Documentof TheWorld Bank FOROFFICIAL,USE ONLY ReportNo 42847-CO INTERNATIONAL BANKFORRECONSTRUCTIONAND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIPSTRATEGY FOR THE REPUBLICOF COLOMBIA FORTHE PERIOD FY2008-2011 March4,2008 Colombia andMexico Country ManagementUnit LatinAmerica andthe CaribbeanRegion This document has a restricteddistributionand may be usedby recipientsonly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The last CAS Progress Report was discussed by Executive Directors inOctober 2005. CURRENCY EQUIVALENTS (ExchangeRate Effective March 3,2008) CurrencyUnit= Colombian Peso (Col$) US$ = 1,845.17 COP FISCAL YEAR January 1to December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities CAS CountryAssistanceStrategy CONPES NationalCouncilfor Economicand SocialPolicy CPS CountryPartnershipStrategy CPPR CountryPortfolio PerformanceReview DNP DepartmentofNationalPlanning DPL DevelopmentPolicy Loan ELN NationalLiberationArmy ESW Economic Sector Work FARC RevolutionaryArmedForcesof Colombia FDI ForeignDirect Investment GDP Gross domesticproduct GEF GlobalEnvironmentFacility FTA Free Trade Agreement IBRD InternationalBankfor ReconstructionandDevelopment IADB The Inter-AmericanDevelopment Bank ICETEX ColombianInstitutefor EducationCredit andTechnicalStudies Abroad IFC InternationalFinanceCorporation IMF InternationalMonetaryFund ICB InternationalCompetitiveBidding MDB Multilateral DevelopmentBank MDGs MillenniumDevelopment Goals MIC Middle Income Country MIGA Multilateral InvestmentGuaranteeAgency MHCP Ministry ofFinanceandPublic Credit NCB NationalCompetitiveBidding NDP NationalDevelopmentPlan NLTA Non-LendingTechnical Assistance PFM PublicFinancialManagement PIU Project ImplementationUnit SENA NationalTrainingInstitute SIGOB Goals-andResults-BasedProgrammingandManagementSystem SINERGIA NationalSystemfor Evaluationof Public Sector Performance SISBEN System for IdentificationofPotentialBeneficiariesof SocialPrograms SME Small andMedium-sizedEnterprise TA ' Technical Assistance TAL Technical AssistanceLoan UN UnitedNations WBG World BankGroup IBRD IFC RegionalVice President:PamelaCox Vice Presidentfor CAL: FaridaKhambata Country Director:Axel van Trotsenburg Director, CLADR: Atul Mehta Task Manager: LauraKullenberg Task Managers:Miguel de PomboPierreNadji Country Manager:Miguel Lopez-Bakovic CountryManager:Roberto Albisetti FOROFFICIAL USE ONLY Republic of Colombia COUNTRYPARTNERSHIPSTRATEGY Executive Summary ......................................................................................................................... Table of Contents I. 1 I1* Introduction....................................................................................................................................... 3 I11. A. Recent Economic Developments and FutureProspects............................................................. Country Context................................................................................................................................ 5 5 B. Macroeconomic Outlook andDebt Sustainability 6 C 7 D Political andGovernance Developments .................................................................................. .. Poverty, Inequality, and the MDG's .......................................................................................... ..................................................................... 8 IV. A SharedVision.............................................................................................................................. 10 A The National Development Plan.............................................................................................. . 10 V. ........................................................................................................................... A The Current Program............................................................................................................... The CPS Program 11 B Summary Findings fromCompletionReport, Consultations, andClient Survey .................... .. 11 C. Rationale for WBG Support to Colombia................................................................................ 11 D Strategic Elements ofthe ProposedCPS ................................................................................ 13 14 E. WBG Areas o fConcentration and Collaboration .................................................................... . F The WBG's FY08-FY09 Indicative Program.......................................................................... . 15 ............................................................................... 22 H. Other Partners andthe ParisDeclaration................................................................................. G. Fiduciary and Safeguard Implementation 23 24 I ProgramEnvelopeandProjectedExposure J.. ............................................................................. 25 .................................................................................................................. 26 K. Risks........................................................................................................................................ 27 ResultsMonitoring Annexes Annex A Private Sector Strategy.................................................................................... 30 Annex B -46 Key Economic Indicators..................................................................... Colombia at a Glance.............................................................................. Governance Challenges...................................................................... Annex C 53 Annex D 55 Annex E IFCMIGA Program Summary................................................................ 57 Annex F Indicators of Bank PortfolioPerformance and Management ........................... Summary o f Lending andNon-Lending Services................................................ 58 Annex G 59 Annex H Annex I Results Matrix.................................................................................. Fiscal Sustainability and Debt Management................................................ 60 Annex J Key Exposure Indicators...................................................................... 71 67 Annex K Operations Portfolio (IBRD/IDA and Grants)............................................. 72 Annex L CAS Completion Report...................................................................... 73 Tables Table 1. KeyEconomic Indicatorsfor Colombia...................................................................... 5 Table 2 Macroeconomic Projections for Colombia. 2008-201 1............................................... 6 Table 3 Indicative WBG Lending andAAA Program ........................................................... Colombia's Priorities per Pillar inthe National Development Plan.......................... 10 Table 4 ... 23 Graphs Graph 1. Poverty Indicators for Colombia ................................................................................. 7 Graph 2 . FY04-07 IBRD Commitments inColombia.............................................................. 11 Boxes Box 1 . 4 Box 2. World Bank Group/Colombia Partnership: Successes Create New Opportunities .....13 Debt and Risk Management ...................................................................................... World Bank Approach to Governance Issues., ............................................. Stakeholder Consultations and Client Survey ........................................................... Box 3 21 Box 4 .. 25 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Republicof Colombia Country PartnershipStrategy FiscalYears 2008-2011 I. ExecutiveSummary 1. The last World Bank Country Assistance Strategy (CAS) for Colombia was presented to the Board in December 2002. At that time, President Alvaro Uribe had just been elected with a strong mandate to restore security and economic stability. The country was still recovering from its worst economic crisis in seventy years and grappling with spiraling violence. 2. Duringthe CAS period, Colombia's economy rebounded from near stagnation in 2002 to achieve a growth rate o f around 6.6 percent in 2007. This turnaround was due partly to a favorable external environment, but improved internal security and sound macroeconomic management also played a critical role. High growth rates have reduced poverty and raised social indicators, while reduced violence and enhanced government effectiveness and rule of law have resulted in increased consumer and investor confidence. This combination o f economic recovery, increased state presence and successfil security measures against illegal groups have worked together in a virtuous cycle to significantly improvethe quality o flife o fmillions o f Colombians. 3. During the last CAS period, the World Bank Group made an important contribution, more than doubling average annual bank lending and providing the new administration with a strong package o f advisory services. The challenge for Colombia now is to consolidate these important gains and the challenge for the Bank Group is to continue its strong partnership and remain a relevant partner to this dynamic middle income client. While the immediate economic and political outlook i s positive, the Government still faces daunting problems. First, it still continues to combat various armed groups, while at the same time reintegrating thousands o f former combatants into civilian life, providing them sufficient incentives not to re-engage in violent or illegal activity. Extreme poverty and deep inequities continue to haunt the country and could, if left unattended, fie1new cycles o f instability. 4. The Government recognizes these challenges and aims to address them through its 2006-2010 National Development Plan (the NDP), the outcome o f broad-based consultative process. The NDP lays out a comprehensive set o f costed programs built around six main pillars-Peace and Security, Equity, High and Sustainable Growth, Environmental Sustainability, Good Governance and Transversal Themes. These form the basis for the World Bank Group's Country Partnership Strategy (CPS) for FY08-11. 5. In line with the Bank's middle-income country (MIC) strategy a rolling programming approach i s proposed, under which the CPS pipeline will be determined during annual reviews held in conjunction with results-based Country Portfolio Performance Reviews.' Results will be measured using the Results Matrix in Annex Iand NDP's monitoring indicators, which will be tracked through SIGOB, the national monitoring system.2 Thus, the success o f the CPS will be coterminous with the success of the Government's programs that the WBG i s supporting. Provided the Government sustains a commitment to strong macroeconomic management and effective poverty alleviation, the Bank Group proposes to maintain an active IBRD lending program o f up to US$ 4 billion this CPS period (about US$ 1 billion per year) and IFC financing o f up to US$ 300/400 million per year, complemented by a diverse set of analytical and advisory services andspecialized grants. 6. The CPS embodies the World Bank Group's strategy for working inmiddle-income countries and features many o f the characteristics expected for new CPSs. There i s a focus on flexible programming and exposure management, quick-response and jointly prepared knowledge products; and frontier products (including initiatives in sovereign asset management, sub-national finance, private-public partnerships, contingent lending and insurance instruments). In addition, strong continuity with successful operations will be maintainedthrough several second and third-generationoperations. 7. Most of the risks identified in the 2002 CAS-increased conflict, economic deterioration, stalled reforms-did not materialize; instead the country made important gains ingrowth, security and economic stability. Nonetheless, risks remain. Peace has not been secured and poverty, corruption, and the drug trade remain significant challenges for the country. The external environment could change as a result of the slow down of the U S economy and/or potential reduction o f trade with Venezuela, which could cause a deterioration o f Colombia's fiscal situation. As the Bank Group increases its engagement at the sub-national level, moreover, reputational, fiduciary and safeguard risks will increase, posing increasedportfolio management challenges. 8. At present, however, Colombia appears well positioned to absorb likely external and internal pressures, rendering the risks to the Bank Group manageable, including IBRD exposure risks. Over the last four years the Government has made important advances in addressing the challenges highlighted above and the current National Development Plan has comprehensive programs (organized by pillar) dedicated to each o f these issues. Further, the President's policies have been widely debated and approval for them is reflected instrong, sustained popular support. 9. Insum, while political, economic, and operational risks are present, as they were in the previous CAS, they appear manageable and warrant Bank Group commitments o f the envisaged scale. The potential rewards o f continued large-scale engagement in Colombia are very high, as demonstrated clearly by the successes achieved over the last CAS period. ' While this CPS is not fully programmedin advance, there are areas inwhich the Governmenthas askedfor or indicated it will seek WBG support, includingtacklingextreme povertyandregionalinequality, infrastructureandpublic services, competitiveness,publicsector management,the environment, education, social protection,housing, transportation,energy and mining, agriculture, and peace-building. In addition, collaboration on financial services, banking and risk managementproducts is likely to intensify. http://www.sigob.gov.co/pnd/pnd.aspx,under "Objetivos y Estrategias del PND" contains all of the NDP monitoring indicatorsorganizedbypillar. 2 11. Introduction 10. The last World Bank Group's Country Assistance Strategy (CAS) for Colombia was presented to the Board in December 2002. At that time, President Alvaro Uribe had just been elected with a strong mandate to restore security and economic stability. The country was still recovering from its worst economic crisis in seventy years and grappling with spiraling violence associated with the armed conflict. Under the FY 2003-07 CAS, the World Bank Group (WBG) more than doubled average annual lending to Colombia, providing the administration with a strong package o f advisory services, investment and lendinginfour strategic areas-Sustained Growth, Equity, Governance andPeace.3 11. Since 2002 a combination o f factors-economic recovery, an increased state presence and successful security measures-have worked together in a virtuous cycle to significantly improve the quality o f life o f millions o f Colombians. Throughits support, the WBG has beenable to accompany the administration inmany o f its most important policy initiatives and continue a substantial program o f financial assistance. 12. This Country Partnership Strategy (CPS) covers fiscal years 2008-11andis aligned with the country's development goals as expressed in the 2006-2010 National Development Plan and longer-term development strategy "Colombia Vision 2019". This CPS proposes to maintain an active IBRD lending program o f up to US$ 4 billion (about US$ 1 billion per year), with an increasingly active IFC program in the range o f US$ 300/400 million per year, complemented by a diverse set o f analytical and advisory services and specialized grants. 13. The CPS embodies the World Bank's evolving strategy for working in middle- income countries and features many o f the characteristics expected for new CPSs. Programming i s done on an annual basis, synchronized with the national budget process, and based on a demand-driven "menu" approach. Frontier products will feature strongly (including initiatives in sovereign asset management, sub-national finance, private-public partnerships,contingent lending and insurance instruments) andemphasis will beplaced on jointly prepared, quick-response AAA. In addition, strong continuity with the previous CAS will be maintained, capitalizing on past successes through several second or third- generation operations. Examples o f some o f the successful initiatives which are expected to continue into this CPS period are summarized below. A CAS Progress Report was submitted to the Board in September, 2005 (report 32999-CO). It was at this stage that a new "Peace Pillar" was introduced at the Government's request. 