institutionalcapacity for HR management. To control corruption, the Office of Disciplinary Investigations was placedunder the Director General and special administrative disciplinary regime was created for expeditiousremoval of corrupt employees. With the help of the PFMP, financial management and pay-roll systemswere implemented. Also, a detailed analysis of business processes was carried out to assess corruptionrisks therein and identify changes to mitigate the risk. Finally, a major overhaul of the informaticsinfrastructure of the DL4N was undertaken. This includes creation of a wide area network, setting up oflocal area networks in each regional administration, procurement or upgrade of new communicationsystems, servers, PCs and printers. The new systems have empowered regional administrations byallowing them direct access to corporate databases for planning and execution of their operations,quickened information exchange between the head quarters and the regions, slashed processing time ofmajor business processes and improved the quality of information.

(ii) Voluntary Compliance:

Since voluntary compliance is the bedrock of revenue collection, various steps have been taken to helptaxpayers comply with their legal obligations. These include setting up special units to provide services to

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taxpayers, importers and exporters; establishing an Office of Grievances and Complaints; providinginformation regarding tax law changes and compliance procedures through publications, TV spots, theinternet and over the telephone; assisting taxpayers in filling declaration forms; and providing informationon specific queries. With the assistance of the PFMP, a system for electronic filing of tax returns has beenmade available to large taxpayers in five major regional administrations. Recently, the Office of theTaxpayer Ombudsman has been created by law. The impact of these efforts is reflected in the increase inthe number of tax and customs declarations filed from 3.85 million in 1997 to 4.1 million in 1999 and areduction in the compliance gap for VAT from 32.40 % in 1994 to 23.90% in 1999.

(iii) Routine Processing of Tax Declarations and Payments:

The DLkN processes about 2.88 million tax declarations and associated payments armually. The PFMPhas provided it with sophisticated tools to properly manage this heavy information flow. A new taxpayercurrent account system has been developed, along with a system that automatically updates the currentaccount by incorporating the impact of administrative decisions, such as assessments, penalties, appealsand refunds on a taxpayer's tax liabilities. Two systems, one for monitoring the performance ofcommercial banks that collect tax declarations and payments and, the other, linking their compensation tothe quality of service have been commissioned. At the same time, the period for which banks could retaintax receipts has been negotiated down from 22 days to 14 days, substantially reducing the cost of servicesprovided by them. A system for monitoring the deduction and payment of taxes by tax withholders has alsobeen implemented. Further, a system for controlling tax refunds and credits has been put into use. Asalready mentioned, the facility of electronic filing of tax returns has been provided to large taxpayers. Sofar 8000 taxpayers, accounting for about 40% of tax payments, use this facility. The number of taxpayersfiling electronically is expected to increase to 47,000 by June 2001. This has improved the timeliness ofreceipt of declarations, significantly reduced filing errors and enhanced the DIAN's ability to monitorcompliance by this important segment of taxpayers.

(iv) Routine Processing of Cargo, Customs Declarations and Payments:

The merger of customs and tax administrations in 1993 created unintended problems for the customsadministration. Following the merger, the number of customs staff was reduced from 5,000 to about2,000, resulting in a significant loss of expertise both at management and functional levels. Themodernization of customs administration was initially not included in the PFMP. Therefore, it laggedbehind in informatics capacity as well. For the most part, customs has continued to operate with obsoletelegacy systems. In addition, the level of political interference and corruption in customs is perceived to behigher than that in tax administration. These factors have resulted in a marked weaknesses in theinstitutional capacity of the customs administration, both in the routine processing of cargo and collectionof taxes and duties as well as in enforcement. In the meantime, the volume and sophistication ofinternational trade has increased.

Efforts to deal with the institutional deficiencies of customs were initiated in the last few years. To givespecial attention to the needs of customs administration, a separate Directorate of Customs was created in1993, as mentioned above. Some PFMP funds were reallocated to begin the development of a modem setof information systems, collectively christened SIGLO XXI (21 st Century), while providing assistance toupdate legacy systems for operation in the interim. A pilot of the new system of processing customsdeclarations and payments (COMEX) has been commissioned at Bogoti. Also, a system for themanagement of sale of confiscated goods (ADA) has been put into operation.

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(v) Enforcement:

In order to improve the enforcement capacity of tax administration, the PFMP has helped develop andimplement an advanced system for selection of cases for tax audit (SICAT) and a system to manage therecovery of tax arrears (SIPAC). Also a system for automatically generating notices to taxpayers who failto file returns on time and/or default on payment of taxes has been implemented. Methodologies forestimation of the extent of tax evasion in VAT and Income Tax have been developed. To support auditorsin investigation of cases, an input-output matrix for major industries has been created. The impact of thesetools, coupled with other measures taken by the DIAN, on the enforcement capacity of the latter has beensignificant. For example, additional tax assessed as a result of tax audits increased from 1.55% of total taxcollections in 1996 to 5.57% in 1999. Also, the gap between potential and actual VAT collections hasdropped from 32.40 % in 1994 to 23.90% in 1999 as mentioned above (the compliance gap for Income Taxand Business Tax has remained steady around 40%). Additional tax collections as a result ofadministrative and enforcement actions increased from US$ 35.8 million in 1995 to US$ 385.9 million in1999 (Source: DIAN and PFMP). . In the area of customs, an audit selection system (SIFARO) has beenimplemented. Finally a study for estimating the volume of contraband has been completed. Under Law488 of 1998, a Fiscal and Customs Police Directorate has been created to assist the DIAN in curbing taxevasion.

B. Public Expenditure Management:

During the last decade, various steps have been taken to strengthen public expenditure management. TheConstitution of 1991 mandated transfer of a significant proportion of public resources to territorial entities;created the office of the Accountant General of the Nation charged with the responsibility of consolidatingthe accounts of all levels of government; changed the role of the Auditor General from ex-ante control toex-post audit of government expenditures; and emphasized the establishment of modem financialadministration based on efficiency and effectiveness in public spending. The Organic Budget Law(Estatuto Presupuestal) was amended four times: Law 38 of 1989, Law 179 of 1994, Law 225 of 1995 andthe Law of the Plan (Law 142 of 1994). Five presidential decrees were also issued to complement thereforms introduced by these laws. The reforms aimed to strengthen fiscal stability and macroeconomiccoordination; introduce a new planning framework based on increased civil society participation; provideautonomy in budget execution to operative agencies; and introduce performance management in the publicsector. The current administration is also undertaking structural reforms in various areas of public finance.During 1999, within the context of the National Development Plan, Congress approved legal amendmentsthat would improve the fiscal situation in the medium term. These include (i) reform of the resources andcompetencies of local governments (Law 60), including increasing efficiency of expenditure in education;(ii) improving efficiency in public Universities (Law 30); (iii) changes in royalties allocations, to attractprivate investment; (iv) legislation that mandates saving of a part of the transfers to local government tofinance local pension funds; (v) law to rationalize territorial government finances by limiting their currentexpenditures; and (vi) reforms to reduce earmarking and improve the allocation of local expenditures.

Complementing these reforms, the PFMP has focused on strengthening the institutional capacity of theMinistry of Finance and Public Credit (Ministerio de Hacienda and Credito Puiblico - MHCP); the NationalPlanning Department (Departamento Nacional de Planeaci6n - DNP); the Office of the NationalAccountant General (Contador General de la Naci6n) and the Comptroller General of the Republic(Contraloria General de la Repuiblica - CGR). The contributions made by the project to improving publicexpenditure management are as follows:

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(i) Macro-programming, Formulation and Monitoring of the Budget:

The PFMP financed the work of a multi-party Commission for the Rationalization of Public Expenditureswhich carried out a detailed review of public expenditure management issues. The recommendations of theCommission have been an important input into policy reforms undertaken by the government in variousareas, such as pensions, territorial transfers and privatization. To strengthen the capacity of the MHCPand the DNP in macro-economic analysis for the purpose of macro-programming, the project assisted in thedevelopment of methodologies for production of quarterly national statistics and GDP estimates,monitoring of real economic activity and preparation of social accounting matrices; models for economicanalysis, including general equilibrium models and a model for fiscal projections; information systems forgenerating leading indicators, monitoring of public finances and monitoring of public sector cash flow. Italso supported studies of specific issues relating to public finance, and staff training. In the area of budgetformulation the development of a system for formulation of the investment budget has been initiated. Alsoa system to provide online access to budgeting norms was implemented.

