Document of The World Bank Public Disclosure Authorized FOR OFFICIAL, USE ONLY
Report No 42847-CO
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
Public Disclosure Authorized INTERNATIONAL FINANCE CORPORATION
COUNTRY PARTNERSHIP STRATEGY
FOR
THE REPUBLIC OF COLOMBIA
FOR THE PERIOD FY2008-2011 Public Disclosure Authorized
March 4,2008
Colombia and Mexico Country Management Unit Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the
Public Disclosure Authorized performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The last CAS Progress Report was discussed by Executive Directors in October 2005.
CURRENCY EQUIVALENTS (Exchange Rate Effective March 3,2008) Currency Unit = Colombian Peso (Col$) US$ = 1,845.17 COP FISCAL YEAR January 1 to December 3 1 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities CAS Country Assistance Strategy CONPES National Council for Economic and Social Policy CPS Country Partnership Strategy CPPR Country Portfolio Performance Review DNP Department ofNational Planning DPL Development Policy Loan ELN National Liberation Army ESW Economic Sector Work FARC Revolutionary Armed Forces of Colombia FDI Foreign Direct Investment GDP Gross domestic product GEF Global Environment Facility FTA Free Trade Agreement IBRD International Bank for Reconstructionand Development IADB The Inter-American Development Bank ICETEX Colombian Institute for Education Credit and Technical Studies Abroad IFC International Finance Corporation IMF International Monetary Fund ICB International Competitive Bidding MDB Multilateral Development Bank MDGs Millennium Development Goals MIC Middle Income Country MIGA Multilateral Investment Guarantee Agency MHCP Ministry of Finance and Public Credit NCB National Competitive Bidding NDP National Development Plan NLTA Non-Lending Technical Assistance PFM Public Financial Management PIU Project ImplementationUnit SENA National Training Institute SIGOB Goals-and Results-BasedProgramming and Management System SINERGIA National System for Evaluation of Public Sector Performance SISBEN System for Identification of Potential Beneficiaries of Social Programs SME Small and Medium-sized Enterprise TA ' Technical Assistance TAL Technical Assistance Loan UN United Nations WBG World Bank Group
IBRD IFC Regional Vice President: Pamela Cox Vice President for CAL: Farida Khambata Country Director: Axel van Trotsenburg Director, CLADR: Atul Mehta Task Manager: Laura Kullenberg Task Managers: Miguel de PomboPierre Nadji Country Manager: Miguel Lopez-Bakovic Country Manager: Roberto Albisetti FOR OFFICIAL USE ONLY
Republic of Colombia COUNTRYPARTNERSHIP STRATEGY Table of Contents I. Executive Summary ...... 1
I1* Introduction...... 3 I11. Country Context ...... 5 A . Recent Economic Developments and Future Prospects ...... 5 B. Macroeconomic Outlook and Debt Sustainability ...... 6 C . Poverty, Inequality, and the MDG’s ...... 7 D. Political and Governance Developments ...... 8 IV. A Shared Vision...... 10 A . The National Development Plan...... 10 V . The CPS Program ...... 11 A . The Current Program ...... 11 B. Summary Findings from Completion Report, Consultations, and Client Survey ...... 11 C . Rationale for WBG Support to Colombia ...... 13 D. Strategic Elements ofthe Proposed CPS ...... 14 E. WBG Areas ofConcentration and Collaboration ...... 15 F. The WBG’s FY08-FY09 Indicative Program...... 22 G. Fiduciary and Safeguard Implementation ...... 23 H. Other Partners and the Paris Declaration ...... 24 I. Program Envelope and Projected Exposure ...... 25 J. Results Monitoring ...... 26 K. Risks ...... 27 Annexes Annex A Private Sector Strategy ...... 30 Annex B Governance Challenges ...... -46 Annex C Colombia at a Glance ...... 53 Annex D Key Economic Indicators...... 55 Annex E IFCMIGA Program Summary ...... 57 Annex F Summary of Lending and Non-Lending Services ...... 58 Annex G Indicators of Bank Portfolio Performance and Management ...... 59 Annex H Fiscal Sustainability and Debt Management ...... 60 Annex I Results Matrix...... 67 Annex J Key Exposure Indicators...... 71 Annex K Operations Portfolio (IBRD/IDA and Grants) ...... 72 Annex L CAS Completion Report...... 73 Tables Table 1. Key Economic Indicators for Colombia ...... 5 Table 2 . Macroeconomic Projections for Colombia. 2008-201 1...... 6 Table 3 . Colombia’s Priorities per Pillar in the National Development Plan...... 10 Table 4 . Indicative WBG Lending and AAA Program ...... 23 Graphs Graph 1. Poverty Indicators for Colombia ...... 7 Graph 2 . FY04-07 IBRD Commitments in Colombia ...... 11 Boxes Box 1. World Bank Group/Colombia Partnership: Successes Create New Opportunities .....4 Box 2 . Stakeholder Consultations and Client Survey ...... 13 Box 3 . World Bank Approach to Governance Issues., ...... 21 Box 4 . Debt and Risk Management ...... 25
This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise disclosed without World Bank authorization .
Republic of Colombia Country Partnership Strategy Fiscal Years 2008-2011
I. Executive Summary
1. The last World Bank Country Assistance Strategy (CAS) for Colombia was presented to the Board in December 2002. At that time, President Alvaro Uribe had just been elected with a strong mandate to restore security and economic stability. The country was still recovering from its worst economic crisis in seventy years and grappling with spiraling violence.
2. During the CAS period, Colombia’s economy rebounded from near stagnation in 2002 to achieve a growth rate of around 6.6 percent in 2007. This turnaround was due partly to a favorable external environment, but improved internal security and sound macroeconomic management also played a critical role. High growth rates have reduced poverty and raised social indicators, while reduced violence and enhanced government effectiveness and rule of law have resulted in increased consumer and investor confidence. This combination of economic recovery, increased state presence and successfil security measures against illegal groups have worked together in a virtuous cycle to significantly improve the quality oflife ofmillions of Colombians.
3. During the last CAS period, the World Bank Group made an important contribution, more than doubling average annual bank lending and providing the new administration with a strong package of advisory services. The challenge for Colombia now is to consolidate these important gains and the challenge for the Bank Group is to continue its strong partnership and remain a relevant partner to this dynamic middle income client. While the immediate economic and political outlook is positive, the Government still faces daunting problems. First, it still continues to combat various armed groups, while at the same time reintegrating thousands of former combatants into civilian life, providing them sufficient incentives not to re-engage in violent or illegal activity. Extreme poverty and deep inequities continue to haunt the country and could, if left unattended, fie1 new cycles ofinstability.
4. The Government recognizes these challenges and aims to address them through its 2006-20 10 National Development Plan (the NDP), the outcome of broad-based consultative process. The NDP lays out a comprehensive set of costed programs built around six main pillars-Peace and Security, Equity, High and Sustainable Growth, Environmental Sustainability, Good Governance and Transversal Themes. These form the basis for the World Bank Group’s Country Partnership Strategy (CPS) for FY08-11.
5. In line with the Bank’s middle-income country (MIC) strategy a rolling programming approach is proposed, under which the CPS pipeline will be determined during annual reviews held in conjunction with results-based Country Portfolio Performance Reviews.’ Results will be measured using the Results Matrix in Annex Iand NDP’s monitoring indicators, which will be tracked through SIGOB, the national monitoring system.2 Thus, the success ofthe CPS will be coterminous with the success of the Government’s programs that the WBG is supporting. Provided the Government sustains a commitment to strong macroeconomic management and effective poverty alleviation, the Bank Group proposes to maintain an active IBRD lending program ofup to US$ 4 billion this CPS period (about US$ 1 billion per year) and IFC financing of up to US$ 300/400 million per year, complemented by a diverse set of analytical and advisory services and specialized grants.
6. The CPS embodies the World Bank Group’s strategy for working in middle-income countries and features many ofthe characteristics expected for new CPSs. There is a focus on flexible programming and exposure management, quick-response and jointly prepared knowledge products; and frontier products (including initiatives in sovereign asset management, sub-national finance, private-public partnerships, contingent lending and insurance instruments). In addition, strong continuity with successful operations will be maintained through several second and third-generation operations.
7. Most of the risks identified in the 2002 CAS-increased conflict, economic deterioration, stalled reforms-did not materialize; instead the country made important gains in growth, security and economic stability. Nonetheless, risks remain. Peace has not been secured and poverty, corruption, and the drug trade remain significant challenges for the country. The external environment could change as a result of the slow down of the US economy and/or potential reduction of trade with Venezuela, which could cause a deterioration of Colombia’s fiscal situation. As the Bank Group increases its engagement at the sub-national level, moreover, reputational, fiduciary and safeguard risks will increase, posing increased portfolio management challenges.
8. At present, however, Colombia appears well positioned to absorb likely external and internal pressures, rendering the risks to the Bank Group manageable, including IBRD exposure risks. Over the last four years the Government has made important advances in addressing the challenges highlighted above and the current National Development Plan has comprehensive programs (organized by pillar) dedicated to each of these issues. Further, the President’s policies have been widely debated and approval for them is reflected in strong, sustained popular support.
9. In sum, while political, economic, and operational risks are present, as they were in the previous CAS, they appear manageable and warrant Bank Group commitments of the envisaged scale. The potential rewards of continued large-scale engagement in Colombia are very high, as demonstrated clearly by the successes achieved over the last CAS period.
’ While this CPS is not fully programmed in advance, there are areas in which the Government has asked for or indicated it will seek WBG support, including tackling extreme poverty and regional inequality, infrastructure and public services, competitiveness, public sector management, the environment, education, social protection, housing, transportation, energy and mining, agriculture, and peace-building. In addition, collaboration on financial services, banking and risk management products is likely to intensify. http://www.sigob.gov.co/pnd/pnd.aspx,under “Objetivos y Estrategias del PND” contains all of the NDP monitoring indicators organized by pillar.
2 11. Introduction
10. The last World Bank Group’s Country Assistance Strategy (CAS) for Colombia was presented to the Board in December 2002. At that time, President Alvaro Uribe had just been elected with a strong mandate to restore security and economic stability. The country was still recovering from its worst economic crisis in seventy years and grappling with spiraling violence associated with the armed conflict. Under the FY 2003-07 CAS, the World Bank Group (WBG) more than doubled average annual lending to Colombia, providing the administration with a strong package of advisory services, investment and lending in four strategic areas-Sustained Growth, Equity, Governance and Peace.3
11. Since 2002 a combination of factors-economic recovery, an increased state presence and successful security measures-have worked together in a virtuous cycle to significantly improve the quality of life ofmillions ofColombians. Through its support, the WBG has been able to accompany the administration in many of its most important policy initiatives and continue a substantial program offinancial assistance.
12. This Country Partnership Strategy (CPS) covers fiscal years 2008-1 1 and is aligned with the country’s development goals as expressed in the 2006-2010 National Development Plan and longer-term development strategy “Colombia Vision 2019”. This CPS proposes to maintain an active IBRD lending program of up to US$ 4 billion (about US$ 1 billion per year), with an increasingly active IFC program in the range of US$ 300/400 million per year, complemented by a diverse set of analytical and advisory services and specialized grants.
13. The CPS embodies the World Bank’s evolving strategy for working in middle- income countries and features many of the characteristics expected for new CPSs. Programming is done on an annual basis, synchronized with the national budget process, and based on a demand-driven “menu” approach. Frontier products will feature strongly (including initiatives in sovereign asset management, sub-national finance, private-public partnerships, contingent lending and insurance instruments) and emphasis will be placed on jointly prepared, quick-response AAA. In addition, strong continuity with the previous CAS will be maintained, capitalizing on past successes through several second or third- generation operations. Examples ofsome ofthe successful initiatives which are expected to continue into this CPS period are summarized below.
A CAS Progress Report was submitted to the Board in September, 2005 (report 32999-CO). It was at this stage that a new “Peace Pillar” was introduced at the Government’s request.
3 Lox 1: World Bank Group/Colombia Partnership: Past Successes Create New Opportunities Health, Education and Social Protection. Building on earlier work to mitigate the social consequences of the 1999 crisis, IBRD participated in extensive policy dialogue and financed a highly successful DPL series which promoted a comprehensive approach to social protection, and supported reforms in health, education, and labor force training. Lending in the area of social protection focused on a national conditional cash transfer program called Familias en Accidn, which has been expanded to cover some 1.5 million poor families. Complementary operations help strengthen rural education and expand coverage in higher education. These operations are expected to have fiuther phases during this CPS. Financial Sector and Competitiveness. Continued restructuring of the financial sector was high on the Government’s agenda in the aftermath of the 1999 crisis. IBRD provided support to restructure public banks, strengthen banking supervision and, with the IFC, helped the Government develop the regulatory framework for the insurance industry and capital markets. These efforts were largely successful, particularly in restoring the banking sector’s financial viability. Continued support under the Business Productivity and Efficiency DPL series focused on increasing economic competitiveness. IFC issued the first Colombian peso-denominated bonds, helped establish Colombia’s first secondary mortgage company, continued to back the transformation of the mortgage sector through partial credit guarantees, and supported the issuance ofnon-performing mortgage-backed securities (the first in the LAC region). Additionally equity and medium-term facilities have been provided to local financial groups covering the whole range of financial services and asset management companies. IFC is exploring in collaboration with the Colombian Association ofHydrocarbon and ECOPETROL, a project to help oil-rich municipalities improve their management ofoil royalties. Urban Infrastructure. IBRD provided US$ 457 million for the expansion of the Transmilenio rapid mass transit system within Bogoti and to five additional cities. The Transmilenio is an innovative system of articulated buses which run on designated routes with fixed stops. Since it began operation in Bogota it has reduced traveling times, crime, congestion and air pollution and is being emulated in other major cities such as Lima, Mexico City, and Jakarta. Follow up operations are anticipated. Water Supply and Sanitation. IBRD and Government are finalizing a national program to modernize water sector management at the departmental level. This flagship initiative is the result of a concerted engagement between the Bank and Government authorities over the last decade to develop replicable models for addressing problems ofwater supply and sanitation in urban areas. Colombia has emerged as a leader in Latin America in the sector in part as a result ofits close work with the IBRD. Environmental Management. IBRD has provided grant support (under the GEF, Montreal Protocol, and Carbon Fund facilities) to address land degradation and encourage biodiversity conservation, renewable energy production and the reduction of ozone depleting substances. A DPL series focusing on mainstreaming environmental sustainability policies, complemented by a recent Country Environmental Analysis, provided the analytic underpinnings for many of the activities presented in the NDP’s Environmental Pillar. A third ofthe DPL series is expected during this CPS. Peace and Development IBRD has been supporting a series of pilot projects since the mid 1990s which have demonstrated that participatory development can be undertaken successfully in the midst of conflict zones. This model inspired similar initiatives throughout the country and was incorporated into the Government’s Democratic Security Policy and National Development Plan. In addition, recent ESW led the Government to request Bank assistance to design its National Reintegration and Reparations Program.
4 4 111. Country Context
A. Recent Economic Developments and Future Prospects
14. The near stagnation of the economy during the early 2000s has given way to sustained economic growth and a strengthening of consumer and investor confidence. The turnaround was influenced by an improved global economic environment in which demand for Colombia’s primary exports has risen along with prices, while the cost of international borrowin has fallen.4 Sound macroeconomic management has played a major part in the recovery F and improvements in internal security helped as well.
15. Real GDP growth accelerated from 1.9 percent in 2002 to 6.8 percent in 2006, with private investment rising from 7.7 percent of GDP in 2002 to over 16 percent in 2006. Unemployment has fallen from over 17 percent in 2002 to below 11 percent currently, while inflation declined from 7 percent in 2002 to below 4.5 percent in 2006; however, progress in reducing unemployment stalled during 2007.6
Public sector 7.6 8.2 5.6 5.8 7.0 7.1 Private sector 7.7 9.0 13.6 14.9 16.4 15.7
16. The economy remained strong in 2007 with GDP growth estimated at 6.6 percent for the year. Significantly improved factors supporting both.domestic demand (internal peace, healthy investment and credit levels) and external demand (rising exports and foreign direct investment) should result in sustained economic growth in the 5 percent range through 201 1. Foreign Direct Investment has increased five-fold since 2003 and strong flows are anticipated in the wake ofrecent business climate reforms, provided that positive security conditions are maintained and the Free Trade Agreement with the US is eventually ratified.7 The current account deficit rose to about 4 percent of GDP in 2007, however, on the back of a sharp increase in imports of both consumer and investment goods.
4 A recent review of growth performance in Colombia “Economic Growth in Colombia: A Reversal of ‘Fortune”’ by Mauricio Cardenas can be found on Fedesarrollo’s website: www.fedesarro1lo.org. The Government had a US$ 2.34 billion Stand-By Arrangement (SBA) with the IMF covering 2003-05 followed by a US$ 613 million SBA through November 2006 and treated both agreements as precautionary and did not draw on the funds available. Recent (2006) changes in the survey methodology have complicated the analysis of employment trends. ’ In the interim the United States has extended the Andean Pact Trade and Drug Enforcement Agreement for 10 months, preserving the current preferential tariff treatment for Colombia.
5 17. The combination of domestic economic growth, improved international conditions, peso appreciation, and revenue-enhancing policy reforms have benefited the country's fiscal accounts, as did improvements in tax administration8 Revenue growth has continued to outpace GDP growth, and as a result the general Government deficit' decreased from 4.9 percent of GDP in 2002 to about 1.9 percent of GDP in 2007. To further strengthen fiscal performance, the Government has been introducing measures to improve the fiscal balances of regional governments and public enterprises, and the non-financial public sector deficit (which includes the surpluses ofpublic enterprises and regional governments) fell from 4.2 percent ofGDP in 2002 to a projected low 1.O percent ofGDP in 2007.
18. Due to budget and legal rigidities, expenditures have continued to grow in two areas: transfers to sub-national governments and the pensions system. Congressional approval ofan Acto Legislativo last year limited the growth rate oftransfers to sub-national governments to 4 percent in real terms in 2008-09, 3.5 percent in 2010, and 3 percent in 201 1-16. From 2016 onward the growth rate of transfers will be calculated based on the weighted average of the previous four years. In addition subnational governments will receive additional resources earmarked for education (to meet national coverage and quality goals) and childhood development programs. Transfers to the main state pension system will continue to expand over the next decade as payouts will greatly exceed new contributions; a 2005 constitutional reform, however, reduced the net present value of pension liabilities by 19 percentage points of GDP, from 162 percent to about 143 percent.
B. Macroeconomic Outlook and Debt Sustainability"
19. The rapid growth of2007 is expected to subside to more sustainable growth rates of around 5 percent of GDP during the remainder of the CPS period, as domestic demand has been growing faster than GDP, inflation has accelerated and the current account deficit has widened substantially. The main external risk to the economy would be a slowdown in the global economy, particularly if key trading partners like the United States or Venezuela'' were affected. Adverse commodity price shocks represent a related risk.
Source: IMF Article IV StaffReport for 2007; World Bank staff calculations for projections.
* Tax revenues increased by 4.7 percentage points of GDP from 2002 to 2007. The sum ofthe central Government balance plus the balance of the social security system. loSee also the IMF's 2007 Article IV Consultation with Colombia, discussed by the IMF Board in January 2008. I' Total exports to Venezuela were USs3.2 billion from Jan-Sep. 2007 (about 2 percent of GDP), total imports were US$ 1.2 billion from Jan-Sep. 2007 (about 0.7 percent of GDP). Exports were dominated by automobiles (21 percent of exports), chemical products (10.9 percent of exports), and food, beverages and tobacco (8.7 percent of exports).
6 20. Colombia still has an important gross debt burden; however, effective debt management to lower the foreign currency exposure and to lengthen the average maturity ofthe debt has resulted in reduced risk. As noted in the Debt Sustainability Annex H, the public debt burden is sensitive to a combination of shocks, but even in a worst case scenario the debt ratios would stabilize at sustainable levels. On the external front, the Bank's base case debt projection includes deterioration in the current account deficit from an already sizeable 4.0 percent of GDP in 2007 to 5 percent of GDP in 2008. With non- debt creating inflows projected to decline from high levels (which allowed financing the current account deficit fully in 2006 and to a large extent in 2007), external debt would marginally increase to 27 percent of GDP in 2008 under the base case presented in the annex. Actions to moderate domestic demand--in particular, a succession of interest rate increases by the Central Bank--imply that high domestic demand growth, accelerating inflation and the widening current account would be restrained during the latter part of the CPS period.
C. Poverty, Inequality, and the MDG's
21. Colombia's high rate ofeconomic growth has had a positive impact on poverty. By 2006, the nationwide poverty rate dropped to 45 percent ofthe population, and the extreme poverty rate to 12 percent (see Graph 1 below). National estimates of2-dollar and 1-dollar per day poverty levels reveal the same story, with a decline from 18 to 8 percent and 10 to 2.5 percent respectively between 1999 and 2004. With these trends Colombia is moving towards achieving its Millennium Development targets, though this will require the sustained increase in social spending and targeting that occurred under President Uribe's first term.
Graph 1: Poverty Indicators for Colombia Poverty Extreme Poverty
I I National Urban A Rural
Source: MERPD, 2005. Like many countries, ColombiaS official poverty line is much higher than the $1-2$per day measurement.
22. Improvements in national averages, however, mask serious ethnic, gender, and regional differences and overwhelming disparities remain. Poverty in rural areas remains high at 68 percent (2006), compared with 42 percent in urban areas. Afro-Colombians (1 0.5 percent of the population), indigenous peoples (3.4 percent), and female-headed
7 households experience poverty disproportionately. l2While the country as a whole should be able to reach most of its Millennium Development Goals by 2015, this is not likely to be the case for Afro-Colombian and indigenous populations who inhabit regions of the country where poverty and economic exclusion are most entrenched. l3 23. With the poorest 20 percent of the population receiving only 3 percent of total national income, Colombia has a highly unequal income distribution. This is reflected in a Gini index of 0.575, the third-worst in Latin America behind Paraguay and Bra~i1.l~ Reducing these gaps and promoting social and economic inclusion of vulnerable groups remain one ofColombia’s most critical unmet challenges.
D. Political and Governance Developments
24. Security. When the Uribe administration took office in 2002, the armed conflict was the most important issue facing the nation. It is widely acknowledged that President Uribe’s tough security policies and commitment to forcefilly tackle the conflict brought him high levels ofpopular support in the 2002 and 2006 elections. Over the last five years, the expansion of the armed forces and the establishment of state presence throughout Colombian territory have resulted in a significant reduction of violence, particularly in urban centers. l5Uribe’s first administration oversaw a 40 percent reduction in homicides, a 49 percent decline in households forcefully displaced, an 83 percent fall in kidnappings, and a 63 percent reduction in terrorist attacks on towns and infrastructure. By way of comparison, Bogota now has a lower homicide rate than Washington DC, Caracas, Mexico City, Detroit, and Rio de Janeiro. These achievements are mirrored by significant improvements in social indicators.
25. Governance. Since 2002, Colombia has also shown steady improvements in government effectiveness, control of corruption, and rule of law. Political stability and voice/accountability indicators have improved, with regulatory quality remaining stable.
26. Elections. In October 2007 free elections were held in all of Colombia’s 1099 municipalities and 3 1 departments and the coalition of arties that support President Uribe increased their dominance in larger cities and provinces76 (though the mayorship ofBogota went to the opposition Polo Dernocratico party). While these victories are a show of political support for the current administration, there are uncertainties surrounding the 2010 elections and whether this coalition will remain intact.
l2 For example, illiteracy among indigenous and Afro-Colombian populations is estimated to be nearly double the national average, and the infant mortality rate among indigenous is about 50 percent higher than in the general population. l3 To illustrate this point, one can compare national progress on MDGs with that of the department of Choco-whose population of 400,000 is 90 percent Afro-Colombian and 4 percent indigenous. According to departmental officials, Choco trails national averages in nearly every MDG category; infant mortality nationwide is 20 deaths per 1,000 vs. 44 in Choco, maternal mortality is 99 per 1,000 births nationally vs. 417 per 1,000 in Choco. Households in precarious settlements are 16 percent nationally vs. Choco’s 39 percent (2003); water coverage is 88 percent nationally vs. 37.7 percent in Choco (2003), while sanitation coverage is 74 percent vs 25.3 percent for Colombia and Choco respectively (2003). In another measure, the UN’s Regional Human Development Index places Colombia 73rd from the top, with Bogota’s ranking an even higher 38th place (similar to Hungary) while the department of Choco is ranked 148th. l4 Furthermore, Colombia’s Gini index hasn’t moved below the 0.55 mark for the past fifteen years. Rural violence, however, remains at pre-Uribe levels in some parts ofthe country. l6 Parties of the Uribista coalition increased their share of elected officials from less than 113 to more than 2/3rds in departments and won more than half of the major city mayoral contests, up from 1/4th in 2003.
8 27. Peace Process. Today, over 42,000 ex-combatants have been demobilized, most from paramilitary forces. The Government has taken steps towards peace negotiations with a much-weakened ELN (Ejkrcito de Liberacidn National). Recent attempts to arrange a humanitarian prisoner exchange with the FARC (Fuerzas Armadas Revolucionarias de Colombia) have resulted in the liberation of two important political figures. However, even in the absence of a negotiated settlement, the influence of the FARC and ELN has been reduced significantly as a result ofthe military actions by the Government and lack of public support.
28. Current Challenges. Despite its remarkable success in pulling the country back from the brink of economic crisis, spiraling violence and social upheaval, the Government still faces daunting and simultaneous challenges to achieving sustained peace, security and economic stability.
29. As a result of successful demobilization negotiations, the Government must now reintegrate thousands of former combatants into civilian life and provide them with sufficient incentives not to re-arm or re-engage in illegal activities. This is a costly process which involves i)complex reconciliation and reparation arrangements to compensate the victims ofpolitical violence and ii)creation ofconditions to reintegrate ex-combatants into society and into the labor market. This implies the creation of incentives for the private sector to incorporate former combatants into productive activities.
30. The guerilla and paramilitary activities and the narcotrafficking which have haunted the country for decades continue to be the leading obstacles to achieving sustainable development in Colombia. The authorities are working on the complex task ofpromoting lasting peace and socio-economic development in those areas where the Government has gained the upper hand militarily, while continuing military operations in those areas of continued guerilla activity.
31. This task is being complicated by narcotrafficking in which both the FARC and paramilitary forces are involved. l7Sustaining security and military gains and consolidating state presence throughout the country were achieved through a major build-up of security forces (military and police) from about 297,825 in 2002 to about 405,729 in 2007. The budgetary implications of combating guerrilla forces, paramilitaries, and narcotrafficking are reflected in substantial military and security-related spending, representing almost 5 percent of GDP.I8 A sustainable peace process would hold the promise that, over time, more resources could be channeled to the deeply embedded structural problems of extreme poverty and inequity, whereby all vulnerable groups, (including the demobilized, the internally displaced, victims of the conflict, and excluded groups living in deep poverty) are better incorporated into society and the labor market and given opportunities to develop their productive capacities.
” In recent years the FARC, as well as paramilitary forces, have come to fund their activities primarily from the drug trade (extortion and kidnapping having diminished under President Uribe). Though some of the trade has shifted to Mexico and other South American drug cartels, narcotrafficking is still said to generate enormous revenues per year in Colombia, and constitutes a major source of continued financing for illegal groups. ’* These figures are drawn from“Logros De La Politica De ConsolidacidnDe La Seguridad Democrhtica” a presentation made by Colombia’s Ministry of Defense in December 2007.
9 IV. A SHARED VISION
A. The National Development Plan
32. The Government fully recognizes all of the challenges elaborated above and is trying to address them in the 2006-2010 National Development Plan (the NDP). The NDP lays out a comprehensive set of costed programs for the 2006-2010 period and provides guidance for monitoring results and outcomes. The NDP is the result of a broad-based consultative process” overseen by the National Planning Council.2o ’able 3. Colomb 1’s Priorities per ’illar in the Natic ial Developmenl ?lan Peace and A State at the Promotion of High Sustainable Environmental Security for Service of its Equity Growth Sustainability Citizens Citizens
Consolidate Poverty and Macroeconomic Integral Requirements of a “Democratic Vulnerable Conditions Management of Communal State Security” Policy Populations Productivity and Water Resources Challenges of a Displacement, Market and Labor Competitiveness Territorial Communal State Human Rights and Relations High Impact Environmental Reconciliation Social Protection Sector-Specific Planning Access to Credit Programs Sustainable and Competitive Livable Cities Agrolcompetitive- ness and Growth Production Equity and Rural Processes Development Saving, Investment and Finance Prevention/ Control Infrastructure for of Environmental Development Physical Capital Degradation Formation Risk Management Strengthen Energy Supply National Systems Institutions and (SINA) to Promote National Policies Environmental Governance Transversal Themes run throughout the pillars and include Gender, Youth, Ethnic Groups and Intercultural Relations, Culture Demography and Development, Science and Technology, Migration Policy, Foundations and Cooperatives, Promotion of Economic Solidarity, International and Regional Dimensions ofDevelopment.
33. The Government has articulated clear goals and progress indicators for each of these pillars and has developed mechanisms to continuously monitor progress throughout the CPS periodq2’
l9 Consultations on the NDP were carried out between September 2004 and December 2006 in 27 departments and 24 large and mid-size cities. An estimated 21,000 people participated, representing a wide range of non-state organizations such as academia, religious groups, private sector, trade unions, and youth. *’ The National Planning Council (NPC) is a constitutionallymandated body created to promote civil society participation in public policy. The NPC is made up of 18,000 community and social organizations, representing 24 sectors nationwide. Further information can be found on its website www.cnDco1ombia.org. 2’ A detailed description of the NDP goals can be found in Chapter 7 of the NDP on the Government’s website httD://www.dnD.nov.co. SIGOB, the Government’s system for monitoring progress against all country goals, including the NDP, is also accessible on the web at httD://sigob.Dresidencia.gov.co.
10 V. The CPS Program
A. The Current Program
34. The previous CAS envisioned a maximum IBRD lending program ofUS$ 4 billion for the FY04-07 period. Commitments eventually totaled US$ 3.1 billion, split 40/60 between investment and policy lending respectively, and spread fairly evenly across four main sectors as per Graph 2. BRD exposure reached US$4.7 billion at the end ofFY07.
Graph 2: FYO4-07 IBRD Commitments in Colombia
EeaRh and hfraestructure, Mucation. 26%1 22%
2004 2005 2006 2007
/aDRs (p104-07 60%) t IL WO4-07: 40%) 0 Total (Averwe of Total: US77Om) 1
35. IBRD's portfolio consists of 16 projects under implementation for a net commitment of US$ 1.65 billion-of which US$ 715 million remains undisbursed. In addition, 4 GEF grants (US$ 42.4 million) are under implementation. At the end ofJanuary 2008 only one project in the portfolio was at risk. The overall portfolio for FY07 had an average annual disbursement ratio on investment projects of 34 percent. Proactivity and realism ratios have remained in line with Bank best practice, at 100 percent for both categories at the end ofJanuary 2008.
36. IFC operations have broadened in scope as improvements in security and strong growth have triggered a surge in investment, creating new opportunities for IFC support. Colombia is now IFC's tenth largest exposure, and fourth largest in LAC. In FY07, new IFC operations amounted to US$ 274 million, and at the end of the fiscal year, IFC commitments totaled US$ 860 million which was directed to companies in the financial, oil, manufacturing, agricultural and infrastructure sectors. Like IBRD, IFC's portfolio has performed well throughout the CAS period. See Private Sector Strategy Annex A for details ofIFC and MIGA programs.