3 Lox 1: WorldBank Group/ColombiaPartnership:Past Successes Create New Opportunities Health, Education and Social Protection. Building on earlier work to mitigate the social consequences o f the 1999 crisis, IBRD participated in extensive policy dialogue and financed a highly successful D P L series which promoted a comprehensive approach to social protection, and supported reforms in health, education, and labor force training. Lending in the area o f social protection focused on a national conditional cash transfer program called Familias en Accidn, which has been expanded to cover some 1.5 million poor families. Complementary operations help strengthen rural education and expand coverage in higher education. These operations are expected to have fiuther phases during this CPS. Financial Sector and Competitiveness. Continued restructuring o f the financial sector was high on the Government's agenda in the aftermath o f the 1999 crisis. IBRD provided support to restructure public banks, strengthen banking supervision and, with the IFC, helped the Government develop the regulatory framework for the insurance industry and capital markets. These efforts were largely successful, particularly in restoring the banking sector's financial viability. Continued support under the Business Productivity and Efficiency D P L series focused on increasing economic competitiveness. IFC issued the first Colombian peso-denominated bonds, helped establish Colombia's first secondary mortgage company, continued to back the transformation o f the mortgage sector through partial credit guarantees, and supported the issuance o f non-performing mortgage-backed securities (the first inthe LAC region). Additionally equity and medium-term facilities have been provided to local financial groups covering the whole range o f financial services and asset management companies. IFC i s exploring in collaboration with the Colombian Association o f Hydrocarbon and ECOPETROL, a project to help oil-rich municipalities improve their management o f oil royalties. Urban Infrastructure. IBRD provided US$ 457 million for the expansion o f the Transmilenio rapid mass transit system within Bogoti and to five additional cities. The Transmilenio i s an innovative system o f articulated buses which runon designated routes with fixed stops. Since it began operation inBogota it has reduced traveling times, crime, congestion and air pollution and i s being emulated in other major cities such as Lima, Mexico City, and Jakarta. Follow up operations are anticipated. Water Supply and Sanitation. IBRD and Government are finalizing a national program to modernize water sector management at the departmental level. This flagship initiative is the result o f a concerted engagement between the Bank and Government authorities over the last decade to develop replicable models for addressing problems o f water supply and sanitation inurban areas. Colombia has emerged as a leader inLatinAmerica inthe sector inpart as a result o f its close work with the IBRD. Environmental Management. IBRDhas provided grant support (under the GEF, Montreal Protocol, and Carbon Fund facilities) to address land degradation and encourage biodiversity conservation, renewable energy production and the reduction of ozone depleting substances. A DPL series focusing on mainstreaming environmental sustainability policies, complemented by a recent Country Environmental Analysis, provided the analytic underpinnings for many o f the activities presented in the NDP's Environmental Pillar. A third o f the D P L series is expected duringthis CPS. Peace and Development IBRD has been supporting a series of pilot projects since the mid 1990s which have demonstrated that participatory development can be undertaken successfully in the midst o f conflict zones. This model inspired similar initiatives throughout the country and was incorporated into the Government's Democratic Security Policy and National Development Plan. In addition, recent ESW led the Government to request Bank assistance to design its National Reintegration and Reparations Program. 4 4 111. CountryContext A. RecentEconomicDevelopmentsand FutureProspects 14. The near stagnation o f the economy during the early 2000s has given way to sustained economic growth and a strengthening o f consumer and investor confidence. The turnaround was influencedby an improved global economic environment inwhich demand for Colombia's primary exports has risen along with prices, while the cost of international borrowin has fallen.4 Sound macroeconomic management has played a major part inthe recovery and improvementsininternal security helped as well. F 15. Real GDP growth accelerated from 1.9 percent in 2002 to 6.8 percent in2006, with private investment rising from 7.7 percent o f GDP in 2002 to over 16 percent in 2006. Unemployment has fallen from over 17 percent in 2002 to below 11 percent currently, while inflation declined from 7 percent in 2002 to below 4.5 percent in 2006; however, progress inreducing unemployment stalled during2007.6 Public sector 7.6 8.2 5.6 5.8 7.0 7.1 Private sector 7.7 9.0 13.6 14.9 16.4 15.7 16. The economy remained strong in 2007 with GDP growth estimated at 6.6 percent for the year. Significantly improved factors supporting both.domestic demand (internal peace, healthy investment and credit levels) and external demand (rising exports and foreign direct investment) should result in sustained economic growth in the 5 percent range through 2011. Foreign Direct Investment has increased five-fold since 2003 and strong flows are anticipated in the wake o f recent business climate reforms, provided that positive security conditions are maintained and the Free Trade Agreement with the U S is eventually ratified.7 The current account deficit rose to about 4 percent o f GDP in 2007, however, on the back o f a sharp increase in imports o f both consumer and investment goods. 4A recent review of growth performance in Colombia "Economic Growth in Colombia: A Reversal of `Fortune"' by Mauricio Cardenascanbe foundon Fedesarrollo's website: www.fedesarro1lo.org. The Government had a US$ 2.34 billion Stand-ByArrangement (SBA) with the IMF covering 2003-05 followed by a US$ 613 million SBA through November 2006 and treated both agreements as precautionaryand did not draw on the funds available. 'Recentinterim (2006) changes inthe surveymethodologyhave complicated the analysisof employmenttrends. Inthe the United States has extendedthe Andean Pact Trade and Drug EnforcementAgreement for 10 months, preservingthe currentpreferentialtarifftreatmentfor Colombia. 5 17. The combination o f domestic economic growth, improved international conditions, peso appreciation, and revenue-enhancing policy reforms have benefited the country's fiscal accounts, as did improvements intax administration8 Revenuegrowth has continued to outpace GDP growth, and as a result the general Government deficit' decreased from 4.9 percent o f GDP in2002 to about 1.9 percent of GDP in2007. To further strengthen fiscal performance, the Government has been introducing measures to improve the fiscal balances o f regional governments and public enterprises, and the non-financial public sector deficit (which includes the surpluses o fpublic enterprises andregional governments) fell from 4.2 percent o f GDP in2002 to aprojected low 1.O percent o f GDP in2007. 18. Due to budget and legal rigidities, expenditures have continued to grow in two areas: transfers to sub-national governments and the pensions system. Congressional approval o f anActo Legislativo last year limitedthe growth rate o f transfers to sub-national governments to 4 percent in real terms in 2008-09, 3.5 percent in 2010, and 3 percent in 2011-16. From 2016 onward the growth rate o f transfers will be calculated based on the weighted average of the previous four years. In addition subnational governments will receive additional resources earmarked for education (to meet national coverage and quality goals) and childhood development programs. Transfers to the main state pension system will continue to expand over the next decade as payouts will greatly exceed new contributions; a 2005 constitutional reform, however, reduced the net present value o f pension liabilities by 19 percentage points o f GDP, from 162 percent to about 143 percent. B. MacroeconomicOutlookand Debt Sustainability" 19. The rapid growth o f 2007 i s expected to subside to more sustainable growth rates o f around 5 percent o f GDP duringthe remainder of the CPS period, as domestic demand has beengrowing faster than GDP, inflation has accelerated and the current account deficit has widened substantially. The main external risk to the economy would be a slowdown inthe global economy, particularly ifkey trading partners like the United States or Venezuela'' were affected. Adverse commodityprice shocks represent a relatedrisk. Source: IMFArticle I V StaffReport for 2007; WorldBank staff calculationsfor projections. * Taxrevenues increased by 4.7 percentage points o f GDP from 2002 to 2007. The sum o f the central Government balance plus the balance o f the social security system. loSee also the IMF's 2007 Article IV Consultation with Colombia, discussed by the IMFBoard inJanuary 2008. I'Total exports to Venezuela were USs3.2 billion from Jan-Sep. 2007 (about 2 percent of GDP), total imports were US$ 1.2 billion from Jan-Sep. 2007 (about 0.7 percent of GDP). Exports were dominated by automobiles (21 percent of exports), chemical products (10.9 percent o f exports), and food, beverages and tobacco (8.7 percent of exports). 6 20. Colombia still has an important gross debt burden; however, effective debt management to lower the foreign currency exposure and to lengthen the average maturity o f the debt has resulted inreduced risk. As noted in the Debt Sustainability Annex H, the public debt burden i s sensitive to a combination o f shocks, but even in a worst case scenario the debt ratios would stabilize at sustainable levels. On the external front, the Bank's base case debt projection includes deterioration in the current account deficit from an already sizeable 4.0 percent o f GDP in 2007 to 5 percent o f GDP in 2008. With non- debt creating inflows projected to decline from high levels (which allowed financing the current account deficit fully in 2006 and to a large extent in 2007), external debt would marginally increase to 27 percent o f GDP in 2008 under the base case presented in the annex. Actions to moderate domestic demand--in particular, a succession o f interest rate increases by the Central Bank--imply that high domestic demand growth, accelerating inflation and the widening current account would be restrained duringthe latter part o f the CPS period. C. Poverty, Inequality, and the MDG's 21. Colombia's highrate o f economic growth has had a positive impact on poverty. By 2006, the nationwide poverty rate droppedto 45 percent o f the population, and the extreme poverty rate to 12 percent (see Graph 1below). National estimates o f 2-dollar and 1-dollar per day poverty levels reveal the same story, with a decline from 18 to 8 percent and 10 to 2.5 percent respectively between 1999 and 2004. With these trends Colombia i s moving towards achieving its Millennium Development targets, though this will require the sustained increase in social spending and targeting that occurred under President Uribe's first term. Graph 1:Poverty Indicators for Colombia Poverty Extreme Poverty I I National Urban A Rural Source: MERPD,2005. Like many countries, ColombiaS official poverty line is much higher than the $1-2$per day measurement. 22. Improvements in national averages, however, mask serious ethnic, gender, and regional differences and overwhelming disparities remain. Poverty in rural areas remains high at 68 percent (2006), compared with 42 percent in urban areas. Afro-Colombians (10.5 percent o f the population), indigenous peoples (3.4 percent), and female-headed 7 households experience poverty disproportionately. l2 While the country as a whole should be able to reach most o f its MillenniumDevelopment Goals by 2015, this is not likelyto be the case for Afro-Colombian and indigenous populations who inhabit regions o f the country where poverty and economic exclusion are most entrenched.l3 23. With the poorest 20 percent of the population receiving only 3 percent o f total national income, Colombia has a highly unequal income distribution. This i s reflected in a Gini index of 0.575, the third-worst in Latin America behind Paraguay and Bra~i1.l~ Reducing these gaps and promoting social and economic inclusion of vulnerable groups remain one o f Colombia's most critical unmet challenges. D. Political and Governance Developments 24. Security. When the Uribe administration took office in 2002, the armed conflict was the most important issue facing the nation. It is widely acknowledged that President Uribe's tough security policies and commitment to forcefilly tackle the conflict brought himhighlevels ofpopular support inthe 2002 and 2006 elections. Over the last five years, the expansion o f the armed forces and the establishment o f state presence throughout Colombian territory have resulted in a significant reduction of violence, particularly in urban centers.l5Uribe's first administration oversaw a 40 percent reduction inhomicides, a 49 percent decline inhouseholds forcefully displaced, an 83 percent fall inkidnappings, and a 63 percent reduction in terrorist attacks on towns and infrastructure. By way of comparison, Bogota now has a lower homicide rate than Washington DC, Caracas, Mexico City, Detroit, and Rio de Janeiro. These achievements are mirrored by significant improvements insocial indicators. 25. Governance. Since 2002, Colombia has also shown steady improvements in government effectiveness, control o f corruption, and rule o f law. Political stability and voice/accountability indicatorshave improved, with regulatory quality remaining stable. 26. Elections. In October 2007 free elections were held in all o f Colombia's 1099 municipalities and 31 departments and the coalition o f arties that support President Uribe increased their dominance inlarger cities and provinces76 (though the mayorship o f Bogota went to the opposition Polo Dernocratico party). While these victories are a show of political support for the current administration, there are uncertainties surrounding the 2010 elections and whether this coalition will remain intact. l2For example, illiteracy among indigenous and Afro-Colombian populations is estimated to be nearly double the national average, and the infant mortality rate among indigenous is about 50 percent higher than inthe general population. l3 To illustrate this point, one can compare national progress on MDGs with that of the department o f Choco-whose population o f 400,000 is 90 percent Afro-Colombian and 4 percent indigenous. According to departmental officials, Choco trails national averages innearly every MDG category; infant mortality nationwide is 20 deaths per 1,000 vs. 44 in Choco, maternal mortality is 99 per 1,000 births nationally vs. 417 per 1,000 in Choco. Households in precarious settlements are 16 percent nationally vs. Choco's 39 percent (2003); water coverage is 88 percent nationally vs. 37.7 percent in Choco (2003), while sanitation coverage is 74 percent vs 25.3 percent for Colombia and Choco respectively (2003). In another measure, the UN's Regional Human Development Index places Colombia 73rd from the top, with Bogota's ranking an even higher 38thplace (similar to Hungary)while the department of Choco i s ranked 148th. l4 Furthermore, Colombia's Gini index hasn't movedbelow the 0.55 mark for the past fifteen years. Ruralviolence, however, remains at pre-Uribe levels in some partsofthe country. l6Parties o f the Uribista coalition increased their share o f elected officials from less than 113 to more than 2/3rds in departments and won more than half o f the major city mayoral contests, up from 1/4thin2003. 8 27. Peace Process. Today, over 42,000 ex-combatants have been demobilized, most from paramilitary forces. The Government has taken steps towards peace negotiations with a much-weakened ELN (Ejkrcito de Liberacidn National). Recent attempts to arrange a humanitarian prisoner exchange with the FARC (Fuerzas Armadas Revolucionarias de Colombia) have resulted in the liberation of two important political figures. However, even in the absence of a negotiated settlement, the influence o f the FARC and ELN has beenreduced significantly as a result o f the military actions by the Government and lack o f public support. 28. Current Challenges. Despite its remarkable success in pulling the country back from the brink o f economic crisis, spiraling violence and social upheaval, the Government still faces daunting and simultaneous challenges to achieving sustained peace, security and economic stability. 29. As a result o f successful demobilization negotiations, the Government must now reintegrate thousands o f former combatants into civilian life and provide them with sufficient incentives not to re-arm or re-engage inillegal activities. This i s a costly process which involves i)complex reconciliation and reparation arrangements to compensate the victims o fpolitical violence and ii)creation o f conditions to reintegrate ex-combatants into society and into the labor market. This implies the creation o f incentives for the private sector to incorporate former combatants into productive activities. 30. The guerilla and paramilitary activities and the narcotrafficking which have haunted the country for decades continue to be the leading obstacles to achieving sustainable development in Colombia. The authorities are working on the complex task o f promoting lasting peace and socio-economic development in those areas where the Government has gained the upper hand militarily, while continuing military operations in those areas o f continued guerilla activity. 