Document of JL Be vw orldu EMUi Report No. 24489 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT D1 n.() A MA TArn ThATPlJT FOR A PROPOSED SOCIAL SECTOR ADJUSTMENT LOAN IN THE AMOUNT OF US$155 MILLION TO THE REPUBLIC OF COLOMBIA June 18.2002 Human Development Department Colombia, Mexico and Venezuela Country Management Unit Latin America and the Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective October 25, 2001) Currency Unit = Colombian Pesos (COP) Lr. f :_n r t~ AA tAf _ TTCf1 flA UUIVULU rvu 5'R,J .V.VV - U13.'VU US$0.00042735 = 1 Colormbian Peso FISCAL YEAR January 1 - Decemnber 31 ABBREVIATIONS AND ACRONYMS ARS |Admnistrdora del Rigimen Subsidiado INS National Institute of Health ^Ub auivuejunwas unlaa= ae L mUlam I.N Ur, 14ariaonal wsustu of nuciai muen nousmg anu Urban Reform BTOR Back-to-Office Report - IPS Instisucion Prestadora de Salud CAIP ] Centers of Integrated Attention for Pre-School Children _ISA I International Standards on AUDTITNG CAS Country Assistance Strategy ISS Social Security Institute 'no-rn. LULMJU" 4y ^ &hI, a;tfins = _ .T n.^ vIRe.u . fA L.l. LUUU tUUCIL. 4UU tAlC L-UfelOUl acwui CFAA Country Financial Accountability Assessment LDP Letter of Development Policy CMU Country Management Unit _MEN IMinistry of Education CONPES Consejo Nacional de PoliticaEconomicay Social ____MOF | MinistryofFinanc CPAR I Country Procurement Assessment Report MOH Ministry of Health I______ C lods ej Naia P'taecosy S -c V-.4- ^Ngial PN FincSeo DN ________ Departaento Adminissrasivo Nacional de Estadistica .OPV Organciones Privadas Voluntarias I _ t _ en_ _ __in_ 1a _vo_ci_ _ _ DNP Department of National Planning PAC Plan Anual de Caja DTP?3 Diphtheria^Tetanus^Pertussis Vaccine ..... . .............................. PACES Program for Expanding Coverage of Secondary . - Education IRT DiphthriTn d o Zehnr-rss Vaccinena/ IV PATCE I P-an m Health Oamiwni EN Escuela Nueva PFMPW I Public Financial Management Project EPIIPAI Expanded Immunization Program QAG I Quality Assurance Group EPS IEmresas Promotoras de Salud QER j Quality Enhancemnent Review I FARC I Fuenas Armadas Revolucionarias de Colombia RAS Red deApoyo Social I Frpr I Fnndn dp rnm,mnp,,eniAn 1 . I I R_dd SolAda.ldad Scial I FINDETER Fiacierade Desarrollo Territorial SABER National Evaluation System for the Quality of I_ _ _ __ _ I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ _ - . . ._ . . _ _ _ I Education I tWAFiN I anking ZSupenntendency and Financial Guarantee ISAT I Sitema deAprendizae Tutorial I FOSYGA IFondo de Solidaridady Garanda I SDR [ Special Drawing Rights I FSAL I Financial Sector Adiustment Loan I SECAL I Social Sector Adiusment T nan | GDP | GroDss Dornestic Product !NZ.. I.S.e.....v...i|cSENA Seraiclioaclnal de Aprndizaje J GOC I Govenunent of Colombia ISFAL 4 Structural Fiscal Adjustmnent Loan B i nternatLonal Bank tor Reconstruction and Development I SGP l Sisteia General de Participaciones IICBF I Colombian Institute for Family Welfare SIIF Integrated Financial Management Sytem I DB I Tnter-Amerin Develonnent Bank I SNER.TLA I NationalvswtenmforEvalationnof Results ofPulilic I I I I Sector Performance I IDF InsttutionalDevelopment Facility ISISBEN I Sstema de Selecci4n de Beneficiarios I_ _ Ins mtetnaily espitceco ropuiation INSS I Natronat Pysem ot sociai secuty tiealtti | IFI | Intemational Finance institutions UNESCO/ United Nations Educational, Scientific and Cultimrl I___________________________ _ I IOREALC Oranization Intematiotal Monetary Fund |WBG -- World Bank Group Vice President: David de Ferranti Country Managemenvt/Trector: Oiivier Lafourcade Director: Ana-Maria An-iagada Task Team Leader: Vicente Paqueo This SECAL core team consists of: Vicente Paqueo (Task Team Leader, LCSHS), Laura Rawlinpgs (Deputy TLL, | LCSHS), Ana-Maria Arriagada (LCSHD), Eduardo Velez Bustillo (LCCIC), Fernando Rojas (LCSPS), Vance Dietz I (PAHO), Jairo Arboleda (LCCCO), Panagiota Panopoulou (Consultant), Vicente Fretes-Cibils (LCC1A), Karla | McEvoy (LCSHS), Alejandro Yepes (LCSHS), and Margarita Lannon (LCSHS). Valuable contributions and advice I ~ ~ ~i..I.. /T 'f't A \ T.._ nl,-1. TTt.."~Q IT '~T1 4--t- T .1... -L I QT r.TTI |C were rcived .^I om Marelo;Va 'eugatu IC:AA. If), JUablo rUI I Ufite IvLA f, Maf a zia Ear F..utILVc A.O1rX), Car:os I Eduardo Velez (LCSPP), Gina Tambini (PAHO), Connie Luff (LCCIC), and Zeinab Partow (LCCIC). Peer 3 I Reviewers are: Shantavanan Devaraian (HDNVP). Margaret Grosh (HDNSP). and Lvnne Sherburne-Benz (HDNSP). U TABLE OF CONTENTS Page LO.AN AND PROCRAM SU .I. ..A.. .1 INTRODUCTION .. 3 1. THE ECONOMIC CONTEXT ..................................................... . . 5 A. POVERTY, ECONOMIC SETBACK AND CONFLICT ................................................5 B. MACROECONOMIC PERspEcTIvE...................................................................................................7 2. THE SOCIAL SECTOR: PERFORMANCE AND CHALLENGES ................................................. 13 A. AN OVERVIEW OF PUBLIC SOCLAL SPENDING ..................................................... 13 B. SUBSECTORAL ISSUES..................................................... 15 (1) SoCIAL SAFETY NET ...................................................... 15 (2) THE HEALTH SYSTEM ..................................................... 17 (3) EDUCATION ..................................................... 20 (4) EMPLOYMENT AND TANNG ..................................................... 22 (5) TRANSPARENCY AND CITIZENS' OVERSIGHT OF SOCIAL PROGRAMS ............................................ 23 3. THE GOVERNMENT REFORM PROGRAM ...................................................... 24 (1) SOCIAL SA?ETY NET ........................................ . . . ... 25 (2) EDUCATION AND TRANING ............................................2......... 26 (~3) viEALn l. 28 (4) TRANSPARENCY AND CITIENS' OVERSIGHT ..................................31........... .. 31 4. THE SOCIAL SECTOR ADJUSTMENT LOAN (SECAL) .. 32 A. O jcT.irvr s A1D CoNTEw ...,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, . 32 B. FISCAL, TIMNG AND OTHERRE;KS ....................................................................................................... 37 C. I OAN AMOI1NT; CONDITIONS. FiNANCAL SAF C7IJARn AND DTswYRsU1MRN Ts AND AirDn--------------- 38 S. BANK STRATEGY . ............................... 4 ........................................................................., 41 A. THE CAS AND THE PROPOSED SECAL ..................... 41 B. COMPLEMENTARrrY WITH OTHER WORLD BANK OPERATIONS AND ACTIVITIES .41 C. COMPLEMENTARTY WITH OTHER INSTITUTIONS' OPERAnONS .42 ANNEXES A. The Republic of Colombia - Country Assistance B. External Financing Requirements C. Letters of Commitment and GOC Request for Financial Assistance D1 CiOC Letter of Develonment Policv E. Bank's Medium Term Social Sector Strategy for Colombia F. Cnsultntion Process in Colomnhia and Actinns Rtelatefd tn the Adillutment Lonn G. Specifications, Definitions and Evidence for Tranche Release Conditions H. 1DB Social Sector Adjustmr.ent T oan Map - IBRD 31251 LOAN ANID PROGRAM SUMMARY REPUBLIC OF COLOMBIA SOCIAL SECTOR ADJUSTMENT LOAN (SECAL) Borrower: Republic of Colombia Amount and Terms: US$155 million fixed-spread loan, with automatic interest rate fixing wvhenever disbh1rcPm.etts reach an, agr,reyatp of TTS ! 51 mi!ion;- fina! repayment maturity of 15 years with level repayments of principal, each equivalent to 5 opercent of the lon aounrr.t. Comnmitmernt charge: 0.85 %A$LI V 1t,.LL V S L~. Ij "I%, Ilwl*l ""1U 11UfL. ~.d -LLfiflUILVL t*&LV percent p.a. for the first four years, and 0.75 percent p.a. thereafter. Front- edIU IfV. I peVrcenL1L VI the loUani tlUIVULIL, LU Ur. paJIU by UIth GoUYVerWimen;L oJUL Vo its own finances. Implementing Agency: Ministry of Finance (Public Credit) Description: The proposed SECAL, a one tranche loan intended to be completed before the end of the current Administration on August 7, 2002, is the Bank's response to the current govemment's demonstrated commitment to social sector reforms. The loan would: (i) encourage and enable the current Administration's momentum on several key social reforms that have been developed with active Bank support; (ii) provide an opportunity to influence the social sector agenda of the next Administration; and (iii) help sustain the Government's fiscal program during this calendar year. The operation supports the medium term strategic framework laid out in Table 4.1 and includes among others the following core set of legally binding actions: (i) the introduction of a system of periodic impact/performance evaluation and public monitoring of the Government of Colombia's (GOC) main social sector programs to improve their transparency and citizens' oversight; (ii) the development of a comprehensive Social Risk Management System, improvements in ICBF child assistance nrograms, and formulation of a time-bound action plan to eliminate barriers to internally displaced population's access to social programs; (iii) the expansion of the subsidi7ed health insuranre coverage of the poor, issuance of regulations to implement the new methodology for a!cting tllhealthlk an 0 to t.rletro".gthanlnr of theJA H!Lth Superintendency, and the revitalization of the country's Expanded IJILUIIUIQLGLV1 JPLo znUIL, a (uiv iVv)i"vFlvIiLent of the public edu mtio regulatory framework (including issuance of regulations to implement a new . _1 vl _ . __ -1 _ ---.: ._u_ - -."- a_- A++ II4LIIUUIUg,y UlI dIlUL.4LIl, VUUdL1uII L1Ull1UbIVLW tLU LrILV 1111 VLUL1ltVA allu guiding contracts between public education entities and private providers), establismnent of performance and monitoring agreements betw-een uisc national and selected local governments/Education Secretariats, and more effective dissemination of information regarding education methodologies to improve the education of the poor. The above social strengthening program is the product of sustained colla_hOrfionn oa.nn1ngr (-r, the 1snn ui and the 1DB - a_nd is financed in parallel by the IDB's Social Sector Project. Risks and Benefits: The actions supported by the operation are likely to lead to improvements in pAeAoples 1 kA; - -4- --nsrn fk..^4rn,lo,l,m ^mene ,-lAron onA LA A A %1L ILM5 1U --g,A va. tiAdtfIf 1V)W u -a _s .n is. poor. These would include among others: (i) increased health status and _WCi^ ffIr aC« r _>£rli^ns J^" ^ eApio of L_lU ]IVLUUIUUU 1.1 1jUa11ILM~ IiLD&Z 1jul11 L1ULVO LLUUUU& UIV VApOCJ"IVJU 'JI UVa1U1 insurance coverage, improved managed competition, and the revitalization of 1ne iUimuizatuon program; () greeLrI twuri w UbLeI c'Uu' care programs through incombe-based cost recovery and efficiencies from the decentralization of iCBF programs; and (iii) improved educational status of children through increased efficiency and equity in the allocation of resources. The timing of the loan is an issue posing some risks. Given the upcoming change of government, questions have been raised about the wisdom of presenting the Board with a one-tranche loan to be disbursed by the end of the current Administration's term. The principal concern has been that the new Administration might fail to support or might even reverse the various reform initiatives embodied in the SECAL. This risk factor has been weighed against the benefits of approving the proposed loan under the current Administration. The conclusion is that the expected benefits outweigh the risk for reasons elaborated in Section 4B. Two reasons are noteworthy in this regard. First, various programs supported by the operation (e.g. the expansion of the number of poor people affiliated with the subsidized health insurance regime) are now under implementation and are already providing substantial benefits to their target population. These benefits are unlikely to be reversed. Second. the social strengthening program supported by this loan has strong backing from a wide spectrum of qtnkAehnIders incliIding the incoming Administration which haq indicateA itq agreement to the presentation of the proposed loan to the Board before the rha"na nf oveuprnmn.nf ;cneuie of DL.sbursuMeu1t SAUAS UA «u%LLV. INTRODUCTION i. I submit tor your approval the following report and recommendation on a proposed Social Sector Adjustment Loan (SECAL) to the Republic of Colombia for US$ 155 million in support of the government's social sector development program. The loan will be fixed spread in US Dollars with 15 years maturity including 5 years of grace with a Libor-based variable interest rate ii. The proposed SECAL is a one tranche loan to be conpletwed before the end nf the nr1rrt-nt Administration on August 7, 2002. The loan would: (i) support key social reforms that the current atministrntion has deAvelped uvith actiuve Ba4- support; (ii) n-AAd an ^"",rhm,l.rty . inf. the- ArcA sector agenda of the next Administration; and (iii) help sustain the Government's fiscal program during this caler,a..r year iii. TLhi SEC 1IIIIJUWAL LU LkIm to LI1r a %.uuuC y abbibLanutw strgya wei :l asI Uue s sIhUIL term financial needs and social goals. The proposed SECAL supports the GOC's strong commitment to soun,d fiscal mnanagement and hel,ps provide a financial cushion, t^he need for wnich has become even more pressing as a result of recent developments: the breakdown of the peace process, weak economic growth, and unfavorable financial markets - factors that have combined to increase UGO's financiai needs and raise the price of borrowing from private financial markets. The proposed SECAL also ensures fiscal space for social protection to enhance the sustainability of the fiscal reforms supported by tie recently-approved Bank-supported Structural Fiscal Adjustment Loan (SFAL), a need underscored by the Board in recent discussions on the SFAL. On the social front, the SECAL supports the GOC's ongoing efforts to establish enabling regulations for the implementation of the health and education reforms mandated by the recently approved Law 715. In this regard, the CAS Update recently discussed with the Board confirmed the strategic importance of this SECAL. iv. The proposed SECAL represents the culmination of the Bank's program of social sector strengthening activities initiated with the GOC three years ago. This program consists primarily of three lending operations and two sector studies aimed at improving social protection, human capital development and poverty reduction. Of the three lending operations planned in 1998 for Bank and 1DB financing, two investment loans - the Community Works and Employment Project and Human Capital Protection Project that are part of the Red de Apoyo Social (RAS) emergency safety net program -- are currently under implementation; the third one, intended as an adiustment operation from the start, is the current proposal.! The analytical work consists of the recently completed Colombia Social Safety Net A.sse.ssment and the Colombia Povertv Renort. These studies have not only informed this nronosed operation, but have also stimulated discussions of social sector reform issues within and outside a vernm,i-nt rirnles (see Annex- P on cions1ltRtions) rhese lending operations are complemented by other human capital investment projects, notably the Youth Development LIL, Rural Education, and Decentralization Education Management Projects, which support institutional strengthening and e ..r.enttation wvith mn. ative a,p.o-achhes. for de-a.;ng -A.th issues of violence &-A the education of poor children, ir.clS,i_ children in isolated areas. J v. While the SECAL marks the completion of the above-mentioned package of social sector strengthening activities, it also acts as a bridge to the future. The medium-term policy firamework supported by this loan identifies follow up activities for the incoming Administration that the Bank deems important for the coming years. These activities are summarized in the Policy Matrix (Table 4.1) and the Letter of Development Policy (Annex D). They are further elaborated in Annex E, which lays out the Bank's Colombia Social Sector Strategy for the medium-term. Dialogues with various stakeholders, including the technical teams of leading presidential candidates, indicate strong and broad political support for the operation and its medium-term policy framework. vi. Undertaking this loan in the face of an upcoming change of Administration clearly entails considerable risks. The main concem is the sustainabilitv of the measures supported by the operation, due to the timing of the loan. Various measures have been taken to address those risks, including confirming broad-based supnort for the measures backed by the loan (see Section 4) and obtaining agreement from the incoming Administration. On balance, signaling the value of sustained cooperation and of continued focusl on the social sot.tnr reform issues being addressed by the adusLstment loan outweigh- the risks of approving the proposed loan. vii. This operation, like the loans supporting the Red de Apoyo Social (RAS) safety net program and the recent analyrtical work, is the product of sustaited collabornadon among the GOC, the Bank and the IDB. In fact, the proposed SECAL and IDB's Social Sector Project are financing in parallel the GOC's social setor auJuILLL.nt prograwr.. 4 1 TT1 VANAMTC CrNTET1YT A. Poverty, Economic Setback and Conflict 1. Achievements In growth and poverty reduction. Colombia has benefited from stable growth and low economic volatility. Steady GDP per capita growth averaging 1.8% annually between 1978-1995 brought significant improvements in overall poverty rates (Table 1.1), although growing inequality affected the distribution of the benefits.2 TABLE 1.1. Income Ineaualitv and Povertv Indicators. 1978-1999 1978 1988 1995 1999 N atinnal Poverty rate 80% 65% 60% 64% Pno,vt ap% 32%A9 29 34O/%) OOA. AOL FGT P(2)' 32% 20% 17% 22% --.4- -+- ~A COL M OO/ 1OA L,0 LxALA'.,i. eJpov .Y ME 1GL e 4 /0 If. 2 9 £.io /0 2 3 J/O US$2perdaypoverty2 54% 15% 11% 13% ik - -- :--,, 3 . . IN I on 11 I IC1 Iviva" ULvairV, Pl '.t1pL4IZ. IS 103 SI 4.V Average annual growth rate NA 5.0%* 3.6%** -1.4%*** I,m,~~~~~~~ ~A 1fn14 A If, (G.DP ggrvOwtuh r.1roete 4 .% 5O .2 -4.3%7 Income inequality (Gini) 53% 54% 56% 57% Source: Colombia Poverty Report (velez et al., 2001). 'Foster-Greer-Thorbecke index. 2B3ased on Purchasing Power Pantv Converters from WDI dahase 3 Thousand 1999 pesos, based on monthly household income. * 1978-1988 ** 1988-1995 *** 1995-1999 4 non8 f & 70V"U&V 2. In tue last 70 years, the country experienced only one economic downturn. A recent cross-country study has shown that the probability of the Colombian economy entering episodes of "high volatility" in the last 30 years was close to zero.3 Steady economic growth afiorded Colombia poverty reduction as well as marked improvements in health and education (see Section 2 below). 3. At the heart of this remarkable performance was Colombia's prudent economic management that allowed it to steadily accumulate and mobilize human and physical capital, resulting in high productivity and employment. Colombia's simultaneous support of employment and GDP growth was crucial to poverty reduction.4 2The tight connection between GDP growth and poverty in Colombia is documented in Annex C of the SFAL. 3Rodrikt D. "Why is there so much Economic Insecurity in Latin AmericaT' World Bank mnimen. October 1999. 4 The critical relationship between growth, unemployment and poverty is indicated by the enormous effect of household head's unemployment on poverty. In urban areas poverty is 25 percentage points higher if the head used to work and is presently unemployed (the nexus between poverty and employment/income growth is discussed in Annex D of World Bank SFAL, 2001). 5 4. Economic setbacks and their consequences. In 1999 Colombia experienced its most severe ----- J 1_ _ - -- - I ! - A ~fl/ -_~ - _ j ---J _ . recession in 70 yeYU, likirKeU Dy a udcline of 4.3O in Gir and accompanied by a growing deficit, with the combined public sector balance reaching 5.5% of GDP. This shock had its origin in several factors discussed below thai resuited in the deterioration of key social indicators. Tne downturn in economic growth, the high unemployment rate, and the continued widening of income inequality combined to dramatically reverse the reduction in poverty achieved over the past two decades, as shown in Tabie 1. 1. Between 1995 and 1999, poverty rates rose four percentage points and extreme poverty rates rose by two percentage points. This reversal is disappointing, considering that even at its lowest in the mid-nineties 60% of the population remained poor. The severity of poverty increased as well, particularly in urban areas, where the poverty gap rose from 19% to 26% from 1995 to 1999.5 5. The recent crisis did not leave rural areas unaffected. Even though the rural poverty headcount measure remained relatively stable, this masks the deterioration in the depth of poverty as marked by the increase in the poverty gap from 40% to 44% between 1995 and 1999. 6. A closer look at the impact of the economic downturn, using results of a 1999 survey, when the economic recession was strongest, indicates that while 37% of the households in the sample registered a negative income shock, 54% modified their consumption habits in varying degrees, depending on their savings/wealth and access to credit.6 It was found also that poor households are more vulnerable. in that they are more likely to be affected by negative income or consumption shocks (Figure 1.1). FIGURE: 1.1 Probability of a Reduction in Economic Weli-being by Quintile I 70%- 60% . = l l I 50%J1 \ I 40% [ __ Consumotion 30% - _ Income+other 20% 1 ~ I 20%j 1K I I Pmhahilitv 1 2 3 4 5 I _, Quintiles J Source: Gaviria, 2000. 5The severity of poverty is measured by the poverty gap which indicates how far the poor are below the poverty line vrsreipctina thelj et nf n1Iirina the minimi m rAnrirc iintnitp. nhii an nllnuv nne fnr hasic iinn-foo necessi_; See Gaviria 2000 for results of the Encuesta Social survey conducted in Colombia's 4 main cities in 1999. Twenty- one nercent (21%) of randomlv samoled households renorted having savinas available to draw unnn in the farce nf income reductions and 17% acquired some type of debt. v 6 One reason is that poorer households are less likely to have access to savings and credit, as indicated by the 'income + other' line denoting the probability of an income shock by poverty quintile for. households with access to savings and/or credit. 7. As illustrated in Figure 1.1, the probability of a reduction in consumption is approximately 20 percentage points higher for the four lowest quintiles as compared to the wealthiest quintile. The same survey further found that the probability of a household member dropping out of school is 8 percentage points higher in those households that reported a negative income shock that in those that did not. This result underscores one of the negative human development impacts of the recent economic setbacks. Section 2 further discusses how the weakening of the economy has affected the education. health care, and nutrition status of the population. 8. Structural weakening. There are various reasons for the economic reversal. Part of the explanation ic that Conlnm.ia's notable - onoi-nnni re-pror in the past mr..ase irmportant stimr-^tiiral T%rnhlpm.. .whir-h in, conjunction with extemal shocks and the emergence of forces undermining prudent fiscal and financial ma no an'anere-t, eernOl. .o1 x, produced a sha.p de.eror nat n ;un tim nannn,,,y *hJanab,,i~ihI.,c -A I QA . --+- _ A :L _ 1 .A' A__ i -- ASJ-%- %Jflf- lJ _ . __1 7. OALLUr, 1X1 UII; J.UU-17.7V;J, VUiiiui 1UCl a PaCl VU isc1 OLU LaIUiG.liU1 m1UaL MUALL. v.1u UIV AiOalOi side, key determinants of the imbalance include the progressive weakening of fiscal discipline brought abut Uy -uiurbleu uUD-11uwuUti1 spendi,,g, uhe SubsLtttiOn of L-;uflent f101r capitaLl UexpVenditures a Iisimg inefficiency in the delivery of social services. The financial imbalance, on the other hand, was caused by weaknesses in the banking sector. lO. With those critical structural weaknesses in tne government accounts and the financial sector, the country was vulnerable to the 1998-1999 economic recession triggered by a combination of a sharp deterioration in the country;s terms of trade, the effect of the East Asia and Russia crises, and a weakening of private investor confidence due to stepped-up violence and internal conflict. 11. Increasing violence and transaction costs. Complicating the investment climate and poverty reduction effort is the intensification of the internal conflict. This governance problem has contributed to the deterioration of the investment climate and to the disruption of the lives of many families. It has also made delivery of social and development assistance difficult and dangerous to the above-mentioned areas, calling for the implementation of creative solutions for reaching the civilian population in affected areas. 12. The increase in violence, deaths, kidnappings, extortion and displacement due to the rise of the guerrillas' and paramilitaries' economic and military strength has carried a heavy toll, especially among the rural civilian population. There is no reliable figure on the number of displaced population. The G(OC estimates that there are currently 400,000 displaced people. Other estimates put it at a much higher level. This nonulation has been evicted from areas where they have been engaged in productive economic activities and relocated in urban slums where economic prospects are limited. B.~JT Mancreenonnn rcP.peeL:,e ~~~~~~~~~1 <_11_ A_|S_1_1 _. kVRU.A_ ~W.IJ AE . ._1 __ XA NV l__t+ 1J. '.JUV U1 UIl plJ.M;4pdi lIM1l bVUU%I s U1 '.,UIULLURi b IUUSLUALLU a 1 WVamunmi %;i. UV Ua%v U vaci LU changes introduced in the 1991 Constitution. One key change involved an emphasis on decentralization, with territorial transfers to finance decentralization dependent on the government's current fiscal revenues which were volatile during the 1990's due to fluctuations in economic activity. An asymmetry between increases and decreases in expenditures resulted, and revenue transfers below anticipated trends were not sufficient to cover the asymmetry, creating additional financial obligations for the central government. Other important changes introduced by the 1991 Constitution involved reforms in social secunty and a 7 renewed emphasis on the role of the state in the provision of social services, justice, and security. The fiscal implications of the new rules were large. Transfers from the central to local governments nearly doubled from 22% of current revenues in 1990 to over 42% in 2001, social security expenditures at the central level grew from 2.9% to 5.3% of GDP between 1990 and 1997, and defense spending increased from 1.4% to 3% of GDP over the same period. TABLE 1.2 Colombia: Selected Macroeconomic Indicators, 1990-2000 'u percentage of GDP (unless othel-wiUseU UjlucaLuj 1990-95 1996 1997 1998 1999 2000 2001e Real GDP Growth (%) 4.5 2.0 3.1 0.6 -4.3 2.7 1.6 NFPS Balance -0.7 -3.0 -3.9 -4.6 -6.3 -3.9 -3.8 Central Government Balance -1.3 -3.7 -3.7 -4.9 -7.1 -5.9 -5.8 Current Account Balance -3.7 -4.9 -5.5 -5.3 -0.4 -0.5 -2.1 Inflation Rate (%) 24.8 21.6 17.6 16.7 9.2 8.7 7.6 Investment 18.4 22.2 21.3 19.6 12.9 13.4 15.8 Unemployment Rate (%) 9.5 11.2 12.4 15.2 19.4 20.2 18.7 14. The emnhasis on decentralization was not. however. comnensated by a reduction in the size of the central government. Central government expenditures, other than transfers to local governments and to social secnlritv- continued to rise during the 1 QOs, Trowinro by 50%,/- from 4=20/ to 6.3% of GDP dirinn the decade. This pressure led to continuous attempts to raise revenues through no fewer than eight tax hille uvith litthp PmnhnqiQ i,nt-il rePPr,'nt1v nn trimmrnmine qnpniiino Whilp rPntiMI onv rnmmnt tny rPvPnlhPe increased by 1.9 percentage points, expenditures did so by 3.3 percentage points during the decade. From a si.tution of a nearly balanced budget in the ea-ly !990s, Coloma.bia thus en,ded 1 999 ,,,h a Nor Financial Public Sector (NFPS) deficit of 6.3% of GDP (Table 1.2). 15. In addition, a rapid real appreciation of the peso through the early and mid-1990s, partly as a result of large capital inlow due to new oil discovVries, Uireased borr-owing from abroad as a resut VI 'ifz country's new investment-grade rating, and the repatriation of foreign exchange undermined trade liberalization efforts. Capital infiows pusheu up asset prices, particularly real estate. A strong peso was supported by a newly independent Central Bank with a Constitutional mandate to control inflation. The appreciating currency was particularly detrimental to the agriculturai sector and to textile manufactures. In addition, while capital and imports were relatively cheap, labor became increasingly costly. The combination of these factors led to growing fiscal and external deficits, pushing Colombia first toward slower growth and rising unemployment from 1996 onward, and later into a full-blown recession. 16. The current account deficit had reached worrisome levels by 1997-98, standing at above 5% of GDP. The deterioration in the current account began in 1993 as a result of rapid growth in private investment and borrowing spurred by a boom in the real estate sector. By 1997, however, the external deficit reflected the imbalance in the fiscal accounts, spurred by growing public expenditures and rising interest payments. In addition, export revenues fell in 1997 and 1998 as a result of the drop in oil and coffee prices, Colombia's two largest exports, further aggravating the problem. 17. Colombia's deteriorating fundamentals, combined with a trade shock estimated at 1.5% of GDP, and with events in international credit markets. resulted in the virtual closing of financial markets to the country. This forced the Colombian authorities to turn to the domestic market to fulfill their large finncing needs, putting increasing pressuire on donmestir interest r2tes* Tnterest rates were driven even higher by continued attacks on the peso in 1998 and 1999, confirming market concerns regarding the OsL staii o m a'fal and ' iJtornl imbalances. The failed attens bthu Arnt.a! no-S to defend the existing exchange rate band led to a cumulative loss of US$1.8 billion in reserves. The 8 encAhm n1r Apoasift vntt haA risen tn almnaot 2004 iin real tp,-rno %i1ala the anniral vol 1mnelinc rate rcp to -t A A A -Afl- t *f - L t%_ ±AAA 11 - t4J&_ dA - t*S AtL.teA A A 26% in late 1998. The exchange rate band was finally abandoned in September 1999 and the peso was allWoe to float freely.7 18. 1L LAJeconorny, an eady sueIvi-ng fivUiJI Lui CarieVr UvIuhu VI ouX COiULS0tUCUIOAU seVtor UIr 1779-97, was thus hit by the collapse of productive activity as a result of galloping interest rates. Private investment fell by uver 60%V a 4aU pLr,LV-te uunuLptioLn dropped 170. T UV SeLcUib UhiL s-uffIreu Li1^ Ie mos UmarA&U contractions were construction (-20%), manufacturing (-15%), and commerce and financial services (each -7%). With thAe severe recession haT hit thAe country, however, imports piummeted as domestic demand collapsed, while exports benefited from the high international price of oil and the devaluation of the peso. Tne current account in 1999 and 2000 was therefore in near balance. Tne condition of the financial system, already under strain, worsened during 1998 and 1999 due to the sharp deterioration of loan portfolios and a large volume of nonproductive assets. High interest rates and negative economic growth stretched the payment capacity of most borrowers, and arrears in the loan portfolios grew to almost 15% in 1999. To head off a systemic crisis in the financial system, the government put in place programs to assist financial institutions and mortgage holders. Measures were also put in place to recapitalize viable private banks and to address the problems of public banks.8 19. Economic woes have been accompanied by high unemployment levels of about 19%, which have not reacted significantly to the moderate resumption of growth over the past two years. Shrinking demand has also been partially responsible for the drop in inflation from nearly 18% in 1997 to under 8% in 2001. 20. Macroeconomic adjustment. In response to the severity of the recession, the Colombian government embarked on a program of stabilization, supported by a three-year (2000-02) Extended Fund Facility from the IMF and the recently-negotiated Bank-financed SFAL. The government program aims to increase revenues and reduce expenditures; this is to be complemented by a rationalization and definition of the roles and competencies of central and local government. 21. A number of measures, mainly directed to enhancing revenues, have been taken. These include (i) pasagop of Qtrirt hiutipte sincep 2000 (ii) uAaiprninc of the uavlip AeAMleA taav hbasp (iii imnrnv4ina tax collection and fighting evasion and smuggling; (iv) changes in royalty allocation to attract private investment, particuarlyt the aoi sctor; sA (v) rcnt passage of t+n 1;11 vno-t-A to -AIA aAA;t;1ol v_C>sW=vs ~~~~ W.. __ lSl-. *V0_5 _ V^ wVs1M\}*VsWsJ* - -w lS_}_W -F- Y.-_V revenues on the order of 1.8% of GDP. 'These revenue measures are being complemented with structural r.eas in a nu.be f --as A finacia -yter- .- -.l Aa -a pase inOt 199rasn .- .ur ULIaoulvaL U JJ. HG IAIUUIU'.' VI~ 11101.II~3I I uvIUi UL 1GW WG.L'L kJG0 s ii 1 77.7 1 GWIU5y JIIIULLLLLL capital requirements and strengthening the faculties of the Banking Superintendency and Financial Gu4t1un ruuu ( -ur N'. A constu.Wo,u,ual amen,dmlUenLt was passed LUhat would save p-at fi We transfers to local government in order to finance local pension funds. In 2001, a constitutional _ .js __r __._ _ _s ___. -_ __ -_ _L r _ _ - P__ - - r amendment Ue-liKmig terrWtrLal transfers from the central governmeLt s current revenues tor a periou of eight years was also been approved by Congress, as was a reform of the resources and competencies of local government (Law 60/93). Legislation to limit the operationai expenditures of government at both the central and local levels was also enacted. A number of other important reforms are currently under consideration by Congress, includin2 the vital pension reform, a fiscai responsibility law, and a territorial tax reform. 7 The peso has depreciated by about 15% in inomninal terms since the collapse of the band, and the behavior of the exchange market has remained largely orderly. 8 The government estimates the cost of cleaning up the balance sheets of private banks at about 4.5% of GDP, nearly half of which would come out of public coffers through FOGAFIN loans, with an additional 4% of GDP for the restucturing of public banks. 9 22. Economic recovery The anpe-mment's effortns -avve yieAPld sorr.e er.coi r e,l,ts 1P1 0-TID grew by 2.7% in 2000 following the 4.3% drop in output in 1999. The recovery is nevertheless fragile, wiiith eco;olhi.t' ornurth reophina ^" 1 .6%I min 2001 s a .resLt of e s * t domes" and _Mo V~=~~***~'**J *= *~~ n 'L VT .l-A- UUJ.LILi.UJI~U.QI external environments. External conditions deteriorated substantially in 2001, with significant declines in oi!~~~~~~~~~~~~ and coie rcs adteswpsovdw nvoldeoo"c. an-d interala.onal reut y~W-VV i% F.A.L., ~ iu IVTU .JL VU ii0 T '1 ecnoU gI,JU Lv UW LU Lu mLIU4LVIuJtI4 L1W.LV ULLL intensified following the attacks of September 1l '. On the domestic front, internal demand growth reinedI~m sluggish. The.