B. Summary Findings from Completion Report, Consultations, and Client Survey
37. Preparation of this CPS was informed by four types of external consultation: i)the country-wide consultations on the NDP conducted by the Government and the National Planning Council, ii) in-country interviews for the CAS Completion Report, iii) issue- based Stakeholder Consultations, and iv) a Client Survey.
11 38. The CAS Completion Report for the 2002 CAS ranks the WBG’s overall performance as satisfactory. The report’s findings and recommendations which informed this CPS are summarized below: a Build on what works and deepen the continuity between the previous and the present country strategy; a Synchronize the CPS with the national planning cycle; a Set realistic short and medium term targets for programmatic operations, given the difficulty of designing relevant policy triggers for the outer years ofthe CAS; a Retain the flexibility to reprogram as conditions change; a Build strong consensus for new initiatives, using pilot operations; a Reemphasize work in the rural sector; a Internalize equity and social exclusion concerns into Bank analytical work and operations.
39. The WBG organized ten direct Stakeholder Consultations to guide CPS preparation and a complementary Client Survey of 170 respondents was also commissioned.22 The main opinions and messages expressed are summarized in Box 2 below.
22 Stakeholder consultations involved 128 representatives of diverse groups including Afro-Colombians and indigenous communities, regional governments, NGOs and civil society organizations, the private sector and multihilateral donors and were held in Bogota and in the depments of Boyach and Valle del Cauca. IFC also held three panel discussions with private/public entrepreneurs on infrastructure, oil and gas, and finance-related issues.
12 13ox 2. Stakeholder Consultations and Client Survey Main Messages: Image and Outreach. The Bank receives very high ratings for its overall image in Colombia. Stakeholders perceive the Bank as respectful, responsive, and collaborative with Government and other donors. The two main sources of information about the WBG are work-related exchanges and the Bank’s website-which is seen to offer timely and easily accessible information on the country program. However, policy messages do not travel far beyond official circles and academia to the broader population and better use could be made of alternative media (such as periodicals). Stakeholders are in general unclear about the procedures to apply for Bank-related grants, scholarships, and training opportunities and would like easier access to this information, particularly those living outside Bogoti. Products and Services. The Bank is valued for its financial resources, technical advice, and knowledge; though it is felt that it should improve the price, terms and processing requirements of its loans as well as non-financial services. (Note: the client survey was conducted prior to recent changes in IBRD’s pricing policy.) Respondents see the Bank as needing to become more competitive in a MIC country that has other financing alternatives. The Bank’s strategies and recommendations, moreover, are not always seen as realistic or well-tailored to country circumstances. Country Priorities. Poverty reduction and the lack of employment opportunities are the main development challenges for Colombia-and the Bank needs to be more involved in poverty eradication through the provision of education, jobs and basic infrastructure (although, at the same time poverty alleviation was the area where the Bank was seen as relatively less effective). Specific Areas of Intervention. The WBG should address land policy (a priority for the rural poor), provide more nuanced advice to tackle disparities at the regional level (a view widely held by Afro- Colombians and indigenous groups consulted), give greater focus to promotion of science and technology for competitiveness, and focus more on youth.
C. Rationale for World Bank Group Support to Colombia
40. The World Bank Group and the Government of Colombia have built a productive and dynamic dialogue on a wide range of development issues and this has led to a strong lending program. IBRD is currently Colombia’s largest single creditor, its market-share among multilaterals having increased steadily since 2001 from 24 percent to 44 percent today. Through its long engagement, the WBG has gained significant knowledge and expertise in the areas most critical to the country’s development. The synergies offered by the combined services of IBRD, IFC and MIGA constitute an unmatched suite of country experience and strategic, financial, and technical support which is accessible within a stable and long-term multilateral relationship.
41. Today, there is still a significant demand for WBG services to help the Government consolidate its achievements and address ongoing challenges. Furthermore, aligning the CPS with the NDP offers the WBG an opportunity to fully harmonize its program with the country’s own plans and budget cycle. Moreover, a NDP developed with broad popular consultation is consistent with Paris Declaration commitments.
42. It is important to highlight that while there has been an intensification of WBG engagement with Colombia over the last CPS period, the Government has been very successful in changing its debt profile, favoring domestic currency debt, and managing its debt strategically, using local currency instruments and accessing international capital markets. While the Bank remains competitive in terms ofpricing, the challenge will be to
13 continue reducing the non-financial transaction costs imposed on the client country and ensure that the Bank’s technical expertise and advisory services is cutting-edge, and responsive to rapidly-changing needs. A sophisticated middle-income country like Colombia is an important test case for demonstrating that the WBG can deliver on its MIC strategy of faster, more flexible client-driven support.
D. Strategic Elements of Proposed CPS
43. When President Uribe was re-elected in May 2006, the Bank had already prepared a series of 18 Policy Notes, “Colombia 2006-201 0: A Window of Opport~nity”.~~These were discussed with the President and his cabinet shortly after his reelection. In December the WBG country team and senior Government officials convened for a day-long workshop in Washington DC, at which the Government presented its National Development Plan and outlined how the WBG could best support its goals under a new CPS.
44. The authorities requested WBG support for five pillars of the National Development Plan-Peace and Security for Citizens, Promotion of Equity, High and Sustainable Growth, A State at the Service ofits Citizens, and Promotion ofEnvironmental Sustainability, as well as support for its Transversal Themes. Under each pillar it was agreed that the Bank would provide a flexible menu-based mix of financial and analytical services tailored to the country’s evolving needs. New frontier products would also be offered, particularly in the area offinancial and risk management.
45. In line with the Bank’s MIC agenda, the Government and the WBG have agreed to a rolling programming approach whereby the CPS pipeline will be determined and adjusted on a yearly basis in conjunction with results-based CPPRs. Results will be measured using the monitoring indicators of the NDP,24 and these indicators will be tracked through the national monitoring system (S1GOB)-thus the success of the CPS will be coterminous with the success of the Government’s programs that the WBG is supporting. A mid-term CPS Progress Report will also provide an opportunity for adjustments.
46. Bank interventions will be designed in conformity with Paris Declaration principles ofdonor alignment and harmonization with national systems. Where country systems have not evolved to international standards, the WBG will provide technical assistance to help build institutional capacity at the local, provincial, and national levels.
47. The CPS also incorporates the main tenets of the Bank’s Governance and Anti- corruption Strategy and LAC regional policy as a complement to Colombia’s efforts on this front, including its recent ratification of the UN’s Anti-Corruption Convention and the Governance Pillar goals of the NDP. WBG support to governance at the subnational level is expected to increase over the CPS period, as discussions have already been initiated with several newly elected mayors and governors (e.g. Medellin, Bogota, Cartagena), which has led to requests for assistance with several public sector management and governance
- ~~ ~~
23 Copyright World Bank 2007, also available at www.worldbank.ordco 24 http://www.sigob.gov.co/pnd/pnd.aspx under “Objetivos y Estrategias del PND” contains of all of the NDP monitoring indicators organized by pillar.
14 initiatives, through lending and AAA. (see Section V. and Governance Annex B for hrther details).
48. While this CPS is not fully programmed in advance, there are areas in which the Government has either asked for or indicated it intends to seek continued active Bank support, including tackling extreme poverty (particularly in income generation for the poor and vulnerable groups), infrastructure and public services, competitiveness, (including trade promotiodbarriers) public sector management, the environment, education, social protection, housing, transportation services, energy and mining, agriculture, sustainable tourism and pea~e-building.~~In addition, collaboration on financial services, banking and risk management products is likely to intensify. The lending program anticipated for 2008- 2009 is expected to take advantage ofrecent changes in Bank lending instruments (e.g. the new DDO and maturities policies). The Bank is also exploring with the Government other program innovations such as the joint IFC/IBRD subnational Sub-national Finance Facility. New product lines, taken together with the diversity of engagement the WBG can offer, positions the WBG to responds to Colombia's need for cutting-edge, multi-sectoral solutions to its major development challenges, such as resolving striking regional inequities, competitiveness, stimulating regional development as a source of poverty reduction, and adapting to global climate change.
E. WBG Areas of Concentration and Collaboration
49. The following section focuses on the type of financial and AAA services the WBG is positioned to offer under each pillar, identifying areas where discussions are underway or where the Government has said it intends to seek support. The list is indicative, as explained in previous paragraphs.
I. Sustained Equitable Growth26
50. The overall objective of WBG support under this pillar is to help improve Colombia's competitiveness in order to maintain high and sustainable GDP growth over the medium term. This agenda involves close collaboration between the Bank and IFC, who have a shared interest in improving infrastructure and social services, developing sources of renewable energy, and strengthening the financial and private sectors. This level ofcollaboration is expected to intensify. 51. Examples of how the synergy between IBRD and IFC products could be leveraged during this CPS are highlighted below and described in greater detail in the Private Sector Strategy, Annex A: e Competition and Doing Business. The central vehicle for IBRD support to the competitiveness agenda has been the Business Efficiency DPL series.27 The
~~
25 While the range of potential IBRD engagement is broad, the Bank will exercise selectivity, in line with its comparative advantage and resource capacity to provide high-quality support. 26 The main focus in this section is on growth as another pillar addresses equity issues more directly. 27 This has underwritten reform in five areas: (a) enhancing the business environment and improving the regulatory framework; (b) increasing the soundness and depth of the financial system; (c) promoting access to financial services by
15 Government requested a third phase in FY08, which will be presented with this CPS, and there is potential for continued support through follow up operations, if requested. Much of IFC’s country program also revolves around strengthening the business environment and private sector competitiveness. IFC’s Bogota-based pilot to reform the inspections systems is expected to be expanded to the municipalities of Cartagena, Cali, Medellin, Bucaramanga and Santa Marta (through a multi-donor initiative). IBRD reports on infrastructure, logistics and regional competitiveness,28 have been complemented by the recent regional Doing Business report, prepared in collaboration with USAID. IFC plans to undertake studies in areas such as Public Private Partnerships, Simplification of Business Processes, and Management of Petroleum Royalties. In addition, the rural dimension of competitiveness is being addressed by IBRD projects which support small-holder involvement in the agricultural production chain and quality and technology improvements needed to compete globally (via the Productive Partnerships and Agricultural Transition projects respectively). a Infrastructure. IBRD and IFC are supporting Government policies to improve utility management, particularly public-private models of service delivery in the water sector, where IFC is also a potential investor in small and medium sized private operators. IFC and IBRD are also helping to structure infrastructure concessions, with IFC focusing on private sector participation and IBRD providing technical assistance to the G~vernment.~~Further infrastructure collaboration can be envisaged in such areas as ports and airports, additional roads, energy and telecommunications. IFC/IBRD involvement has several advantages; it helps attract long-term investors, helps the Government negotiate fair contracts and provides added assurance that technical, social and environmental standards are observed. a Urban Services. In addition to ongoing support for specific jurisdictions (Cartagena, La Guajira, Bogota), IBRD is expected to provide assistance to several departments through a Water and Sanitation APL in FY08. IBRD would also support a follow-up operation to provide urban services for the poor in Bogota, as well as a project to manage solid waste. IBRD support could also be provided through a Housing DPL, which could address land access, housing finance, improved targeting of housing subsidies and other sectoral issues. In urban transport, IBRD is financing the expansion of Bogota’s Transmilenio system to five additional cities, some of whom may be interested in borrowing from IFC or mobilizing market resources without a central Government guarantee. The city of Bogota is working with the IFC on a new loan agreement ofaround US$45 million. This financial package (which does not have a central government guarantee) will be used to support urban street rehabilitation and maintenance, an approach which could be replicated. All of the initiatives above are aligned with the Government’s underserved groups; (d) adoption of quality standards and innovation for export products; and (e) improving the regulatory framework for investment in infrastructure and transport logistics. 28 Reports include the “REDI” Colombia: Recent Economic Developments in Infrastructure (2004), followed by Infastructura Logistica y de Calidadpara la Competitividad de Colombia (Report No. 35061 -CO, 2006), and Colombia: Inputs for Sub-regional Competitiveness Policies (2007). 29 IFC is currently advising INCO and the Ministry of Transport on the structuring and financing of Colombia’s largest road concession project-Ruta del Sol- a 950km highway which runs from Bogota to the Caribbean coast.
16 Macro Projects Program. Also, IBRD, jointly with IFC, has an ongoing dialogue with Bogota on their plans for a new metro system.
0 Financial Sector. IBRD has supported the Government’s efforts to strengthen the financial sector in multiple ways, including support to issue and implement a new Capital Markets Law, consolidate supervision across all financial markets and develop a new financial sector law. To support country efforts to promote sustainable access to financial services, IBRD produced a study which investigates Colombia’s relative performance (compared to other LAC countries) in banking sector finance to SMEs. IBRD is also exploring a potential contingent credit line for Disaster Risk Management and is collaborating with an inter-agency committee to carry out simulations ofpotential financial crises to ensure Government readiness to adequately manage risks. IFC is evaluating private equity players to identify strong business models that will generate efficiencies in industries with strong growth potential. IFC will also continue to focus on capital market development, as well as investment in firms at the pre-IPO stage. Finally, expanding access to finance for housing solutions for the poor is an area in which the WBG could offer support, possibly through a joint operation with FINDETER and the National Savings Fund.
11. Poverty Alleviation and Equity of Opportunity
52. The overall objective of WBG support under this pillar is to support Colombia’s efforts to achieve its MDG and NDP goals to reduce poverty and increase equity. This involves a broad array ofactivities in many sectors, as summarized below:
0 Extreme Poverty and Vulnerable Groups. IBRD collaboration with Colombia on its strategy to eradicate extreme poverty is expected to be extensive. IBRD and IDB have been asked to finance the expansion of an innovative and highly successful conditional cash transfer program (Fumilius en Accidn), 30 with IBRD potentially providing around US$ 300-600 million in FY09. The Bank has been asked to support analytical work on labor markets and income generation for the poor under an ongoing NLTA and Social TAL, and to assist the Government in developing incentives for local governments and the private sector to promote greater social and economic inclusion of the extreme poor and vulnerable groups. To increase access to finance by the poor, IFC is supporting microfinance institutions to promote SME and micro-credit products through the formal banking system and extend their reach to the poor. e Regional Dimension of Poverty. Colombia’s poorest regions are disproportionately rural with a high proportion of indigenous andor Afro- Colombian populations. These persistent pockets ofhard poverty remain a growing challenge for regional and national authorities. WBG engagement in the coming CPS period will include a deeper and more systematic series of activities to address issues of social exclusion and poverty, through analytical work and potentially
30See Attanasio, “Evaluating a Conditional Cash Transfer Program: The Experience ofFamilia en Acci6n in Colombia” 2006
17 through regionally-based comprehensive poverty programs such as those now under discussion with the department of Choc6 and municipality of Cartagena. The Bank will complement lending and analytical work with grant-financed activities, such as the recently approved Japanese Social Development Fund (JSDF) capacity building grant for Afro-Colombian communities. e Bank support for the health financing system is expected to continue, with additional technical assistance and possible investment lending for information systems development, health insurance, and hospital restructuring. e In education, operational support is planned through a second Rural Education APL, including pre-school, basic and secondary levels. Secondary education in particular suffers from serious retention problems, and further incentives would be piloted under the Antioquia Secondary Education Project planned for FY08. The Bank will also provide programmatic AAA on Education Quality. In the tertiary sector the Bank-financed student loan program (ACCESS) has significantly increased university enrollment among the lowest three deciles of the population. A follow-up APL of US$ 300 million to ICETEX (Colombian Institute for Education Credit and Technical Studies Abroad) in support of student loans was approved in March 2008, which will have a central government guarantee. IFC is also supporting this program with technical advice on accessing private capital markets. e Social Protection. The Bank will continue to support the redesign and rationalization of the social protection system and improve targeting of subsidies. Through the Informality AAA, the Bank will explore the dynamics of informality and how social protection coverage can be extended to informal sector workers; at the same time the ongoing Social Safety Net I1program is supporting a redesign of the safety net system, while NLTA is looking at alternative ways of extending pension coverage. If requested, this analytical work could potentially form the basis of an operation to follow the successful Labor Reform and Social Development Policy (PLaRSSAL) programmatic DPLs.~~ e Agriculture and Rural Development. Support for agriculture competitiveness and rural poverty reduction is expected to continue. The Government has requested second hases of the Productive Partnerships and the Agriculture Transition Projects' and has asked for technical support to design an agriculture and rural development strategy. This strategy would develop, among other dimensions, a poverty and income generation strategy for rural areas, policies for productive land use and protection, use of innovative rural technologies, potential mechanisms of social protection for the rural poor, and incentives for local governments and the private sector to accelerate economic inclusion and productive opportunities for the rural poor.
31 See CAS Completion and Progress Reports for the results achieved through the PLaRSSAL series. 32 A detailed review of the Productive Partnerships, Agricultural Transition and Peace and Development Projects can be found in the CAS Completion Report.
18 111. Environment and Natural Resource Management
53. The Bank’s key objective under this pillar is to support Government’s NDP and MDG goals of ensuring environmental stability. The Bank and the Government enjoy considerable convergence on the environment agenda, and this has led to an active grant program with many innovative features, and a deepening of support for environmental reform under a series of Sustainable Development DPLs. Complemented with a technical assistance these DPLs are helping to improve the effectiveness of the National Environmental System and to integrate principles of environmental sustainability into policy making throughout critical sectors ofthe economy.
54. In this CPS period, the Bank will continue to offer a wide array of instruments based on emerging demand. Operations and AAA under discussion for FY 08 and 09 are highlighted below:
0 Environmental Policy. Phase I11 of the Sustainable Development DPL series (described above and in the CCR) with a particular emphasis on protecting the most vulnerable, is anti~ipated~~and may be co-financed by the Dutch Government. A third phase of the Natural Disaster Mitigation operation is being explored. In the broader sense, the WBG could offer its convening power and international expertise to help the authorities consolidate their thinking and strategy in the areas of climate change and global public goods in general.
0 Climate Change. Colombia has been a pioneer among middle-income countries in its approach, and during the CPS period the Bank is expected to significantly expand its support for national and local climate change initiatives. In principle, the energy, water, and transport sectors would be areas of focus, with special emphasis on developing a comprehensive climate change energy strategy which takes into account, among other things, the country’s critical paramos and mangrove ecosystems.
0 Renewable Energy. Strengthening the resilience of the power sector to climatic changes, thereby enabling Colombia to maintain its low carbon footprint, could involve market-based reforms to attract investment flows in renewable energy and new technologies such as C02 capture and sequestration or integrated gasification combined cycle power plants (IGCC). Analytical work in the areas of biohels and alternative energy are likely to emerge during the CPS period. Colombia will continue to access opportunities under the Kyoto Protocol via the Global Environment Facility (GEF) and the Prototype Carbon Fund in order to reduce
33 Sustainable Development Investment Project supports SINA (Sistema Nacional Ambiental) in the design and implementation of policy reforms and related investments in line with the DPL Program framework. 34 Triggers for the 3rd DPL in this series include implementation of a national policy on environmental health, a system to monitor and evaluate national and regional environmental management, approval of an Urban Environmental Policy, strengthening DNP and the Vice Ministry of Environment structures to better manage environmental policies and NDP environmental goals, strengthening the Water Resources Unit in MAVDT in line with new water management reforms, developing a national policy for air pollution control, strengthening MAVDT’s Climate Change Unit to meet NDP goals.
19 carbon emissions while fostering important technology transfers to the renewable energy sector.35 LFC will support new initiatives for production ofbiofuels (ethanol and biodiesel) and the development of carbon credits projects, and could potentially finance institutions and companies interested in energy efficiency and renewable energy projects.
IV. Peace
55. The Bank’s main goal is to help the Government provide the social and economic foundations for national reconciliation and a lasting peace. For the last ten years the Bank has been helping Colombia advance its peace agenda through a combination of grants, studies and lending operations across several sectors. Experience gained from these initiatives was integrated into the NDP of the first Uribe administration and influenced Government strategy for assisting rural populations in conflict zones.
56. During the 2005 CAS mid-tern review the Government asked the Bank to consolidate its activities and intensify its support under a new Peace Pillar. Since then the Bank has scaled up its flagship Peace and Development LILs into an APL series, and has produced fresh analytical work on the demobilization and reinsertion of ex-combatants (used in the redesign of the national demobilization program) and reparation to victims of the conflict, which was recently discussed with cabinet authorities, and is expected to help shape Colombia’s National Reparation Program.
57. This experience positions the Bank to support a more comprehensive peace program that addresses social and political inclusion as well as the economic rehabilitation ofconflict-affected populations. Such a program could address three key elements: a Prevention could involve the expansion of the Bank’s current Peace and Development project as well as the Protection of Patrimonial Assets grant (which focuses on land ownership for rural families at risk), the pursuit of universal access to basic education and health for families in high conflict zones (through Familias en Accidn investment loans), and protection ofthe assets ofthe poor. a Reintegration could involve the revitalization of municipalities andor regions with high numbers of demobilized individuals via rural infrastructure provision (roads and markets), education and psycho-social support for ex-combatants, as well as credit and technical assistance for productive asset accumulation. The Bank has been asked to support the Government in designing and, administering a Multi- donor Trust Fund for Peace-Building, which is also expected to catalyze significant private sector participation. a Bank assistance for reparation and reconciliation could include the design of a program for victim reparations in line with the options presented in recent
35 The GEF-funded Silvo Pastoral project developed “ago-eco-tourism” activities that could be expanded to enhance service provision and incomes in remote areas. Emerging international carbon markets also offer opportunities to capture value-added from environmental assets, as well as carbon sequestration and storage via land use, land use change and forestry activities.
20 completed ESW, complemented by resources from the Familias en Accidn loan for eligible internally displaced families and victims of the violent conflict. Post Conflict Fund and IDF Grants could be used to support consensus building efforts, knowledge sharing and institutional strengthening-leveraging the convening role ofthe WBG to bring together key parties to build consensus on the best options and lines of action for the country to move out ofthe conflict. 58. All activities under this pillar would be developed with multiple Government stakeholders and would also include technical and financial support to enhance the effectiveness ofboth control and judicial mechanisms related to peace activities.
V. A State at the Service of its Citizens: Efficient and Effective Government
59. This pillar is a cross-cutting thematic area that supports the achievement of the Government’s goals in social and economic development. Institutional reforms to improve governance and public sector management are necessary ingredients for improved service delivery and economic policy making.
public sector management and good governance and has supported initiatives in justice and tax administration, financial management, procurement, asset management, legal defense of the State, public investment, evaluation and results-based management, among others. Procurement is a key area of governance and IBRD has supported improvements to the national procurement law, and helped strengthen the institutional framework for procurement while at the same time working jointly with other MDBs to harmonize bidding documents. In addition to these efforts, the Bank will respond to Government requests to support its good governance goals36and will focus on areas of comparative advantage highlighted in the LAC region’s Governance Strategy, which include initiatives in civil service, external control, social monitoring, monitoring and evaluation, building statistical capacity, public asset and income disclosure and combating money laundering, among others.
60. The Bank and Government are currently exploring ways in which the Bank can support next-generation efforts to promote good governance over the next CPS period and stimulate citizen participation the various stages of public policy making. Some potential areas of involvement, which coincide with the World Bank LAC Region’s governance strategy, include initiatives in civil service, external control, evaluation and social monitoring, public asset and income disclosure, as well as an increased engagement at the subnational level. Activities in progress or under discussion include:
36 The National Development Plan includes an Anti-Corruption program, the main elements of which include, i) promoting normative reforms to achieve better coordination with territorial entities at the national level, ii)updating the Anticorruption iii)strengthening the involvement of the Presidential Program for Fighting Corruption in the monitoring and investigation of corrupt practices, iv) private sector adopts self-regulation agreements that promote exemplary entrepreneurial practices and provide a transparent framework for relations between public and private administration, and v) provide early childhood education in moral and ethical concepts to build a culture of legality.
21 Tax Administration and Public Sector Institutional Reforms. IBRD has been supporting Government efforts to improve tax administration which has yielded substantial gains in both revenue performance and reductions in the administrative cost of paying taxes. The key instrument has been the first and second public administration projects (“MAPF” I1 & 11). These projects also supported broader public reforms and additional financing is under discussion to support efficient tax and customs administration and public expenditure management. Also under consideration are NLTNloans to support implementation of transfers reforms, pension reform and/or results-based budgeting. Procurement Reforms for Improved Expenditure Efficiency. IBRD has also been supporting improvements to the National Procurement Law and the institutional framework for procurement through NLTA and direct advice from its regional procurement specialists. The Bank is also working with other MDBs towards harmonization ofbidding documents. Royalty Management. IFC’s Enhancing Local Benefits Program aims to maximize the socio-economic benefits communities can derive from large private sector operations (mainly extractive industries). IFC works with its client companies, private associations and governments to improve the management of local government revenues derived from clients’ operations, to achieve more effective local investments and greater transparency. IBRD has prepared a study on decentralization (which includes an analysis of the royalties issue) to which IFC could contribute its royalties management experiences in the oil and mining sector. Decentralization. A variety of instruments could assist Colombia in improving Government performance at the subnational levels: these include sector- specific or multi-sector TA focused on departments or municipalities, and/or multi-sector DPLs. Ongoing (and planned) decentralized service delivery operations in the solid waste and water sectors also have important governance goals. Recent AAA on decentralization could lay the groundwork for future initiatives, including assistance to DNP in implementing the reform ofthe intergovernmental transfer system. Anti-Corruption, Transparency, Results Monitoring and Judicial Sector Strengthening. The Government has been stepping-up efforts to improve governance and the WBG has been supportive of those efforts at a country and project level (see Box 3). A FY08 TA loan to support monitoring, evaluation and information systems is intended to mainstream new processes in budget and policy design, including subnational governments. In addition, a second phase loan for Justice Sector system strengthening is under preparation.
The WBG’s FYO8-FYO9 Indicative Program
61. The WBG and Government have agreed on a proposed program of up to US$ 4 billion for the next four years from IBRD (approximately US$ 1 billion per year) and US$ 300-400 million annually from IFC. In line with the Bank’s MIC agenda, a rolling programming approach will be used, whereby the CPS pipeline will be determined during
22 annual reviews held in conjunction with results-based CPPRS.~~Results will be measured using the NDP's monitoring indicators3*in line with the Results Matrix in Annex I.
62. In addition to traditional ESW, the AAA program is likely to include a number of shorter, fast response, studies or policy notes or non-lending technical assistance. In the past, the Bank has worked closely with local research institutes and the central bank in both the preparation and dissemination ofAAA. These cooperative approaches are expected to intensify in the coming years.
63. The table below summarizes the potential areas of WBG support in FY08-09 which have been discussed with the Government.
rable 4: Indicative WBG Lending and AAA Program FY-08 Lending Program Commitment US$ million FY-08 AAA Antioquia Education (approved) 20 Education Quality Productive Partnerships (approved) 30 Informality Programmatic Increasing Access to Higher Education (approved) 300 Poverty and Jobs for the Poor Promoting Rural Education 40 SME Finance (delivered) Business Efficiency I11 DDO upto 650 Alternative Energy Departmental Water and Sanitation 75 IFC - Business Climate Building National M & E Systems 9 IFC - Public Private Partnerships IFC Financinghnvestments 300/400 IFC - MSME - Access to Finance IFC - Business Simplification
FY09 Lending Program FY-09 AAA Familias en Accion I1 Education Quality I1 Solid Waste Management Health System Modernization Macro-Urban Projects Financial Sector Access Improving Municipal Services Poverty and Jobs for the Poor I1 Justice Sector Strengthening Peace Programmatic I11 and NLTA Peace and Development I1 IFC - Oil Royalties Management Sustainable Development I11 DPLDDO IFC - Technical Assistance IFC FinancingAnvestments IFC - Regional Competitiveness Subnational Capacity Building Private Pension Costs and Regulation Sumort to Transfer Reform
G. Fiduciary and Safeguard Implementation
64. During this CPS period, use of country systems in financial management, procurement and safeguards will be increased as the Bank works closely with the Government to support its efforts to continue strengthening its policy and institutional
37 While this CPS is not fully programmed in advance, there are areas in which the Government has either asked for or indicated it intends to seek Bank support, including tackling extreme poverty and regional inequality, infrastructure and public services, competitiveness, public sector management, the environment, education, social protection, housing, transportation services, energy and mining, agriculture, and peace-building. In addition, collaboration on financial services and banking and risk management products is likely to intensify. 38 http://www.sigob.gov.co/pnd/pnd.aspx, under "Objetivos y Estrategias del PND" contains all of the NDP monitoring indicators organized by pillar.
23 framework to enhance the development effectiveness of Colombia’s public expenditure^.^' These efforts will be supported by on-going joint capacity building activities (IBRD- IADB/others).
65. In financial management, Colombia is moving rapidly towards the full use of country systems. Agreements between the Bank and the Government during the December 2005 CPPR, followed by Bank technical assistance, have led to (i)most project financial accounting and reporting being generated from the central government’s own financial information system (SIIF); (ii)the widespread use of national institutions for project management (with PIUs used only under exceptional circumstances); and (iii)agreement that the Controller General will be the default external auditor of Bank-financed projects. The intention is to extend such provisions to the sub-national level, with suitable adaptation. The Bank is in the process of agreeing on national Standard Bidding Documents which are consistent with both Bank policy and national law and incorporate acceptable features ofthe latter. This will be an important step to make further progress on country systems.
66. In relation to safeguards, the Bank has begun to promote the progressive alignment of Colombian systems with Bank policies through support for targeted actions that would be carried out during the upcoming CPS period and beyond. While not representing formal country systems piloting as per OPBP 4.00, these actions center on the policy reforms and institutional capacity improvements needed to adopt Colombia’s own norms and institutions for managing social and environmental opportunities and risks in the long term. As a first step, a rapid assessment of Colombian safeguards systems and institutions that was recently undertaken found an overlap of at least 80 percent between the country’s legal and regulatory frameworks and the Bank’s safeguards policies. This is partly due to the Bank’s strong engagement and support during the last CAS period, in both AAA and policy lending. During this CPS, safeguard issues will be addressed through a more consistent programmatic framework based on country-wide diagnostics. This is expected to contribute to improved quality and consistency in individual projects, simplify project processing, and reduce transaction costs.
H. Other Partners and the Paris Declaration
67. The Colombian Government has signed the Paris Declaration and is committed to implementing its principles. The Government exercises full ownership of its development agenda and has taken a strong lead in coordinating international donors. The Bank’s ensuing program is aligned with the country’s development plan and thus automatically complements other international cooperation programs.
39 Regarding procurement in particular, reform launched by the GOC is promising and the Bank will continue to monitor and support it with the objective of increasing progressive reliance on the country systems within the CPS period and beyond. However, the level of this reliance will depend on the outcome of the regulatory and intuitional reforms underway and the Board’s approval of the proposed policy for use country systems for procurement. The Bank and the Government will carry out a full assessment of the domestic procurement system using the OECD-DAC benchmarking tool and will continuously update this baseline as reforms progress.
24 68. Results based management is also high on the Government’s agenda. The Government’s monitoring system (SIGOB) assesses progress against the national development strategy goals. A three-party (Government, international cooperation, and civil society) coordination mechanism known as the “G24 Coordination Group” meets regularly to discuss strategy and track the delivery ofall international cooperation provided to Colombia. The Government and the Bank also hold annual portfolio reviews (CPPRs) which will in hture be results rather than project-based. Progress towards the Paris Declaration commitments is presented at the end ofAnnex B.