(ii) Budget Execution, Treasury, Public Credit and Accounting:

One of the major outputs of the PFMP has been the development and implementation of an IntegratedFinancial Management System (SITF). The system is in operation in 46 central govemnment entities sinceJanuary 2000, with over 1000 users. It covers about 80% of the central government budget. The systemhas automated the entire process of budget execution by line entities. Payments are now made through asingle national account. This has already resulted in a reduction in idle cash balances by about US$ 45rnillion per month on average. The SIIF generates accounts based on transactional information. Itsdatabase is available to the CGR, for real time audit of central government accounts, and to the CGN, forpreparation of national accounts. In addition to the SIIF, the project has also supported the development ofa treasury planning module. In the area of public credit, the PFMP has provided assistance in developingmethodologies for risk management and in identification of options for the replacement of the existing debtmanagement system. A decision to implement the UNCTAD's debt management system has been takenrecently. The project supported the establishment of the Office of the Accountant General of the Nation(CGN). The CGN has since developed and implemented new accounting norns, a new chart of accountsand trained officials at all the three levels of govemment. National accounts are being published by theCGN since 1995. The PFMP also provided support to the CGR for training its staff. Besides training infinancial audits, assistance was provided in developing methodologies and skills in management andperformance audits. Currently the project is supporting the CGR's efforts to implement a system of socialcontrol, by involving civil society in oversight and audit of public expenditures.

(iii) Evaluation of Results of Public Expenditure:

With the assistance of the PFMP, the govermnent embarked on an ambitious initiative to introduce resultsoriented management in the public sector. A National System for Evaluation of Results of Public SectorPerformance (SINERGIA) has been implemented in all 16 sector ministries and 170 public entities. Underthis system Indicative Plans (IPs) are established for each sector and entity for each year. In the case ofsectors, the IPs include the strategic objectives of the sector and specific indicators relating to the actualresults to be achieved, along with targets for minimum, satisfactory and excellent performance. In the caseof public entities, besides sector objectives, the objectives of the entity are also included. The system hasbeen in operation since 1997. Performance evaluations of the sector ministries are carried out by the DNP.The entities carry out auto-evaluation and are also evaluated by their respective ministries. An informationsystem to manage the evaluation system has also been implemented. The IPs are being used now as themain information source for evaluating performance in the context of the National Development Plan. The

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SINERGIA has also changed the tenor of annual reports presented by the DNP to the Economic and SocialPolicy Council (CONPES), by focusing attention on strategic objectives, performance indicators and actualperformance. At the entity level, they have helped clarify the key results areas of each entity and the resultsexpected of it. Based on the SINERGIA, the DNP and MHCP have also started the practice of signingEfficiency Agreements with specific ministries and public entities. In exchange for commitments regardingavailability of funds made by the DNP and MHCP, the ministry or public entity concerned commits todeliver specific outputs.

Notwithstanding the aforesaid substantial achievements made in strengthening revenue administration andpublic expenditure management, much remains to be done as described in detail in Section 2: Main sectorissues and Government strategy. In order to address the persisting deficiencies, the project wouldundertake the following activities falling under three components.

By Component:

Project Component I - US$36.02 millionRevenue Administration: This component will have the six sub-components. The main activities to besupported under each sub-component are indicated below:

Sub-component 1: Strengthening Organization and Management of the DL4N - $13.64 million:

* Strategic Planning and Management: Develop and implement a Management Information System atthe Centmal, Regional and Local levels of the DLAN; develop a project bank to facilitate betterformulation, execution, monitoring and evaluation of strategic initiatives; implement an informationsystem regarding inter-institutional and intemational agreements; and improve quality of businessprocesses by implementing ISO 9000 standards.

* Personnel Management and Professional Development: Design and implement an informationsystem for the administration of the career path and professional development of DLN staff; providetraining to 3000 staff in basic functions of tax and customs administration and to 250 staff in advancedtechnical functions; design and implement a Virtual Training School that will allow DLAN staff at alllocations to enhance their professional skills, through conveniently paced self-learning, so as to qualifyfor promotions along the career path.

* Prevention and Control of Corruption: Provide specialized training to staff of the Office ofDisciplinary Investigations at the national level to enable them to carry out effective investigations intoallegations of corruption; strengthen intemal audit; modify business processes of the DLAN, inaccordance with the risks highlighted in the Corruption Risk Maps developed under the PFMP toreduce the possibilities for corruption; carry out a sustained campaign to sensitize DIAN staff to theprofessional ethical standards expected of them and the institutional and personal consequences ofcorruption.

* Information Management: Review and enhance the central information system of the DLAN (SistemaInformatico de Administraci6n Tributaria - SIAT) to ensure its ability to handle new technologies andmodes of reception of infornation; strengthen the capacity of the DIAN in Internet and ElectronicCommerce technology; strengthen the capacity of the Office of Informatics Services (Oficina deServicios Informaticos - OSI); consolidate servers to eliminate current proliferation of applicationservers; re-dimension the network administration infrastructure to connect 29 additional localadministration online with the corporate systems; improve system security and contingencyarrangements; train staff in new technologies and specialized tools; and measure and enhance thequality of corporate information.

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* Management of Notifications, Official Correspondence and Archives: Develop and imnplementsystems for management of official notifications; correspondence and archives and improve recordstorage facilities.

* Change Management: Facilitate institutional change by carrying out a sustained communicationcampaign to explain the objectives and implications of the modernization of the DIAN to internal andexternal stakeholders, in order to sustain support for the reforms.

* Sub-component 2: FacUitating Voluntary Compliance - $6.50 million:

* Establish Integrated Taxpayers Education and Assistance Centers to guide and assist taxpayers andcustoms clients in complying with their legal obligations.

* Develop and disseminate educational materials and interactive tools to educate and inform current andpotential taxpayers.

* Extend the system of electronic filing of tax declarations, currently available to large taxpayers, tosmall and medium taxpayers and add functionality to the current system to enable taxpayers to interactwith the DIAN online in other matters, such as payment of taxes and submission of claims for taxrefunds.

* Make the Office of the Taxpayer Ombudsman fully operational.3 Train external stakeholders, such as firms providing advice in customs and trade matters, importers

and exporters, in tax and customs policy and procedures.* Foster a tax compliance culture through outreach programs aimed at school and college students.

Sub-component 3: Improving the Effectiveness of the DIAN in Managing Routine Processing of TaxDeclarations and Payments: $1.23 million:

* Update, expand and improve existing information systems for registration of taxpayers; accounting oftax and customs duty collections and control of refunds and credits.D Develop and implemnent a systemn for assessment of taxes of small and medium enterprises coveredunder a special tax regime.

Sub-component 4: Improving the Effectiveness of the DIAN in Managing Routine Processing ofCargo, Customs Declarations and Payments: $9.61 million:

* Cargo Processing: Strengthen cargo processing infrastructure, by acquisition and installation ofweigh-bridges and other equipment; design and implement systems to prevent unauthorized access torestricted areas; and train staff engaged in cargo clearance.

* Processing of Customs Declarations and Payments: Implement the External Commerce (COMEX)module of the SIGLO XXI customs information systems throughout the country for automaticprocessing of regular imports; design and implement additional modules of the COMEX to coverexports, imports under special regimes and cargo in transit; implement filing of digitally signedcustoms declarations and other documents; and train staff.

* Release of Merchandise: Train staff in classification and valuation of merchandise and assessment ofcustoms duties; and equip customs laboratories for effective and timely testing of materials.