-e was litf' si1.UL reactiva.ion il coUL onIUUUUU aiid real es'wte sectors, as credit supply and demand stalled. The private sector elected to pay off its debts and continued to be cauLiowu a L UOl1UW1Ul sigificaity for acceieraug i-vestments. The fnanciai system, aithiough stronger as a whole, suffers from continued fragility in its mortgage banking sector. The oil sector, Colombia's main export earner, saw earnings deciine as a result of the aging of oii fieids and guerrilia attacks on pipelines, combined with lower international prices. Unemployment remained high, at about i9 percent, and in response, much of the government' s investment program focused on strengthening the social safety net, targeted to mitigate the negative impact of the economic contraction on the poor. 23. Colombia in 2001 again met the public sector deficit targets set out in its program with the IMF. The targets were modified to take into account the impact of lower-than-expected economic growth on government revenues. The NFPS fiscal deficit stood at 3.8% of GDP, while the consolidated public deficit was lower, at 3.3% of GDP, due in large part to the central bank's cash profits. The current account deficit widened by more than 2% of GDP in 2001 as traditional exports, particularly oil and coffee, weakened sharply both in volume and price, while growing domestic demand sustained imports. The growth of nontraditional exports to neighboring Andean countries, despite flagging demand in the United States, helped to moderate the expansion of the current account deficit. The capital account strengthened in 2001 as a result of further public sector borrowing and reduced net capital outflows from the private sector. International reserves remained at about six to seven months of imports in the coming years, with small yearly increases resulting largely from interest earnings on the reserves. 24. To finance its deficit, the government has relied on both external and domestic credit. Public smertor external debt at the end of 2001 stood at about 28.5% of GDP, up from 24% and 26% in 1999 and 2000, reqnectively; total net public debt was about 46% of GDP. On the mnnet-rv freont the rpie arm,th in currency since 1999 subsided in 2001 in response to the recovery of the financial sector and the exemp.tion from the financial transaction tox grnted on deposits in mortgage banks. Fin&ncial system credit to the private sector languished, however, during the year, and the economic recovery continued to be fjmnoced~ lornAu b thu pr1 uctA sectors ft"ou" ft use ofr 0vWU capita&l znd inlle wwi i, *m.U~~~ bJ -_~ F. - .- V ~ W. 4W"LI *JU1l L SIV)VTu .aJIa JU 1~ LliI0u %;FWt LY. Nevertheless, after heavy losses in previous years, the financial system did record moderate profits in 20 Uz pUadenf.;l i i.tors im. prove iv fr the syst.erll as a I whioe, Wi Ul eV Vexcepu'io VI miuorgagc (as whose condition remains delicate. 25. Economic Prospects. GDP growth of about 2% is projected for 2002. Prospects for an acceleration of growth are hamripered by weak domesuc demana, nigh unemployment, and low rates of private investment. As mentioned above, lower-than-projected growth has meant an easing of fiscal targets under Colombia's program with the iME as revenues have declined, and it is likely that targets would be eased again in 2002 should growth performance be weaker than the 2.5-3% projected by the Fund. The recent collapse of peace negotiations with the FARC, the country's largest guerrilla group, and the return to open hostilities compounds the down-side, particularly in terms of the fiscal outcome and the investment climate. 26. The external environment, namely declines in both the price and total production of oil, combined with low coffee prices, will also have an impact. In this regard, the government intends to continue its flexible exchange rate policy to encourage nontraditional exports and foreign direct investment. Developments in the US economy, Colombia's main trading partner and the largest importer of 10 Colombian goods, are particularly important, as are conditions in Venezuela. Colombia's second largest export market. Another risk in the external macroeconomic environment involves possible increased difficuitv of acces.s to international flnancial mark-ets for emerging economies. Here; the government's commitment to sound fiscal management (as supported by the recent SFAL and the IMF program) has £llnwp, it tn tan internatinn,nl npait"! marlkfptq r.oli1nr1v nuvvr the pnt vyr finel hiag pupvin AnmhlA significant pre-financing of Colombia's 2002 external financing needs. The government also retains access to TI fin ,anina 27.* Table 1.3 presents a rnnAa..r-t--- scen- +4a- assn.es cont;ued i o.f s4 -. reforms to strengthen the fiscal account;. Under such a scenario, an increase in the rate of GDP growth to 1- 1-I _ 1AZ--_ 11f2 - _1 1COI r. 1ArA A%C TT-.- - . lveUls approaching .5J LU J.V0%O is jJIJ.t.U for 2003, and .U 3 L* 3.J 0 for 200r 05J. UUndeL a Saurm.lu 01 continuing reforms, the NFPS deficit would decline from 3.3% of GDP in 2001 to about 3.1 % of GDP the Z- __J ------ I .3 -1-~L I Enl -V 1Ir%T 1.._^^^ IrtAr --1.. -- - ! fo;lo-wig yar, and woVuld steadily Upproach i.5-%a VI iif r oy 2VV0. Lll; wrung DuflIWs VI strucuJral reforms would make this fiscal stabilization possible despite expected declines in oil production over the next five years. 'under this scenario, Colombia's total pUblic debt would stabilize at about 50% of GDP in the long term. 28. As stated, maintaining sustainable deficits into the future requires the passage of structural reforms outlined above that are designed to improve control over public sector expenditures. The government has remained committed to its adjustment and reform program despite difficult domestic conditions. The significant reduction of the fiscal deficit since the onset of the recession and the passage of the bulk of its program of structural reforms are evidence of this. Nevertheless, a few important reforms, such as the pension reform, fiscal responsibility law and territorial tax reform, have yet to be approved by Congress. While these reforms are crucial for medium- and long-term fiscal sustainability, it should be noted that their short-run fiscal impacts are modest. The administration has also worked hard to build consensus and support for its reform package and for the fiscal adjustment efforts which will need to be continued by the newly-elected government. TABLE 1.3 Colombia: Selected Macroeconomic Projections, 2000-05 Tn npet - srnao of M.fP (unlm-e nthewike indinctiei'i 2000 2001e 2002pr 2003pr 2004pr 2005pr GDP Growth (°/0) 2.7 1.6 2.0 2.8 3.5 3.5 imr rS na'tu,c - . -3 .0 -3.1; -2 .6 -2 .1 -1I.5) Central Government Balance -5.9 -5.8 -5.2 -4.6 -3.8 -3.3 Current Account Balance -.0.2 -2.1 -2.6 -2.8 -2.6 -2.5 Inflation (%) B.7 7.6 6.0 4.0 4.0 4.0 investment 13.4 15.8 16.5 18.3 19.1 19.2 Unemnlovment Rate (%) 20.2 18.7 17.5 15.7 15.3 14.8 Source: World Bank Staff projections 29. Attainine the envisioned level of economic growth would be suDDorted bv increases in Dublic savings. thus helping to raise national savings amd maintain a current account balance in the 2 to 2.5-percent-of- C.DP range over the medium term. International reserves are nroiected to remain at about six to qeven months of imports in the coming years, with smafl yearly increases resulting largely from interest -arnings on the reserves. .3. A'. reIUcLto o1 UaLULtionUOII111 f .V70 III *VI LU 070 LUU a t7n I%JI 4U 20anU 2VV0, Ir tUYveLy, i6 Lb foI.CL as the Central Bank moves toward inflation targeting in conducting its monetary policy. While some inflaiionary pressures can be expected as tne econoimc recovery proceeds, continued migh levels of unemployment, slackness in external and domestic demand, and productivity gains should enable the attainment of infiation targets. 31. A higher national savings rate and a sustainable current account deficit would create the required space for expansion in private investment that is critical to achieving an economic growth of 3.5% or above. Both private and public investment dropped significantly during the 1998-99 recession, and have not rebounded to levels sufficient for sustaining long-term growth at the 3.5% level envisioned-total investment in Colombia stands at about 16% of GDP. Central government investment has been reduced to about just over 1% of GDP, half its average level during 1990-97, and represents about one third of the resources currently spent on interest payments on central government debt. Private investment has undergone a decline since 1994, and now stands at only about 8% of GDP. 32. The key ingredient for improving Colombia's investment climate is achieving a reduction in both political and economic uncertainty. On the political front, the breakdown of peace negotiations has delayed a rebound in investment. While realizing Colombia's full growth potential could not haDpen under conditions of conflict, much can nevertheless be done on the economic front to improve the investment climate in the countrv. Bringing the fiscal accounts onto a sustainable path is therefore important, and would help to significantly reduce the country risk associated with Colombia. The reduction of the deficit and. therefore. of the need to tan domestic markets to finance the deficit; would not only open needed space for the private sector, but would also enhance the credibility of the stPbili7tion pronmm and the prospects for the fiuture. Fiscal qtahi1ization would also create the rpacne for public sector investment in areas complementary to private sector activity, effectively "crowding in" pwrivte i,nveftmeptnt 'hfp nrnonpects for a 'nnenlidAtinn nf thfF Pprnrnmir rp-nup,ru iri 20A2O'-0 andi hPbey thus depend on the success of the government in garnering support for structural reforms to strengthen the fiscal posit z n ;f.-A rnveents in the cLte for in3esient in +1e cnt. ±IOLGA fLJOIVLI'.JU GLLLA. W ---FS % l r _ves*_1u LU 2J 12 2. THE SOCIAL SECTOR: PERFORMANCE AND CHALLENGES 33. Colombia's social programs have largely addressed the welfare of its citizens through the provision of education. health. social safety net emnlovment. training and labor nrotection. Todavy these nrograis are central to the GOC's social sector strengthening program that aims to protect and accumulate human canital in the face of increLased volatility and tiQht blidgetarv constraints. 34 The diq,iecinin hblnw nrnvidp-s an nvPrv. w nf roinmhiroc man,r social prorrams, summari7ing social sector issues and challenges. A A If 3. R *1I. --2..i L A.A veiv wv of' F-uubli; 0"%eru Spendxng 35. Following a period of aiLmost complete stagnation tmrougn the i970s and 1980s, puDiic expenditure in Colombia began to grow dramatically firom 1990 onwards. Between 1990 and 1997, overall public expenditures rose from 1 i% of GDP to i8.9% and had almost doubied by 2001, reaching 20.1% of GDP. This increase was driven primarily by spending in the social sectors, notably in health, education, and pensions resulting from the dramatic social reforms of the 1990's promulgated by the 1991 Constitution, Law 60 and Law 100 (see Figure 2.1, which presents the 1990-2000 trends in social spending relative to GDP by category of expenditure). 36. Three aspects of this growth in social sector spending are relevant to this discussion. First, total social spending (defined as health, education, pensions, and other social spending) increased sharply from 1 993- 1996, led by increases in health and education, and steady growth in pensions. The government budget for health and education rose from approximately 4% of GDP in the early 1990's to over 8% of GDP by 1996. Second, the rapid growth in social public spending was unsustainable, as evidenced by the fiscal imbalances accumulated in the closing years of the twentieth century as the economy went into recession. Third, spending for social assistance remained low and pro-cyclical even with onset of the crisis in 1998. Social assistance was not included in the social sector reforms of the 1990's that resulted in institutional reform, increased spending and decentralization. In contrast to the trends observed in other social sectors, central government budgeted exoenditures on social assistance fluctuated around 1% of GDP during the first part of the 1990's and fell to less than 0.7% by 2000.9 37. Today Colombia is faced with the dual challenge of restoring a fiscal balance and protecting the gains it h,e mAtep in hllnimin dipuplninpmnt Althjilah ipnt_..itininal rnmnarienne nf imillMi soi-a! p.YnPnti.nrPc (Table 2.1) show that Colombia's allocation of 13.0% of GDP remains slightly below the LAC average of !4.50, the only aveno,,nuefo fnrt, -her mincriaases in socla! spenving h o be t-bough reho,lloc-atio n.l0 Given the budget cuts already implemented, the protection and advancement of human development will depend critic lly voni incemIS I.e ef;iecyofJ VA xisI.:n IeoVLU s LLUUL1r iUqJL UVeU allocation. 9Social assistance is defined as spending on the four main social assistance programs reported in agareaated budgetary data - the ICBF family welfare institute, the RSS social fund, the INURBE housing institute and utilities subsidies. 10 There is no fixed definition of what should be included as social sector programs. Consequently, estimates of social sector expenditures vary substantialy. In Colombia, whore it is legaUy stipulated that a minimum amount should be allocated for social programs, the official definition of social expenditures is quite broad (and has been changing) to comply with the legal mandate. Iii ad,dtiou he com---:i-ve data do -no wi rino azco-irn di-i-i---- m -h amount of Myalu -xpvnd1iur,iw financed by mandatory health insurance contributions. FIGURE 2.1: Trends in Social Expenditures and GDP, 1990 - 2000 14.0 11 1 0. 8.0. 6.0 I -4---- Health (5 GDP) Nk -.-* Penmcons t% CDP) 4-0 | ' K ; A ||_ -Educatdon(%eGDP) O r- i= _-.11 Total Social Expend. (08UDP) 0 1990 1991 1992 1993 1994 1995 1996 1997 1998\ 1999 V 20D0 -2.0 _ 1 -4.0 . Sowuce: Colombia Social Safety Net Assessment, 2002 1A TABLE 2.1 Level of Total Public Social Spending (PSS) and Spending by Sector in Selected LAC and Far Eastern Countries, 1996 - % of GDP Education Health Social Security Housing Total and Welfare Argentina 3.5 1.8 8.0 0.8 14.1 Bolivia 7.4 2.2 4.5 0.2 14.3 Brazil 3.0 1.7 11.0 0.6 16.2 Chile 312 2-5 7.1 1.2 14.0 Colombia 5.4 2.0 4.9 0.7 13.0 Costa Rica 5.1 6.8 6.3 0.1 18.2 Dominican Republic 2.0 1.7 0.7 2.1 6.5 Indonesia 1.3 0.4 1.1 3.0 5.7 Korea 3.7 0.2 2.2 0.5 6.5 AA~~1--.. 9 A I ~~~A I I A A Mexico 3.8 0.5 3.0 0.5 7.8 Jranana 4.6 5. J .7I 1.L 17.1 Philippines 3.4 0.5 0.5 0.3 4.7 T urKey 3.5 0.7 1.4 0.4 5.1 Uruguay 2.1 1.9 19.4 0.5 23.9 Latin American Average* 4.0 2.7 7.1 0.8 14.5 Far Eastern Average* 3.4 0.6 1.3 1.3 6.6 *Average for the selected countries included in the table. Source: Castafieda et al., 2000, based on Government Finance Statistics Yearbook (1998) of the IMF B. Subsectoral issues (1) Social Safety Net 38. Colombia's historical reliance on economic growth as a social safety net is no longer available as an option. Today, Colombia must craft a functional social safety net to minimize social welfare losses from uncertainty and to facilitate economic adjustments. The GOC appreciates this point and recognizes the need to be better prepared to face future crises. The recent experience with designing and launching the Red de Apoyo Social (RAS) program held a valuable lesson: in times of crisis lack of preparedness imposes considerable costs in terms of the efficiency and timeliness of social assistance. Consequently, one of the GOC's priorities has been to develop an effective countercyclical social assistance system before the next economic crisis hit the countrv. 39 In Colombia snoial aqsistnce programs c insist primarily of proms aAdminiistpred-by the Colombian Institute for Family Welfare (ICBF), including early childhood development and school feeding. Other in nara are rulpn hu the Red da .Vnlidnrtiridand S.ocia!i (WZS scnria! fii,nti incA1ii.ne ix,rnfarp andi eldrlu programs as well as a mandate to spearhead initiatives assisting the internally displaced population. Thorn are lals na-lona. prograr f-r Ino, ir.,n -- hmng r- 1-y TT.1 TIDD U syate. ofr water ar.A A. fQm.5.. t UO~J C4LSJU Fl jit ULO -WA -Wu "Tfff~lJli~ WJI.015 A U.f 1hW j aLLJ O OIAI"li SA VT GL%.i 1AL4 sewerage subsidies and a program for secondary school vouchers that is being phased out. Colombia's pension and health insurance pro amils also-C ontain 1eUdU1UU1V-V componentsU 'Ut U1At JIUVVI a IU -PLY net function. 40. Key Vulnerable Groups. A recent Bank study, the Colombia Social Safety Net Assessment lays out the vuinerabie population groups and their needs and matches them witn existing sociai assistance programs. The study highlights the following conclusions: (a) Children and adolescents are the main age-specific vulnerable groups in Colombia today requiring attention from a reformed safety net. Pre-school and primary school age children face important health and nutrition risks. In rural areas, this age group is at risk of malnutrition as over 85% are poor. Some health indicators are also preoccupying, particularly the decrease in vaccination rates, increase in prevalence of some diseases like diarrhea among children, and increase in the percentage of children receiving no medical treatment. In both rural and urban areas youth age 12-17 have been identified as exceptionally vulnerable due to their exposure to multiple aspects of violence and crime. This age group is at risk of dropping out of school, joining gangs or paramilitary groups, and engaging in prostitution or the narcotics trade. The probability of children dropping out of school among the poorest households in the four rnaior cities increases significantly when households suffer an income shock (Gaviria 2000). (b) The elderly are particularly exposed to risks because they do not receive any substantial source of nrotection from the current safety net. Pension coverage reaches 18% of the elderly, and only 2% in the poorest quintile. (c) The internally displaced people, a result of Colombia's internal conflict, constitute another rritirnllv vuinornahlo orn1nn The CTOC. eqtirnateq that there are ciurrentlv 400n)00 disnlced ne,nle while other estimates put the number of displaced at close to 2 million." This population has been evicted from areas where they haov b-A n pingang in pnrhdiitivp ennonmin hvtiPiQe _nIA rplo^atpij in urban slums where employment prospects are limited, access to social services constrained and -iolence and crime are r,pant. A-ailable dAta su,ggest that many of the displaced are womrren (50%) and children (48% under 18) with limited skills and education. Despite the development of a IIG K 1.119 WIV1 1 1 _ A /jVu 1_ ._LI__ _ _V 1 _J D 1 V ^lk I 1A I aV71.1 .d1U11 TV_ L_1._ IDP has been complicated by (i) resources remaining insufficient for financing the national strLegy; andU (ii) a pIogXUIUu1cUL approacU hUuu 1 that mi15 nabrbmes au1uurU a ivgisuy listg people as displaced, an identification process that has been both lengthy and difficult to manage given the stigma and risk of being identified as an LD-P. (d) Unemployment is critical to vulnerability. in the recent crisis, households experiencing the largest increases in poverty were those with only self-employed workers or only non-labor income. A higher employment rate within households remains the singie best protection against poverty (Poverty Assessment, 2001). 41. The social safety net study also shows the need for institutional improvements in the following areas: (a) Establishing a Social Risk Management System. Although Colombia made important advances with the introduction of the Red de Apoyo Social (RAS) safety net programs, these programs remain temporary in nature and a broader vision for Colombia's social safety net has yet to be articulated. Although individual programs are in place, Colombia needs to define the scope and function of the social safety net during crisis and non-crisis times. This articulation should involve a review of not only the new and existing social assistance programs, but also the social insurance programs in health and pensions targeted to the poor that play a key role in Colombia's social safety net. Looking ahead, the Government of Colombia needs to prepare itself to exploit the opportunity for further reform of the Social Risk Management System at the end of 2004 II1 TL..n .c.,.l ;A^:epanc y a result of +he diff.ent .h,Arlo,. a,d by, Wao- andA '. onv ft that p rely on different sources of information and divergent methodologies for estimating the size and characteristics of the IDP. 12 The institutional framework includes Law 387 launched in 1997, followed by the "Plan of Action for the Prevention and Attention of Forced Displacement" (CONPES 3057) implemented in November 1999. The latter plan redefined mechanisms and instruments for the prevention of displacement, the protection of the IDP and emergency humanitarian attention. It also established actions for their social and economic stabilization. when external financingz for the RAS Drograms concludes and the impact evaluation results of these programs will be available. Ideally, other impact evaluations of key social programs that comnose or could be directed toward the social safetv net would be available at this time to serve as an input to a more systemic reform of the safety net. (b) Increasing Social Assistance Spending. Social assistance funding is not only relatively low but alsn nro-r.ylical. RnSending nn thnot noramnq connetitu-t appnrnyimnately 0. O/% nf rGDP (nnt including the new, temporary Red de Apoyo Social programs). This percentage appears low when cn,..pareA tn couAntres at a ;m.ilor st+oGt of -l-t3 as - to the r.eeds of -p-ii ~~f.jJt k flJ .- .,,, S' OfLlt '.'J. O. ' - -~l~Jff%V L 4 TVtL 4 SAW(tI * .4J Op'- -lt vulnerable groups that lack access to key social assistance programs. With respect to funding pro- cycIlicality, a recentL OLUUy reVea0 Ls that for eacU pUes oV reuceU GlDP, solcil milma0lnv fell by 7 pesos, making social assistance the most pro-cyclical component of social sector spending.14 This overall pattern is evident in tie recent economic crisis which resulited in reduced spending on social assistance programs, with earmarked programs such as ICBF suffering less dramatic reductions than those financed from generai revenues inciuding the RSS programs for the indigent elderly and internally displaced people. (c) Improving Poverty Targeting. Existing social assistance programs are available primarily to formal sector workers. T-here is little use of Colombia's well-know SiSBLEN proxy means test outside of the health insurance system. Improvements in targeting could be achieved through expenditure re-allocation toward targeted safety net programs combined with the expanded use of SISBEN or other appropriate poverty-targeting schemes. Despite advances in improving the targeting of social expenditures and ongoing reforms to the SISBEN proxy means testing system, problems remain concerning heterogeneous coverage of SISBEN, manipulation of the instrument, lack of effective social control mechanisms, and limited monitoring and quality control.15 (2) The Health Sgstem 42. Before 1993 the Colombian health care system exnerienced four tvnes of nroblems: (i) low levels of insurance coverage and access to services, (ii) inequity in the distribution of public subsidies, (iii) low nualitv of services in the governmental facilities and (iv) inefficiency in the use of public resonrces for health. Law 100 of 1993 radically reformed the health system of Colombia. The health reform created a mnnriAtnrv iiniv.ersa heanlth insrairncep svytpm Peeintially, the refnrm en,oaht to% ,raAuiallu rp-.ifrepit government health expenditures from direct financing of health facilities based on historical budgets LVWaL.W Ll1. OUbsid%.4LL1VA VI UheU IL inu.ance coVerage Vo UV poor, giiing jpeIopei ao c Loivung competing health insurance agencies and providers. This reform was carried out in parallel with the UVUelUtUIZAtiUUUVII oL the 1UdgrLLUL Vi hueal.h nud educationL reso-urces .o deUuPtualvlus rldiU m1WUncipuintl through Law 60. 13 Spending on social assistance as a percentage of GDP averages 0.9% in Argentina, 1.1% in Mexico, 1.4% in Peru, 3.4% in UruguaY and 1% in Venezuela. 14 CRECE (2001) looking at social assistance spending defined as RAS programs, ICBF programs, and other programs for the elderly, children and handicapped. ' Several of these issues are cwuTently being addressed and are supported by the 1DB Social Sector Adjustment Loan (see Annex H). 17 43. The bizzest success of the health reform has been the increase health insurance coverage from 24% to 57% of the population between 1993 and 1997. Rural areas experienced a much higher increase in coverage from 7% in 1993 to 48% in 1997. Furthermore, increases in coverage concentrated in the lower income deciles, with insurance coverage in the first decile rising tenfold from around 4% in 1993 to 40% in 1997 Wnw.ev.-r tbe innrepse nf uinenmlnvm-nt rates etsirting en_i nf 1QQ7 reviltpd in a de-rPrsie in affiliation in 2000 at a level equal to around 53%. Similarly, between 1997 and 2000, affiliation rates AdereasdA for all income deciles w,th the exetion ohf the wealthiOt AA. ~ ~ ~ ~ ~ ~ ~ _yo ofpi. -hs wciv.,nt oobashat yieali-unest. A=Lgz ugstdb h AA JWW* W bf' t ya' w .IAl* t 1Tv. .~ji~ Lu%'o. 1A.I.'.,VMAL1AUL %, ..JA'IIU10, 0 IiLa1LU ajva 10o U1 iJc '.IiiI1 aGO ao%. U3 LLL following international comparison: in 1997-1998, Colombia's life expectancy at birth adjusted for Lisabulity (62..7 yeMOs) waO less UIOI Ut-aLOLUk'-WUZ of C a a .7), PJr (66wIiZ kVU.0), aIU V eU.euvla (6J.0), whose health spending and GDP per capita were lower than Colombia's. To improve its performance, Colombia needs to coLmplete iLUnplementation of ilS healh systein reform and lo remedy a range of weaknesses affecting the system's effectiveness, efficiency and stability. 45. The ISS-Health Problems. In the context of overall health system reform, Law 100 also gave the ISS (Institituto del Seguro Social) the legal form of a public industrial and commercial company. As such, it could manage retirement pensions, workers' compensation, health insurance (ISS-EPS), and health service delivery (ISS-il'). In health, ISS-EPS and ISS-IPS businesses are in practice a simple fimancing operation, which remains inefficient and unable to compete with the private sector. 46. The Public Hospital System's Problems. In the context of health reform, the public network of hospitals, health centers, and other health facilities was supposed to (i) compete with and complement the private network of health providers, and (ii) sell services to the affiliated population through the EPS and ARS providers. Simultaneously, since the National System of Social Security in Health (Sistema Nacional de Seguridad Social en Salud, SNSSS) did not cover the entire population, the public hospitals provided services to those not affiliated with an insurer. 47. Health Financing Problems. One of the key problems in the sources of health system financing, affecting both the contributory and the subsidized regimes, is evasion in the contributory regime. 48. FOSYGA Accounts. Another issue relates to the use of the Solidaritv and the ECAT accounts of FOSYGA. By law, the contributions going into these accounts are to be used for expansion of health inqiire cot.prnverse nf the poor. The use of these acnounts has been subjecit to expenditulre ceilings. In itself, this policy practice can be justified as a way of enabling the GOC to control aggregate spending better. The problem, howpver, is that the unused reso irpoe app,mnlateAd ln thaes account s have ben .e to finance other expenditures. 49. Accountability, transparency and information problems. Aggravating the above problems are various deiiciencies in the assignment of responsioilities, information availability, and oversignt. Tnese deficiencies, which affect the efficient functioning of a decentralized and managed competition health care system, include: (i) lack of clarity in the assignment of responsibilities; (ii) weak supervision of health insurers and providers of care; (iii) delays in fund transfers due to complicated and non-transparent bureaucratic processes; and (iv) inadequate information and mobilization of the reform's intended beneficiaries. 18 50. Immunization and control of communirahle diveav proble ms A critical problem that has arisen after the implementation of Laws 60 and 100 is the weakening of the country's system of protection against Amm1nrnininthle diQesq.P Tn the past rnAlmbli uras a lp-9dipr iin wptvPfntinn n-tvitip.e Thriner the 1980s and early 1990s, Colombia achieved impressive gains in vaccination coverage levels and disease prevention Byu 1005q r.nuprane leuvls fnr all routine v,acc;es reacheA or aiirnacs- 90%; levels, t0ht f/, countries in the Americas have accomplished. 51. Unfortunately, since 1997, coverage levels for all vaccines declined to below 80%. Coverage against I,1.. A--.--.A A- ACO/ . 100IM.C '- 700/ -. IlAnA T. 00 £.A..C1..., A----. -, 311-'- measles1Ll desl L1L1 7.5% in 1770 LU 10/0 Lu A.000. Iu 1779, cuvelage1 v JLoVr UU.he ds o ulptiulerid- tetanus-pertussis vaccine (DTP3), often, considered the key indicator of the Expanded Immunization rrolgram (EPvrt-u) perloruiauce, was Ule hiughsL in me AIlnuean 1Region, i.C., Y94o. However, in 2UUU, levels fell to 77%, the lowest in the Andean Region (Figure 2.2). 52. The above data are indicative of a general decline of the EPIIPAI, which had been earlier established ~~~~~ _ A1__4MA A---- -- - I_ -3 G as a natiOUIal IIVIIy. ILIg jIVIt4LUI F.APUL1VLULLU UWclasC LU 5LW.Is U4unug auu 5upeiuvisiou. e consequence is not only a decline in immunization coverage, but also reduced surveillance. The current systemi may not be s-ufficiently sensiive o Uwteci Ue re-emergence 01 VIrI circl.uaUon m time To implement effective control activities. 53. The underlying cause(s) of the decline vaccination program performance is cornplex. Inadequate la .__: - LA- U- _ + _ SLA A L- 0 - -An A- _ _ - - - - I _tS_ _.A_AA A _ 1__]_ _ lUILU1LLS LIab VU Vu one Ia4L. 1LL LIUPO..L 1=0 L1ILL IWL--U ULI 5UULL4L* 01 PVLb0UHrC dLU bUppIllb. Additionally, the combination of staff turnover and the lack of funds for supervision and training has res-uied in a situaLUii wiicret inauequately uiaimed and inexperienceu s-afu ifai to ioiow current vaccination guidelines or practices. 54. Equally important are institutional factors. Weaknesses in the design of the decentralization and 1141LLL Lcare 101LU.s soUMV so0Ue of tUh 1resPoLn1sLbLi.y fr ULUe WV-weak p0U,LLa.nLLr 11L Yin v L;,LLaV11 acti-vit-ies over the past years. Details regarding the immunization situation in Colombia is elaborated in a recently completed report prod-uced by a group of locai and international experts (including PAHO) in cooperation with the Ministry of Health. 16Tne weakening of Colombia's immunization program and surveillance system could have serious consequences. For examnpie, the reintroduction of measles virus via an importation (e.g., froin Venezuela where there is a current measles epidemic), could have cAtsketrophic eonseenimQ Current vacriinatiofn Gnvemo Ifevepl are fiar hlnw the entidal 905% level to prevenut vrl dissemination if reintroduced in the country. Based on measles coverage levels since 1997, over 600,000 children I to 4 years of age in Colombia (17% of all children in this age group) are susceptible to measles. With this nunber of susceptible children, the reintroduction of measles virus into Colombia could result in a large outbreak with considerable consequences in terms of morbidity, cost of medical care, and mortality among the very young and malnourished. Without major infusion of new funds and major institutional and organizat-onal strengthening the programi, coverage levels would either decline sligmhiy or wouid be maintained at approximately current levels, in a best-case scenario. 19 FIGURE 2.2. Coverage levels for three doses of DTP among children <1 year of age: by country (Andean Region) & year: 1990 - 2000 100 _ 80 . g- rn ~~~~~~~~~~~~~~~~~~~UI--FcAuadnr 50 Peru *40 . ~r-'-venezuela 30 - 5 | ° Colombia 20 a)-%;.9 -4 "' 4~;4Zw *kI4~F¾ ~~~'*. O \v45i;.tc' i1:. fI ,j;r>.'wn 1990 i99i i992 i99 i93 4 1995 i9t i997 i998 i9w9w 2000 (3) Education 55. Like other modem states, Colombia recognizes the fundamental importance of education in the economic and social development of a country - and the critical role of the government in education finance, provision and regulation. While education alone does not guarantee sustained high economic growth, poverty reduction and stability, its considerable value added when combined with sound governance and economic policies is undeniable. Colombia recognizes the contributions of education to the economic and social well-being of its citizens. 56. With a growing economy and increasing share of GDP going to education attributable to the 1991 Constitutional mandate, Colombia achieved notable educational progress.17 Enrollment rates rose in the first half of the nineties compared to the mid-eighties. In the second half, however, enrollment rates did not change, as the economy faltered and funding increases became unsustainable. The stagnation in education coverage and availability of additional public funds for education illustrates the challenge of achieving additional educational progress in the coming years. 5'7 Despite its nrhievementg the Cnlnmhinn ediirmdnn system h2c room for further imnrovempntc Tn thig regard, there are five critical issues related to the country's education system: (i) low and inequitable educatinna! conerae, ( lw inn ntornoal efficiency and eAducatin muialhti (iii) eAduation fnance anA resource use issues; and (iv) decentralization weaknesses, and (v) civil conflict. 58. Low and inequitable coverage. Educational. coverage remains inadequate in relation to the requirements of a miodern econom y and the needs of tue poor. Enrollment in prescouul prograls is approximately 40% of the school-age population. Primary, secondary and tertiary education enrollment rates are lower than other middle income countines.-8 17 The enrollment rate at the primary level is far from universal - only about 85%, compared to the avenge of 97% for middle income countries. Similarly, the secondary net enrollment rate of 62. 1% is less than the middle income country average of 71%. This situation has been worsened by the recent economic crisis, which appears to have affected the schooling of the very poor (in income quintiles i and 2) at this educationai level. 20 59. A important aspect of this issue is reducing educational inequality. The problem manifests itself in several ways: (i) Colombia's education Gini coefficient, which is higher than other countries in the region, such as Mexico and Chile; (ii) the failure of the urban-rural education gap to narrow even during periods of rapid GDP and public spending growth; and (iii) disparities in educational attainment among the poorest, middle, and richest income groups, which have increased over the last few years. 60. Internal efficiency and learning achievement problems. The Colombian education system is characterized by weaknesses at all grade levels, and particularly by repetition in the first grades of primary education. Although the internal efficiency of the system is improving, some changes still need to be made. 61. With respect to student learning achievement, results from the National Evaluation System for the Quality of Education (SABER) indicate that a majority of primary school students in grades 3 and 5 have an academic level below that of their age level. The performance of Colombian students on the recent UNESCO/OREALC assessment is in a median position when compared with other countries in the region. Furthermore, scores indicate a high level of disparitv between the achievement of urban students and their rural counterparts, who scored consistently lower. 62. Low educational quality in Colombia is due to both school-related factors and broader socioeconomic Cnnditionm raiwh as ponvertv Amnno the schnnl-rpntp fantntr the mnrev imr%nurtant are: () deficie.ncies in teacher training and/or allocation (most teachers want to be in urban areas); (ii) weak curriculum irn,pln,mnftat on, aendl a ni irrticlhim thoat placesa pmnmvaho; on r.emorizat.on o1A rote l-fa.n4n; (iii) inadequate supervision; (iv) non-conducive school environment; and (v) limited time on task. 63. Education finance and resource use issues. Taken together, the public spending on education is cosieabl --- elati__ve .G-DP ^^r% A- wlaioa co1-rsl reval utinM:9eoobi' -bi IAIiilUrViOUll- iLWIVVL LU %.JLJr-. VUi ILLLr.IIaU4UWI W11UULpIUVIUI ICVV41b UIaL III 1Y70 %'..