I. Program Envelope and Projected Exposure
69. The Government’s track record regarding macroeconomic and debt management has been strong. The economy has been growing at close to 7 percent annually, the investment rate is above 20 percent of GDP, and the consolidated public sector deficit is about 1 percent of GDP. While potential risks still exist, the Government has made significant progress to improve its debt profile. Gross Non-Financial Public Sector Debt has been reduced to about 38 percent ofGDP, with the average maturity profile increasing to 3.7 years and foreign currency exposure reduced to 28 percent of total debt. IBRD has increased its share of debt to 5.5 percent of the total, making the IBRD the Government’s largest single creditor, followed closely by the IADB which holds 5.3 percent oftotal debt.
box 4. Debt and Risk Management The Colombian authorities have been actively managing a number of potential risks on the Government’s balance sheet, including currency, interest rate, and refinancing risks, as well as contingent liabilities related to infrastructure guarantees and sub-national debt. Potential natural disaster risks are also being addressed and the authorities are looking at potential commodity price risks all with in their MTEF. Colombia has been a leading country in LCR in taking fill advantage of IBRD’s banking products and financial services in order to manage some of its balance sheet risks, particularly interest rate and currency risks. Colombia has signed the first Master Derivatives Agreement with the World Bank that would allow managing the risk at the balance sheet level. It has executed numerous risk management transactions using the flexibility of IBRD Fixed Spread Loans and has taken a leading role in using local currency financing. To date, Colombia’s sub-national borrowers have completed 4 currency conversions into Colombian pesos (COP) of USD-denominated IBRD loans, with an aggregate amount exceeding the equivalent of US$ 145 million. This in turn has helped to reduce the currency risk exposure in the contingent liability at the central level due to the guarantees of these loans. Collaboration between Colombia and IBRD on banking products and financial services is likely to intensify. Discussions are currently underway to continue such local currency conversions as well as to potentially implement innovative financial structures that could further assist the funding and risk management needs ofthe Colombian Government at the central as well as the sub-sovereign level.
70. The Government and the WBG have agreed that as long as the Government maintains strong macroeconomic performance, effective poverty alleviation programs, and a well-managed WBG portfolio, an overall financial envelope ofup to US$4billion in new commitments from IBRD will be made available over the four year CPS period.
71. Given a program of US$ 1 billion in annual commitments (of which half would be quick-disbursing loans and the other half investment loans), IBRD’s exposure could increase to US$ 7.4 billion by the end of FY11. The increase in exposure will be continuously monitored consistent with Bank credit risk practices.
25 72. The Government has also expressed interest in the use of contingent financing mechanisms as a risk management mechanism. IBRD's revised Deferred Drawdown Option would constitute an attractive mechanism for the Government to secure low-cost contingent finan~ing.~'
73. Should the Government's financing needs be lower, or should macroeconomic management, the effectiveness of its social programs or the quality ofthe Bank's portfolio deteriorate, IBRD would reduce the overall financial envelope.
J. Results Monitoring
74. In addition to annual CPPRs, the mid-term CPS Progress Report, the Bank intends to monitor the results under the CPS from three additional angles, in conjunction with the Results Matrix in Annex I. First, NDP monitoring: The Government of Colombia is strongly committed to monitor the implementation of its development program. Towards this end, the Government developed a system called Sistema de Seguimiento a Metas de Gobierno" (SIGOB-Management and Monitoring System of the Objectives of the G~vernment).~'It is regularly updated and provides the basic framework for results- oriented monitoring and evaluation. Since the CPS is driven by the Government's NDP, the Bank would evaluate, as one dimension under its results-monitoring of the CPS, how effective the Government is in achieving its own development vision and objectives. Those objectives have been detailed in the NDP and the Bank will monitor the overall progress of the Government's own benchmarks.
75. Second, AAA monitoring. The Bank's knowledge products are meant to contribute to the public policy process. These products will not be linked to the country outcomes per se but rather be judged on criteria of their quality, relevance, and sustainability. The quality of the Bank's AAA can be assessed based on (i)the feedback from the client; (ii) periodic evaluations of a sample of knowledge products from outside experts, from Colombia, the region, and globally; and (iii)the Bank's internal evaluations. The relevance of the Bank's knowledge products can be assessed by whether the Government invites the Bank to contribute to Colombia's high-priority policy issues and whether the policies that the Government pursues reflect Bank's advice. The Bank does not expect directly attributable outcomes, but does believe that when advice has been useful the Bank's input will be evident in the resulting policy reform. Finally, the sustainability of the Bank's provision ofknowledge products will be the market test, i.e. whether the Government will continue demanding the Bank's AAA services.
76. Third, project monitoring. The Bank's active investment program constitutes a third dimension in monitoring CPS results. At the individual project level, the Bank will track key results indicators for each project. In this context, only fully satisfactory performance will be acceptable with respect to the Development Objectives and
40See Board Paper "Proposal to Enhance the IBRD Referral Drawdown Option (DDO) And To Introduce A DDO Option for Catastrophic Risk" dated March 4, 2008. 4' www.sigob.gov.co/vn,nd/vnd.asvx
26 Implementation Performance indicators. The Bank and the Government will jointly monitor this part of the CPS implementation with the annual CPPRs. It is important to note that Colombia is a leader and innovator in sharing project successes with other countries through various forms of south-south and it is expected that this trend will continue during this CPS, with Bank support where requested.
K. Risks
77. Most of the risks identified in 2002-increased conflict, economic deterioration, stalled reforms-did not materialize, other than difficulty gaining congressional support for some key reforms, Instead, Colombia made impressive gains over the last CAS period and now enjoys greatly reduced risks on both the security and economic front. However, risks do remain, the major elements ofwhich are summarized below.
External
78. Trade. The external environment that has proved so favorable since the last CAS (commodity prices, interest rates, and strong demand from Colombia’s two main trading partners, the US and Venezuela) could change, affecting Colombia’s fiscal accounts. In particular, any major disruption of trade with Venezuela could have a significant effect on Colombia’s trade balance as Venezuela represents the second largest destination of Colombia’s exports (about 2 percent of GDP). Efforts to improve the country’s competitiveness, in general, reduce these risks. Colombia is also actively engaged in negotiating bilateral free trade agreements with a number of large economies while the Free Trade Agreement with the United States is pending ratification by the US Congress. Further, despite the real appreciation of last two years, the real effective exchange rate remains near historical averages for the last two decades and it is substantially less appreciated than the level that preceded the economic crisis of 1999.
79. Finance. The ongoing problems in US and European financial sectors stemming from the subprime mortgage crisis could lead to increased borrowing costs by developing countries like Colombia. The current global financial environment could adversely affect net capital flows to Colombia and other emerging market economies. To minimize external risks, the Government has reduced the foreign currency share of its public debt, and the combined external debt of both the public and private sector is now about 30 percent of GDP. In addition, international reserves have increased substantially and stand at over US$ 20 billion at the end of January, 2008. Bank debt sustainability analyses show that Colombia is likely to be resilient to a number ofshock scenarios.
42 For example, Colombia hosted a study tour to share the design of their Conditional Cash Transfer program with countries as diverse as the Philippines and Ecuador. Similarly Colombia’s Social Targeting System is being replicated in the Dominican Republic and Ecuador, while the Transmilenio Mass Transport System has attracted significant international attention and is being replicated in several large cities around the world.
27 Domestic
80. Overheating of the Economy. Continued rapid economic growth brings with it the risk of overheating-the current account deficit reached about 4 percent of GDP last year. FDI flows last year exceeded the size ofthe current account deficit, and total external debt is below 30 percent of GDP, making it likely that the country will be able to manage this potential problem without serious dislocation. Additional efforts at fiscal consolidation could also lower the risk of overheating. Other domestic risks include Colombia’s vulnerability to natural disasters and rising inflation. Since May 2006, the Central Bank adopted measures to alleviate demand pressures on prices. Twelve increases of 25 basis points in the rate of the monetary policy have taken place, and at the beginning of 2007 additional measures were adopted to correct the high growth rate of banking sector loans. Regarding natural disasters, Government is working with local authorities (with IBRD support) to improve land use planning and regulation to reduce the costs of and vulnerability to potential future natural disasters.
81. Political. Peace has not been secured throughout the entire country and poverty, corruption, and the drug trade remain significant challenges. The Government has recently suffered setbacks on the political front with the arrest of several congressmen and one senior official for links to paramilitary organizations. Should the scandal widen or come closer to the administration or the security situation deteriorate, political consensus- particularly between the Executive and Congress-could unravel.
82. However, the Government recognizes these challenges and has launched major initiatives to address them, particularly within the context of the National Development Plan. The President’s major policies are on strong footing and the fact that he was re- elected in May of 2006 with 56 percent of the popular vote and has maintained strong popular support (around 70 percent) signals a fairly strong consensus for advancing his Government’s social/economic reforms and for continuing his democratic security policy. Also, in the October 2007 elections, the coalition of parties that support President Uribe increased their dominance over Colombia’s larger cities and provinces.
83. Social Cohesion. While the immediate economic and political outlook is positive, the Government still faces daunting problems. First, it must continue to combat various armed groups, while at the same time reintegrating thousands of former combatants into civilian life, providing them sufficient incentives not to re-arm or re-engage in illegal activity. Secondly, despite some improvements, narcotrafficking still flourishes in Colombia, financing both guerilla and paramilitary forces and contributing to violence, poverty, corruption, insecurity and illegal spin-off activities. And long standing structural problems of extreme poverty and inequality continue to haunt the country, and could, if left unattended, fuel new cycles of instability.
28 Risks to the World Bank Group
84. Working at Subnational Level. As the Bank intensifies its engagement at the sub- national level, fiduciary and safeguard risks will increase-as will the costs of attendant mitigation mechanisms. The Bank may also face potential reputational risks as it expands its support into regions where local governments are subject to the influence of illegal groups and other actors. The central government’s commitment to work with the sub- national authorities and the Bank to embed strong fiduciary measures will help offset these potential risks.
85. MIC Strategy. The Government has been very successful in changing its debt profile and managing its debt strategically, using local currency and accessing international capital markets, with a clear eye on competitiveness. While the Bank remains competitive in terms ofpricing, the challenge will be to continue to reduce the non-financial transaction costs to the client and ensure that the Bank’s technical expertise and advisory services are cutting-edge, and responsive to rapidly changing needs. Thus, a sophisticated middle- income country like Colombia is an important test for demonstrating that the WBG can deliver on its MIC strategy of more flexible, focused and fast client-driven support.
86. In summary, political, economic, and operational risks are still present, making it essential that practical mitigation measures are implemented and that risks are continuously and openly assessed. The annual reviews of the WBG’s program would also allow for reassessment of both risks and the appropriate risk mitigation measures. However, it is important to emphasize that while risks exist, as they have in previous CASs, the potential rewards of large scale engagement in Colombia are very high, as demonstrated clearly by the successes achieved over the last CAS period. ***
29 CPS Annex A Private Sector Strategy
1. Colombia's private sector development suffered greatly from the macroeconomic and banking sector crisis of the late 199Os, early 2000s, as well as the tremendous costs associated with the deteriorating security situation over that period. Private sector investment was a mere 8 percent of GDP in 2002. It has doubled since then as both the macroeconomic context and business climate have improved.
Private Sector Trends and Challenges Real GDP per Capita, IS60 to 2006 1960=100 2. Macro Context. Colombia's long term macroeconomic performance is known for its moderate but relatively stable growth compared to other Latin American countries. Colombia I 25030011 avoided debt defaults and the hyperinflation that numerous countries experienced, and economic 200 growth varied less dramatically despite largely 150 following regional trends over the last 45 years. Colombia's most severe economic crisis since 100 1960 was without doubt the 1999 crisis that led to stagnating growth for several subsequent years.
3. The deceleration of growth of the 1980s and 1990s was accompanied by a deceleration in total factor productivity. The growth accounting below shows how productivity gains have been much slower in the 199Os, and in recent years, as compared to the rapid productivity gains ofthe 1970s.
Colombia: Growth Accounting 1970- 1976- 1981- 1986- 1991- 1996- 2001- I 1975 1980 1985 1990 1995 2000 2005 Colombia GDP 5.65 5.37 2.24 4.94 4.13 0.92 3.42 Capital -1.39 0.29 2.12 2.60 4.35 2.44 2.07 Labor 3.23 3.27 3.12 2.53 2.44 2.25 2.07 TFP 4.04 3.15 -0.52 2.39 1.03 -1.40 1.36 Source: World Bank. (2007a), as cited in World Bank (2007b). Calculations use WDI data for GDP, labor growth and gross investment. Capital is computed using an inventory rule assuming a 7 percent depreciation of the capital stock and an initial capital to output ratio of 5. The share of capital comes from Loayza, et. al. (2004).
4. As noted above, at the end of the 199Os, Colombia faced its worst economic crisis in decades. Growth had been strong in the mid 1990s; however, there were major asset bubbles - particularly in the housing sector - that proved to be unsustainable. The crisis itself was caused by a combination of factors, including: a deteriorating security situation and ensuing political stress, a crisis in the banking system, and an earthquake in the coffee- producing region ofthe country.
30 5. Investment as a share of GDP plummeted when the crisis hit in the late 199Os, and only in recent years the ratio has returned to a level above 20 percent. With last year’s investment rate of 23 of percent of GDP, sustained growth of around 5 percent may be feasible. Several key factors have contributed to the positive developments: first and foremost, the improved security situation domestically; global liquidity and increased foreign direct investment; and the recovery of the financial system. These trends have continued into the first half of 2007. One concern has been that capital inflows have resulted in an appreciation of the real exchange rate. Part of this has been reversed recently, and in general terms, the real exchange rate is not out of line with historical averages.
6. With real exchange rates appreciating but still not out of line from historical averages, the focus of attention is on the microeconomic determinants of productivity. Colombia has made progress in reducing the administrative cost of doing business through a variety of reforms, including landmark anti-bureaucratic process legislation (‘Ley Anti- trdmite”) that was approved in 2005. The Government also established “one-stop shops” to make it easier for firms to register and license their businesses. Progress in financial sector stability, regulation and expansion has led to lower financing costs and broader access to credit. The Government has also improved the system for product quality standards, and there are plans for major transport infrastructure investment to facilitate international trade. IFC has provided extensive advise support to the municipality of Bogoth’ in piloting a successfwl program for the reduction and simplification of trdmites that now is being expanded to other cities.
7. Despite this progress, Colombia’s performance in Doing Business indicators reveal a broad range of outcomes relative to regional and international comparators. The table below displays some ofthe relative indicators. Colombia performs relatively well in terms of the cost of starting a business, including the cost of registering the business; however, licensing requirements are still very costly relative to regional and OECD averages. Colombia is also a relative outlier in terms of the cost to export. Part of this is driven by the fact that export production centers are located far from ports; however, part ofthis cost is driven by less than ideal transport infrastructure along with regulatory problems in the trucking industry (as noted in last year’s World Bank report on transport logistics).
Source: Doing Business 2008 (data for 2007)
8. The Bank also conducted an enterprise survey ofinvestment climate variables. The analysis of the data (conducted in 2006) indicates that variables related to red tape,
31 corruption and crime and to infrastructure present the higher relative impacts on productivity. The results show that for infrastructure the three most important factors for average productivity are: (i)days to clear customs; (ii)wait for electricity supply, and (iii) shipment losses. Under the general category of “red tape”, crime and corruption, court conflicts, security costs and crime losses have a relatively high impact on aggregate productivity. Finally, regarding the category of product quality, innovation and labor skills, the overall relative impact is lower than what has been found in other Latin American countries.
9. Colombia has made important strides in increasing both traditional and non- traditional exports over the last decade. Total exports (goods and non-factor services) as a share of GDP increased from 13 percent in 1996 to 20 percent in 2006. This has been achieved despite substantial geographic challenges for transport with major industrial centers located in the Andean highlands (two separate mountain ranges) distant from coastal ports. Lowering the cost of the movement of goods is a key factor for export led private sector development.
10. The main weaknesses in the freight logistics system in Colombia are not restricted to hard infrastructure, but deal with regulations and government-managed processes. A recent Bank report showed that the freight logistics complex should be approached with a broader perspective, including transport infrastructure and services, business logistics development, and trade facilitation processes. Three main problems were found to be particularly critical: (a) the trucking industry, (b) public use ports, and (c) inspections in international gateways (see World Bank, 2006).
Figure: Main freight logistics problems in Colombia, key problems underlined
HIGHWAYS Bottleneck in critical segments, geometry
TRUCKING INDUSTRY Low efficiency and quality of service
Bottlenecks for coal: no participation in other markets
INLAND NAVIGATION Great potential, navigational constraints
AIRPORTS Need to expand freight facilities
A 2“d generation regulatory reform badly PORTS needed Lack of efficient standards, procedures and information systems: i.e.: port-truck SMES with logistics costs three time higher SCM than averaoe
Source: Adaptedpom World Bank (2006~).
11. A recent worldwide survey of operational staff in freight forwarding shows that Colombia logistics performance is frail, even by LAC regional standards, particularly in the management of customs and border procedures. The Logistics Perception Index (LPI) was estimated for 150 countries, based on seven sub-indexes. Hard data on the logistics environment and physical performance indicators were collected as well for 110 countries,
32 including Colombia.’ Colombia ranked 82 out of 150, with some sub-indexes performing very low, particularly “Efficiency of Customs and Other Border Procedures”. Sub-indexes reveal that Colombia’s weaknesses are not just infrastructure, but mostly in the inspection procedures and logistics service organization.
Finance
12. Though financing to the private sector has been increasing during the last two years, the system remains very shallow when compared to other countries in the region and lack of financing remains a key bottleneck to firm’s expansion as reflected on most enterprise surveys. Increasing such depth and efficiency ofthe financial system will require lowering the costs associated with financial sector activities and continuing implementation of policies for markets development while ensuring that prudential supervision continues to be strengthened.
Domestic Credit to the Primte Sector (% of GDP) 200 180 160 140 120 100 80 60 40 20 0
Source: World Development Indicators, data for 2005
13. While there has been substantial progress on the financial sector, credit to the private sector represents about 25 percent of GDP, less than the 60 percent average for middle income countries. Debt markets have deepened considerably-average annual bond issues (including private and public) in 2004-05 where almost three times the average reached in 2001-03. However, penetration is still somewhat low: total bond issues in 2005 totaled US$2.2 billion, or about 2 percent ofGDP. Forty-three percent ofthese were placed by private sector companies in eight issues. The equity market is still underdeveloped as only 98 companies are listed and only one industrial conglomerate account for 60 percent ofthe market capitalization.
Government Strategy and Programs
14. The Government has placed a strong focus on competitiveness. The National Development Plan and the earlier “Colombia Vision 2019” led to an “Internal Agenda” for
World Bank - GFP - Turku: Measuring Global Connections.
33 improving competitiveness. This was based on consultations that involved some 22,000 participants over the 2004-2005 period. The process identified 293 critical productive sectors at the regional level, 108 strategies for intervention, 1,287 “necessities” for regions, etc. Implementing the recommendations clearly represents an institutional challenge- especially in terms offocusing on detailed regional or sectoral initiatives.
15. That said, on a national level, Colombia has made progress in reducing the administrative cost of doing business through a variety ofreforms, including landmark anti- bureaucratic process legislation (“Ley Anti-trhite”) that was approved in 2005. The Government also established “one-stop shops” to make it easier for firms to register and license their businesses. Progress in financial sector stability, regulation and expansion has led to lower financing costs and broader access to credit. The “Opportunities Bank” program (Banca de Oportunidades) has helped to coordinate the efforts of existing financial intermediaries to expand access to bank services in numerous regions. The Government has also improved the system for product quality standards, and there are plans for major transport infrastructure investment to facilitate international trade.
16. Recent progress was validated by the Doing Business 2008 team, and Colombia was named one ofthe top 10 reformers. The main areas of improvement cited were in the areas ofprotection of investors, ease ofpaying taxes and trade across borders. It should be noted, however, that in the latter two categories there is substantial room for improvement with the rankings at 167 and 105 respectively.
17. The Government’s tax reform last year was intended to provide stronger incentives for private sector investment. The treatment of investment expenditures by firms in the corporate income tax is certainly favorable. With the combination of partial up-front expensing and gradual depreciation, there is an implicit subsidy to new capital investment. There remains unequal treatment across sectors due to a wide array of special exemptions for particular sectors.
18. In transport and logistics, there is a major effort to launch a concessions program for regional highways. The National Development Plan highlights a number of highway routes that would be top priority in this process. In addition, the Government is working with subnational governments to improve secondary roads. The Plan also outlines activities to improve river transport, better transport connection nodes and portdairports.
19. The financial sector has consolidated, systemic stability has been restored but the coverage of the sector remains limited. The Government is seeking to address this through three sets ofpolicies: a. Increasing financial sector eficiency by preparing a Financial Sector Reform Law to (a) liberalize the type ofproducts that can be offered by financial institutions; (b) allow the creation of multiple portfolios in the private pensions industry (multifondos); (c) facilitate cross-border financial transactions allowing the creation of foreign branches and the acquisition of insurance abroad by Colombian entities; and (d) strengthen the independence of the Superintendencia Financiera by increasing the legal protection to its staff,
34 b. Strengthening creditor rights and credit supply through (a) the preparation of a legal reform to the Civil Code to streamline executive processes to liquidate collateral (procesos ejecutivos); (b) implementation of the Habeas Data Law through the issuance of the decrees necessary to regulate the Law including the definition of standard information to the reported for each counterparty; and (c) issuance of a decree by MHCP liberalizing the interest rate regime by establishing risk-adjusted predatory lending interest rate caps; and c. Fostering access to financial services for the poor through the (a) enactment of a tax reform law exempting from financial transactions tax basic savings account for the poor; (b) issuance by MHCP of a decree democratizing access to the capital markets by allowing the creation ofbrokerage agencies; (c) issuance by MHCP of a decree streamlining data requirements to open savings accounts; and (d) budgetary allocation of resources to subsidize on a declining basis the opening of banking branches in underserved areas.
20. In terms of policy formulation, the Government plans to establish a Technical Support Committee for Transport and Logistics comprised of public and private sector representatives. They are also in the process ofpreparing two CONPES, one for toll roads and another for a National Logistics Plan (expected in March 2008).
IFC and the Colombian Private Sector - Five Decades of a Strong Partnership
21. Colombia joined the IFC in 1956 and three year later, IFC committed its first investment operation in the country: a US$ 0.5 million loan to a pulp and paper company. Since then, the Corporation has provided US$1.72 billion, including syndications, for 66 companies in 75 projects. About half of these commitments were made in the period after opening our Bogota office in 2001. During the past five decades, IFC provided risk capital and long-term finance, as well as technical assistance, to infrastructure, financial sector, oil and gas, and general manufacturing.
22. Colombia is one of the countries that for decades has sought and followed WBG advice on several fronts, including private sector development. For instance, in the 1960s the World Bank provided support to develop the mortgage sector. In the 1970s and early 1980s, a similar approach took place with the Development Finance Corporations with the World Bank coming in to advise and establish these financial intermediaries, and IFC providing both equity and debt. These institutions played a catalytic role in channeling financing to emerging local companies and groups during those years. During the late 1990s Colombia went through a severe recession and the WBG responded with strong support. While the World Bank provided policy advice and budget support lending, the IFC provided critical support for the restructuring ofthe backbone ofColombia's industrial and financial sectors. These activities included, among others, support for the modernization and expansion of Bavaria, the Grupo Empresarial Antioqueiio conglomerate, 2"d tier banks like Davivienda, and emerging 2nd tier groups like Grupo Carvajal.
23. In Colombia, IFC has introduced and implemented some of the most innovative products and services in the region and worldwide. IFC was the first supranational institution to issue bonds in Colombia, known as El Dorado and has also provided partial credit guarantees to diverse entities in order to facilitate access to local capital markets,
35 including the first securitization of Non Performing Loans from several mortgage institutions. IFC has also supported key projects in housing finance, provided direct investments in companies that promote growth and employment but have limited access to finance, and funded infrastructure projects. IFC’s clients in Colombia have been leaders in the areas ofcorporate governance.
24. IFC support during the last CAS period. IFC’s strategy, outlined in the FY2003 CAS, aimed to help in broad-based “reactivation” of the country’s economic growth by promoting an increase in private sector investment and activity, and more broadly-based growth. The strategy was updated in the FY2006 Progress Report, centering on: (i) strengthening and deepening of financial sector institutions and local financial markets to better serve the needs of local companies, including SMEs and micro enterprises; (ii)the development of infrastructure, including potential public-private partnerships and support to sub-national entities in the provision of infrastructure, in coordination with the Bank as warranted; (iii)investment in extractive industries; and (iv) the modernization of Colombian businesses to help improve their competitiveness and support their expansion both domestically and abroad.
25. Consistent with these priorities, IFC committed a total of US$ 720 million, in January 2003 - June 2007, diverse sectors, including the financial sector, infrastructure, oil and gas, and manufacturing; and helped improve the competitiveness of the Colombian private sector.
26. In the financial sector, IFC played a key role in helping shape a more efficient capital market in Colombia and in developing a sound regulatory framework, both in collaboration with the Government, the private sector and LBRD. Support was provided through innovative ways, including: initiating first Colombian Peso-denominated bonds issued by a multilateral financial institution- El Dorado, assisting with the establishment of Colombia’s first secondary mortgage company, strengthening institutional investors, and consolidating the domestic capital market with partial credit guarantees for corporate bonds as well as debt and equity facilities to leading financial groups.
27. During the CAS period, IFC supported housing finance, micro and SME finance, and domestic securities market, providing US$ 228 million in equity investments and US$ 350 million in debt facilities. Financing was mostly in local currency. In housingfinance, aiming to deepen the liquidity of the mortgage market and foster Colombia’s capital markets, IFC continued to back the transformation of the mortgage sector. IFC’s primary support was through partial credit guarantees. It included IFC’s support for the issuance of non-performing mortgage-backed securities, a first in the LAC region, which received a very favorable response from investors. IFC also assisted a former savings and loans institution which was shifting its business focus from financing mortgages to origination and securitization and repositioning itself as a universal bank. In micro and SMEfinance, IFC placed a greater focus on this sector starting in FY2006, with the aim to broaden address access to financial services to lower-income groups. A total financing ofUS$ 57.5 million was provided to microfinance institutions and other well-established local players promoting SME and micro credit products through the formal banking system to support expansion of their operations. In addition, in FY2006-07, IFC offered a partial credit guarantee for the first bond issue by a leading local brokerage (pending disbursement) and
36 invested equity in the company to help it reduce its reliance on commercial bank funding, and further facilitate market liquidity and activity in the domestic securities markets.
28. Improving the Business Enabling Environment - In 2004, Colombia started a program for the Simplification of the Procedures to start operating a business that has reduced the time needed to register a new business to 44 days. With the leadership of the Chambers of Commerce, the country has achieved good results in terms of the time required to register a new business. The city of Bogota asked the IFC LAC Facility to support the 2nd stage of the program consisting ofimproving and simplifying the system of municipal inspections. This initiative, launched in 2006, aims to improve Colombian business competitiveness and promotes formalization. The next step is to replicate the experience in other major Colombian cities.
29. IFC’s support for infrastructure included three projects undertaken by leading local players. The first project helped an innovative public-private partnership company contribute to the water and sanitation services for the poorer areas in the southwestern part of Barranquilla. As the company explored a non-traditional source of funding for public infrastructure services in the domestic capital market, IFC provided an US$ 18 million equivalent partial credit guarantee to enhance the company’s local currency bond. The second operation, a US$ 50 million senior loan, supported an IFC’s longtime client and one of the few locally-owned, experienced gas transmission companies in Latin America. Supporting the company’s expansion strategy in natural gas transmission and distribution in the country and south-south investments in the region, IFC is helping achieve enhancement of basic infrastructure services, promotion of job-creating economic activities, and considerable environmental benefits. The other project is a US$ 15 million debt facility to a private port concession company to improve its technical and container capacity output.
30. In oil and gas, IFC invested US$ 27 million in equity commitments and US$ 25 million in debt facilities, in two small local companies with significant experience in Colombia’s energy industry, currently dominated by large foreign and state companies. IFC also provided technical assistance: (i)to enhance the use of oil and gas royalties paid to municipal governments, with the support of the hydrocarbon association, the state regulator, and (ii)to help the company’s adoption of best practices in environmental and social standards, with funding from IFC’s Corporate Citizenship Facility.
31. IFC’s support for manufacturing consisted of three projects with two leading Colombian pulp and paper products manufacturers operating regionally. The companies were in need of long-term financing and faced challenges as they further expand business. To help with both ends, IFC provided US$ 142 million total financing, and along with the financing, supported strengthening their competitiveness and financial fundamentals by assisting with multiple areas in operational sustainability, such as financial reporting and restructuring, corporate governance, and environmental, social, health and safety standards.
32. Throughout its activities, IFC placed a special emphasis on helping improve corporate governance across the different sectors in Colombia as an integral part of strengthening the country’s capital market framework. IFC’s assistance was provided directly to several of its client companies in Colombia, as well as through training
37 programs sponsored for senior executives in coordination with the local Chamber of Industry and Commerce, Confecamaras.
33. IFC Portfolio. As of end June 2007, IFC's total committed portfolio stood at US$ 755 million, with an outstanding balance ofUS$ 456 million, or more than three times the level of FYO1. Colombia is the fourth largest country exposure in Latin America after Brazil, Mexico and Argentina. The quality of the portfolio is good with no Non Performing Loans (NPL's) and loss provisions during the last four fiscal years.
34. The trend of IFC commitments in Colombia, and its portfolio composition are illustrated by the graphs below.
Portfolio by product as of June-07 Portfolio by sector as of June-07
Chemcak
hlp8hper- i j-- - 7% Wholesale and
16% ~ 1 Retail Trade A ban 41%
_.. Guarantee Finance 8 - I--- hsurance 52%
hformbn I -- Mneral Rcduct L 0% " .-.> 1%
300
250
200
150
100
50
0 2Wl 2032 2033 2We 2W5 2oc8 2W7
35. The IFC pipeline in the region has not only increased by the total amount in US$ millions but also by the total number of commitments and new potential clients. IFC has built an important sector diversification in its pipeline, increasing the amounts and number of investments in the real sector especially in Oil and Gas, General Manufacturing and Infrastructure.
World Bank Group Private Sector Strategy
36. The objective is to build on the recent successhl economic performance to improve competitiveness and secure growth in the 5 to 6 percent range over the medium term.
38 IBRD, IFC and MIGA can build on synergies and the broader variety of instruments that the World Bank Group has to offer in helping the Government to achieve this objective.
37. The overall objective of WBG PSS, focused mainly on the Sustained Equitable Growth pillar, is to help improve Colombia’s competitiveness in order to maintain high and sustainable GDP growth over the medium term. This agenda involves intimate collaboration between the Bank and IFC, who have a shared interest in improving infrastructure and social services, developing market-based reforms to attract investment flows in renewable energy and new technologies such as integrated gasification combined cycle power plants (IGCC), and strengthening the financial and private sectors. PSS support to the CPS pillar is illustrated below:
Pillars/PSS Financial Infrastructure Local Tier I BEE Focus Markets Companies
Sustained MSMEs, Tsptl Logistics, Agribusiness Bus. Equitable Low Inc. Simplif., Education. Growth Housing, WaterISanitation SoutWSouth Export Interm. Competitive Bks., Renewable ness LOC.Cap. Energies and Mkts. New Technologies
Pov. Allev. MSMEs, Access to basic Enhancing Enhancing Health, & Equality Low Inc. utilities Local Local Education of Housing Benefits Benefits Opportunity
Env. & Nat. Renewable Sustainab. Sustainab. Res. Mngt. Energies and Standards, Standards New Ecofuels Technologies
Peace
State at the Municipal Bus. Simplif. Royalties Serv. of its Utilities jm/l Citiz.