31. This task is being complicated by narcotrafficking in which both the FARC and paramilitaryforces are involved.l7Sustaining security and military gains and consolidating state presence throughout the country were achieved through a major build-up of security forces (military and police) from about 297,825 in 2002 to about 405,729 in 2007. The budgetary implications o f combating guerrilla forces, paramilitaries, and narcotrafficking are reflected in substantial military and security-related spending, representing almost 5 percent o f GDP.I8 A sustainable peace process would hold the promise that, over time, more resources could be channeled to the deeply embedded structural problems o f extreme poverty and inequity, whereby all vulnerable groups, (including the demobilized, the internally displaced, victims o f the conflict, and excluded groups living in deep poverty) are better incorporated into society and the labor market and given opportunities to develop their productive capacities. "InrecentyearstheFARC,aswell asparamilitaryforces,havecometofundtheiractivitiesprimarilyfromthedrug trade (extortion and kidnapping having diminished under President Uribe). Though some of the trade has shifted to Mexico and other South American drug cartels, narcotraffickingis still said to generate enormous revenues per year in Colombia, and constitutesa major source of continued financingfor illegal groups. '*These figures are drawnfrom"Logros DeLa Politica De ConsolidacidnD eLa SeguridadDemocrhtica" a presentation madeby Colombia'sMinistry of Defense in December 2007. 9 IV. A SHARED VISION A. The NationalDevelopmentPlan 32. The Government fully recognizes all of the challenges elaborated above and is trying to address them inthe 2006-2010 National Development Plan (the NDP). The NDP lays out a comprehensive set o f costed programs for the 2006-2010 period and provides guidance for monitoring results and outcomes. The NDP is the result of a broad-based consultative process" overseen by the National PlanningCouncil.2o 'able3. Colomb 1's Prioritiesper 'illar in the Natic ialDevelopmenl ?lan Peaceand Promotionof A State at the Security for High Sustainable Environmental Equity Serviceof its Citizens Growth Sustainability Citizens Consolidate Poverty and Macroeconomic Integral Requirements of a "Democratic Vulnerable Conditions Management of Communal State Security" Policy Populations Productivity and Water Resources Challenges of a Displacement, Market and Labor Competitiveness Territorial Communal State Human Rights and Relations HighImpact Environmental Reconciliation SocialProtection Sector-Specific Planning Access to Credit Programs Sustainable and Competitive Livable Cities Agrolcompetitive- ness and Growth Production EquityandRural Processes Development Saving, Investment andFinance Prevention/ Control Infrastructure for o f Environmental Development Physical Capital Degradation RiskManagement Formation Strengthen Energy Supply National Systems Institutions and (SINA) to Promote National Policies Environmental Governance TransversalThemes runthroughout the pillars andinclude Gender, Youth, Ethnic Groups andIntercultural Relations, Culture Demography and Development, Science and Technology, MigrationPolicy, Foundations and Cooperatives, Promotion o f Economic Solidarity, International and Regional Dimensions o fDevelopment. 33. The Government has articulated clear goals and progress indicators for each of these pillars and has developed mechanisms to continuously monitor progress throughout the CPS periodq2' l9 Consultations on the NDP were carried out between September 2004 and December 2006 in 27 departmentsand 24 large and mid-size cities. An estimated 21,000 people participated, representing a wide range of non-stateorganizations *'such asNationalPlanningCouncil(NPC) academia, religiousgroups, privatesector, trade unions, and youth. The is aconstitutionallymandatedbodycreatedto promotecivil societyparticipation inpublic policy. The NPC is madeup of 18,000 communityand socialorganizations,representing24 sectors nationwide. Further informationcan be foundon its websitewww.cnDco1ombia.org. 2' A detailed description of the NDP goals can be found in Chapter 7 of the NDP on the Government's website httD://www.dnD.nov.co. SIGOB, the Government's system for monitoring progress against all country goals, including the NDP, is also accessibleon the web at httD://sigob.Dresidencia.gov.co. 10 V. The CPS Program A. The CurrentProgram 34. The previous CAS envisioned a maximum IBRD lendingprogram o fUS$ 4 billion for the FY04-07 period. Commitments eventually totaled US$ 3.1 billion, split 40/60 between investment and policy lending respectively, and spread fairly evenly across four main sectors as per Graph 2. BRD exposure reached US$4.7 billion at the end o f FY07. Graph 2: FYO4-07 IBRD CommitmentsinColombia EeaRhand hfraestructure, Mucation.26%1 22% 2004 2005 2006 2007 /aDRs (p104-07 60%) t ILWO4-07: 40%) 0 Total (Averwe of Total: US77Om) 1 35. I B R D ' s portfolio consists o f 16 projects under implementation for a net commitment o f US$ 1.65 billion-of which US$ 715 million remains undisbursed. In addition, 4 GEF grants (US$ 42.4 million) are under implementation. At the end o f January 2008 only one project in the portfolio was at risk. The overall portfolio for FY07 had an average annual disbursement ratio on investment projects o f 34 percent. Proactivity and realism ratios have remained in line with Bank best practice, at 100 percent for both categories at the end o f January 2008. 36. IFC operations have broadened in scope as improvements in security and strong growth have triggered a surge in investment, creating new opportunities for IFC support. Colombia i s now IFC's tenth largest exposure, and fourth largest in LAC. In FY07, new IFC operations amounted to US$ 274 million, and at the end of the fiscal year, IFC commitments totaled US$ 860 million which was directed to companies in the financial, oil, manufacturing, agricultural and infrastructure sectors. Like IBRD, IFC's portfolio has performed well throughout the CAS period. See Private Sector Strategy Annex A for details o f IFC and MIGA programs. B. SummaryFindingsfromCompletionReport,Consultations,andClient Survey 37. Preparation o f this CPS was informed by four types o f external consultation: i)the country-wide consultations on the NDP conducted by the Government and the National Planning Council, ii) in-country interviews for the CAS Completion Report, iii)issue- based Stakeholder Consultations, and iv) a Client Survey. 11 38. The CAS Completion Report for the 2002 CAS ranks the WBG's overall performance as satisfactory. The report's findings and recommendations which informed this CPS are summarized below: a Build on what works and deepen the continuity between the previous and the present country strategy; a Synchronize the CPS with the national planningcycle; a Set realistic short and medium term targets for programmatic operations, given the difficulty of designingrelevant policytriggers for the outer years o f the CAS; a Retainthe flexibility to reprogram as conditions change; a Buildstrong consensus for new initiatives, usingpilot operations; a Reemphasize work inthe rural sector; a Internalize equity and social exclusion concerns into Bank analytical work and operations. 39. The WBG organized ten direct Stakeholder Consultations to guide CPS preparation and a complementary Client Survey o f 170 respondents was also commissioned.22 The main opinions and messages expressed are summarized inBox 2 below. 22 Stakeholder consultations involved128 representatives of diverse groups including Afro-Colombians and indigenous communities, regional governments, NGOs and civil society organizations, the private sector and multihilateral donors and were held in Bogota and inthe depments of Boyachand Valle del Cauca. IFC also held three panel discussions with private/publicentrepreneurson infrastructure, oil andgas, andfinance-relatedissues. 12 13ox 2. StakeholderConsultationsandClientSurvey M a i n Messages: Image and Outreach. The Bank receives very high ratings for its overall image in Colombia. Stakeholders perceive the Bank as respectful, responsive, and collaborative with Government and other donors. The two main sources o f information about the WBG are work-related exchanges and the Bank's website-which i s seen to offer timely and easily accessible information on the country program. However, policy messages do not travel far beyond official circles and academia to the broader population and better use could be made of alternative media (such as periodicals). Stakeholders are in general unclear about the procedures to apply for Bank-related grants, scholarships, and training opportunities and would like easier access to this information, particularly those living outside Bogoti. Products and Services. The Bank i s valued for its financial resources, technical advice, and knowledge; though it is felt that it should improve the price, terms and processing requirements o f its loans as well as non-financial services. (Note: the client survey was conducted prior to recent changes inIBRD's pricing policy.) Respondents see the Bank as needing to become more competitive ina M I C country that has other financing alternatives. The Bank's strategies and recommendations, moreover, are not always seen as realistic or well-tailored to country circumstances. Country Priorities. Poverty reduction and the lack o f employment opportunities are the main development challenges for Colombia-and the Bank needs to be more involved in poverty eradication through the provision o f education, jobs and basic infrastructure (although, at the same time poverty alleviation was the area where the Bank was seen as relatively less effective). Specific Areas of Intervention. The WBG should address land policy (a priority for the rural poor), provide more nuanced advice to tackle disparities at the regional level (a view widely held by Afro- Colombians and indigenous groups consulted), give greater focus to promotion of science and technology for competitiveness, and focus more on youth. C. Rationalefor WorldBankGroup Supportto Colombia 40. The World Bank Group and the Government o f Colombia have built a productive and dynamic dialogue on a wide range o f development issues and this has led to a strong lendingprogram. IBRD is currently Colombia's largest single creditor, its market-share among multilaterals having increased steadily since 2001 from 24 percent to 44 percent today. Through its long engagement, the WBG has gained significant knowledge and expertise in the areas most critical to the country's development. The synergies offered by the combined services o f IBRD, IFC and MIGA constitute an unmatched suite of country experience and strategic, financial, and technical support which i s accessible within a stable and long-term multilateral relationship. 41. Today, there i s still a significant demand for WBG services to help the Government consolidate its achievements and address ongoing challenges. Furthermore, aligning the CPS with the NDP offers the WBG an opportunity to fully harmonize its program with the country's own plans and budget cycle. Moreover, a NDP developed with broad popular consultation i s consistent with Paris Declaration commitments. 42. It is important to highlight that while there has been an intensification o f WBG engagement with Colombia over the last CPS period, the Government has been very successful in changing its debt profile, favoring domestic currency debt, and managing its debt strategically, using local currency instruments and accessing international capital markets. While the Bank remains competitive interms o f pricing, the challenge will be to 13 continue reducing the non-financial transaction costs imposed on the client country and ensure that the Bank's technical expertise and advisory services i s cutting-edge, and responsive to rapidly-changing needs. A sophisticated middle-income country like Colombia i s an important test case for demonstratingthat the WBG can deliver on its M I C strategy o f faster, more flexible client-driven support. D. StrategicElementsof ProposedCPS 43. When President Uribe was re-elected inMay 2006, the Bank had already prepared a series o f 18 Policy Notes, "Colombia 2006-2010: A Window of Opport~nity".~~ These were discussed with the President and his cabinet shortly after hisreelection. InDecember the WBG country team and senior Government officials convened for a day-long workshop inWashingtonDC, at which the Government presented itsNationalDevelopment Planand outlined how the WBG could best support its goals under a new CPS. 44. The authorities requested WBG support for five pillars o f the National Development Plan-Peace and Security for Citizens, Promotion o f Equity, High and Sustainable Growth, A State at the Service o f its Citizens, andPromotion o f Environmental Sustainability, as well as support for its Transversal Themes. Under each pillar it was agreed that the Bank would provide a flexible menu-based mix o f financial and analytical services tailored to the country's evolving needs. New frontier products would also be offered, particularly inthe area o f financial andrisk management. 45. Inlinewith the Bank's MIC agenda, the Government andthe WBGhave agreedto a rolling programming approach wherebythe CPS pipeline will be determined and adjusted on a yearly basis inconjunction with results-based CPPRs. Results will be measured using the monitoring indicators o f the NDP,24and these indicators will be tracked through the national monitoring system (S1GOB)-thus the success o f the CPS will be coterminous with the success of the Government's programs that the WBG is supporting. A mid-term CPS Progress Report will also provide anopportunity for adjustments. 46. Bank interventions will be designed inconformity with Paris Declarationprinciples o f donor alignment and harmonization with national systems. Where country systems have not evolved to international standards, the WBG will provide technical assistance to help buildinstitutionalcapacity at the local, provincial, andnational levels. 47. The CPS also incorporates the main tenets o f the Bank's Governance and Anti- corruption Strategy and L A C regional policy as a complement to Colombia's efforts on this front, including its recent ratification o f the UN's Anti-Corruption Convention and the Governance Pillar goals o f the NDP. WBG support to governance at the subnational level is expected to increase over the CPS period, as discussions have already been initiatedwith several newly elected mayors and governors (e.g. Medellin, Bogota, Cartagena), which has led to requests for assistance with several public sector management and governance - ~~ ~~ 23 CopyrightWorld Bank 2007, also available at www.worldbank.ordco 24http://www.sigob.gov.co/pnd/pnd.aspxunder "Objetivosy Estrategiasdel PND" containsof all of the NDP monitoring indicatorsorganizedby pillar. 14 initiatives, through lending and AAA. (see Section V. and Governance Annex B for hrtherdetails). 48. While this CPS i s not fully programmed in advance, there are areas in which the Government has either asked for or indicated it intends to seek continued active Bank support, including tackling extreme poverty (particularly inincome generation for the poor and vulnerable groups), infrastructure and public services, competitiveness, (including trade promotiodbarriers) public sector management, the environment, education, social protection, housing, transportation services, energy and mining, agriculture, sustainable tourism and pea~e-building.~~ Inaddition, collaboration on financial services, bankingand riskmanagement products is likely to intensify.The lendingprogram anticipated for 2008- 2009 i s expected to take advantage o f recent changes inBank lending instruments(e.g. the new DDO and maturities policies). The Bank is also exploring with the Government other program innovations such as thejoint IFC/IBRD subnational Sub-national Finance Facility. New product lines, taken together with the diversity o f engagement the WBG can offer, positions the WBG to responds to Colombia's need for cutting-edge, multi-sectoral solutions to its major development challenges, such as resolving striking regional inequities, competitiveness, stimulating regional development as a source o f poverty reduction, and adapting to global climate change. E. WBG Areas of Concentrationand Collaboration 49. The following section focuses on the type o f financial and AAA services the WBG i s positionedto offer under each pillar, identifyingareas where discussions are underway or where the Government has said it intends to seek support. The list is indicative, as explained inprevious paragraphs. I.SustainedEquitableGrowth26 50. The overall objective o f WBG support under this pillar i s to help improve Colombia's competitiveness in order to maintain high and sustainable GDP growth over the medium term. This agenda involves close collaboration between the Bank and IFC, who have a shared interest in improving infrastructure and social services, developing sources o f renewable energy, and strengthening the financial and private sectors. This level o f collaboration i s expected to intensify. 51. Examples of how the synergy between IBRD and IFC products could be leveraged during this CPS are highlighted below and described in greater detail in the Private Sector Strategy, Annex A: e Competition and Doing Business. The central vehicle for IBRD support to the competitiveness agenda has been the Business Efficiency DPL series.27 The ~~ 25While the range of potentialIBRDengagement i s broad, the Bank will exerciseselectivity, in line with its comparative advantageandresourcecapacityto providehigh-qualitysupport. 26 The mainfocus inthis sectionis on growthas anotherpillar addresses equity issues more directly. 