=UIUiiiUi 5 V.UUII%.o education spending amounted to 5.7% of GDP, which is more than that of the average middle income country (auo-ut 4.8%o i99-i;9i). Colombia also spends more tnan other Latiun American countries, especially if private education spending (4.2% for Colombia) is included in the comparison. The above discussion confirms tne view that in Colombia there is scope for expanding educational coverage and improving student achievement, by focusing on efficiency gains and better targeting of educational assistance to the poor. 64. The scope for efficiency gains can be substantial. Evidence on opportunities for getting more outputs from existing educational resources can be drawn from various experiments (e.g. Bogota's innovative scheme for use of non-governmental providers of education services and the PACES voucher experiment). Their experience reveals that education can be provided at a lower unit cost, while maintaining, if not improving, educational outcomes through innovative methods of education delivery and the use of performance-linked contracts with non-government providers. The implication is that more students can be enrolled with currently available educational resources. 65. Contributing to the weakness of the education system is Colombia's education finance system. Financial transfers to the territorial entities are determined by the supply of teachers, rather than by the education needs of the student population. This tendency is partly due to the perverse incentives created by the FEC.20 19 Based on data from the same study, relative to other Latin American countries Colombia does much better in rural areas, mainly in math Only CuVba does better. These results are due in part to the success of a pedagogical model, Escuela Nueva (EN). 20 The use of Lhe FEC, by nh fthe cen,tm gover.n.et pic,, ap t4he cost. of h- n- .it .ye- -4- y-, - incentive for departments and districts to hire new teachers without due consideration of long term cost implications. 21 66. Weaknesses in the design and implementation of decentralization. The decentralization process has had limited success. Colombia has clearly implemented the decentralization of education management and operation in accordance with the Constitution. The municipality has now become a central player with the responsibility, autonomy, and resources to imnlement nrimarv and secondary education programs. For decentralization to fulfill its education objectives, however, a variety of challenges and issues have to addressed- Brieflv- they incluide: (i) Mood tn i,mnlomant a v e,jt'tninhlo firr/71 lme,ownro- ffnr daro.arnIi'nAPt7in (ii) Institutional weaknesses; ... I-'J -.V ... fl., O*-ta* * v t *fL U JV S tJvJ vr tj w4flvta 4 * t 7)JJ3 (iv) Budgetary and staff weaknesses in MEN (Ministry of Education); (v) 77a LICCOuroalu55sy aIM durfo, ,,a4AFjJfor UcaX.3Sors-MnIu5fi. 6.UIVII Cu.v lJcny1.ct ura W eu-culuprOulem I. ie priv oflu viU viuilnUce in oloiiula has severa; dimensions that are directly or indirectly related to education. Violence affects educational opportunities and incentives to go to schoo;. i ms probiem m comorinaion with youth unemployment, nas been cited as one of the main contributing factors to the increased rate of crime and violence among Colombian youth. Complicating the situation, however, is that violence itself has had the effect of limiting access to education facilities by both users and providers. (4) Employment and Training 68. Employment is a key element in poverty reduction. For the poor, who have little physical capital, it is often the only means for earning income legitimately. Employment opportunities allow the poor to mobilize available labor and increase household income. They also give the poor bargaining power for higher wages. eventually as labor supply becomes relatively scarce. 69. Empirical evidence on the imnortance of emnloymnent to the poor is discimqed in Rank Renort No. P7483-CO. Two findings regarding employment and poverty are worth noting. One is that unemployment disprnnortionatelyv nffects thp nnor (mebmhprs nf the first quintile Pynxpriencp irumninpment rat c %over 4 . J-r-1-r- J-i -- r-- - of - - exp-ence m- empl~oment-te _N,_-- 4.5 r-S[ times as high as those of the fifth quintile). The other is the relatively large impact of employment com.pared to other -vai-ablees. '70. LiW -ml;.= c__ _ be exp&nded is one o,f the- -os seriou Liene fcn ora UV,l I -.. LAO" .Uq~3P.L~~. LJ- '1ApUiiUs..U W JLO V 1%,V LAM, ILtIJL O1 IJVUO 1a.L.1u5 LUVUIV IUL . '.JI answer is to increase aggregate demand.21 Another answer is that there are underlying factors determining UVLU UInpVwui111 LIU VULLqUL. %JLV VI LJUIvS L4UtVlb IS LIUC SugF IVL VI IUUV[ regulauiols, HOVLDIY Wltu respect to its effect on employment.22 The employment impact of regulations has been found to be particularly detrimental to young, female and informally-employed workers. Tne young suffer not only foregone current income, but also future income due to the lack of opportunities for training on the job as a result of reduced formal employment. 21 Employment clearly responds to aanrezate demand fluctuations, with an elasticitv close to 80%. Bo2ota's aforementioned experiment is an attempt to overcome the detrimental effects of this policy and can provide valuable lessons for other areas. 22 James Heckman and Carmen Pages (2000), "The Cost of Job Security Regulations: Evidence from Latin American Labor Markets"; Adriana Kugler and Maurice Kugler (2001), "Effects of Payroll Taxes on Employment and Wages: Evidence from the Colombian Social Security Reform", and Hugo Lopez (2001), " Mercado Laboral Colombiano: Funcionamiento y Barreras 22 '71 A-oro nf tlh met nf 1^f ol,nf -mlt r.A ^r a 4n ;ranno f a,1--r Af1o r('Ar --t, -. IkV 4 - MS C _ost - v1 -h % -LA W. --_ -I v C fl vULs L -ta - -._r.ILj introduced a bill in Congress to address these issues. In essence, the bill seeks to reduce labor costs and QIIJW IlL IV IU~L LUI , JVUUU, WT'J Itt'IS "L ILC00 LUCLJA IIILJJLLILULI Wa l-4 ILI VAI,UG,LLQLL 11)1 UaLILIIiii p10tu V IY LUJ firm or other providers (not necessarily SENA). There are, however, obstacles to its approval. "CI UII0pIli%- AIZ .I I L_Aa .VI 0I -I QAA I DA A_U I Ii..%'..VLIVIUGLiLa 0IL FJVJIUVVJL%AA OJDLWLIJ VI JFUU1II.V %,AF1U1LU1V, lq-ULlL ~VYIaLaIVUbJ ULaCI UIVUILVUI rUVV1IlLW1LLL program performance. The National System for Evaluation of Results of Public Sector Performance (SINERGIA) has been in operation si,ce 1977 and encorr,passes all 16 sector ministuies and I70 public entities.. Recently, the National Planning Department and Ministry of Finance and Public Credit have signed Efliciency Agreements, linking funding to outputs. Despite thes advances, however, impact evaluation results are almost non-existent and there is no systematic public information system to disseminate results of public sector performance or engage the public in the monitoring of national program performance. 23 3. THE GOVERNMENT REFORM PROGRAM 73. The Colombian government has initiated various steps to address the social sector challenges articulated in the previous section. These steps are aimed at securing the present and future well being of Colombians and encompass both remedial and structural measures that have been develoned with sunnort from the Bank and the IDB. This section summarizes the various social sector policies and actions which the pronnoed lending oneration would sunnort in parallel writh MT)R's qnnial sectnr lnan. Tt nresents the rationale for these policies and describes their relevance to achieving the outcomes set fort in the GOC's enpi Q1 cPr.tar gtrpnorthpiino nrnoi-nm 74. The GOC can no longer relyvprimArily on incnrease-d resoumr-es for the social sectors as its main strategy for sustaining social progress. It needs to adopt a new strategy based on improving efficiency and eqit in thl, use of social sec'tor expendiAtii,te The lf b-oo .QSrecognize tbSis exgc and, has ac. accordingly. In its final year in office, the government remains committed to implementing this new suat-O-, seekin to -enoreA -in -a som cases, intit new 4 ac.-;n --hat would --te -----2eit ~UaLV&Y, 0%I%Jr-Ur %AJ C&A ULLUL "I O%JiLJIi% iJIULCK U1VW G¾%UJLL0 LUaI WVUUU LLU~LLU1 VAJ1LOU11U.LV 1LO reform program. This commitment reflects its appreciation of the importance of social services in poverty reuuc.ivul, pivrnuLvUot Vo sUiliLy, aLdU Vwmllum gowLU Il UinV lJlig luul. I.L alsou Iravuw %-Ue ulum C widel-y held belief that the state should extend a helping hand to citizens in need, particularly to the marginalized popwuation, the vulnerable and the victimIs of te internal conflict. 75. hLIe policies thaLt make utlp Colombia's reform program, including its overall strategic vision and the social sector strengthening initiative, are described in the government's Letter of Development Policy (Annex D). Tne authorities' ownersnip of the program is strong and widespread, and tne President of Colombia has expressed the GOC's commitment to continue implementing reforms until the very end of his administration (see letter of President Pastrana, Annex C). While supporting the (GC's full reform program, the Bank will explicitly require certain key commitments for the disbursement of the loan under the proposed SECAL operation, as elaborated later. 76. Colombia's social sector program seeks to strengthen the state's institutional capacity, the incentive structures of the main social problems, transparency and citizens' participation in order to achieve the following objectives: (a) Improved health care by: (i) increasing immunization rate; (ii) raising health insurance coverage; and (iii) strengthening the quality of health insurance agencies and health service providers; (b) Human capital accumulation through (i) the expansion of enrollment at all levels of education, including preschools; (ii) increased student learning; and (iii) improved on-the-job training opportunities; and (c) Adequate protection to key population groups against the life threatening and crippling effects of poverty and economic crisis by establishing an integrated Social Risk Management System and related measures to: (i) launch a counter-cyclical social assistance system; (ii) improve the poverty targeting of social protection programs; (iii) effectively assist key underserved vulnerable grF0in p including nre-school children- the elderly and the internally disnlaced nninlatinn; and (iv) improve the efficiency and effectiveness of social assistance programs through improved tarrpt:nc, i-net-nrppnuprv mnnitnring and en1v_livtinn (1) Social Safety Net 77. To address the social consequences of the 1998 economic crisis, GOC introduced the Red de Apoyo Soc.;al (Sfo. cial Support DA, lnt .-A tha.t is. -e workare, c tion,alcash transfer and youth training grants based on beneficiary choice of competing providers. These new programiLs are bUegirLL LIJ CLUI0 1imLU4I,ediW 1UUIMU 'LIW VdVeLopLLIL nedUs in Ueiak Weft% Vi LcIr ,i Ms andU UIV shortcomings of existing programs, but it took almost two years to implement a response. Thinking about Lhe lor,g .eLUI UUVV1VeU1Virl VI olf itsoild pro ectio plcy, 'J has sut UVt - acrUeUIV pilUgni for LL.h evaluation of these new initiatives and their eventual integration into a counter-cyclical social protection system to aauress ruture cinses. 78. Tne GOC's recognition of the structural deficiencies of the country's sociai protection system and the delays in the delivery of urgently needed assistance during the 1998-99 crisis led to a serious re-thinking of the system. Consequently, the RAS program has been followed by continuing dialogue and consultation between the GOC, the Bank and the IDB on measures to strengthen the country's social safety net system. The discussions are reflected in the aforementioned social safety report on Colombia produced by the Bank and the GOC in close collaboration with the IDB. 79. Based on those discussions, GOC 'has developed a reform program for its social safety net and requested Bank and IDB parallel financial support. The program includes: (i) establishing a social risk management system that would include a counter-cyclical strategy to address vulnerabilities in times of crisis; (ii) improving poverty targeting instruments and outcomes; and (iii) reforming social assistance programs to improve their efficiency and effectiveness vis-a-vis key vulnerable groups. 80. The "Sistema Social de Riesgo ". Sionificant initial steps have been taken toward establishing a 'Social Risk Management System' (Sistema Social de Riesgo) 3 that would be based on principles of risk prevention; mitigation and coping and would define the role of social protection particularly during periods of crisis. As a first step a "Social Protection Fund" is being established as the principal financial instnrment to support the svytem; The fiund would simnort social aqqiRtance snending durinu recessions once there have been two consecutive trimesters of negative GDP growth. The fund would accumulate resomirce ildlring nprinod whe-n WDP rrnowth PyeAedc AOI. The nrnnnose svinge nilp anvprning accumulation stipulates that 50% of the difference between actual income and estimated income given 4% GDP gro-th ould be allocated to the fund.24 The GrC' s proposed otratAe±o, which has recently been approved by CONPES, is to establish the fuid by legislation in 2002. 81. Improving Poverty Targeting. The proxy means testing system SISBEN (Sistema de Selecci6n de D AL _L J J__ Jv1__: -A_-_A - _ UA 4Av AA- AAs_A "Ur1UC-aWU4r9c.3) 1 Us11lr UJUaLVU allU auLLVPWU 4aU LU4IL 1LL U UUIVL LVI UL15LIIU bUIwwal a,10LaOIW programs in Colombia. The updating consists of (i) improving the SISBEN poverty estimation instrument and methodology; (ii) developing a system of norms guverniug tle applicaiion of he SISBEN inst um ent to assess poverty levels, a function carried out by municipalities; (iii) monitoring and evaluating the quality of the information coliected by consolidating dataDases, carrying out fieid-based spot reviews and evaluating the efficiency and effectiveness of the instrument; (iv) applying a system of sanctions and incentives aimed at minimizing the manipulation of SISBE-N and rewarding its regular use and updating; and (v) establishing clear norms and procedures between local and central levels for reporting and resolving problems and ensuring the transparent use of the instrument. It is anticipated that a full re- application of SISBEN will be completed by 2005. Nonetheiess, the success of this effort will depend on municipalities' ability to successfully apply SISBEN in their local areas. 23 See CONPES "Sistema Social de Riesgos y Fondo de Proteccion Sociar' December 2001. 25 82. Reforming Social Safety Net Programs. Initial steps are also being taken to (i) improve the flexibility of hFe Colo-mIrbiain Tnstitut.e for Fa.smily W. el.faren(ICBF) by introducirig a pilot project in l Omuricipalities separating financing from provision of services and giving local communities an opportunity to influence the alitcaadonv of f.fids to~ specfic pyr.or.ties; an(ii) el4minat4ity ,prnt,vaw ovrnrlapi s,At1in selec.ted social assistance programs, notably by transferring some of the smaller programs in the Social Solidarity XTAX.,.l MOO A\ -a;l -A-A .-^ VA >A; ^A -r^+U_ D-.A--. +_ _+LA_ ^ A A _As4L _ +-^b Iw;VVA t&a1 OVVI 1- U~LX~ JL I IUJU GJ MeU f fl'. .1 .V SL AL 1VOIUVL.I &v VLU%U l V.I . £UViv UJL V&'J 1UL.7 &IVJ L by ICBF with regards to CAIP, a poorly targeted and costly early childhood development program, is its Udecisio LU C.oM8 lcrar fUe onb.eicLiCiLes acdCO4.1n1g LU Mull abiUi.y *. pay UL geinieate Lunud forI iW expansion. A redirection of funds from less well-targeted social programs such as the SENA training courses or thie CLasy de CompensaciOn toward well-targeted social assistiuce programs has, howe-ver, not been considered. (2) Education and Training 83. To put the GOC's adjustment efforts in education and health in proper perspective, it is important to view them in relation to recent reforms involving fiscal strengthening. These reforms sought to address weaknesses in Colombia's fiscal accounts; shortcomings in intergovernmental fiscal relations; inefficiencies in the provision of key public services, including education and health; and increasing fiscal pressure from the pension system and public sector debt. This fiscal strengthening agenda would put the non-financial public sector accounts on a more sustainable path while contributing to enhancing and improving the provision of social services. 84. Intergovernmental relations. The govemment program in intergovemmental fiscal relations is particularly relevant because of the decentralization of health and education to territorial entities. In this regard, reforms include: (i) making subnational govemments fully responsible for expenditures; (ii) increasing subnational tax revenues: (iii) simplifving and making more transDarent the transfer svstem; and (iv) reducing moral hazard from subnational borrowing and reinstate hard budget constraints. 85. As laid out in the Bank's report on the Structural Fiscal Adjustment Loan25, the Colombian Congress recently approved aConstitutional reform (Arto Legivlativo) that see-ks to tde-link transfers fronm tnrrent revenues, and put the -growth of transfers from the central govermment to the territorial entities on a more ciiatanahl nat..h thilic 1;mit ng the rnufith nf .pnfral aA n;natrnt;nin'C, nnpra,mtinnal Pvv-inA;ireP (".tosfn generales).2 The reform combines the current three major sources of transfers financing-Situado Fiscal, Pari.cipaci;ones, an rF . +e S;stema Ge,.eral de .a,- c (SGP, anD d .-A cludes a six-year transition period (2002-08). Specifically, the reforms include that total ransfers will: (i) grow by 2-% ini real t1erms during 2002-05, and 2.5%IO during 2006-08; a.d (it) fro, 2009 increase at the average growth rate of the central administration's current revenues during the four preceding years.27 It is expecteo mat aiter re Acto Legislarivo is implemented, tihe annual xanisfars woud decliine from about 5% of GDP in 2001 to about 4% of GDP in 2010, and would generate fiscal savings equivalent to a total accumulated amount of about 5% of GDP over the next 10-years. 2' The World Bank (2001), Proposed Structural Fiscal Adjustment Loan, Bank Report No. P 7483-CO 2 6Th limitr. nn th,- ornnwth nfpthn 'pntl ntlmlnictinn mwnt,nnnl nynpitiwr wi11 hp wnrnl tn (n) 1 S in rpsd tprl ner year for 2002-08; and (b) thereafter, a rate of growth equal to the average growth of the central administration's current revenues during the previous four years. n In addition, if real GDP growth exceeds 4% in any year of the transition period, SGP resources would be increased proportionally, but only after adjusting for the transfers made during years where real GDP growth was less than 2% (2002-05) or 2.5% (20068-0). 26 86. Reform of Law 60. The Constitutional reform of transfers is complemented by the amendment of the 1993 Law 60, which specifies the mechanism for distribution of resources among territorial entities. These reforms, over the long term, will help to (i) reduce earmarking of transfers so that they specify only the sector allocation (for example, education and health), not the economic category (for example, wages and investment); and (ii) distribute all transfers on a capitation basis to pay for social services (as equalization grants to entities with lower than average per capita tax bases). 87. With respect to exDenditures. the authorities seek to control the cost of general administration of subnational levels and to allocate public resources more closely toward the original design of decentrali7ation in the Constitution-which foresaw an Allocation according to service needis by population, with adjustments for poverty, among other factors. To control general administration costs, suiihntinnsol anvPrnmt-ents arne getting sh iintnril a,ri,ugtmnipnt lnsncn tn fimnrnP &nWumai-ina nf nPve*in!p (severance pay, etc.) under the terms of Law 617 of 2000. 88. The amendment of Law 60 (Law 715) includes, inter alia, (i) the automatic certification of r..icAipaitiw (that are, ap.tILa.10 L Uof eaeU s1L a GJIVI ha.Ve rr.ore WanT 100V,V00 IiudIaubi4js LU autonomously manage the provision of education services; and (ii) specific education performance goals _ _ --.C . -- -2 _t_A4 J -- - - _ _ _____\t_N _ML _-- I_ _ ____ t inclUded Lu a peIrumanLe uil_A tlix Ur5rTirz us u(.rnp5nu). it1C 0vu luicuU Will Uo uir pullQ[u_lWlic agreements to certify' municipalities for 'the autonomous management of education-related resources. In …i.. 2.t~ n AT - I -- A^nl, _ ~ ~t 1--lt --_ -- - . accordan-ce -WitP SFl a agreerient, at i e3 40%o o0 ihc stuucni populaion wouid oc covered under this approach. 89. More specifically, the automatic certification or performance agreements will imply that (i) the transfer of resources to municipalities will be calculated on the basis of the number of students who attend class (not the number of teachers on the payroll); (ii) minimum coverage goals will be established with the objectives of increasing enrollment and reducing drop-out ratios; (iii) certified mumcipalities will be authorized to reallocate resources from teacher vacancies-both existing and new-within the education sector and to eliminate teacher positions; (iv) certified municipalities will be able to reallocate teachers within the local jurisdiction; and (v) the Ministry of Education will provide technical assistance to certified municipalities, if requested. The central government will publish and otherwise disseminate quarterly performance monitoring and evaluation reports of the certified municipalities. 90. Application of the new model of allocating national transfers for education among municipalities will require enabling regulations. While Law 715 has specified the principle that the allocation should be based on number of students, population to be attended, and poverty indicator, the details of how it will actually be implemented (e.g. regarding the indicators, weights and procedures to be used) have still to be worked out. GOC will issue regulations that would enable consistent and effective application of the resource allocation model. 91. Additional measures. To support these education sector strengthening objectives, additional measures would be undertaken, including: * Doulme-nt and publish suc-cessfiui experiences writh education delivery approarhes based on performance (concession) contracts with non-governmental providers as well as voucher programs scl,h -Q PACES; * Establish regulatory framework that would enable public educational institutions to contract prv, -rvdr *.oA_ -eie educa.;or __vics as_ T-p aeinL- 171J;. P1lVliLV P1UYIUVID LU UVI1VVII1 AULCLlUVIlI bvvb ~Ub uULVUa l LU 4W Ili, * Design and organize (and provide, if requested) technical assistance for municipalities and/or Departments willing to try tme above-mentioned aiternative education deiivery approaches; * Strengthen the capacity of the Ministry of Education (MEN) to assist territorial entities develop their own information systems in support of the implementation of Law 715; 2 7 * Develop a methodology and action plan for the evaluation and dissemination of innovative models for e-xpanding basi- and mEidlpe educa.tion technology; * Disseminate (by MEN) the results of the last SABER assessment in national media by DeTportrnAnt miiini4;na lit arAd o]honl nha- s ^ an * Establish a policy strengthening the ability of Colombia's student loan program to meet the f111anclU ne W. hgWher cduLatio"L1 nI vILF, espeially ofJUU poo U zn 3e VL Ur OLUdLeLVt. 92. Finally, ,-A,tth r to nbt . t-o I,-1 - Ao,-44- c a KTA 1- As -ecAeA to Use it 1- . -- -op. w'JU I.-J-w L -1WU6 LU llr.r.n 1taLfl Je.. llao WM.a%.L 1 resources to finance implementation of the Jovenes en Accion (but maintaining its fundamental rules and 4A - ; A,-__ -A [A -.I- A _AA A1f _:A+AD AC -_ ---I _ AA1 __ V AIAAws_ A_ *U ---- + U - 1 1 1 A +U +E _ %ML60irLJ. JUvrMIZE 10 a FJvJL jV9JJVL VI XL.ZrLLJ-rL VIlr, 1a;OLU F0alLe LVU UAj )YUU5, IJVUL LUiaL WUUIU al0W UlUVLL LU choose on-the-job training supplied on a competitive bases by private firms. GOC has also introduced lusiblauU Lt rUL-uLe 4labor cost toL incirelabse re1Ulp10yi111eLt .and opportUAULLI IVI Vi1-UIv-JUU tUra1Uig. lIe legislation would further permit hiring of young workers and paying them below legal minimum wages in excnange for tiainiig to be provided by te fiiirm or other training providers (not necessarily SENA). (3) Health 93. Through the new Law 715, GOC has taken important steps to address some of the problems facing Colombia's health system. Law 7 i 5, which aims to promote transparency and accountability in the heaith system as well as to reward performance, stipulates: * The distribution of transfers (allocated to the health sector out of the above-mentioned Sistema General de Participationes) among public hospitals, insurance coverage and public health. * Speeding up of the flow of transfers from departments to hospitals and from municipalities to ARSs; * Clearer assignment of responsibilities; and * The distribution of resources among territorial entities based on performance related factors. 94. Under the old system of allocation established by the Law 60 of 1993, there is no clear assignment of rQesonsihilitipe as far as plyniv and demand subidies and pulic hpaith arp recncernedA Transfers follow. a complicated path from the national government to territorial entities (departments and municipalities) to heal. c..t.+anAm,,c1rotnre -A -e) and _r lly, to health care providers. This p.rocess h0 create delays in the flow of transfers and resulted in the accumulation of debt among the various entities involved. 95. Under the new law, departments will assume responsibility for public and private hospitals, while Ulp0UaillJ4llWw Wlil 00Weslts 1GeJVUi0U1liLt jUV B1 1.CAW1UM bUir ULUV_llrV VI LLUt W UUelUJlEW lCQlIL1IV. VJU leeUs of public health, such as vaccination, municipalities will be responsible for the execution of the in-irnunization prograns anu, uaccrdingly, will receive the necessary funds. In he case of public hospitals, resources will be allocated according to the number of vinculados in the department, while in the case of subsidized insurance according to the number of aftiliates in the municipality (vinculados are persons eligible for subsidized health insurance that are not yet affiliated with ARS). 96. The new law is expected to spur the transition from a supply to a demand-based subsidy system. Given that the number of vinculados wil have been decreased and the public restructuring program will have contributed to limiting costs, resources per vinculado will be higher. This will pernit a greater allocation of resources to financing the expansion of coverage among the poor through the subsidized regime, relative to direct subsidy to hospitals. 97. With respect to vaccinations, targets for optimum levels of vaccination coverage will be set and the monitoring of whether the targets are met will be used to adjust the amount of resources allocated to municipalities. 28 9R Rvtru.eurin47g o -fpubl.ic hospitals. Tn response to the problems facedA b theti pic si- ev4al na-.eo-rlr some steps have been taken to restructure public hospitals. The objectives of this restructuring program a to E . t.ee UOe . LArIl v xiObulty d public hospILOalO UU anIdJV UIive the produU.c ItiVitLy 1 in halIUI se Vice, delivery. To achieve the first objective the program has taken actions to reduce costs, including: (i) reforiuung wV persorel SuOUCCLI, (il) rilvi1I accUI1-aUUedU UdeUbt 4aU 1i1i) lerego'UudLUlg llecUive1L bargaining agreements with hospital unions. 99. To achieve the second objective, the program includes actions such as (i) reaching agreements Wetween teritoria enuties anu hospital directors to advance iong-iasting restructuring and To develop functional health service networks and (ii) identifying and analyzing existing information regarding supply and demand for health services in different regions in order to better define pians for manageriai and technology improvements. Preliminary results from a pilot program aiming to restructure 27 hospitals (out of a total of about i 70 medium and highi complexity public facilities) administered by the Ministry of Health appear to be positive - in one year hospital costs have been reduced by 30%. 100. SISBEN improvement. As previously mentioned in relation to the social safety net discussion, the government has initiated a reform of the SISBEN proxy means testing system that allows for the targeting of public subsidies to the poor. SISBEN ,has been used primarily to identify beneficiaries qualifying for affiliation to the subsidized health regime. The new guidelines for the reformed targeting system have recently been approved by the CONPES 'and include: (i) adjustment of the identification instrument (the SISBEN index) to capture regional differences and dynamic aspects and a strategy for the adoption of the new instrument; (ii) a system of quality control and centralized monitoring through regular evaluations of the SISBEN surveys and punitive measures in cases where the municipality responsible for its application has an identification error greater than 15%; and (iii) strengthening supervision and administration at the local level. 101. ISS-Health services. In an effort to address the Social Security Institute's (ISS) financial problems, the government has agreed on a restructuring Dlan for ISS-Health services. The main objectives of this plan is to improve quality of services to affiliates, eliminate inefficient supply subsidies to ISS hospitals (ISS-IPS) and limit fiscal costs to the national government. The ISS-Health is currently facing both 'stock' and 'flow' problems that need to be addressed. With respect to its existing accumulated deficit7 the nrnomrm includies (i) trnsferring of resou1rces to the ISS only after the renegotiation with collective bargaining agreement with its labor unions has been successfully completed, (ii lifrina the enct:nn applipe hu thie THealth RimprpntoTin,nnu nrnihih4tna new i affiliation n tho TheISS aftjr the underlying causes of the sanction have been, resolved and (iii) withholding compensation transfers from FOSYC- A to thm TIS nti .o1:e cn-- ..farn,n4nn on -- .nkoer of its ffri;ab. has been provided. To resolve the 'flow' problem, the government aims to increase revenues and decrease costs. isVIUrUe S'.,O flo redUUcUin cOst .rni.clUde Ut.' e rOU U%LUJLJ-.1Ur VI of %uLIiL1115 debt1 LatVI lg cl....cs and. ambulatory health services and improving contracting mechanisms with own and extemal health care providers. Mesres for `ncreas" L reven-uv1 c IVubiute better colection Uo co-wUibutions by affiliates through reforms to the current system of self-estimated -contributions, increased collections or arrears and enrolling more afiuiaites aiter me sanction imposed by. ne rieaiin Superintendency is iified. i02. aolidariy account of FSu'iA. According io tne Estatuto Orgamico de Presupuesto tme solidarity account of FOSYGA forms part of the national budget, thus has a limit/ceiling of expenditure. This has resulted in resources accumulating in the account, which subsequently had on occasion been used for purposes other than the ones defined by the solidarity account. GOC is about to issue a regulation stipulating the exclusive use of the said accumulated resources for financing subsidized health insurance coverage, as originally intended. Putting it differently, if the decision is taken that accumulated resources above the expenditure ceiling of the account are to be used, these resources can only be employed to finance the subsidized health insurance regime. 29 103. Strengthening of the National Health Superintendency. The GOC has started to address the budgetary problems and other issues hampering the ability of the Health Superintendency in carrying out its responsibility of oversight, control and monitoring of insurers (EPSs and ARSs), health care providers and territorial entities. Following the principles governing the operation of other superintendencies in Colombia, a decree is about to be signed enabling the Health Superintendency to charge a fee to the entities that are under its supervision. This measure will enable the Health Superintendency to carry out its fiduciary responsibility more effectively. 104. Additionally, GOC will (i) complete a business study currently being carried out by the Health SuDerintendency analyzing its oDeration and wavs of strengthening its Derformance, and (ii) disseminate systematically to the public its assessment of the performance of its supervisees. The former will enable the Health Sunerintendencv to set clear targets and develon supervision strategies and benchmarks, while the latter will provide information to eligible affiliates for making informed choices regarding insurers and health care providers. The last point is expectpd to improve qullity control, as they will be winder greater pressure to perform better, as informed clients tend to stay away from unreliable entities with bad 105. OC on.;ctv.ns p.nn A.. tihe ilia vi,4hy.4-ogA r..;me T- ,ornpnlaenrt tfh aohrnx r.naalr-n GC is developing a time-bound communications action plan to inform eligible individuals of the subsidized rcEgimle regarding16 thefir leg-,al rightUk to bUe affiliated to an AID/+,- --A afiito rcs zdi_lzlet 1% ULI L%1I.G 5A U U ILXXLU L LV L U GJI UIJ, GL%, ILIIL"ivu'J Fl%%O GJiU 1LIIjJIJi LQIiI.. LU them of the full implementation of the supply to demand subsidies reform program. Emphasis will be ginven L tou.ILr %,1UiiIkLV.%L ber. ca11sU1Va UJf ULb by ;eJJL.1 S JEN VAy IrVU,e .t alldac.-l affiliation to an ARS. Furthermore, the campaign will concentrate on issues such as consumer's rights to select the uisurinCe provider and health care package of their choice. 106. Strengthening the immunization program. hiie Ministry of Health (MIGH) has snown resolve to strengthen the EPIVPAI immunization program. In collaboration with Panamerican Health Organization (PAHO`), nationai autnorities conducted a detailed evaluation of the entire nationai vaccination program. The GOC has now allocated the funds necessary to purchase vaccines and syringes and to carryout a nationai vaccination campaign in 2002. I ne governrment has aiso ciarified the responsibilities between the MOH and the National Institute of Health (INS) in terms of EP1VPAI coordination and supervision at the national level. 107. Equally noteworthy, the MOHIINS in collaboration with the local PAHO office, is developing a detailed needs analysis for the national cold chain to ensure adequate storage and transport of vaccines. Moreover, the MOH is developing performance indicators for monitoring vaccination coverage levels at the municipality level and has begun to address the development of a functional information system for the collection, analysis and dissemination of infornation on vaccination activities. The above indicators will be used to certify compliance by the private sector with vaccination guidelines and the information system will monitor the number of vaccine doses given by provider as well as by geographic location. 108. However, to ensure the efficient functioning of the EPI/PAI program and to ensure achievement of acceptable coverage levels, the government is initiating the following additional steDs to accelerate the implementation of needed reforms and address issues that have lead to poor vaccination practices (e.g., missed opportunities to vaccinate): * Development and completion of a detailed Plan of Action based on the recommendations from the National Evaluation that clearly specifies short and long-term activities to remedy weaknesses in the national EPI/PAI program. These activities will be coupled with performance indicators to measure their implementation and their impact. * Pilot testing of the computer software PAISOF-2 and development of a plan for its national application to ensure access to adeciuate and accurate information to monitor Derformance via standard indicators. D Fina!yvj development and institntinnalI7atinn nf mesmirtur tn strenothPn the cnnrrdinatinn and exchange of information between providers to eliminate missed opportunities to vaccinate due to either lack of informnation sharing or to restrictive billi;ng procedur-es. (4) Transparency and Citizens' Oversight 109. Through the creation of SINERGIA, the Government of Colombia has made important advances in estaDiishing a founuation for ennanced governance tmrougnt me use of key performance indicators. Building on this solid base, the GOC proposes to (i) move beyond monitoring and establish periodic impact arid performance evaluations of the main public sector programs financed by the national government, and (ii) establish a system of public monitoring to improve transparency and accountability. 