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World Bank Document Report No. 7891 -CO Colombia Public SectorExpenditure Review January15, 1991 Public Disclosure Authorized LatinAn-erica and the CaribbeanRegion CountryOperations Department: CountryDepartment IlIl FOR OFFICIAL UJS' ONLY Public Disclosure Authorized Public Disclosure Authorized 'Documentof the WorldBank Public Disclosure Authorized 1hisdocument has a restricteddistribution and maybe usedby recipients only in the performanceof their official duties.Its contentsmay not otherwise be disckl.sedwithout World Bankauthorization. FISCAL YEAR January 1 to December 31 CURRENCYEQUIVALENTS Currency Unit: Peso (Col$) Exchange Rate as of: December 1, 1989 = US$1.0C = Col$424 December 1, 1990 = US$1.00 = Col$557 ACRONYMS BDP Banco de Proyectos CAIP Centro de Atenci6n Integral al Prescolar CAJANAL Caja Nacional de Previsi6n CFT Corporaci6n Financiera de Transporte CONPES Consejo Nacional de Politica Econ6mica y Social CORELCA Corporaci6n Eldctrica del Atlantico CSPF Consejo Superior de Politica Fiscal CVC Corporaci6n Regional del Valle del Cauca DNP Departamento Nacional de Planeaci6n ECOPETROL Empresa Colonbiana de Petr6leos EEEB Empresa de Energia EMPOS Empresas Municipales EPM Empresa Plablica de Medellin FEDESARROLLO Fundaci6n para la Educaci6n Superior y Desarrollo FEN Financiera Electrica Nacional FER Fondos Educativos Regionales FNC Fordo Nacional de Cafe FNCV Fondo Nacional de Caminos Vecinales FVN Fondo Vial Nacional HISP Health Integration Services Project ICBF Instituto Colombiano de Bienestar Familiar ICEL Instituto Colombiano de Energia Electrica IFI Instituto de Fomento Industrial ISA Interconexi6n Electrica, S.A. ISS Instituto de Seguridad Social IVA Impuesto al Valor Agregado JNT Junta Nacional de Tarifas MME Ministerio de Minas y Erergia MS Ministerio de Salud PROEXPO Fondo de Promoci6n de Exportaci6n PSAL Power Sector Acjustment Loan PSAP Power Sector Adjustment Program PSSC Power Sector Superior Council RDES Rentas de Destinaci6n Especifica RSNS Reorganizaci6n del Sistema Nacional de Salud SENA Servicio Nacional de Aprendizaje SSS Servicios de Salud Seccionales FOR OFFICIALUSE ONLY Table of Contents Page No. EXECUTIVE SUMMARY................. i CHAPTER I INTRODUCTION. 1 CHAPTER II MANAGEABILITY OF PUBLIC EXPENDITURE .5 A. Administration of Public Expenditures and Efficiency.... 5 B. Inefficient Planning and Budget Process. 5 Contradictory Regulations. 8 Limited Budget Coverage. 8 C. Reforms Undertaken l.1 Organic Law of the Budget l.1 Decentralization .14 Coffee Fund .15 Railroads .16 Procurement Statute .17 Other Initiatives .................................... 17 D. The Need for Further Rrf-iXrms: Administrative Reorganization u. the Public Sector ..................17 CHAPTER III EARMARKINGOF GOVERNMENTREVENUES ........................ 19 A. General Definition ................... 19 B. Trends in the Size and Structure of Earmarking (1970-87).19 Size ati Structure of Earmarking .19 The Effects of Law 55 (1985).21 Consideration of Social Security and Public Enterprise Profits .23 C. The Experience of Earmarking .24 The Origins of Earmarking .24 Recommendations of Previous Government Commissions .25 D. An Evaluation of Earmarking .27 Revenue Sharing............... 27 National Government Level Earmarking ................. 32 Departmental Earmarking .............................. 38 Municipal Level Earmarking .39 Payroll Taxes.41 E. Summary and Recommendations .44 This report is based on the findings of a mission that visited Colombia in October 1988. The missicn was led by Mr. Luis Ramirez and comprised Messrs. L.J. Vasquez, William McCleary, and consultants D. Adkins and Salles. Messrs. A. Covarrubias and A. Raizen (consultant) also contributed to this report, but did not participate in the mission. Ms. Laura Santalla provided secretarial assistance irn the preparation of the entire report; Ms. K. Scalzulli asisted in the final stages. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - 2 - CHAPTER IV POWER SECTOR.......................................... 49 A. Overview .......................................... 49 13. Organization and Institutions ..........................50 C. Power Demand .......................................... 54 D. Demand Forecast ........................................ 55 E. Power Supply .......................................... 56 F. Electricity Losses ..................................... 57 G. Sector Planning ........................................ 58 H. Investment Program .....................................60 Period 1989-1992....................................60 Generation .......................................... 