I
38. World Bunk Group Synergies - There are numerous examples of where these synergies can be expanded in the coming years. Following the financial crisis ofthe end of the 199Os, the IBRD worked with the authorities on improvements in the regulatory environment for the financial system, while the IFC made strategic investments in the sector. A new study is almost finished on SME finance, and the IFC is also working in this area. Continued support for loans for students to finance higher education (with IFC advisory inputs) will help increase the skill level ofthe workforce-aligned with actions to improve the quality and coverage of secondary education at the departmental level. Ongoing and future work on private pension fund regulations and investment in the sector could lead to pension fund financing of infrastructure investments. IBRD and IFC have
39 worked together on advisory services for transport infrastructure concessions. The regionalization of the Doing Business report is complementary to IBRD’s recent regional competitiveness study. In terms ofregional competitiveness, MIGA has provided TA to the city ofBogota for the creation of a regional economic development agency for investment promotion. These examples provide the path for future work across the World Bank Group to support sustained growth.
39. IFC Strategy. Going forward jointly with IBRD, IFC will continue building on this strong partnership with an active engagement in areas where it can provide the highest value-added for further development of Colombia’s private sector. The thrust of IFC support will be in 3 key areas to: (i)improve access to finance through the development of domestic financial and capital markets including microfinance and low income housing finance; (ii)investments in infrastructure (transport/logistics, renewable energies, water and sanitation, including support to PPPs); (iii)Local tier I companies particularly in agribusiness with an emphasis in SoutWSouth investments, and sustainability. In addition IFC will also allocate resources to: (iv) improve the business enabling environment; (v) selective investments in extractive industries promoting sustainable resource management, enhancing local benefits, and facilitating royalties sharingmanagement; (vi) develop human capital - health and education.
40. Some of IBRD/IFC joint efforts will be reflected in a more comprehensive/multisectoral approach in support ofsubnationals, mainly municipalities: e Improving access to basic utilities: IFC advisory services and investments, IBRD AAA will support PPPs and private sector investments in infrastructure - water and sanitation, urban transport. This maybe further extended to electricity supporting investment in renewable energy. e Maximizinghmproving municipal revenues via: business simplification - IFC LAC Facility and IBRD, institutional building - IBRD DPLs, extractive industries royalties sharing and management - IBRD and IFC LAC Facility. e Microfinance: supporting local business benefiting from business simplification, facilitating access to basic services (e.g. microlending for household connection to water) - IFC support to intermediate private banks e Low income housing via IFC support to intermediate private banks.
41. Throughout the implementation of the PSS, to address climate change issues, IFC will emphasize environmental improvement and preservation in its project selection. IFC will support new initiatives for production of ecofuels (ethanol, biodiesel) and identify opportunities to develop carbon credits projects. It will also consider financing leading financial institutions and companies interested in energy efficiency, renewable energy and new technologies (IGCC)2 projects. Another potential area is in the forestry sector.
42. Implementation and impact will be hrther strengthened by the LAC Facility through the advisory work done under its main three pillars: (i)Enhancing Local Benefits,
Integrated Gasification Combined Cycle power plants
40 (ii)Improving Business Environment through simplification of processes and (iii)Access to finance.
43. Enhancing Local Benefits (ELB) applies essentially to the manufacturing, agribusiness, and extractive industries sectors. ELB leverages the socio-economic benefits that communities derive from the operations of large private sector investments that are significant with respect to the local economy. ELB provides services, capacity building support and advice to companies to help them more effectively respond to the challenges of deepening their development impact. The services ELB offers are structured in two areas: e Revenue Management. Assisting local governments improve the use of revenues received as a direct result of extractive industry operations, and collaborating with civil society organizations to increase the social accountability of local governments. IFC is supporting two clients in the oil and gas sector by providing technical assistance and advisory services to improve the management of royalties in selected municipalities. e Linkages. Assisting the development of SME’s to supply large companies so that more local economic activity can be generated.
1. Improving access to finance through the development of domestic financial and capital markets
44. IFC will continue to support the consolidation of the banking sector and provide technical assistance to develop financial markets, facilitating SME access to long-term finance and supporting the development of micro enterprises through investment and non- investment products.
45. IFC is pursuing a program developing access to finance for microenterprises and SMEs. In microfinance, the IFC LAC Facility is working with MFIs committed to institutional transformation to help build their capacity to operate in a more commercial environment as regulated financial institutions. Advisory projects are implemented in parallel with IFC investments and interventions are based on shortcomings identified in institutional needs. Their main focus is on corporate governance, risk management, funding, product development and information systems.
46. The Facility is considering Colombian banks for inclusion in its pilot SME lending program, in which IFC will work with a small number ofbanks to help with down-scaling to serve the SME segment. The Facility is currently developing a shortlist of potential partner banks in ten low and low middle income countries in the region. The program would provide a bundled package of technical assistance and investment. Technical assistance covers: streamlining credit policies and procedures, risk management, product development, market and sales strategies, credit scoring and training oflending staff.
47. Microfinance (Banca de Oportunidades) - WB has engaged the Government and prepared studies on the negative impact of interest rate ceilings on microfinance lending. The Consultative Group to Assist the Poor is currently assisting the Government in
41 thinking through the policies that will constitute the Banca de Oportunidades. This will facilitate IFC support for investment in microfinance, notably via intermediate banks
48. Deepening Capital Markets - IBRD provided TA for the new Capital Markets Law and is assisting MHCP to issue a secondary regulation to implement the law. Additional TA supports consolidated supervision across all financial markets (banking, capital markets, insurance, etc). A recent study investigates Colombia’s relative performance (compared to other LAC countries) in banking sector finance to SMEs. There is analysis underway that looks at how to improve the regulatory environment for private pension hnds. IFC is evaluating private equity players to identify strong business models that will generate efficiencies in industries with strong growth potential. IFC will also continue to focus on capital market development - in particular the insurance market.
2. Infrastructure and Public Private Partnerships
49. As most Latin American countries, infrastructure needs in Colombia are significant. A recent WB report indicates that, in order to attain coverage levels similar to Korea, Colombia would need to invest between 6 and 9 percent of GDP in infrastructure every year for the next 20 years. This is above the 4-6 percent for the region and substantially above the current Government’s fiscal capacity to invest in these projects.
50. The Government is determined to address this gap through an increased private sector participation in infrastructure projects. WB supported road concessions in the past and has recent AAA on logistics demands related to FTA and broad infrastructure studies including recommendations on PSP (see Colombia: Recent Economic Developments in Infrastructure, 2004study). IFC has an active investment pipeline for infrastructure sector including ports, road concession (investment and advisory), airline, airport, and hydro. IFC is also supporting the creation ofpublic-private partnerships.
5 1. IBRD/IFC has engaged actively with the Government indicating their availability for financing and advisory services. Joint IFC/IBRD involvement has several advantages; it helps the Government negotiate fair contracts and ensure that adequate technical, social and environmental standards are observed and helps attract potential long-term investors.
52. This PSS will have a special focus on transportation and logistics projects (roads, airports, ports and railroads) to improve the competitiveness ofthe private sector. IFC and IBRD are helping to structure toll road concessions-with IFC focusing on private sector participation and IBRD providing technical assistance to the G~vernment.~
53. The IFC has actively participated in reviewing road and port infrastructure projects in Colombia. On the analytic side, the IBRD has worked in a quasi-programmatic fashion, with a series of reports starting with Colombia: Recent Economic Developments in Infrastructure, 2004, followed by a report on transport logistics (Infraestructura Logistica y de Calidad para la Competitividad de Colombia, Report No. 35061-C0, 2006), and a recently completed regional competitiveness report (Colombia: Inputs for Sub-regional Competitiveness Policies). Dissemination of the regional competitiveness report will help
IFC is currently the sole advisor to INCO and the Ministry of Transport to structure the largest Colombian road concession project Ruta del Sol which runs from Bogota to the coastal town of Santa Marta.
42 establish a more nuanced policy agenda for hrther work at the regional level. Additional advisory work on the public-private partnerships in transport (jointly with the IFC) may help the Government construct improved transport infrastructure at the lowest possible cost.
54. The Bank and IFC are both advising on toll roads, including joint work on a concession structure for the Ruta del Sol highway from Bogota to Santa Marta - 9OOkm. Currently IFC is the advisor to the Ministry of Transport and INCO on the “Ruta del Sol” concession estimated to be largest infrastructure project in the country.
55. Urban transport systems - IBRD helped Bogota’s Transmilenio and is now also financing five additional cities (Pereira, Medellin, Cartagena, Barranquilla and Bucaramanga). Some cities may be interested in borrowing from IFC or mobilizing market resources without central government guarantee. There are opportunities with private bus operators (often new companies).
56. Ports -joint IBRD/IFC work has resulted in long term strategic financial partner to support Port expansions (Muelles el Bosque and Cartagena). IFC recently made a US$ 10 million loan to a private port facility in Cartagena. IBRD is advising on port reform and advised on integrated development of Buenaventura. There may be scope for further joint work on airports.
57. Furthermore, IBRD and IFC are focusing on improved delivery of urban services - notably water and sanitation. IBRD, together with the Ministry ofEnvironment developed and is supporting PSP models for different size utilities. This includes private operators for small and medium sized companies (usually originally construction firms) for which IFC funding and financial management support may be usehl.
58. Municipal utilify financing - The Bank is lending directly to municipalities in water (Cartagena, Bogota in the past, La Guajira) with other water and energy utilities expressing interest. Coordination with IFC may be based on Bank involvement for broader reform and reform based investment and IFC focus on financial management and needs of utilities.
59. Other areas of investment may include electricity generation and distribution, gas transmission projects, and utilities at national and municipal levels. The main focus will be on renewable energies 3. Supporting the Modernization and International Expansion of Leading Colombian Groups - Agribusiness, South/South, and Sustainability
60. There are eleven Colombian representative conglomerates mainly family owned, most ofthem created in the 50’s and currently managed professionally. Aggregated sales of the eleven groups represent approximately 14 percent of GDP and only three are listed in the Colombian Stock Exchange.
61. IFC has been able to build relationships with six of the eleven groups providing either equity or debt financing, and we are currently in advanced conversations with at least three ofthe remaining groups. IFC investment in firms has been particularly valuable at the
43 pre- PO stage. The strategic business development IFC plans for Colombia targets continuous support to the local and international expansion of these conglomerates, with a priority for agribusiness groups notably involving ecofuel industries. Preference will be for projects where IFC can add value by promotinglenhancing sustainability standards, as well as enhancing local benefits.
62. Large and medium size corporations are increasing their access to local financial and capital markets due to the overall economic recovery, higher liquidity and the strengthening of local financial intermediaries. IFC will continue supporting them via equity and long-term financing to facilitate their expansion overseas and help the consolidation of certain sectors. Besides agribusiness, IFC may also consider investments in construction materials, retail, pharmaceuticals, petrochemical and tourism.
4. Improving the Business Enabling Environment
63. The central vehicle for IBRD support to the competitiveness agenda is the Business Efficiency DPL series. This DPL series has supported the Government’s reforms in five areas: (a) enhancing the business environment through improvements in the regulatory framework and a reduction in the administrative burden on enterprises; (b) increasing the soundness and depth of the financial system; (c) promoting access to financial services, including capital markets, by firms and underserved segments of society; (d) increasing the country’s export competitiveness by promoting the adoption by firms of quality standards and technological innovation; and (e) lowering firms operational costs by improving the regulatory framework to increase investment in infrastructure and facilitating transport logistics. A third phase is expected in the near future. The Government has requested a third phase in the first year ofthe CPS period.
64. Much of IFC’s country program also revolves around strengthening the business environment and private sector competitiveness. IFC’s Bogoth-based pilot to reform and simplify the inspections systems is expected to be expanded to the municipalities of Cartagena, Cali, Medellin, Bucaramanga and Santa Marta (through a multi-donor initiative). IBRD has produced a series of reports on infrastructure, logistics and regional competitiveness5, and these have been complemented by the recent regional Doing Business report. IFC plans to undertake studies in areas such as Public Private Partnerships, Simplification of Business Processes, Management of Petroleum Royalties, and Technical Assistance to PYMES
4 There is also a rural dimension to competitiveness. The Productive Alliances projects support small-holder involvement in the agricultural production chain and the Agricultural Transition projects support the quality and technology improvements needed to compete globally. 5 Reports include the “REDI” Colombia: Recent Economic Developments in Infiastructure, 2004), followed by Infiastructura Logistica y de Calidadpara la Competitividad de Colombia, (Report No. 35061-C0, 2006) and Colombia: Inputs for Sub-regional Competitiveness Policies.
44 5. Extractive Industries and Sustainable Resource Management
65. Colombia has the fifth-largest oil supply in Latin America. Oil reserves and production have been declining since peaking in 1999. Therefore a new regulatory framework and fiscal measures have been implemented by the Colombian Government to open up the sector which led to increased investment in oil and gas. Under the new regulatory framework, the country has signed 32 E&P contracts out ofan expected 30 E&P in FY06. Crude production this year has risen to around 600,000 barrels per day (bpd) up from 500,000 bpd last year.
66. The IFC’s strategy for oil and gas in the next years aims to support local medium sized companies via equity and long term financing, while assuring that the projects meet high environmental, social, and governance standards, and that revenues from the projects are used transparently and effectively. In the gas sector, IFC plans to support opportunities for private investment that have been created by a new contract model that reduces the state’s share ofhydrocarbon production.
67. IFC provided equity and debt to two oil and gas companies (Petrotesting and Kappa) to support their expansion plans. IFC is also providing technical assistance to improve the municipal management of oil royalties in the regions where Petrotesting and Kappa operate. Supporting of Ecopetrol, Kappa and Petrotesting, IFC has launched a project for effective municipal management of oil royalties. IFC is also assisting Petrotesting to develop an Annual Sustainability report, and to upgrading its environmental and social systems.
68. Municipal development (extractive industries revenue sharindmanagement) - WB is preparing decentralization study (including analyzing “regalias” issue) where IFC could also collaborate with its own revenue management experiences at the client level in the oil sector. In addition, Colombia offers interesting opportunities to replicate the study on Environmental and Social Impacts ofthe Mining industry, done jointly with IFC in Peru.
6. Human Capital and the Competitiveness Agenda
69. Better health and education improves the competitiveness ofthe private sector. While private sector investment opportunities maybe more limited in health and education, the private can play a role in improving the quality of and access to health and education, especially in the realm of PPP where joint IBRD/IFC work can add value. Continued support for loans for students to finance higher education (with IFC advisory inputs and potential investments notably via private bank commercial lines) will help increase the skill level of the workforce-aligned with actions to improve the quality and coverage of secondary education at the departmental level.
70. IBRD is implementing a student loan operation through ICETEX, a public sector institution that plans to turn to private markets in the mid- to long-term. IFC may accompany this process and/or finance expansions of higher education capacity. Furthermore, IFC has offered the Ministry of Social Protection support to facilitate the sale ofpublicly owned health facilities to private operators.
45 CPS Annex B Governance Challenges
Introduction
1. This annex presents some of the key governance challenges being faced by Colombia, as well as the current efforts at addressing them and their potential implications for World Bank group operations in the country. For the purposes of this annex governance is defined as the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the Government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them.6
Main Governance Challenges in Colombia
2. The single most influential challenge not only to governance but also to economic and social development in Colombia is the armed conflict, which has pitted democratically- elected governments against left-wing guerrilla movements (the FARC and ELN). Over the last two decades paramilitary forces have evolved from self-defense groups assembled by landowners, into organized armies living off extortion and drug trafficking. The growing economic and political influence of illegal armed groups, coupled with ruthless violence and intimidation, gradually opened up opportunities to capture the Colombian State, most notably at the municipal and departmental levels.
3. National-level institutions of every kind are also susceptible to capture from illegal armed groups as well as more traditional mafias such as drug-trafficking cartels. Institutions such as Congress and the national intelligence service have been seriously undermined by alleged linkages with paramilitary groups, and recent investigations by the Ministry of Defense have discovered a significant level ofpenetration of drug cartels into the armed forces, and cases are being prosecuted. This level of state capture disrupts governance at every level, undermining democratic institutions.
4. Proper control of campaign financing is important to at least partially reduce the influence of illegal groups on public policy. According to the 2006 annual report of the Colombian chapter ofTransparency International, transparency in the financing ofpolitical campaigns is the single major challenge to combating corruption in the country. The same report highlights the major influence of paramilitary and drug-trafficking interests in the 1994, 2002 and 2003 elections, as well as allegations of illegal financing of congressional campaigns in 2006.’
5. The lawmaking process itself has frequently been singled out as a major obstacle to good governance in Colombia. Weak party discipline and fragmentation of political representation arising from low vote thresholds for access to Congress were serious challenges to orderly, transparent, and programmatic lawmaking. Reforms to the
WBI: Governance Matters 2007. ’ La Transparencia en la Financiacidn de la Politica, in Corporacibn Transparencia por Colombia: Informe Anual2006.
46 governance of political parties and voting thresholds have taken place, but their impact seems to be less than anticipated. Furthermore, Congress voting rules are not transparent, making it difficult to track individual voting records and ensure accountability to voters.
6. In terms ofrules that control the proper use ofpublic funds, Colombia has advanced considerably in the modernization of key national-level institutions. The national tax administration has undergone dramatic improvements over the last five years, not only in the combat of tax evasion but also in the implementation of internal probity regulations. Public expenditure is in turn subject to controls through a comprehensive integrated financial management system. There is still, however, room for streamlining transactional controls through the ongoing implementation of risk management tools. Capacity to implement these new financial management and control frameworks can vary among entities, particularly at the subnational level.
7. However, there is a widespread public perception among Colombian society that corruption in Colombia’s country procurement system is abundant. The regulatory framework on fraud and corruption exists, but corrupt practices are still present within the system and often mixed with local politics. Lack oftraining ofauditors and narrow political motivations are important obstacles to the scope and credibility of their work. There are also issues with the institutional framework, as there is no dedicated, centralized agency in charge ofprocurement regulation, control and supervision.
The Government’s Strategy to Address These Challenges
8. Reestablishing State control over the entire Colombian territory is a key element of the Government’s Democratic Security Policy. As established in the current National Development Plan, the Government will continue its frontal fight against drugs, terrorism, kidnapping and all forms of organized crime, as well as strengthening the support mechanisms for populations displaced by violence and for the reintegration ofdemobilized members of illegal armed groups into society.
9. This last point is one of the most important components of the policy to deal with all forms of violence and organized crime. Reintegration of demobilized combatants is done through two types of actions: (a) a peace dialogue with those groups that are willing to cease hostilities and (b) a path for individuals who decide to give up arms on an individual basis. The final aim of these actions is to “create a virtuous circle of recovery, presence, and consolidation of state control.” The Justice and Peace Law (Law 975) provides the legal framework for the Government to demobilize illegal armed groups and to guarantee the right to truth, justice and reparation for victims whose human rights have been seriously violated.
10. Congress recently reformed the Procurement Law, making considerable improvements to the procurement system, such as the application ofmerit evaluation as the sole criteria for selection ofconsultant’s services, thus creating an opportunity to converge with international best practices. Framework contracts are also foreseen, which should translate into important savings in terms ofpublic procurement. However, there are several aspects ofthe reform which are still underway and will need to be fully evaluated as their implementation progress.
47 11. The National Development Plan contains a number of other important initiatives to consolidate the model of democratic governance. Some of its most important elements are: e Consolidation of the democratic model, including initiatives in personal identification of Colombian citizens, strengthening the political and electoral systems, promotion of civil society participation and social control, and support to local and sub-national democratic institutions. e Improved justice systems. e Combating corruption, including initiatives contained in the proposal for a State anticorruption policy prepared by the Presidential Anticorruption Program. e Ongoing improvements to public management, including the areas of budgeting, legal defense of the State, asset management, procurement, internal control, and results-based management.
The World Bank Group’s Role in Helping Address These Challenges
12. The Bank has been engaged with Colombia for many years in the improvement of public sector management. Through several investment and policy-based operations, the Bank has supported the implementation of reforms in justice administration, tax administration, financial management, procurement, asset management, legal defense of the State, public investment and results-based management, among others. Alternatives are also being explored with the Government on how the Bank can support next-generation efforts to promote good governance; these elements, which are part of the Bank’s LAC region governance strategy, include initiatives in civil service, external control, evaluation and social monitoring, public asset and income disclosure and combating money laundering, among others.
13. Specifically in the area of procurement, the Bank has been supporting improvements to the national procurement law and the strengthening the institutional framework for procurement through a technical assistance loan and direct advice from its regional procurement specialists. Support is being provided to the National Planning Department to develop implementing regulations for the amendments to the law, and joint efforts with other MDBs are being carried on for the harmonization ofbidding documents. Finally, the Bank is financing “quick gains” studies in the country to promote more efficient and cost-effective procurement in certain sectors.
Effect of the Overall Governance Context on the Bank’s Portfolio and Individual Operations
14. In general, Bank operations implemented through entities ofthe National executive branch or major local governments have faced relatively low risks associated with the governance challenges mentioned above. Despite the ongoing armed conflict, key entities such as the National Planning Department, the Ministry of Finance, and sector ministries involved with Bank projects have maintained a clear orientation reflected in publicly- available policy and strategy documents, several of which have been extensively reviewed
48 and commented by Bank staff. This open process reduces the probability ofthe interests of illegal groups filtering into the design of Bank-financed operations. Implementation of these operations hinges upon a careful review of the capacity of executing agencies to properly implement financial management and procurement processes and controls.
15. Colombia has made progress over time in the enhancement of public financial management (PFM) regulations and systems, particularly through the development of the integrated financial management system (SIIF). These improvements are reflected in improved financial management arrangements for Bank-financed projects, which now make extensive use of SIIF for accounting and reporting purposes at the national level. Looking ahead, it would be advisable to strengthen the country’s external audit hction and its application in Bank-financed investment projects and introduce a framework of PFM performance measurement against internationally recognized benchmarks, contributing to the design of future reforms and to the Paris harmonization targets’. The framework could also be adapted to the specific needs ofsubnational governments.
16. In terms ofportfolio-specific issues, progress has been made in reducing the use of project implementation units, find administrators and private external auditors. The Bank and Government have agreed on a decision framework that promotes capacity building with exceptional use of separate structures when these are justified in response to documented risks.
17. While procurement in Bank projects is relatively safe and conducted under Bank Guidelines, International Competitive Bidding (ICB) and National Competitive Bidding (NCB) are usually not competitive enough due to the lack of bidder participation, especially in civil works tenders. In most projects, procurement capacity in the executing agencies is weak, and project staff who have benefited from procurement training and experience often leave after one or two year of practice, switching to different activities both in the Government system or the private sector. The risk of confusion as to how and when to apply national procurement law or Bank Guidelines is, therefore, not unusual in Bank-funded projects.
18. The recent amendments to the Procurement Law include the mandatory registration of bidders, which may create an obstacle for the use of country systems as it could constitute a barrier for the participation of foreign bidders, and, in terms ofprocurement of goods and civil works, there are still legal provisions that are not consistent with Bank’s confidentiality and bid evaluation policies.
19. Bank-financed projects implemented by local or sub-national entities that are susceptible to capture by illegal groups face a different set of challenges and require particular design considerations. These must be made on a case-by-case basis and must balance the achievement of quality results at reasonable costs and times with the need to establish increased control mechanisms that protect the project from external influences. Often, these mechanisms will go against the tendency of reducing reliance on external administration or execution agencies and adopting country systems where possible, in order to ensure as much independence as possible from captured Government entities and “ring fencing” the flow ofhds under special procedures with abundant external oversight.
* Progress on Harmonization targets is found at the end of this Annex.
49 20. Possibly the highest profile case has been the La Guajira Water and Sanitation Infrastructure and Service Management Project (P09695), approved by the Bank’s Board of Directors in 2007. The Department of La Guajira, in northeast Colombia, has been regularly singled out as one of the most severe cases of capture of a sub-national government, and linkages between elected officials at the departmental and municipal level and illegal armed groups are often cited. Many millions ofdollars have been spent there to improve basic public services over the last decades but have not borne fruit, likely reflecting serious problems ofcapture and corruption.
21. The La Guajira Project aims to improve the quality of basic services in the water and sanitation sector throughout the Department. La Guajira, like many departments in Colombia - and particularly in Colombia’s Caribbean coastal area - has a reputation for weak governance, corruption, and the continued presence of parallel institutions which have prevented public sector efforts to meet citizen needs in an equitable and effective manner. Analysis undertaken during preparation - and the clear messages which emerged through dialogue with stakeholders at all stages of Project preparation - clearly indicates that corruption, public sector malfeasance, capture by elites and special interests, and the paucity of accountability and transparency in La Guajira are among the greatest obstacles to economic and social development in the Department. The Department is historically among the worst performing in the country as regards sectoral achievements.
22. To address these obstacles to achieving the Project Objectives, the operation includes 10 concrete design elements which aim to ensure the project benefits reach their intended beneficiaries and that the Bank and central Government authorities are well positioned to take action in the case ofmalfeasance:
i. No Bank funds will pass through the hands of a public official at the national, departmental, or local level. All Bank loan proceeds will pass from the Bank, though a commercial fiduciary account Wduciaria), and direct to contractors. The use of fiduciaries - specialized trust banks supervised by the banking regulator in Colombia and with extremely high levels of financial management capacity - has been used successfully in other Bank and internationally-financed operations in Colombia. The fiduciary would be a commercial entity, competitively selected to play the role of financial intermediary. .. 11. All project funds, including royalty revenues, are ring fenced. Under the operation, royalty (regalia) revenues will be passed directly to the Jiduciaria, without passing through the departmental budget. Such an approach not only enhances the creditworthiness of the Department and ensures the availability of cash flow for investment and repayment but adds an important measure of transparency in an environment in which the ineffective use of royalty revenues has been a major impediment to achieving poverty reduction and equity enhancing outcomes. ... 111. The key project implementation entity is an independent management team, contracted through a competitive bidding process, which brings independent technical management skills from outside ofthe Department. This unit, staffed
50 by qualified Colombian professionals with experience in the sector, in public procurement, in financial management, and project management, brings key technical knowledge as well as independent management to the Project.
iv. The technical management unit will maintain a public website which will include all relevant contract award information, including the publication of comparator prices for similar works. The team believes that a key corruption risk imbedded in the Project is the risk of inflated bid prices which might reflect the cost of doing business in La Guajira including the payment of kickbacks, protection, and patronage. The technical management of the Project will publish comparative prices for similar public works in other departments to make publicly known any major cost variations.
v. The Bank’s procurement approach for the operation includes several specific actions identified during preparation to enhance both transparency and control, including: (a) all NCB contracts will include audit rights for the Bank as well as standard Bank fraud and corruption clauses; (b) the prior-review threshold will be set to capture all NCB and ICB contracts; (c) the annual investment plans will be reviewed by the Bank with special attention to the risk of contract splitting and opportunities for packaging of contracts will be given regular review; and (d) information related to all bids - including non- winning bids - will be included in agreed-upon reporting formats to enhance the identification ofpatterns which might indicate collusion, among others.
vi. The Project includes a strong role and presence of central Government institutions. Stakeholders interviewed during preparation repeatedly referred to the credibility which Central Government institutions bring to the operation. As such, representatives of the Ministry of Environment, Housing, and Territorial Development and the National Planning Department sit on both the Project’s Executive Committee - which provides overall supervision and oversight to the Project, as a whole - and the Technical Committee, which is involved in the detailed technical review of the investment plans prepared by operators.
vii. The Project includes explicit avenues for citizen participation and accountability. In addition to specialized social staff within the Program Implementation Unit, an ongoing campaign of public outreach, dissemination, and feedback will be financed. This community oversight mechanism complements the existing robust regulatory framework for water and sanitation but allows for a Project-specific mechanism under which citizens can voice concerns about Project implementation and the performance of utility operators. ... v111. In advance of the formal contracting of the technical management unit, a broad Communications Strategy was launched with the objective ofinforming stakeholders as a whole, with particular emphasis on interested groups, public opinion shapers, and the media, on the strategic objectives of the project and the detailed design elements which aim to reduce corruption risk.
51 ix, A major risk of corruption in infrastructure projects comes from the upstream use of inappropriate technology and technical designs and from poor supervision and technical oversight during construction which can result in such problems as poor quality works or the fraudulent use of substandard materials or inputs, etc. The Project thus relies on a redundant system of technical oversight.
X. The World Bank will employ a more-intensive-than-usual supervision approach to the Project, including (a) the contracting of a full-time local staff to work exclusively on the supervision ofthe Project; (b) quarterly, rather than the usual biannual, supervision missions; and (c) the use of a multi- disciplinary team which will include dedicated fiduciary, social and environmental specialists to complement the technical water sector team.
Procurement Yes Yes 100% Peace and Development (IADB-EU); “Familias en Acci6n” (IBRD-IDB), Higher Education ICETEX (IBRD- IFC)
79%
Environment (IBRD- Humboldt Institute), Peace: (IBRD-EU), - Education: (IBRD-ICETEX), Monitoring and Evaluation: (IBRD-Universidad de Los Andes) 8b. Percent of AAA products (or ESW) completed in FY07 that were prepared jointly with one or more donors 100% Managing for Results 9a. At the national level, does the country have performance assessment framework for assessin ro ess a ainst the national develo ment strate 9b. At the sector program level, does the country have performance assessment framework for assessin ro ess a ainst its sector strate Mutual Accountabili 1Oa. Was there a mutual or independent assessment of progress in implementing a eed commitments on aid effectiveness accountabili undertaken in FY07?