110. Under this new policy, impact evaluations would first be carried out of ICBF's daycare and nutrition programs as well as of the main SENA training programs. The results of these evaluations will be produced by the end of 2004 and made available at the same time as the RAS safety net program evaluations allowing for the next administration to carry out a comprehensive review of the social safety net system. The system of public monitoring will bring to the general public information that has to date been the purview of central government officials. Adapting the successful model of "Bogota Como Vamos" implemented at the municipal level, the central government will establish a public inforipation and monitoring system that will not only give the public information about the central government's performance, but also allow the central government to benefit from public opinion and open dialogue with its citizens. 31 4. THE SOCIAL SECTOR ADJUSTMENT LOAN (SECAL) A. Objectives and Content 111. The proposed SECAL, a one tranche loan to be completed before the end of the current Admlnitrtinn ho q three nvearchino nhipetive-q Firqt the FCAT. imp to encnrsge and enable the current Administration's momentum on several key social reforms that have been developed with active Banlr imponrt Thic nobipjetive incfludpe rncnolidation of thp cilrrpnt stnge nf Conlnmbia's Bnknr suprpvr rtP.A social sector strengthening program. Begun in 1998, this program is based primarily on education and 1,a 141. -n4.n. -ci.n.n A ti- *l,o fh- -nl ,,4n --4 -..rnl+-h, m ne . -.c sA t1im -cn.lcinmn -4 UhOiui i.,ilis supporwd bi thLe po rrit4Ltioll oL EIDIJ 3 rIIL.MasW MCI and t Ie I SIIIIIWIIE ML an integrated social risk management policy framework. Second, the operation seeks to promote continuity 1..U IILLUUiUit a ob%ialW D%LtJI U~VVVlJJIUpUilL U)' I9I;UlyLr LUV, ULVAL rLUIUmLLLU UaU LU lllUI,1JIVLaV 111 1La medium term strategic agenda follow up activities the Bank deems critical to carry forward the reforms the loan is supporting. Lhird, in light of thie breakdo-wn in the peace pruoces, w-eak woumiic growut and financial uncertainty, the loan aims to provide the GOC needed financial cushion as well as support for social measures complementing the fiscal reforms under the Structurai riscai Adjustment Loan (SFAL). Together, these objectives establish a foundation for the expansion of key reforms that with follow up actions can significantly contribute to the advancement of social sector strengthening and the politicai sustainability of fiscal reforms. 112. Table 4.1 presents the tranche release conditions, key strategic goals and actions for the next few years (medium term framework), and the progress indicators for monitoring achievement of said goals. This medium term framework provides a "road map" on how the activities being promoted by the operation would ultimately lead through follow up actions to sustained improvements in education, health and social protection, particularly of the poor and vulnerable. Although the goals and actions listed under the medium term framework are not legally binding, they have been endorsed by the GOC in its Letter of Development Policy (Annex D) and are consistent with the views expressed by the technical team of incoming Administration. The list under the column "Policy Actions for SECAL Tranche Release" present the legally agreed actions that would constitute conditions for Board approval and trigger a one tranche disbursement of the loan. The specificity and definition of the conditions as well as the evidence of compliance are discussed in Annex G. 113 Formallvy the oneration is not a nroarammatic loan- Yet in substance- it is nart of a coherent program of activities complementing ongoing Bank operations and initiating follow up measures to carry fnorwar nnoning scnial rpfnmsc On the nne henA sc mentinn-d at thp noitse.t thp lnon complements ongoing lending and analytical activities, including among others: (i) the aforementioned series of cooTA-A *.edopramion launchedA 1by r c and` the 1 inco, a n Labotironi th flt to protect aAx,oances in the social sectors and implement a effective social safety net in the face of the recent recession and its peris,nt neativeCons--.encs28. fii) +U- e LsA T -A.-e-t --Aas escnr"ig-uaio n eL+ pesb-111neI UgU Vui -,r jUL 9 I,kil LJIV 01rXI CLPAuJ UOHIPILL LlIF3II,&l%i3 %.LlLIUULIr V%UUL.LVLL aLLLU LUvaLui expenditures; and (iii) human capital investment projects, notably the Youth Development LIL, Rural Educa ion, and LcurJULralWJ4uuUn zuwuauin ivIdHdrgCIIHLt PrLujvuw, WLiUcU s-upport U]StitUtioIaI strengthening and experimentation with innovative approaches for dealing with issues of decentralization, violence and the education oI poor chiidren, particuiarly children in isoiated areas. 21 These are the Community Works and Employment Project, Human Capital Protection Project, Colombia Social Safety Net Assesment and the Colombia Poverty ReDort. 114. Looking to the future, the proposed SECAL would set the stage for the next phase of social sector reforms by supporting: (i) the restructuring of traditional, calcified social assistance programs including the large ICBF child welfare program; (ii) the establishment of a system of periodic impact and performance evaluations of social programs, beginning with an analysis of the main safety net programs and the SENA training program to lay the groundwork for a full social assistance reform; (iii) reforms in health and education service provision and financing, as outlined above; (iv) attention to the internally displaced population, one of the most vulnerable groups in Colombia today; and (v) enhanced Government transparency and accountability in the social sectors through information dissemination and dialogue. These initiatives will be carried forward in the medium term, as laid out in Table 4.1. 115. With respect to financial objectives, the GOC is counting on the proceeds of this proposed loan to ensure that it will be able to protect both its social and discretionary investment expenditures, which might have to be cut if the country is forced to resort to higher interest private financing. Recent data indicating weak economic growth and greater financial uncertainty coupled with the breakdown in the peace have reinforced this concern. Beyond the financial cushion it would provide, the operation would balance the Bank's assistance to Colombia by providing a vehicle for addressing social deficits, as a complement to the fiscal deficits addressed by the SFAL. 116. The diffusion of innovative education delivery models supported by the SECAL could improve the access of populations affectpd by violenre to good eduration as these population are generally located in the areas targeted by the education reforms. 117. Finally, the tranche release conditions in the proposed SECAL complement the SFAL and the recen..Uuy approved 1TB sc wr loan. A coma - omf we SECAT tranche rlease nAitions 1fith those of the SFAL and the IDB loan is presented in Annex H. Given the parallel financing between this prop-osedu SECtu arld '=eI 1BAJJ Ivan, *.ra are, both overlaps and su;-r; co.pAF1le...er.t :.nL UIe UancheL release conditions between the two loans. It should be mentioned, however, that only those measures that were taken recently or about to be completed have been indcluded in tiis SECa-'s policy matrUx. WitU respect to the Bank's SFAL, it should also be noted that this SECAL's tranche release conditions complement but do not overlap with the legal conditions stipulated in the SFAL's policy matrix, except the general macroeconomic condition. Close coordination with 1DB has been and will be maintained to ensure policy consistency and facilitate implementation of the conditions. 33 TABLE 4.1 Social Sector Adjustment Loan Policy Matrix Policy Actions for SECAL Tranche Relesase Medium-Term Framework (2002-2005) Progress Indistors _(seeAnnex G for details) _ A. Genmeral C'onditions of the SECAL The macroeconomic framework ofthe Republic of Colombia is consistent with the objectives of the pro_m_ _ _ - _ _ _ B. Specific Conditions of The SECAL Transparency and etizens' oversight or social prograns Goals: to improve the gOvernance of social programs I Intduction of a systemn of impact and performance evaluations and ptiblic through greater transparency of their impact and monitoring of Colombian Goverments's ((OC) main social sector programs. citizens' oversight of their performance. * Increa in rate oftcitizens' and Approved CO]NPES tstablis]hing: (i) periodfic impact and performance policymakers' awareness about the coverage, evaluations of the main social sector programs financed Iby the nationall Measures: impact and efficiency of social programs government ard (ii) public monitoring to improve social sector transparency * Completion oifevahuation of'ICBF iamily welfare, * Nuiber of'social programs evaluated and aid accountability. The system will be launched throughi (i) impact and RAS safety net, Cajas de Compensacz6n transfer and number of evaluations publicly dfisseminated performance evaluations of the main ICBF' family welfiue, RAS safety net, SENA training programs. * Increased participiation levels in public transfer and SENA triining progranms; and (ii) the establishmenit of a system * Evaluations used as basis for the full establishment monitoring system activities (#web site hits, of public monitoring of sociatl sector programs to improve transparency and of the 'Social Risk Mtnagement System. attendatnce at town hail meetings, etc.) accountability through the dissemination of monitoring and evaluation results * Establishment of a system oifpublic monitoring oif imd consultation with civil society. [A CO]NPES is an authoritative statement Colombia's main social programs, building on the of goverment polcy and gurdelnes issued by the National Coumcil of'Social work of SINERGLA. and Economic Policy.] Soial Safety Net Godls: (i) Ito improve the state of readiess of Colombia * Authorizedl list of pre-qualified social 2. Development of a comprehensive Social Risk Management System, to assist the vulnerable poor during times of cisis; (ii) to assistance lprograms ready for expansion including: nonns for its role in nornmal and crisis periods, including a system strengthen social assistamce and insuraice to chronically during crisis periods fior maintaining/expanfing the coverage of'pre-qualified programs during vuboerable poor during normal times; (iii) to improve the * Reduced time lag implementing counter- c nsis peiods using emergency financing; and the function of arid relationship qualty and covenrge of early cbildhood development cyclical saiety net response in ftue crisis between social assistaLnce ansi insunance programs. services; and (iv) to assist the internally displaced (lesis than 2 years) 3. Improving the coverage, effictivewnss and efficiency of I]CBF tihough (i) a population (IDP). * % of GDP devoted to social assistance pilot decentalizing anid separating financiig fromn provision in 110 programs municipalities; (ii) ICBF boaLrd approval and implementaition of'a cost- Measures.: * % of poor with SISBEN documentation card recovery polcy based on sliding-scale fees graduated by income from users * Improved targeting, efficiency and coverage of main * Updated SISBEN proxy ieans test of CAU?s fomral day-care centers; (iii) improved monitoring tdhough die social assistance and training programs * Increase in coverage and improved targeting launching of a citizens' oversight plan in each ICBF regional office; and (iv) al * Functioning cAunter-cyclical social risk management of ICBF day-care programs technical review of the management informaion system. strategy with clear saving and spenisng rules * IImproved infant and child mallntrition rates 4. Akttention to the intenally displacedL popubition (IDP) though (i) adoption of a * Increasing fimancing of social assistance programs as * increased local citizens' participation in comnmon methodology for characterizing die IDP; and (ii) developmenit and % of GDP ICB;F oversight activities launching of a time-bound action plan for elhminating barriers to IDP's access * Clear cost-recovery mechanisms applied in all CAIP * General adoption of citizen's oversight model ID social programs. formal daycani centers by ICBF based on results of regional plans * Commonly aocepted measure of the size ai d * % of municipalities that have adopted ICBF chamaCteristis of th DP &a 6eiad moel semfing fimniei *Implementaticin of measures ehlminating barriers lb filoDrnPovision 34 _~ _ _ _ _ IDP's access to health insurance and social safety net * Improved coverage of health, education, programs. social assistance and social insurance programs amnong IDP Health Goads: to improve healthi status and reduce financial * Improvement of health status indicators such 5. Expansion of health insumrnx coverage ard improvemenit of re;ource ie risks from illnmess trouglh (i) the achievement of as life expectancy, lie expectancy adjusted through: (i) expansion of the subsidized health insurance coverage (R6gimen universal health insurance coverage anl (ii) the for iisability, and infant mortalilty Subsidiado) by 350,000 additional individiuals bellonging to SISBEN levels I strengthening of the control of communicable diseasts. * Increase of insurnkce coverage to at least and 2 by Decenber 31st 2001; (ii) approval of new resource allocation model 85%4o of the total populatiDn for territorial entities according to the numnber of affiliates, numiber of Measures: * Incmease of treatiment rates, particularly for vinculados and public healti covenrge targets (e.g. vaccination rates);i * ContinLed expansion of the health insurance the ipoor approval of CONPES defining the implementation miles for the distribution of coverage of non-affiliated population including the * ReduCtion of the aLmount of dirct health transfers pursuant to ]aw 715 of 2001; (iv) agreement to use the: poor ajid tbe sef-eniloyed through: (i) 9l governmenit subsidies to 'public hospitals as a FOSYGA Solidarity Accouint resources emclusively for subsidizing health implenientatnien of the health reform law (Law 715) percentage of total (supply and dlemand) insuranLce coverage; (v) enactment of regulations (decretos reglamentarios) for mandating tmasformition of supply to demand subsidies the impdlementation of Law 715 with respect to the assignment of subsidies for health care; (ii) reduction in the evasion * DecTease of the rates of evasion and responsibilities for ptblic health and the methodology and information for the - - and underpayment of health insurance contributions; - underpayment of insurance contributions- distribtition of health transfers pursuant to said law; and l(vi) allocation in the (iii) exclusive use of the FOSYGA Soidarity * Dissemination of iinformaition to consumers 2003 proposed budget of necessary resources to inform eligible poor Accouit resources for subsidfizing hkealth irstrance regarding the finanlcial performance and the population about the subsidized health insurance regime rights and affiliation coveralge; and (iv) improved commanications cost and qLality of the services of insurers procedares. program informing tte public in general and the poor and health care prDvides, 6. Strengthening oftheoperation of tte National Health Superintendency in particular albout the affiliation process, eligibility * Increase of(i) the rate ofcitizens' awareness through: (i) approval of the necessary decrees requiring ihe payments bly rights, and allocation of resources to tentorial regarding health insurance rights and use of EPSs, ARSs, lerritorial entities and hospitals to the National Health entities for demand and supply subisidies; public health resources; and (ii) the rate: of iSuperintendency and establishing die fee brwvel, (ii) signed contract for a * Full implemenLtation of Law 715 mnmdate on quality citizens participation, particularly the poor, in business study, financed by ithe Program Support to the RLeform (Apoyo a la assumrace, promDtion of public accountability of oversight activities Reforira), regarding ithe operation of the Superintendency and thie ways that insurers and health care providers writh the support of * Decrease of unit costs of public hospital its role can be reinfoirced, and (iii) internet dissemination of information on a strengthened Health Superintendency andi services ithe perEonDanoe of EPSs, ARSs, territorial entities and hospitals by the development of citizens' oversight (Veeduria * Fus icenmsization coventge of sit leat 95% National Health Superintendency. Ciudadana) of the use of public health resources; 7. Strengthening of the Expanded Program of Immunization (EPI) through: (i) * Opftmization of the financial flow cof health sector 'budget allocation to finance year 2002 immrLunization needs to achieve at least resources, including, prevention of illegal use, 95% valccination coverage; (ii) developmaent of detailed Action Plan based on retention or use for other puiposes; the recommendations of the National Evablation to strengthen the EPI * Restructuring of the network: of pubilic hosipitals in imnun ization program and initiation of certain ke-y measures; (iii) allocation order to operate as efficient providers of health care of resources fo3r executing the EPI plan; and (iv) clarification of the services with limited direct government sdbsidies assignrient of responsibilities at the central level regarding iniUDizafion. and adoption of a newv health care wodel fiocusing on Pm healdt care; * Full implemeritation of the measures to stnmgthen the Expanded Prograi of lmmun iztion based on the recommendations of the National Evahiation, includinkg the completion of activities related to recomrendations for the strengthening of the coli chain. 35 Education Goals: to inprove overall educational status for children * Incnrase of enrollment rate and student 8. Improving public education regulatory framework through: (i) alpproval of a through increased efficiency and equity in the allocation learning achievement new resource allocation model for territorial entities according to number of of resources. * Increase of student/teacher ratio in students, population to be attended, and poverty indicators; (ii) approval of accordance with norms established by MEN CONPES defining the implementation rules for the distribution of the Measures: * Impllementation of the SABER (criteria- educational transfers pursuant to Law 715; and (iii) enactment of regulations * Full implementation of the Law 715 formu]la for based) evalaation system implemtented esvery (decretos reglamentarios, ministeriadL direclives, resolutions, and. circuhlrs) for allocating education resources to territorial entities other year and the universal (norm-based) the imp]lementaition of'Law 715 in nrgard to infonnation system, including * Continued implementation of the Matriz de assessment for all district; every year regulations strengthening the capacity of the Ministry of Education to assist Seguimiento al Plan de Reorganizacion to Ihe year * A wefl functioning information system for all tenitorial entities develop their education infrmation systems fir resource 2003 municipalities by 2004 aillocation, and guidelines for publc education institutions contracting vith * Implementation of assessment of student leaming * Rate of awagreness of the pedagogical models private providers for the dehilvery of educational services; and (iv) allocation achievement among local education authorities in 2002 budget of resources to strengthen the Ministry of Education's * Development of a well functioning information * Rate of adoption of private delivery capacity to assist territorial entities develop, their education information system for resource allocation in the educalional meclhanisms to provide education services systems. sector 9. Ten performance agreements (Matriz de Seguirmiento al Plan de * Completion of impact evaluation of pilot Rleorgauizacioni) signed between the authorized rqpresentatives of both the pedagogical models fir nirl areas by 2004 and their National Goveanment and Territorial Entities to rationalize the teaching force dissemination inationwvide. and extend education system coverage. * IPromotion of the use of private delivery mechanisms 10. Signing of a MonitoringAgreement (Convenio de Seguimrniento) between lo provide education services authorized representatives of the national govenrnent andl the Mayors of selected districts receiving educational transfers according to the Law 715 formula. Said agreement will allow ithe Mmiistry of Eduation to monitor comphance of the following imeasures that the dislricts agreed tc, undeilake: (i) improve the reliability of the informationl on the number students; (ii) streamline the administrative structure of the Education Secretariats (Secretarias de Educacion); and (iii) increase investment in non-salary education inputs and universal assessment of the educaticinal achievement of children. 11. Public dissemination of information through, inter ala national media, publications and press releases regarding: (i) student learning aclhievement of the last SABER assessment and (ii) the updlating of the "Portfolio of Education Services" (Portafolio de Ofbrtas Educativas) and its inclusioni of uinit cost estimates. [The Portfolio is a brochure on pedagDgical models local authorities should consider fior increasing both enrollment and quality.] 12. Development of a methodology and shortlist for selection of consultants to evaluate models for expanding basic and middle elducation using education technology (e.g. SAT, telesecundarias, posiprimaria and accelerated mnethoologies) -1 ._ _ __ ___ _ _ _ _ _ _ _ - | -- Technical Assistance 13. $5 millon will be aside set fior technical assistance (TA) imd addled to the 2002 budget and/or 2C03 budiget proposaL 36 n. riscai, Timing ana Oiner NisKs 118. Economic risks. The WOC has demonstrated strong and continued commitment to prudent macroeconomic management and structural reform, but there remain significant internal and external risks that could affect the fiscal accounts, as discussed in Section 1. On the external front, the principal risk is posed by the threat of further deterioration in the external macroeconomic environment led by a deeper slowdown or recession in the world economy. The most important transmission channels are (i) a further deterioration in the terms of trade, particularly resulting from continued unfavorable coffee prices and volatile oil prices; and (ii) the closure of access to international financial markets due to crises in major markets and/or emerging market countries. 119. On the internal front, the major risks concern the fragility of Colombia's economic recovery, compounded by the collapse of the peace process. As mentioned earlier, in 2001 the economy grew 1.6 percent, down from 2.8 percent a year earlier, although it still higher than the Latin America average. Prospects for an acceleration of growth are hampered by weak domestic demand, high unemployment, and low rates of private investment. The problem is exacerbated by the recent collanse of neace negotiations with the FARC, the country's largest guerrilla group, and the return to open hostilities which coultd negatively affect the investment climate as well as the (knvernment's fical nrnoram (due to pressures for increases in military expenditure and spending to rebuild damaged infrastructure). In nAddit:irn Adesite rn,CC's citoinetd aind strong rnmrnmitrn-nt tn the adi,Austnmient candl refnrm prnarnrn aC evidenced by the significant reduction of the fiscal deficit (by nearly 50 percent) since the onset of the r.^eessoand rh the passaea of the^ul of,1 t its progra romf atr,.,nh ,.ol rofn,rnc~ a fox,, Gr~inpato,t r^ar^ (o.^ the pension system, fiscal responsibility and territorial tax reforms) have not yet been approved by Congress. 12v. YVUlL are ULU IrnplL'W.icior VI LUVf jje iuz LUC We prUpous SEC? iruLb, 1lMeLLmg ULUV macroeconomic conditions is more difficult now than six months ago. However, given the GOC's increased effort to maintain fiscal discipline, raise revenues, and controi public expenditures, the risk of non-compliance remains moderate and within manageable range. Currently, Colombia's program with the iMF remains on track, following some easing of fiscal targets due to iower-than-projected growth and revenues. There is some likelihood that the fiscal targets might be eased again in 2002 should growth be weaker than the 2.5-3 percent currently projected. It should be noted, too, that slower growth could mean that deposits to the counter-cyclical social protection fund would not be made in the foreseeable future. While not a specific condition of the proposed loan, slower build-up of the counter-cyclical social protection fund would undoubtedly lead to some delay in advancing Colombia's efforts to develop a more responsive system of social protection. Second, while delays in the legislative approval of the previously mentioned reforms (pensions, fiscal responsibility and territorial taxes) are unlikely to have more than a modest fiscal impact in the short-run -- thus not immediately affecting the country's macro-balances - progress in each of these areas is critical for medium and long-term fiscal sustainability and will need to be addressed by the incoming administration as a matter of priority. 2'7 JI 121. Timing and political risks. The presentation of a single-tranche loan to be disbursed by the end of the current Adrninistration's ter-m was deemed an importanti risk during the preparation of this operation. Given the expectation of a new Congressional session in July and an inauguration of a new Administration on August 7, 2002, there was considerable concern that the various reform initiatives embodied in the SECAL might not be embraced by an incoming administration, with the attendant risk that actions already taken might be reversed and/or that little would be done in the way of follow up. This risk has been substantially mitigated in recent weeks, however, by the decisive first-round election results which have enabled discussion of the SECAL with the incoming team of President-elect Uribe prior to presentation of this loan to the Board. Indeed, discussions with Mr. Uribe's team have clarified that the incoming administration strongly endorses the operation and, cognizant of the urgent financial needs of Colombia, is in full support of presentation of the proposed loan to the Board before the change of government. Moreover, given the strong electoral showing enjoyed by Mr. Uribe there is clearly a very promising political foundation for moving forward the reform agenda of fiscal discipline, economic reforms, and social development This expectation is reinforced by the consultations undertaken by the Bank during loan preparation with a wide variety of stakeholders from across the political spectrum, which indicated broad support for the medium-term social sector strategy being supported by this operation.. Finally, it is worth noting, that the operation supports programs that are already providing substantial benefits to their target population and have considerable popular support. The most important example is the expansion of the affiliation of poor families with the subsidized health regime (ARS). In the second semester of 2001, a total of 1,554,852 poor persons were added to the ARS, implying an additional amount of roughly $ 118 million ner year of direct assistance to the noor and accelerating the supply-to-demand transformation of Colombia's health system. C' I o a- A Co--1n.ons, a.nanc:a! 1aCao, and Disbursements and Audits 122. The proposed (US$155 million) SECAL in the form of a fixed spread, U.S.-dollar-denominated loan would be made to the Republic of Colombia. Disbursements under the proposed loan wouid be made to an account (Deposit Account) of the Republic of Colombia, established at the Banco de la Repubiica for this purpose. As mentioned, the proposal is to disburse the loan in one tranche upon Board approval. This tranche arrangement has been designed with the Government and reflects the GOC's and the Bank's assessment of the necessary timing for implementing the proposed conditions. 123. To ensure compliance with financial safeguards, the Government is committed to continue improving public expenditure management, including both procurement and financial management, and combating corruption. Over the last few years, the Bank (at the authorities' request) has undertaken a substantial amount of analytical work to support the Government's efforts for improving public expenditure management. This included Colombia-Country Financial Accountability Assessment (September 1998); a second Country Financial Accountability Assessment, which is scheduled to be carried out in FY03, and will pay particular attention to financial accountability arrangements at the sub- national and municipal levels; the Country Procurement Assessment Report (CPAR, March 2001); the Public Financial Management Project (PFMP-I, closed March 2001); and the on-going PFMP-IH (Februarv 2001) which follows and expands on the earlier project. In addition, the Bank has sunported the Government's anti-corruption program through the World Bank Institute as well as an Institutional Development Facility (MDF) rant comnleted earlier this year. .0 124. The Government of Colombia has established a Public Procurement Project in the National Plannina Denartment, which is working on the development of a naner on national nrocurement policy based on the recommendations of the CPAR. The recommendations to imnprove procurement include the estahlishme_1nt of an institutinnal frampwork fnr an ordprly and cornsistent development and dissepmination of policies, regulations, and standard bidding and contract documentation. In addition, CPAR recommendaed giving priority to simplification ain.d ot to te '..todu f"" of new rii1,a cr.tr!r anA punitive measures that could easily aggravate existing problems and provide additional opportunities for corrupton ., --a . n. o +U- nf - 4-h A---,+.e+ te1-a i -.g ,J1 "4j U . TV 1ILLU I 4Iv J.WIrQ iI_.L.4 U1V V.1 I~ ',U%, X-JL %,VL &LL"UUI L %J%LLI iC UV.ILIr strengthened to allow it to become more effective, as are institutions (both public and private) involved in *uh e1U1ib1UU4i pr"Uofv vi puUliciL U cuuJuJg. ind 1cUua.dU abUve, LhLUs eI1U1Lb 4 UhVa11 bnupplort e d through two specific Bank operations-the PFMP I and the follow-on PFMP II-both highly praised by QAG, and recentuy comiipleted sector work on corruption. 125. Moreover, tnese two projects have also supported the Government of Colombia's measures to strengthen institutional capacity and analysis in a number of key areas of public expenditure, such as macro-programming, formulation and monitoring of the budget, budget execution-including the development and implementation of an Integrated Financial Management System (SIFf)- and evaluation of results of public expenditure-including the implementation of the National System for Evaluation of Results of Public Sector Performance (SINERGIA). Despite important progress in areas of public expenditure, further strengthening of financial management processes is needed. These deficiencies include (i) divergence between budgeted expenditures and the Government's strategic development priorities; (ii) lack of clarity regarding the roles and reporting requirements of government institutions; and, (iii) the need to enhance public sector transparency and accountability by improving the dissemination of the objectives, performance evaluations and budgetary results of public entities. The on- going PFMP II is supporting reforns in these areas. In April 2002 an inter-institutional committee was commissioned, comprised of representatives of the Office of Controller General, the Accountant General and the Bank, with a mandate is to make recommendations for the strengthening of Financial Management arrangements for projects implemented in Colombia. The recommendations will be submitted to the various authorities by June 30, 2002. The recommendations will be submitted to the various authorities by June 30, 2002. 126. In addition, the IMF's safeguard assessments report on the audit mechanism for the Colombian central h!ani nnmpleted in May 201 unider the tr- nsitiona procedures, conclulded that the cuirrent auditing arrangements are capable of providing high-quality audit services. However, while external audit o+f thek centra! ha-i'a fino"nol atn4tmnainto ;0 is%Adrtoalre, it does not no%,rnvl% wlA the s..;ct t nt.nt of an independent audit under the International Standards on Auditing (ISA). The principles governing cena! bank, -A,di4-r me..r -r -lkr-- enhre +ln the -U Colrrbin C -st4on of 1991, wheebyth President is responsible for auditing the central bank, and is permitted to delegate this function to the r41U.LUg .3upV1JJLVLUU.. L d U LU .o aU1UpeV1UVLdL StaL.e aeVLcy, but UVL L. a p,,Va.e 1iLk. BaseU i Lon is finding, and on the legal issues involved, the IMIF and the Colombian authorities are looking for alternatives o ovcrCune tuhis matter. T1he Government also inmtnub to request uvir assistance it in addressing issues of fiscal transparency, and an IMF fiscal transparency mission is envisaged for early next year. 39 127. For the purpose of SECAL's disbursement and audits, prior to furnishing to the Bank the request for withdrawal from the Loan Account, the Government will open and thereafter maintain in its central bank, a deposit account in dollars on terms and conditions satisfactory to the Bahk. All withdrawals from the Loan Account will be denosited bv the Bank into the Denosit Account. The Bank will monitor and assess ex-post (through supervision missions with the Government's permission) the use of the Deposit Account based on the Comptroller CTeneral Autdit Report The Government undertakes that the proceeds of the loan will not be used to finance ineligible expenditures. If the Bank determines at any time that any pnrwePpA nf thp T nan have hbpn iie,pA tn mQke a nay-v-ni-nt fnr an inpBoihle *.Y,p--niht,rP the C,nv.-rnmPnt will, upon notice from the Bank, (i) deposit into the Deposit Account an amount equal to the amount of said pa,ent, or (ii) ifthe Bank hoo m--Af r reA n, siuh a.-nm to fhe B ank. von..oA-ta ref "A-d tn ihe Bank upon such request will be credited to the Loan Account for cancellation. Although a routine audit of +1.- deposi accoun will not --..--Aed the B- X-rse-e +U- riEt +.o conduct one. ULU UIyj.Fai L GCOIJUUM -111 II UV, I I.4.jU.U LU LU- ijOUftL lvaw vaI.A LULV, li I LI JUU L 'LJ4. 40 5. BANK STRATEGY A. The CAS and the Proposed SECAL 128. As the Country Assistance Strategy Progress Report (CAS-PR, Annex A) reconfirmed, the World 1Ba's r,,in objectives HI %,oloJbita a1re .oV 5)u-pOr de-rVWUI --u--i-AI, ---i-a UvVlUpIeIL WIU s-ustaiUi ab economic growth. Anchored with a stable macro-economic environment and fiscal sustainability, these Objectives were to be achieved by interventions in key areas (i) promoting peace and developmeni; (ii) enhancing rural development; (iii) strengthening human capital; (iv) attaining public sector responsiveness and efficiency; (v) improving infrastructure services; and (vi) ensuring sustainabie development. These priorities have not changed and continue to be supported by the Bank's lending program. 