27 This has underwritten reform in five areas: (a) enhancing the business environment and improving the regulatory framework; (b) increasing the soundness and depth of the financial system; (c) promotingaccess to financial servicesby 15 Government requested a third phase in FY08, which will be presented with this CPS, and there i s potential for continued support through follow up operations, if requested. Much o f IFC's country program also revolves around strengthening the business environment and private sector competitiveness. IFC's Bogota-based pilot to reform the inspections systems i s expected to be expanded to the municipalities o f Cartagena, Cali, Medellin, Bucaramanga and Santa Marta (through a multi-donor initiative). IBRD reports on infrastructure, logistics and regional competitiveness,28 have been complemented by the recent regional Doing Business report, prepared in collaboration with USAID. IFC plans to undertake studies in areas such as Public Private Partnerships, Simplification o f Business Processes, and Management o f Petroleum Royalties. In addition, the rural dimension o f competitiveness i s being addressed by IBRD projects which support small-holder involvement in the agricultural production chain and quality and technology improvements needed to compete globally (via the Productive Partnerships and Agricultural Transition projects respectively). a Infrastructure. IBRD and IFC are supporting Government policies to improve utility management, particularly public-private models of service delivery in the water sector, where IFC is also a potential investor in small and medium sized private operators. IFC and IBRD are also helping to structure infrastructure concessions, with IFC focusing on private sector participation and IBRD providing technical assistance to the G~vernment.~~ Further infrastructure collaboration can be envisaged in such areas as ports and airports, additional roads, energy and telecommunications. IFC/IBRD involvement has several advantages; it helps attract long-term investors, helps the Government negotiate fair contracts and provides addedassurancethat technical, social and environmental standardsare observed. a Urban Services. In addition to ongoing support for specific jurisdictions (Cartagena, L a Guajira, Bogota), IBRD i s expected to provide assistance to several departments through a Water and Sanitation APL in FY08. IBRD would also support a follow-up operation to provide urban services for the poor inBogota, as well as a project to manage solid waste. IBRD support could also be provided through a Housing DPL, which could address land access, housing finance, improved targeting o f housing subsidies and other sectoral issues. In urban transport, IBRD i s financing the expansion o f Bogota's Transmilenio system to five additional cities, some o f whom may be interested in borrowing from IFC or mobilizing market resources without a central Government guarantee. The city of Bogota i s working with the IFC on a new loan agreement o f around US$45 million. This financial package (which does not have a central government guarantee) will be used to support urban street rehabilitation and maintenance, an approach which could be replicated. All o f the initiatives above are aligned with the Government's underserved groups; (d) adoption of quality standards and innovation for export products; and (e) improving the regulatoryframeworkfor investmentininfrastructureandtransportlogistics. 28 Reports include the "REDI" Colombia: Recent Economic Developments in Infrastructure (2004), followed by Infastructura Logistica y de Calidadpara la Competitividad de Colombia (Report No. 35061-CO, 2006), and Colombia: Inputsfor Sub-regional CompetitivenessPolicies (2007). 29IFC is currently advising INCO and the Ministry of Transport on the structuring and financingof Colombia's largest roadconcessionproject-Ruta del Sol- a950km highwaywhich runs from Bogotato the Caribbeancoast. 16 Macro Projects Program. Also, IBRD, jointly with IFC, has an ongoing dialogue with Bogotaontheir plansfor a new metro system. 0 FinancialSector. IBRD has supported the Government's efforts to strengthen the financial sector in multiple ways, including support to issue and implement a new Capital Markets Law, consolidate supervision across all financial markets and develop a new financial sector law. To support country efforts to promote sustainable access to financial services, IBRD produced a study which investigates Colombia's relative performance (compared to other L A C countries) in banking sector finance to SMEs. IBRDis also exploring a potential contingent credit line for Disaster Risk Management and i s collaborating with an inter-agency committee to carry out simulations o fpotential financial crises to ensure Government readiness to adequately managerisks. IFC is evaluatingprivate equityplayers to identify strong business models that will generate efficiencies in industries with strong growth potential. IFC will also continue to focus on capital market development, as well as investment in firms at the pre-IPO stage. Finally, expanding access to finance for housing solutions for the poor is an area in which the WBG could offer support, possiblythrough ajoint operation with FINDETERand the National Savings Fund. 11. PovertyAlleviationandEquityof Opportunity 52. The overall objective o f WBG support under this pillar is to support Colombia's efforts to achieve its MDG and NDP goals to reduce poverty and increase equity. This involves a broad array o f activities inmany sectors, as summarized below: 0 ExtremePovertyandVulnerableGroups.IBRDcollaboration with Colombia on its strategy to eradicate extreme poverty i s expected to be extensive. IBRD and IDB have been asked to finance the expansion of an innovative and highly successful conditional cash transfer program (Fumilius en Accidn),30 with IBRD potentially providing around US$ 300-600 million in FY09. The Bank has been asked to support analytical work on labor markets and income generation for the poor under an ongoing NLTA and Social TAL, and to assist the Government in developing incentives for local governments and the private sector to promote greater social and economic inclusion of the extreme poor and vulnerable groups. To increase access to finance by the poor, IFC i s supporting microfinance institutions to promote SME and micro-credit products through the formal banking system and extend their reachto the poor. e Regional Dimension of Poverty. Colombia's poorest regions are disproportionately rural with a high proportion o f indigenous andor Afro- Colombian populations. These persistent pockets o fhardpoverty remain a growing challenge for regional and national authorities. WBG engagement in the coming CPS period will include a deeper and more systematic series o f activities to address issues o f social exclusion and poverty, through analytical work and potentially 30SeeAttanasio, "Evaluating aConditionalCashTransfer Program: The ExperienceofFamilia en Acci6n inColombia" 2006 17 through regionally-based comprehensive poverty programs such as those now under discussion with the department o f Choc6 and municipality o f Cartagena. The Bank will complement lending and analytical work with grant-financed activities, such as the recently approved Japanese Social Development Fund(JSDF) capacity building grant for Afro-Colombian communities. e Bank support for the health financing system is expected to continue, with additional technical assistance and possible investment lending for information systems development, health insurance, and hospital restructuring. e In education, operational support is planned through a second Rural Education APL, including pre-school, basic and secondary levels. Secondary education in particular suffers from serious retention problems, and further incentives would be piloted under the Antioquia Secondary Education Project planned for FY08. The Bank will also provide programmatic AAA on Education Quality. Inthe tertiary sector the Bank-financed student loan program (ACCESS) has significantly increased university enrollment among the lowest three deciles o f the population. A follow-up APL o f US$ 300 million to ICETEX (Colombian Institute for Education Credit and Technical Studies Abroad) in support o f student loans was approved in March 2008, which will have a central government guarantee. IFC i s also supporting this program with technical advice on accessing private capital markets. e Social Protection. The Bank will continue to support the redesign and rationalization o f the social protection system and improve targeting o f subsidies. Through the Informality AAA, the Bank will explore the dynamics of informality and how social protection coverage can be extended to informal sector workers; at the same time the ongoing Social Safety Net I1program is supporting a redesign o f the safety net system, while NLTA is looking at alternative ways o f extending pension coverage. If requested, this analytical work could potentially form the basis o f an operation to follow the successful Labor Reform and Social Development Policy (PLaRSSAL) programmatic DPLs.~~ e AgricultureandRuralDevelopment.Support for agriculture competitiveness and rural poverty reduction i s expected to continue. The Government has requested second hases o f the Productive Partnerships and the Agriculture Transition Projects' and has asked for technical support to design an agriculture and rural development strategy. This strategy would develop, among other dimensions, a poverty and income generation strategy for rural areas, policies for productive land use and protection, use o f innovative rural technologies, potential mechanisms o f social protection for the rural poor, and incentives for local governments and the private sector to accelerate economic inclusion and productive opportunities for the rural poor. 31See CAS Completion and Progress Reports for the results achieved through the PLaRSSAL series. 32A detailed review of the Productive Partnerships, Agricultural Transition and Peace and Development Projects can be found inthe CAS Completion Report. 18 111. Environment andNaturalResourceManagement 53. The Bank's key objective under this pillar is to support Government's NDP and MDG goals o f ensuring environmental stability. The Bank and the Government enjoy considerable convergence on the environment agenda, and this has led to an active grant program with many innovative features, and a deepening o f support for environmental reform under a series o f Sustainable Development DPLs. Complementedwith a technical assistance these DPLs are helping to improve the effectiveness o f the National Environmental System and to integrate principles o f environmental sustainability into policy making throughout critical sectors o f the economy. 54. In this CPS period, the Bank will continue to offer a wide array of instruments based on emerging demand. Operations and AAA under discussion for FY 08 and 09 are highlightedbelow: 0 Environmental Policy. Phase I11 of the Sustainable Development DPL series (described above and inthe CCR) with a particular emphasis on protectingthe most vulnerable, is anti~ipated~~ and may be co-financed by the Dutch Government. A third phase o f the Natural Disaster Mitigation operation is being explored. In the broader sense, the WBG could offer its conveningpower andinternational expertise to help the authorities consolidate their thinking and strategy inthe areas o f climate change and global public goods ingeneral. 0 Climate Change. Colombia has been a pioneer among middle-income countries in its approach, and during the CPS period the Bank is expected to significantly expand its support for national andlocal climate change initiatives. Inprinciple, the energy, water, and transport sectors would be areas o f focus, with special emphasis on developing a comprehensive climate change energy strategy which takes into account, among other things, the country's critical paramos and mangrove ecosystems. 0 Renewable Energy. Strengthening the resilience o f the power sector to climatic changes, thereby enabling Colombia to maintain its low carbon footprint, could involve market-based reforms to attract investment flows in renewable energy and new technologies such as C02 capture and sequestration or integrated gasification combined cycle power plants (IGCC). Analytical work in the areas of biohels and alternative energy are likely to emerge during the CPS period. Colombia will continue to access opportunities under the Kyoto Protocol via the Global Environment Facility (GEF) and the Prototype Carbon Fund in order to reduce 33 Sustainable Development Investment Project supports SINA (Sistema Nacional Ambiental) in the design and implementation o f policy reforms andrelated investments inline with the DPL Program framework. 34Triggers for the 3rd DPL in this series include implementation o f a national policy on environmental health, a system to monitor and evaluate national and regional environmental management, approval o f an Urban Environmental Policy, strengthening DNP and the Vice Ministry of Environment structures to better manage environmental policies and NDP environmental goals, strengthening the Water Resources Unit in MAVDT in line with new water management reforms, developing a national policy for air pollution control, strengthening MAVDT's Climate Change Unitto meet NDP goals. 19 carbon emissions while fostering important technology transfers to the renewable energy sector.35LFC will support new initiatives for production o f biofuels (ethanol and biodiesel) and the development of carbon credits projects, and could potentially finance institutions and companies interested in energy efficiency and renewable energyprojects. IV. Peace 55. The Bank's main goal is to help the Government provide the social and economic foundations for national reconciliation and a lasting peace. For the last ten years the Bank has been helping Colombia advance its peace agenda through a combination o f grants, studies and lending operations across several sectors. Experience gained from these initiatives was integrated into the NDP o f the first Uribe administration and influenced Government strategy for assisting rural populations inconflict zones. 56. During the 2005 CAS mid-tern review the Government asked the Bank to consolidate its activities and intensify its support under a new Peace Pillar. Since then the Bank has scaled up its flagship Peace and Development LILs into an APL series, and has produced fresh analytical work on the demobilization and reinsertion of ex-combatants (used in the redesign o f the national demobilization program) and reparation to victims o f the conflict, which was recently discussed with cabinet authorities, and is expected to help shape Colombia's National Reparation Program. 57. This experience positions the Bank to support a more comprehensive peace program that addresses social and political inclusion as well as the economic rehabilitation o f conflict-affected populations. Such a program could address three key elements: a Prevention could involve the expansion o f the Bank's current Peace and Development project as well as the Protection o f Patrimonial Assets grant (which focuses on land ownership for rural families at risk), the pursuit of universal access to basic education and health for families in high conflict zones (through Familias en Accidn investmentloans), and protection o fthe assets o fthe poor. a Reintegration could involve the revitalization of municipalities andor regions with high numbers of demobilized individuals via rural infrastructure provision (roads and markets), education and psycho-social support for ex-combatants, as well as credit and technical assistance for productive asset accumulation. The Bank has been asked to support the Government in designing and, administering a Multi- donor Trust Fundfor Peace-Building, which is also expected to catalyze significant private sector participation. a Bank assistance for reparation and reconciliation could include the design o f a program for victim reparations in line with the options presented in recent 35 The GEF-funded Silvo Pastoral project developed "ago-eco-tourism" activities that could be expanded to enhance service provision and incomes in remote areas. Emerging international carbon markets also offer opportunities to capture value-added from environmental assets, as well as carbon sequestration and storage via land use, land use change and forestry activities. 20 completed ESW, complemented by resources from the Familias en Accidn loan for eligible internally displaced families and victims o f the violent conflict. Post Conflict Fund and IDF Grants could be usedto support consensus building efforts, knowledge sharing and institutional strengthening-leveraging the convening role o f the WBG to bringtogether keyparties to build consensus on the best options and lines o f action for the country to move out o f the conflict. 