* Monitoring and Control of Warehouses: Design, develop and implement a system for electronicmarking of cargo to facilitate tracking.

* Sale of confiscated goods and other services through electronic commerce: Develop and implementa system for sale of confiscated goods and other services (such as sale of statistical informationregarding foreign commerce, forms and tax literature etc.) through electronic commerce.

* System to Capture Administrative Decisions of Customs Administration: Develop and implement a

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system to capture administrative decisions of customs administration (GESTOR ADUANERO); andenhance the Taxpayer Current Account to include customs transactions.

Sub-component 5: Strengthening the Capacity of the DIAN in Enforcement Operations: $4.57million:

* Economic Studies: Optimize the system for the production of foreign trade statistics; refinemethodologies and systems for measuring tax evasion and contraband; extend the datawarehouse to theregional administrations.

* External Information: Develop a system for collection of external information needed to supportenforcement of customs and foreign exchange laws; Train 250 auditors in the use of the newlydeveloped system of external information required for enforcement of tax laws.

* ntelligence Operations: Review, improve and implement norms, procedures, organizationalarrangements and information systems pertaining to intelligence operations conducted by the DIAN andtrain staff in this area.

* Risk Analysis for Selection of Cases for Tax Audit: Design and implement a system for organizationof statistical information required for selection of cases for tax audit; and develop additional modulesof the current system for selection of cases for tax audit (SICAT).

* Tax Audit and Investigation: Develop manuals on tax audit and investigation techniques and trainstaff.

* Risk Analysis for Selection of Cargo Consignments for Inspection: Develop and implement a riskanalysis system for selection of cargo consignments for physical inspection; and train staff in the use ofthe system.

* Post-release Customs Audits: Enhance existing customs audit systern; and train staff* Monitoring of Filing of Declarations and Payment of Taxes: Enhance the current system for

monitoring of filing of declarations and payment of taxes.* Control of VAT Invoices: Develop and implement a system to integrate VAT invoicing via the

internet, with the systems of the DIAN.* Coercive Recovery of Tax Arrears: Enhance the current system for recovery of tax arrears (SIPAC)

by developing and implementing additional modules for recovery of tax arrears throughinter-institutional agreements and recovery of arrears from legal representatives.

- Legal and Appellate Functions: Expand the existing legal information system for taxes and customs;organize joint seminars with the Consejo del Estado to exchange experience between the appellateauthorities and the DIAN, with a view to improve the quality of DIAN's decisions, fill deficiencies inits representation of tax cases before appellate authorities and streamline disposal of appeals; and trainstaff working in legal and judicial areas.

Sub-component 6: Improving Policy and Legal Framework of RevenueAdministration - $0.45milion:

* Review and revise tax and customs policy, laws and regulations to expand the tax base and reduceeconomic distortions, simplify substantive and procedural provisions to reduce compliance costs andimprove the legal authority of the DLAN to enforce tax and customs laws.

* Strengthen the ability of the DIAN, through staff training, to participate in international tax andcustoms negotiations.

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Project Component 2 - US$18.51 millionPublic Exwenditure Management: This component will have four sub-components. The main activitiesto be supported under each sub-component are as under:

Sub-component 1: Improving Macro-programming and Formulation and Monitoring of the Budget:$6.09 million:

0 Institutional Roles and Responsibilities: Clarify the roles and responsibilities of entities thatparticipate in the programming, budgeting, execution and evaluation of public expenditures i.e. MHCP,DNP, CGN, CGR and Sector Ministries; develop and implement regulations to give effect to the rolesso defined; delegate analysis of sectoral policies, programs and projects to sector ministries to enablethe DNP to focus on planning and evaluation; and train relevant officials in their new roles;

* Macro-programming: Develop models and systems for (a) medium term and long termmacro-economic projections and simulations, (b) evaluation of expenditure and revenue policies toassist in decisions regarding reforms in the fiscal structure, (c) generation of consolidated economic,fiscal and budgetary accounts of the public sector, (d) classification of budget execution informationcontained in the SIIF according to economic categories, and (e) monitoring of public sector finances;and train staff in the use of these models and systems.

* Budget Formulation: Develop, improve and implement methodologies and systems for (a) analysis ofbudget programming, (b) quantification of expenditures earmarked by different laws and developmentof options for reforms aimed at reducing earmarking, (c) projection of revenues, with interfaces withinformation systems of the DIAN, (d) calculation of unit costs of inputs and outputs, initially for theTransport Sector and the Judiciary and, subsequently, for the Education and Health Sectors, (e)formulation and monitoring of the investment budget of the central government (e analysis of policies,programs and projects, (g) projection of cash flows of the non-financial public sector, (h) financialmonitoring of the budget; and improve interfaces between the information systems of the BudgetDirectorate of the MHCP and those of the sector ministries to improve analysis of budgetary needs andperformance of the sectors.

O Rationalization of information flows: lInplement existing inter-institutional agreements between theMHCP, DNP and CGR to reduce the costs of monitoring of budgetary expenditures, by identifyingshared information needs, eliminating duplicate reports, establishing primary sources of informationand developing systems to provide access to these sources.

Sub-component 2: Strengthening of Budget Execution, Treasury, Public Credit and Accounting:$9.70 million:

* Integrated Financial Management System (Sistema Integrada de Informaci6n Financiera - SUF):Extend the SIIF to 145 regional offices of central govermment entities; develop a modified version ofthe system for decentralized entities partially funded by the central budget and implement the system in11 major entities; enhance the functionality of the system in accordance with user feedback andincrease its capacity to include additional users; and develop a module of the system to allow executionand accounting of externally funded projects through the system.

* Treasury: pevelop and implement a system to improve the capacity of the Treasury to better manageits investment portfolios.

* Public Credit: Develop and implement a new system for management of the public debt portfolio.* Accounting: Improve the quality of accounting information in public entities by supporting

mechanisms for the registration and reconciliation of accounting records covering income, debttransactions, expenditures and physical assets; support dissemination, advisory services and training to

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improve accounting practices in public agencies; and strengthen the information systems of the Officeof the Accountant General of the Nation, to capture and integrate accounting information at thenational, decentralized and territorial levels.

Sub-component 3; Improving the Evaluation of Results of Public Expenditure: $ 0.73 million:

* National System for Evaluation of Results of Public Sector Performance (SINERGIA): Enhancethe SINERGIA by improving the evaluation system to, inter alia, include recurrent expenditures in theevaluation process; developing new modules for strategic evaluations of different sectors andevaluation of performance of territorial and decentralized entities; developing and implementing anincentive model linked to public policy outcomes in two pilot ministries, namely the Ministry ofForeign Trade and the Ministry of Economic Development; and updating the information systemsupporting SINERGIA.

* Efficiency Standards: Develop a systematic methodology for identification of inputs and outputs ofdifferent sectors to establish efficiency standards pertaining to delivery of public policy outcomes foreach sector.

* Transparency: Design and implement dissemination strategies to provide information to the public onperformance targets for different policies, programs, projects and public sector entities, evaluation ofthe actual results achieved and the amount of money spent in the process.

Sub-component 4: Strengthening Public Procurement and Contracting: $ 1.99 million:

* Procurement and Contracting Regulations: Develop legislation and regulations to supportmodifications to the Procurement and Contracting Law (Law 80) with a view to improve the legalframework for public procurement.

* Regulation, Monitoring and Evaluation of Procurement and Contracting Practices in the PublicSector: Design and implement institutional arrangements, including the possibility of establishing anational body, for developing and regulating public procurement and contracting policy, standardizingand disseminating procedures and bidding and contract documents, and supporting central andterritorial entities on an ongoing basis. In addition, develop and implement a system for monitoring andevaluation of procurement and contracting practices in the public sector, piloting the system in twocentral level entities (INYVIAS and Ministry of Mines and Energy), in one decentralized entity (ECOPETROL) and in two territorial entities (Antioquia and Arauca).