129. The proposed SECAL is consistent with the CAS and the World Bank's Social Sector Strategy for Colombia (Annex E). It is part of a series of social protection projects that the GOC, World Bank and IDB agreed at the beginning of the economic crisis to assist the poor, particularly those most affected by the crisis. Two of them are investment projects currently under implementation that form part of the GOC's Red de Apoyo Social (RAS) safety net strategy: (i) the Community Works and Employment project which provides temporary employment to poor unemployed workers in urban areas through small community projects; and (ii) the Human Capital Protection project that funds a conditional cash transfer program to protect children's health, education, and nutrition. 130. A% nlanned. the Government has asked the Bank to nrenare the third nroiect of the series, a Social Sector Adjustment Loan (SECAL) to support structural reforms needed in the social sectors to ensure that the impnat on novertv and the sustainahilitv of the gove-rnment'q intPrvPntionQ in this arpe are maximi7ze. As envisioned in the CAS, the operation would assist Colombia in establishing a social protection system that r>tt ni4pcu in responseten tar i and t _ -geted, rr.ore tranrspr.t ar.d properly evaluated. The operation would also enable the implementation of recent health and education reRot . 13.I'EAwll d:recuy A -onubut Ato4.. aciein the CAS-R' 1113e of poert redutio,: I. JI * jLL OJ~,f WiLI U1IV..L13 i..ULUIUUL~ LU UIL1LVUIr, 1.1V, 0 VVUJ1P%UVqV- UkV fUVV1ILY IVULL%L;L1VUU, social development and economic growth. Complementing the SFAL, the SECAL will help (i) protect the poor from thie poteltial effect of tihe fiscal adUustLI-ent; and (ii) ensure t-hat key socia; sezrvices, including safety net programs, are targeted to the poor, and delivered more efficiently and effectively. In the iong run, the social sector strengthening program wouid improve Colombia's social protection system, while at the same time building up human capital. 132. The proposed SECAL operation is fully consistent with the strategy proposed in the CAS and CAS-PR, not only in terms of policy content but also in terms of overaii iending and exposure ilmits. T he overall external debt exposure of Colombia is relatively high, but manageable (see Annex A9). B. Complementarity with Other World Bank Operations and Activities 133. First, as mentioned, the two ongoing Bank operations (the Community Works and the Human Capital Protection Projects) supporting the government's social assistance program complement the SECAL. Bank financing for those two projects totals US$250 million. 41 134. Second, there are the Financial Sector Adjustment Loan (FSAL) for US$500 million (approved Uy LUV JU.U Boa 1dUVmNoeUUbe 1777) andU UI, recendj appoJVed SUUL.>LUal iscal V1GU0UI11.e LoznU ISFL )1.LC for $400 million projects. These projects help Colombia achieve economic recovery, sustained economic growth and stabilitjy- crical conditions for atuaining long terml success in social protection, huLLnan development and poverty reduction. The FSAL operation supported a comprehensive program of financial structural reforms that soughit to promote the development of a healthy and s-usainable fiiniancial system, while the SFAL supports the Colombian government's fiscal strengthening program. The latter gives the government fiscal space for protecting sociai sector expenditures and impiementing difficult structural measures-such as reforming transfers and expenditure responsibilities in health and education, restructuring public hospitals, and redefining pension systems. 135. Third, two studies have provided analytical information to this operation. The Colombia Poverty Report assesses and reviews (i) the evolution of poverty and inequality in urban and rural areas over the past two decades; (ii) the incidence of crime and violence and related household responses; and (iii) selected aspects of public assistance, including an overview of public social expenditures and a specific review of the subsidized health insurance system. The Colombia Social Safety Net Assessment evaluates reforms to Colombia's social safety net, both for addressing the needs of vulnerable groups during normal times and for developing a counter-cyclical strategy that could be implemented rapidly during future crises. The study (i) assesses vulnerability and risk management in Colombia; (ii) evaluates how the three new emergency Red de Apoyo Social safety net programs fit into the broader social safety net over the long-term; (iii) assesses the efficiency, effectiveness and gaps in Colombia's existing social assistance programs; and (iv) proposes technical program and policy reforms aimed at improving the social safety net. C. Complementarity with Other Institutions' Operations 136. The Bank and IDB are financing in parallel the social sector strengthening program. The IDB has recently processed a US$390 million social sector loan (approved by its Board on December 19, 2001). The IDB loan committed GOC to a set of policies and actions laid out in the policy matrix for said loan in Annex H. This proposed SECAL would not only support the measures agreed with the 1DB, but deepen and widen the program by including the measures described below. 137. It should also be mentioned that as part of the Bank's close collaboration with the IDB, the workfare and conditional cash transfers projects have been designed with IDB and have been also financed in parallel by the IDB for US$250 million. Finally, the Bank and IDB have coordinated their a,nalvrtinl pffFnrft npartinrilariv in reuard to the qnnisaI sfe-t net stiidv A4 Annex A THE REPUBLIC OF COLOMBIA Country Assistance Update Note' The Current Strategic Framework Al.The last Country Assistance Strategy (CAS) for Colombia was discussed by the Board of Executive Directors in November 1997. and the Countrv Aqqiatance Strateyv Progress Renort WASR-PR) wR° discussed in November 1999. Under normal circumstances a new CAS would have been presented in the middle nf 2002 Honw-vier it u.. dPAidP.p thhat np-ew CASZ ounild ehi hPttpr ilictif,PA fnllnuw nn tih Stort nf the new administration in early FY03 to coincide with Colombia's political cycle. In addition, we are onrrentlu nrancr4nn a collecotion of polinc, natac -, smn ;ng. 'w gor *10 c^i,ho in r,-- i ni a -'c son cial- economic development. The policy notes will serve as a bridge to the new administration, which will take 04r.A; A..- ')A . LA r N A;o.., -b ..A11 U- +1A -^1A +1 EA: - --., fAT A Ss ' _A_ M-_. A VII= 111 I-UrUSL ,VVJ. A D1O V&J1A VV 111 UV ULL (AuG1 UI.JLII U.OLO IDL LIiV UMW XVI UV, JJflOVV IL L%JLV, FAVjVIUVD an update on the strategic framework under which the Bank proposes to operate until the Board of Exe-vte AiActr dicuse flh Aevv C. JLAINUElI V LJITMErSU1 LISCUMC L.LI UAV JVW A2.Following participatory consuitations with government ieaders and civii society the CAS identified, and the CAS-PR reconfirmed, the main objectives of poverty reduction, social development and sustainable economic growth. Anchored with a stable macro-economic environment and fiscal sustainability, these objectives were to be achieved by interventions in key areas (a) promoting peace and development; (b) promoting rural development; (c) developing human capital; (d) attaining public sector responsiveness and efficiency; (e) improving infrastructure services; and (f) ensuring sustainable development. These areas of intervention have not changed and continue to be supported by the Bank's lending program. Furthermore, the CAS-PR recognized that Colombia's economic performance, especially economic growth and the fiscal balance, had deteriorated since the presentation of the CAS and recommended strengthening fiscal stability to restore growth and reduce poverty. The CAS-PR confirmed that a reduction of the fiscal deficit was a key macroeconomic objective of the government, and it recognized that without a correction of fiscal imbalances, Colombia could face financing gaps and problems in accessing external financial markets. Worsening economic conditions, combined with uncertainty as a result of the country's long-standing internal conflict, could hinder the achievement of the government's objectives as reflected in the CAS. In addition, the international economic and financial repercussions of the tragic events of September 11 2001 have reinforced the importance of a return to fiscal sustainability as these repercussions may be severe and could further restrict capital flows to Colombia and augment the deterioration of the countrv's terms of trade. A3. The CA presen+ed a base=case DPTn le..ing po.. of n-A T US$3A00 ,.ii pero yar fot 8 00. This relatively low lending ceiling was determined by Colombia's preference at the time to limit its LTJ.J UbIoroinigs. Ine U 2-rn. ULUVVt.L r,oe U3a0s0sLsIIa,V sIULVSe LU & La L .eV leaUnI jFLgVSU,, WIULL increased emphasis on adjustment lending, to around US$450 million annually. This movement was 1 nis %uiryun-ry ASSIuanc upuuLd. Note was wnutvn on N4ovember 16, 2001 and discussed with tuhe oard in conjunction with the Structural Fiscal Adjustment Loan (see Annex A of SFAL Memorandum of the President). Reent CVU iticlW dev-elIopy-Menut arUe n0tud in -U-sequeIUt ioLU0lotes. Annex A justified by (a) the need to cushion the adverse social impact of the economic recession, financial instability and internal conflict on the poor and vulnerable, and (b) the Government's commitment to undertake fiscal adjustments and implement structural reforms to be supported by an IMF program. These trinpers remain valid. Furthermore; the CAS-PR indicated that we would reassess the lending program and move to a base-case or low-case scenario if (a) the fiscal stabilization program supported by the IMF nrnoarsm went off track- (h) nroiect imnlemrentation nrnblemc arose; or (G) increaed violence and social unrest significantly reduced our ability to work effectively in Colombia. These risks have not Rcntm DeCvelopmenus A4. Peace Process. Colombia has been ravaged by intense conflict for the past 40 years, financed in part by the illegal drug trade. About 40,000 people have died in clashes during the last decade alone. President Andres Pastrana has made a highly ambitious peace initiative the focus of his administration. The two main rebel groups in Colombia, the FARC and ELN, as well as the paramilitary group, the AUC, are on the United States' official list of foreign terrorist organizations. On October 7, 2001, Mr. Pastrana decided to continue the peace negotiations by extending the demilitarized zone for three months, but with firmer conditions, most notably the negotiation of a truce and agreements to end kidnappings and attacks on the civilian population2. The refocused peace discussions will center on a ceasefire and on obtaining commitments from guerrillas to respect international humanitarian law. Colombia will continue to need the assistance of the international community to fight terrorism and to address the socio-economic determinants of violence in order to construct the underpinnings for peace and development. A5.The Economy. Economic growth for 2001 is now projected to be about 1.5-2.5 percent-down from last year's n 3 eorent. wliile this un prrtet real econo crra'wlh is above the country's a1fl1! 2av2e real growth trend of less than I percent observed over the past five years, it is still well below the 4.5 per.enit n -l .rel -ona nc , n4* +of nn..arl 19 I00. 'M. ro,fnt. ,u4ng nd a nanttional exports have provided the main impetus to growth over the past year; improved performance in agric"ultue, con, Uerce, and uonsuuction have La LLc b t A teu L,i vu.,ut. Hovwe.ver, weakening of investment spending, disruption of oil exports, falling coffee export prices and strikes in booth puolic and private sectors ha-ve negatively affected economnic grovwth. iflation contin-ues its downward trend and is expected to attain the Central Bank's year-end target of 8 percent for 2001. The balance of payments' current account deficit is projected at 2.6 percent of GDP-up from the deficit of about 0.2 percent of GDP in 2000. This is due to an increase in domestic demand for imports, and the simultaneous weakening of traditional exports, particularly oil and coffee. Nevertheless, gross international reserves (in months of goods and services) are projected at around six months for the rest of 2001. While these projections take into account the initial impact of the tragic events of September 11, 2001, they will have to be further assessed. Nonetheless, it is certain that the impact on global financial markets and economic growth will be substantial and that as a result, Colombia's economy will also be negatively affected, including by restricted access to capital markets and further deterioration of terms of trade (particularly coffee and oil). Colombia's total external financing needs are projected at about US$ 8 billion per year for the 2001-2003 period. Total public external debt has risen steadily, both in absolute terms and as a proportion of GDP. In gross terms, it has almost doubled from 27 percent of GDP in 1994 to 50 percent in 2000. Since then, the negotiations between *e govemnem and FARC brdoe down, ending *e peace process. Annex A A6. The government's macroeconomic program has three pillars (a) sound fiscal management, including the implementation of fiscal reforms; (b) an inflation-targeting monetary policy; and (c) a flexible foreign exchange regime. If this macro-economic policy mix is maintained, and given a stable economic environment, average real economic growth is projected for the medium term (2002-2003) at about 2.5-3 percent per year, and for the long-term (2004 and on) at about 3-3.5 percent annually, fueled mainly by investment expansion. As a result of the imrplementation of the forthcoming fiscal reforms and the continuation of sound macroeconomic management, the deficit of the Non Financial Public Sector would decline and reach about 1.5 percent of GDP in 2005. Inflation is projected to continue its downward trend, and to stabilize at about 4 percent in 2003 and beyond. The external current account deficit would reach about 2-3 percent of GDP, and cross international reserves are projected at about seven months of goods and services imports. Finally, in this macroeconomic framework, Colombia's net total public debt would stabilize at abult 50 perce^nt of GDPbby 2005. A7. - ' .17 Pogram. 'm- govermen's s zbilizato prg . is bein suppor ed by an "v Extended A-Ll ZVLV r M IA. U.. VL '.LUL~LL~," %4U "I~I.IonG1 p)rogra t is Unlir Lu4ui IU J11UVILF UA21 Uc Facility, the first of its kind for Colombia, which was approved in December 1999 and extends through the eindl ofL 2002.. .Le, IVVe1UMet1L en'.LVreU iLto an Extended FacUilty Prograri Ll mrdUer to sendU a positive signal to international markets; it was understood that the arrangement was precautionary and that it wo-uiid not be drawn -upon unless thaere was a pressing 'oalance-of payments need.3 Tne government requested that the Fund focus on stabilization and balance of payment issues and that the Bank take the lead on key structural issues. Therefore, the Fund's program concentrates on stabiiization of the fiscal accounts within the duration of the program, and the Bank has taken the lead in identifying and supporting key structurai reforms that will contribute to bringing Colombia' s fiscal accounts onto a sustainable path in the long term. Colombia has so far met, and at times exceeded, the performance targets under the IMF program; two program reviews have been successfully completed, and the third is expected to be presented to the Fund's Board in early 2002. All performance indicators are expected to be met with the exception of the original program targets for the fiscal deficit. The weakness of the economic recovery this year, combined with external variables such as low commodity prices and the events of September 2001, make it likely that deficit targets for both 2001 and 2002 will be modified in the current program review - the targeted fiscal deficit is expected to shift from 2.8 to about 3.3 percent of GDP for 2001 and this adjusted target will be met4. 3~~~~~~~~~~~~~~~~~~~~~~~~~ 3 We support this strategy for several reasons, including: (a) the signal to international markets is working as can been seen by Colombian spreads, particularly in light of the recent events of Sentember 11: i (b the fsct that the Central Bank is bound by strict constitutional restrictions against lending to finance the deficit-an exemplary practice; and, (c) more importantly, the division of labor and responsibilities between the Fund (stabilization and balance of payments) and the Bank (structural issues). 4Portfoiio performance in ColombDia as of June 2002 remains satisfactory. Tne portfolio increased to 24 projects with net commitments and undisbursed balance rising to about US$1.5 billion and US$857 million, respectively. . - c -_ Un-M_~~~t P. 1.i. As before, only one pjsect is curretly raLdU unsausfiaeLory. hne disDu-rsnment ratio iwi a iittie to 23.5 percent in FY02, but proactivity index remains at 100 percent. Colombia continues to surpass all of the key portfolio jJwL a.uc u.iU.icGato ircludded in wU CAS and CSJL -X. Annex A Proposed Bank's Assistance Program Through the Next CAS A8. Portfolio Performance. At the presentation of the CAS-PR, it was recognized that the quality of the portfolio had improved substantially since the presentation of the CAS; this trend has continued. Portfolio performance in Colombia remains satisfactory. The portfolio currently contains 23 projects, with net commit ents of about US$ 1.3 billion and an undisbursed balance of about US$663 million. Only one project is currently rated unsatisfactory. The disbursement ratio was 24.6 percent in FY01, up from 20.2 percent in 1RVQ' The proartivitv index is 100 percent. Cnlnmhia ha-- mimrnasqed all nf the key nnrtfolin performance indicators included in the CAS and CAS-PR5. A9. Country Procurement Assessment Report (CPAR). A CPAR was completed in March 2001. r. r- -11- -- - - - a _ - A - n q Its findings will be broadly discussed and its recommenuations incorporated into the next CAS. nRC report found that for Bank-assisted projects procurement is carried out in accordance with Bank policies and procedures, and procurement performance under those projects is generamly satisfactory and free of major problems. Two procurement audits and four agency procurement capacity assessments carried out in the last two years have found no major problems and determined that the procurement risk in Bank projects is lower than average. However, the CPAR found that public procurement and contract management had deficiencies that had the potential to result in inefficient use of public funds and could be a source of corruption. The findings and recommendations of the CPAR to strengthen public procurement were discussed with the Colombian authorities. Following recommendations of the CPAR, the government is implementing with its own resources a Public Procurement Project. In addition, the second Public Financial Management Project (PFMP), approved by the Bank Board on March 22, 2001 includes a component to strengthen public procurement. AIO. Country Financial Accountability Assessment (CFAA). A CFAA was carried out in September 1998. As a result of the recommendations in the 1998 CFAA report, the Office of the Accountant General and nublic accounting institutions have been strengthened. These efforts have been sunnorted by recently completed sector work on corruption and by the Bank-financed PFMP I and II. These projects have supported the government's measures to strengthen institutional capawity and snalvqiq in a nlimber of key areas of public expenditure: macro-programming, formulation and monitoring of the budget, budget executionn ihingliAmy the AevUpln,imynt andi ir. pv%m.ntatinn of an integratePdV Financnial Maranaprnat Qxu'ttm. (SIFW), and evaluation of results of public expenditure, including the implementation of the National QSyterr. for -+ Ev -o f Pves-lt of Pub,icSeto IDrforC-anc (SLJEMCTV ).Depie , ^TApres .J WLUL IWL L_~ Y "LUISJJ SJ± A'UIJL A IUL.LV JA L~1I~ ~J1AL~ ~ A~~ OFJJIA LkjJI WlLAI& Fl.JI ~ in public expenditure management, further strengthening of financial management processes is needed. inubue -weaessesov Unc-ude (a) diveg1YVU%,Vc OVVWVU bUUdgetUe VAxUHU.LLMU WM Land rVI gvUt'sMi sUate5c development priorities; (b) lack of clarity regarding the roles and reporting requirements of government institutions; and (c) the need to enhance public sector transparency and accountability by improving tle dissemination of the objectives, performance evaluations and budgetary results of public entities. The on- going PFMi- II is supporting reforms in these areas. The next CFAA will be completed prior to the CAS and will have a special focus on sub-national finances. Its recommendations will be incorporated into the strategy and program of the next CAS. 5 At the time of writing this SECAL, Colombia continues to meet the performance targets under the iMF pmgram. Three program reviews have now been successfully completed; the fourth and final review is scheduled for September 2002. Most performance indicators are expected to be met, aithough the target for the fiscal deficit is likely to be affected by the weakness of the economy, combined with external variables such' as low commodity prices and detendoradung conuiions afecting irau. I ne targeted fisca; diUcit fIor ihe combined public secior iLs .3 percent of GDP. After taking into account government plans to increase security-related outlays by 0.3 percent of DJLP, IhU L.-eUsLIS QSAg deScit set UnVdL L1t.h ILVIAV FLVLMs 1J LO 2.6 p ML ent & ofGDP WI 2VV0. Annex A Proposed Bank Lending and Analytical Program Through FY02 All .Lending Program for FY02. As mentioned above, the CAS-PR moved the assistance strategy to a high-case lending progran, including adjustment lending, to around US$450 million for the lending program of FY98-01. Including FY02, the proposed lending program would total about 2 billion and average about US$400 million per year. In FY98 and FY99- we committed TTU$13 12 million and US$142 million, respectively. In FY00, six operations were approved for a total of US$935 million (including the US$500 million Financial Sector Adiuitment Loan and the exceptional TUSS25 million Rnrthrnilke Recovery Loan). In FY01 we committed US$185 million. In FY02, we expect to present six operations, in -ldiiina the QT.AT riirrpntlu iintiar .onnieratiron and tie S,oial Sector AAd,ustme-t T^an (for an art..ont of about US$150 rnillion). This would bring our proposed FY02 program to about US$630 million. With *i,k e 4" -of+i,.QAT nl,fk, ~.VTl * zS.%,jJ excetio of w. J , - lL oLf WFe 1 Q,tJJin IJtUL We, propos Oj 1T J 0L * s ' I W OCULLy ilUdICU 111 the CAS-PR. Although a fiscal adjustment operation was not explicitly envisioned in the CAS-PR, the au0a,.LSy cleally LUdn.;iULLU UIe nIeeU LV sUpportL ClVUILUI pogaIVrLUL VLf fisal andU UoLe stuctuIal refOrLmIbs. Ai2.The Bank's FY02 program supports the short-term and longer-term efforts of the Government of Colombia to protect and promote the welfare of the poor through a series of interrelated lending operations, as well as analytical work. * Magdalena Medio H. The Bank has supported this program through a recently completed LIL (Magdalena Medio Regional Development Project) and will continue its support through a second LIL approved in September, 2001. The first project was very effective in creating a longer term vision of a better future for the poor in this region in the midst of conflict. It aims to strengthen human and social capital, and start a comnmunity-led process of improving basic services and investment. The second project will gradually shifting the focus of decision-making and leadership of the program to local and regional actors, with communities playing a lead role. * Water Sector Reform Assistance Project. The Bank approved a $40 million project in October, 2001 to supnort Cnlnmnhiq's initiative to reform mlrniini l water ntilitie: in lindermerveai nirul and urban areas in the country's Caribbean coastal region. The project will provide technical accietanep to m,idie milinithial leadtver as the,y in_piorn,rate the priu'ate ecptor in the vnmaagcwmie.n.t and operations of their water utilities and expand water and sewerage services to more people, * rUFUU UIVC rUt1LUCF3p PrruJeL. his p[roject aiums L*o Lesualish a s-accessuI prugraul Uo productive partnerships between agribusiness and small farmer producer organizations. It will do so by providlng an integrated package of incentives and assistance for tne development anu implementation of demand-driven, sustainable subprojects that generate income and employment opportunities for rurai communities. Tne project would contribute to (i) reactivating the rural economy; (ii) improving the welfare of poor rural inhabitants; and (iii) generating an enabling environment for the peace process in the country. * Judicial Reform. This project constitutes the first phase of a long-term initiative to improve judicial conflict resolution services in the civil, labor and family law jurisdictions. The proposed project is expected to have three key impacts (i) improvement of the judiciary's social legitimacy and ability to respond to society's justice needs; (ii) increased incentives for the resolution of labor, family and civil conflicts' through peaceful means, thus improving the prevalence of the nrle of law and peaceful coexistence; and (iii) more effective enforcement of contracts at lower cost. Annex A * Structural Fiscal Adjustment Loan (SFAL). The proposed SFAL would support Colombia's efforts to achieve macroeconomic stability and consolidate growth by undertaking structural reforms that would put the country's fiscal accounts on a sustainable path. The Bank's strategy would assist the government to (i) ensure that the fiscal decentralization process is economically sustainable through the reform of intergovernmental fiscal relations, including transfers, and the imposition of hard budget constraints on subnational governments; (ii) rationalize central government expenditures to sustain fiscal discipline; and (iii) support structural reforms in sectors where both national and subnational governments share responsibilities, including education. health and pensions. The SFAL will ensure that within the fiscal strengthening program, public resource allocations to social programs are nrotected. narticularly those for health and education. By consolidating growth and fiscal sustainability, it will support poverty reduction. History has shown that Cnlnmhia has emivoye4 significant declines in poverty dluring ntrin4ds of nnpitive growth and fiscal balance. For example, from 1988 to 1995, as average GDP grew at rates of ahbot 3.5 mir-ent aninianllu arnA _nd prfu r, tpe upe_inped frnm aounit 65 tn 60 nprepnt of tAP population. Furthermore, by protecting macro-economic stability and reducing the likelihood of fic. 1 c.,ses at .-n nntional an -btio-na-1 levs. thn VFPAT -!! hAl mo In nrotnt I16. -cia! A political instability that negative macro-economic shocks could engender. * Social Sector Adjustment Loan (SSAL). In order to alleviate the impact of the economic crisis on the poor, the government asked the Bank and the iDB to support programs targeted to segments of the population most impacted by the crisis. In this context, the Bank is currently financing the Community Works and Employment project which provides temporary employment to poor unemployed workers in urban areas through small community projects. The Bank is also financing the Human Capital Protection project that funds a conditional cash transfer program to protect children's health, education, and nutrition. To ensure that the impact on poverty and the sustainability of the government's interventions in this area are maximized, the government has asked the Bank to prepare a Social Sector Adjustment Loan to support structural reforms needed in the social sectors. The project would assist Colombia in establishing a social protection system that reacts quickly in response to economic crises and that is better targeted, more transparent and properly evaluated. The project would also assist in the reform of labor regulations that have hindered the employment of the poor, particularly young, female and self-employed workers. A3l-Key Analytcal Work for PV02. To sunnort the pronosed nrogram the Bank is undertaking the following analytical work: * The Colombia Policy Notes will summarize the major challenges in Colombia's social-economic deveiopluic&t and will srve a bridge to tiWi neW UdU11iniJaU7iZU. IL Will inIIIUUV LUia141i UOLes on peace, growth, governance, natural resource management and poverty and inequality. It addition, it will summarize essentiai sector issues for development in about 33 areas. * Tlhe Colombia Poverty Report assesses and reviews (i) the evolution of poverty and inequality in urban and rural areas over the past two decades; (ii) the incidence of crime and violence and related household responses; and (iii) selected aspects of public assistance, including an overview of public social expenditures and a specific review of the subsidized health insurance system. Annex A * The Social Safety Net Assessment evaluates reforms to Colombia's social safety net, both for addressing the needs of vulnerable groups during normal times and for developing a couriter- cyclical strategy that could be implemented rapidly during future crises. The study (i) assesses vulnerabilitv and risk management in Colombia: (ii) evaluates how the three new emergency Red de Apoyo Social safety net programs fit into the broader social safety net over the long-term; (iii) assesses the efficiencvy effectiveness and aans in Colombia's existing social assistance nrograms; and (iv) proposes technical, program and policy reforms aimed at improving the social safety net. Risks and Opportunities of the Proposed Program A14.There are serious risks associated with the proposed program. If security conditions were to significantly ude-riuratV, 1i..1plementation ui uic BariJk prugram wuuiu ob nuguuveiy uafetcu. In addition, the current broad-based support for the: reform process could weaken, particularly during the upcoming national elections. However, President Pastrana nas expressed nis commitneni to use the finai year of his current administration to support the implementation of vital reforms. Moreover, the program has been discussed with the main politicai parties (wnich would like to have paifuli but necessary reforms out of the way before they take office), helping to increase its viability and continuity beyond this administration. There are also several external risks that have been augmented by the events of September 11, namely a further deterioration in the terms of trade and closure of access to intenational markets. However, the implementation of the fiscal reform program will mitigate these risks by sending positive signals to the market that Colombia is committed to maintaining sound economic management. Al 5.The risks of not proceeding with the program are even higher. First, the possibility of a deterioration in the fiscal situation and growing fiscal deficits, jeopardizing macro-economic stability and growth prospects, which could in tun lead to deepening political and social conflict in Colombia. Second, a missed opportunity to alleviate the impact of economic crises on the most vulnerable citizens and to ensure that key social services are targeted to the poor and delivered efficiently and effectively. A16.Although this is a high-risk program, its returns could be substantial. Present political and economic circumstances in Colombia, as well as recent performance of the Bank portfolio, do not warrant any si'nificant denarture from the strategv outlined in the CAS and reaffirned in the CAS-PR. Indeed thev confirm the need to focus urgent attention on several important aspects, such as promoting key social and fiscal stnrutull reformns. Under these circumstances, it is management's view that there is no reason to deviate from the high-case scenario for Bank lending at the rate of approximately $450 million per year. ArnnpX A-1 %o-AoVILUL itL a glaInce 91/701 Ltiin Louf- POVERTY and SOCIAL AmerIca middle , Colombia & Caulb. tnco D nt dlamonfd 2000 Populatbon, mid-yewr (ginffls) 42.3 6t6 2,048 LNG expectancy GNI per cadita (AUes met , US$) 2,020 3,680 1,140 GNI (Atlas fefUd, USt bUiWins) 85.3 1,895 2,327 Average annuad grwthl 199400 Populatlon (%) 1.9 1.6 1.0 19 I Labor fbme() 2.7 2.3 1.3 GNI ' p Gross pAT nd _ immv Moat recent etmate (teat year avaUable, 199400) capta enrollment Poverty (% of populWaon below r ial pove Dne) 55 s r Urran popaion rx dron popwcnj 74 to 42 Ufe expectancy at birti (yers) 70 70 69 Infant mortality (per 1,000 five bliths) 23 30 32 Child malnution (X of chDldren under 5) a 9 11 Aoos to Improved water source Access to an Improved water source f% of populabton) 91 85 80 lliteracy (5 of aoouabon age 15+) 8 12 16 Gross primary enrollment (X of schodl-ge populaon) 113 113 114 Colombe Male 113 116 Lower-enIddle-Incone group Female 112 . 114 . KEY ECONOMIC RATIOS and LONG-TERM TRENDS Iio- w iw 1099 ; v Economic ratlo. GDP (US$ bifllons) 33.4 40.3 84.8 81.3 swU0c0r SAJ*I*COWI..,.I.U .D *9.0. 8.. 1S 12 Trade Exports of goods and servIces/GDP 16.2 20.6 18.6 21.9 Gross domestic savIsGDP 19.7 24.2 12.6 13.7 Gross naionai savingsiGDP 19.6 21.6 u0.6 I . Curent account balance/GDP 0.3 1.3 -0.2 -0.2 e I intrt paymeftB .GDP 0.9 3.9 2.8 2.5 DomesA c 0nvAitmw Total debt/GDP 20.8 42.8 40.7 44.3 savngs Total debt servkle/exorts 16.1 40.9 43.5 47.9 V I Prn n d aebuGDP .. .. 39. Present vatue of debtexports .. .. 221.8 .. ___ __ ___ __ ___ ____ ____ _ . Indebtedness (average annual growth) GDP 3.6 3.0 -4.1 2.8 4.7 CColomnbI GDP percapita 1.5 1.1 -6.7 1.0 2.9 Iower-m-ddle4ncome group Exports of goods and sArvoss 7.5 5.3 4.7 5.3 4.4 STRUCTURE of the ECONOMY *V') v wv *ew vvv Uwrow eq inVesment arian^dw(7%) (56 of GDP) 4 Agriculture 19.9 16.7 13.8 13.8 __ I indiustry 32.5 37.9 28.1 30.6 _ - Manufacturng 23.9 20.6 13.7 13.8 I 0f c x I Services 47.6 45.4 58.1 55.7 r T Privae consmpUuon 70.2 66.4 64.4 68.1 II General governmentconsumputon 10.1 9.4 23.1 IS.2 GDI - -GDP PrIvate consumpllon 70.2 18.2~~~~- -- I 0 1(Fl I imports oi goods anc services 15.6 14.8 18.6 20u. (average annual growth) I o Agrculture 2.9 -2.2 0.2 5.2 3°1 Idustwy 5.0 1.7 -9.0 S a -- ManufacturIng 3.5 -2.3 -10.2 9.3 - I SerAoes 3.1 43 -. 1.9 | - 9s go 97 -*ti Qs9 to I Private consumption 2.6 2.6 -4.5 6.5 i5t IV General government consumption 4.2 9.5 3.9 -14.5 -30 s _ -.entc 1.4. . 2.4 1 3 1062 x pvorts - _pr. Imports of goods and services 0.4 9A -22.3 5 Note: 2000 data are prelimInary estimates. The dlamonds show four key Indicators In fte country (n bold) compared vAth Its Income-group average. If data are missing, the diamond will be incompiete. Annex A-1 Colombia PrICES and GOVERNMENT FINANCE 1960 1990 1999 2000 1 J ,.i Domesifc prices (% change) Consumer prices 26.4 32.4 9.2 8.8 Implicit GDP deflator 27.6 28.6 10.2 10.7 Governmont finance 0 ______ (% of GDP, Includs current grants) o 6 . 5 _ Current revenue .. 15.8 12.7 12.1 g5 95 97 95 99 00 Current budget balance 6.8 -4.9 -5.3 Overall surplus/deficit .. 3.9 -7.5 -6.1 ' ,,WA r - W1 (US$ mllons) 9 2000 Export and Import levele (USS mill.) IotaJi upons (fob) 4,2w 7,139 1ii,S6i i3,ii 20000 Coffee 2,381 1,415 1,324 1,069 J Petroleum 101 1,951 3,757 4,569 15,000 Manufactures 973 1,759 3,947 5,190 Total imports (clf 4,683 5,589 10,659 11,538 1S,000 - i b - I Food 296 245 1,426 1,428 Fuel and energy 564 330 252 234 in m * m * m mi Capital goods 1,616 2,034 3,651 3,414 o Expon price index (19950100) 7 61 194 243 94 95 95 97 98 99 M Import priceindax (1995l100) 5 58 161 201 NExponts *Imporats Terms of trade (1995=100) 126 110 121 121 BALANCE of PAYMENTS 1980 11990 400099 (Un$ million1) Current account balance to GDP (%) (US$ millons) Exports of goods and services 5,747 8,87 13,886 15,8 o ,m w wf Q2TAR, O _ AW,A.W 65,69-7 7.09 -13,40 1,1 ._ _ _ _ _ L A, Resou balance 15 97 4: 1,307 Ii Nat Income -211 *2.080 -1.422 2429 Net current transfers 166 1,026 785 990 4 ' * * Current account balance 105 544 -11 -132 4 Financing items (net) -430 53 502 -737 4 .