58. All activities under this pillar would be developed with multiple Government stakeholders and would also include technical and financial support to enhance the effectiveness o fboth control andjudicial mechanisms relatedto peace activities. V. A State at the Service of its Citizens: Efficient and Effective Government 59. This pillar is a cross-cutting thematic area that supports the achievement o f the Government's goals in social and economic development. Institutional reforms to improve governance and public sector management are necessary ingredients for improved service delivery and economic policy making. public sector management and good governance and has supported initiatives in justice and tax administration, financial management, procurement, asset management, legal defense o f the State, public investment, evaluation and results-based management, among others. Procurement is a key area of governance and IBRD has supported improvements to the national procurement law, and helpedstrengthen the institutional framework for procurement while at the same time working jointly with other MDBs to harmonize bidding documents. Inaddition to these efforts, the Bank will respond to Government requests to support its good governance goals36and will focus on areas o f comparative advantage highlighted inthe L A C region's Governance Strategy, which include initiatives in civil service, external control, social monitoring, monitoring and evaluation, building statistical capacity, public asset and income disclosure and combating money laundering, among others. 60. The Bank and Government are currently exploring ways in which the Bank can support next-generation efforts to promote good governance over the next CPS period and stimulate citizen participation the various stages o f public policy making. Some potential areas o f involvement, which coincide with the World Bank L A C Region's governance strategy, include initiatives in civil service, external control, evaluation and social monitoring, public asset and income disclosure, as well as an increased engagement at the subnational level. Activities inprogress or under discussion include: 36 The National Development Plan includes an Anti-Corruption program, the main elements of which include, i) promoting normativereformsto achieve better coordinationwith territorial entities at the nationallevel, ii)updatingthe Anticorruption iii)strengthening the involvementof the PresidentialProgram for Fighting Corruptioninthe monitoring and investigation of corrupt practices, iv) private sector adopts self-regulation agreements that promote exemplary entrepreneurial practices and provide a transparent framework for relationsbetween public and private administration, and v) provideearly childhoodeducationinmoralandethicalconceptsto build acultureof legality. 21 Tax Administration and Public Sector Institutional Reforms. IBRD has been supporting Government efforts to improve tax administration which has yielded substantial gains in both revenue performance and reductions in the administrative cost o f paying taxes. The key instrument has been the first and second public administration projects ("MAPF" I1& 11). These projects also supported broader public reforms and additional financing i s under discussion to support efficient tax and customs administration and public expenditure management. Also under consideration are NLTNloans to support implementation o f transfers reforms, pensionreform and/or results-based budgeting. ProcurementReformsfor ImprovedExpenditureEfficiency. IBRD has also been supporting improvements to the National Procurement Law and the institutional framework for procurement through NLTA and direct advice from its regional procurement specialists. The Bank is also working with other MDBs towards harmonizationofbiddingdocuments. RoyaltyManagement.IFC's EnhancingLocal Benefits Program aims to maximize the socio-economic benefits communities can derive from large private sector operations (mainly extractive industries). IFC works with its client companies, private associations and governments to improve the management o f local government revenues derived from clients' operations, to achieve more effective local investments and greater transparency. IBRD has prepared a study on decentralization (which includes an analysis o f the royalties issue) to which IFC could contribute its royalties management experiences inthe oil and miningsector. Decentralization. A variety of instruments could assist Colombia in improving Government performance at the subnational levels: these include sector- specific or multi-sector TA focused on departments or municipalities, and/or multi-sector DPLs. Ongoing (and planned) decentralized service delivery operations inthe solid waste and water sectors also have important governance goals. Recent AAA on decentralization could lay the groundwork for future initiatives, including assistance to DNP inimplementingthe reform o f the intergovernmentaltransfer system. Anti-Corruption, Transparency, Results Monitoring and Judicial Sector Strengthening. The Government has been stepping-up efforts to improve governance and the WBG has been supportive o f those efforts at a country and project level (see Box 3). A FY08 TA loan to support monitoring, evaluation and information systems i s intended to mainstream new processes inbudget and policy design, including subnational governments. In addition, a second phase loan for Justice Sector system strengthening is underpreparation. TheWBG's FYO8-FYO9 IndicativeProgram 61. The WBG and Government have agreed on a proposed program o f up to US$ 4 billion for the next four years from IBRD (approximately US$ 1billion per year) and US$ 300-400 million annually from IFC. In line with the Bank's M I C agenda, a rolling programming approach will be used, whereby the CPS pipeline will be determined during 22 annual reviews held in conjunction with results-based C P P R S . ~Results will be measured ~ usingthe NDP's monitoring indicators3*inline with the Results Matrix inAnnex I. 62. Inaddition to traditional ESW, the AAA program is likely to include a number of shorter, fast response, studies or policy notes or non-lending technical assistance. In the past, the Bank has worked closely with local research institutes and the centralbank inboth the preparation and dissemination o f AAA. These cooperative approaches are expected to intensifyinthe coming years. 63. The table below summarizes the potential areas of WBG support inFY08-09which have been discussed with the Government. rable 4: IndicativeWBG LendingandAAA Program FY-08 Lending Program Commitment US$million FY-08 AAA Antioquia Education (approved) 20 Education Quality Productive Partnerships (approved) 30 Informality Programmatic Increasing Access to Higher Education(approved) 300 Poverty and Jobs for the Poor Promoting Rural Education 40 SME Finance (delivered) Business Efficiency I11DDO upto 650 Alternative Energy DepartmentalWater and Sanitation 75 IFC -Business Climate Building National M& E Systems 9 IFC - Public Private Partnerships IFC Financinghnvestments 300/400 IFC - MSME -Access to Finance IFC - Business Simplification FY09 Lending Program FY-09 AAA Familias en Accion I1 EducationQuality I1 Solid Waste Management HealthSystem Modernization Macro-Urban Projects Financial Sector Access Improving Municipal Services Poverty and Jobs for the Poor I1 Justice Sector Strengthening PeaceProgrammatic I11andNLTA Peaceand Development I1 IFC - Oil Royalties Management Sustainable Development I11DPLDDO IFC -Technical Assistance IFC FinancingAnvestments IFC -Regional Competitiveness Subnational Capacity Building Private Pension Costs and Regulation Sumort to Transfer Reform G. Fiduciaryand SafeguardImplementation 64. During this CPS period, use o f country systems in financial management, procurement and safeguards will be increased as the Bank works closely with the Government to support its efforts to continue strengthening its policy and institutional 37While this CPS i s not fully programmedin advance, there are areas in which the Government has either asked for or indicatedit intendsto seek Bank support, includingtackling extreme povertyandregionalinequality, infrastructureand public services, competitiveness, public sector management, the environment, education, social protection, housing, transportation services, energy and mining, agriculture, and peace-building. In addition, collaboration on financial services andbankingandrisk managementproducts is likelyto intensify. 38http://www.sigob.gov.co/pnd/pnd.aspx, under "Objetivos y Estrategias del PND" contains all of the NDP monitoring indicatorsorganizedby pillar. 23 framework to enhance the development effectiveness o f Colombia's public expenditure^.^' These efforts will be supported by on-going joint capacity building activities (IBRD- IADB/others). 65. In financial management, Colombia is moving rapidly towards the full use of country systems. Agreements between the Bank and the Government during the December 2005 CPPR, followed by Bank technical assistance, have led to (i) project financial most accounting and reporting being generated from the central government's own financial information system (SIIF); (ii)the widespread use o f national institutions for project management (with PIUs used only under exceptional circumstances); and (iii) agreement that the Controller General will be the default external auditor of Bank-financed projects. The intention is to extend such provisions to the sub-national level, with suitable adaptation. The Bank is in the process of agreeing on national Standard Bidding Documents which are consistent with both Bank policy and national law and incorporate acceptable features o f the latter. This will be an important step to make further progress on country systems. 66. In relation to safeguards, the Bank has begun to promote the progressive alignment of Colombian systems with Bank policies through support for targeted actions that would be carried out during the upcoming CPS period and beyond. While not representingformal country systems piloting as per OPBP 4.00, these actions center on the policy reforms and institutional capacity improvements needed to adopt Colombia's own norms and institutions for managing social andenvironmental opportunities and risks inthe long term. As a first step, a rapid assessment o f Colombian safeguards systems and institutions that was recently undertaken found an overlap o f at least 80 percent between the country's legal and regulatory frameworks and the Bank's safeguards policies. This i s partly due to the Bank's strong engagement and support duringthe last CAS period, inboth AAA and policy lending. Duringthis CPS, safeguard issues will be addressed through a more consistent programmatic framework based on country-wide diagnostics. This i s expected to contribute to improved quality and consistency inindividual projects, simplify project processing, and reduce transaction costs. H. Other Partners and the Paris Declaration 67. The Colombian Government has signed the Paris Declaration and is committed to implementing its principles. The Government exercises full ownership o f its development agenda and has taken a strong lead in coordinating international donors. The Bank's ensuing program is aligned with the country's development plan and thus automatically complements other international cooperation programs. 39 Regardingprocurementin particular,reformlaunchedby the GOC is promisingandthe Bankwill continue to monitor and support it with the objectiveof increasingprogressivereliance on the countrysystems within the CPS periodand beyond.However,the levelof this reliancewill dependonthe outcomeof the regulatoryandintuitional reforms underwayand the Board's approvalofthe proposedpolicy for use countrysystems for procurement. The Bankandthe Governmentwill carryout afull assessmentofthe domestic procurement systemusingthe OECD-DAC benchmarking tool andwill continuouslyupdatethis baselineas reforms progress. 24 68. Results based management i s also high on the Government's agenda. The Government's monitoring system (SIGOB) assesses progress against the national development strategy goals. A three-party (Government, international cooperation, and civil society) coordination mechanism known as the "G24 Coordination Group" meets regularly to discuss strategy and track the delivery o f all international cooperation provided to Colombia. The Government and the Bank also hold annual portfolio reviews (CPPRs) which will in hture be results rather than project-based. Progress towards the Paris Declaration commitments is presented at the end o fAnnex B. I. ProgramEnvelopeandProjectedExposure 69. The Government's track record regarding macroeconomic and debt management has been strong. The economy has been growing at close to 7 percent annually, the investment rate is above 20 percent o f GDP, and the consolidated public sector deficit is about 1 percent o f GDP. While potential risks still exist, the Government has made significant progress to improve its debt profile. Gross Non-Financial Public Sector Debt has been reduced to about 38 percent o f GDP, with the average maturity profile increasing to 3.7 years and foreign currency exposure reduced to 28 percent o f total debt. IBRD has increased its share of debt to 5.5 percent o f the total, making the IBRD the Government's largest single creditor, followed closely bythe IADBwhich holds 5.3 percent o f total debt. box 4. Debt and Risk Management The Colombian authorities have been actively managing a number o f potential risks on the Government's balance sheet, including currency, interest rate, and refinancing risks, as well as contingent liabilities related to infrastructure guarantees and sub-national debt. Potential natural disaster risks are also being addressed and the authorities are looking at potential commodity price risks all with in their MTEF. Colombia has been a leading country in LCR in taking f i l l advantage o f IBRD's banking products and financial services in order to manage some of its balance sheet risks, particularly interest rate and currency risks. Colombia has signed the first Master Derivatives Agreement with the World Bank that would allow managing the risk at the balance sheet level. It has executed numerous risk management transactions using the flexibility o f IBRD Fixed Spread Loans and has taken a leading role in using local currency financing. To date, Colombia's sub-national borrowers have completed 4 currency conversions into Colombian pesos (COP) o f USD-denominated IBRD loans, with an aggregate amount exceeding the equivalent of US$ 145 million. This in turn has helped to reduce the currency risk exposure in the contingent liability at the central level due to the guarantees of these loans. Collaboration between Colombia and IBRD on banking products and financial services is likely to intensify. Discussions are currently underway to continue such local currency conversions as well as to potentially implement innovative financial structures that could further assist the funding and risk management needs o f the Colombian Government at the central as well as the sub-sovereign level. 70. The Government and the WBG have agreed that as long as the Government maintains strong macroeconomic performance, effective poverty alleviation programs, and a well-managed WBG portfolio, an overall financial envelope o f up to U S $ 4 billion innew commitments from IBRDwill be made available over the four year CPS period. 71. Given a program of US$ 1billionin annual commitments (of which half would be quick-disbursing loans and the other half investment loans), IBRD's exposure could increase to US$ 7.4 billion by the end o f FY11. The increase in exposure will be continuously monitored consistent with Bank credit risk practices. 25 72. The Government has also expressed interest in the use o f contingent financing mechanisms as a risk management mechanism. IBRD's revised Deferred Drawdown Option would constitute an attractive mechanism for the Government to secure low-cost contingent finan~ing.~' 73. Should the Government's financing needs be lower, or should macroeconomic management, the effectiveness o f its social programs or the quality o f the Bank's portfolio deteriorate, IBRDwould reduce the overall financial envelope. J. ResultsMonitoring 74. Inadditionto annual CPPRs, themid-termCPS Progress Report, the Bankintends to monitor the results under the CPS from three additional angles, in conjunction with the Results Matrix in Annex I.First, NDP monitoring: The Government of Colombia i s strongly committed to monitor the implementation o f its development program. Towards this end, the Government developed a system called Sistema de Seguimiento a Metas de Gobierno" (SIGOB-Management and Monitoring System of the Objectives of the G~vernment).~'It i s regularly updated and provides the basic framework for results- oriented monitoring and evaluation. Since the CPS i s driven by the Government's NDP, the Bank would evaluate, as one dimension under its results-monitoring o f the CPS, how effective the Government i s in achieving its own development vision and objectives. Those objectives have been detailed in the NDP and the Bank will monitor the overall progress of the Government's own benchmarks. 75. Second, AAA monitoring. The Bank's knowledge products are meant to contribute to the public policy process. These products will not be linkedto the country outcomes per se but rather be judged on criteria of their quality, relevance, and sustainability. The quality o f the Bank's AAA can be assessed based on (i) feedback from the client; (ii) the periodic evaluations o f a sample o f knowledge products from outside experts, from Colombia, the region, andglobally; and (iii) Bank'sinternal evaluations. The relevance the o f the Bank's knowledge products can be assessed by whether the Government invites the Bank to contribute to Colombia's high-priority policy issues and whether the policies that the Government pursues reflect Bank's advice. The Bank does not expect directly attributable outcomes, but does believe that when advice has been useful the Bank's input will be evident in the resulting policy reform. Finally, the sustainability of the Bank's provision o f knowledge products will be the market test, i.e. whether the Government will continue demandingthe Bank'sAAA services. 