* Dissemination of Procurement and Contracting Information and E-Commerce): Design andimplement an intemet based public procurement information system aimed at disseminating allinformation regarding procurement notices, bidding documents and contract awards to interestedparties and the public, thereby laying the basis for online public procurement.

* Training: Carry out a survey to determine procurement training needs and develop a pedagogicalsystern aimed at providing public sector personnel with learning tools relating to the conceptual,technical, legal and procedural aspects of public procurement and contracting.

Project Component 3 - US$ 4.35 millionProiect Management: This component will finance consulting services, equipment and training for thestaff of the Project Management Units; communication of project objectives and activities to stakeholder;and surveys to collect data on key performance indicators and obtain stakeholder feedback.

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Annex 3: Estimated Project CostsCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11

Local Foreign TotalProct Cost By Component US $mIlion US $million US $million

Revenue Administration 12.35 21.87 34.22Public Expenditure Management 7.27 10.32 17.59Project Management 4.11 0.02 4.13

Total Baseline Cost 23.73 32.21 55.94Physical Contingencies 0.70 0.97 1.67Price Contingencies 0.54 0.73 1.27

Total Project Costs 24.97 33.91 58.88Front-end fee 0.35 0.35

Total Financing Required 24.97 34.26 59.23

Local Foreign TotalProject Cost By Category US $million US $"mIlion US $rni11ion

Goods 5.58 17.04 22.62Services 12.56 15.16 27.72Training 6.83 1.71 8.54Other 0.00 0.00 0.00

Total Project Costs 24.97 33.91 58.88Front-end fee 0.35 0.35

Total Financing Required 24.97 34.26 59.23

Identifiable taxes and duties are 0 (USSm) and the total project cost, net of taxes, is 59.23 (US$m). Therefore, the project cost sharing ratio is 59.89% oftotal project cost net of taxes.

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Annex 4: Cost Effectiveness Analysis SummaryCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11

Summary of benefits and costs:The qualitative benefits in the area of revenue administration would consist of improved client services tohelp law abiding taxpayers to comply with tax and customs laws more easily and at lesser cost; improvedmanagement of the routine documentary information and trade flows, leading to greater control overrevenue collections, reduced processing times, quicker movement of imports and exports and overallefficiency gains; better targeting of tax evasion and smuggling activities, so as to maximize the deterrentimpact of enforcement actions; greater organizational effectiveness, through improved strategy formulation,planning, monitoring, evaluation, personnel management, professional development and informationmanagement; prevention of corruption, through re-engineering of business processes, reduced discretionand strengthening of disciplinary mechanisms; and enhanced employee morale in the DIAN.

The qualitative benefits of improving public expenditure management would include enhancedaccountability for achievement of performance objectives, spending of public resources, and procurementof goods and services; increased value for money in public spending; increased transparency; and enhancedcivil society capacity to monitor public sector performance. At the operational level, the project wouldcontribute towards clarifying inter-institutional roles and equipping decision-makers with the tools,information systems and skills needed to take well-informed decisions about allocation, use, control andevaluation of public expenditures.

Many of the qualitative improvements mentioned above, would also be accompanied by financial gains tothe government, either as a result of increased revenue flows or savings in expenditures. These financialgains are, however, subject to a number of variables, many outside the scope of the project. Also, they aredifficult to quantify ex-ante, especially in the area of public expenditure management.

Be that as it may, an attempt was made to quantify the potential benefits of the project in revenueadministration. First, additional revenue likely to accrue, through a combination of easier voluntarycompliance and stronger enforcement, was estimated. Second, savings from increased administrativeefficiency, resulting from introduction of modern technologies and other operational improvements wereestimated.

Estimates made by the DIAN indicate a current compliance gap of 23% in VAT and 40% in Income andBusiness Profit Tax. Also, contraband is estimated to be 18% of total imports. Assuming a reduction of0.5% per annum in the VAT compliance gap, a reduction of 1% per annum in the Income Tax andBusiness Profit Tax compliance gap and a reduction of 0.5% per annum on contraband, the potentialadditional revenue collection, from 2001 to 2005, would total 4,544 billion pesos. Further, assuming animprovement of 1% in the ratio of annual recurrent expenditure of the DIAN to total revenue collected, asaving of 79 billion pesos is estimated. The net present value, of the combined benefits of additionalrevenue collection and budgetary savings of 4,623 billion pesos, comes to 2,500 billion pesos assuming adiscount rate of 18%. As against this, project costs for the revenue administration component, over thesame five year period, including incremental recurrent costs at 10% of investment costs, would come to102.5 billion pesos in nominal terms or 66.5 billion pesos in NPV. The benefit to cost ratio for thiscomponent would therefore be 40.4.

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Main Assumptions:See above.

Cost-effectiveness indicators:

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Annex 5: Financial SummaryCOLOMBIA. PUBLIC FINANCIAL MANAGEMENT PROJECT 11

Years Ending2005

l Year1 I Year 2 | Year 3 | Year 4 | Year 5 | Year 6 Year7Total Financing RequiredProject CostsInvestment Costs 7.5 23.1 13.9 8.6 5.8 0.0 0.0Recurrent Costs 0.2 0.8 1.1 1.3 1.5 0.0 0.0

Total Project Costs 7.7 23.9 15.0 9.9 7.3 0.0 0.0Front-end fee 0.3 0.0 0.0 0.0 0.0 0.0 0.0

Total Financing 8.0 23.9 15.0 9.9 7.3 0.0 0.0

FinancingIBRD/IDA 2.5 14.4 8.8 5.7 4.0 0.0 0.0Government 5.5 9.5 6.1 4.2 3.3 0.0 0.0

Central 5.5 9.5 6.1 4.2 3.3 0.0 0.0Provincial o.o 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers o.o 0.0 0.0 0.0 0.0 0.0 0.0User FeeslBeneflciaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 8.0 23.9 14.9 9.9 7.3 0.0 0.0

I Year I Year 2 I Year 3 Year 4 Year 5 1 Year 6 Year 7Total Financing RequiredProject Costs

Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Recurrent Costs 1.5 1.5 1.5 1.5 1.5

Total Project Costs 1.5 1.5 1.5 1.5 1.5 0.0 0.0Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Financing 1.5 1.5 1.5 1.5 1.5 0.0 0.0

FinancingIBRDIIDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0Govemment 1.5 1.5 1.5 1.5 1.5 0.0 0.0

Central 1.5 1.5 1.5 1.5 1.5 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User FeeslBeneflclaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 1.5 1.5 1.5 1.5 1.5 0.0 0.0

Main assumptions:1. Annual recurrent costs in a particular year have been estimated @2.5% of the cumulative investment madeup to that year.

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Annex 6: Procurement and Disbursement ArrangementsCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11

Procurment

Procurement Capacity Assessment: A procurement capacity assessment of the MHCP and of DNP wasconducted in February 2000. The procurement risk assessed as "average". A Procurement Action Plan(PAP) to improve procurement management was developed as part of the assessment. This included the(1) establishment of a central PMU, led by a Project Coordinator and including a Procurement Specialistprior to loan negotiations; (2) establishment of a Project Management Information System, includingprocurement actions, prior to loan effectiveness; (3) hiring of the UNDP as a Project AdministrationAgency prior to loan effectiveness; (4) preparation of an Operational Manual, prior to loan effectiveness,that would include a description and organization of the project, the responsibilities of different staff of thePMU, TOR for key staff, and summary of key operational, administrative, procurement and financialrequirements; (5) preparation of a procurement plan prior to loan negotiations with annual updating; (6)use of Bank standard procurement documents for International Competitive Bidding and acceptable modeldocuments for National Competitive Bidding (NCB), to be agreed upon prior to the issuance of the firstNCB, and (7) inclusion of adequate segments for procurement training in the Project Launch workshop.