52 CPS Annex C Colombia at a Glance
Colombia at a dance 10118107
Latin Lower- POVERTY and SOCIAL Amerlca middle- Development diamond' Colombla 8 Carlb. Income 2006 Population, mid-year (millions) 45.6 555 2,276 Life expectancy GNI per capita (Aflas method, US$) 2,740 4,767 2,037 GNi (Atlas method, US$ billions) 124.8 2.650 4,635 7 Average annual growth, 200006 Population (%) 1.5 1.3 0.9 GNI Gross Labor force (%) 2.5 2.1 1.4 per prima? Most recent estimate (latest year avallable, 200006) capita enroilmenl Poverty (% of population below national povetfy line) Urban population (% of total population) 73 78 47 Life expectancyat birth (years) 73 73 71 Infant mortality (per 1,Wo live births) 17 26 31 Child malnutrition (% of children under 5) 7 13 Access to imoroved water source Access to an improvedwater source (% ofpopulafion) 93 91 81 Literacy (% ofpopulation age 15+) 93 90 89 Gross primary enrollment (% of schod-age population) 112 118 113 -Colombia Male 113 120 117 Lower-middle-incomewouo Female 111 116 114 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1996 2005 2006 Economlc ratlo$* GDP (US$ billions) 34.9 97.1 122.9 135.8 I Gross capital format1onlGDP 18.0 22.2 20.4 19.4 Exports of goods and services1GDP 18.8 15.2 21.4 20.8 Gross domestic savings1GDP 24.9 16.5 19.3 20.2 Gross national savingdGOP 23.2 15.1 18.2 18.2 Cunent account balancdGDP 1.8 -4.8 -1.8 -1.2 Interest paymentslGDP 2.8 1.8 2.1 Total debtlGDP 44.0 29.7 30.6 Total debt servicelexports 32.0 36.9 35.3 Present value of debtlGDP 33.2 Present value of debtlexports 141.6 indebtedness 1986-96 199646 2005 2006 2006-10 (average annual growth) GDP 4.2 2.3 4.7 6.8 4.1 -Colombia GDP per capita 2.2 0.7 3.3 5.4 2.6 __ Lower-middle-income group Exports of goods and services 7.4 4.2 5.5 4.4 4.5
STRUCTURE of the ECONOMY Growth of capital and GDP (X) (% of GDP) 1 __ Agriculture 18.0 13.8 Industry 37.3 30.8 Manufacturing 23.2 15.5 15.5 14.4 Services 44.7 55.4 53.3 54.3 Household final consumptionexpenditure 65.3 65.0 61.9 72.2 General gov't final consumption expenditure 9.8 18.5 Imports of goods and services 12.0 20.8 22.2 19.9
1986.96 199606 (average annual growth) Growth of exports and Imports (X) Agriculture -0.1 1.4 3.1 Industry 3.5 2.5 5.1 Manufacturing 0.2 2.8 3.9 Services 4.7 2.3 3.8 Household final consumption expenditure 3.9 2.2 4.7 10.2:; General gov't final consumption expenditure 7.6 1.3 4.8 -10.1 -10 Gross capital formation 7.7 2.7 25.6 7.2 -Exports -9-imports Imports of goods and services 14.7 3.0 21.7 2.4 :w PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 Domestic prices (% change) Consumer prices 189 20.2 5.0 4.3 Implicit GDP deflator 29.2 16.9 5.7 5.3 Government finance (% of GDP, includes current granfs) Oi I Current revenue 9.6 11.8 15.0 01 02 @3 W 05 06 Current budget balance 2.2 0.0 -4.0 -GDP deflator +CPI Overall surplusldeficit
TRADE 1996 2005 2o06 ~xportand import leveis (US$ mill.) (US$ millions) Total exports (fob) 5,467 10,648 20,815 23,941 Coffee 2.988 1.578 1.471 1.712 30.0w1 Petroleum products 463 2,945 5,559 6,434 20'0w Manufactures 817 3,430 7,687 8,453 Total imports (cif) 3,852 13,684 21,204 22,492 Food 187 1,440 1,874 1,907 Fuel and energy 143 413 544 496 Capital goods 1;393 4,586 7,702 8,314 0 Export price index (2000=100) 10 51 44 48 Import price index (2000=100) 9 50 36 37 Terms of trade [2000=100) 109 101 122 128
BALANCE of PAYMENTS lsS6'996 2005 20°6 current account balance to GDP (Y.) (US$ millions) Exports of goods and services 6,542 13,158 24,392 27,342 Imports of goods and services 5.326 16.443 24.887 26.256 'T Resource balance 1,217 -3,285 -495 1,085 1 Net income -1,371 -2,062 -5,525 -5,910 Net current transfers 784 706 4.089 3,203 O Current account balance 630 -4,642 -1,930 -1.622 -, Financingitems (net) 872 2,920 202 494 Changes in net resewes -1,502 1,721 1,729 1,128 -2 Memo: Reserves including gold (US$ millions) 3,512 9,939 14,957 13,659 Conversion rate (DEC, local/US$) 194.3 1,036.7 2,320.8 2.361.1
EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2005 [US$ millions) Total debt outstanding and disbursed 15,362 28,896 37,656 IBRD 3,896 I 3,261 2,177 IDA 17 10 4 Total debt service 2,252 5,401 10,172 IBRD 489 520 392 IDA 1 1 1 Composition of net resource flows Official grants 26 61 157 Official creditors 655 -111 -722 Private creditors 964 4,167 -272 Foreign direct investment (net inflows) 674 3,112 10,375 Portfolio equity (net inflows) 0 292 86 20966 World Bank program Commitments 640 334 953 E - Bilateral Disbursements 529 152 705 Princip'al repayments 253 351 219 Net flows 276 -199 486 683 interest payments 237 170 174 210 Net transfers 39 -369 312 473
Note: This table was produced from the Development Economics LDB database. 10116/07
54 CPS Annex D Key Economic Indicators
~
Actual Estimate Indicator 2003 2004 2005 2006 2007 Vational accounts (as YOof GDP) 3oss domestic product a 100 100 100 100 1O( Agriculture 13 12 12 12 1( Industry 32 34 34 36 2! Services 59 57 53 52 6( rota1 Consumption 83 81 60 79 7’ 3oss domestic fixed investment I 17 19 21 23 2: Government investment 8 6 6 7 Private investment 9 13 15 16 It
3xports (GNFS) 21 21 22 22 l! mports (GNFS) 22 22 22 25 2( 3ross domestic savings 17 19 40 21 2: jross national savings 17 18 39 20 Memorandum items 3oss domestic product 85,434 115,154 122,937 136,008 174,245 US$ million at current prices) 3NI per capita (US$, Atlas method) 1,910 2,230 2,600 3,120 3,300 teal annual growth rates (%, calculated from 94 prices) Gross domestic product at market prices 3.9 4.9 4.7 6.8 6.6 Gross Domestic Income 4.5 6.4 7.1 8.0 11.0 teal annual per capita growth rates (“A, calculated from 94 prices) Gross domestic product at market prices 2.3 3.3 3.3 5.4 5.2 Total consumption 0.2 3.3 3.4 4.1 0.c Private consumption 0.8 4.5 3.6 5.2 -1.6 3alance of Payments (US$ ) Exports (GNFS) 14,855 18,698 23,482 27,303 30,071 Merchandise FOB 12,934 16,442 20,8 18 23,930 25,049 Imports (GNFS) 16,152 19,259 24,197 26,829 3 1,733 Merchandise FOB 12,792 15,324 19,43 1 23,976 26,2 14 Resource balance (1,298) (561) (715) 474 (1,662) Net current transfers 3,052 3,455 3,822 4,450 Current account balance (974) (906) (1,881) (3,222) (6,077) Net private foreign direct investment 1,720 3,016 10,240 6,463 4,884 Long-term loans (net) 369 (823) (882) 90 1 2,396 Official 2,052 84 (722) 1,114 (526) Private (1,683) (907) (161) (213) 2,922 Other capital (net, incl. errors ommissions) (932) (3,828) (9,206) (4,165) 657 Change in reserves (1 84) 2,541 1,729 23 (1,860) [emorandurn items Lesource balance (% of GDP) -1.5 -0.5 -0.5 0.3 -1.1 Leal annual growth rates ( YR94 prices) Merchandise exports (FOB) 27.1 26.6 14.9 4.7 6.4 Primary 22.7 31.6 13.6 -14.5 7.7 Manufactures 34.4 19.2 17.1 -2.0 7.0 Merchandise imports (CIF) 19.8 26.8 23.4 9.3 11.2
55 Actual Estimate Indicator 2003 2004 2005 2006 2007
'ublic finance (as % of GDP at market prices) e Current revenues 30.0% 30.3% 30.8% 32.8% 33.3% Current expenditures 32.6% 33.3% 25.1% 26.9% 27.0% Current account surplus (+) or deficit (-) -2.6% -3.0% 5.7% 5.9% 6.3% Capital expenditure 7.5% 7.2% 5.8% 6.9% 7.1% Foreign financing 1.7 -2.4 -0.5 0.7 0.5 rlonetary indicators M2/GDP 32.6 34.5 36.7 38.5 41.; Growth ofM2 (YO) 10.6 19.2 18.0 18.0 21.5 Private sector credit growth / 56.9 54.8 47.7 -276.3 -29.; total credit growth (YO)
'rice indices( YR94 =loo) Merchandise export price index 329.5 342.2 354.4 385.5 366.f Merchandise import price index 345.2 33 1.7 308.9 320.4 254.7 Merchandise terms oftrade index 95.5 103.2 114.7 120.3 143,s Real exchange rate (USWLCU) 84.9 92.8 105.3 103.6 98.5
Real interest rates Consumer price index (% change) 6.5 5.5 4.9 4.5 5.; GDP deflator (% change) 8.1 7.6 5.7 5.4 5.1
. GDP at factor cost . "GNFS" denotes ''goods and nonfactor services." . Includes net unrequited transfers excluding official capital grants. . Includes use ofIMF resources. . Consolidated central government. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.
56 CPS Annex E IFC/MIGA Program Summary
2005 2006 2007 2008*
?C Commitments (US$ million) Gross 59.2 291.5 374.3 336.4 Net 59.2 291.5 274.3 206.4 et Commitments by Sector (YO) Oil, Gas, Mining 6% 11% 16% Pulp, Paper 85% 62% 65% 61% Utilities 7yo 9% Industrial and Cons. Products 11% Finance and Insurance 15% 21% 17% 14% Total 100% 100% 100% 100% et Commitments bv Investment Instrument (%)
Equity 18% 42% 38% Guarantee 15% 7% 1% 1% Loan 60% 47% 33% 50% Quasi equity 7% Quasi loan 25% 21% 24% 11% Total 100% 100% 100% 100%
4IGA Outstanding Exposure (Gross Exposure US$ million) ectoral Distribution Infrastructure 62.4 62.4 62.4 62.4
[IGA's Risk Profile Transfer Restriction 20.0 20.0 20.0 20.0 War & Civil Disturbance 62.4 62.4 62.4 62.4
[IGA's Gross Exposure in Country 62.4 62.4 62.4 62.4 % Share Exposure in Co 1.2% 1.2% 1.2% 1.2% MIGA Net Exposure in Co 31.2 31.2 31.2 32.2 % Share of MIGA's Net Expos. 1% 1% 1% 1%
57 CPS Annex F Summary of Lending and NowLending Services
Investment AAA Bogota Urban Services 100 Gender Portfolio Review Higher Education - Improving Access 200 Rural Finance 3oo Coffee Sector Work ~y03 Adjustment Voices of the Poor Colombia Program. Fiscal and Instit. Adj. I 300 The Economic Foundation of Peace (policy Notes) Program. Financ. Sector Adj. I 150 Social Sector Adj. 155 605 Total FY03 905
Investment AAA Peace and Development APL I 30 Improvement in Public Expenditure Integrated Mass Transit Systems 250 Land Policy in Transition Cundinamarca Educ. Quality 15 Public Training Reform Issues 295 Colombia CFAA FY04 Adjustment Agricultural Competitiveness Labor and Social Reform PSAL I 200 Rural Finance I1 Program. Fiscal and Instit. Adj. I1 150 Afro-Colombians, Social Inclusion, and MDGs 350 Recent Economic Developments in Infrastrattucture Total FY04 645
Investment AAA TAL to support 2nd PSAL 2 Labor Reform Agenda Agricultural Transition 30 Education Study Water and Sanitation Support APL I 70 CO CEM Disaster Vulnerability Reduction I 260 CO CPAR 362 :yo5 Adjustment Labor and Social Reform PSAL I1 200 2nd Program. FSAL 100 Sustainable Development DPL I 150 Prog. Fiscal and Instit. SAL I11 100 550
Investment AAA Social Safety Net 86 Country EnvironmentalAnalysis Sustainable Development TAL 7 Competitiveness Study Disaster Vulnerability Reduction I1 80 Policy Notes FY06 173 Peace Programmatic (Desmobilization) Adjustment Business Prod. And Efficiency DPL I 250 Total FY06 423
Investment AAA La Guajira Water Supply 90 Regional Competitiveness Social Safety Net (Add. Financing) 105 Decentralization Integrated Mass Transport Systems (Add. Financing) 207 Peace Programmatic I1 (Reparation) FY07 402 Informality Adjustment PLaRSSAL I11 200 Business Prod. And Efficiency DPL I1 300 Sustianable Development DPL I1 200 700 Total FY07 1102
58 CPS Annex G Indicators of Bank Portfolio Performance and Management
Indicator* 2005 2006 2007 200 Portfolio Assessment Number ofProjects Under Implementatiofi 20 20 20 1 Average Implementation Period (years$ 2.8 2.9 3.2 3. Percent of Problem Projects by Numbdl C 10.0 0.0 0.0 5. Percent of Problem Projects by AmourA, C 3.5 0.0 0.0 4. Percent of Projects at Risk by Numb&) d 10.0 0.0 0.0 5. Percent of Projects at Risk by Amou&l d 3.5 0.0 0.0 4. Disbursement Ratio (%y 21.0 29.5 38.3 27. Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/proj ect)
Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 123 21 Proj Eval by OED by Amt (US$ millions) 9,551.6 1,272.1 % of OED Projects Rated U or HU by Number 24.0 15.0 % of OED Projects Rated U or HU by Amt 19.9 10.1
a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age ofprojects in the Bank's country portfolio. c. Percent ofprojects rated U or HU on development objectives (DO) andor implementation progress d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance ofthe Bank's portfolio at the beginning ofthe year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception ofDisbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.
59 CPS Annex H Fiscal Sustainability and Debt Management
1. A debt sustainability analysis was conducted for both the public and external debt. At 38.3 percent of GDP at the end of 2007, Colombia’s Government has a fairly substantial gross debt burden.’ To reduce risks associated with this debt, the Government has reduced the foreign currency exposure by issuing a greater share of debt in local currency and entering into “swap” contracts. The foreign currency component of public debt has been reduced to 28 percent of public debt, and average maturity has been increased to about 3.7 years. Total external debt is fairly moderate at about 27 percent of GDP at the end of2007.
Public Debt
2. We analyzed the public debt prospects in three different ways: i) a baseline projection with historical average values of key parameters; ii) an analysis of policy responses that would be necessary for the Government to meet the debt reduction target of 30 percent of GDP by 2012 in the face of possible economic shocks; and iii) projections ofwhat would happen to debt ratios if there were no fiscal policy response to economic shocks.
Debt Sustainability with Shocks and Policy Adjustment Primary surplus required to achieve Baseline/ Shock scenarios the target debt ratio (30.0 percent by 2012)
Baseline scenario (see above) 2.0%
Real effective exchange rate depreciation of 15 percent in 2008 with maintenance of other variables 2.3% at the values described in the baseline scenario GDP growth shock: in 2008 of historical growth average minus two standard deviations (implies -0.8 percent growth). In 2009, historical average minus one standard deviation (implies 1.6 percent growth). 2.9% In 2010, a growth rate of2.5 percent is assumed, with 201 1 of 3.5 percent. Afterwards the historical growth rate is assumed. All other variables are kept at the values of the baseline scenario. Real interest rate shock. In 2008, we assume a real implicit interest rate of 9 percent. Afterwards, it gradually declines to 6.8 percent. All of the other 2.8% variables are kept at the values described in the baseline scenario. Combination of all three shocks 4.1%
9 Public Sector Debt net of financial assets is on the order of 28 percent of GDP.
60 3. If these shocks materialized and policy remained passive, with primary balances unchanged at 2.0 percent, debt ratios would jump initially and then decline, but the Government would not achieve the target for reducing the debt ratio to 33.2 percent of GDP. With each of the individual shocks, the debt ratio would be below 36 percent by 2012. With the combination of all three shocks, the ratio would peak at close to 44 percent ofGDP in 2009, and then slowly fall to about 41.5 percent in 2012. This level of debt is certainly high and would put considerable fiscal pressure on the Government, but it is not explosive and could be contained by maintaining a primary balance of 2.0 percent ofGDP , which is within the historical experience ofColombia.
Figure 1: Public Debt Sustainability Even Without a Policy Response to Shocks. 55.0%
50.0%
n 8 45.0%
40.0%
.-i n3 35.0% z
30.0%
25.0% 4 2005 2006 2007 2008 2009 2010 2011 2012
4. The previous exercise showed us how policy could respond to certain dynamics that could occur in the economy. However, in reality, the Government is affected by these dynamics. For this, we created a “worst case” scenario, in which the Government could not respond by using fiscal policy during the time period of the shocks. This is a plausible scenario because ofthe extent ofthe expenditure rigidities, and also the shocks to the growth rate would have a negative impact on Government revenues. We will assume that the primary balance falls to 0 percent in 2008, and then will gradually increase to 2 percent in 201 1. We found that even under this scenario the debt is not explosive, given the medium term resumption ofeconomic growth.
61 Colombia Public Debt Sustainability Framework (In percentages of GDP, unless otherwise indicated.)
2005 2006 2007 2008 2009 2010 2011 2012 Gross Public Debt 45.7% 43.1% 38.3% 37.4% 35.6% 33.9% 31.8% 30.0% Interest Payments 4.1% 4.4% 4.7% 5.8% 5.1% 5.1% 4.2% 4.0%
Key Macroeconomic Assumptions Inflation 4.9% 4.5% 5.7% 4.5% 4.0% 3.8% 3.5% 3.0% GDP growth Rate 4.7% 6.8% 6.6% 5.2% 5.0% 5.0% 4.8% 4.0% Nom. Exchange Rate (COP/USD)Av . 2,320.8 2,361.1 2,076.6 2,170.0 2,256.8 2,342.6 2,424.6 2,497.3 Nom. Exchange Rate (COP/USD)EO ’ 2,284.2 2,225.4 2,014.8 2,213.4 2,299.7 2,383.6 2,460.9 2,534.8
Bound Tests Baseline 45.7% 43.1% 38.3% 37.4% 35.6% 33.9% 31.8% 30.0% Shock RER 45.7% 43.1% 38.3% 38.8% 37.0% 35.4% 33.2% 31.5% Shock Growth 45.7% 43.1% 38.3% 39.6% 39.4% 38.5% 36.8% 35.2% Shock Interest Rate 45.7% 43.1% 38.3% 38.9% 38.4% 37.3% 35.6% 34.3% Combo Shocks 45.7% 43.1% 38.3% 42.8% 44.1% 44.0% 43.0% 41.5% Worst Case Scenario 45.7% 43.1% 38.3% 45.4% 49.0% 50.0% 49.5% 48.8%
Source: Bank Staf Projections
External Debt
5. Analyzing the sustainability of the external debt requires a model that incorporates a different set ofkey macroeconomic variables, such as Colombia’s current account, and allows us to model another set of different shocks, for example, a reduction in net international capital inflows. External Debt has fallen from a high of about 52.3 percent of GDP in 2002 to more manageable levels ofaround 27 percent ofGDP in 2007.
6. Despite a sharp increase in the current account deficit this year, Colombia’s total external debt profile (public and private) is likely to be sustainable, given that the recent external imbalances have been financed largely by non-debt flows. Total external debt is expected to decline to about 27 percent of GDP under our baseline scenario. A potential risk associated with external debt sustainability is a sharp exchange rate depreciation. A depreciation of the real exchange rate in excess of 15 percent within one year would increase the total external debt to GDP ratio from about 27 percent at end-2007, to over 30 percent of GDP, which is manageable level. In a worst case scenario, where the current account deteriorates to more than 5 percent of GDP while the non-debt flows decline would put considerable pressure on external indebtedness. Under this scenario, external debt will jump from about 27 percent of GDP up to 35.2 percent of GDP. Although this represents a sharp increase, it is not likely to generate a crisis.
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39 BEn El$a a # Q) Q) 0 0 2 E a CPS Annex J Colombia - Key Exposure Indicators
Actual Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 2009 2010
Total debt outstanding and 40,553 43,030 43,832 44,520 44,800 49,300 50,300 51,300 disbursed (TDO) (US$m)a
Net disbursements (US$m)a 163 -227 -1781 -1352 2100 2500 500 500
Total debt service (TDS) 8645 7688 10172 10640 5904 6282 5310 6190 (uS$m)a
Debt and debt service indicators (%.) TDOIXGS~ 219.6 190.9 157.3 136.1 125.5 128.8 127.1 125.1 TDO/GDP 47.5 37.4 32.8 29.0 28.8 27.5 27.2 26.4 TDS/XGS 46.8 34.1 36.5 32.5 16.5 16.4 13.4 15.1 Concessional/TDO 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
IBRD exposure indicators (%) IBRD DS/public DS 6.4 10.9 6.0 8.2 12.4 10.7 11.3 12.6 Preferred creditor DS/public 28.8 38.7 39.5 27.0 41.6 36.5 35.0 33.1 DS (%)' IBRD DS/XGS 1.9 1.8 1.4 1.4 1.2 1.1 1.1 1.3 IBRD TDO (US$mld 3241 3490 3896 4563 4835 5626 6124 6234 Of which present value of guarantees (US$m) 80 81 81 41 Share of IBRD portfolio (%) 2.8 3.1 3.7 4.6 4.8 5.9 6.3 6.1 IDA TDO (US$m)d 5.3 4.6 3.9 3.2 2.5 1.8 1.1 0.4
IFC (US$m)* 72.0 27.0 58.0 290.0 274.0 207.3 300.0 325.0 Loans 115 92 103 Equity and quasi-equity /c 175 182 104 *Fy 2008 as of February 2008
MIGA MIGA guarantees (US$m) 62.4 62.4 62.4 62.4
a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.
71 n c,m a 8 U n Q c
I LII I CPS Annex L
COLOMBIA CAS COMPLETION REPORT
EXECUTIVE SUMMARY
Introduction
This report presents the self-evaluation by the Bank Group Colombia country team of the Country Assistance Strategy for Colombia for FY03-FY07. It refers to the original CAS, number 25129-C0, dated December 24, 2002, and the CAS Progress Report, number 32999-C0, dated September 9,2005.
CAS Obiectives
The Bank Group’s 2002 CAS was geared to support the country’s quest for peace by helping to: (1) achieve fast and sustainable growth; (2) share the hitsof that growth; and (3) build efficient, accountable, and transparent governance. Operations were expected to have a tangible impact on poverty reduction, help Colombia meet its Millennium Development Goals, restore macro-stability and sustainable growth, and incorporate lessons of ongoing pilott interventions with important demonstration effects. The 2005 Progress Report extended the CAS by one year, while consolidating and expanding the original focus on the peace process and on a result-based culture in the public sector. The results ofthe CAS are presented below.
Country Context
An important dimension of this self-evaluation is to position the 2002 CAS in the context of conditions in Colombia when the CAS was prepared. First, a new administration was taking over, just after peace negotiations with the main insurgency force broke down. President Uribe was elected with a sizeable majority and a mandate to address Colombia’s ever increasing levels of violence and armed conflicts. Second, the economy has not yet recovered from the deep difficulties confronted in 1999. Markets for emerging markets were shaken by the crisis in Argentina; Colombia’s growth in 2001 was still weak; and poverty and unemployed remained high. Fiscal discipline, at the end of the previous administration, had deteriorated significantly in the first half of 2002. Third, constitutional changes, adopted in 1991, had been transforming Colombia’s administrative and judicial structures, giving fiscal and administrative responsibilities to sub-national governments and empowering independent judicial bodies that increasingly acted as checks on executive powers. These three factors influenced considerably the shape ofthe CAS with respect to the Bank’s role and the planned support for Colombia.
Country Outcomes
In contrast to the start of the CAS period, conditions in Colombia have substantially
73 improved, even though many indicators are no better today than they were in the early 1990s. The greatest gain has been in the area of peace and security. As shown in the 2005 Progress Report and in the Government’s evaluation of its 2002-2006 National Development Plan, violence has fallen sharply, even though the situation remains fragile. On the side of economy, growth, employment and poverty reduction have seen sizeable gains. Still, Colombia faces very high levels of poverty and, despite recent progress, income inequality remains pervasive. The country advanced in meeting its Millennium Development Goals, providing the poor with a more extensive safety net and expanding access to social services. In terms of fiscal performance, a combination of strong global markets, high oil prices, falling interest rates, increased domestic confidence because of the quelling ofviolence, and the Government’s own fiscal and tax reforms, supported by the Bank and the other IFIs, the situation has much improved. The main text ofthe report provides details on these outcomes.
The Group Bank’s Contribution
The 2002 CAS outlined a program of US$3.3 billion, more than doubled average annual Bank lending to Colombia, peaking at close to US$1 billion in FY05. Similarly, IFC’s support grew rapidly, especially as the economy revived. The CAS was not resulted based but geared towards realizing a series of measures expected to contribute towards the overall goals which, in turn, were to support the country’s realization of its National Development Plan and its MDGs on the long term. Interim MDGs were set. As shown in the 2005 CAS Progress Report, and updated here, Colombia has done well in implementing its development plan and has progressed in meeting most MDGs. However, there were few quantitative benchmarks set in the CAS and little direct linkage between the Bank’s interventions and the MDGs per se. As a result, the Bank’s contribution and its performance are assessed on the basis of country level indicators, feedback, product outcomes, and available quantitative data.
Evaluation of CAS Performance
With the above limitations in mind and taking into account the weight that can be attributed to different dimensions of the Bank’s work in Colombia, the country team concludes that the Bank Group’s CAS performance was satisfactory, Based on the evidence found, the Bank Group has had a positive impact on Colombia’s overall macro- situation, the solidness of its financial sector, the promotion of the private sector, and access to better quality and affordable transport, water and sanitation services. The Bank was also influential in shaping new public policies and programs for sustainable development and disaster vulnerability reduction. Importantly, the Bank helped shape Colombia’s emerging social policy framework, improving the coverage and quality of social services, and devising a more cohesive social safety net for the poor. The Bank has further had a positive impact, via pilot operations, on finding workable solutions for Colombia’s long-standing problems of conflict: a notable example is the scaling up of the Peace and Development Program. Also, although the route taken by the Bank to demonstrate how to incorporate equity and inclusion into public policy analysis took a different turn, the approach of incorporating M&E and the concerns of marginalized
74 peoples into specific operations, most notably in the social sectors and GEF, has spurred attention to these groups. These accomplishments are described in the main text.
That is not to say that there are not areas that did not advance as originally planned. The Bank’s support for the third pillar of the program-building efficient, accountable and transparent govemance-showed the least progress even though there have been advances in establishing a results-based management culture and in realizing other areas ofthe Government’s Administrative Reform Program not directly supported by the Bank. There was little contraction of the public sector and/or reduction in mandated spending per se, one of the goals set under the macro- program. Yet, spending has been controlled especially at the sub-national level; there has been a shift in spending towards the social sectors, US$1 billion per year or roughly 3.4 percent oftotal spending; and the quality of this spending has fhrther improved via targeting. Moreover, the efficiency of public services, such as tax administration, has increased considerably. Further, the Bank’s planned support to address corruption did not advance, nor did anticipated Bank support for SMEs. Programs focused on the rural sector were less ambitious than planned, while progress in the pilot judicial sector development project has been slow to trigger more widespread reforms.
The portfolio, consisting of 23 operations, has confronted few problems during implementation. All performance indicators, including project outcomes, are better than Colombia’s historical average and above the average for the Bank as a whole and for the Latin America and Caribbean Region. The introduction of country systems has been welcomed by the Government and has facilitated implementation. Generally, Bank financing has been more selective than originally planned. Some areas identified for support, mentioned above, fell by the way side. Responding flexibly to opportunities as they arose, new thrusts were added, building on those areas in which the Bank has a long standing presence.
Lessons for Future Country Partnership Strategies
This evaluation demonstrates the benefits of solid analytical work and effective and flexible country collaboration. Lessons that might be usefhl for the preparation and design ofthe coming Country Partnership Strategy are as follows:
Exercising Fiducialy Responsibilities
0 The Bank, along with the IMF, has a fiduciary responsibility, especially on debt sustainability, fiscal performance, the financial sector, and monitoring of public expenditures, poverty and the MDGs to which the Bank should remain committed. In the case of Colombia, the Bank was effective in keeping issues on the front bumer once the worst ofthe 1999 crisis was over.
Tempering Zeal with Realism
New administrations tend to have ambitious plans, as was the case of the first Uribe
75 Administration’s initial approach to fiscal and institutional reforms. In retrospect, it may not have been realistic to agree-in the early months of a new administration- to policy triggers, covering action four years ahead. In fact, many reforms confronted serious legal and political hurtles and have taken longer than originally anticipated. On the other hand, the Bank cannot stand in the way, so this lesson is nuanced to specific country circumstances.
Setting Targets and Carving out Intermediate Evaluations of Programmatic Loans
Programmatic operations may pose a challenge in terms of agreeing ex-ante to triggers and measuring impacts. To the extent possible, expected outcomes should be established at the start. Ex-post, individual evaluations of each loan in the series as they are completed might be too short term a time frame for impacts to be realized. Some form of mid-way, intermediate assessment and/or ESW might be needed to reconfirm the direction and/or make mid-term corrections.
Buildingon What Worh
Looking broadly at where the Bank has been effective in Colombia, working in sectors with a history of Bank involvement and with established institutional responsibilities and capacities seem to work best in Colombia. This argues for continuing an evolving, programmatic approach and concentrating on and deepening those areas with continuity from one CAS to another.
Building Consensus and Institutional Homes for New Initiatives
The lack of progress in areas such as anti-comption and judicial reform calls for rethinking the Bank’s approach to new initiatives. The analytical ground for an initiative needs to be solidly and convincingly established and the institutional base established ex-ante. For the new CAS, the lesson might be prior ESW and consensus building plus continuing investment to inform policy makers and the public during implementation ofpilot operations so that the growing evidence ofwhat works can be shared with a larger audience.
Refocusing on the Rural Sector: Closing the Gaps
A new approach to the rural sector, with attendant attention to Colombia’s extremely poor and marginalized, may be timely, as the security picture improves. It was a priority in the 2002 CAS but little materialized in terms of specific lending. Nevertheless, the Bank undertook ample analysis of the sector: the policy notes for the CAS and other analytical work have provided evidence that the rural sector was important, dynamic, and disadvantaged. Importantly, the Bank has supported a number of successful pilot rural development and peace initiatives which could be scaled up. Looking ahead, it may be helpful to segment strategies across rural and urban sub-groups as was done in education. Other sectors amenable to this approach are housing, water and sanitation-typified by the La Guajira Project now under
76 preparation-and transport.
Relying on Local Capacity
0 Colombia, as a Middle Income Country, is capable of assuming the lead in developing and implementing the CAS in ways that other countries might not. This is particularly the case in participation. The Bank can ‘piggy-back” on those efforts rather than do own parallel exercise. Moreover, the case of Colombia demonstrates that MICs with solid institutional capacity can be entrusted to use country based systems.
Retaining Flexibility
Another hallmark ofworking with a Middle Income Country is flexibility. The Bank has been flexible is responding to Colombia’s changing economic and social conditions especially as the country’s conditions improved beyond what was expected and when some aspects of the original CAS were not feasible andor did not enjoy full ownership. The CAS Progress Report is an example of how to accommodate MIC needs and conditions. This is an attribute which should be carried over to the next CAS.
Synchronizing Timing and Monitoring of Development Planning Instruments
The 2002 CAS was prepared at a critical moment in Colombia, compounded by transitions at senior levels in both the Bank and the Government. The benefit of preparing the CAS quickly was its timely assistance to the country. But the cost was a lack of internalization and reinforcement among the key development strategy instruments that the country employs, notably the National Development Plan, and a lack of common monitoring definitions, tools and benchmarks. Admittedly, development is an evolving process and new needs can be address over time. The new CAS is the opportunity to avoid the gaps in timing and to focus on results.
Internalizing Equity and Meaningfully Measuring Poverty
0 The Bank’s efforts at internalizing equity considerations into its operations and analytical work, while taking a different track, seem to have energized Bank staff and local authorities to take up the concerns of the extremely poor and marginalized as part ofa growing M&E culture. This momentum can be elevated to the next stage by generalizing analysis of equity, not just in social sector and GEF operations, but in other proposed policies. In addition, agreement on targets presumes agreement on methodologies for measuring poverty, among other indicators, which is now lacking. The focus of targeted programs, moreover, can be tightened with continued refinement of Colombia’s system ofclassifying eligible beneficiaries.
77 COMPLETION REPORT
THE WORLD BANK GROUP’S
COUNTRY ASSISTANCE STRATEGY
COLOMBIA
FYO3-07
1. Introduction
This report assesses the experience of the World Bank Group in implementing the Country Assistance Strategy for Colombia, number 25 129-C0, dated December 24, 2002, and discussed by the Board of Directors on January 16, 2003. That CAS has been updated in the Progress Report, number 32999-C0, dated September 21, 2005, and discussed by the Board on September 29, 2005. The original CAS covered the period FY03 to FY06 but was extended under the Progress Report to include FY07. A new Country Partnership Strategy is anticipated before the end of this fiscal year or early FY08.