* - Chnges in net reserves 325 -597 -322 869 .. Alamo: Reserves lncludng gold (US$ mllions) .. .. 8,103 9,006 Corversi.onl t (DEC IA-nnMIO A7 3 502.3 4f7' e 14 7r 2,-a .e EXTERNAL DEBT and RESOURCE FLOWS 1960 1990 1999 2000 (USS millions) Composltion of 1999 debt (USS mill.) Total debt outstanding and disbursed 6,940 17,222 34.538 35,968 IBRD 991 3,859 1,960 1,920 IDA 21 13 5 8 7 G:3985 A: 198a Total debt service 95i 3,889 6,611 7,8W8 4 32s IBRO 144 751 390 370 IDA / E: 1,470) Composition of net resoume flows 0 1 1 Oficial grants 8 35 103 - v.riciai credim 2r *40 276 \t /I Private creditors 531 -155 2,502 -415 Foreign dlrectinvestment 157 500 1,109 2,247 | Portfolloequity 0 0 25 17 F:22,883 World Bank program I Cou,ir,lntiariw 361 I 5,3 S9i 3 0 1A-iBRD E-Bis=e- I Disbursements 218 213 511 265 B- IDA D - Other multlaterl F -ra Principal repayments 68 435 271 244 C - IUF G - Short-term | Netflows 152 -221 241 21 Interest payments 79 318 121 127 Net transfers 73 -539 120 -105 Development Economics 9/7/01 Annex A-2 Annex A2. Key Economic & Program Indicators-Change from Last CAS As Of Date 11112/2001 Forecast in Last CAS 1Actual Current Forecast Economy (C19 11997" 1998" 1999 200C 11999' 2000f 12001" 2002" 2003" 2004" Growth rates (./! I GDP 2.4 4.2 4.0 3.21 -4.3 2.81 2.0 2.5 3.0 3.5 ExDorts I 4.7 12.4 10.6 1.1 7.2 3.0 2.9 0 4.7 3.3 Inports 5.9 3.0 4.2 1.71 -25.4 8.01 12.2 3.5 3.8 8.2 Inflation (%) 18.5 18.0 17.0 16.01 9.2 8.8| 8.0 6.0 4.0 4.0 National accounts (% GDP) I I I Current account balance I -4.8 -4.2 -3.7 -4.11 -0.2 -0.21 -2.7 -2.6 -2.9 -2.8 Gross investnent | 20.5 19.6 18.8 19.21 13.9 14.51 14.0 16.5 18.3 19.1 Public finance (% GDP) I I I Central Administration balance I -3.6 -2.4 -1.7 -1.41 -6.7 -5.91 -4.0 -3.9 -3.7 -2.8 International reserves 6.1 '5.2 4.7 4.41 6.8 6.91 6.6 6.8 6.8 7.1 (as months of imports) PrOFrmpt Me.k'v FV) IFY07a FV98b FVgY99b VMV FYoobIFyQC FVnc IFY1a FVi FYO3b plFY Lending ($ mnillion) |345.0 375.0 550.0o 140 9301 190 630 665 ____~~~~~~~~~~~~~~~~I IC_ Cz A '2171 f AAA1 n tl no A171 1 012 AnA A Z 4.UIHH UJ.'J .) ID..V 91.Vj LJO 10.) 970 I V ($ million) a. Estimated year b. Projected year c. Actual outcome Annex A-3 Annex A3 Selected Indicators* of Bank Portfolio Performance and Management As Of Date 11/12/2001 Indicator 1999 , 2000 2001 2002 Portfolio Assessment Number of Projects Under Implementation a 20 26 22 23 Average Implementation Period (years) b 3.3 3.4 3.2 3.1 Percent of Problem Projects by Number a, c 0 7.7 4.5 4.3 Percent of Problem Projects by Amount a c 0 6.9 5.5 5.7 Percent of Projects at Risk by Number a, d 0 7.7 4.5 4.3 Percent of Proiects at Risk by Amount a. d 0 6.9 5.5 5.7 Disbursement Ratio (%) e 33.3 36.6 24.6 6.5 P,o.,fni olfoAniwwmwaeu CPPR during the year (yes/no) YES YES NO YES Serns- (-t,al TTQ'tU 1,0l33 !,2A4 1 ')An, !,5A Average Supervision (US$/Project) 51.65 47.88 59.04 83.89 Memorandum item Since FY . Last Five F is Proj Eval by OED by Number 86 7 Proj Eval by OED by Amt (US$ millions) 6176 698.1 % of OED Projects Rated U or HU by Number 25.9 28.6 % of OED Projects Rated U or HU by Amt 23.7 20 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of proiects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. whic U1U1InUclud all Aci pro4jVe as Uel asULpUeILU, WIUI Ue d dApUV U gL the fiscQal yea which includes all active pr-ojects as well as projects which exited during the fiscal year. A.-.ex A A Annex A4. IBRD/IDA Program Summary As Of Date 11/12/2001 Proposed IBRD/IDA Base-Case Lending Program a Fiscal year Proj ID USS(M) Stratenc Rewards5 Implementation (HMEAM ) Risks (HIMIE) 2002 Magdalena Medio II 5.0 H H Wa'w. ^etm RxeLn- -A-sistu-ance to.ect 40.AnA * *iJJ~~~~L .flI.V ~~~H M Judicial Reform 5.0 H H StA^-uz-^I Fisal AAdjgen: TA 400A 0 n Social Sector Adjustment 150.0 H H Pl61,t~U.LL:AW * I,IUIWU5J IaVaIUjJLla.,5L 34.1J 5M M Labor/Tax SAL 400.0 H H THighe.r Ed, .ca.. ,or. Fit,na. ,,c;ng Reformtt 1... ; 50.0 H H Colombia-Bogota Urban Services 80.0 M M Th iq table npmenti tht- nrnnnsrdmi lmnm m fir tlw nP,t thw. fiWA1 Vr b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or Low (L). Annex A-5 Annex A5. IFC & MIGA Program Summary FY 1999-2002 i nnA n n in ~n 1777 'VVV IW1 4%= IFC approvals (US$m) 55.10 21.60 176.38 Sector (%) mrT FG1PTTVF nV AVFHTCT E. I! FINANCE & INSURANCE 65 79 1NO TALTA TIC MINEALT OIL, GAS AND MINING 35 Total ioo 0 100 0 Investment instrument(%) T Las 45 4 EqWty 9 33 Other 57 Total 99 0 1oo 0 MIGA guarantees (US$m) 155.42 155.42 0.00 Annex A-6 Annex A6. Summary of Nonlending Services As Of Date niru212wi Product Completion FY Cost (US$000) Audiencea Objective6 Social Sector CEM FY02 87.5 G, B KG PD Agro-Ecology FY02 60.0 G, B KG, PS lmprov Pub Expend EF FY02 45 0 K, PS Colombia Rural Finance FY02 100.0 G,B KG, PD, PS Poverty Selected Topics Y02 100.0 a, B, PD Gte, PD, PS Social Sector Review FY02 150.0 G, B, PD KG, PD, PS Envinmentzd & Poverty O , n - - - S Av *&i. v w J nJ roui Policy Notes FY02 100.0 G, B PD Labor Reform Agenda FY03 80.0 G, B, PD KG a. Government, donor, Bank, public dissemnmation. b. Knowledge generation, public debate, problem-solving. -p Wa iUURJ P%sd pus uap1cd O8o-,n13 5Wflfl e U S 59JOUP W4P QL Bwiwn. 13WIlES 194 15045 j1111 U41 59q Us1q JOn iswl WJ U ;ON 6X3 AmS B94q P01P0 £q ppmUS owIe rOW.4 SV fOD e s x s r6lwf~~~~~~~~~~~~~~~~~~(vo s ispun s6, uqmupw utR 40 Lo 0 L(id(07J )JU~U t O W (SgvowZ}j J4u W ow unhqunuu a9 ag is 91 cc T 58 es Os 001 a 9Wn 09 go 91 LI t O01 flyppdodjo ,o nato waA powdu4 us oi "w IDOL O as te mo1 am luMGWUS 100p0 Jrlid 194 *r. dSC)D W 8j- PUJS' f,- 'lrr ase B~~~~~SC -0-Jouwp3 sOiYOnOdXG71100d g LB (uqflmisuosoowcqoz p0 fijaupbwusj Bu VC J~paeo sotusuJo 34) B3Aglbnw-j ZOPUf lute (0oo=nes) Kepul eop pooal in m&i i 00 SOJ owIJWS WuVuo DK L 0C09FZ OWi Col't DSS) sM ad INO :",oIu 4 FJr W O' z X4pUl lur&UP lmWpN fsopIpmlo %) AlusAOd I 91 lnoua,.m iA#d aiul ae. -lf,irla- , YEV ML GrIPI ~~~~~CIt£0 (&qMypdodpo%Juonqndod uqMli 01 91.WI . Vi -#A O,ndo.z OWASSIU- 34)90 4tWOJV ci, ait9 (mafOJ.9 uM#OeAV-pSw'uOnledO m9Lt NOUVlfld0d aIl!UIl nuEE S1 fl_.&* aaa er-a ra OIpPW9eIMO, eBOoU Uf dnouiB *woouIuVou t swag JAq q5iuIs ;Isom AUWJ3PUj I1P'OS 5'qWPlO") *LV IS-u-)V LN XOUUV Annex A8 Annex A8. Key Economic Indicators National accounts s % GDP at current market prices) Gross domestic 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 product Agriculturea 13.7 14.2 13.8 13.8 16.0 15.9 15.9 15.8 T_3 . a 9 'na A to. 702 1W I 1fb Z la 12 10 ti 1%A I an rb LUUuL,Iy d7.-7 £o..J do.l .JV.J £O. 0.7 SY7.1 Y7.Z Servicesa 56.9 57.5 58.1 55.7 55.7 55.2 55.0 55.0 Total Consumption 85.0 86.2 87.5 86.3 85.4 85.5 85.8 86.0 Grnns dnmeqtic fixed 21-3 19.6 13.9 14.5 14 0 16.5 18.3 19.1 investment Public investment .. 8.0 8.7 7.5 7.0 8.2 8.3 8.3 Private investment .. 11.6 5.2 7.0 7.0 8.3 10.0 10.8 Exports (GNFS)b 14.8 15.1 18.6 21.9 18.9 19.9 19.2 18.7 Imports (GNFS) 20.8 21.0 18.6 20.4 20.8 20.8 20.6 19.7 Gross domestic 15.0 13.8 12.5 13.7 14.6 14.5 14.2 14.0 savings Gross national 15.6 14.2 13.4 14.9 15.0 15.5 15.4 15.2 savingse Memorandum items LUVs dUVIULI.. XUcII7 7006719 O9tO8t8J 80 827V 80J OJ I OYIJV Y 469UY product fT c m lli^v at current Gross national product 3450.0 2600.0 2200.0 2020.0 1870.0 1900.0 1960.0 2030.0 per capita (US$, Atlas method) Real annual growth rates (%, calculated from 1994 prices) Gross domestic 3.4 0.6 -4.3 2.8 2.0 2.5 3.0 3.5 product at market prices Gross Domestic 3.6 -1.i -3.8 4.2 i.8 3.9 2.6 4.2 Income Real annual per capita from 1994 prices) r_n_ _ om_ .iI 1.5 - -1 5.7 1.0 0.3 0.9 1.4 1.2 product at market nrices Total consumption 3.3 -1.7 -4.2 -0.8 2.6 0.4 0.4 0.3 Private consumption 0.5 -2.7 -6.2 4.6 3.4 0.5 0.3 0.4 Annex A8 XKey Econondc Indleatoirs M iis-vst1 [ * a*Iu Bal£nce of Payments Exports(GNFS)b 14195.0 13560.0 13865.5 15608.0 15511.8 16204.2 16473.6 17255.4 Merchandise FOB 11529.3 10944.3 11556.1 13619.7 13722.3 13520.0 13655.2 13928.3 Imports (GNFS)b 18410.9 17539.5 13408.3 14301.4 16515.5 16978.1 17657.2 18112.3 Merchandise FOB 14371.4 13691.9 9899.5 11076.9 12162.4 12537.9 13039.5 13561.0 Resource Balance -4216.0 -3979.5 457.2 1306.6 -1003.7 -773.9 -1183.6 -856.9 Net current transfers 613.6 444.0 785.4 989.8 382.2 887.9 1056.6 1105.0 (including official current transfers) Current account -5952.9 -5270.3 -179.8 -132.4 -2665.0 -2524.0 -2514.0 -2602.0 oaiance (after official capital grants) Netprivate foreign 4829.6 2432.5 1011.6 1181 1218 1233 1798 1810 (iiregt investment Long-term loans (net) 2199.8 932.1 504.7 -294.0 607.0 1383.0 986.0 1386.3 Official -452.1 103.6 969.5 274.6 -73.5 -618.7 -928.3 -589.0 Change in reservesd 277.4 -1390.1 -321.8 869.0 296.0 278.0 234.0 310.0 Memorandum items Resource balance (% -4.0 -4.0 0.5 1.6 -1.2 -0.9 -1.3 -0.9 of GDP at current market prices) Real annual grol-wU rates (YR94 prices) T1 IT M H --1mu .. n.p.fl.3 . Y.q 1 J.u J. I Me.ch^ I.LLUdis ex t Z. ^ 5. 9. J. 3. . . . . (FOB) Primary -3.7 3.2 24.3 -0.6 -0.6 -8.3 4.3 1.5 Manufactures 4.2 19.3 1.1 5.4 5.2 5.9 4.3 4.3 Merchandise imports -4.5 0.3 -25.4 8.0 12.2 3.5 3.8 8.2 (CIF) PublIc finance (as % of GDD1P at current market prAces)' Current revenues 12.6 11.9 12.7 13.2 14.9 14.7 14.1 14.0 Current expenditures 12.4 13.9 15.0 16.1 16.2 15.9 15.0 14.4 Annex A8 Key Economic Indicators bi~~~~ . ' '% *"";..P;'* >-J.'.?. ~.-. ' -We'9r ',r. r.,,oK.--;; .. ..-;.+ , -. 1'tI_w P I - ~~~~~~~~~~~~~~'"- Total debt outstanding and 31800 33338 34678 34081 35958 38403 41990 46307 disbursed (TDO) (US$m)' Total debt service (TDS) 6960 6584 7117 7974 7947 8986 9112 10280 (US$m)a Debt and debt service indicators (%) TDO/XGSb 224.0 246.0 250.0 218.0 232.0 237.0 255.0 268.0 T'flfltflflfl ~ ~ ~ ~~~C%an a,q Al Al Al fl A`1 A- I A'I n IL/GD 29.8 33.7 t1.V 41.9 4t3.I 45.1 47.1 48.9 TDS/XGS 49.0 48.6 51.3 51.1 51.2 55.5 55.3 59.6 IBRD exposure indicators (%) Tfllf nOt .tl. n' It I fk I I r% o a in A A aaA loRDi DS/p-ubic DS IL1.0 11.9 8. 10.4 IV.2 Y 9.5 9.2 8.4 PreferredcreditorDS/public 42.1 24.7 21.1 25.7 26.200 24.8 22.3 21.1 DS kf%\)c IBRD DS/XGS 4.0 2.6 2.8 2.4 2.3 2.3 2.4 2.2 IBRD TDO (US$m) 1723 1740 1961 1920 2090 2340 2350 2220 IDA TDO (US$m) 10 9 8 7 6 5 4 3 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 Intermational Settlements. Annex A10 Annex A10. Operations Poritfolio (IBMDIII)A and Grantsi) As Of Date 11/12t2001 Cled Projects 141 INDIUA' Totl Disbured (Activei 616.50 ofwhli bhaa bee repaid 35.16 Totl Disb7Xd (Closed) 7f567.30 of whidi aa ben repaid 7,646.40 Totl Dalmd (Active + 8,183.82 CIOtd) of Abidibas been repaid 7,681.56 Tcal Undiaatrad (Acabe) 678.56 Total Undisased (dosed) 0.00 Total Undisbumod (Acdtie + 678.56 laOed) vw e P 1 Dlffennee Bt;7 last fSR Expectead d A itte Supevtdon Ratltg (dnsa c rt to lSS 1 7 n t: ProjectD Pr"ect Name ameDt Lm2Wnem Iled Year IERD CRANT Cace0L UDdiab. Olig. Itm P057692 2nMagdalmraMedioProjert # 2002 5 5 PN00880 AGRICULTURE IECHNOLO S 1995 Ig I 1..S 11.8 -5.7 P041140 CARTAGENA WATER SUE'PLY & SEWERAGE S S 2000 85 68.11 23.9 ENVIRO P043109 CO PUBUC FINANC. MANIA1EMENTPROJICT H S S 2001 35.5 352 -0.2 P0ao861 CO URBAN NFlRSTRUCil7RM U U 1998 75 57.:1 29.5 P064891 CO- AN7.IQUIA EDUCATION S S 1998 40 26 18.3 1.6 P068762 CO- COMMUNITY WORKS (MANCS A LA COBRA) S S 2000 100 96 28 P0a7964 CO- Human Cpotid Ft.- OtahTramnas S S 2001 150 150 0 P045112 CO- PASTOEDUCATION S S 1998 7.2 3.6 2.9 0.3 P050578 CO- RURALEDUICATION S S 20D0 20 18.11 42 P050576 CO- YOUTH DEVELOPMENT S S 1999 5 3 3 P06:1317 COLOMBIA HIGH ANDES S S 2001 15.4 14.1 0.7 P06.5263 EARTHQUAKERECOVERY BS HS 2.000 225 104;! 55.9 P0os893 ENERGY TECHNECAL ASSISTANCE S S 1995 11 0.' 0.5 P005884 FINANCIALMAR1E1EDE:'VELOP11ENT S S 1997 15 5.5 3;2 8.7 PM0125 ODS-PlISE OUT S S 1999 8.7 8.3 0 P05:3243 PEASANT ENESPRISE Z S . S 1998 5 2.7 2A P004887 POWER MARIKETDEVELOPMENT.&ENERCIY(TA) HS S 1996 249.3 11 P063102 REGtREF.TA EIS S 1997 12.5 53 5.3 P0)5894 SANTAFE I(Weer/Suc y) S S 1996 145 39.9 39 P057326 SIERRA NEVADA SUSTAINABLE EEVELOPMENT S S 2000 5 4.4 -06 P0?,9291 URBA ENV1RO180NTlA S S 1996 20 1.9 1.9 4A P065937 WAIE SECOR REFORMI ASSISTINCE PRIDJECr # # 2002 40 40 Oerall_ r_a__t Resot _ 1301.5 24 5.5 701 5 236.1 -32 a Inded diibrnents to dae 1n actual didsaauma to atte as p4ecued at qpraisa. Annex AI 1 Annex All. Statement of IFC's Held and Disbursed Portfolio As of 7/31/2001 (In $US Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1969/85/88/93/95 CF del Valle 0 0 0 0 0 0 0 0 2001 CHMC 0 0.21 0 0 0 0.21 0 0 1974/01 Cementos Caribe 4.05 10 0 12.95 4.05 10 0 12.95 1963/90 Colteier 6.02 0 0 0 6.02 0 0 0 1995/99 Corfinsura 25 0 25 0 0 0 25 0 1987PRODESAL 0 0.59 0 0 0 0.59 0 0 1977/89/92/94/96 Promigas 6.25 0 0 12.5 6.25 0 0 12.5 194/95 Promis-an 0 0.2 0 0 0 0.2 0 0 1996Proyectos 0 5 0 0 0 5 0 0 l997Suiesi.ng 9.1 0 0 0 3.8 0 0 0 1999Surenting 0 5.1 0 0 0 2.5 0 0 2001Tolce.en o I 0- A 10.6 0 0 0 TLOU POuU[iUO. 53.75 2i.1 25 36.12 20.i2 18.5 25 25.45 Approvals Pending Commitment Loan Equity Quasi Partic ~~rnni e~~rmw ~I nnnn A A A 2001 CCGF 0 19000 0 0 Total Pending Commitnent: 100000 19000 0 0 Annex B Externai Financing Requirements In 2001, the government obtained its net deficit financing from both domestic and external sources. Domestic financing accounted for 40 percent of net financing, -and external sources for about 60 percent. In gross terms, Colombia successfully placed about US$5 billion in international bonds to cover its privately provided financing for the year, including US$1 billion backed by a World Bank policy-based guarantee operation. Of this amount, US$1.9 billion represent pre-financing for 2002. The remainder of Colombia's gross financing needs, came from privatizations and multilateral institutions. The government has a general strategy of decreasing its reliance on domestic financing, and this is expected to be maintained over the coming years in order to decrease the crowding out of the private sector and to set the stage for sustained investment and growth. Negative net domestic financing is envisioned from 2002 onward, with limited recourse to privatization. Projections of Colombia's external financing requirements and solute-es of finance are presentAd in Table BI. Total public and private sector gross external financing requirements are estimated at US$7.2 billion, UST7.8 billion, anti TR A hU. illinn %r 201, 2002 anA '2003 rpcvP,tivel.u These x.-vfrnol f-5ncing requirements are expected to be financed largely through public and private debt from both multilateral and privtate souces, in cluding bond placemAents. Net capital in'lows are projected to ;ncrae slightly in 2002, as the public sector draws on its extemal portfolio built up in 2001. A positive net inflow of private capiLali als roV utJU'LUA, asI d:U-cL InVesLUIV wuldU cJULmL- itL rLLnuUVIate incIeasV. JriIV=V uiiML investment is initially projected at a level of about US$2 billion. A small accumulation of reserves is iorecasl 11 le neWLx uUir yUrM, mousuy as a res-iUL 01 mWrest mCome. Tne public sector will continue a strategy oI refinancing extemai puliic debt to improve its cost and maturity structure if international market conditions allow. Maintaining adequate access to longer-term financing as provided by the World Bank and other intemational financial organizations will continue to be essential for improving the structure of Colombia's extemal public debt. 6 r1mnmpatinp Apht r,ectnintro hue alrqoarv imnrmvnPA td. nnvprnmmpnt'g Anwem,tir f1pht ni ,I- lr,.-. IAnAn the authorities swapped US$2.4 billion of domestic debt due in 2001-05 with paper of longer maturity. As a resl.t of this Swap the average matlrity of domestic debt increased firnm 3.5 to 4.5 yea r; proeted oAmestic debt redemptions fell 22 percent in 2001, 34 percent in 2002, and 40 percent in 2003. Aiiriex BD Table 3. Colombia: External Financing Requirements, 2000-03 (uS$ Miiiions) }-" . J -:; n . ;X -; ' y.: . 2000 2001 2002 2001 Finandcing Requirements (1+2+3) 5,285 7162 7,799 8,400 1. CurrentAccountDeficit 132 1709 2,524 2,514 2. Extenal Debt Amortization 4.284 5.157 4.997 5.652 a. Public and Publicly Guaranteed 1,464 2,401 2,717 3,602 b. Private 2,820 2,756 2,280 2,050 3. Change in Reserves 869 296 278 234 Sources of Financing (5+6) 5,170 7162 7,799 8,400 S. Extera DeP-bt 3,089 6,900 6,566I 6,602, a. Public Sector 3,395 3,303 4,503 4,377 Multilateral and Bilateral 1,703 1,424 1,850 1,702 Crnym flqhumrseimentq Prvate Creditors 1,692 1,879 2,653 2,675 b. Private Non-Guaranteed, 594 2,044 2,063 2,225 6. NetPrivate Investment 1,181 1815 1j23A 1,798 Source: World Bank Staff projections Annex C Presidential Letter of Commitment and GOC Request for Financial Assistance -rco Se- n7 Bancou, D.C;, 8 de de200 Doctor OUVIER LAFOURCADE Director Subregional Banco Mundlal -% a A I A Estimado doctor Lafourcade: Recibi con aorado su comunlcacl6n en la que hace referencia a su reclente visita a Colombia en la que pudo conocer mas de e-Ara-a !a aiti u%[An sie-!al y annnAmInq dal naf(a f'nar as mf mn.. naraaernamn.* nrnGWIar.n*e uanlkr esia m aa...stacl6.. de apoyo de parte suya, mas auOn cuando afirma que usted y su equipo pudieron apreciar en su visRta 8! constant esfuerzo del Goblemo Nacional por mejorar la calhdad de vida de los colombianos. En su mensaje tambi6n-hace- alusl6n a las moltiples nnnrtjnirJadr4 nilu tiiv^ re hahlar con psrsnasn nqus artAn verdaderamente agradecidas con este esfuerzo. Son esas fls%aa las In e,s M. a v .a a ...s f.i a par.Mm. nuarn son IGstInpo-fante* labor que, sin lugar a dudas, estd contrlbuyendo eficlentemente al desarroilo de! pais. Annex C Le reitero nuevamente ml agradecimiento y le confirmo una vez mas mi firme decisl6n de continuar con ias reformas quo se han iniciado, pues estamos logrando, como usted mismo pudo Conatatar- Ia transicnin tla 'ina Andiad dinnatiarim nnr IA inequidad a una sociedad en vfas de mejorar la distribucl6n do au i ngreso y det- dar-1 me10Joreas VpI*u,da -%s-u gentes Reciba un cordial saludo, - A C -b - l Unofficial ENLISH TRANSLATION Presidentiai Letter of Commitment and GOC Request for Financial Assistance Bogota. August 8.2001 .AO1i ,xier T afiurp AP Country Director Colombia Mexico and Venezuela Country Management Unit World Bank Washington DC, USA Dear Dr. Lafourcade: It was glad to receive your communication in which you make reference to your recent visit to o1Ul1lUl14i, WhVU yoU LdU Lh , U te U1LU.Ly LU IUlUill UL.UQ -IiI e ' LV IUb.loey WiLU ' - social aLU economic situation of the country. I is really gratifying for me to receive this manifestation of support from you, even more when you affirm that you and your team were able to appreciate in your visit the constant effort of the National Government to improve the auality of life of the Colombian people. T" you r.message, you also r.ade reference to the i lfu1t;.1loe 1vtnitie you h A to ta,llk to p l who are truly grateful of this effort. These are the people who encourage us to continue with this important worK that, without any doubt, is ernIcienuy contuiuting To me counTry- s aevelopment. I reiterate my gratefulness and confirm once again my firm decision to continue with the reforms we have initiated, since we are achieving, as you could see for yourself, the transition from a society punished by inequity to a society on its way to improving its income distribution and nrniAlina bettir n1nnnrtnnithie fnr its npnnlp. Dest regaius, Andres Pastrana Arango President of the Republic of Colombia if I ~Ia7 - a II '~ iI~ ~~~~ ii F~~~~~~~~~~~~C Annex C pums del _acm Mmdl ca d aidito do Rma Soal, cdan Nil d finnic yin sabudad lax ppaddo 200a KWsm dm120. Son .9saUs on1sa quo JuslU eams apeuod pm el Gdblmno do CoWmbic L N P Nul w imn mcecm ama ud cdlo setomea, code in vmuqaa finuielom 9 of os ltow* u coo do dtAw d& id nmad. de bemow. 41i cms;o =s t t. As de lu& OUbor a. OM5j mayw jl do mmGu46 (14 as5) y perod de pe4dS a 9 *a). Do Outs Maun i la Nacdn wioc qo sel muado de bo, id c d smcis de Is d0amad sub an 40' utiA devado. Hut oA tAmidnos peaupseuta Impilogug mduocId slgufaulva Nwm lal Ialwemdu adal&xlbledmm %aj Ik vide dii ciVlts de a weorn mm'crdstd do oua - 1,omddudadm~ a cub&eu dseo dol& 4muda L atuh kg gs%csvavf&do sOpW d1o rdIt do rmfmu 9cd at dangl rc m $cuI S qs bum fmomwr. 2. EziMn Iso a coldi ks beawredetba dato taaoml y tAgmaL Par W" lmdc~ bay ressiagln queua iMSMm an In, mmdc de oqiW"a lmoisodeal "aIn Coorsa lm a" MR ffmdhman!soouhnp baMnintaaakw ltu haaqus tanud an s o mudo Undos cazaldo el Mile ospdmhso do 2001o, rIN etkis do b citul o1gaa g Io poke laUaaomma4aos. laM poom I~o dseoI aumacgo-nooi. * hs a l os osassO eaus am M y coobcilds de bea aWmo. AdamS,t de Ins haursma azmn, el,i l~~B. .. .a A_~~~~~~ 4eV bs . du e!-m to Pm oGM aft. La plesdam qua venca ha b slscalkua pmadbnhjg dads go *A 40cm deauanx lI hi wdms m1 del pcis d asodmico emeoy pi on 0d c In ndanm q. p .f.., -a la w : - __ MN4w mo,mlaf - m=lab*w_g d 5*6* #-."$ .m ~*I" a re4Da dm Bofeocuo di pa, d1 cmi caM .wsdo a.do Jo bae cac_le Es las dimo bsi_c..eeh4 mslurqu Waaj en _am Na lmcsl do lo UJIb on la z Iuydoodu V 1a jafa" de *adtec aeal. at 'i-" d - a QUVOUda cabsim an lo dlalac y pba a far loft to arABha. el de on6.h. ~ dooaus a am opmoaida. dimrscnlstrlo auldscth bno ii iSs no in didmu dosl vs a Colmi IN W do e Toi&~ (:o~AAjt, (*LUA-AXdt,La - 'TOMAlONOJJZM W DA CATAUHA CRAN 8DbisDNP VsmbcoW bo Annex D GOVENMENT OiF COLOMBIA LETTER OF DEVELOPMENT POLICY (June 24, 2002) June 24-, 202 Mr. Jamnes D. Wolfensolln i Mr. WolfentiWn: 1. This ltcer summarites tbc achievemeu that WColPjnbiWs sgeial ah4d cigmoixic piorm hassecurr4 ovcr the phst fbur yeats, outtlines key 'isues thai will be faced by by th incoming adminislration that will take office in Atigtst ZO2. The diseussion Wovidos a contoxt f the:proposed Worid Bank- finaneed Social Seetor Adiusimeni loan, wiadrscaing how the measures proposed in tho toan build upout siitig iu4bnns and' are critical to waianti$ probress in the oddial sectLors. The pplicy aItsi proposed in the loan are aiso fleotiveof fongoing coultatiotis and aotions t*W in cootdiutidb with line ministrics, social setpr preg8 admiinistraroT and. L45ln~. .L4 I . iLIu p.-WYlUv - -Al1u OulluaLm" 1U r till; p5JlLy tLFiub achieved and' propos,ed, enh4actg teir long-totn sislsinabi1ity. _OJMP!A'S NQ1WMIC ftOGRAM 2. The (ovq=vicor f Colomrbia has deioonsimtod a strons and continued omtiotnitmnen to pmdent momreconnliic; n utgfficnl and structural rclor, uemorin our commtmncat to mamconomi stciuty- and ti)e recovery 6f growt afir Colotbie auft*l ith latgest recession in ever 70 years in the petiod I OOR 9WQ. 3. noefa ¢ndiDots i'iprOv$4 in'00 %ith real GDP recovering ao w ds p of 4,2% in 1999 to a growUi.of 2.7% basedcon a rcmweed aWport and some rebound inr dcnii 4nmiqnemnd, ori withi manufacturing outpuits cxpanding by Iitore tain Annex D 10%. Infiation enlded the yearat 8.at , well undir the %OA, lar.ct and had deEined LU eaauut fmxv WY, LJ1v iwr £uVSe zIll ;'I CuD11,u-lt; tpwlvu1 mUWvu ZUWI to approxirntely .3, relleoting the weakciing of oxtemal and iaternal demand. affected coffee. oil and manufacturing qxports. COlombig has$ also suf red suppIy shocks: OiJ exports werc disrupted by sabotfee in the first half of the year and strikes afflited. economic actiVity. The 4nnroployirtWt rate hat remhinod ,high, arotund 18%. 4. Despitc these ciWlangqs, policy iutplemcntation undcr out ec-bnionic pji'grain has progressed well - all quantitativc pertfr*mance critqri, agreed with the IMF have bcon observed up to June 2001, anid indicative qiteria for $eptember upd D:iib8tt- 20)i ttiLu b;Iyu W Liczvd8 bYCvu uz!t, Lu addjtRt .v *auoibc of s+ai*keaj ,reforns haive boen iMpleiented under the govetnment's reform agendai 5. 'he govrnrment's reform agend4 iridu#cs ainbiious wet eS t inicse cconomie efficiendV. stimulate ecinnmiC grow(Ih and ftiqter Sn6intl nm,ar5, Otn the'cconomnie &qon, the mform akenda began with the floating of the peso in 1999. Other important relonns havw included: the. teritorial fiscal Adiustinent reforr (LaW 6& 7); the adoption of an inflaion targetihg framework for monct5ry polint; the rcstru;r#riii of the iwancil sector, two revenue enhancing tax reforins; the cstablishment of foinds to support erritiial govc=ent pdfisiohn; .privatkzatibn/liquidation of public enterprises and bank*s; and actions to. dcpen ..emestic, fnatitatl nukets and develop longer-tern financial instruments for the private sector. 't. 1hese retdris lihse iallowed thd lisdal deficit 'to be reduced by close tp -10% ,since thn onset of she r a..CssiorA A h L. . E ' Pvr , grewth. This objective is fundamcntal to poverty reucatiqp aund the long-term imorovement 6ff livitti stan darAc of the prw The t9 o f hik s1,,ratey i,c ,Srt out in the Dcember 199 agtcrccat idached with tho NMP establishhiig a 2.7 billion dollfar, thru-C'yar Extended. Fund Facilitv. Iinder the agreenient reacli with the !MF, the goveratnet set new niactoeconomie targets troutgh 2002 thyt i et;lt4e doeinag( inflation, a redudtiblo of thi curjrent aecount an4 flsca! 4 icits and a resulmption of growth, Annex D t,* vrwr ,^/,:h;i.z COLOMBIA'S S(MAL PROGRAM 7. In addition to the progress adhieved on tlh niacroccototiiic front outlined above, thi's government has. aiso mirade considerable progtess in the social lcctors. wuCAXa,OUn, Uval h o d 4HU 1 piutciLuuU aieu &ayw uniiprwvuig t,W-Qomic CoMpetititAenWss and grgwth. reducing poverty and inequity in anwome diitrihntinn .ndi in hinfldi n6 n rtmamil an'ritit ThA r.,Nu^n1pnt nfr ,inm.,b h. prioritited tliese areas by fo-using on: (i) ilnereasing t4e quality of basic education and basic health: (ii ironoina the effic-ienWy and eauity of resource distribution in edlucation; (iii-) increasing t;iness of flnaincial contribution and fisancial risi; protection in health; and (iv) alleviating the impact of the current crisis on the most Vulntrable a4q dev%lop a better social protection system, Undoubtedly among, thic biggest suveesesS of th~ec policies are fhupd in the ?eledively good quality ot basic educatiQn as cotupared with other Latin Aimerican cowutries; in the increase .in health insurance cov&r4, esp tlhy in Tural ureas, and the o n heaITK sinil pde2-'tnl'n1- .^n tl,f hu^^ thieve*.b.!i, hv.e .i,oA,e pbl through the cnactment of ikey ref)nrns that ha.ve had coigxessional bacicing. In mid-20)1. Conaress auoroved a Constitutional Reform (Act& Levislt,tivo) changing the sYStem of re'venue transfers to- territorial govemments. These refbrms now have a legal foundation in the receutly aoproved Law 715 that iritrdliccs vefdnns- to JLaw! 60. tI. in the area pf educatien. these refo frms seek for the cre6tidn of an institutional structui. that would allow an effectivc incre.ntent of educational coverage with quly, irutugh ute estuib;siinshrnn oQ cear. definitions of the responsiDilities bertv.en regional and municipaj governaiedts for providing education scrvices; Wo4rCe allocationi yrstcri, replacing the former teacher-based alloation systen; incorporation of nerform Ince indivitiors fior learnnir'o snd etFkhtichrnent of lirntc oni curent spcrnVing. I In health. *hes reforits hOve allowed our gdvemnmeri to initiate a restructuring of tie publIc heaith systelz1 lUVlmg tils j=ui&aziiZatiOj of tile pUbiG Iospitls arld tKC acst adcustMent to guaMtee the fin.ancial viabiltty of public hospitals and inprove the prciductivity in health serwke delivery; the alocation of additiosual rCsqute5 piroduct oP the red a5fon'W"U WL W%, Ae. "; &a1 4451A"o LU [LeW ^M1Wi;a1iu of pouol peUplu iu iilth Annex D J OrMe azd the c4strcuting of the Social Security Institute (ISS) which is faipln. a diffiJ tih a-j - y -1. 4.U53g a- utapidnu &evenues. The ISS restructuring includvs renegotiation with the health Wz*!ts uniQoh re1nd1nio w4Ag nmd peAsiem. h"fitu! smIinwa the f the- ; urmt urhi I debt- n aciavin$ a moro eqpitktilc distribution of ih finiaial burden related to high'cosi illnesses among health service providers. Tti*c.r0fi1Ab shoiiWd allo the system to eliminate its deficit by 20S and qxpand health inaurance coverage. 12. In sopia4 protSe~r, acknowle4ging tlhe urgency of allcoiating te soeial conseqa COs of the eonomli cis sis arid fc p ai ad4sa liMU6, our goverrent emocd a temparary social assistance s4fty not.caWled the kad de Apo,yo $oal 'IRAS in ctlsf, thi¶ min;,m of tbe 61a d6 t w ^m4 0' +3-I' vulpnorb populaLion. The RAS cormplemet the obje¢tves au4 socia} policies .estblish6d in the National Develovteine Plau 1999-2002. which seeks econoric an4 s00l chaties tiat Would prmote tihe establisbuent of peace in Colombia The RAS is also suppoeil by the af9repoen6oned olt1 ; al which provides fit putic Spetidiaig of el additiona 0.3 percent of G,,De p year (abut US$250- 300 nilii *nhuay), Ovaer Aild Above cwmnl public sial etponditures, to be iiitrgwg to thq proviion .o social sapy nrA PrOamns durzg thrbugh 20G4. Rt*lementation of the RAS prorants begW ii- 2Q01 pAd the proramns are 13 Thbe, XAS safeit net is comnnoed of tWhrepincipsal pr"mea: (il tht PflA.,i bbtA A4Cll coitntntiityl *Orks progran (fftinerly knuwn as Mwnow a la Ivbra) whic Wio to Pvi0 tetnpotry einploy,ntni to poor, unbPloyad. low kdiied workers by employing thtpm in lbo intejive s ial nd eoqri;p investment proj0elS $uch as srhool xpatislon and road repair. (ii) a conditinat rsh .bsidy prograo Am P.u A-alliM, Paiffita w. A ci%,i, thet pVidos gcash a ja2itadcc i iod. t p tmtieg invstnuiets. in chiiden's health, education aud nutrition by prvidihg W~41L '! LuCVlI;A 4ltHlM iir; ah Wliu au u provizirg uiem wuii lO prevetdive health care, anod (iii) Jovnes er Aedi*i, a traini*tqpip ip r6ft n for iiting athblse h on _P.etM bdi im- dd, ig p*vA., f-r-s .An p'te eitilied. Co1Oti1biba h con itted itself to~adrinistenng these programs fo ihree Ye4ar (20 R 2 2041 And to review the results of the itnnadt evalimiiatnr at rho ptrjects' wnoclusion to assess the desirability of tior oGnotiltualip at part of a brea4cr saIf nlelt strategy. Anney TD *< w;_ t. *./444v1* owrfrr LookINGTOWARD Tih FUTURE 'M RO MIC tepRSP AND CHALLEN>S 14. toki," ahead. Colombia's eonomic prospocts ook, stw=, dmspite, internal and CAlluas ds"4 Ai4 disuusba:F bova, ;his gpvenrnq3i's uucqsqsfui utrostomi. OI *inardetftbihlc stabiliiy iM the wake of a profound rov;ssc has allowed sigificant challenges jr-paiit for the text. administWuin in ad4mresiog a te0ri of riis. t5, With rgard to internal risks. i C6lombia's economic recover remains fragile, although Cotlodbiats OcangMic pefornnsc in 2001 stil ummais higher than, the Latin Anmrica avetage. Ptgpettt for sn an leration of growth atr hwpete by tWak dontcstic dcmand, high unemplnyment, and low ri¢s oxptrivOr inosuOen¢. * The r6cnt. collapse, Ct pffcw ngotia&ons with the FApC, tbe comntry's la:*eet ptterritla group, and the return to open hostilitinscoMpounds the d4wq- '00, partirulaley t.in ; bt of Obie vesliOt cl>mte 0r the iUapact oti the 'fiscal program. ropvding. thc iew Administraiion's policies, both wi respect to tsa eeconity * 'e 00voxmment, however, tba. remained committed to its a4iustmzit ad rofrm prPgrwn despite 4iffitull dotnestic conditions. The signitkafit reduetin of the fiscal deficit (by narly. 50 pcmt) ;inoe din one of th¢ rooession Snd the passite of the bulk of its program of stn.clural rerormaan * eoi4d4nao ot thit ae do4 Oibad io%Net a few it ' f WR .J. qpj *W* w9 w#1;4 i,W U IUap lu& WIU "WnIXUrA ME rEforms, LXMV yet to he qPproved hy Congs. Their approval pvocess m-aM be flthet dtIlavM 41)14 tn this impn,Awnw *,4m?fit,a ,1t ,A, ,4isA hM , ,wA hard to. bUi ctci1s and siupport for its.efibnn pckage and fgr the I ial ai4tnept efXrts, whici will needJt be c6sisolidated bv the-new Gdveniritent clceed in May. Annex D 16. On the extemnal front: * I'Ke nain. risk is posed by a further detnioration in the cxtcrnal mnacroeconomic environpanct lod by a deeper slowdcyn or tetessi&i in the world economy. Tlhe most important tgansmissiou dhanncls are (a) a furber deterioratio,n in the terms of trade, particularly rcsuling, from contiau.eed InfavbrpSic,WcO PvfDllaC4C, 3nd Vptlbii oil p4oqe; and b) bhq closure of atcox t iuternWtionui flnmncial niarktcis due to: irises in -na-or m. ke.s arior einertng mat1kt COjnUties. In the elvetl f (a), tLhc gocicrment iitids tei con'.ip^ue its J Alei! Ax enak.lie A"L-) poid enOATIMn, nUr-naditi_,na. expbr.r and roreipn directt invcstmnenl Wit :regard to (by, *tte g9vernment has cbmimiitted itselr to sound fiscal maniiaeneent (4s suDoorted by tOe World Bank-linanced Secloral Fiscal A4juMment Loan and the 14T prograilt) And retains access to financing fro intcrnasionaliciai inttutios. R Morc specifically, developmcnts in the US economy, Colombia's main traing pattner and ihe largest importer of Colombiani goods, are panicularly impoitat, a. ar conditiois 'in Wnezuels1 Colombia's secand largest export pJuuzSS. &$,{w .r;ccr;i V^rne;zqe 4v.lo ul:.li.*lis;=sQ eleyniemt of uncertainty to the future path or exports to that coftntrv. 17. Future macroeconomic stsbility will depend o tdreussinrg the above interria ud V.Jem. W-e UD aG ell at m uai_" S: 1-curcn pfillars 6-0 "n. nkoci-p^oconom- prqgmiM (a) souAd Giscal aianagment, including the iinpleniemation of fiscal, refPonnc; b)-an inlati on-targoti-n monetary rp!licy. and £Ia fxible h forei i,n cxchaige regime, If this macro-economic policy mix is i4aintsino anid givenp a stable dCoinomic aOiironmient. dvCrawe real economic growth is projccted for the mediunA, tBnn ( O2-2003 at about 2.5-3 peent per ydar, amid for the long-tenn (2004 and on) at about 3-3,5 perment annually. fueled mainly hy investment cPAt5Stblo AS, a rcjh Ur l dte &Lhpi1cuituiusk u r uhLu I.idm.uijo fl aI tr nd, ihc conuinuation of sound macroeconomic pnaagernent, Colombia's net total ptbtlic dtbtx 'oud stabilizc at about 50 pereent of GDP -by 2005. inla tion is projctetl tt coninue its downward trehd, and to stabilize at abut 4 percdnt in .an w oyond., i.Fll . : tra. w l c.urc, accom-va ., % ..vf.t voud 4 .tach a:bout 0-3 peteat of GOP, and gross inteflnational resetves are projecicd at about seven nijnnths of gnods and servites imports Annex D FUT(IRCiXALLIE.SE A.ND PRQPOSBD AUBrIONS - SOCAL SE¢TRS IS, Several challefigo will,oced to be a&rwssed by thv ne~xt adihiMipition to chsure continued.progress in the social sectors. 1,% The Quest for Peaee. The main thallenge fwing hej incoming adrninisfrimtion will C. .M W"Pes tF1 imrnl.al *-,,,.1,c u-,hasw IruS ava;KM .' muoludi Ir lr'e, past v ye=, but h4 ac=9r*ed new propottions throtugh tinancinig frdn ihe illegal drug trade whicb h-.s he _ntidb hV ¢Alz!. _> ai-. getwhjirk .ul | h fhci rrinnary seutce of fufuding. About 40,000 people have died in. elashcs during the iaM dteaadc elone. AItr three yeAfs of cohccr;ed aitei tPs to nbgotiate a peace with the FARC and0 th9 OL.N, ColQmbWa%'s hiatit amed guerilla $*roups, the peace process was s.spCld in Eileay 2Oy and replace by a strategy that forclefully upiolds the tWle of law. Colombia will continte to need ihe assistance of the intematioral coln=unityl to fight terrorism and to addtecs the socio-economic determnants u vioiviwe i oruer ti conswct the undcrpinxinggs for peace tnd development:t These needs are particuhruy acuic in light of the attacks of ie^p I. dtInW! piA '.