Various actions have been taken to advance the PAP. The organization structure of the project has beenagreed. There will be two PMUs, one located at the MHCP and another one at the DNP. ThePMU-MHCP will have a procurement team consisting of a Procurement Officer and an InformaticsSpecialist, who would look after procurement and contracting activities related to the project. In thePMU-DNP this function will be performed by the Technical Coordinator/ Project Administrator and theProject Officer. UNDP will be hired through counterpart funds to continue procurement managementsupport under this project and will work closely with the PMUs. A draft Operational Manual has beendeveloped. A Procurement Plan relating to project activities has been prepared. Also the use of Bankstandard bidding documents has been agreed. Training of PMU staff in Bank procurement will be includedin the Project Launch workshop.

Pre-eminence of Bank Guidelines: Law 80 of 1993 and regulatory decrees, especially Decree 172/95constitute the regulatory framework for procurement in Colombia. The Law embraces public competitivebidding as the preferred procedure for contracting and constitutes an important instrument for achievingefficiency in public procurement. The Law has areas conflicting with the Bank rules, especially regardingconfidentiality, previous registration of contractors and procedures for hiring consultants. Any bidder hasthe right to obtain copies of the offers of other contractors. Frequent resulting claims, however, do notproduce suspension of the procurement process. Article 22 of the Law establishes the requirement for allfirms, including foreign firms, to register in a national system. According to the Law, the bidding processfor the employment of consultants is the same as for any other type of contracts. These deviations fromBank Guidelines would, however, not affect the project, because the Law also establishes the precedence ofthe Bank procurement guidelines over Colombian legislation, although its Art 40 limits the precedence ofthe Guidelines "to the extent that they are not contrary to the constitution or the law." This matter has beensolved by Decree 1721, where IBRD procurement has been excluded in the applicability of Article 40.

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Procurement methods (Table A)

The following paragraphs provide information on the methods for procurement of goods, hiring ofconsultant services and training. The procurement methods are summarized in Tables A and B. Theproject does not envisage financing of civil works.

Goods

Procurement of goods will follow the "Guidelines for Procurement under IBRD loans and IDA credits",dated January 1995 (revised January and August 1996, September 1997 and January 1999). Procurementof information systerns would be carried out using the Bank's Standard Bidding Documents for the Supplyand Installation of Infornation Systems. Goods estimated to cost US$250,000 or more will be procuredthrough International Competitive Bidding. Goods estimated to cost less than US$250,000, but more thanUS$ 100,000, will be procured through National competitive bidding (NCB), up to an aggregate ofUS$1,000,000. Finally, goods estimated to cost US$100,000 or less will be procured through internationalor national shopping procedures, up to an aggregate of US$1,500,000.

International competitive bidding (ICB) will follow World Bank standard documents. NCB will usedocuments acceptable to IBRD. According to national procurement policy, bidders have access to bidspresented by other bidders, contractors are required to register prior to bidding, and consultant services areconsidered as restricted procurement of services. To deal with these deviations from the Bank's Guidelines,the Loan Agreement specificies that, (i) all bids will be kept confidential throughout the evaluation, and (ii)foreigners who wish to participate in national biddings should not be required to pre-register. The firstNational Competitive Bidding (NCB) will be subject to the IBRD's prior review, irrespective of theestimated amount of the contract.

Consultant Services and Training

Employment of consultant services will follow the "Guidelines for the Selection and Employment ofConsultants by World Bank Borrowers" (dated January 1997 and revised September 1997 and January1999).

Firns: Consultant and training services from firms will be procured through Quality and Cost BasedSelection (QCBS). Other methods are not envisaged, but may be considered by the Bank at the request ofthe borrower with adequate justification.

Individuals: Individual consultants will be hired following procedures established in Section V of theBank's Consultant Guidelines.

World Bank standard model request for proposal (RFP) and contracts will be followed. Table Al providesa breakdown of selection procedures for consultant services.

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Main packages of goods and services to be procured under the project:

Revenue Administration component: US$ 2.7 million in electronic processing equipment for customs;US$ 0.34 million of laboratory equipment for customs; US$3.0 million of hardware and US$ 2.0 million inconsulting and training services for expanding the electronic declaration and payment system to mediumand large taxpayers; US$ 0.8 million for database servers for DIAN.

Public Expenditure Management component: USS 1.9 million of computer equipment for SIIF(approximately 946 PCs), US$ 1.8 million for the adaptation of the SIIF in the decentralized entities; andUS$0.98 million for the development and implementation of the Treasury's system for managing itsinvestment portfolio; US$ I million for hardware and software (servers, firewall and licenses) for thedevelopment of a web-based procurement system for the GOC; and US$ 2.5 million for the design andimplementation of a debt management system for the Directorate of Public Credit.

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Pwourqm,nt MethodE-penditure Catgory .-iB me's N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00.______ _ i(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 15.71 1.00 1.50 4.41 22.62(15.04) (0.50) (1.50) (0.00) (17.04)

3. Services 0.00 0.00 23.31 4.41 27.72(0.00) (0.00) (17.15) (0.00) (17.15)

4. Training 0.00 0.00 8.54 0.00 8.54___________ (0.00) (0.00) (1.28) (0.00) (1.28)

5. Front-end fee 0.00 0.00 0.00 0.35 0.35(0.00) (0.00) (0.00) (0.00) (0.00)

Total 15.71 1.00 33.35 9.17 59.23(15.04) (0.50) (19.93) (0.00) (35.47)

"Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies

v Includes goods to be procured through national and international shopping, consulting services andtraining.

ICB: International Competitive BiddingNCB: National Competitive BiddingNBF: Not Bank Financed.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

A. Firms 15.16 0.00 0.00 0.00 0.00 0.00 0.00 1516(12.13) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (12.13)

B. Individuals 0.00 0.00 0.00 0.00 0.00 8.15 4.41 12.36(0.00) (0.00) (0.00) (0.00) (0.00) (5.02) (0.00) (5.02)

Total 15.16 0.00 0.00 0.00 0.00 8.15 4.41 27 721 (12.13) (0.00) (0.00) (0.00) (0.00) (5.02) (0.00) (17.15)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Loan.

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Prior review thresholds (Table B)Prior review thresholds for the applicable procurement methods are identified in Table B. ApproximatelyUS$33.87 million of the procured goods and services (95% of loan amount) will require the Bank's priorreview. Terms of references for critical tasks, irrespective of the amount of the contract, will require theBank's prior review and approval. The critical tasks will be identified in the POA and will be reviewedannually.

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Sublect te.Threshold Procurement Prior Review

Expenditure Catsoory (US$ thousands) Method (US$ nitfions)1. Works

2. Goods > $250 ICB 15.71< $250 and > $100 NCB 1.00

Below $100 Shopping (International orNational)

3. ServicesFirms > $100 QCBS 15.16Individuals > $50 2.00Training

Total value of contracts subject to prior review: 33.87

Overall Procurement Risk Assessment

Average

Frequency of procurement supervision missions proposed: One every 12 months (includes specialprocurement supervision for post-review/audits)

In addition, project procurement activities will be supervised during each supervision mnission. Thiswould include ex-post reviews of procurement actions and agreement on a revised procurement plan, asmay be necessary.

'Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of loan proceeds (Table C)The project is estimated to be disbursed over a period of 5 years, in accordance with the Table in Annex 5laying out the disbursement schedule of IBRD funds. The proceeds of the Loan would be disbursed against100% of foreign expenditures of goods and equipment and on consultants and training and against 85% oflocal expenditures of equipment and materials through Management Service Agreements with UNDP. Anadvance under the contract to cover 3-4 months of IBRD financing of expenditures will be deposited inUNDP's general account. Funds will be spent and reimbursed by JBRD though this account.

Retroactive Financing

Under the Public Financial Management Project (PFMP), the World Bank has provided a no objection tothe Government of Colombia to sole source with UNCTAD for the purchase of a public debt managementinformation system - SIGADE. The first phase of the contract is expected to be financed by the PEMP(U$105,000), while phases II and III would be financed by PFMP-IE (US$580,099). However, if theBorrower incurs eligible expenditures, after the closure of PFMP-1 (3/31/2001), but before the date ofsigning of the Loan Agreement, these expenditures will be financed retroactively by PFMP-II up to anaggregate amount of US$500,000.