76. Third, project monitoring. The Bank's active investment program constitutes a third dimension inmonitoring CPS results. At the individual project level, the Bank will track key results indicators for each project. In this context, only fully satisfactory performance will be acceptable with respect to the Development Objectives and 40See BoardPaper "Proposal to Enhancethe IBRD ReferralDrawdown Option (DDO) And ToIntroduce A DDO Option for CatastrophicRisk" datedMarch4, 2008. 4'www.sigob.gov.co/vn,nd/vnd.asvx 26 Implementation Performance indicators. The Bank and the Government will jointly monitor this part o f the CPS implementationwith the annual CPPRs. It is important to note that Colombia i s a leader and innovator in sharing project successes with other countries through various forms of south-south and it is expected that this trend will continue duringthis CPS, with Bank support where requested. K. Risks 77. Most o f the risks identified in 2002-increased conflict, economic deterioration, stalled reforms-did not materialize, other than difficulty gaining congressional support for some key reforms, Instead, Colombia made impressive gains over the last CAS period and now enjoys greatly reduced risks on both the security and economic front. However, risks do remain, the major elements o fwhich are summarized below. External 78. Trade. The external environment that has proved so favorable since the last CAS (commodity prices, interest rates, and strong demand from Colombia's two main trading partners, the US and Venezuela) could change, affecting Colombia's fiscal accounts. In particular, any major disruption o f trade with Venezuela could have a significant effect on Colombia's trade balance as Venezuela represents the second largest destination o f Colombia's exports (about 2 percent o f GDP). Efforts to improve the country's competitiveness, in general, reduce these risks. Colombia i s also actively engaged in negotiating bilateral free trade agreements with a number of large economies while the Free Trade Agreement with the UnitedStates i s pendingratification by the U S Congress. Further, despite the real appreciation o f last two years, the real effective exchange rate remains near historical averages for the last two decades and it is substantially less appreciated than the level that preceded the economic crisis o f 1999. 79. Finance. The ongoing problems in U S and European financial sectors stemming from the subprime mortgage crisis could lead to increased borrowing costs by developing countries like Colombia. The current global financial environment could adversely affect net capital flows to Colombia and other emerging market economies. To minimize external risks, the Government has reduced the foreign currency share o f its public debt, and the combined external debt of both the public and private sector is now about 30 percent o f GDP. In addition, international reserves have increased substantially and stand at over US$ 20 billion at the end o f January, 2008. Bank debt sustainability analyses show that Colombia i s likely to be resilient to a number o f shock scenarios. 42For example, Colombiahosteda studytour to sharethe designoftheir ConditionalCashTransfer programwith countriesas diverse as the PhilippinesandEcuador. Similarly Colombia's SocialTargetingSystemis beingreplicatedin the DominicanRepublicand Ecuador,while the TransmilenioMassTransport Systemhas attractedsignificant internationalattention and is beingreplicatedinseverallargecitiesaroundthe world. 27 Domestic 80. Overheating of the Economy. Continued rapid economic growth brings with it the risk of overheating-the current account deficit reached about 4 percent o f GDP last year. FDIflows last year exceeded the size o fthe current account deficit, andtotal external debt i s below 30 percent of GDP, makingit likely that the country will be able to manage this potential problemwithout serious dislocation. Additional efforts at fiscal consolidation could also lower the risk o f overheating. Other domestic risks include Colombia's vulnerability to natural disasters and rising inflation. Since May 2006, the Central Bank adopted measures to alleviate demand pressures on prices. Twelve increases o f 25 basis points in the rate o f the monetary policy have taken place, and at the beginning o f 2007 additional measures were adopted to correct the high growth rate o f banking sector loans. Regarding natural disasters, Government i s working with local authorities (with IBRD support) to improve land use planning and regulation to reduce the costs of and vulnerability to potential future natural disasters. 81. Political. Peace has not been secured throughout the entire country and poverty, corruption, andthe drug trade remain significant challenges. The Government has recently suffered setbacks on the political front with the arrest o f several congressmen and one senior official for links to paramilitary organizations. Should the scandal widen or come closer to the administration or the security situation deteriorate, political consensus- particularly between the Executive and Congress-could unravel. 82. However, the Government recognizes these challenges and has launched major initiatives to address them, particularly within the context o f the National Development Plan. The President's major policies are on strong footing and the fact that he was re- elected in M a y o f 2006 with 56 percent of the popular vote and has maintained strong popular support (around 70 percent) signals a fairly strong consensus for advancing his Government's social/economic reforms and for continuing his democratic security policy. Also, in the October 2007 elections, the coalition o f parties that support President Uribe increased their dominance over Colombia's larger cities and provinces. 83. Social Cohesion. While the immediate economic and political outlook i s positive, the Government still faces daunting problems. First, it must continue to combat various armed groups, while at the same time reintegrating thousands o f former combatants into civilian life, providing them sufficient incentives not to re-arm or re-engage in illegal activity. Secondly, despite some improvements, narcotrafficking still flourishes in Colombia, financing both guerilla and paramilitary forces and contributing to violence, poverty, corruption, insecurity and illegal spin-off activities. And long standing structural problems of extreme poverty and inequalitycontinue to haunt the country, and could, ifleft unattended, fuel new cycles of instability. 28 Risks to the WorldBank Group 84. Working at Subnational Level. As the Bank intensifies its engagement at the sub- national level, fiduciary and safeguard risks will increase-as will the costs o f attendant mitigation mechanisms. The Bank may also face potential reputational risks as it expands its support into regions where local governments are subject to the influence of illegal groups and other actors. The central government's commitment to work with the sub- national authorities and the Bank to embed strong fiduciary measures will help offset these potentialrisks. 85. MIC Strategy. The Government has been very successful in changing its debt profile and managing its debt strategically, usinglocal currency and accessing international capital markets, with a clear eye on competitiveness. While the Bank remains competitive interms ofpricing, the challenge willbeto continueto reduce the non-financialtransaction costs to the client and ensure that the Bank's technical expertise and advisory services are cutting-edge, and responsive to rapidly changing needs. Thus, a sophisticated middle- income country like Colombia is an important test for demonstrating that the WBG can deliver on its M I C strategy of more flexible, focused and fast client-driven support. 86. In summary, political, economic, and operational risks are still present, making it essential that practical mitigation measures are implemented and that risks are continuously and openly assessed. The annual reviews o f the WBG's program would also allow for reassessment o f both risks and the appropriate risk mitigation measures. However, it is important to emphasize that while risks exist, as they have inprevious CASs, the potential rewards o f large scale engagement in Colombia are very high, as demonstrated clearly by the successesachieved over the last CAS period. *** 29 CPS Annex A Private Sector Strategy 1. Colombia's private sector development suffered greatly from the macroeconomic and banking sector crisis of the late 199Os, early 2000s, as well as the tremendous costs associated with the deteriorating security situation over that period. Private sector investment was a mere 8 percent o f GDP in 2002. It has doubled since then as both the macroeconomic context andbusiness climate have improved. Private Sector Trends and Challenges RealGDP per Capita, IS60to 2006 2. Macro Context. Colombia's long term 1960=100 macroeconomic performance i s known for its moderate but relatively stable growth compared I 3 0 0 1 1 to other Latin American countries. Colombia 250 avoided debt defaults and the hyperinflation that numerous countries experienced, and economic 200 growth varied less dramatically despite largely following regional trends over the last 45 years. 150 Colombia's most severe economic crisis since 100 1960 was without doubt the 1999 crisis that led to stagnating growth for several subsequent years. 3. The deceleration o f growth o f the 1980s and 1990s was accompanied by a deceleration in total factor productivity. The growth accounting below shows how productivity gains have been much slower inthe 199Os, and inrecent years, as compared to the rapidproductivity gains o f the 1970s. Colombia: Growth Accounting 1970- 1976- 1981- 1986- 1991- 1996- 2001- I 1975 1980 1985 1990 1995 2000 2005 Colombia GDP 5.65 5.37 2.24 4.94 4.13 0.92 3.42 Capital -1.39 0.29 2.12 2.60 4.35 2.44 2.07 Labor 3.23 3.27 3.12 2.53 2.44 2.25 2.07 TFP 4.04 3.15 -0.52 2.39 1.03 -1.40 1.36 Source: World Bank. (2007a), as cited in World Bank (2007b). Calculations use WDI data for GDP, labor growth and gross investment. Capital is computed using an inventory rule assuming a 7 percent depreciation of the capital stock and an initial capital to output ratio o f 5. The share of capital comes from Loayza, et. al. (2004). 4. As noted above, at the end of the 199Os, Colombia faced its worst economic crisis in decades. Growth had been strong in the mid 1990s; however, there were major asset bubbles - particularly in the housing sector - that proved to be unsustainable. The crisis itself was caused by a combination o f factors, including: a deteriorating security situation and ensuing political stress, acrisis inthe bankingsystem, andan earthquake inthe coffee- producingregion o f the country. 30 5. Investment as a share o f GDP plummeted when the crisis hit inthe late 199Os, and only in recent years the ratio has returned to a level above 20 percent. With last year's investment rate o f 23 o f percent o f GDP, sustained growth o f around 5 percent may be feasible. Several key factors have contributed to the positive developments: first and foremost, the improved security situation domestically; global liquidity and increased foreign direct investment; and the recovery o f the financial system. These trends have continued into the first half o f 2007. One concern has been that capital inflows have resulted in an appreciation o f the real exchange rate. Part o f this has been reversed recently, and in general terms, the real exchange rate is not out o f line with historical averages. 6. With real exchange rates appreciating but still not out o f line from historical averages, the focus o f attention i s on the microeconomic determinants o f productivity. Colombia has made progress inreducing the administrative cost o f doing business through a variety o f reforms, including landmark anti-bureaucratic process legislation (`Ley Anti- trdmite") that was approved in2005. The Government also established "one-stop shops" to make it easier for firms to register and license their businesses. Progress infinancial sector stability, regulation and expansion has led to lower financing costs and broader access to credit. The Government has also improved the system for product quality standards, and there are plans for major transport infrastructure investment to facilitate international trade. IFC has provided extensive advise support to the municipality o f Bogoth' in piloting a successfwl program for the reduction and simplification o f trdmites that now i s being expandedto other cities. 7. Despite this progress, Colombia's performance inDoing Business indicators reveal a broad range o f outcomes relative to regional and international comparators. The table below displays some o f the relative indicators. Colombia performs relatively well interms o f the cost o f starting a business, including the cost of registering the business; however, licensing requirements are still very costly relative to regional and OECD averages. Colombia i s also a relative outlier in terms o f the cost to export. Part o f this i s driven by the fact that export production centers are located far from ports; however, part o f this cost i s driven by less than ideal transport infrastructure along with regulatory problems in the trucking industry (as noted inlast year's World Bank report on transport logistics). Source: Doing Business 2008 (datafor 2007) 8. The Bank also conducted an enterprise survey o f investment climate variables. The analysis o f the data (conducted in 2006) indicates that variables related to red tape, 31 corruption and crime and to infrastructure present the higher relative impacts on productivity. The results show that for infrastructure the three most important factors for average productivity are: (i) days to clear customs; (ii) for electricity supply, and (iii) wait shipment losses. Under the general category o f "red tape", crime and corruption, court conflicts, security costs and crime losses have a relatively high impact on aggregate productivity. Finally, regarding the category o f product quality, innovation and labor skills, the overall relative impact i s lower than what has been found in other Latin American countries. 9. Colombia has made important strides in increasing both traditional and non- traditional exports over the last decade. Total exports (goods and non-factor services) as a share o f GDP increased from 13 percent in 1996 to 20 percent in 2006. This has been achieved despite substantial geographic challenges for transport with major industrial centers located in the Andean highlands (two separate mountain ranges) distant from coastal ports. Lowering the cost of the movement o f goods i s a key factor for export led private sector development. 10. The main weaknesses in the freight logistics system in Colombia are not restricted to hard infrastructure, but deal with regulations and government-managed processes. A recent Bank report showed that the freight logistics complex should be approached with a broader perspective, including transport infrastructure and services, business logistics development, and trade facilitation processes. Three main problems were found to be particularly critical: (a) the trucking industry, (b) public use ports, and (c) inspections in international gateways (see World Bank, 2006). Figure: Main freight logistics problems inColombia, key problems underlined HIGHWAYS Bottleneck in critical segments, geometry TRUCKING INDUSTRY Low efficiency and quality of service Bottlenecksfor coal: no participation in other markets INLANDNAVIGATION Great potential, navigationalconstraints AIRPORTS Needto expand freight facilities PORTS A 2"dgeneration regulatory reform badly needed Lack of efficient standards, procedures and informationsystems: i.e.: port-truck SCM SMES with logistics costs three time higher than averaoe Source: Adaptedpom World Bank (2006~). 