^ti S"^p w rpm_A.i lJ' 20. Enhanclia Good Governance thrnugh Imnreved Aernuntahilitv snd Transpdreaey.. TIhrouh the 4ttbliUhent of the National Systcm for-Evaluation of Results of Pubijo Sectgr Perftrmnnoc (SINERGA1i CtOlomnbia has eatablishod an cxcellcnt base for monitoring pbhrc sector pqfornn o'te Thilis basc nceds to be eXpanded by etisuring tlat setcd impact evaluatins of key proqrapis arp carried out, to con1*enent the ;nonitotWng dpta; by cuiggip$ Coimia itizers OVcrsight of public sootor performance through} ativyc issiuipation of the d4a1' WAIA J14Qi 4laW gigVIUS LcIJe il 414U aIrU.Ud UII4o 4pJ 1f ine UgIa W opcptionalize perhrzmaotebaspd managentem tdrough the implemnntstion of the. re!nt,itsiinned affidtency asurecinents liking nruvram f3inding to Rnpnifiin 21. I.mprov1tg thC Efrociency gnd Effectiveness o, the Sovial $fety Net. The advances made .'vt the past for y if reformin the,social safety net, nanmely by Iaurmiling the RAS progrtms as a cotunur-4yulieal response to the tecent recession, need to be cansolidated over the, next four years. Four main challenges RL .i'iIAv1J24P a -fomrit,ni _',,fml' .1i Qver the 'las -01 ! rs social assisance has skown the strQrngest pro-cyclicAl .spendiig pattnsms of the various \( Annex D components gf social sector expenditures. In the face of the recent recession, ive made considerable advances in building a base for cur1ter-cyclical safety net rogpon;e throdgh the est iblishrherit of the Red dd Apnya.nSneial. Nnnetheles. thivt remains a teniporary program. Lpoking ahead to the need to rsOnd coutlet- eyediially to fat4ue crises, Colombia needs to improve the state of readiness of its social protection system, both respect to its ability to respond quickly io vulnerabie groups and in temrs or ensuring adequate nncing for saify net progiams that have traditionally suffcred -from pro-ycIi$aJ funding_ In this seae, eeqls for an articulatcd and ftexible supply of sotial prograrns provided by tie State and the rncnthenina nf it: ranaciiv tn nrevent. mitiifate andoveftcnrVbe ris-kc resultanl fiom Tencomic crisis. 23. Instituiio,ial reforns to address rigidit#eT, coverpgp gps, asid Overlappino an&da4esi After years of rdative neglect. the overall social protection -system uneeds refopm to better address the nee4s of the chroLucally poor and vulnerable during normal times. The relative emphasis on cli 4ren under IS yez of age implied by the dominance of sociai assistance buqger by rthe Cotomipian nstiwutE for Fwamily Welfare rtcaios an approriate toctus given tbc vulnerabilities of this 5- a.d -in. c JI ,AtQ-poWlA IU tr a -it# sk -,nSg- strategy in C(loonibia; Althougi ICBF has began a descentralizgtion pcess to make mare flexihb1e iti progarams aceording tn reLrionn iccurir L stanmqs. atill it iS constrained by pioor mia toring and evaluation SYsteMis. An overalt refdn of the social safety net should be plantied under the next, administrton to address thes issues related to pxistitg programs, as well as to decide how the new RAS progams should be incopQrated into the overall safety het. 24. Addressitig Jhe sperial needs of 1h latoehally bisplaced Population. The legal and prograrpmatic foundation for auwrv sing the needsof uie hteruaiiy Displacd Population as elubodied in Law 387 and the aclivities ofrthe Re# de. Sofdaid4d t*; } a p*-v ,_t ArWl epsvlx, .-A^, ot; .d,vu stabiliza6ton of tis.populat#on thoseprogmns and policies also ektl for ei6suring tcit this niilsatinn hal. ipt r.ceAt to the niitia *n-en"Mt's awv4sd. pre.rais. Allthough the State's investment has increased five times ijR the lesi three years to attend the displacement problem, tWurzees are stfil insufficient to attend the needs of this vulnerable popujation, Seai, IP's face berriet to accessing sbmae social pro$ramns, Given the lack of, resolution io the iAtenial conflict, one of the key challenges in the medinin term wilJ be to addtes$ the nods of the TDP ensuring not onlyk thcir access to the social programs provid4d by Annex D the State, but also attention fi;used On tleir poarcdular vulierabi,ities. These aetinn )I5ill 'ieerito ted ri In a mri.; .rzo ^-ve, ^Jw. o authorities, and in, collabaration with (he NGQ's thai have..spearheaded many of (he efTTots to assist the IDP. >5. R4ing the bu~e: ,fr the sbitia sa,fety net .througc cos-recoae-e and re- allocation. Colombiga's social assistane budgQt is inadequate f6r meeting the needs of vulnerable populations, evCtc dering normal tirges. By redirecting funds away lunD ics well-targeted programs (incluaing non-social sector programs), instituting cst-recQve1y and esutjng adequate tatgetirig Colombia could make Ut S.fl. *9JO4JUU5 UU* VV^.t%SVS WJ" UO.fW54 th% exULY .W I JUS issue. witl be paitic6larly critical when the financing for thc cmergenqy RAS programs - equivalent to 0.3Y% of G)DP - e)mii-qr in 2004. u .tmprpvibg fleldih Status and Reducing the Fipancial Rlik of ll1nesS. The croWning achievoenct bf Colombia's fat-reaching healthrcefonn launched in 1993 creating a manndatory tunivosal bhalth. inlurafice systft bas beeh the large micreage Mi heath insuice coverage, .even among the poor. Coverage rose fniom '24 to 7 ctril Of t^ pylaim bWtfccn 7 fiLaLi crisix a inc rae in ineCnpiyvymuet nas iiurtca me syssem's atiiity funner expand covetagt in boih the subsidizod and winLuibutory regimns. Moreovyer, the gt,*~ ig io", eAW* Ay. t a w. p. V.',. U,Alt0 u> a.ptny p the tA4tuto de Seo4ridad S;lofal (ISS) which is responsiole for Managing health insurance (EMS) hd health service (IPS) proidde.r the conihtitivenas and financiaf problems of the public hospit#als; health flnancirig issues 9teitimig maily-ftrnm 4Voasift; and systcdiic problems with accountability, ihformation knd sparency, In additiot to thcse structutal problfths, Colombia has experienced .a dr4niatic 4edline iin vaccination covcrage rates. Since 1995, whed C:olombia estabIlsWed j fas th6 Lin. Ameccan iWer with ovcr Y9O/o coverage rates for aI m*,ine vaccines, rates have fallet to below 9O%. 27. To O4ress thqse health issues, tbe next adMinistration will need to continue what this administration has begun. First, the next adrninistraxion needs to give priotitv to the continned cxpatided coverage of the hcalth ins4tance regime, particul4rly amon$ pXt anAd independent workoes through: (i) ftll'irnplementation of Law 715 mandating transformation of supply to desand subsdics for health care; (ii) tehcing OvftSiQ and underpaynent of helth inmw'ance co trioutions; (iii) pmgviding ior 'ine xcluiv usea oa thc FSu uA Soliaanity Account reources for subsidizingg health insurance coverage; oti4 (ivj inmproving conmniications Annex D it - r W M -X - 4f,:f*****t ~ fdr #Wdf*, 9 .',;sv-f programs informing the public in general and the ,poor in particular about the afinaibtiko process, eligibility right, and allocation of, resources to territorial entities orq deniad and supply subsidies. Second, CtIonbia will heed to focus on Elil implemnentation of Law's 715 manidate on qual,ty asurance, promori n of public accountWbility of insurers and health care providers with the support of a stren$thendd Iealth Supetintendency and developmem of citizens' oversight V tVuLLU VI of th e ublie tIea;i U UL:s. * [buu.i, 3OpLW1iZiUOU cf ihe financial flow of health sector resourccsg including, preveption of illegal ii .S M,fLmtfiei or nti- f. r1h o_w. niki,A i"'alv, r%etms,_,,i ,n,e AF fh,¢ no.+.4 -F O public bospitals in order to aopcrac as thc`ie`.t providers of health care services wit lim ited direct gove'rnent subsidies and adoption of a ncw health care model fnusing on prtna)y hsltli care. 2-. With rspect to ro;oveng tnrimunmmon ooverage rates, tme next amminstrat6ih should conisider full implemcntatibn of the tessures to strengkhen tie Expanded riOUtd4L t5. of ImU*WH~,iIUV1Iun u oiL Lhe rtuu1Iuzuu:uOiius ut fte ratuonal Evaluation, iniluding the 'completion of activities related to recomniendations for Strnothchning fth.erod orhniv¶ 29. Improvini iiltienev stid 1Fuitv In th!e Allocation of Edocation Resources. bt spitc oon4jiderable' 4dvas*ces in the tesow es dedicated to edu¢tion, the. liuBching of a number of imnvative :education programs, and s Clolibia's leadership psition .i measuring achievement, Colombia's. education sector is plag;ied by imeqitable P0902a8e rates, poor intemal 'cfficiency and achievemnet and wealnesscs in the design and implementtion Ofedducatiofial decentaioation efobrt. Matiy of thcsc problems stem fibm a financial system linked to paying teachfer s wag-s. withoit4 wW¢1tz quwaity WLU sCovaage lssues. Frurithrmure, the education sqitor is raught, in tha maelstrom of Colobik's gowing violettce and, disproportionate nanber of bth the peipetra1rs and victims of crime and violence, calling for a conceded resDonse from the education sector to brinir these yo-uth back into the educational system. On the supply-side, violence has come to the cl$asipom posing challenges for teachers ana administrators, with the rarngnitinn thai schools tmay be qep of the few comeninity 0 ec whCre emany of the problems tfCrime and violence caa be effectively addres§ed. 30. Ri addreksing the problems in the education setor the. incoanig 'adjinistuion shouldto-04--c- 4..71 .. ' .qn ....A s T c . r- ,,*; '.4,.; W education resources to territorial entities conptinued impleniontation of the Matriz Ane de Seguimnienwto /iPtla die kQ.gq/aCi6 to ific year 2003: in1lImeiltati4ii of aeeehr. oSedu-tjtI>ring ar.eenc. ^tvb^,uret of a wr^!! ffl*inr information systern f or rcsourcc altoction in the edi4atiotal sector. completi6f of iipacl evaluation of biiot pedqogical inodets for rural areas by 2004 and, their dissetion , li4cn lionwidet and promn4tion of the usc of' private delivery nieclanilsm$ to providc educatibb smivces. 31. This btief review.r untorscQrcs Colomlbia's aclhieventdit in securihg macroecQnomiy stability. shorin& Up gaiis ieW fIlth. and education in thu face ot thre t.ent econQnmic crisis, and 4t%iiIi,hiL4 a selid fo4undatiolt ftr the reforrm of .hLSc- e .-'-I r ne 't. PIh spo. r 1^ lI,hw ), bre:*~ a". disit ^iat jni achieving some of tbtsq gaiij. andl will eothinute to be important in Ahc futurc. narticulaily in secuting a solid fit,udatioi Rd cconoloaic 2groNfh and social stabithy in the face oF chahieging intemnal and extenmal rlsks. In conclusion, Govcrnmept endorses the iua oedgnornic an'd social strengthening PrOrarns supporLed byz the Social Sctot Adjl4stmcnt Lean and the medium terni framework hi;jd out it its P Mlicy Matrix. Sincerely Yours, Federico Rejifio Vicemninlter 6f Financo ondi Piublic Credit In chrai-g ofthe Funcitions of the Nlinistei Annex E Bank'a Mium Term SRiai SeRctnr Strategy for Colombia In s.it. of A.e reet e and social .fi r_.,.uch7 of _az standard of living than average for Latin America. Advances in many social indicators have been zchiVU overV UI F pasL years. Fri VAeunpl.e, lIfL expe a;)L biL s ULL Uhas incWresU signuiicuauuy iLn ULe lasL two decades; infant mortality rates have been slashed by a factor of four in the last four decades; and enrollmern in, basic education has increased. Tihese auvances, however, mask serious problems of inequities, and poverty remains a critical problemn The poverty gains reduction achieved in the early l990s were unexpectedly reversed by the current crisis. Consequently, the rates of poverty and extreme poverty in urban areas are currently about the same level as in the early 1990s, while in rural areas they remain almost 10 percentage points higher than at the beginning of the 1990s. At the same time, there has been a rising trend of inequality, which reduced the potential welfare gains of Colombians up to 1995 and aggravated the welfare losses during the recession. Sharp regional disparities in the quality of life continue to contribute to social disintegration. For example, poverty incidence is much higher in rural than in urban areas; infant mortality rates in Choc6 are similar to the national average of more than twenty years ago; child malnutrition is 50 percent higher in households in which the mother has no education; and vaccination rates, which declined significantly during the last couple of years as a whole, are still much lower in households with head of household without education. Furthermore, high and pervasive levels of violence, guerrilla warfare and narco- trafficking have become critical barriers to improving living conditions and contribute to the displacement of a large number of people mainly from the rural areas. Education, health and social protection are key to improving economic competitiveness and growth, reducing poverty and inequity in income distribution, and building a peaceful society. In this context, Colombia is trying to develop human capital as an imnortant element towards further economic growth and development. Among its priorities, the Government has focused on efforts to: (i) increase the quality of basic edlcation and baSic health; (ii) im,nrnov thte effAniPiryv and Pnilitv nf rpennirn-es im.. in Milit-satinon (iii) increase fairness of financial contribution and financial risk protection in health; and (iv) alleviate the im.rn-t nf the cilrrnt ,'ricia on the meoat %nl1i.rah1e aonA Aoem.e^vt a h*flw nr soial nrnt.e n system. Undoubtedly, the notable successes of these policies are found in the relatively good quality of basic as nn,... ,alA -t44 +Ia., T .44,, A - - - +; +1ta - . education, as1 WoWle vJ £11111.I1UJ %1TcULLU1AV ,in wLue 1i1ncrseOI VI hea1thu 1IWU1fLnc COV0 V e, especially in rural areas; and in the implementation of social assistance programs to mitigate the effect of LUV %Aloo issues Tne country faces the following challenges and issues in the social sectors, inter alia: 7Colombia is currently experiencing one of the most difficult periods in its history, and it is just recovering from one of the most severe economic crises in over 60 years. In 1999 economic activity declined 4.5 percent, and the fiscal deficit surpassed 6 percent of GDP. All productive sectors have been affected and the living standard of Colombians, especially the poor, has plummeted. This raises important issues for the social sectors. Annex E Education. Five distinct avenues of effort are proposed for Colombia: (a) continuing and intensifying the focus on the poor to address inequalities: in access and completion at all levels, in particular at post- secondary; (b) improving the quality and relevance of education at all levels; (c) supporting the financing, governance, and management of education at the central and local levels through a rationalization and deepening of the decentralization process under way, involving public-private partnerships; (d) increasing higher education oDportunities. in Darticular for the underserved nonulations: and (e) building social capital through education for peaceful coexistence. Health. The Colombian health system needs to deal with the following five priority issues: (i) efficient distriblution of available resontr-ces to achiev.e fill covevrag,e of the noor in the subsidi7ed rpahimne 5 - d to effectively deliver basic health services and control of communicable diseases; (ii) elimination of evasion, the- tmnsf rmatnion of sunpply to dem anbased subsidies and the use of the accumulated rese.res of FOSYGA (Fondo de Solidaridad y de Garantia - Solidarity Fund) for increasing coverage8; (iii) *MU I4LLISA&, 'L jJ'.UIL, 1 "VO IL"1, WVIL'J1%A Cl4o %U.L&1VLL. JA1CI %,-4i,U U.Y ULJ.L-,% YV V ILUL1L1L OUU*1UVi3 1aLJIL Um"LI through the sale of their services9; (iv) reform of the Institute of Social Security (ISS)10; and (v) the iU11VUlUU1UUI1 Vi nunuiuiatuiu a.uu duuduon u U1paiJJU rvgauig LUh UhaUlh bvLo[ r iUFHhi WhichI.u is crucial for increasing coverage as well as access to health care. Social Protection. The main issues here are: (i) effective monitoring and evaluation of the Red de Apoyo Social, wnich includes a workfare program (Empieo en Accion), a conditionai cask transfer program (Familias en Acci6n); and a youth training program (Jovenes en Acci6n); (ii) lack of information on coverage, efficiency and effectiveness of ali social assistance programs in Colombia; (iii) financing for these programs in 2004 and beyond; (iv) existing programs' lack of a strategic focus; (v) lack of flexibility to respond rapidly during a crisis and need for counter-cyclical financing; (vi) improvement of poverty targeting; and (vii) poor budgetary data. Social Sector Strategy in the Context of the Country Assistance Strategy The last full CAS, discussed by the World Bank Board in November 1997, presented two main objectives covering poverty reduction and sustainable growth, and specifying six strategic areas: (a) promoting peace and development, (b) promoting rural development, (c) developing human capital, (d) attaining public sector responsiveness and efficiency, (e) improving infrastructure services, and (f) ensuring sustainable development. The basic obiectives and strategies of the CAS remain valid, although, in reviewing the recent political, economic, and financial developments in the county and examining the progress achieved since the CAS. a CAS Progress Report in November 1999 recommended certain adjustments in the lending program. These changes in strategy were considered necessary because of the need to resnond to several international economic crises; narticularlv the crisis in international credit markets, and the sharp drop in oil and coffee prices that resulted in the deterioration of the general economic conditions and the domestic financial sector in the coulntrv (these cnnditionq are still valid today). 8 This would mrean the expansion of the subsidized regi,me by 6.2 million indivduals or 65 perent of the po-it;nfion already affiliated to the subsidized regime 9This will accumulate, in 10 years, a net savings of US$2 billion -in 2000 dollars- equivalent to 3 percent of 2000's GDP depending on the type of the reform 10This can provide, in 10 years, a fiscal savings varying between 1.2 to 2.4 percent of 2000's GDP, depending on Uue kypl. VI we refo,,n Anneix E The CAS Progress Report took into consideration the many changes that had taken place both internationally and domesticallyv and attempted to align Bank strateav and instmrnentq with the nriorities of President Andres Pastrana's government. The CAS Progress Report confirmed the "basic objectives and nvupra1l thiniet" nf the exyigtino C-AS in fnoiicin non nnvprty reAdiitiionn qns-inl diveAnnmrent and sustainable growth. However, the Progress Report proposed intensifying the assistance strategy to include tw^o adjust.Ment opertions in responset t the need to cushion the adverse sc!nial impnact of the economic recession on the poor and vulnerable groups. In this way, the report responded to the dteri.tdv i aa condition LinZU1 t-16t-lt. in wi .-A -+.-.ialI iLbO aila, connlict -re aYUcf5ing the poor and vulnerable groups particularly. The adjustments in assistance strategy also supported the goviIemu t iii its co-mMi,mU nt oL UiLUVIe CZ serVIoUs 1fiscal adUJUOUIVILk p.IogaIlL, III ILIIplVlIinLJ.L1UI structural reforms supported by a formal IMF program, and in advancing the developmental aspects of the peace process. Ine oojectves outlineci m me i997 CAS ana its suDsequent updaTe in i999 were iuiiy consistent witheine priorities articulated by the current Administration. The government prepared a four-year National Development Plan outlining a national development strategy for 1998-2002. Areas covered are good governance, social capital, peace and development, and macroeconomic growth and employment. The emphasis on social capital is seen as key to resolving the internal conflict and violence in the country by devolving power to the communities, improving access to basic goods and services, promoting universal access to education and health services, ensuring gender equality, and achieving peace. As a means of implementing the National Development Plan, the government has also developed a comprehensive strategy, the Plan Colombia, in which various initiatives are presented to strengthen the peace process, control drug traffic, and reactivate the economy. The CAS goals and priorities of expanding coverage and improving the quality of basic education and basic health were reinforced by the CAS Progress Report. The goals of the Bank's social sector strategy by sector in Colombia are: Education: (i) To bridge the considerable equity gaps that exist in access to education, including higher education, while improving completion rates (these gaps affect the most vulnerable population groups, such as those in the rural areas, the poor, the indigenous, the Afro-Colombians, and the displaced. Such ineauities are widening because of the current economic, social, and security situation in the country); (ii) To increase acces to nnstlitv of education in rnral and uirban schools by inroroting the exnannion of proven cost-effective models; (iii) To raise efficiency in the usee of resources by prormroting demand-side financinrg a an important complement to purely supply-driven investment and improving the financing and management of edua ,nni4 n it- n ...oare reso.nci.,o -loal needs and acco an kle o ta govennrah r.ce s.nlc-.ae ot all levels; and (iv) IV learnL LiVfL L .U cLILItY e 1u4UWatIoVnal peiencesLU .Lod, disLtilUin gooU practUice ifi LuLui- pFliny and implementation. Health: (i) To improve distriDution and use of available resources for health through tne exclusive use of the funds of the Solidarity account of FOSYGA for the financing of the subsidized regime, as well as the further transfonmation of supply to demand subsidies as defined by Law 715 (favoring demand subsidies will provide strong incentives for hospitals and the ISS-Health to achieve greater efficiency and competitiveness); (ii) To restructure public hospitals, which are currently financed by historical budget-based subsidies rather than sale of services; (iii) To improve access to basic health delivery and control of public health threats; (iv) To reform the Institute of Social Security (ISS); Annex E (v) To provide more effective information and education to the population to increase insurance coverage, as well as access to health services"; and (vi) To reduce evasion of health insurance contribution, which would have a positive effect for both the contributory and the subsidized regimes. (Development of vieilance and control strategies with high capacity to detect and punish evasion will add resources into the system and support the solidarity nrincinle mandated by the health reform. In narticular elimination of evasion wouild increase the resources entering the Compensation Account by CCOP$1,881,000 million (US$767 million), equivalent to 56 percent of the size of the Comnensation Acc.Ount in 2000 and exnmmd affihiAtinn to the su bsidi7ed regime by 1.2 million individuals.) Social protection: (i) T Ao ex-pa.-A +le lbudget for --ilassac .drc;ngfig+osca sivnean obr;g I 111CIAJA EUV. WLCLw jsIG~~I owl 010&LL ~ kIUiILUI0&,L LULLL%LUriI lAP a'JL.LGI GctalI~LLV aulu '.,PJILFJ .ILIkI, targeting with cost-recovery from less poor groups) while avoiding duplication; (1iJ) o V IrVLIf I plarJ1ing5 aUU UUUdgetLng Lo I L1VUy LUI lack& Vf accura.e in10ormnation ounu CO1VU0-Vage, costs and effectiveness; (iii) To impro-ve the efficiency of the social safety net obetter targeting and elimination of excessive program overlap and fragmentation) in close coordination with the institutions that formally deliver public services like ministries, ICBF, eic.; and (iv) To develop an integrated Social Risk Management System. Implementation of the social sector programs has been limited in part because of the continued weakness of the social sector ministries, including among others the high turnover at the ministerial level, complex budgeting process, the inadequate operation of the national co-financing system, the lack of effective monitoring and evaluation instruments, and complications from the decentralization process. The Bank can play a catalytic role in bridging the gap between strategies and policies and implementation. To do it, the Bank needs to redirect its efforts in the social sectors, mainly to facilitate the decentralization process while ensuring the strengthening of social service delivery at the local level within a sustainable fiscal framework. In the education sector the-Bank will continue supporting projects both at the local and central levels to: (i) improve coverage and quality across all levels; (ii) identify specific strategies for reaching vulnerable populations and ovening up opportunities for those who traditionally have been excluded so that inequity will be reduced; (iii) improve the quality of life of the youth; (iv) provide administrative tools for the implementing agencies, including MOE, to strengthen their capacity; and (v) change some incentives in the system (for example, resources should follow students and not teachers: sector information should be disseminated to the community as a whole). In the health sector support should be provided to: (i) expand the coverage of health insurance among the nonr- (iA rniih the transitinn from a qimniv to dernand cide finonnina of nihlir' henith fnrilities (iii) support autonomy of public health facilities; (iv) promote facilitation of private organization in the provision of health ser.vices; and (ul imn f%t ucin at.i,iot;nn 1I e.la a ,'rnd nfrtl ofp ,-uiiimL ,alkla1 Abceaai=c Tin social protection, the situation in Colombia calls for a two-staged approach to be carried out on both the racroar.-A +A -icroe-onoric fro,- ts a shor1-terr. crisis response n,-.;.n plan a a .naA....-ter... strategy. As an immediate response to the crisis, the Bank has supported two of the Red de Apoyo Social kxvlko) prograUns: CorumLium;y YV' ors. andU JLPIJJVyILAVI1L FUJVA; kJUp1IV eLn IAcUcio), WhIca1 t oii LV 1 The health care system of Colombia is currently defined by complex legislation, which makes the workings of the system even more difficult to imderstand for the regular citizen Aq a resuth there is laek of knnwle-de regarding issues i e ch as the sffiliation process, the content of the health care benefit package and the free choice of insurer and health care provider. The implementation of communication and information campaigns will be an important element in guaranteeing the reform's success as a means for individuals to understand both their rights and their obligations. Furthermore, the definition of rights and obligations both for affiliates and the state will be further assisted by the approval of a Ley Estatutaria for the health sector. Annex E provide temporary employment to the poor, unemployed and unskilled workers; and a family assistance program for poor families (Familias en Acci6n) to give cash assistance to the poor on condition that they keep their children in school and provide them with basic preventive health care. The medium-term reform should focus on the development of a Social Risk Management System. Vehicles for Bank Assistance Lending services. To manage the risks in the sector the Bank needs to maintain flexibility in its operations. Although lending will mainly include investment loans, programmatic lending will be considered as an instrument in the social sectors, combining investment with adiustment loans to promote needed structural reforms. To complete the set of operations in support of the social protection sector, the terhninn tesns nf the nresientia! canitlates have reqne-ted technical cooneration in the form of Technical Assistance (TA). A follow up TA for the SECAL will help to link the policies implemented nder the present operation with actions to be taken dluing the next AdministrAtion. Tn e-Airtion the plan is to continue with the Rural Education APL (Phase 2 in FY03) and support a new investment project to improve equitY and quality in erda (FY03). l -r to deepen education decentralization, the Bank will support a decentralized human capital development project (probably in Lae DepaL m Ue n1t of (7un.inarna£rca11 i I0 . T_ thehalth sectL heL L B will jJiJV investent support to the health reform in FY04. And in social protection, in addition to the proposed SECAIL for uis FrYx, a prograi-iiua.ic operationi -is being consideUreUd .o suppr L Lhr reforum illi e social sector , including development of a Social Risk Management System and promotion of decentralization. The Youth Deveilpment LIL will also be expanded during FY03. Non-lending Services. In addition to severai policy notes done in this FY on basic education, higher education, social protection, health, and science and technology, sector work will be proposed on social sector program efficiency and on hospital management and restructuring in FYO3. Tne Bank will continue to support activities related to education and peace. In particular, in alliances with cother partners, it will conduct two studies in this regard: one, to assess education models that improve tolerance, democratic values and social cohesion; and the other, to evaluate the impact of the current conflict on the delivery of education services. With a combination of these services, the Bank will help the GOC improve access to quality social services and reduce the disparities (mainly urban-rural) in standard of living. Progress benchmarks will include indicators showing increases in: primary education in rural areas to about 75 percent by 2005; the intake of students in six grade in rural areas; the probability that poor students have access to higher levels of education; the coverage of the subsidized health care scheme for the poorest population; the number of hosnitals converted into semi- or autonomous units (all by 2005); and the number of municipalities certified to manage autonomously government financial transfers. Finally, it is expected that the efficiency of programs like the National Training Service (SENA) and the Colombian Institute for Family Welfare (ICBF) will be monitored regularly. Annex F The Consultation Process in Colombia and Actions Related to the Adjustment Loan This annex provides an overview of the consultation process that the Bank has promoted in Colombia. with a particular reference to social sector policy. Colombia has a rich array of civil society organizations and private sector associations involved in the crafting and imnlementation of social nolicv. In many cases these groups have assumed a social service delivery role as important of equal - and in some cases greater - imnortance than the Rtate BRevynd thece non-government nroAni7atinnq the RRnkl heo a1Ro developed an active dialogue and relationship with local governments and a variety of political actors. Below, the consultation process that the Bank has supported in Colombia is outlined, highlighting: the nart;.c,patr.n prnocss usedA tn A-tln the Count A ssisfncea ttrn+nen, (CA S') it.h -crsltaf.n proc..e yt.fltlS.lOtSJl pin o t.0 - S - . ,V.W -ni LU W~V lJ~ 40010 t4411..JI U.5 k3~.~t J, SILUt tJ0fti,.tJ j. vo,t applied to the development of the proposed Social Sector Adjustment Loan (SECAL), the Policy Notes p.es iuy being deVeloped, anju eler.ents of tUh SEC ^ Jt1, T U sppo a co.tr.e cnILsLUUtU aL11aLVUPI procs. w respe.U to thUe propUosU SEC-tL, UilUUtltllIgU it systeHIULac CUIMMULI1 a Ut U co-ul noi beIcoUULMU WcLUI til relevant stakeholders, this annex highlights both the overall consultation process and the specific activties thai were conducted with seiected staKehoiders more directly reiated to the SECAL. i) Participatory Country Assistance Strategy (CAS) process The most recent Country Assistance Strategy (CAS) was prepared using a new, participatory approach being piloted in the World Bank which included extensive consultations with civil society and workshops in Bogota with government and civil society representatives. The process used to develop the CAS resulted not only in a shared assessment of the actions required to meet Colombia's development needs, but also a strengthened relationship between;government, civil society and the World Bank. The consultations carried out in the preparation of the CAS concentrated mostly on diagnosing areas of needed action, which was used to develop six strategic areas in the CAS. This proposed SECAL responds directly to three of the six strategic areas identified during this consultation process: (i) promoting peace and development; (ii) developing human capital; and (iii) attaining public sector responsiveness and efficiency. Furthermore, it does so by promoting reforms in the areas identified by the Government, the Bank and civil society as being particularly imnortant and challenging, namely implementation and institutional change. In promoting peace and development, the process used to develop the proposed SECAL as well as several Of the SECATL comnonents supnort a nihnber of the CASR reconmmendationS, including: using recent sector work exploring the impact of violence, inequality and vulnerability to inform the SECAL strategy; ncaanina civi! snrocietv in Ahe A-u.enn%rnPnt anA im.pemnIPntigtn nf the 4CrAT- mti Qllnnds noi" inrrPsePd information access and dialogue through specific conditions in the SECAL related to health, education .-A -n0- ...onito. ngf govr.nn.ent nard'ance. 111 U4VVW JE1JU'5g rJuriggig LuyLsW, LU JL IVVOUpu ~L;A.-rXLI DUjJJIJV1t Al-. VIVLIVIO 0 UJI- W%'-r%O O Ua4LlW& ILI%L&%LLUiU expanding health insurance and education coverage among the poor; increasing the involvement of priva-te providers in ed-uctLuiuori ehaLiJcing conLsumuers' awareness o1 Ue perIolu,aiuce of ue healtUl and education sector; introducing cost-control mechanisms in health; and enhancing the quality of education. Tne modaiities supported by the SECAL for implementing these reforms aiso cirectly supports the Government of Colombia's efforts at decentralizing key social services, another area identified in the CAS. Annex F In attaining public sector responsiveness, the proposed SECAL supports: strengthening the responsiveness of public sector institutions, by building upon efforts established in SINERGIA and sunnorted by the World Bank financed Public Sector Management Proiect; increasing social control and enhancing transparency in health, education and social protection; and promoting effective dece,ntra1i7ation and enhancing particination of the nrivate sector. 71 Connsuluat4nne Qellnnnrtin the nrpnarntion of the Sndein or-tar Adillatment Loan Several rans,,lotaion ,,iv,ditalrpn rpi'Pntlu a r.lnewplu rPlatpA tn thP T%rpnsirntinn nf thP SREAT, inehiidina vwV.~~~~~U 660.L _1_. -P L -- ; -1 M-A-~-~^ -. 4~ X~-A~ * Fieldwork for ULe "Social Dimensions of the Economic Crisis" V%A& ofw Bank Social Safety Net Assessment sector work on that included: focus group and structured interviews wiiui gro-ups in rLi .-lU UaUn U rban ars1fLfe.eU by LL LI eecLnt 1recssoV1n (kLi.al1J displaced populations, micro-entrepreneurs, construction workers, day laborers, and middle- income debtors caught by rising mortgage rates) regardi-ig their perceptions of -vulnerabilLty, use of social risk management and recommendations for social sector reform. * Consultations with presidential candidates and their policy advisers. In preparing for tne 2002 elections and presidential transition, consultations on the policy initiatives in the proposed SECAL were held in January, March and May 2002 with advisers to the three main presidential candidates. * A series of workshops in three cities (Bogot6, Cali and Medellin) held in May 2002 conducted broad consultations on social sector policy using the results of the 2002 Poverty Assessment and Social Safety Net Assessment studies recently concluded by the Bank in collaboration with the Government of Colombia and the IDB. These workshops included an off-the-record discussions of social sector policy and were attended by academics, government policymakers at the national and local levels, civil society leaders and staff from bilateral and multilateral development institutions. * Ronidtahbes were held in Cnli and Rngota with stakeholders at the central and local aovemment level to review the policy matrix for the proposed SECAL. 