Table C: Allocation of Loan Proceeds

1x ed 0 i ture Categor Amounf0;RS0 1t in U8miIo f t0fFXinanci Percen001. Goods 17.04 100% of foreign expenditures and 85%

of local expenditures

2. Consultant's Services and Training 18.43 100%0.00

Total Project Costs 35.47

Front-end fee 0.00

Total 35.47

Use of statements of expenditures (SOEs):

Disbursement applications will be submitted on the basis of Statements of Expendituresfor:

(a) contracts whose value does not exceed the equivalent of:

* US$ 250,000 for goods;* US$ 100,000 for consulting firms; and* US$ 50,000 for individual consultants.

(b) all local training programs

All other expenditures will be fully documented when submitted to IBRD. All consolidated documentationrelevant to SOEs, will be available at the PMUs for review by Bank missions and auditors for one fiscalyear after the year in which the last disbursement occurs.

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Once the Action Plan to enable the PMUs to produce Project Management Reports has been implementedin a manner satisfactory to the Bank, the Borrower will have the option to request withdrawals from theLoan Account on the basis of Project Management Reports, such withdrawals to be made under terms andconditions as the Bank shall specify by notice to the Borrower.

Financial Management Arrangements

GOC has decided to sign Management Service Agreements (MSAs) with UNDP to manage both loan andcounterpart funds. The MSAs would include a clause that would allow anyone of the implementing entitiesto contract out of such an agreement and use the direct payment option as allowed by the Bank, wheneverthis is deemed more convenient by the authorities. Since UNDP cannot compete, as required by Bankprocurement rules, the MSA would be financed entirely out of counterpart funds.

The MSAs would have the advantages of allowing the project a more predictable access to both loan andcounterpart funds due to budgetary regulations governing this type of agreement. UNDP also has ampleexperience in international type of procurement and has tax exemptions status. Under this arrangement theresponsibilities of the PMUs and UNDP would be divided as follows. The PMU would have the primaryresponsibility for: (i) financial management, monitoring and reporting of the project; (ii) dealing with allaspects of the processes related to procurement under the guidelines applicable to each source of funds i.e.technical specifications, TORs, no objections, draft contracts etc.; (iii) authorizing UNDP to pay for suchservices or goods that have been received satisfactorily; and (iv) preparing withdrawal applications andsending all required documentation to the IBRD for reimbursement. The UNDP would have theresponsibility for- (i) acting as an internal auditor by guaranteeing that all applicable procurementGuidelines are adhered to; (ii) reviewing the contracts to be signed, from the legal point of view; (iii)signing all contracts and paying the beneficiaries of the contracts and (iv) transferring all goods purchasedto the executing agencies; (iv) at the end of each month, sending all payment vouchers and a statement ofexpenses to the PMU for accounting purposes. In addition, for the management of counterpart funds,UNDP would play a fiduciary role in accordance with its procurement guidelines. Under these guidelines,UNDP sets thresholds for prior review by either a local committee or a committee in New York. Presentlythose thresholds are > US$30,000-99,000 for review by the local committee and > US$100,000 by thecommittee in New York.

In the future, GOC may engage another agency to perform the functions that would initially be performedby the UNDP, subject to the agreement of the Bank and under terms and conditions satisfactory to it.

Summary of the Financial Management Assessment

A Financial Management Assessment of the PMUs was carried out in February, 2000. It was notedthat through the execution of the ongoing Public Financial Management Project since 1994, the PMUsresponsible for the new operation have gained experience in accounting, disbursements, financial reportpreparation and management of the project audit process. The strengths of the PMUs include (a) ampleexperience of staff in project management, (b) defined organizational structures, (c) established cultureand procedures with regard to planning, budgeting and monitoring of activities, (d) knowledge of Bankguidelines and (e) experienced external government auditors. However, in the light of certaindeficiencies found at the time, the project was rated 4-C and an Action Plan for strengthening thefinancial management capacity of the PMUs was agreed. Since then, the PMU-MHCP has prepared a

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draft of the Operation Manual, including an organization chart, Chart of Accounts and TORs for PMUstaff. It has also contracted consultants for designing a project financial monitoring system. Thesystem will integrate project procurement with budgeting and accounting. It will also include aninventory module. Thus, the requirements of the revised Bank financial management policies andprocedures (OP/BP 10.02) have been met substantially. As a result of these actions and review of theprogress by the FMS, the PMUs' financial management capacity rating has been raised to 4-B.Certain enhancement actions described in Annex 11 will be carried before project effectiveness. AnAction Plan to enable the PMUs to produce Project Management Reports will be implemented withinsix months of effectiveness.

Audit Arrangements

The Comptroller General of the Republic (CGR) by law conducts the audits of public sector programs,including IBRD projects. Accordingly, this project would also be audited by the CGR. Audits of accountsand the financial statements of the project, including a separate opinion on Statements of Expenditures,would follow accounting and auditing procedures satisfactory to the Bank. All supporting records wouldbe maintained at least one year after the completion of the project. A consolidated audit report would besubmitted to the Bank no later than four months after the end of each fiscal year. The audit would coverproject expenditures until such time as the loan has been closed. It is noted that during the ongoing projectthere have been some delays in the submission of the audit reports by the CGR. To ensure timelysubmission of the audit report to the Bank, the CGR will submit within four months after loan effectivenesstheir report on the review of Project Internal Controls. Further, arrangements will be made with the Officeof the CGR to ensure its involvement in project audit early in the fiscal year, thus, enabling it to completethe audit process in a timely manner. The use of Bank guidelines on project audits and the tenns ofreference of Auditors have been agreed.

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Annex 7: Project Processing ScheduleCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11

Project Schedul* Planned ActualTime taken to prepare the project (months) 22 28First Bank mission (identification) 09/07/98 09/07/98Appraisal mission departure 10/10/2000 10/10/2000Negotiations 02/13/2001 02/13/2001Planned Date of Effectiveness 05/01/2001

Prepared by:

MHCP, DIAN, DNP, CGN and Bank Project Team

Preparation assistance:

BB Budget

Bank staff who worked on the project included:

Narne SpecialityJit B. S. Gill, LCSPR Task Team Leader/ Sr. Public Sector Management SpecialistJohn Pollner, LCSFPSI Sr. Financial Sector SpecialistCarmen Machicado, LCSPR Operations AnalystJaime Roman, LCOPR Principal Procurement SpecialistLuiz Gazoni, LCOPR Senior Procurement SpecialistNorma Rodriguez, LCSPR Procurement AnalystEmilio Rodriguez Consultant - Procurement SpecialistLivio Pino, LCOPR Senior Financial Management SpecialistManuel Vargas, LCOPR Financial Management SpecialistIssam Abousleiman, LOAEL Senior Disbursement OfficerMarie Khoury Consultant -Disbursement SpecialistJose Augusto Carvalho, LEGLA Senior Counsel, Country LawyerMariana Montiel CounselNatalia Gomez, Resident Mission Project OfficerZeinab Partow Country EconomistSharon Spriggs Program AssistantEduardo Fernandez Consultant - Public Expenditure ManagementFernando Medina Consultant - Revenue AdministrationRonald Myers Peer ReviewerMichael Engelschalk Peer ReviewerVinaya Swaroop Peer Reviewer

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Annex 8: Documents in the Project File*

COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11

A. Project Implementation Plan

* Project Implementation and Procurement Plan* Matrix of Project Costs

B. Bank Staff Assessments

* Diagnosis of Institutional and Organizational Weaknesses of Revenue Administration in Colombia,October 1999.

* Diagnosis of Public Expenditure Management, October 1999.* Country Procurement Assessment Report, July 28, 2000.* Procurement Capacity Assessment, March 2000.* Financial Management Capacity Assessment, February 2000.