11. A recent worldwide survey of operational staff in freight forwarding shows that Colombia logistics performance i s frail, evenby L A C regional standards, particularly inthe management o f customs and border procedures. The Logistics PerceptionIndex (LPI) was estimated for 150 countries, based on seven sub-indexes. Hard data on the logistics environment and physical performance indicators were collected as well for 110 countries, 32 including Colombia.' Colombia ranked 82 out o f 150, with some sub-indexes performing very low, particularly "Efficiency of Customs and Other Border Procedures". Sub-indexes reveal that Colombia's weaknesses are not just infrastructure, but mostly in the inspection procedures and logistics service organization. Finance 12. Though financing to the private sector has been increasing duringthe last two years, the system remains very shallow when compared to other countries in the region and lack o f financing remains a key bottleneck to firm's expansion as reflected on most enterprise surveys. Increasing such depth and efficiency o f the financial systemwill require lowering the costs associated with financial sector activities and continuing implementation o f policies for markets development while ensuring that prudential supervision continues to be strengthened. Domestic Credit to the Primte Sector (% of GDP) 200 180 160 140 120 100 80 60 40 20 0 Source: World Development Indicators, datafor 2005 13. While there has been substantial progress on the financial sector, credit to the private sector represents about 25 percent o f GDP, less than the 60 percent average for middle income countries. Debt marketshave deepened considerably-average annual bond issues (including private and public) in 2004-05 where almost three times the average reached in2001-03. However, penetrationis still somewhat low: total bond issues in 2005 totaled US$2.2 billion, or about 2 percent o f GDP. Forty-three percent o f these were placed by private sector companies in eight issues. The equity market is still underdeveloped as only 98 companies are listed and only one industrial conglomerate account for 60 percent o fthe market capitalization. Government Strategy and Programs 14. The Government has placed a strong focus on competitiveness. The National Development Plan and the earlier "Colombia Vision 2019" ledto an "Internal Agenda" for World Bank -GFP-Turku: MeasuringGlobalConnections. 33 improving competitiveness. This was based on consultations that involved some 22,000 participants over the 2004-2005 period. The process identified 293 critical productive sectors at the regional level, 108 strategies for intervention, 1,287 "necessities" for regions, etc. Implementing the recommendations clearly represents an institutional challenge- especially interms o f focusing on detailed regional or sectoral initiatives. 15. That said, on a national level, Colombia has made progress in reducing the administrative cost o f doingbusiness through a variety o f reforms, including landmark anti- bureaucratic process legislation ("Ley Anti-trhite") that was approved in 2005. The Government also established "one-stop shops" to make it easier for firms to register and license their businesses. Progress infinancial sector stability, regulation and expansion has led to lower financing costs and broader access to credit. The "Opportunities Bank" program (Banca de Oportunidades) has helped to coordinate the efforts of existing financial intermediaries to expand access to bank services in numerous regions. The Government has also improved the system for product quality standards, and there are plans for major transport infrastructure investment to facilitate international trade. 16. Recent progress was validated by the Doing Business 2008 team, and Colombia was named one o f the top 10reformers. The mainareas o f improvement cited were inthe areas o fprotection o f investors, ease o fpaying taxes and trade across borders. It should be noted, however, that inthe latter two categories there i s substantial room for improvement with the rankingsat 167 and 105 respectively. 17. The Government's tax reform last year was intendedto provide stronger incentives for private sector investment. The treatment o f investment expenditures by firms in the corporate income tax i s certainly favorable. With the combination o f partial up-front expensing and gradual depreciation, there i s an implicit subsidy to new capital investment. There remains unequal treatment across sectors due to a wide array o f special exemptions for particular sectors. 18. Intransport and logistics, there is a major effort to launch a concessions program for regional highways. The National Development Plan highlights a number o f highway routes that would be top priority in this process. In addition, the Government i s working with subnational governments to improve secondary roads. The Plan also outlines activities to improve river transport, better transport connectionnodes andportdairports. 19. The financial sector has consolidated, systemic stability has been restored but the coverage o f the sector remains limited. The Government i s seeking to address this through three sets o fpolicies: a. Increasingfinancial sector eficiency by preparing a Financial Sector Reform Law to (a) liberalize the type o f products that can be offered by financial institutions; (b) allow the creation of multiple portfolios in the private pensions industry (multifondos); (c) facilitate cross-border financial transactions allowing the creation o f foreign branches and the acquisition o f insurance abroad by Colombian entities; and (d) strengthen the independence o f the Superintendencia Financiera by increasing the legalprotection to its staff, 34 b. Strengthening creditor rights and credit supply through (a) the preparation o f a legal reform to the Civil Code to streamline executive processes to liquidate collateral (procesos ejecutivos); (b) implementation o f the Habeas Data Law through the issuance o f the decrees necessary to regulate the Law including the definition o f standard information to the reported for each counterparty; and (c) issuance o f a decree by MHCP liberalizing the interest rate regime by establishing risk-adjusted predatory lendinginterest rate caps; and c. Fostering access to financial services for the poor through the (a) enactment o f a tax reform law exempting from financial transactions tax basic savings account for the poor; (b) issuance by MHCP o f a decree democratizing access to the capital markets by allowing the creation o f brokerage agencies; (c) issuance by MHCP of a decree streamlining data requirements to open savings accounts; and (d) budgetary allocation o f resources to subsidize on a declining basis the opening o f banking branches inunderserved areas. 20. In terms o f policy formulation, the Government plans to establish a Technical Support Committee for Transport and Logistics comprised o f public and private sector representatives. They are also inthe process o f preparing two CONPES, one for toll roads and another for aNational Logistics Plan (expected inMarch2008). IFC andthe ColombianPrivateSector -Five Decades of a StrongPartnership 21. Colombia joined the IFC in 1956 and three year later, IFC committed its first investmentoperation inthe country: a US$ 0.5 million loan to a pulp and paper company. Since then, the Corporation has provided US$1.72 billion, including syndications, for 66 companies in 75 projects. About half o f these commitments were made in the period after opening our Bogota office in2001. Duringthe past five decades, IFC provided risk capital andlong-term finance, as well as technical assistance, to infrastructure, financial sector, oil and gas, and general manufacturing. 22. Colombia i s one o f the countries that for decades has sought and followed WBG advice on several fronts, including private sector development. For instance, in the 1960s the World Bank provided support to develop the mortgage sector. Inthe 1970s and early 1980s, a similar approach took place with the Development Finance Corporations with the World Bank coming in to advise and establish these financial intermediaries, and IFC providing both equity and debt. These institutions played a catalytic role in channeling financing to emerging local companies and groups during those years. During the late 1990s Colombia went through a severe recession and the WBG responded with strong support. While the World Bank provided policy advice and budget support lending, the IFC provided critical support for the restructuring o f the backbone o f Colombia's industrial and financial sectors. These activities included, among others, support for the modernization and expansion of Bavaria, the Grupo EmpresarialAntioqueiio conglomerate, 2"dtier banks like Davivienda, and emerging 2ndtier groups like Grupo Carvajal. 23. In Colombia, IFC has introduced and implemented some o f the most innovative products and services in the region and worldwide. IFC was the first supranational institution to issue bonds in Colombia, known as El Dorado and has also provided partial credit guarantees to diverse entities in order to facilitate access to local capital markets, 35 including the first securitization o f Non Performing Loans from several mortgage institutions. IFC has also supported key projects in housing finance, provided direct investments incompanies that promote growth and employment but have limitedaccess to finance, and fundedinfrastructureprojects. IFC's clients inColombia have been leaders in the areas o f corporate governance. 24. IFC support during the last CASperiod. IFC's strategy, outlined in the FY2003 CAS, aimed to help in broad-based "reactivation" o f the country's economic growth by promoting an increase in private sector investment and activity, and more broadly-based growth. The strategy was updated in the FY2006 Progress Report, centering on: (i) strengthening and deepening of financial sector institutions and local financial markets to better serve the needs o f local companies, including SMEs and micro enterprises; (ii) the development o f infrastructure, including potential public-private partnerships and support to sub-national entities in the provision o f infrastructure, in coordination with the Bank as warranted; (iii)investment in extractive industries; and (iv) the modernization o f Colombian businesses to help improve their competitiveness and support their expansion both domestically and abroad. 25. Consistent with these priorities, IFC committed a total o f US$ 720 million, in January 2003 - June 2007, diverse sectors, includingthe financial sector, infrastructure, oil and gas, and manufacturing; and helped improve the competitiveness of the Colombian private sector. 26. In the financial sector, IFC played a key role in helping shape a more efficient capital market in Colombia and in developing a sound regulatory framework, both in collaboration with the Government, the private sector and LBRD. Support was provided through innovative ways, including: initiating first Colombian Peso-denominated bonds issued by a multilateral financial institution- ElDorado, assisting with the establishment o f Colombia's first secondary mortgage company, strengthening institutional investors, and consolidating the domestic capital market with partial credit guarantees for corporate bonds as well as debt andequity facilities to leading financial groups. 27. Duringthe CAS period, IFC supported housing finance, micro and SME finance, and domestic securities market, providing US$ 228 million in equity investments and US$ 350 million indebt facilities. Financingwas mostly inlocal currency. Inhousingfinance, aiming to deepen the liquidity of the mortgage market and foster Colombia's capital markets, IFC continued to back the transformation o f the mortgage sector. IFC's primary support was through partial credit guarantees. It included IFC's support for the issuance o f non-performing mortgage-backed securities, a first in the L A C region, which received a very favorable response from investors. IFC also assisted a former savings and loans institution which was shifting its business focus from financing mortgages to origination andsecuritizationand repositioning itselfas a universalbank. Inmicro and SMEfinance, IFC placed a greater focus on this sector starting in FY2006, with the aim to broaden address access to financial services to lower-income groups. A total financing o f US$ 57.5 million was provided to microfinance institutions and other well-established local players promoting SME and micro credit products through the formal banking system to support expansion o f their operations. In addition, in FY2006-07, IFC offered a partial credit guarantee for the first bond issue by a leading local brokerage (pending disbursement) and 36 investedequity inthe company to help it reduce its reliance on commercial bank funding, and further facilitate market liquidityand activity inthe domestic securities markets. 28. Improving the Business Enabling Environment - In 2004, Colombia started a program for the Simplification o f the Procedures to start operating a business that has reduced the time needed to register a new business to 44 days. With the leadership o f the Chambers o f Commerce, the country has achieved good results in terms o f the time required to register a new business. The city o f Bogota asked the IFC L A C Facility to support the 2nd stage of the program consisting o f improving and simplifyingthe system o f municipal inspections. This initiative, launched in 2006, aims to improve Colombian business competitiveness and promotes formalization. The next step is to replicate the experience inother major Colombian cities. 29. IFC's support for infrastructure includedthree projects undertaken by leading local players. The first project helped an innovative public-private partnership company contribute to the water and sanitation services for the poorer areas inthe southwestern part o f Barranquilla. As the company explored a non-traditional source o f funding for public infrastructure services in the domestic capital market, IFC provided an US$ 18 million equivalent partial credit guarantee to enhance the company's local currency bond. The second operation, a US$ 50 million senior loan, supported an IFC's longtime client and one o f the few locally-owned, experienced gas transmission companies in Latin America. Supporting the company's expansion strategy in natural gas transmission and distribution in the country and south-south investments in the region, IFC is helping achieve enhancement o f basic infrastructure services, promotion o f job-creating economic activities, and considerable environmental benefits. The other project i s a US$ 15 million debt facility to a private port concession company to improve its technical and container capacity output. 30. In oil and gas, IFC investedUS$27 million in equity commitments and US$ 25 million in debt facilities, in two small local companies with significant experience in Colombia's energy industry, currently dominated by large foreign and state companies. IFC also provided technical assistance: (i) to enhance the use of oil and gas royalties paid to municipal governments, with the support o f the hydrocarbon association, the state regulator, and (ii) to help the company's adoption o f best practices in environmental and social standards, with funding from IFC's Corporate Citizenship Facility. 31. IFC's support for manufacturing consisted o f three projects with two leading Colombian pulp and paper products manufacturers operating regionally. The companies were inneed of long-term financing and faced challenges as they further expand business. To help with both ends, IFC provided US$ 142 million total financing, and along with the financing, supported strengthening their competitiveness and financial fundamentals by assisting with multiple areas in operational sustainability, such as financial reporting and restructuring, corporate governance, and environmental, social, health and safety standards. 32. Throughout its activities, IFC placed a special emphasis on helping improve corporate governance across the different sectors in Colombia as an integral part o f strengthening the country's capital market framework. IFC's assistance was provided directly to several o f its client companies in Colombia, as well as through training 37 programs sponsored for senior executives in coordination with the local Chamber o f Industryand Commerce, Confecamaras. 33. IFC Portfolio. As of end June 2007, IFC's total committed portfolio stood at US$ 755 million, with an outstanding balance o f US$ 456 million, or more than three times the level o f FYO1. Colombia is the fourth largest country exposure in Latin America after Brazil, Mexico and Argentina. The quality o f the portfolio is good with no Non Performing Loans (NPL's) and loss provisions duringthe last four fiscal years. 34. The trend o f IFC commitments in Colombia, and its portfolio composition are illustrated by the graphs below. Portfolio by product as of June-07 Portfolio by sector as of June-07 Chemcak hlp8hper- i j-- - 7% Wholesale and 16% 1 RetailTrade ~ A ban 41% _.. Guarantee Finance 8 -I--- hsurance 52% hformbn I -- Mneral Rcduct 0% " .-.> L 1% 300 250 200 150 100 50 0 2Wl 2032 2033 2We 2W5 2oc8 2W7 35. The IFC pipeline in the region has not only increased by the total amount in US$ millions but also by the total number o f commitments and new potential clients. IFC has built an important sector diversificationinits pipeline, increasing the amounts and number of investments in the real sector especially in Oil and Gas, General Manufacturing and Infrastructure. World Bank Group Private Sector Strategy 36. The objective is to buildon the recent successhl economic performance to improve competitiveness and secure growth in the 5 to 6 percent range over the medium term. 38 IBRD, IFC and MIGA can build on synergies and the broader variety o f instruments that the World Bank Group has to offer inhelpingthe Government to achieve this objective. 