60 Transmission .........................................61 Subtransmission and Distribution .....................62 Studies and Training .................................62 Investment Program 1993-1996 ......................... 63 Financing of the Investment Program ..................64 I. Recommendations ........................................ 68 CHAPTER V HEALTH .......................................... '0 A. Health Conditionq ........................ 70 The Health System ................................... 71 B. Structure and Strategy of the Health System ............ 72 Coverage ............................................ 72 The Government System ................................ 72 The Social Security Subsector .74 Integration of the Public .ealth Sector .76 C. The Government's Program Goals Compared to Implementation ........................................ 77 The "Basic Health for All' Program ................... 77 Actual Performance vs. Planned Expenditure Targets ...78 Actual Performance vs. Planned Financing Targets ..... 79 Planning for Basic Health Expansion .................. 80 D. The Financing of Expanded Health Care .................. 81 Earmarked Taxes and Revenues in Health ............... 81 The Financing of Expanded Health Care ................82 E. Impact of Past Deficiencies in the Budgetary Process on Health Programs ................... 86 F. Conclusions ................... 88 - 3 - CHAPTER VI EDUCATION ................................................ 91 A. The Educational System................................. 91 Resource Mobilization for Education in Colombia ...... 93 B. The Government's Primary Education Goals Compared to Implenentation.93 The Gap in Primary Education .93 The Escuela Nueva Program .94 The "Basic Education for All" Program .95 Actual Performance vs. Planned Expenditure Targets .96 Actual Performance vs. Planned Financing Targets . 97 C. The Government's New Investment Program for Primary Education ..................................... 98 D. Domestic Sources of Finance in Education ............... 98 Ordinary Budget Appropriations and the Situado Fiscal ....................................... 99 Earmarked Taxes and Other Earmarked Revenues ......... 100 Reform of the Education System .......................101 Cost Recovery and Privatization in Higher Education ..........................................101 E. Conclusions .......... 104 ANNEX I.106 ...................................................... STATISTICAL APPENDIX - i - Public Sector ExpenditureReview Executive Summary 1. Colombia's low level of productivity growth is limiting its capacity for long term economic development. To use domestic savings and net foreign inflows productively the country will have to improve substantially the overall productivity of investment. As suggested in the Country Economic 'Memorandum on Colombia, private sector savings and capital productivity can be enhan ed throuigh a variety of measures.1 In contrast, this report focuses on the capacity to increase savings and to improve the efficiency of expenditures in the public sector. Improving the efficiency of resources in the public se-tor will require significant reforms ir public administration. The Government of Colombia is aware of the neeci for these reforms and has expressed serious intentions to undertake them. Important measures have been taken in the area of taxation and of deficit control. However, management of public expenditures continues to be weak. Conscious of this weakness, the Barco administration, after several years of negotiations, was successful in securing Congressi-onal approval of a new Organic Law of the Budget. This important piece of legislation has the potential to improve significantly public sector management and to reduce the inefficiency of expenditures. The Executive begun reorganizing the administration of the public sector to implement the new law. Administrative reorganization and implementation of the Budget Law are now the key issues. 2. The primary goal of public sector expenditure reviews (PSER's) undertaken by the Bank is to provide an objective analysis of and hence recommendations to governments on how to increase efficiency by altering the level and composition of public expenditures. In Colombia, the size and composition of public expenditures has been difficult to control. The Central Government has traditionally had little power and few legal or institutional mechanisms to reallocate expenditures as needed. The primary goal of this PSER, therefore, is to analyze: (i) the degree of this lack of control over public expenditures, (ii) the progress achieved by the Colombian authorities towards increasing control and improving management of public expenditures, and (iii) the main reforms required
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