C. Other

3 Colombia: Medidas para Aumentar las Eficacia de la Administraci6n de Impuestos, Marzol998, IMF.3 Modernizaci6n de la Administraci6n Aduanera Colombiana, Julio 1998, IMF.3 Reports of the Commission for the Rationalization of Public Expenditures and Finances (Comisi6n de

Racionalizaci6n del Gasto y de las Finanzas Publicas).v Solicitud de Donaci6n (Proceso de contrataci6n y adquisiciones en el estado) entre la Repuiblica de

Colombia y El Banco Mundial, DNP.e Diagnostico, Acciones para Detectar, Prevenir y Compartir los Posibles Casos de Enriquecimiento

Ilicito, Sintesis, Conclusiones y Recomendaciones, August, 1998.9 Analysis economic benefits of the project in revenue administration.*Including electronic files

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Annex 9: Statement of Loans and CreditsCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT II

Feb-2001tNfference between expected

and actualOriginal Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Fnn Rev'dP044140 200 CARTAGENAWATERSUPPLY&SEW. ENVIRO 85.00 0.00 0.00 75.75 12.05 0.00

P050578 2000 CO- RURAL EDUCATION 20.00 0.00 0.00 19.80 1.95 0.00

P057326 2000 SIERRA NEVADA SUSTAINABLE DEVELOPMENT 5.00 0.00 0o00 4.77 -0.23 0.00

P063643 2000 CO-FSAL 506.00 0.00 0.00 212.99 0.00 0.00

P065263 2000 EARTHQUAKE RECOVERY 225.00 0.00 0.00 103.86 -2.81 0.00o

P068762 2000 CO- COMMUNITY WORKS (MANOSALAOBRA) 100.00 0.00 0.00 100.00 11.67 0.00=.

P039082 1999 TOLL ROAD CONCESSION 137.00 0.00 0.00 100.00 100.00 0.00

P050576 1999 CO- YOUTH DEVELOPMENT 5.00 0.00 0.00 3.18 2.35 0.00

P053243 1998 PEASANT ENTERPRISE Z 8.00 0.00 0.00 3.46 1.63 0.00

P046112 1998 CO- PASTo EDUCATION 7.20 0.00 0.00 4.28 262 0.00

P006891 1998 CO- ANTIOOUtA EDUCATION 40.00 0.00 0.00 31.71 16.56 0.00

P006861 1998 URBAN INFRASTRUCTURE 75.00 0.00 0.00 57.32 14.49 0.00

P040102 1997 REG.REF.TA 12.50 0.00 0.00 6.77 4.27 0.00

P006884 1997 FINANCIAL MARKETS DEVELOPMENT 15.00 0.00 0.00 10.52 9.62 0.00

P039291 1996 URBAN ENVIRONMENT TA 20.00 0.00 0.00 3.39 3.39 -1.20

P006887 1998 POWER MARKET DEVELOPMENT & ENERGY (TA) 249.30 0.00 0.00 19.00 14.83 1.54

P006872 1998 URBAN TRNSPRT 65.00 0.00 0.00 4.16 3.00 0.16

P006894 1996 SANTAFE I (WaredSupp(y) 148.00 0.00 0.00 64.87 62.70 0.00

P006880 1995 AGRICULTURETECHNOLO 36.00 0.00 0.00 15.95 13.35 -4.75

P006893 1995 ENERGY TECHNICAL ASSISTANCE 11.00 0.00 0.00 0.47 0.47 0.00

P006866 1994 CO- SECONDARY EDUCATION 90.00 0.00 0.12 0.06 0.18 -3.76

PD08854 1993 CO- MUNICIPAL HEALTH SERVICES 50.00 0.00 2.12 0.09 1.39 2.22

P006889 1994 PUBLIC FINANCIAL MANAGEMENT 30.00 0.00 0.00 1.94 1.94 0.00

Total: 1904.00 0.00 2.24 842.41 273A8 4.80

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COLOMBIASTATEMENT OF IFC's

Held and Disbursed PortfolioFeb-2001

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1969/85/88/93/95 CF del Valle 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001963/90 Coltejer 6.02 0.00 0.00 0.00 6.02 0.00 0.00 0.001995/99 Corfmsura 25.00 0.00 25.00 0.00 0.00 0.00 25.00 0.001999 Harken 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001987 PRODESAL 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.001977189/92/94196 Promigas 6.88 0.00 0.00 14.58 6.88 0.00 0.00 14.581994/95 Promisan 0.00 0.23 0.00 0.00 0.00 0.23 0.00 0.001996 Proyectos 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.001997 Suleasing 24.82 0.00 0.00 0.00 2.25 0.00 0.00 0.001999 Surenting 0.00 5.10 0.00 0.00 0.00 2.50 0.00 0.00

Total Portfolio: 92.72 10.92 25.00 14.58 15.15 8.32 25.00 14.58

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

2001 Tolcemento 3333.33 0.00 0.00 10666.672001 CHMC 0.00 10000.00 30000.00 0.002001 Cementos Caribe 4047.62 0.00 10000.00 12952.38

Total Pending Commitment: 7380.95 10000.00 40000.00 23619.05

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Annex 10: Country at a GlanceCOLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT II

Latin Lower-POVERTY and SOCIAL America middle-

Colombia & Carib. income Developmnsnt diamond'1999Population, mid-year (millions) 41.5 509 2,094 Life exspectancyGNP per capita lAtlas method, US$) 2,170 3,840 1,200GNP (Atlas method, US$ billions) 90.0 1,955 2,513

Average annual growth, 1993-99

Population M%) 1.S 1.6 1.1 GLabor force (%) 2.7 2.5 1.2 p Gross

per - primaryMoat recant estimate (latest year available, 1993-99) capita enrollment

Poverty (% of population below national povertv line) 21Urban population (% of total population) 73 75 43Life expectancy at birth (Years) 70 70 69Infant mortality (per 1,000 live birthas) 23 31 33Child malnutrition (% of children under 5) 8 8 15 Access to safe waterAccess to improved water source (% of population) 78 75 86illiteracy (% of population age 15+) 9 12 16Gross Drimary enrollment (% of school-ape populaion) 113 113 114 Colombia

Male 113 114 Lower-middle-income groupFemale 112 116

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1979 1989 1998 1999Economic ratios'

GDP (US$ billions) 27.9 39.5 99.1 86.6Grossdomesticinvestment/GDP 18.2 18.5 19.5 13.0 TradeExports of goods and services/GDP 15.2 18.0 15.0 17.8Gross domestic savings/GDP 19.9 22.7 13.6 11.0Gross national savings/GDP 19.2 19.8 12.3 9.0

Current account balancetGDP 1.4 -0.5 -5.3 -1. 1 mInterest paymentslGDP 0.9 4.0 1.6 2.1 Domestic InvestmentTotal debt/GDP 21.0 42.7 33.6 39.9 SavingsTotal debt srvicel/xports 14.3 48.4 30.5 43.2Present value of debt/GDP 32.7 45.1Present value ofdebt/exports 216.5 255.6

Indebtedness1979-89 1989-99 1998 1999 1999-93

(average annual growth)GDP 3.4 3.4 0.5 -4.3 2.6 -ColombiaGNP per capita 0.8 1.6 -0.9 -7.1 1.0 ---- Lower-middle-income groupExports of goods and services 5.8 5.8 5.9 4.7 3.6

STRUCTURE of the ECONOMY1979 1989 1998 1999 Growth of investment and GOP (%)

(% of GDP)Acriculture 22.0 16.6 13.3 12.2Industr" 30.3 38.2 25.7 24.8 so

Manufacturing 23.0 21.6 14.2 12.9 2Services 47.7 45.1 61.0 62.9 o

Private consumption 70.7 68.1 67.5 67.9 40 _General government consumption 9.3 9.2 18.9 21.1 1GD GDPImports of coods and services 13.5 13.8 20.9 19.5

(average annual growth) 197989 1989-99 1999 1999 Growth of exports and imports (%)Agriculture 2.5 -2.1 0.6 -0.2 40Industry 4.7 1.9 -1.8 -11.0

Manufacturing 2.8 -1.7 -0.3 -12.4 20Services 3.0 5.3 -5.5 -0.7

Private consumption 2.6 3.5 0.8 -5.1 o 9I7General qovernment consumption 4.3 8.4 0.9 4.3 94 96 96Gross domestic investment 2.3 5.7 -5.7 -301 20Imports of aoods and services 0.8 13.2 -2.8 -13.5 Exports lmportsGross national product 2.9 3.6 1.0 -5.5

Note: 1999 data are preliminary estimates.