2. Colombia’s Development Strategy
At the start of his Administration in August 2002 (after elections in May 2002), President Uribe announced a comprehensive development strategy for his term. This strategy, entitled “Towards a Communal State”, laid out the broad goals for the Government from 2002 to 2006. It was reinforced by more detailed programs in the national investment program covering the authorized investments to be financed with public resources, including borrowings from the World Bank and other multilateral development banks. Colombia’s development strategy was further enhanced by the Millennium Development Goals Action Plan and the results of the 2004 Commission on the Strategy to Reduce Poverty and Inequality. The strategy emphasized the following:
(a) delivering, in a democratic context, safety and security for the people, including enhancing military and investigative capacities, strengthening judicial services, reinforcing values and peaceful ways of coexistence, securing control over and developing the areas of the country affected by conflicts, and protecting human rights; (b) promoting sustainable growth and employment, including housing, infrastructure, public services, science and technology, competitiveness, trade policy, natural resource use, conservation and ‘green” production; (c) constructing an equitable society, with emphasis on improving the quality, efficiency and access to education, social security and health, recovering
78 losses in vaccination rates, advancing the public health agenda, developing small and medium enterprises, improving the quality of urban life, enhancing planning and protection against natural disasters, rural development and strengthening ethnic groups; and (d) instilling transparency and efficiency in the public sector, covering public administration reforms, fiscal adjustments, public enterprise/entity restructuring and decentralization among other things.
These priorities reflected Colombia’s situation as of 2002 and were designed to address those factors keeping Colombia from realizing its development potential. The first was the breakdown of peace negotiations with the main insurgency group in February 2002, after three years of negotiations, and the continuing escalation of violence. Disappointment and frustration were widespread. Many indicators demonstrated the worsening conditions: the land devoted to growing coca, the number of persons displaced by conflicts, the number of armed combatants, kidnappings, murders, attacks, and stealing of cars. All had increased during the 199Os, especially after 1999. Second, the economy, while doing better than in 1999 when Colombia faced its worst economic crisis in 70 years, was still struggling: in 2001, growth was only about 1.4 percent and decelerated in the first quarter of2002; unemployment was in the range of 15 percent; and poverty reached 60 percent of the population as compared to 50 percent in 1997. Moreover, the fiscal and debt situation was on a downward spiral, exacerbated by the economic crisis in 1999, increased costs relating to security, and the slow economy recovery. Importantly, the 199 1 Constitution, optimistically looking ahead to an inflow of petroleum revenues, had set in motion a new dynamic that increased mandatory spending for pensions and decentralized social programs. As a result, the gap between revenues and expenses stood at more than 6 percent of GDP as of 2000, with a commensurate increase in Colombia’s public debt.
It should be noted that Colombia’s Millennium Development Goals (MDGs) were not explicitly referenced in the National Development Plan. Indeed, the Government’s action plan to meet those goals by 2015 was only prepared in March 2005, well after the National Plan was approved. Further, the country’s Strategy to Reduce Poverty and Inequality was elaborated in a subsequent stage and was approved in September 2005. As a result, there was considerable evolution on the side of the Government on its development priorities since the 2002 CAS was prepared. While many MDGs were addressed at that time, such as education, vaccinations and other public health issues, several areas, notably reducing maternal mortality, were not explicitly addressed. These are areas where the Government’s MDG Action Plan indicates that a more aggressive and concerted stance needs to be taken.
3. The World Bank Group’s Assistance Strategy
The original CAS, covering FY03-06 and an anticipated US$3.3 billion in new lending, was supportive of the Government’s strategy and was designed in parallel to the preparation of the National Development Plan. Both documents shared a number of
79 common analyses and benefited from the policy notes prepared by the Bank in anticipation of the new administration. There was congruence in many areas. Nevertheless, there was discontinuity in timing, with the CAS finalized before the National Plan. This created a gap between the CAS and the Government’s specific plans and limited the ability to gain a common appreciation ofwhat it would take to advance in new areas, such as anti-corruption, where there was not already a track record and an established institutional base. Finally, there were significant changes in senior positions in both the Bank and the Government that coincided with the preparation ofthe CAS. It is therefore not surprising that the CAS program was modified during implementation as described in subsequent sections. Nevertheless, the core of the program, especially its focus on policy reforms, remained in tact.
The 2002 CAS established the following four pillars:
(a) Achieving Fast and Sustainable Growth
Macro-economic framework: correcting fiscal imbalances and monitoring debt sustainability Financial Sector: restructuring public banks, developing capital markets, strengthening banking supervision and banking resolution, easing judicial and procedural impediments, reforming the pension system and developing sustainable banking systems for the rural areas Infrastructure to Foster Competitiveness and Improve Services for the Poor: expanding and improving mass urban transport, water and sanitation, reducing logistic costs, management and mitigation of national disasters, analyzing the knowledge framework Private Sector Development: supporting reactivation of the economy, fostering a conducive business environment, promoting SMEs, facilitating investor response, especially by underserved segments Rural Development: boosting competitiveness of Colombia’s agricultural sector, promoting productive alliances, strengthening local leadership and community development, supporting small-holders, increasing access to land and to credit, and improving land management and forestation Environmental and Natural Resource Management: mainstreaming sound environmental management, reforming the licensing system, and capturing value- added from environmental assets
(b) Sharing the Fruits of Growth
Education and Health: enhancing quality, coverage, equity and efficiency, increasing completion rates of primary students, piloting decentralized school management in vulnerable areas, expanding rural education, and restructuring hospitals, transforming health financing to demand side subsidies Social Protection: pioneering new approaches to cash transfers, workfare, child protection, developing a risk management system of social protection, revamping targeting and delivery systems
80 Empowerment and Inclusion: opening a dialogue with government on implementing targeting programs, continuing to focus on indigenous and Afro-Colombians in GEF and Bank-financed operations, and emphasizing disaggregated analysis of marginal groups in public policy Forced Displacement: supporting efforts to fulfill preventative and coordination responsibilities at the local level, creating incentives for displaced people to return to their homes
(c) Building Efficient, Accountable and Transparent Governance
Anti-corruption: helping to broaden the focus and scope of the country’s anti- corruption program and assisting in other related areas such as procurement, budgeting, financial management, and information systems Judicial Reform: transforming competencies, improving the information base, enhancing the timeliness of conflict resolution services while piloting resolution methods
The 2005 CAS Progress Report extended the timeframe of the original CAS by one year to FY07, adding a net of about US$800 million in Bank lending and bringing total potential lending to US$4.1 billion under the high case scenario. The program’s extension provides for continuity while giving more time for the incoming administration and the Bank to develop the next CAS. The progress report also introduced modifications to the thrust ofthe original CAS, adjusting to the latest country conditions and new emphases. In the case ofthe IFC, its updated strategy centered on: (i) strengthening and deepening offinancial sector institutions and local financial markets to better serve the needs of local companies, including SMEs and micro enterprises; (ii)the development ofinfrastructure, including potential public-private partnerships and support to sub-national entities in the provision of infrastructure, in coordination with the Bank; (iii)investment in extractive industries; and (iv) the modernization of Colombian businesses to help improve their competitiveness and support their expansion both domestically and abroad. On the side of the Bank, the first change was to expand the agenda for supporting improvements to Colombia’s competitiveness, with a new series of DPLs, not anticipated in the original CAS. In addition, the Progress Report added a component under the Governance pillar to strengthen and systematize the Government’s approach and capacity to monitor and evaluate public programs. This new component fit well within the CAS’S original emphasis on instilling results-based management in the public sector.
The other modification was to add a new pillar explicitly to support the Government’s peace effort. In effect, this new pillar consolidated actions anticipated under other CAS pillars and provided continuity to programs that have aimed to support peace and development under prior CASs. This change gave an explicit focus to the peace process and an enlarged scope ofpotential Bank support as follows: e Peace and Development: scaling up of the community focused pilots that have proved to be successful, protecting assets of displaced people, integrating delivery of
81 social services for the displaced, sharing knowledge and studies to develop viable strategies, studying the impacts on particular groups, such as women, children, and ethnic groups 0 Rebuilding the Presence of the State: exploring options for strengthening local government capacities and promoting security 0 Demobilization and Reintegration of Ex-Combatants: tapping into international experience and documenting what is happening on the ground in Colombia.
4. Colombia’s Progress towards its Goals
The Government has made very good progress in realizing the goals of its 2002-2006 National Development Plan. Its own evaluation shows that 85-90 percent of the measures and resources under the Plan have been realized. The Government has pursued close monitoring of the Plan’s execution and undertook dedicated evaluations of major social programs, with Bank support. Such focus is evidence of the growing culture of monitoring and evaluation within the Government. Highlights of the results of the National Development Plan are listed below.
Citizen Safety and Security
The Uribe Administration has had striking success in reducing the level of violence and conflict in society and in reinvigorating the peace process. Examples are:
0 Homicides fell from 66 per 100,000 inhabitants in 2001 to 39 in 2005. 0 Kidnappings decreased from almost 3000 in 2002 to 800 in 2005. 0 Attacks fell from an average of about 1,400 per year from 1997 to 2003, to just over 600 in 2005. 0 Persons displaced by conflicts had risen sharply from 1999 to 2002, peaking at more than 400,000 new refbgees annually. Since 2002, the number of new refbgees has fallen to about 140,000 persons per year. 0 Area dedicated to coca cultivation reduced from about 160,000 hectares in 2001 to 80,000 in 2004.
Sustainable Growth and Employment
The economy responded to the greater sense of peace and stability. Solid macro- policies and positive international economy conditions also helped. Reactivation has been most noticeable in the jump in private sector investment. As a result, the economy has grown faster from 2003 to 2006 than it had since the early 199Os, with attendant effects on unemployment, poverty, and income equality. At the same time, the Government has advanced in its agenda for natural resource management and environmental protection and expanding infrastructure services. Some indicators of progress are:
Growth in 2005 reached 4.7 percent, up from 1.4 percent in 2001. 0 Spreads on Colombian public debt (EMBI) fell from 1043 basis points in mid 2002 to
82 about 200 basis points as of the end of2006. Investment by the private sector rose from 7.8 percent ofGDP in 2002 to 14.9 percent in 2005. Unemployment fell from 15.6 percent in 2002 to 11.8 percent in 2005. About 5.8 million hectares of land were placed under the system ofprotected areas, a 50 percent increase over the amount in 2002.
Equity and Social Reactivation
After seeing the effects ofthe 1999 crisis on the poor, the Uribe Administration made a concerted effort to consolidate and expand its social protection network, focusing on the Familias en Accion Program which provides conditional grants to poor families. It also invested considerable resources in expanding access to education, decentralizing educational services, adding to the rolls of the poor who obtained subsidized health insurance, expanding nutritional support and focusing more attention to displaced populations. Major achievements are:
The percentage of the population below the poverty line fell from 57 percent in 2002 to 49 percent in 2005. The Gini coefficient peaked in 1999 at over 0.59 but fell to 0.55 in 2005. Some 70,000 families have been added to the Familias en Accion, not including displaced families. In total, 515,000 families benefited as of2005. By 2005, 8 million more poor people have been added to the subsidized system of health insurance since 2002, bringing total coverage of the bottom two income rungs to 73 percent, up from 47 percent in 2002. 5.8 million beneficiaries receive 100 percent subsidy, as compared to 400,000 before 2002. The rate of vaccinations, which had fallen during the 1999 crisis, recovered and increased from 82 percent in 2002 to 89 percent in 2005. One million poor children are now served breakfasts, up from only 78,000 in 2002, and 400,000 poor elderly benefit from nutritional support, a new program since 2002. About 1.6 million poor rural families benefit from nutritional support, another new program since 2002. Education has been expanded, covering some 1 million new primary students and 200,000 new secondary students. Professionhechnical training has expanded to 3.9 million students, up from 1.1 million in 2002.
Transparency and Efficiency of the Public Sector
The fragile fiscal situation, growing debt, and worries about competitiveness and the quality of public services put the reform of the public sector at the fore of the Administration’s agenda in 2002. The Government embarked on a program of Administrative Reform in order to consolidate ministries, reduce staffing, put in place information systems, reinforce internal controls and reorient the bureaucracy’s culture towards results. While progress was uneven and expenditures have remained relatively fixed as a percentage of GDP, pension surpluses have increased as have tax collections,
83 thanks to reduced evasion, increased rates and greater efficiency. There has been progress in a number ofareas, as follows:
Administrative overheads reduced from 4.4 percent ofGDP to 4.1 percent from 2001 to 2005, albeit short ofthe goal of3 percent. Almost 30,000 civil service positions have been eliminated since 2002. Red-tape and bureaucracy has been reduced: the number of steps to export products and the steps to start a new enterprise has fallen from 29 to one and from 17 to one, respectively. The average time to secure an environmental license dropped from 130 days in 200 1 to 16 days in 2005. The share ofpublic investments evaluated ex-post rose from 4 percent in 2001 to 24 percent in 2006. Tax collection efficiency has gone up with overall taxes increasing by 34 percent in real terms from 2002 to 2005. 750,000 new tax payers were added as of 2006. The cost ofcollections has been reduced by about 10 percent. About US$lOO million in assets have been recovered as part ofthe asset management program. 10,000 buildings have been inventoried. More than 175 public entities now use the electronic portal for bidding and processing procurement.
5. CAS Outcomes: The WGB’s Contribution to Colombia’s Progress
The 2002 CAS was designed to support the Government’s overall development plan. The CAS was broadly linked to the realization of country-level interim MDGs and did not contain many specific monitorable indicators of CAS outcomes. Most benchmarks were stated in qualitative terms, as actions or general progress in implementation. As a result, this section relies on a mix of country-level indicators, including those from the Government’s evaluation ofits National Development Plan summarized above, outcomes of operations completed during the CAS period, data on the MDGs, and other quantitative and qualitative assessments. A synthesis is presented in the following.
84 CAS PILLAR DIAGNOSTIC AS OF 2002 PROGRESS DURING CAS Achieving Fast and Large fiscal imbalances The Bank Group’s main focus was on Sustainable Growth Increasingdebt burden encouraging sound macro-fiscal policies, Public banks need to be stimulating a supply response, and shoring Macro-framework restructuredandor up the financial sector after the 1999 crisis. privatized The economy has responded well and so has Financial Sector Slow judicial procedures the financial sector. The Bank supported, Capital markets via a series of Fiscal and Institutional DPLs underdeveloped and a TAL, improved fiscal management. Infrastructure Gaps in regulatory The results were most evident on tax policy framework and banking and administration and keeping spending in- supervision check. Pension reforms have led to higher Private Sector Lack of water and sanitation surpluses, transfers to sub-national governments curbed, and the public debt Development roads, electricity and burden has fallen as a share of GDP. The telephone Bank worked to strengthen banking Impediments to private supervision and resolution and encourage Rural Development sector development of the regulatory framework Lack of integratedsupply for the insurance industry and capital chains in rural sector markets. Continued support for financial Environment and Natural Lack of opportunities and sector reform, based on recent analytical Resource Mgt. access to land work, is provided under the Business Slow legal framework for Environment and Competitiveness DPLs environmental licenses which also address ways to bolster the Country not prepared for private sector, complementingIFC and major disasters MIGA. IFC continues to have a robust level of activity, supporting capital markets, SMEs, manufacturing, water and sanitation services, and oil and gas. The Bank has further provided support to improve and expand urban infrastructure, especially in transport, water and sanitation, environmentalmanagement, disaster planning and mitigation. There was less progress on expanding the rural development agenda, despite the extensive analysis of its problems. Still, rural programs under implementation are performing well and offer potential for scaling up.
Continued.. .
85 CAS PILLAR DIAGNOSTIC AS OF 2002 PROGRESS DURING CAS Sharing Fruits of Growth Scope for enhancing quality While levels are still high, and no better than and coverage of education they were in the early 199Os, poverty and Education Need to reinforce inequality have fallen since 2002. Building decentralization on the Bank’s earlier work on mitigating the Health Financial sustainability of social consequences ofthe 1999 crisis, the health insurance Bank engaged the Government in an Social Protection Need to implement a extensive policy dialogue and financed comprehensive safety net series of Social and Labor Adjustment DPLs Labor Markets Afro-Colombians and that encouraged adoption and indigenous people left out implementation of a comprehensive Labor market rigidities approach to social protection, and supported Gap between formal and reforms in health, education, and labor informal labor markets training. In addition, it complemented this support with financing for expansion of higher education, rural education, decentralizing education services, and the social safety net. Building Efficient, Successive attempts to curb There has been general but uneven progress Accountable and corruption not effective in the Government’s Public Administration Transparent Government Introduction of oral judicial reform program, part of which has been procedures need to be supported under the FIALs, TAL and Anti-corruption complemented with investment programs. Efficiency of some organizationaland logistical public services (e.g. tax administration and Judicial Reform reforms education) seems to have gone up and there Ambitious program of has been a shift to targeted social programs. Results Oriented Mgt. reforms adopted to address According to the Bank’s Governance HR management, indicators, Colombia’s relative rating has procurement, performance improved during the 2002-2005 period. The budgeting and evaluation. Transparency International index of corruption has also moved in the right direction. However, progress in the specific areas identified for support from the Bank has been mixed. Progress has been slow on piloting judicial reforms and Bank support has not materialized for anti-corruption. On the other hand, there has been progress in results-basedmanagement. The Bank’s support for these efforts has been via the ongoing Financial Management I1TAL and the new M&E operation. Promoting Foundations of As of 2002 The Government has been effective in Peace Peace negotiations with reducing the level of violence in the country leading insurgency group and has made progress in reaching Peace and Development broke down agreements with para-military forces. The Increasing number of people Bank’s contribution over the years, starting Restoring Local Presence displaced from their homes in the mid-l990s, has been to build up a and livelihoods knowledge base on the nature of the Demobilization Violence, murders, and conflicts and to focus on the people affected kidnapping rampant by the conflicts. The successful approach, Forced Displacement piloted under the two Magdalena Medio As of 2005 projects, has scaled up to six regions. The Security conditions vastly Bank also helped focus attention on improved integrating social programs for displaced The pilot Peace and persons. More recently, work has begun on Development program an expanded agenda agreed with the proving successful Government in the CAS Progress Report. Negotiations opened with However, the situation remains fragile and it paramilitary forces, agreeing is too soon to measure further progress in to demobilization implementing the peace pillar.
86 Pillar One: Achieving Fast and Sustainable Growth
Overall. Increasing the pace ofeconomic growth was a high priority in the 2002 CAS and country results have been encouraging. As shown in Table 1, the growth rate steadily increased over the 2002-2005 period with exports, especially non-traditional ones, almost doubling the level of exports in 2006 as compared to 2002. Growth has been broad based, led by the petroleum-mining sector, construction, telecommunications and agro-industries. While the agriculture sector was not among the fastest growing sectors, it showed positive results with a substantial increase in both production and the total area cultivated: due to the lack of security, the amount of land being cultivated had sharply dropped since the early 1990s. Increased economic growth had positive impacts on unemployment, poverty and income equality.
Source: IMF, DNP, Ministry of Finance, Central Bank
Macro-economic Performance. Restoring the macro-underpinnings of Colombia’s growth strategy was a fundamental consideration when framing the 2002 CAS. Without solid fiscal management, it was concluded that growth could not be sustained and, without greater growth, the public’s lack of confidence and the grinding effects of poverty and violence would undermine a successful outcome of the country’s efforts to achieve peace. Two dimensions stood out in the 2002 CAS: the fiscal deficit and the public debt burden. Public spending had increased almost 10 percentage points of GDP since 1990, the result of constitutional changes that mandated transfers for pensions and to sub-nationals and rising interest charges, without commensurate increases in revenue, resulting in growing deficits. On a functional basis, the sectors seeing the largest increases in public spending were education, health, defense, security and justice. The rising public sector debt burden further aggravated the fiscal situation by increasing interest expenses. There has been considerable progress on both fronts, thanks in part to the IFIS’support over this CAS period and the previous one.
87 Source: Bank Staff
First, on the deficit, Table 2 shows the fiscal space created since 2002. These data demonstrate that much ofthe reduction in the overall fiscal deficit has been generated by the Government’s reform effort: improving the tax system, reforming the social security system, and strengthening sub-national finances under the Constitutional Amendment in 2001 and the 2003 Fiscal Responsibility Law. These areas were the focus of Bank support under the FSAL (FY02) and the series of Fiscal and Institutional Adjustment (FIAL) DPLs (see Box 1). Improved tax collection alone is estimated to represent one percent of GDP (see CEM 2005). This table further shows that: (1) while the Government was not able to reduce current expenditures as a share of GDP, it held the line after even allowing for a modest increase of 0.2 percent of GDP for military expenditures; (2) changes to Colombia’s cost of borrowing did not have an appreciable affect on the net result; and (3) increased revenues from petroleum royalties and oil profits, while having a positive effect, were not the determining factor in explaining the positive outcome of Colombia’s public finances in the 2002-2005 period. It is also important to note that, although expenditures did not increase significantly as a share of GDP, there has been a shift in the sectoral distribution of that spending, with about US$1 billion per year or about 3.4 percent of total expenditure redirected in favor of spending in the social sectors, as described in later sections.
88 Box 1: Outcome of Fiscal Adjustment and Fiscal and Institutional Adjustment (FIAL) DPL Series A cornerstone of the 2002 CAS was a series of Development Policy loans to support fiscal and institutional reform. The Bank has supported such reforms since the 1999 crisis. The first operation, the FSAL, was a two-tranche, US$400 million loan, approved December 2001 and closed March 2003. It acted as a bridge between the two CASs and the two administrations, and formed the basis for a new series of loans: FIAL I, US$300 million, approved March 2003 and closed April 2003; FIAL 11, US$lSO million, approved November 2003 and closed February 2004; and FLAL 111, US$lOO million, approved March 2005 and closed June 2005. The FSAL also laid the basis for reforms in health and education supported by the other DPLs addressing social and labor concerns. The original intention in the CAS was to have four FIALs, totaling US$900 million, but the program ended after the third loan, with total support reduced to US$550 million. The reason for this was that the Government was not able to meet fully the triggers for the 31d operation: as a result, the fourth operation was dropped and the amount of the third reduced from US$150 to US$lOO million. The two unmet triggers were adoption of an organic law to enhance budget management and a new procurement law. Both measures had languished in Congress and neither was likely to see passage in a reasonable time-frame. As a result, at the end of2005, the Bank and the Government decided to shift resources to other reform efforts with chances for timely implementation. Nevertheless, the Government continues to pursue expenditure reforms, on both budget management and procurement, as well as other aspects of the FIAL-supported program.
These operations have been individually rated as satisfactory or moderately satisfactory with the exception of the last one, FIAL 111, rated moderately unsatisfactory by IEG. A comprehensive evaluation by IEG of the whole series is pending. There are several sticking points: (1) whether Colombia’s improved fiscal position is the result of reforms or cyclical factors such as oil prices; (2) whether or not some tax measures are of the desired quality in terms of their distortionary and social impacts (the extension of the VAT to cover food, health and educational services was declared unconstitutional so alternatives such as a tax on bank transactions and a wealth tax were adopted to close the fiscal gap); (3) whether or not the caps on sub-national spendingltransfers will be sustainable, since the constitutional measure expires in 2008; and (4) whether or not the lack of progress on the expenditure side, blocked by the courts and not endorsed in the 2003 referendum, outweighs the positive results on the revenue side. That said, and despite the set backs, the end results are a much improved fiscal situation which, in turn, has created fiscal room for new priorities and reduced crowding out of the private sector. This has likely contributed towards a virtuous circle of increased confidence, investment, growth and poverty reduction, the ultimate goal. Thus, from the perspective of this CAS Completion Report, the Bank’s overall support for improving Colombia’s macro-economic situation and restoring growth under the first CAS pillar is considered moderately satisfactory, acknowledging that there is still much to do to address the misalignment between the central and decentralized levels of governments and to build better budget and expenditure management processes.
The experience under the FIALs is rich with lessons. First, severe austerity measures, such as a freeze on civil service salaries-even if proposed by a popular executive-may not be supported by the legislature or the general public, especially when the sense of urgency has dissipated. It also shows that a public referendum on a complex reform package, containing 15 measures, may prove to be impractical for gaining support for reforms, despite the intention ofpromoting direct democracy. Also, as development partners, the Bank and the Government may not have been realistic in committing to a series of measures, extending over a four year period, so early in the life of a new government. It should be noted that the first FIAL, like the CAS, was approved before the presentation ofthe National Development Plan to Congress and that the FIAL I1 loan, six months later, was negotiated just before the October 2003 Referendum. Moreover, the intent ofthe reforms and the tools used need to be clear: conceptual and semantic difficulties, notably on the notion offiscal rigidity and inflexibility, remained. Finally, the FIAL series demonstrates that changing roles may be very hard in a country such as Colombia with entrenched institutional responsibilities. Source: IEG, Bank documents
89 Improvement in the fiscal balance combined with a growing economy has had a marked effect on Colombia’s public debt burden. Under the slower economic growth predictions contained in the original CAS, Colombia’s gross public debt burden was expected to reach 52.9 percent of GDP by 2005, up from 50 percent in 2001. In 2002, given disappointing fiscal performance at the start of that year, gross public debt burden jumped to 53.9 percent of GDP. Since then, thanks to improved debt management, use of alternative financing sources, and better fiscal performance, the rate of growth in Colombia’s public debt stock has slowed and its share of GDP has fallen to 45.8 percent of GDP as of 2005. At the same time, the composition of Colombia’s public debt has changed with a shift to domestic currency denominated instruments, reducing exposure to foreign exchange risk: foreign denominated, non-financial sector gross public debt has fallen from 30.5 percent of GDP in 2002 to 18.7 percent ofGDP in 2005.
The Bank provided technical advice for improved debt management. Under the recently completed Financial Market TAL, the Bank assisted the Government in developing the market for domestic public bonds and other debt instruments (see Box 2). This was deepened under the series of Financial Sector Adjustment Loans (see below). Moreover, the Bank has continued to analyze Colombia’s debt sustainability and make recommendations on debt management in its periodic reports (e.g., the FY02 Policy Notes, the CAS and the CAS Progress Report) and kept the Government engaged in a dialogue on how to manage its debt burden. This dialogue has further evolved to informal advice on how Colombia can attain investment grade for its public debt.
Financial Sector. Another area high on the agenda in the 2002 CAS was the continued restructuring of the financial sector. After the 1999 crisis, the Bank worked with the Government on a series of measures to strengthen the financial system, help resolve banking failures, especially among publicly owned banks, and strengthen financial markets. These efforts have largely been successful, especially on cleaning up portfolios and restoring the sector’s financial viability, as evident in the indicators as presented in Table 3.
Table 3: Financial Soundness Indicators I2002 I2003 I2004 I2005 12006 I
Capital Adequacy (percentage) 11.0 11.6 12.1 12.3 11.0 Non-performing Loans (percentage of total loans) 8.7 6.6 3.3 2.7 2.8 Return on Equity (percentage) 9.6 17.1 23.0 22.1 18.1 98 150 167 145 I 4.1 I 4.0 I 3.3 Source:OUUlbG. IMFLlVLL
IFC has also been playing a key role in helping to shape a more efficient capital market in Colombia and in developing a sound regulatory framework, in collaboration with the Government, the private sector and the Bank. Programmatic support was provided through innovative ways, including initiating the FC’s first Colombian Peso- denominated bonds, El Dorado, assisting the establishment ofColombia’s first secondary mortgage company, strengthening institutional investors, and consolidating the domestic capital market with partial credit guarantees for corporate bonds. In addition, IFC
90 supported housing finance, micro and SME finance, and domestic securities market, providing US$188 million in total for nine transactions, Financing was mostly local currency to better serve the nature ofthose projects.
In housing finance, with the aim to deepen the liquidity of the mortgage market and foster Colombia’s capital markets, IFC continued to back the transformation of the mortgage sector which was badly hit when the housing price bubble burst during the 1999 crisis. Mortgage financing continues to decline as a share of total loans. IFC’s primary support was through partial credit guarantees, which amounted to US$46 million enhancing the rating and enabling the leverage in the size of the bond issues. This included IFC’s support for the issuance of non-performing mortgage-backed securities, which was the first in the LAC region and received very favorable response from investors. IFC also assisted with a former savings and loans institution that was shifting the focus from financing mortgages to origination and securitization and repositioning itself as a universal bank.
As reflected in the CAS Progress report, IFC has also placed a greater focus on micro and SME finance, as compared to what was originally anticipated under the 2002 CAS, with the aim to help address underprivileged access to financial services among lower- income populations. Total financing of US$57.5 million was provided to microfinance institutions and other well-established local players promoting SME and micro credit products through the formal banking system. In addition, in FY06, IFC partially guaranteed the first bond issue by a leading local brokerage company to help it reduce its reliance on commercial bank funding and fbrther facilitate market liquidity and activity in the domestic securities markets.
The Bank has been an active partner in the sector, as noted above, building on the work that had been done at the height of the banking crisis under the Financial Sector Adjustment operation (US$506 million, approved November 1999 and closed December 2001). During this CAS period, the Bank provided support under two programmatic Financial Sector Adjustment operations (FSAL I,US$150 million, approved April 2003 and completed June 2003, and FSAL 11, US$lOO million, approved September 2004 and completed March 2005). Outcomes for the two programmatic operations have been rated satisfactory, as confirmed by IEG. Among other things, these operations made progress on instituting risk-based banking supervision, management of intervened banks, norms for asset securitization, regulations on insurance, trust and pension firms, harmonization of collective investment schemes, and auctions of government T-bills. Grunuhorrur, an intervened bank that had been prepared for privatization under the initial FSAL, was finally sold in October 2006. Advance work on many of these measures had been included under the Financial Market TAL (see Box 2).
Box 2: Outcomes of Financial Market Development TAL The Financial Market Development TAL (US$8.2 million, approved June 1997 and closed December 2003) was rated satisfactory in achieving its objectives (this rating was subsequently downgraded in IEG’s Project Audit to moderately unsatisfactory because it did not anticipate the 1999 crisis and was slow to restructure). While designed and largely implemented in the previous CAS period, the operation’s benefits have camed over into this CAS. The operation was effective in: (1) revising the way in which the Government calculated its pension liabilities, helping to focus attention to the issues
91 of the long run viability of the system and gaining support for the reforms to the pension system enacted in 2002 and 2005; (2) merging three stock exchanges and helping to draft a new security law, adopted in 2005; (3) facilitating the securitization of housing loans; (4) helping to set up the Government’s system for monitoring financial transactions as part of its efforts to reduce money laundering and financing of terrorists; and (5) strengthening financial sector regulation and supervision. All of these developments, as assessed in two FSAPs and Bank AAA, are considered positive. The operation, however, was not successful in developing the local capital market although it helped introduce regulations for the market for public sector debt. Source: IEG
As pointed out by IEG, the primary accomplishment of the Bank-supported work in the financial sector so far has been the establishment of an appropriate legal and institutional framework for the financial markets, even though the effectiveness of these measures has yet to be tested under stress. The 2005 FSAP showed that the banking system continues to be dominated by financial conglomerates; the level of provisioning of non-performing loans was still relatively low; corporate restructuring remains biased against financial institutions; and the sector suffers from the taxes on financial transactions. The Bank’s latest analysis, well received by the Government, confirms the continuing weaknesses. As part of its ongoing reform program, the Government asked the Bank in FY06 to provide technical advice to assess the overall system, identify legal and regulatory bottlenecks, review creditor rights and insolvency procedures, credit reporting, the costs of financial regulations, and the financial dimensions of reforms to the pension system. Thus, while there has been considerable progress, there is more to do to strengthen regulation of banking, insurance, pensions, and the security market along with measures to improve the payment system and reduce corporate sector vulnerabilities. These conclusions have been incorporated into initiatives currently being taken by the Government, such as drafts of a new insolvency law and the habeas data law, and are being built into the package of reforms supported by the Business Productivity and Efficiency DPLs (see below).