3) Policy Notes The Colombia Policy Notes compendium presently being prepared will summarize the major challenges ill ColombiUd' s Vctia-VconoU,L,, UdeV1VUp1UIL,L. A%1LUU&U IUJI3U'y L UViIiU ds V 0'i VI, as a bridge t Oe new administration by providing a basis for policy discussion with the transition team, the Policy Notes also serve an important runction in providing a tiruusparent fo-nUUULion for ic-ussiug key polic;y lsues wiIh civil society. The compendium will include thematic notes on peace, growth, governance, natural resource management and poverty and inequaiity. It addition, it will summarize essential sector issues for development in over thirty areas, including education, health, social protection, gender, violence and the internally displaced population. Many of the Policy Notes have been drafted by the team members involved in the preparation of the SECAL. These Policy Notes will be discussed with the advisers to the newly-elected president and will help to ensure a smooth transition in the Bank's work from one administration to another. A ---~ r. tr,rex r 4) Elements of the SECAL supporting a continued consultation process Several initiatives in the SECAL support a continued consultation process with civil society, building transparency and accountability in the public sector, including: * The establishment of a public momtoring system based on regular, ongoing consultations with civil society on public sector performance in the social sectors. * A pilot for increasing citizens' 'oversight of ICBF, the largest social assistance program in Colombia. * Internet dissemination on the performance of health services providers * M II..poe quality and6 avai"labliy of pJublic% JLVLInfrLt"ion on- s.L-u,dentL MAievernent results ardu promising pedagogical models. Taken as a whole, the actions and elements reviewed above have provided a solid foundation for dialogue regarding the main policy issues addresed by ihe SECAL and will serve to strengthen an ongoing dialogue, particularly between the state ana civil society, on key social sector issues. The SECAL team will look to continue te uiaiogue as the reforms are impiemented, particularly after the ioan is effective to ensure the future sustainability of the social sector reforms promoted by the SECAL. Annex G RE:PUB]LIC IDF COLOMBIA SOCILAL SECTFOR ADJUST]MENT LOAN Specifications, Definitions, and Evidence for Tramche Release Conditions Trancche release conditions Specifications and definitions Evidence AL General iCondilion of the SEICAL The fact that the rnacroeconomic framework of the Republic of Colombia is consistent with ithe l'he Bank stafl; in consultation with the objectives of the program (as described in the govenment"s Letter of Development Policy sent to the IMF andi the governmrent, will exchange l'he nmacroeconomic framework of the Bank) implies that the macroeconomic program supported by the MF's threyear extended views on the macroeconomic Republic of Colombia is consistent with arranagemenit facility (approved in Deceniber 1999) is on track. The macroeconomic programl is performance, and will assess progress the objectives of the program. considered to be on track if the quarterly performance criteria-namely, the overall fiacal deficit of in the program's implementation the combined public sector, the inflation targets, the net international reserves, the increase in through exchange of information via e- medium- and long-term debt, and the issuance of guarantees by the public sectDr for private externl mail and missions to 'Colombia. debt-wenre observed; and the Bank staff is satisfied with the overall prcogress of the program as -~ _____ defiked in ithe Letter of Development Policy. Annex G B. Specific Conditdons of the SECAIL Tranisparency anld citizens' oversiightt of social._ ___ progranas iL With respect to the periodic imapaclt and performance evaluations, the Government of iL Official copy of approved Colombia will havie issued a CONPES defining the norms for thke periodic evaluations, CONPES. 1. Introduction of a SystemCL of irnpact and including (i) which programs will be' subject to irmpact evaluations; (ii) the scope and performance evaluations and public monitoring of content of ithe performnarce assessments; (iii) how often the evaluiations will take place, l.i Official ODpy of a document Cblombian Government's (GOC) main social sector (iv) what elements will be considered iin the evaluations, and (v) norms and showing resource allocation in programs. Aipproved CONPES establishing (i) responsibilities for carrying out the evaluatiois, particularly in order to ensure objectivity the 2003 proposed budgel: and periodic impact and performance evaluations of the and policy relevankce. Initially the periodic evaluations will be conducted on Colombia's terms of reference fobr impact nain social sector programs finan*ed by the nalional main social assistince and training programs: the Red de Apoyo Social (RAS) safety net and performance evaluation govemnlent and (ii) public monitoring to improve programs (conditional cash transfer, workfare and youth training), ithe main ICBF nutrition work of the 3 RAS safety net, social sector transparency and accountalbility. The and day care progiams, aid the imain SIENA training prograins, with resulits to be produced the nmain ICBF (Colombian system will be launiched dtrough: (i) impact and in 2004. Tlhe resuldts should provide information on not cnly reforms Ito the individual Instittie for Famill Welfare), performance evaluations of the main ICBF fimily programs under evaluation, but also to the network of social assistance and training and SIENA (National Training welfare, RAS safety net trnsfer aind SENA training progmms as a whole. Service) programs. progrmas; and (ii) the establishment of a system of public monitoiring of social sector programs to lii With nrspect to the public monitcoring activities, a CONPES will have been isrued I.ii Official copy of a document improve transparency and accountability through the defiming (i) the form and content of the public monitoring activities building on the (DNP) sbhwing - resource disseminiation of monitoring and evaluationm results and information established by SINERGIA (the system ofpublic sector resulb; nonitoring); and allocation in the 2003 proosed consultation with civil society. [A CONPES is an (ii) norms and responsibilities fbr managing the dissemination and consiultationi activities. budget and terms of reference authoritative statement of government policy and The public monitoring activities will be lahuched tirough regular, specific dissemination for dissemination and guidelines issued by the Legislature"s National (websites, press releases, etc.) and coirsultation (town hail meelings, apinion pols, etc) consultation activities for public Council ofSocial and Econiomic Policy.] measures outlinecd in the time-bound action plan includxed in the CONPES. Public monitoring activities. informationr campaigns to make ciizen; aware of the resourses should also be irnluded. 2 Annex G Social Safety Net 2. The: SRMI system will be detailed in either a CON1PES or decrees ('decrelkos 2. Official copy of approved CONPES on the 2. Development of' a regalmetarios'). dlesign md implementation of a Social Risk comprehensive Social Rislc The discuLssion of the SRM in times; of crisis should specify: (,i) characteristics of the crisis Management System, with a time-bound Management System, including: that would trigger the expansion of' the SRM; (ii) norms governing the expansion of pre- action plan. norms for its role in normal and qLualified progruns during crisis periods using emergency financing (either from the social (3i) Official copies ofiagreements cisis periods, iuicuding a system for protection stabilizatio]n fund or alternative sources such as international lending if, the ('convenios') between ICBF and each maintaining/expanding the Coverage stabilization fund is undercapitalized); (iii) rules governiing the protection of pre-iidentified participating municipality conernming the of pre-qualified programs during social piogramns during crises; andl (iv) guidelines governing how to target populations establishment of the decentralization pilot crisis periods usinlg emergency affected by the crisis. project; copy of evaluation reports approved financing; and the function of and The discuassion of the SRM during niormal times should include: (i) incentives for improving by the National Planning Department (DNP) rellationslhip between social the targeiting of social programs, inciluding incentives for the regular and effiective application regarding physical and financial progress assistanos and insurance programs. of' SISBEN, the prioriization of expansion of program coverage amrrong Sl[SBEN I and 2 relative to targets established for separating pcpulations, and norrms for targeting the non-structural poor, (ii) steps to be taken in the future financitng fromn provision; 3. Irproving the coverage, to achieve a mDre efficient tnd efiective SRM system, outlining areas to build on current (3ii) Official oDpies of a letter from ICBF effectiveness and efficiency of ICBF reform efforts. Board stating adoption and describing through (i) a pilot decentralizing and The discassion of the SRM will recognize (i) the inclusion of both social assistance and implementatioin (physical and financial separating finar'cing firom social insurance programs in a comprehensive SIM that function in 'both crisis and normal progress) of new cost-recovery policy; periods and (ii) the role of subsidized health insurance and the pension solidarity fund that (3iia) Official copy of ICBF directive to the in 10 municipalities; (ii) ICBF boani are socia!l insurance programs with a safety net role. regional offices to present plans for approval and implementation of aI Tle document will specify and assign areas of action and investigation for the development of improvement of social controt; cost-recovery policy based on a comprehensive SRM systemL (3iib) Official copy oif citizens' oversight sliding-scale fees graduated by 3. To meet this condition, ICBF will have (i) developed a pilot to decentralize and separate pwlans fl'Dm at lieast 65% of ICBF regional inoome from users of CAIPs formal financing from provision of ICBF services; in 10 municipalities; (ii) received ICBIF. Board offices; corresponding letter from 1CBF day-care cente rs- (iii) improved approval of cost-recovery norms to be applied in CAIPS fbrmal day care program and holding Board outlining strategy for the evaluation of day-care centers; 'iii) improved of' workshop with rejgional offices concerning new rLorms; and (iii) launched a policy the plas and fbllow-up actions concerning monitoring through the launching of establisbhd by the ICBF Board requiring each IC!BF regional office tco submit an atnalysis of improvements in citizens' oversight activilies. a citizens' oversight plan in each what has been done and time-bound action plan for the strengthening of citizens' oversight (3iv) Official copy of terms of reference and ICBF regional office; and (iv) a actions (Veeduria Cuiada), with an accompanying ICBF central office led evaluation of al signed contraict for the technical review of technical review of the management the implementation of actiorn plan; and (iv) developed terms of reference and launched a the managemenDt information systemrL infiormation syslem. technical review, of the management information system. 4. This would include: (i) adoption of a common methodology for estumating the size and (4i) Establishment of a council composed of 4. At.intioi to ithe internal characteristics of internally dlisplaoed population (IDP); (ii) af time-lbound action plan fbr I)ANE (the National Statistical Instiute), 4. Attention to the internally elbiminating barniers to access that would include the following components: (a) the possiblle MSS, Codhes and Pastorial Social to validate displacedt population (IDP) though use by displaced persons of their SISBEN cards from their municipality oif origini to have the methodology to be applied to estimate the (i) adoption of a common access to public services; (b) a sijgned agreement ('convenio') betwveen RlSS (ttLe Sociial characteristics and size of the IDP Iopulation. methodology for characterizing the Solidarity Network responsible for IDP policy), the Office of thie Presiidency (responsible for (4i) Copy of sign (4ii) Oifficial copy of the IDP; ald (ii) development ani the RAS safety net programs) and DNP outlining time-bound steps for eliminating IDP's aetion plan signed by RSS alid DN1'. launching of a time-bound actioni balriers to access to Red de Apoyo Social (RAS) safety net programs; and (iii) proposed (4iii) Official Copy of a documenat showing plan for eliminating barriers tD IDP allocation in the 2003 budget for implementing the aclion plan for eliminating barriers to resource allocation in the: proposed 2003 access. budget including finankcing for the access to social programs. implementatioin of the actioni plan. 3 Annex G Health_ 5. Exp7ansion of health insurance coverage and 5v) Law 715 mandlates that the respolnsibility for public health shouldl be (5i) Official copy of PAC (MOF budget improveiment of resource use through: (i) expansion removed from the Health Promotinig Entities of the contributcory regime (EPSs) authorization document) of 2001 showing of the subs.idzed health iuance coverage .and assigned to the Nation (article 46 of said law). The resources financing that a budget (85,000 million pesos) has components oF public health which under Law 100, which were receiived by the been programmed to finance health (A'eghnew Subsidiado) by 350,000 additionkal lEPS should now be received by the lerritorial entities (unnicipalities and insurance coverage of 350,000 additional individuals belonging to SIS]BEN levels I and 2 lby departnments). The National Council of Social Security in Health (CNSSS) is individuals of SISBEN level I and 2 (done) December 31', 2001; (ii) approval of new resouee responsible for defuiing the amount of resources subtracted from the ]Risk (5ii) Official copy of Law 715 as published allocation model for territorial entities according to Adjustrment Premiunm (UPC) of the Contributory Regime, which will nowr be in Oflicial Gazette (IDiario Oficial) (done) the number of affiliates, number of vinuadds and uised by rritorial entities for the financing of public health activities. (5iii) Official copy of CONPES 057 public health coverage targets (e.g. vaccination 'Distribution of the Geineral System of rates); (ii) approval of' CONPIES (legali document of (6i) Laiw 488 oDf 1998 establishes that the Nationial Health Superintenkdency has Participations, Year- 2002' (done) the rigbt to charge a fee to the entities that are under its supervrision (e.g., EPSs, (5iv) Official copy of a letter of commitment the National Council of Social Policy) defining the ARSs, public hospitals anl- territorial entities). According to said law, the duly signed by the Minister of Finance implementation nrles for the distribution of health Ministry of Finance (MOF) is responsible for th- definition of the mncthodollogy certijt,ing that the use of resources in the transfers pursuant to Law 715 of 2001; (iv) used in the callculation of the fee. The MOF has regulated the above-mentioned FOSYGA Solidarity Account will be agreement to use the FOSYGA Solidarity Account issues through two decrees; (i) Decree 14D5 of 1999 which regulates the system dedicated exclusively to financing the resources exclusively for subsidizing heal.th aind the methodology employed for fee definitioin and (ii) Decree 2787 of 2001 subsiclized health insurance regime ----- -- vwhich establishes the level of the fee for the various entities sitp>rvised-by the (5v) Official copies 6of (i) Decree 159 of insurance coverage; (y) enactment of regulations National Health Superintendency. 2002 providing information and lefining the (decretos reglarnentarios) for the implemenitation of methodology, for the distribution of health LaW 715 with respect to the assignment of (6ai) A business study financed by tb he Program Apoyo a la Reforura wil have tansfers pursuant to Law 715 (done) and (ii) responsibilities for public health and the been contracted with respect to the diffrent aspects of the operation of the acconr ofthe CNSSS defining tih amount of methodology and infoirmatior for the distribution of Health Superintendency. The studly aims to assist the Health Superintendency resources destined to territorial entities for health transfers pursuant to said law; and ( ri) identifying actions that will increae vigilance and improve controL The study the financing of public health. allocation in the 2003 proposed budlget of niecessary can draw lessons from the experience of other Superintendencies in Colombia. (5vi) Official copy of time-bound communication action plan infonning resources to inubnm eligible poor population about (7ii) The Colombian Government (GOC) wil have carried out the fillowing eligiblle poor population about subsidized the subsidized health insurance rime rights and actions to improve th- immunization system (i) budget allocated to finance year health insurance rights and affiliaton affiliation procedures. 2002 irnmunination needs lo achieve at least 95% vaccination coverage; (ii) procedures; and official document showing 6. Strengthening of the operation of the ctevelopment of detailed Action Plan to strengthen the EPI immunization resource allocation in the 2003 M[OH budget National Health SuFerintendency through: (i) Frogram and initiatioin of certain key measures; and (iii) allocation of resources proposal needed tso carry outt said plan aFproval of the necessary decrees requiring fee fur executing the action plan. payments by EPSs, ARSs, tenitorial entities and (6i) Officiall copies of (i) Decree 1405 hospitals to the National Health Superintendency The Ministry of Heallth (MOH) and the National Institute of Health (INS) will regulating the system rind methodology and establishing the fee level; (ii) signed contract have finalized the above-mentioned Action Plar, including short andi medium- employed for the definiticin of dte Nati[onal for a business study, financ ed by the Program term acdvities to strengthen the EPI program. The Plan uses te Final Report of Healtl Superintendency's fee (done) anci (ii) Support to tt: Reform (Ajoyo a la Reformnr), the Nalional IEPI Evaluation as a basis and covers aUl components in the Decree 2787 establishing the fee level (done) regarding the operation of the Superintendency and evaluation. Emrphasis is placed on: (a) financing, (b) strengthening maLnagement, (6ii) Official copy of contract for business the ways that iits role can be re-enlbrced; and (iii) (c) infiastructure and staffing development, (d) strengthening infbrmation study of the: National Health internet dissemination of infornmation on the systems, (e) oald chaLin, and (f) enhancinig coordination between providers by Superundentency performance of EPSs, ARSs, territorial entities arid assigning necessary funds to ensure the adequate coordinalion and flow, of (6iv) Actual availability of information in hospitals by the National Health Superintendency. information. the Internet 7. 5 g1Iingi of tho Expanui1d Mg= of (7i) Official copy ol PAC 20Q2 sliowing that Immunization (EPI) through: (i) butdget allocation a budget has been programmed to finance 4 _p '/Y TP_+;A%__tlV i. _il Ibhe government will have assigned funds for the National Plan of Action and 4 Annex G to linance year 2002 immunization needs to achieve will have begun impllementation of the plan. Initial priorities for immediate year 2002 immunization needs to achieve at at least 95% vaccination coverage; (iii) developmnent initiation include steps for adequate staffing, national vaccination guidelines will least 95% vaccination coverage of detailed Action Plan based on the be under development and training scheduled, surveilance workshops will be (7ii) Official copies of (i) the Action lPlan recommendations of the National Evaluation tOD scheduled, a Supervision Plan will be in place, and evaluation activities to developed and signed by both the MOH and strengthen the EPI bmmunization progmrn and monitorvaccination coverage levels and surveiHallce sensitivity will be ongoing. INS, presenting the activities described in initiation of certatin key measures; (iii) allocation of InstaUlation of computer solfware for disease surveillance (e.g., MESS and Specifications and Definitions, cost resources for executing the EPI plan; and (iv) P]ESS) at the Department level will be ongoing. The govenrnent will have estimates and a chronogmtm; (ii) a report clarification of dte assi;gnment: of responsibilities ait contracted (the first phase in all capitals of the 33 Departments andl in the 4 signed by MOH and the INS on the initiation the central level regarding immnmization. Districts of a study) t) conduct an inventory of the national cold chain system of the above-mentionedl selected key and wiDl have estimated the cost of its renovation. As a first step, Supervisory measwues and other activities underway; (iii) and training activities should be initiated. The national inventDry should be official docurment from MOH showing wuderway and purchase orders will htave been placed for meeded equipmnent allocation of resources for executing the EPI Assuming that the results of the pillot testing of PAISOF-2 are acceptable, h plan; and (iv) a contdact for the first phase of government will have assiigned fimds for, and wiDl have begun, the national cold uchainosystem. implementation of PAJSOF-2 at different levels within the health caure sector. (7iii) Official copies of: (i) Resoution 228 Training activities will have been initiated. The MOH/INS will be nionitorng of 2001 of the MOH delegj,ating to tihe ]NS vlLccinatilon coverage levels alt the municipal level and b,y health plan using the the implementation of the EPI program at an following indicators: operational level (done) and (ii) Resolution * 95So coverage for DTP3 (and/or, pentavalent), OPV3, MMR, BCG, 537 niandating the creatioDn of a Special Hepatitis ED, at the appropriate ages, e.g., I-year of age for MMR and less Group of Technical SLtpport for the than 1-year of age for tlhe other vaccines. execution of the aigreement between the MOH and the INS (done). * Proportion of chilldren living in municipalities with 95% aoverage levels by vaccine and by the appropriate age * Proportion of municipalities with 95S% coverage levels by, vaccine and by the appropriate age Perfnrmance target indicators will inchide DTP3 coverage over tinme ameing children less than one year of age, inmeasles coverage over time among children I-year of age, and the proportion of children living in municipalities with coverage of 95S% for DTP3 and measles vaccine. Finally, a mechanism will bave been idenatified, formalized and implemented that permits a child to receive needed vaccination from any vaccinatiDn center, regardless of affiliation. Based on this. activity, missed opportunities to vaccination willI be minaimized. (7iii) Both the MOH and INF, are responsible for the implementation of the EPI program. Decisions at a policy level are taken by the MOH, while at an operational level by the INS. Resolution 228 of 2001 of the MOH delegates the operational execution of the EPI program t) the INS and Resolution 537 of 2l01 mandateg the creation of Special Group of' Technical Support fiDr the execution _______ of the agreement (coenio) between the MOH and the INS. __ .__ .- Annex G Educatlon (8i) Official copy of Law 715 as; published in 8. Inprowing public education regulLatory iramework throughi (i) approval of a the Officiall Gazette (Diario Oficial) (done) new resource allocation model for teritorial entities according to number of students, (8ii) Official copy of CONPES 057 population to be attended, amd poverty indicators; (ii) approval of CONPES defining 'Dist(1 bution of the Ceneml SysteSm of the implementation irles for the distribution of the educational trans&rs pursuant to Participationsf Year 20e' (dSon e ) Law 715; and (iii) enactment of regulations (decretos regkzmentarios, rinisterial (8iii) Official copy of regulations (decree, directives, resolutions and circulars) for ithe implementation of Law 715 in regard to mmisfteal directives, resolutions, and information srstem including regulations strengthening the capacity of thet Ministry circulars) duly signed by autborized of Education to assist territorial enirties develop their education information systems representatives. for resource allocation, and guidelines for public education institLuions contacting (8iv) Offical copy of Budget Law 2002 with private Providers for the delivery of educational services; and (iv) allocation in (dore). '2002 budget of resources to strengthen the Ministry of'Education's capacity to assist (9) Officild copies of' the duly signed ernitorial entities develop their eduication inforsation systems. agreements (done). 9. Ten performance agreemrents (Matrz de Seguiniento ad Plan de (10)Official copies of the duly signed .Reorgrnizacion) signed between the authorizecd represientatives of both the National agreements Government and Territorial Entities to rationalize the teaching force and extend (li') Physical evidence of disseminiation, education system coverage. e.g.,)press releases, brochure, and intemnet 10. Signing of al Monitring Agreement (Convenlio de Seguiniento) between (I Iii) Offical copies of uipdated drafts of the authorized rqpresentatives of the national govemment and ihe Mayors of selected Portafolio de Ofertas Educativas distri.-ts receiving educational tramsfers according to the Law 715 formula Said (12) Officlial copies of the methodology, lagreelmlent will allow the Minisitry of Education to monitor compliance of te tenrs of reference and shorlist of following measures that the districts agreed to undertake: (i) inprove the reliability of consultants the infirmation on the numlber stwuents; (ii) streamline the administrative stnrcure of the Ecbcation Secretaliats (Secretarkas Le Educacion); and (iii) increase investment in non-salary education inputs and universal assessmenit of the educational achievement of children. 11. Public dissenination of information through, inter alia, national medlia Ipublicaitions and press releases regarding: (i) student learning achievement of the last SABER assessment and (ii) the updating of the "Postfolio of Education Services" i(Portafblio de Ofertas Educativas) and its inchlsion of unit cost estimates. [The Portfolio is a brochure on pedagogical mnodels local authorities should consider for iincreasing both enrollment amd qullity.] 12. Development of a methodology and shcrtlist for selection of consultants to evaluahe moiels fcor expanding basic and middle education using education technollogy (e.g. SAT, telesecundarias, posVprimnaria and accelerated mnethodologies) 13. $5 miUion will be aside set fiDr technical assistance (A) and added to 'the 2002 budget and/or 2003 buidget ProposaL. _ _ _ _ _ 5 Annex H Relations,hip with EDB Social 'Sector Adjustment LDan and IlBRD Structural Fiscal Adjustment Loani (SFAL) This annex outlines the relationship between the proposed Social Sector SECAL, the existing IDB (Inter-America-n Development Bank) Social Sector Loan, and the IBRID Structural Fiscal Adjustment Loan (SFAL). 'The IDB and IBRD isocial sector loans are being carried out under parallel financing; shared policy conditionalities with the IDB loan are highlighted in ithe SECAL mlatrix. Many of the other conditionalities in the IDB mEatrix are complementary to those in the IBRD matrix. The proposed SECAL sha res no conditionalities with the '3FAL beyond macroeconomic framework objectives, but refi)rms imI the SFAL matrix supported by the proposed SECAL are highlightel in the SFAL. matrix. I. ]IDB Social Sector Adjustment Loan (Tl =- ranchjbe l T2 = Tran)che 2) L Macroeconomic Stability TI and T2 C2mPlimuce witL IMf Extended Fund Pai t greeemnt and the mnroecoomic pogramyinythe a ter. IL Social Sa rety Net Refornm of SISBEN proxy means lsting lnstrument Ti Reform cof SISBEN approved by CONPES, including * Adjustments of the instumnent to capture regional differences and d)nauc aspects * Quality control and cetalized monitoring * Stenthening of its administraion and superiSion at the local level 12 PNt into effect SISBEN reform, icluding at least: * Re-survey and Iraining undertadken in at least 4 municipalities . Lauaching of the ision di monritng - em Refoerm of Sial Asstance progams T2 Establishment of a pilot scheme for the decentrasizatici and separation of fnancing and provision functions of ICB17 * ImplementatiolL of the above ICBF pillot scheme in 10 municipalities IJOINT WITH HIRIDI TI CONPES, approred plan for consolidating, improvement, and adjustment of existing social ssistance programs T2 Implemeanation of the above-mentioned plan in regard to: * Suspeion of overlapping RSS programs * Reform of the assistance to old indigents * Insfitutionalizagtion of selected pr ns of the Deputment of the Presidency _ _ _ _ Countercydical safiety net firnanbg progrm Tl Fumd for the stabilization. of social assistance spending approved by CONPES,, including: * S9t Nplisai fmiaaub for ipTandin$ taqsded social assistance propams during crisis * Objective and transparent rules regarding funds accnmlatditra, investment, and spending * Reconamn tiaon lrding the creation of the above find by Law Annex H 12 That into effect the stabilization find, whlich implies: * Approval of a law creating the fund * Establhsbment of regullations enabling its implementation * Call for biddg for the selection of a firm to the resources of the fund M. Heanl- TI Permanent expansion of the subsidized bealth misuranoe coventge (Rfgvnen Sabridiado) to 350,000 wesons and extnsion of SGSSS to the SISBEN m and IV pOpulationL [JOINT WITH IBRD] T2 Wideninlg of health inurance membership of the self-employed with capacity to pay amd effectiveness of the extension of SGSSS tD the SISBEN m and rv population TI Budget allocated to fimnce 95 % of next year's imn iization coverage tael:IJOINT WITH IBRDi T2 Execution of budget proaned to finance 95 % of the immmiization trgt of the rent ycar. IV. uEdcation TI Ten perfnrmance agreements signed by the Ministries of Finance and Education, the DNP and ten departments to rationalizv the teaching force and extendl education systwm coverage. IJOINT WITH IBRDI 12 Five additional performance agreemenis as above and progress achieve in regard to the efficiency indicators stipulated in the ten performmace agreements mentioned in the first tranche 12 Approval of enabling decrees (decrs regiletentarios) for thie reforn of Lav 60 in regard to natinal regulation, information system, andl crtificadion ofrinumicipaltfies V. Ermployment and Training TI Presentaion to Congress of drafl legislaion (nonnatMz) for reducing labor costs, including among otherse * Reduction of payroll taxes (qjvrenaparqf=ewle,) * Creatiom of wotrk opprniities for the young throughl the amendment of the "tcontritO de apredcj#e" * Reduction of none-wage labor costs (Fomatmg trmche) Al least two of the theel measmes inchlded in the abore condition are in effect. 2 ,1i I l i i.sI t l Annex H … 5. The govelnment has initiated a restructuring plan for ISS Health, inchding negotiating with 188 unions about labor costs and benefib, and bas implemented the first phase, inchlding the completion of renegotiating :50 percmnt or mre of ISS's tol outstanding debt to health sevice providers and the reduction in at least 30 pernt in thie waiting list for elective surgeries (as of June 30, 2001). 6. nke govenmment has creded a new social secufity department in the Ministry of Finace for improving sDcial security system control. Improved control has; generated fiscal savigs equivalent to more thma US$ 100 nillion in ,001. Public Sectoir Reform 7. The govenmnent's approved budget for FY02 has included a reduction in total cental government cunent eapendiftre (net of interest payraents and tansfers to subatinal entities and to social security) of more gman 4 percent in real terms in relafion to the same expenditures in the approved tudget frFYOl. 8. The governmet'rss approved budget for FY02 has included a reduction in central governument's genceal exapditues (gtor genern) of:more than 15 percent in real tenns in irelation to the same expenditures in the FY00 executedi budget. 4 Annex H Second T'ranche A. General Conditon of the SPAL The macroeconomic framework ofthe Republic of Colombia is consistent with the objectives of the program B. Speefic Conditions of the SFAL Intergovernmental FIsCILI Relations 1. The govermment is itplemencting the Constitutionil amendment (Acro Legislaivo No. 1, of July 30, 2001) in accordance with its terms, limiting the rate of growth of(a) total transfers to sulmational governments to last year inflation lplus 2 percentage points; and (b) the centml administration's openrtional expenditures to last year inflation plus 1.5 (percentage points)-as both were inchlued in tbhe FY02 budget, approved by Congress 2. The decree governing debt and bomrwing by territorial entities (referred to in condition 3 of the lirst tranche) is lbeing implemenkted in accordance with its terns Ediiation 3. (a) Laew 60, 1993 hai been amended to provide for certification ol municipalities that, together with districts, represent at least 40 perent oflhe country's school enrollment enabling such municipalities tD autonoImously manage the provision of education services i(inchluing teacher payroll) and. to estabhlish education perfomlance monitorirng mechanisms; or (b) the central government has certified mumicipalities that, together with districts, represent at least 14 percent of the country's school enrolment enabling such municipalities to autonomously manage the provision of education services (including teacher payroll) and intergovernmental performance agreements have been signed between the Central Goverment and such certified districts and municipalities. In either case, no extra budgetury trnsfers fcr education to certified districts or municipalities have talen place. [COMPLEMENTED BY SECAL]l Health 4. The govermment has signed contmracts with at least three sibnational governments to fimnce the restructuring of public hospitals, and the implemenitation thereof has started These contracts have included specific annual targets for (a) productivity incieases in inpatient and outpatient services and (b) labor cost reductions The reltming fiscal savings are equivalent to at least 5 percent in real terms per momth, on average among those participating subnlational governments, compared to the previous year in a manner satisfactory to the Bank S. The govemment has tansformed 60 percent or more of the 2001 budgeted health situadlofiacai (after legal manidatory deductions) to demand subsidies. [COMPLEMENTED EIY SECAId ISS The govemment and the ISS have reached agreeament to generate arnual savings in ISS' total costs over a lOLyear period wlbich will, in the opinion of the Bank, :make E;S financially and econaomically viable. Pensdon 5 Annex H 7. Ihe governtneat is carying out and controlling the trensfirs of public pension regimes into a single agency, reducing payments of ineligible pension claims. Ongoing controls generate fiscal savings of on average, at least US$10 million per montiL Publc Sector Reform 8. The central goremnment's total actal current expenditures (net of interest paymnents and transfers to subnational govermmnts and to social security) that are being incurred in :2002 are generating average saings of more than 4 percent in real tenms in relation to the same expenditures incurred during the same period in 2001. 9. The budget approved for FY02 has included general expenditures (gsrtos generalei) that in real tetms are not highier tham those executed in the MY01 budget Floating Tranche A. Generail Condition of the SFAL The macroeconomic framerork of Ibe Republic of Colombia is consistent with the objctives of the prog__n. B. Specific Conditions or the SFAL Intergovernmmental Fical RelatIons I. Congress has approved the lavw referred to in condition 2 (fi: tranchie), substantially in accordance with the proposal submnitted by the government Penson 2. Congress has approvod a law to reform the general pension system to put it on a sustainable pink; or Congress. has approved a law to reform at east one of the exempted pension regimes; to bring it/them, in the opinion of the Bank, in line vith the general pension regime. 6 IBRD 31251i 78° 74° ;Ni jjRICA 'R. B. DE 12° aiba 12 . ,t 40R.AD < p Sea ~~~~~~~~~~~~~~~Riochocs -FJj °M|COLOMBIA _in F 9 t i e < 1Sea * I t / tt S ; + f)E | | (E / *!~Snta M I~~~~~~~~~~~~~~~3 B R A Z I 7 meorcpLncfshbude <_ P~~~ ] r qn jo ^ r, ~" \ / G U A| N RiA r. | * DcporimcnlCapihisDA 7 tw P A M AZO N A R E l -~~~~~~~~~~~~~ Dcpcln Vonure I> C H A A _ - ~~~~~~~~~'0 ANT 10 5 ILE _ ~ ~~~ ~ ~ it I_/I 1 %.J L Ifln M E T A~~~~~~~~~~~~~DCEBE 20 RePort No.: 24489 CO Type: PAD