The diamonds show four key indicators in the country (in bold) compared with its income-qroup average. If data are missing, the diamond willbe incomplete.

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Colombia

PRICES and GOVERNMENT FINANCE1979 1989 1998 19" Inflatlon (%)

(% change) 30Consumer prices 24.7 26.1 16.7 9.2 20Impicit GDP deflator 24.1 24.7 15.5 12.5

10 Government finance(% of GDP, includes current grants) 0Currentrevenue .. 10.2 11.9 12.6 94 96 96 97 98Current budget balance .. 1.2 -3.1 -4.7 -GDP deftor _CPOverall surplus/deficit .. -0.5 -5.3 -8.5

TRADE

(US$ millions) 1979 1989 1998 1999 Export and Impon levels (USS rnill.)

Total exports (fob) 3,441 6,031 11,494 12,044 20,000Coffee 2,005 1,476 1,896 1,325Petroleum 146 1,400 2,333 3,761 15000,Manufactures 1,224 2,145 6,588 3,922 IC

Total imports (cif) 2,978 4.558 14,836 10,311 10,0DOFood 254 219 1,655 1,415 SODFuel and enerqy 322 316 158 270Capital goods 1,077 1,595 5,522 3,651 0o .E__ _ _ _ _

93 94 96 96 97 98 99Exportpricmindex(1995=100) 5 36 112 117Importpriceindex(1995=100) 4 43 116 116 HExports aImportsTerms of trade (1995=100) 123 82 96 101

BALANCE of PAYMENTS

(USS millions) 1979 1989 1998 1999 Currant account balance to GOP (%)

Exports of goods and services 4,532 7.330 13.560 13,959 0Imports of goods and services 3,919 6.411 17,542 13,595Resource balance 613 919 -3.982 363

Net income -277 -2.019 -1,735 -2,123Net current transfers 66 898 444 796

Current account balarnce 402 -201 -5,273 464 -4_ _

Financing iterms (net) -487 350 6,663 1,387Changes in net reserves 85 -149 -1.390 -423 .s

Memo:Reserves induding gold (USS millions) .. . 8,741 8,103Conversion rate (DEC, loclUS$) 42.5 382.6 1,426.5 1,757.0

EXTERNAL DEBT and RESOURCE FLOWS1979 1989 1998 1999

(USS millions) ComnpositIon of 1998 debt (US$ mill.)Total debt outstanding and disbursed 5,869 16,886 33,263 34,519

IBRD 838 3,808 1,740 1,958 A: 1,740IDA 22 15 9 8 G0:2,801

Total debt service 703 3,905 4,585 6.596 E: 1,397IBRD 124 640 347 391IDA 0 1 1 1

Composition of net resource flowsOffidal grants 10 37 61Official creditors 137 102 107 923Private creditors 542 -10 56C 995Foreign direct investment 127 576 3,038 1,008Portfolio equity 0 0 26 663 F: 21,084

World Bank programCommitments 331 330 227 591 A - lsRD E - BilateralDisbursements 139 361 184 499 B-IDA D-Othermultilateral F-PrPvatePrinipal repaVments 52 333 233 271 C - IMF G - Short-termNet flows 87 28 -48 228Interestpaytnents 73 308 115 123Net transfers 14 -280 -164 105

Development Eoonomics 8/29/00

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AdditionalAnnex 11

Plan de Implementacion para Fortalcimiento de la Administracion Financiera del Proyecto

Concepto Responsable (1) Fecha Seguimiento

1. Personal Calificado

Contrataci6n del personal: DNP/MHCP Antes Todo el personal de- Terminos de Referencia Negociaciones presente proyecto se- No objeci6n del Banco Mundial mantiene; se ainadira a- Firma de contratos otra persona en MHCP- Inicio del trabajo que formara parte del

equipo decontrataciones

Implementacion de sistema de DNP/MHCP Antesevaluaci6n Efectividad

2. Responsabilidades

Preparacion de descripci6n de cargos DNP/MHCP Manuel Terminos de referenciaincluyendo areas t6cnicas Operativo han sido preparados eInclusi6n de Manual Operativo incluidos en el Manual

Operativo

Elaboraci6n del manual operativo. DNP/MHCP Antes Manual Operativo ya- Borrador Negociaciones esta en preparaci6n- Revisi6n muy avanzada, una-Aprobaci6n copia del contenido de

este se envio al FMS

- Definici6n mecaDismo de manejo defondos DNP/MHCP Antes Ya esta definido se- PNUD: contrato Negociaciones utilizara un MSA con

- Cuenta especial PNIJD- Procediniiento de tesoreria, flujo de Antesfondos Efectividad

Ates Ya estan definidos el enNegociaciones manual de operaciones

Apertura de Cuenta Especial Antes N/AEfectividad

Apertura de Cuentas en moneda local Antes N/AEfectividad

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3. Salvaguardias para los activos

Mejoramiento del registro auxiliar de DNP/MHCP Antes Se esta disefiando unactivos Efectividad sistema de integrado de

administraci6n delproyecto que mcluye unmodulo de registro deinventarios. El sistemaesta contratado y segunel cronograma seespera terminarlo endiciembre

4. Sistems de Contabilidad

Preparaci6n del Manual de DNP/MHCP Antes Ya esta listoContabilidad Negociaciones

Actualizaci6n de Plan de Cuentas DNP/MHCP Antes Ya esta listoNegociaciones

Instalaci6n software sistema de DNP/MHCP Antes El sistema deinformaci6n financiera MHCP Negociaciones informaci6n financiera- Revision ya ha sido contratado.-Aprobaci6n El sistema unira el-Instalaci6n sistema de

- Prueba adquisiciones con laparte financiera(incluye desembolsos,contabilidad). Tambi6nincluyera un modulo deinventarios y produciratodos los reportes demonitoreo acordadasdurante la evaluaci6n

5. Informes Peri6dicos

Mecanismos para consolidaci6n DNP/MHCP Antes Formaran parte delmensual de estados financieros Efectividad sistema de contabilidad

descrito arriba

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Implementaci6n de PMRs (I) DNP/MHCP Antes Formaran parte del- Definici6n de formatos Efectividad sistema de contabilidad- Presupuestos indicadores fisicos descrito arriba. Ya sebasados en PAD definieron los formatos,- Sisterna de informaci6n dentro del manual deimplementado operaciones- Borradores- Revisi6n- Aprobaci6n

6. Auditoria Externa

Acuerdo para uso de Guias de DNP/MHCP/CGR Antes De acuerdo a leyesAuditoria. Negociaciones nacionales CGR

continuarA efectuandolas auditorias delproyecto

Coordinaci6n de visitas intemas DNP/MHCP/CGR AntesEfectividad

(1) DNP - Departamnento Nacional de Planeaci6n, MHCP - Ministerio de hacienda y Credito Publico,CGR - Contraloria General de la RepuTblica

(2) De acuerdo con los nuevos requisitos de informaci6n financiera del Banco Mundial, los proyectosproducen Informes de Administraci6n de Proyectos en periodos trimestrales (PMRs), lo cual le permite alBanco Mundial y al ejecutor el monitoreo fisico, financiero y de adquisiciones en forma simultanea. Losreportes mencionados sirven ademas para la realizaci6n de desembolsos del Prestamo al proyecto (debeespecificarse en el contrato legal).

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