Infrastructure to Foster Competitiveness and Improve Services for the Poor. During the CAS period, the Bank Group continued to support decentralized administrations and expansion of basic public services, with an attendant impact on the poor (see Box 3). IFC’s support for infrastructure included two projects undertaken by leading local players. A prominent part of the Bank’s efforts have been ongoing support of the extension of the Transmilenio rapid bus service under the Bogota Urban Services project (FY03; US$lOO million), now being replicated in five secondary centers under the Integrated Mass Transit Project (FY04; US$250 million). These rapid bus lanes are considered a model for reducing commuting times, especially over longer distances from locations where poor people tend to live. Besides supporting investment in the Transmilenio system, the Urban Services project finances a time-slice of investments in transport, air quality, solid waste management, and housing in Bogota’s deprived neighborhoods. A follow up operation is anticipated in FY07.
Next to urban transport, the water and sanitation sector has been an important area of Bank Group activity. In the case of IFC, it supported an innovative public-private partnership company to develop water and sanitation services to the poorer areas in the southwestern part of Barranquilla. As the company explored non-traditional hnding for
92 public infrastructure services in the domestic capital market, IFC provided a US$18 million equivalent partial credit guarantee to enhance company’s local currency bond, aiming for possible demonstration effect. In the case of the Bank, besides several completed operations (see below), the Bank has on-going operations in the city of Cartagena (approved FYOO; US$85 million); TA for the transformation of municipal water utilities (approved FYOO; US$5 million); and a Water and Sanitation ALP (the first loan approved FY05; US$70 million) with the goal of instilling sound management and operational efficiency in medium-sized and small municipalities. Overall, these Bank operations have been performing well and meeting their goals although the Cartagena project has been subject to a complaint to the Bank’s Inspection Panel discussed later.
Box 3: Bank Support for Urban Infrastructure Two urban infrastructure operations closed during the CAS period: the Santa Fe Water Supply and Sewerage (two loans totaling US144 million approved November 1995 and closed December 2003) and Urban Infrastructure (US$48.8 million, approved June 1998 and closed June 2004). Both operations, rated satisfactory, focused on broad institutional, legal, financial, environmental and operational improvements; the first on Bogoti’s water and sanitation services and the second, on the water sector plus transport, telecommunications and other services (health, education, gas distribution) in sub-national entities. In the case of Bogota, 1.8 million new consumers were added, many ofwhom were likely poor. Nevertheless, 600,000 potential consumers in informal settlements had yet to be served. A major achievement was with respect to environmental considerations: the water entity made considerable gains in adopting innovative and sound environmental and resettlement practices. Fundamental institutional reforms ofthe entity as originally anticipated, however, were not achieved.
These efforts have had a positive impact on access to basic infrastructure services. As the Bank’s strategy in infrastructure has evolved over time-first supporting major urban centers and now reaching out to medium and smaller sized communities-services are now almost universal among the urban population. According to Bank statistics, improved water and sanitation reaches 99 and 96 percent, respectively, of the urban population. Importantly, the rate of improving coverage seems to be slowing with an increase of only one percentage point in water services, for example, since 2002, with water utilities keeping pace with population growth. The remaining uncovered populations are now likely to be living in extremely poor pockets. Quality of services, however, can still be a problem that needs to be overcome as many locales continue to report shortages and interruptions in service. Meanwhile, the gap in service levels between urban and rural populations continues: comparable figures for coverage ofwater and sanitation in the rural areas are 72 and 66 percent, indicating considerable room for expanding access among rural populations. The La Guajira Water and Sanitation APL, currently under preparation, is an example ofgrowing attention to rural infrastructure.
The third area of emphasis in the 2002 CAS was support for improving Colombia’s capacity to manage natural disasters. This priority emerged as a result of the 1999 earthquake for which the Bank provided emergency assistance. The Emergency Recovery loan (US$225 million, approved March 2000 and closed August 2002) was rated satisfactory in providing shelter, rehabilitating social and public infrastructure, and preparing new preparedness plans. An important contribution was to demonstrate the feasibility of reducing housing construction costs and effective decentralized implementation. This positive experience led to a broader discussion between the Bank
93 and the Government on preventive measures, appropriate building codes and contingency planning, and, as envisaged under the CAS, agreement to proceed with an APL for Disaster Vulnerability Reduction (first loan approved in FY05, US$260 million; the second in FY06, US$SO million). While it is too soon to measure progress and the new system has yet to be tested, these operations point to the potential for important gains.
Unlike the Bank, IFC has been active in the oil and gas sector. Its strategy aims to support local medium sized companies while assuring that their projects meet high environmental, social and governance standards, and that revenues are used in a transparent and effective manner. Consistent with this strategy, IFC has supported, with a US$15 million equity commitment, a smaller, local company with significant experience in Colombia’s energy industry, which is dominated by large foreign and state companies. As the company demonstrated strong interest in long-term sustainable development, IFC is also providing technical assistance in: (i)enhancing the use of oil and gas royalties paid to municipal governments, with the support by the hydrocarbon association, the state regulator, and the company, and (ii)helping company’s adoption of the best practice environmental and social program, with a hnding mobilized from IFC’s Corporate Citizenship Facility. This technical assistance is expected to bring about the impact beyond the company, at the sector level. IFC has also ventured into the area of natural gas, with a US$50 million senior loan to a long-time client and one of the few locally-owned, experienced gas transmission companies in Latin America. IFC is supporting the company’s expansion strategy in natural gas transmission and distribution business in Colombia as well as other investments in the region, which is expected to help achieve enhancement of basic infrastructure services, promotion of job-creating economic activities, and considerable environmental benefits.
Other segments of infrastructure received less support from the Bank Group during the CAS period for a number of reasons but that situation is starting to change. First, in transport, financing of infrastructure, especially roads, has typically been shared by the Bank with CAF and the IDB, explaining in large part why the Bank has not had a presence since the 1990s. This situation has been reversed and the Government has currently requested financial support from the Bank for new road investments. In the case of energy, which had been an important part of the Bank-Colombia engagement in the past, the sector has been, by and large, privatized. As a result, the Bank has focused on strengthening the sector’s institutional capacity under the Power Market Development and Energy TAL (US$15 million, approved June 1997 and closed December 2002; rated satisfactory). In term of the electricity sector, Colombia has advanced in expanding electricity service, reaching 93.6 percent ofthe population accessible by the national grid. For those off-grid, largely isolated rural populations, 35 percent have electricity, only up one percentage point since 2002. In the case of ports, the Bank has provided technical advice, under Colombia’s first fee-for-service agreement, to review the regulatory framework for port concessions. This TA helped to define port policy and how to improve port contracts if the Government goes ahead with renegotiations.
There is ample scope for more and better investment in infrastructure. These issues were brought to light in the Bank’s FY04 flag-ship report, entitled “Colombia: Recent
94 Economic Developments in Infrastructure”, not anticipated under the original CAS program but produced as part of the Bank’s Global Infrastructure Action Plan. This report provides a comprehensive basis for developing of approaches to expanding and upgrading Colombia’s infrastructure base, from both the perspective of social needs (basic water and sanitation, secondary/access roads, communications and other services) and the needs for the productive sectors (roads, ports, airports, telecommunications).
Increased Productivity Through Private Sector Development. This area of the 2002 CAS was broadly intended to remove impediments to the private sector, addressing regulatory, environmental and administrative procedures. MIGA’s activities are summarized in Box 4. In the case of IFC, beyond the support for SMEs and micro- finance, cited above, IFC provided financing for three manufacturing projects with two leading Colombian pulp and paper product manufacturers operating regionally. These companies needed long-term financing and faced challenges as they expanded domestically and abroad. To help with both dimensions, IFC provided US$142 million in financing and supported strengthening competitiveness and financial fundamentals by assisting with multiple areas in operational sustainability, such as financial reporting and restructuring, corporate governance, and environmental, social, health and safety standards. On the non-financing front, IFC has placed special emphasis on helping improve corporate governance across different sectors in Colombia as an integral part of strengthening country’s capital market framework. IFC’s assistance to promote higher-standard governance environment was provided directly at several of its client companies in Colombia, as well as through training programs sponsored for senior executives in coordination with the local Chamber ofIndustry and Commerce.
Box 4: MIGA’s Support for Private Sector Development Under this CAS period, MIGA’s support for Colombia has evolved, reflecting the country’s improved risk perceptions. MIGA only issued one new contract of guarantee in Colombia since FYO1. Currently, one project remains guaranteed by MIGA, with overall exposure to Colombia falling from 3.8 percent of MIGA’s gross portfolio in FYOl to 1.3 percent. In turn, MIGA has begun supporting Colombian investors in projects in the region. Two operations were approved in FY06: the Santo- Doming0 Samama Toll road in the Dominican Republic; and the Prodenvases Crown manufacturing facility in Ecuador. MIGA has further engaged local governments in strengthening their investment promotion capacities. Beginning in 2004, MIGA has been providing technical assistance to the Chamber of Commerce of Bogota in the creation of an investment promotion agency. This was MIGA’s first ever sub-national promotion initiative. The new agency, formally inaugurated in 2006, is presently receiving advice on staffing, identification of target sectors, and outreach. Similar assistance was launched in 2006 to support Pro-Barranquilla in tracking investors, facilitation, and partnerships in that city. Colombia is also participating in MIGA’s Global Enterprise Benchmarking Program, with the aim of providing the country with information on which industries it may most likely be able to compete internationally. Source: MIGA
Turning to the Bank, the anticipated support for SMEs and micro-finance in the 2002 CAS did not come to fruition nor did the Bank carry out planned ESW on SMEs and knowledge management. Instead, the IDB took the lead on SMEs, with the Bank continuing to work on the setting up andor strengthening of regulatory institutions for key areas such as telecommunications, road concessions, water supply, and the power sector under the US$ 12.5 million Regulatory Reform Technical Assistance loan
95 (approved February 1997 and closed August 2004). This operation was rated satisfactory, as confirmed by IEG, in increasing private financing and improve management of infrastructure, including toll roads, water supply, power, natural gas distribution, and telecommunications. It accomplished this by strengthening the relevant legal and institutional framework for the different sectors and by promoting private participation. The project was successful in concessioning mobile telephone services, attracting US$ 1.2 billion, and shaping the stock issue by the Bogota Telephone Company.
New priorities for Bank support for private sector development, however, emerged in the latter part of the CAS period as competitiveness became a greater priority for the Government, especially as a free-trade agreement with the USA became a distinct possibility. As a result, the Bank and the Government have engaged in a wider examination of Colombia’s ability to compete internationally than was originally anticipated. First, the FY06 CEM deepened understanding of the issues, including those in the agriculture sector, one of the most sensitive areas in opening markets to international competition. This assessment was further deepened via other AAA products that analyzed the nature and extent of the different impediments to Colombia’s competitiveness, including labor markets (see “Labor Market Adjustment, Reform, and Productivity”, November 2005), logistics and the quality of Colombia’s infrastructure, and the financial system.
These studies have provided the analytical underpinning for reaching agreement in the CAS Progress Report on proceeding with a new series of three proposed DPLs, bridging with the next CAS. This series is designed to address constraints in the business environment, foreign trade and competitiveness, the financial sector, quality and standards, and logistics and infrastructure. The first such loan of US$ 250 million was approved October 2005 and closed May 2006. The second loan ofUS$300 million was approved in December 2006 and closed January 2007. So far, there is little tangible evidence ofthe outcomes of these operations but country trends are in the right direction. There have been modest improvements in Colombia’s regulation-governance indicators as demonstrated in the Bank’s Governance Indicators: in the case ofregulatory quality, Colombia improved its percentile ranking to 54.0 in 2005, as compared to 50.2 in 2002.
To complement these broader efforts to spur Colombia’s competitiveness, IFC is assisting the Municipality of Bogotil with improving and simplifying the system of municipal inspections. The project, which includes a comprehensive diagnostic of the inspection procedures and a technical proposal for implementation ofthe reform, aims to deepen the initial improvement that the Municipality had already achieved under a business procedures simplification program in 2004. Based on the considerable impact elsewhere in the LAC region, IFC’s support with business procedures simplification in municipalities could double the businesses registered in Bogota.
Rural Development. Rebirth of the rural economy was to have been a central feature of the 2002 CAS, critical for the peace process and offering opportunity for the 12 million people who live in rural areas, of whom 79 percent were poor and 37 percent
96 lived in extreme poverty as of 1999. The CAS anticipated both analytical work and new lending. First, to inform the debate on what to do in the sector, the Bank devoted considerable resources to analyzing Colombia’s rural sector, including the question of land ownership: land ownership is extremely skewed with a Gini of 0.86 (1988). The Bank carried out several pieces of ESW, starting with the 2002 Policy Notes and followed by reports on rural finance, coffee production, agricultural competitiveness, and land policy. As noted above, the FY06 CEM specifically analyzed the effects on Colombia’s agriculture sector of a Free Trade Agreement with the USA. Second, despite the fact that a much scaled-back loan was approved for the sector during this CAS period, the Bank continued to support innovative ways to address some of the sector’s key problems through on-going operations. Three examples stand out: the Peasant Enterprise Project, the on-going Productive Partnership Project, and the Magdalena Medio Peace and Development Project (see Box 5). In addition, the Bank has supported advances in agricultural technology under the completed Agriculture Technology Development Project (US$46.8 million, approved June 1997 and closed December 2003). This operation was rated satisfactory, citing achievements in increasing competitive funding of research, raising incomes of 350,000 farmers and strengthening the decentralized planning process. It also provided the base for the new Agricultural Transition project (see below). lox 5: Pilot Peace and Rural Development Interventions
Peasant Enterprise Zones Development Project (US$4.2 million, approved June 1998 and closed December 2003) This LIL was designed to develop replicable methodologies for operating in Peasant Enterprise Zones in conflict areas and areas adjacent to protected rain forests and indigenous territories. Three zones were selected for the pilot, with assistance provided to local communities to plan and undertake small infrastructure investments, land titling, farming, and environmental protection, in an open, participatory fashion. The idea was to build local capacity and to demonstrate the viability of working together. The project was successful in realizing its goals and the potential for scaling up exists. The approach developed under the LIL has been adopted by the Rural Development Institute, but has yet to receive full scale support for replication.
Second Magdalena Medio Regional Development Project (USSS million, approved September 2001 and closed May 2004) This LIL, rated satisfactory, was also intended to test new forms of managing and implementing the region’s development plan with the goal of increasing citizen influence, making institutions more responsive, and demonstrating concrete ways to increase economic and social returns. It built on the first LIL, approved in June 1998 and closed in December 2000 (also rated satisfactory), that laid the groundwork in establishing a non- governmental entity to lead the process. The idea for the second LIL was to complete the investment cycle, as investments planned under the first LIL did not have enough time to materialize, leading to demand for a follow-up operation to test out those investments, and to reduce the dependence on the intermediary organization, the Corporation for Development and Peace Magdalena Medio (an NGO sponsored by the Catholic Church and Ecopetrol). The operation has been successful and mobilized funding from the EU. Since its closure, the concept has been adopted by the Government and is being scaled up with Bank support under the Peace and Development APL in six regions.
Productive Partnerships (US32 million, approved FY02, ongoing) This operation demonstrates the benefits of pairing small-scale producer organizations with modern agro-businesses. The intention is to transfer knowledge and generate mutual benefits that made commercial sense in a demand-driven way with limited recourse to the public sector. So far, the approach has been working with interim evaluations showing a gain of 20 percent in incomes and employment for farmers participating in the program. This result is well above the 10 percent gain anticipated at the start. The operation has been included in the Bank’s Agricultural Investment Handbook as an example of promising innovation. Importantly, the Government has adopted the concept as a main element of its strategy to stimulate the agriculture sector. The total number of hectares under the Government’s program has risen by more than 20 percent since 2002, to 1.1 million hectares. Source: IEG, Bank Documents
97 The 2002 CAS anticipated that there would be an opportunity to move forward on a broad agenda ofissues in the rural sector, related to access to land, land markets, forestry, and smallholder competitiveness. But the scope of the only new lending operation was reduced because a lack of agreement over the vision for the sector, the limited fiscal space available for such an operation, and differences within Colombia over its response to the costs of opening domestic markets. Instead, the Bank and the Government agreed to a narrowly focused program, the recent Agricultural Transition Loan (US$30 million, approved FY05), addressing phyto-sanitary standards, technology and other issues relating to Colombia’s integration into global markets and meeting its obligations under the Free-Trade Agreement with the USA.
Environment and Natural Resource Management. There is considerable convergence between the Bank and Colombia on the important of sound environmental management and sustainable development. The CAS envisaged a broad based reform of environmental management, supported by a series of Sustainable Development DPLs. The first operation ofUS$l50 million was approved June 2005 and closed January 2006; the second operation of US$80 million is pending meeting of triggers, including the passage of a new Water Resources Management Law. A companion Sustainable Development Investment loan (US$7 million, approved October 2005), not anticipated under the original CAS, was added to support targeted investments (mainly monitoring equipment) and to strengthen local capacities to undertake reforms.
These operations address a range of concerns-urban pollution, water quality, environmental health, integrated water management-and target mainstreaming environmental sustainability and achieving a direct impact on meeting Colombia’s MDGs (notably the targets relevant to sustainable development and child mortality), implying attendant improvements in M&E. They also build on previous lending that encouraged the adoption of sound environmental management policies and processes in major urban centers (see Box 6). The programs were reinforced by the recently completed Country Environmental Assessment, entitled “Mitigating Environmental Degradation to Foster Growth and Reduce Inequalities” (February 2006), which provided the analytical basis and priorities for the Sustainable Development DPLs. Again, it is too soon to assess results but the start is encouraging, especially in the depth ofthe reforms and the shared appreciation ofthe importance of sustainable development within Colombia.
Box 6: Urban Environmental Management The US$19.07 million loan (approved January 1996 and closed December 2002) was rated satisfactory in strengthening the capacity of the Ministry of Environment to provide policy advice and technical assistance to major urban centers and smaller communities. The focus was on designing environmental management plans addressing solid waste management, land use planning, water resource management, waste water treatment, public awareness and education. Such plans were created for Colombia’s four largest cities-Bogoth, Cali, Medellin and Barranquilla. In the case of Bogotb, two thirds of the plan has been put into actual use and an Environmental Fund set up. Development of a National Environmental Information System was not achieved, with the IDB eventually providing support for this component. Source: IEG
98 A specific goal set in the 2002 CAS was to address the delays in the environmental licensing system. That goal has been achieved, with the average number of days to receive an environmental license falling to 16 days in 2005, down from 130 days in 2001. The Bank helped revise procedures for issuing these licenses as part ofthe preparation of the Sustainable Development DPLs. In addition, as anticipated in the CAS, the Bank advanced the possibility ofreducing carbon emissions: several GEF and PCF operations have been approved and/or are in the pipeline with the expectation that they will demonstrate concrete ways to reduce carbon emissions. There is no specific evidence as yet. A new opportunity arose to help Colombia prepare for climate change with the GEF grant for the Integrated National Adaptive Program. More broadly, the Bank and Colombia have a strong commitment to an active program of GEF grants to address global environmental concerns as well as the inclusion of indigenous and Afro- Colombian peoples (see below).
Pillar Two: Sharing the Fruits
Overall. Economic growth has been the preeminent factor in explaining the reductions in poverty and income inequality since 2002. However, credit also has to be given to the efforts by the Government, with Bank support, to share the benefits of growth via increased opportunity, financial security for those facing medical problems, and greater public resources directed to those with insufficient incomes and/or facing temporary dislocations. The impetus for reforming the social sectors has been long standing, with fundamental reforms articulated in the 1991 Constitution. These changes were accompanied by extensive decentralization intended to improve the quality and quantity of social services, particularly health and education. Unfortunately, these reforms were derailed by the 1999 economic crisis which cut funding and exposed deficiencies in social programs and the social safety net. That crisis set the stage for developing new approaches to protect the poor and provide a social safety net.
The Bank’s support has been critical in helping to shape and implement these new approaches under a series of Labor and Social Sector Development Policy loans (PLaRSSALs), accompanied by targeted investment programs in education and social protection to put these new policies into effect. The results of this work have been very positive. The first PLaRSSAL (US$ 150 million, approved September 2003 and closed June 2004), the second (US$ 200 million, approved November 2004 and closed March 2005) and the third (US$ 200 million, approved July 2006 and closing March 2007) have continued and deepened the process ofreform initiated under the previous CAS, with the Social Sector Adjustment Loan (US$155 million, approved August 2002 and closed December 2002). A TAL of US$ 2 million, approved in FY05, was added to provide technical backup to the local teams designing and executing these reforms. Like its companions in the financial sector and the fiscal adjustment, the initial Social Sector SAL was designed to carry forward the reform agenda between administrations.
The Social Sector SAL, the ensuing PLaRSSALs Iand I1 and the LaRSDPL I11 demonstrate continuity. According to IEG, the SSAL and two completed PLaRSSALs
99 were successhl in meeting their goals, with the first PLaRSSAL rated highly satisfactory. They contributed towards improving transparency and citizen oversight via M&E measures; developing a risk management approach to social protection; expanding health insurance coverage; improving the efficiency and equity of resources devoted to the education sector; and enhancing labor market possibilities. The third loan in the series added child nutrition to the agenda along with the restructuring of public hospitals. Details ofthe accomplishments in each ofthese areas are provided below.
Education. The 2002 CAS anticipated that the first priority for Colombia in the social sectors would be to meet its goal ofuniversal education at the primary level. In working towards that goal, the CAS set interim targets of 90 percent for both primary completion and net primary enrollment as of2006. Additionally, supported by subsequent analytical work, attention was directed to reaching those in the 12-17 year age bracket which, according to the Bank’s FY03 report, “Closing the Gap in Education and Technology” (FY03), was critical for Colombia’s competitiveness. Beyond the expansion ofprimary- secondary enrollment, the CAS also sought efficiency and quality gains, promotion of innovative pilots in decentralizing education management, expansion of rural education opportunities, and enhancing demand for higher education by providing student loans. Most ofthese goals have been met and in some cases exceeded.
Country-level results are impressive. Data show that that enrollment in public primary and secondary education has increased from 7.8 million students in 2002 to 9.2 million in 2006 (95 percent oftarget). Of the new students, almost one-third came from lower income groups. Concerning primary completion rates, the CAS interim goal of 90 percent as of 2006 was surpassed, with 94 percent reached in 2004. Preliminary data for 2006 show that the goal for net enrollment was also surpassed, with the net enrollment close to 95 percent. It is important to note that this latter figure is based on the 2005 census data. When the CAS was prepared, then available information had net enrollment for primary students at 87 percent as of 1998, up from 84 percent in 1992. By 2003, net enrollment had increased to 88 percent. However, these data were based on interim population estimates which were too high. As a result, earlier assessments have overestimated the gap in meeting these MDGs and it will now be necessary to reassess Colombia’s progress in reaching the 2015 MDGs on the basis ofthe last census.
A number of Bank operations made important contributions to these achievements. The series of PLaRSSALs focused specifically on expanding access and improving quality, with the number of primary and secondary students surpassing the specific targets set under the PLaRSSAL, increasing by 743,000 between 2002 and 2004. Moreover, 90 percent of students-some 9.5 million-are now subject to standard proficiency tests in language, mathematics, and sciences. It was also expected that 90 percent of 9th grade teachers would be subject to performance evaluations, but the Constitutional Court rejected this measure. Almost 8,000 schools have prepared improvement plans, and 77 out of 78 quality assurance centers had been set up as of 2006. It should be highlighted that the cost of expanding opportunities are largely financed by the fiscal space generated by increasing efficiency (Le,, teacher-student ratios) and savings redirected from other sectors. In addition, one ofthe driving forces in
100 expanding enrollment was the new incentive to local authorities to enroll students, when transfers from the central Government were changed to being based on the number of students, instead of the number of teachers. This reform was adopted under the SFAL- FIAL development policy series and is being implemented by the National Planning Office via the criteria to distribute petroleum royalties to local governments.
In addition to supporting the sector’s policy framework, the Bank financed separate investment operations to test methods to stimulate decentralized education management and expand education at the municipal level. The goal was to demonstrate how local authorities could best make use of the knds transferred to them from the central level. These operations were implemented under conditions of conflict and/or the influx of displaced persons and their record of achievements is mixed: municipal-level management ofthe educational system (brought about by the 1991 Constitution) has been slow and difficult to implement (see Box 7). ESW (completed in August 2006) on the policy options and international experience on contracting out education services is an example ofthe Bank’s technical advice on improving decentralized services.
Box 7: Experiences in Municipal Management of Education The first attempt at directly supporting decentralized education was the Antioquia Education Project (US39.5 million, approved November 1997 and closed December 2003). IEG rated this project as modestly satisfactory, in light of the mixed results as drop-out rates, repetition and student math achievements did not change. Communities were not able to assume management responsibilities as expected. However, enrollment went well up: pre-school by 14 percentage points (to 88 percent), primary by 7 percentage points (to 97 percent), and lower secondary by 16 percentage points (to 89 percent). Upper secondary enrollment decreased slightly, staying at about 63 percent. The results of the Pasto Education Project (US$7.1 million, approved November 1997 and closed August 2003) were better and IEG confiied a satisfactory rating. Gross enrollment targets were met, even though net rates fell; repetition rates went down as did drop-out rates; and student test scores improved for grade 3 math, but fell for language. The Cundinamarca Education Quality Improvement project (approved FY04, US$15 million) started slowly and was subsequently canceled because the differences with the newly elected local administration, over the pedagogical model to be used, procurement, and the role ofthe Secretariat ofEducation. Source: IEG, Bank documents
The Rural Education APL has also been hard to implement but has been reaching far more locales and students than originally anticipated. The first loan of US$20 million, approved in FYOO, was designed to encourage greater enrollment and quality in up to 70 poor, rural municipalities starting with net enrollment of as low as 30 percent. The goal is to get enrollment eventually up to 60 percent, still well below that achieved in the urban centers. The second of the series, originally expected in FY04, is now programmed for FY07. So far, while it has been hard to reach rural communities, demand for participating in this program has been overwhelming: 582 municipalities have participated, exceeding the initial target eight-fold. Between 2002 and 2006, 241,000 new school places were created and 460,000 students in rural areas have benefited from the program.
Another dimension of the 2002 CAS was to increase demand for higher education. Colombia experiences low enrollment in tertiary education as compared to other Latin American countries, with very low participation from the bottom income strata. To
101 address these concerns, the ongoing Higher Education Loan (US$200 million, approved December 2002) helps to finance student loans and grants and expand the number ofpost graduate students. It is also supporting ways to improve the quality assurance system, set up M&E to measure progress and develop Labor Market Observatories to track labor movements and employability. According to supervision reports, this operation has been surpassing initial expectations. Country data, combined with supervision reports, show that enrollment in higher education increased from 1 million students in 2002 to 1.3 million in 2006 (about 85 percent oftarget) and that student loans rose to 88,000 in 2006, doubling the number ofstudents receiving financial support. Surpassing the initial target, almost 60 percent of beneficiaries are from income strata 1 and 2, up from 30 percent before the program started. The number studying at master or doctor level almost doubled to 13,000 in 2006. Equally, the efforts on quality assurance are progressing, with 432 programs now certified as high quality, and 3,600 programs (88 percent of target) for minimum standards of quality. A new loan, expanding the program, gas been requested.
Health is the second anchor of the Bank's work in the social sectors, focusing on coverage of Colombia's health insurance system, nutritional supplements for vulnerable populations, and overcoming weakness in public health services. The underpinnings of Colombia's health care system were established by the 1993 law that set up a system for providing direct subsidies to those who could not afford health insurance. However, the pace of implementation faltered for several reasons: decentralization became more difficult as conflicts increased during the 1990~~and the resources to pay for insurance subsidies were in short supply, especially after the 1999 economic crisis. But, restoration of growth and easing of the fiscal concerns enabled the reactivation of the reform effort under the current CAS. To support this effort, the Bank first seconded a senior Bank- staff health expert to Colombia for two years. That expert engaged in day-to-day problem solving and assisted the Ministry ofHealth to refocus the debate, engage a larger audience, and provide the technical assessments allowing decision makers, including members of Congress, to gain confidence in the reform's merits. Financial support for the reforms was then provided under the series ofPLaRSSALs.
These efforts are paying off. The principal achievement has been the number of persons receiving subsidies to acquire health insurance coverage. According to country data, the number of subsidized beneficiaries now amounts to 18.6 million persons as of 2006, up from about 10.7 million in 2002. Currently, 73 percent of the target population is covered, as compared to 42 percent at the start of the CAS period. An important change has been the shift to full subsidy (instead of partial): 5.8 million beneficiaries now receive 100 percent subsidy, up from only 400,000 in 2002. According to an independent evaluation, this is an outstanding result, as very few low and middle income countries have achieved almost universal coverage of their health insurance schemes. In terms of health outcomes, as pointed out in the independent evaluation, the first-order result is improved access to and utilization of health services as insurance affiliates are more likely to use the health care system as compared to those without insurance. This holds true, for example, for children suffering from diarrhea and respiratory infections.
102 Supply side problems, nevertheless, can have a negative impact on the quality of services provided and the impact of insurance coverage on health status. Thus, the continuing dual-track of reforms in the health sector remains important. Accompanying the expansion of health insurance are efforts supported by the PLaRSSALs to alter the way health care is delivered. In 2001, a major decentralization took place, putting hospitals and primary care under the responsibility oflocal governments. Hospitals were also expected to operate independently and compete with private providers: subsidies were increasingly to be shifted to the demand side. These reforms have been taking effect, hospital by hospital, with the results positive thus far, based on the experience of 71 institutions under the IDB’s program of hospital restructuring: service levels have gone up, staffing got down, total costs reduced and deficits narrowed. Nevertheless, there is a long way to go to eliminate operating deficits in public facilities. Under the PLaRSSALs, some 127 hospitals, as of 2005, were under management contracts (target 100). More than 90 percent of third level public hospitals have been licensed (target 70 percent) as have 27 out of28 private insurers.
The rate ofvaccinations-one ofthe MDGs in which Colombia falls short ofthe CAS interim goal-has increased to about 87-90 percent as of 2005, up from 82 percent in 2002. The interim target was 92-95 percent. World Health Organization statistics show that the rate ofvaccinations in Colombia fell during the 1996-2000 period, mostly likely because of security concerns and the fiscal crisis. Under the PLaRSSALs, better performance has been hoped for as the resources had been sufficient to make the target; however, continuing conflicts and forced displacements have made it difficult to reach the interim goal. To strengthen further the incentives to vaccinate children, the Government made an immunization card a pre-requisite for participating in nutritional programs and school enrollment. Complementing the Bank’s PLaRSSALs, the IDB has been active in providing resources for the investments for both hospital restructuring and vaccination programs, the latter area also receiving support from CAF.
A disappointing area in terms of realizing the interim MDGs set out in the CAS is Colombia’s performance in reducing maternal mortality. The long term goal of45 deaths per 100,000 now seems out ofreach by 2015 unless there is concerted action to improve the situation. The maternal mortality rate, as of 2005, stood at 99 deaths per 100,000 women, with no improvement since 1998, according to the Government’s assessment (the Bank estimates material mortality in Colombia to be 130 per 100,000, based on its own methodology). It is now recognized that tracking maternal mortality has proven to be very difficult. An ongoing assessment by the Bank of Latin America’s system for collecting vital statistics shows considerable deficiencies in recording deaths, let alone accurately recording the cause of death, in Colombia and elsewhere in the region. Reducing maternal mortality is an area in which there was no specific Bank intervention anticipated under the 2002 CAS.
Social Protection. Another critical area of reform supported by the Bank has been to restructure, refocus and expand Colombia’s system of social protection. As noted earlier, the 1999 economic crisis brought to light deficiencies in Colombia’s tradition social safety net system (largely dependent on family and community assistance). At that time,
103 the Government, the Bank and the IDB worked collaboratively to put in place the Red de Apoyo Social (RAS), a temporary emergency support program financed by the Bank and IDB. The RAS consisted of three programs: Familias en Accion, a new conditional grant program linked to child health check-ups, and regular school attendance, financed in part by the Human Capital Protection Project (US$lSO million, approved FYO1, closed November 2005; rated satisfactory); Jovenes en Accion, which provided scholarships and internships for poor youths (supported by a Bank-financed Youth Development LILY US$5 million, approved FY99, closed June 2003; rated satisfactory), and Empleo en Accion, a temporary workfare program, supported with the Bank-financed Community Works and Employment loan (US$lOO million, approved in May 2000, closed November 2005; rated unsatisfactory). The first two programs have been incorporated into Colombia's institutional structures and scaled up. On the other hand, the third did not meet its goals (see Box 8).
Box 8: Outcome of the Community Works and Employment Loan This US$lOO million operation, approved in May 2000 with joint financing from the IDB, was one of the three pilot social protection programs developed with Bank support in response to the 1999 economic crisis. It initially aimed at contracting the poor and unemployed to work in small public works at the municipal level, patterned after Argentina's successful workfare program, Trubujar. It also benefited from a number of analytical studies that were helping to frame Colombia's a comprehensive risk based social safety net. Because of the crisis, the operation was very quickly prepared and approved in four months. Implementation, however, spanned a frustrating four years before two-thirds of the loan was cancelled and US$6 million redirected to a pilot of a wage subsidy for private sector ficontracting those previously not employed. That pilot experience did not meet expectations either. In the end, 228,000 beneficiaries did participate in the workfare program; ex-post evaluation shows that beneficiaries were largely poor or extremely poor and they did increase their incomes as compared to control groups. However, the way that program was implemented was unworkable: it took an average of28 months for municipal sub-projects to be prepared, evaluated and authorized (as compared to 9 months in Argentina). Rather than using simplified procedures to speed up disbursements, there was a tendency to centralize and create unnecessary steps, resulting in delays. This was opposite to what was done in Argentina, showing that the transfer of a concept from one country to another must be matched by the attributes needed for implementation, effective decentralization and results-orientated management. That was not the case in Colombia. This experience also demonstrates the risks of a large gap between the program designers, who tend to be highly qualified staff in central agencies, and the implementators from a broad array ofmunicipalities and NGOs. Source: Bank ICR
Building on these experiences, the Government proceeded to deepen and refine its social safety net system with financial support provided under the series of PLaSSRLs. In almost all areas, targets under these programs are being surpassed. The underpinnings of the system were further validated in the Bank's ESW, "Colombia's Social Safety Net Assessment (FY03) and facilitated by technical studies under a PHRD grant. Additional technical support is now being provided under the Social Sector TAL (US$2 million, approved November 2004). Some of the changes have been institutional, such as the merger of the Ministries of Labor and Health, to create the new Ministry of Social Protection with responsibility for several autonomous agencies (the Social Security Institute, the Family Welfare Institute and the National Training Program). Successful pilot programs, such as Familias en Accion, have been scaled up and institutionalized, and a number ofnew programs have been introduced, particularly in the area ofnutrition.
104 Monitoring and targeting of social programs have been tightened.
Colombia’s restructure social safety net has expanded and improved targeting of nutritional programs. Targeting was introduced for early child development and children breakfast programs whose coverage has been increased five fold to 300,000 families. In total, 1 million children participate in the breakfast program as of 2006 (up from 78,000 in 2002) and 2.3 million children benefit from school lunches (up marginally from 2.2 million in 2002). A new nutritional program has been added for the elderly, with some 400,000 now served and the number of elderly receiving cash assistance has tripled since 2002, reaching 200,000 persons, As part ofthe move towards results-based management, M&E procedures were introduced and ex-post evaluations have been undertaken ofthe child breakfast and community day care programs.
A major part of the effort on Colombia’s social safety net has been to institutionalize and expand Fumilius en Accion, the successful program of conditional grants to poor families. As a follow-on operation to the Human Capacity Protection loan, the Bank is presently provided support for the transition of the Families program, under the new Social Safety Net loan (US$86.4 million, approved FY06). Besides expanding coverage from 320,000 to 568,000 families as of 2006 (target 400,000), the loan is assisting the Government in concentrating resources on the extremely poor in marginal areas and in conflict zones and incorporating 100,000 displaced families (63,000 enrolled as of 2006). The 2005 independent evaluation of the Families program demonstrated its effectiveness in targeting the poor and improving social indicators. Some 91 percent of beneficiaries are below the poverty line. Consumption of basic goods increased by up to 19 percent. Increased intake ofprotein was noticeable in both urban and rural populations. Chronic malnutrition reduced by 10 percent among children 0 to 2 years. School attendance by secondary students increased by 14 percentage points to 89 percent in rural areas and by 9 percentage points to 94 percent in urban areas with a commensurate reduction on the hours worked by children. Still, the evaluation showed that there could be further improvements in targeting and the design of the SISBEN system, the methodology used by Colombia to identify beneficiaries for social and other targeted programs.
Labor Markets. The goal in the 2002 CAS was to help make labor markets more flexible. Under the first PLaRSSAL, the Government made improvements to labor regulations in order to make it easier for hard-to-employ workers (youths, those over 50 years, the disabled, and unemployed heads of households) gain access to the labor markets. Law 789, passed in 2002, reduced the cost of firing and payroll taxes, provided incentives for businesses to employ more people and added a safety net for the unemployed. The Bank’s assessment of those reforms (see above mentioned EWS on labor markets) shows that these reforms resulted in greater employment of young workers, less informality and higher wages for the unskilled. At the same time, the PLaRSSALs supported the transformation ofexisting labor training programs, separating the regulatory, accreditation and service provision roles of SENA, the National Training Institute. Reforms further made the provision of training more competitive by allowing licensed private providers and firms to provide their own internal training. The changes in the system have resulted in a dramatic increase in graduates: according to Government
105 statistics, the number of graduates from professional training institutes has more than tripled to almost 3.9 million as of 2006 (target was to double). Graduates from the Jovenes en Accion program (mentioned above) have increased eight fold.
Empowerment and Inclusion, Colombia has important populations of indigenous and Afro-Colombians that tend to been marginalized. The approach adopted under the CAS was to heighten awareness among policy makers of the specific hurtles faced by these groups. The CAS proposed to address ethnicity systematically in the Bank’s own AAA program in order to demonstrate how and why such groups were important, and to incorporate indigenous and Afro-Colombian peoples as target populations under rural development, bio-diversity, and climate change projects, financed by the GEF. The Bank committed itself to have all analytical work include breakdown by ethnicity, undertake AAA on Colombia’s indigenous peoples and Afro-Colombians and help Colombia include ethnicity in the 2005 Census and household surveys. This action plan has by and large been accomplished. First, many of the GEF operations do target these groups. Second, the Bank did carry out an analysis of the status of indigenous and Afro- Colombians: this report, entitled “The Gap Matters: Poverty and Wellbeing of Afro- Colombians and Indigenous People” (July 2005) provided an overview of the current status of these groups and the gaps in services. Third, the newly available 2005 census data now breaks down information on ethnicity with assistance provided under the MECOVI program supported by an IDF grant (US$290,000, approved FY04). The availability of these data has encouraged the Colombians to carry out their own analysis of three disadvantaged groups-indigenous, Afro-Colombians and Roma (the latter, not covered in the Bank’s work). But not all of the Bank’s AAA addressed exclusion. Instead, the Bank has taken an alternative route by using the analyses underpinning social sector operations to heighten the Government’s interest, first, in targeting the poor- disproportionately members of indigenous and Afro-Colombian groups-and in M&E in general (see Box 9).
Box 9: Mainstreaming Exclusion A good example of mainstreaming exclusion is the FY06 Social Safety Net operation. The analysis backing that operation showed that the SISBEN system, used to target beneficiaries, might not capture well the socio-economic conditions of indigenous and Afro-Colombian groups and that the M&E system in place for the Fumilius program did not track their participation. This led to an indigenous action plan being prepared. Another example of an operation giving particular attention to the unique challenges faced by indigenous and Afio-Colombia groups is the Bank-financed Peace and Development APL (first loan US$30 million, approved FY04). A third example, now under preparation, is the La Guajira Water and Sanitation project. As of now, it is too early to measure their impact but these examples demonstrate the scope for internalizing these groups into program design and for systemic changes to the way that the SISBEN works. Source: Bank documents
Pillar Three: Building Efficient, Accountable and Transparent Governance
Overall. The goal of this pillar was to support the Government’s efforts to make governance more transparent and efficient and to stimulate accountability under its Public Administration Reform Program. Even though it did not have much margin for maneuver on the expenditure side, especially after the rejection of austerity measures in
106 the 2003 referendum and the rulings by the courts on various measures, the Government embarked on a reform program to change how the central agencies operate- consolidating ministries, cutting authorized positions in the civil service, reducing bureaucratic steps, upgrading information systems, implementing e-procurement, and putting in place a results-based management culture. So far, progress has been quite good, even though the results are uneven and the benefits are more evident on the quality and efficiency of spending than on reducing spending per se. Among the quantitative indicators is the drop in wages and salaries as a share oftotal spending from 11.1 percent in 2002 to 10 percent in 2006. Colombia’s relative ratings on the Bank’s Governance Indicators all show improvement: Colombia jumped from the 43rd percentile to 53rd percentile on government efficiency and from 36th to 53‘d on the control of corruption between 2002 and 2005. It tends to rank higher on government efficiency, regulatory quality, and control of corruption than other countries in its income category and countries in the LAC region. Rule of law, voice and accountability, and violence- especially the last measure-are where Colombia falls short.
As discussed above, the Bank’s main vehicles to support this effort have been the FSAL, the FIAL series of policy based loans and the Second Public Financial Management Project. Besides supporting the impressive record of improvements to tax policy and administration cited earlier, the last operation further helped to design and install Colombia’s integrated financial management system, SIIF, and performance monitoring system, SINERGIA. The new series of Business Environment and Competitiveness DPLs, also cited previously, picks up some ofthese themes, particularly on those areas that affect the business environment, quality and standards. Beyond these instruments, the original CAS identified two specific areas, Judicial Reform and Anti- corruption, for attention. The CAS Progress Report expanded a third, Monitoring and Evaluation. Progress in each of these areas is summarized below.
Judicial Reform. The Government’s National Development Plan places considerable priority on improving the quality and relevance of the country’s judicial services. For many years, the high levels of violence in society, the lack of physical presence of the state in conflict areas, and perceptions of corruption and impunity have contributed to a low level of use of and trust in judicial services by the general public. The 1991 Constitution set in motion a number ofchanges to the way that the judiciary is managed and structured. Under its development strategy, the Government placed particular emphasis on increasing access to community based, alternative dispute mechanisms, justice for the poor, via community tribunals and “houses ofjustice”. These initiatives have been support the IDB and USAID.
The Bank oriented its support, via the Judicial Conflict Resolution Improvement LIL (approved FY02 and closed in June 2006, US$3.9 million), to test a comprehensive approach to judicial reform in civil courts. The intent was to devise new processes, human resource capacities, and organizational set-ups capable of reducing processing times, increasing productivity and increasing demand for legal services, starting with a sample of some 80 civil courts in five major centers (with some labor courts added subsequently). This pilot has moved slowly: the LIL was first to close by June 2004 but
107 has been extended by two years. Implementation was confounded by the intrinsic complexity of the sector, the ambivalence of the executive branch in dealing with the judicial branch, and the lack ofexperience of lead actors. Nevertheless, the experiment is starting to show some results: one of the achievements has been the adoption of performance evaluation of judges. Gains have also been experienced in overall efficiency, thanks in large part to new case tracking mechanisms: the participating courts were able to increase their resolution rate from 63 percent to 80 percent; lower their congestion rate from 3.2 to 2.1; and increase their case completion rate from 32 percent to 48 percent. While not uniform among the participating courts, average performance is considerably better than that of non-participating courts. Qualitative feedback from users shows greater social legitimacy. Because of the priority placed on improving judicial services, and despite the difficulties so far, the Government is committed to moving to a second phase ofthe process with a Judicial Sector Development Loan planned for FY07.
Anti-Corruption. Since the 1990~~successive governments have placed high priority on reducing corruption in Colombia. In the first Uribe presidential term, the Vice President was mandated to spearhead the development of the National Plan Against Corruption. The Commission’s report and action plan was presented in September 2005, building on, among other things, the survey of corruption carried out with the help of WBI in April 2001, the Bank’s Governance Indicators, and technical input from WBI to the commission’s work. During this period, perceptions concerning corruption have improved according to World Bank Governance Indicators cited above and Transparency International ratings. In the case of TI’S rating, Colombia ranked 5gth overall in 2006, with a rating of 3.9, up from 3.6 in 2002. This is better performance than many other countries in Latin America. Nevertheless, these ranking are still low and corruption remains a serious concern: according to the WEF’s Competitiveness Report (2004), corruption was rated the number one obstacle in doing business in Colombia.
Beyond the Bank’s technical support provided to the Vice Presidential commission, the assistance envisaged under the 2002 CAS has failed to materialize. Earlier criticism by the Bank was that the Government’s focus, to that point, had been narrowly on the quality of legal and administrative controls, handling complaints, and the role of control agencies and did not respond to the diagnosis revealed in the 2001 survey. This still seems to be the case, with the Bank continuing to look for a broader, more comprehensive approach. The alternative of working at the sub-national level failed when central authorities would not agree to provide authorization for the sub-national government willing to collaborate with the Bank to take on additional debt. The situation is complicated by the lack of clear institutional home for any anti-corruption initiative. Nevertheless, the ongoing discussion on the Policy Notes (FY07), plus the conclusions of pertinent AAA-Institutional Governance Review (FY07) and Decentralization (FY07)-may revitalize the dialogue.
Monitoring and Evaluation. In contrast to the slow progress in the above areas, the Government and the Bank have advanced fkrther than anticipated in the 2002 CAS on instilling a results-based management culture in the public sector. As confirmed in a recent IEG evaluation ofM&E practices and policies in Latin America, Colombia stands
108 out as a leading case. The mainstay ofthis effort was a dedicated component of the on- going Public Financial Management I1 project, helping the Government to improve and extend Colombia’s performance management system, SINERGIA, to all sector ministries and 170 public entities and to enhance monitoring by civil society. Under the National Development Plan, the Government set the goal of increasing the share ofthe investment budget subject to ex-post evaluations, now reaching 24 percent as of 2006, up from 7 percent in 2002. The Bank has supported this effort by financing individual evaluations in social sector operations, as a way ofbuilding a body of M&E experience that can be replicated and scaled up. The 2005 Progress Report responded to this growing interest by adding a new M&E component to the Governance pillar. The plan now is to proceed with the proposed US$ 1Omillion Monitoring and Evaluation Loan, currently in the lending program. This project is expected to increase the links between‘ results and budgeting, complete the institutionalization of the SINERGIA system, and upgrade the quality ofinformation and data used in measuring performance.
Pillar Four: Building the Foundations of Peace
Overall. The original CAS foresaw the peace process as an essential and integral part ofthe Bank’s program in Colombia with actions embodied in the four pillars. There was no separate peace pillar per se. However, as the country conditions changed, it became apparent that the Bank could have a role in both dealing with the after-effects of the peace negotiations as well as the dislocations caused the ongoing conflict. Thus, the 2005 Progress Report consolidated the various actions under separate pillars and added new activities to form a new Peace pillar. As highlighted in the Progress Report and in the Government’s assessment of its National Development Plan, this is an area of considerable improvement, with numerous statistics demonstrating how security conditions have changed.
The Bank’s contribution to that process were indirect but important, both at the general level-helping to restore macro-economic confidence-and specific-the piloting of new ways to collaborate peacehlly and to plan and execute community development programs, focusing on those most affected by the conflicts. The fact that approach developed under the two Magdalena Medio projects have been adopted by the Government as its national strategy and has attracted EU financing under its Peace Laboratories program attests to the impact of these operations. The new Peace Pillar is tentative, subject to maintaining improved security conditions. It focuses on scaling up the Peace and Development approach and on learning. The following describes the main elements ofthe Peace Pillar as it now stands:
0 Peace and Development: The first operation under the Peace and Development APL (US$30 million, approved FY04) expands the approach to collaborative community development piloted under the Magdalena Medio LILs. It extends the approach to six areas encompassing 3 million persons, as compared to 800,000 under the LILs. Within that population, it targets vulnerable, poor and displaced families and provides support for restoringhuilding assets, accessing social services, and improving living conditions (e.g. basic food production, sanitation). So far, progress has been slow but
109 going in the right direction. It is expected that the second phase, also for US30 million, will follow in the coming CAS. Further work is also anticipated on understanding better the needs of displaced populations and the impact ofviolence on vulnerable groups. Integrating Former Combatants: The Government’s strategy has focused on encouraging paramilitary groups to give up their arms and revert to civilian livelihoods, with the expectation that the reduced number of combatants on one side will increase pressure on the guerrilla movement commensurately reduce its engagement. So far, the strategy has produced positive results, as described elsewhere, even though the situation continues to be fragile. However, the integration of former combatants in Colombia, as in other conflict situations, presents challenges. The Bank’s response is to help the Government devise a strategy based on AAA drawing out the lessons of other countries and an assessment of what Colombia has done so far. These lessons could form the basis for Wher engagement. The study is currently underway. Rebuilding the Presence of the State: One of the serious negative effects of the ongoing conflict has been the retraction ofthe state from areas ofconflict. People are left to their own devices. At this stage, the idea is to study how best to build capacity of local administrations previously paralyzed by violence and social capital. At this stage, no specific activity is underway. Forced Displacement: The 2002 CAS envisioned that the Bank would support a pilot intervention, using Japanese grant funds, to help the people displaced by conflicts and carry out ESW on their conditions. Most of the 2.8 million displaced are poor (but not exclusively) and more than likely to be indigenous or Afro- Colombian descent. The Government faced a conundrum: was it better to support resettlement in new locations or to wait until it might be auspicious to return home? Another question was how to protect the assets that the displaced left behind. There was no generally accepted answer. As a result, the Bank and the Government decided on three steps: first, to concentrate on integrating social services (including those supported under Bank-financed operations in the social sectors as discussed above) for the displaced persons; second, provide direct support under the Peace and Development APL; and, third, to start a systematic process ofknowledge building. So far, special quotas have been set for displaced people to be included in the conditional grant program, Familias en Accion, subsidized health insurance and school enrollment. Further analytical work is underway to sort out the best way to provide incentives for these people to return to their homes and/or to protect their assets during their absence.
Measuring Bank Performance
Overall, the Bank Group’s performance under the 2002 CAS is rated satisfactory. This conclusion is based on: (i)the positive country level indicators to which the Bank and IFC have contributed directly and indirectly; (ii)the quality of the outcomes of the Bank’s specific products and services; and (iii)the continuing progress of on-going operations and investments. The strength of the Bank Group’s contribution rests in the overall achievements in the macro-economic sphere, contributing to poverty reduction,
110 strengthening the financial sector, promotion of competitiveness and the private sector, delivery of urban public services, improvements to access to social services, plus increased financing and targeting of social spending and attention to social protection. Not least are the Bank’s contributions to sustainable development and, indirectly, to the peace process. The scaling up of Bank-financed pilot operations and the national adoption ofpolicies and programs that have emerged from the results ofBank support are particularly strong indicators of the impact of the Bank’s work in Colombia. These achievements are off set by the persistent fiscal imbalances and misalignments, the lack of progress in reaching Colombia’s rural and extreme poor, and slow progress in addressing the chronic problems of corruption and deficient judicial services.
Delivew of Services. The 2002-2006 period has been one of considerable expansion ofthe Bank Group’s support for Colombia. A variety of instruments were used: DPLs, investment loans, TALs, grants, and AAA. Programmatic DPLs have constituted the mainstay of the program, with quick disbursing funds representing about 60 percent of total lending over the period. In the case ofthe World Bank Institute, Colombia has not been a regional focal country; its activities have diminished during the CAS period, with the exception of early technical support for the deliberations of the Vice-presidential Commission on Anti-corruption. On the side of the Bank, lending increased from average of about US$370 million per year during FY97 to FY02 (including a substantial increase in FYOO to help cope with the 1999 crisis and the earthquake) to an average of US$721 million per year from FY03 to FY06, peaking at US$ 912 million in FY05. Working within the original CAS envelop ofUS$3.3 billion, the program has remained in the high case. Total lending through FY06 amounted to US$2.9 billion, keeping the Bank’s exposure in Colombia to about 4 percent of total Bank outstanding loans. The 2005 CAS Progress Report anticipated an additional US$1.2 billion of lending in FY07. The quality ofthe portfolio is excellent, as described below, and outcomes, as confirmed by IEG, are largely satisfactory with substantial contributions made to institution building.
Business has similarly increased for IFC: between January 2003 and September 2006, IFC invested a total of US$ 413 million for its own account. The investment commitments in FY06 reached US$ 291 million, the highest level in any given year for Colombia, as investment activity picked up due to favorable domestic prospect and external conditions. IFC’s total committed portfolio at the end-FY06 stood at US$ 504 million, the fourth largest country exposure in Latin America after Brazil, Mexico and Argentina. The quality ofthe portfolio is good with no non-performing loans (NPLs) and loss provisions during the last three fiscal years. MIGA, with only one outstanding guarantee, similarly does not face any portfolio problems.
Oualitv of Products and Services. The record of Bank operations completed during the CAS period has been good, with outcome ratings higher than Colombia’s historical experience and the Bank’s overall average, and in line with experience in the rest of the Latin American Region (ref: IEG’s ARDE and Development Effectiveness Reports). There also appears to be synergy and mutual reinforcement between the Bank’s lending operations and the AAA program. Several IEG project evaluations have commented on
111 the importance of solid A4A underpinning the success ofthe Bank’s lending operations. An area that warrants comment for the new CAS is the lack ofconsistency in the way the Bank measures and monitors poverty and other MDGs. In the case of Colombia, there is no consensus on the most appropriate poverty measure and there have been inconsistencies and mistakes in the Bank’s analyses. The Bank’s latest poverty assessment (ongoing) reveals differences between the way that the Bank calculates the absolute poverty (US$1 and US$2 per day). Different Bank documents, moreover, use different measures and these measures are not always consistent with country measures. The new CAS is an opportunity to resolve these differences and to start on the basis of population figures using the 2005 census.
Of 24 Bank operations completed, thus far during the CAS period, only four operations have been rated as not meeting their objectives: the Community Works and Employment loan (unsatisfactory rating not yet confirmed by IEG), the FIAL I11 loan, after two triggers for policy agreements to move forward with the series were not met, and the Financial Market Development loan and the Financial Sector Adjustment loan, both of which had been originally rated as satisfactory or moderately satisfactory, but since been down graded to moderately unsatisfactory by IEG in its project performance audits. Five operations have been rated by IEG as having moderately satisfactory outcomes: the Antioquia Education loan, the FIAL Iand I1 loans, the first programmatic Financial Sector Adjustment loan, and the Structural Fiscal Adjustment loan. One operation, the first PLaRSSAL loan, was rated as highly satisfactory. ICRs are pending for six closed operations: the PLsRSSAL 111, the Justice LILY the Sustainable Development IDPL, the Business Productivity IDPL, the Cundinamarca Education Quality loan, and the Rural Education IAPL. In the case of DPLs, there is some lack of clarity on whether or not these operations require simplified ICRs at the close of each one, or only one comprehensive evaluation at the end of the series. Either option might not prove adequate for purposes ofvalidating the overall direction and scope ofthe series and some form of interim evaluation or accompanying ESW might be explored in the next CAS.
Other measures ofperformance are equally good. Bank operations are considered as having made modest to substantial or high impacts on institutional capacity and, where evaluated, all are considered likely or highly likely to be sustained with the exception of the Santa Fe Water Supply loan, as the fimdamental institutional reforms were not forthcoming and the Community Works and Employment loan. Bank performance, with the exception of the Community Works and Employment loan and the FIAL I11 loan, has consistently been considered satisfactory.
As of FY07, all 24 ongoing operations as of FY07-15 Bank loans, 8 GEF grants, and one policy-based guarantee (approved under the previous CAS)-are performing well. In the case of the Bank’s exposure, there do not appear to be any implementation concerns, as demonstrated in Table 4. The portfolio is relatively young, with an average of 3.3 years since approval. Indicators of the portfolio are positive, with a nil level of problem projects, rapid rates of disbursement, few inherent risks-only four projects have any risk flags, mostly delays in implementation-and compliance with fiduciary
112 requirements. Feedback from the Bank’s procurement group indicates that there are no major procurement concerns under Bank-financed projects. In terms of quality of entry, there do not seem to be any recurring, significant issues. Nor does there seem to have been any adverse impacts ofBank Group operations: in the case ofthe Inspection Panel complaint concerning the Cartagena Water Supply and Sanitation loan, as agreed with the Panel, steps were taken to further verify and strengthen the project’s design and to take precautions to ensure that the needs ofa previously unidentified affected population were addressed before the sewerage plant was completed.
Implementation Policies and Procedures. One ofthe major changes that has occurred during the CAS period is the shift to country systems and to 100 percent Bank financing. The Bank also dropped the requirement for no more than 60 percent quick disbursing financing and shifted to an upper limit on Bank exposure in Colombia to a maximum of4 percent of the Bank’s total loan portfolio. Colombia was the first Bank borrower to be eligible under the 2004 new Expenditure Eligibility Policy. The Bank’s reluctance to use special accounts, a chronic complaint from the Government, has also been reversed. At this point, the use ofcountry systems for procurement is still not feasible pending further reform ofthe domestic procurement system to meet Bank criteria. The reaction of local authorities to these changes has been positive and, while the evidence is not conclusive, the upward trend in disbursement since FY04 seems to support the conclusion that these changes have eased implementation procedures and processes. The greater fiscal space provided for investments in Colombia’s budgets is another factor facilitating the pace of disbursement.
Promam Costs. Table 5 shows that the cost of the Bank’s program in Colombia, as compared to other large countries in the region and countries with similar levels of development and program size, is in the middle of the road. It ranked 5th out of eight comparators in terms of average costs of supervision, lending and AAA products.
113 Table 5: Comparative Costs of Bank Program (FY05-06)
Country Dialogue and Aid Coordination. Colombia is a middle income country with strong institutional capacity in the core sectors of its administration. This not only facilitates country dialogue, but means that the Bank’s analytical contribution and knowledge sharing, via AAA and other instruments, tends to find a keen audience among public officials. It also means that the Bank’s program tends to be demand driven. The central coordination and filtering functions are effectively carried out by the National Planning Department and the Ministry of Finance, with lending programs and borrowing capacity divided among the Bank, IDB and CAF. In that context, the competitiveness of the Bank both in terms of financial costs and its processing time and complexity can be a determining factor in the demand for Bank Group assistance. In addition, Colombia is highly committed to citizen participation and has a robust civil society, reducing the need for the Bank on its own, to ensure that voice ofthe people are heard. That said, the Bank still needs to hear for itself concerns and perceptions of those directly affected by Bank financed operations and the design and implementation ofthe CAS.
7. Lessons for Future Country Partnership Strategies
This evaluation demonstrates the benefits of solid analytical work and effective and flexible country collaboration. Lessons that might be useful for the preparation and design ofthe coming Country Partnership Strategy are as follows:
Exercising Fiduciary Responsibilities
The Bank, along with the IMF, has a fiduciary responsibility, especially on debt sustainability, fiscal performance, the financial sector, and monitoring of public expenditures, poverty and the MDGs to which the Bank should remain committed. In the case of Colombia, the Bank was effective in keeping issues on the front burner once the worst ofthe 1999 crisis was over.
Tempering Zeal with Realism
New administrations tend to have ambitious plans, as was the case of the first Uribe Administration’s initial approach to fiscal and institutional reforms. In retrospect, it
114 may not have been realistic to agree-in the early months of a new administration- to policy triggers, covering action four years ahead. In fact, many reforms confronted serious legal and political hurtles and have taken longer than originally anticipated. On the other hand, the Bank cannot stand in the way, so this lesson is nuanced to specific country circumstances.
Setting Targets and Carrying out Intermediate Evaluations of Programmatic Loans
Programmatic operations may pose a challenge in terms of agreeing ex-ante to triggers and measuring impacts, To the extent possible, expected outcomes should be established at the start. Ex-post, individual evaluations of each loan in the series as they are completed might be too short term a time frame for impacts to be realized. Some form of mid-way, intermediate assessment and/or ESW might be needed to reconfirm the direction and/or make mid-term corrections.
Buildingon What Works
Looking broadly at where the Bank has been effective in Colombia, working in sectors with a history of Bank involvement and with established institutional responsibilities and capacities seem to work best in Colombia. This argues for continuing an evolving, programmatic approach and concentrating on and deepening those areas with continuity from one CAS to another.
Building Consensus and Institutional Homes for New Initiatives
0 The lack of progress in areas such as anti-corruption and judicial reform calls for rethinking the Bank’s approach to new initiatives. The analytical ground for an initiative needs to be solidly and convincingly established and the institutional base established ex-ante. For the new CAS, the lesson might be prior ESW and consensus building plus continuing investment to inform policy makers and the public during implementation ofpilot operations so that the growing evidence ofwhat works can be shared with a larger audience.
Refocusing on the Rural Sector: Closing the Gaps
0 A new approach to the rural sector, with attendant attention to Colombia’s extremely poor and marginalized, may be timely, as the security picture improves. It was a priority in the 2002 CAS but little materialized in terms of specific lending. Nevertheless, the Bank undertook ample analysis of the sector: the policy notes for the CAS and other analytical work have provided evidence that the rural sector was important, dynamic, and disadvantaged. Importantly, the Bank has supported a number of successhl pilot rural development and peace initiatives which could be scaled up. Looking ahead, it may be helpful to segment strategies across rural and urban sub-groups as was done in education. Other sectors amenable to this approach are housing, water and sanitation-typified by the La Guajira Project now under preparation-and transport.
115 Relying on Local Capacity
Colombia, as a Middle Income Country, is capable of assuming the lead in developing and implementing the CAS in ways that other countries might not. This is particularly the case in participation. The Bank can ‘piggy-back‘’ on those efforts rather than do own parallel exercise. Moreover, the case of Colombia demonstrates that MICs with solid institutional capacity can be entrusted to use country based systems.
Retaining Flexibility
Another hallmark ofworking with a Middle Income Country is flexibility. The Bank has been flexible is responding to Colombia’s changing economic and social conditions especially as the country’s conditions improved beyond what was expected and when some aspects of the original CAS were not feasible and/or did not enjoy full ownership. The CAS Progress Report is an example of how to accommodate MIC needs and conditions. This is an attribute which should be carried over to the next CAS.
Synchronizing Timing and Monitoring of Development Planning Instruments
The 2002 CAS was prepared at a critical moment in Colombia, compounded by transitions at senior levels in both the Bank and the Government. The benefit of preparing the CAS quickly was its timely assistance to the country. But the cost was a lack of internalization and reinforcement among the key development strategy instruments that the country employs, notably the National Development Plan, and a lack of common monitoring definitions, tools and benchmarks. Admittedly, development is an evolving process and new needs can be address over time. The new CAS is the opportunity to avoid the gaps in timing and to focus on results.
Internalizing Equity and Meaningfiully Measuring Poverty
The Bank’s efforts at internalizing equity considerations into its operations and analytical work, while taking a different track, seem to have energized Bank staff and local authorities to take up the concerns of the extremely poor and marginalized as part ofa growing M&E culture. This momentum can be elevated to the next stage by generalizing analysis of equity, not just in social sector and GEF operations, but in other proposed policies. In addition, agreement on targets presumes agreement on methodologies for measuring poverty, among other indicators, which is now lacking. The focus of targeted programs, moreover, can be tightened with continued refinement of Colombia’s system ofclassifying eligible beneficiaries.
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