37. The overall objective o f WBG PSS, focused mainly on the Sustained Equitable Growth pillar, is to help improve Colombia's competitiveness inorder to maintainhighand sustainable GDP growth over the medium term. This agenda involves intimate collaboration between the Bank and IFC, who have a shared interest in improving infrastructure and social services, developing market-based reforms to attract investment flows in renewable energy and new technologies such as integrated gasification combined cycle power plants (IGCC), and strengthening the financial and private sectors. PSS support to the CPS pillar i s illustrated below: Pillars/PSS Financial Infrastructure Local Tier I BEE Focus Markets Companies Sustained MSMEs, TsptlLogistics, Agribusiness Bus. Equitable L o w Inc. Simplif., Education. Growth Housing, WaterISanitation SoutWSouth Export Interm. Competitive Bks., Renewable ness LOC. Cap. Energies and Mkts. New Technologies Pov. Allev. MSMEs, Access to basic Enhancing Enhancing Health, & Equality Low Inc. utilities Local Local Education of Housing Benefits Benefits Opportunity Env. & Nat. Renewable Sustainab. Sustainab. Res. Mngt. Energies and Standards, Standards New Ecofuels jm/l Technologies Peace State at the Municipal Bus.Simplif. Royalties Serv. of its Utilities Citiz. I 38. World Bunk Group Synergies - There are numerous examples o f where these synergies can be expanded inthe coming years. Following the financial crisis o f the end o f the 199Os, the IBRD worked with the authorities on improvements in the regulatory environment for the financial system, while the IFC made strategic investments in the sector. A new study i s almost finished on SME finance, and the IFC i s also working inthis area. Continued support for loans for students to finance higher education (with IFC advisory inputs) will help increase the skill level o f the workforce-aligned with actions to improve the quality and coverage o f secondary education at the departmental level. Ongoing and future work on private pension fund regulations and investment inthe sector could lead to pension fund financing o f infrastructure investments. IBRD and IFC have 39 worked together on advisory services for transport infrastructure concessions. The regionalization o f the Doing Business report is complementary to IBRD's recent regional competitiveness study. Interms o f regional competitiveness, MIGA has provided T A to the city o f Bogota for the creation o f a regional economic development agency for investment promotion. These examples provide the path for future work across the World Bank Group to support sustained growth. 39. IFC Strategy. Going forwardjointly with IBRD, IFC will continue buildingonthis strong partnership with an active engagement in areas where it can provide the highest value-added for further development o f Colombia's private sector. The thrust o f IFC support will be in 3 key areas to: (i) improve access to finance through the development o f domestic financial and capital markets including microfinance and low income housing finance; (ii) investmentsininfrastructure(transport/logistics, renewable energies, water and sanitation, including support to PPPs); (iii)Local tier I companies particularly in agribusiness with an emphasis in SoutWSouth investments, and sustainability. Inaddition IFC will also allocate resources to: (iv) improve the business enabling environment; (v) selective investments in extractive industriespromoting sustainable resource management, enhancing local benefits, and facilitating royalties sharingmanagement; (vi) develop humancapital healthand education. - 40. Some o f IBRD/IFC joint efforts will be reflected in a more comprehensive/multisectoral approach insupport o fsubnationals, mainly municipalities: e Improving access to basic utilities: IFC advisory services and investments, IBRD AAA will support PPPs and private sector investments ininfrastructure-water and sanitation, urban transport. This maybe further extended to electricity supporting investmentinrenewable energy. e Maximizinghmproving municipal revenues via: business simplification - IFC L A C Facility and IBRD, institutional building - IBRD DPLs, extractive industries royalties sharingand management - IBRD and IFC L A C Facility. e Microfinance: supporting local business benefiting from business simplification, facilitating access to basic services (e.g. microlending for household connection to water) - IFC support to intermediate private banks e Low income housing via IFC support to intermediate private banks. 41. Throughout the implementation of the PSS, to address climate change issues, IFC will emphasize environmental improvement and preservation inits project selection. IFC will support new initiatives for production o f ecofuels (ethanol, biodiesel) and identify opportunities to develop carbon credits projects. It will also consider financing leading financial institutions and companies interested in energy efficiency, renewable energy and new technologies (IGCC)2 projects. Another potentialarea is inthe forestry sector. 42. Implementation and impact will be hrther strengthened by the L A C Facility through the advisory work done under its main three pillars: (i) Enhancing Local Benefits, Integrated Gasification CombinedCycle power plants 40 (ii) Improving Business Environment through simplification o f processes and (iii) Access to finance. 43. Enhancing Local Benefits (ELB) applies essentially to the manufacturing, agribusiness, and extractive industries sectors. ELB leverages the socio-economic benefits that communities derive from the operations o f large private sector investments that are significant with respect to the local economy. ELB provides services, capacity building support and advice to companies to help them more effectively respond to the challenges o f deepening their development impact. The services ELB offers are structured intwo areas: e Revenue Management. Assisting local governments improve the use o f revenues received as a direct result o f extractive industry operations, and collaborating with civil society organizations to increase the social accountability o f local governments. IFC is supporting two clients in the oil and gas sector by providing technical assistance and advisory services to improve the management o f royalties inselectedmunicipalities. e Linkages. Assisting the development o f SME's to supply large companies so that more local economic activity can be generated. 1. Improvingaccess to financethroughthe developmentof domestic financialandcapitalmarkets 44. IFC will continue to support the consolidation o f the banking sector and provide technical assistance to develop financial markets, facilitating SME access to long-term finance and supporting the development o f micro enterprises through investment and non- investmentproducts. 45. IFC i s pursuing a program developing access to finance for microenterprises and SMEs. In microfinance, the IFC LAC Facility is working with MFIs committed to institutional transformation to help build their capacity to operate in a more commercial environment as regulated financial institutions. Advisory projects are implemented in parallel with IFC investments and interventions are based on shortcomings identified in institutional needs. Their main focus i s on corporate governance, risk management, funding, product development andinformation systems. 46. The Facility is considering Colombian banks for inclusion in its pilot SME lending program, inwhich IFC will work with a small number o f banks to help with down-scaling to serve the SME segment. The Facility is currently developing a shortlist o f potential partner banks in ten low and low middle income countries in the region. The program would provide a bundled package o f technical assistance and investment. Technical assistance covers: streamlining credit policies and procedures, risk management, product development, market and sales strategies, credit scoring and training o f lending staff. 47. Microfinance (Banca de Oportunidades) - WB has engaged the Government and prepared studies on the negative impact o f interest rate ceilings on microfinance lending. The Consultative Group to Assist the Poor is currently assisting the Government in 41 thinking through the policies that will constitute the Banca de Oportunidades. This will facilitate IFC support for investment inmicrofinance, notably via intermediate banks 48. Deepening Capital Markets - IBRDprovided TA for the new Capital Markets Law and is assisting MHCP to issue a secondary regulation to implement the law. Additional TA supports consolidated supervision across all financial markets (banking, capital markets, insurance, etc). A recent study investigates Colombia's relative performance (compared to other L A C countries) in banking sector finance to SMEs. There i s analysis underway that looks at how to improve the regulatory environment for private pension hnds. IFC is evaluating private equity players to identify strongbusiness models that will generate efficiencies in industrieswith strong growth potential. IFC will also continue to focus on capital market development - inparticular the insurance market. 2. Infrastructureand PublicPrivatePartnerships 49. As most LatinAmerican countries, infrastructureneeds inColombia are significant. A recent WB report indicates that, in order to attain coverage levels similar to Korea, Colombia would need to invest between 6 and 9 percent of GDP in infrastructure every year for the next 20 years. This i s above the 4-6 percent for the region and substantially above the current Government's fiscal capacity to invest inthese projects. 50. The Government is determined to address this gap through an increased private sector participation in infrastructure projects. WB supported road concessions in the past and has recent AAA on logistics demands related to FTA and broad infrastructure studies including recommendations on PSP (see Colombia: Recent Economic Developments in Infrastructure, 2004study). IFC has an active investment pipeline for infrastructure sector including ports, road concession (investment and advisory), airline, airport, and hydro. IFC i s also supportingthe creation o fpublic-private partnerships. 51. IBRD/IFC has engaged actively with the Government indicating their availability for financing and advisory services. Joint IFC/IBRD involvement has several advantages; it helpsthe Government negotiate fair contracts and ensure that adequatetechnical, social and environmental standards are observed and helps attract potential long-term investors. 52. This PSS will have a special focus on transportation and logisticsprojects (roads, airports, ports and railroads) to improve the competitiveness o f the private sector. IFC and IBRD are helping to structure toll road concessions-with IFC focusing on private sector participation and IBRDproviding technical assistance to the G~vernment.~ 53. The IFC has actively participated in reviewing road and port infrastructure projects inColombia. On the analytic side, the IBRDhas worked ina quasi-programmatic fashion, with a series of reports starting with Colombia: Recent Economic Developments in Infrastructure, 2004, followed by a report on transport logistics (Infraestructura Logistica y de Calidad para la Competitividad de Colombia, Report No. 35061-C0, 2006), and a recently completed regional competitiveness report (Colombia: Inputs for Sub-regional Competitiveness Policies). Dissemination o f the regional competitiveness report will help IFC is currently the sole advisor to INCO and the Ministry of Transport to structure the largest Colombian road concession project Ruta del Sol which runs from Bogota to the coastal town o f SantaMarta. 42 establish a more nuanced policy agenda for hrther work at the regional level. Additional advisory work on the public-private partnerships in transport (jointly with the IFC) may help the Government construct improved transport infrastructure at the lowest possible cost. 54. The Bank and IFC are both advising on toll roads, including joint work on a concession structure for the Ruta del Sol highway from Bogota to Santa Marta - 9OOkm. Currently IFC i s the advisor to the Ministry o f Transport and INCO on the "Ruta del Sol" concession estimated to be largest infrastructureproject inthe country. 55. Urban transport systems - IBRD helped Bogota's Transmilenio and is now also financing five additional cities (Pereira, Medellin, Cartagena, Barranquilla and Bucaramanga). Some cities may be interested inborrowing from IFC or mobilizing market resources without central government guarantee. There are opportunities with private bus operators (often new companies). 56. Ports -joint IBRD/IFC work has resulted in long term strategic financial partner to support Port expansions (Muelles el Bosque and Cartagena). IFC recently made a US$ 10 million loan to a private port facility in Cartagena. IBRD i s advising on port reform and advised on integrated development o f Buenaventura. There may be scope for further joint work on airports. 57. Furthermore, IBRD and IFC are focusing on improved delivery of urban services - notably water and sanitation. IBRD, together with the Ministry o f Environment developed and i s supporting PSP models for different size utilities. This includes private operators for small and medium sized companies (usually originally construction firms) for which IFC fundingand financial management support maybeusehl. 58. Municipal utilify financing - The Bank i s lending directly to municipalities in water (Cartagena, Bogota in the past, L a Guajira) with other water and energy utilities expressing interest. Coordinationwith IFC may be based on Bank involvement for broader reform and reform based investmentand IFC focus on financial management and needs o f utilities. 59. Other areas of investment may include electricity generation and distribution, gas transmission projects, and utilities at national and municipal levels. The main focus will be on renewable energies 3. Supportingthe Modernizationand InternationalExpansionof Leading ColombianGroups-Agribusiness,South/South, andSustainability 60. There are eleven Colombian representative conglomerates mainly family owned, most o f them created inthe 50's and currently managed professionally. Aggregated sales o f the eleven groups represent approximately 14 percent o f GDP and only three are listed in the Colombian Stock Exchange. 61. IFC has been able to build relationships with six o f the eleven groups providing either equity or debt financing, andwe are currently inadvanced conversations with at least three o f the remaining groups. IFC investment infirms has been particularly valuable at the 43 pre- P O stage. The strategic business development IFC plans for Colombia targets continuous support to the local and international expansion o f these conglomerates, with a priority for agribusiness groups notably involving ecofuel industries. Preference will be for projects where IFC can add value by promotinglenhancing sustainability standards, as well as enhancing local benefits. 62. Large and medium size corporations are increasing their access to local financial and capital markets due to the overall economic recovery, higher liquidity and the strengthening o f local financial intermediaries. IFC will continue supporting them via equity and long-term financing to facilitate their expansion overseas and help the consolidation o f certain sectors. Besides agribusiness, IFC may also consider investments inconstruction materials, retail, pharmaceuticals, petrochemicalandtourism. 4. Improvingthe BusinessEnablingEnvironment 63. The central vehicle for IBRD support to the competitiveness agenda i s the Business Efficiency DPL series. This DPL series has supported the Government's reforms in five areas: (a) enhancing the business environment through improvements in the regulatory framework and a reduction in the administrative burden on enterprises; (b) increasing the soundness and depth o f the financial system; (c) promoting access to financial services, including capital markets, by firms andunderserved segments o f society; (d) increasing the country's export competitiveness by promoting the adoption by firms o f quality standards and technological innovation; and (e) lowering firms operational costs by improving the regulatory framework to increase investment in infrastructure and facilitating transport logistics. A third phase is expected in the near future. The Government has requested a thirdphase inthe first year o fthe CPS period. 64. Much o f IFC's country program also revolves around strengthening the business environment and private sector competitiveness. IFC's Bogoth-based pilot to reform and simplify the inspections systems is expected to be expanded to the municipalities o f Cartagena, Cali, Medellin, Bucaramanga and Santa Marta (through a multi-donor initiative). IBRD has produced a series o f reports on infrastructure, logistics and regional competitiveness5, and these have been complemented by the recent regional Doing Business report. IFC plans to undertake studies in areas such as Public Private Partnerships, Simplification o f Business Processes, Management o f Petroleum Royalties, and Technical Assistance to PYMES 4 There is also a rural dimension to competitiveness. The ProductiveAlliances projects support small-holder involvement inthe agricultural production chain and the Agricultural Transition projects support the quality and technology improvements neededto compete globally. 5Reports include the "REDI" Colombia: Recent Economic Developments in Infiastructure, 2004), followed byInfiastructura Logistica y de Calidadpara la Competitividadde Colombia, (Report No. 35061-C0, 2006) and Colombia: Inputsfor Sub-regional Competitiveness Policies. 44 5. ExtractiveIndustriesandSustainableResourceManagement 65. Colombia has the fifth-largest oil supply in Latin America. Oil reserves and production have been declining since peaking in 1999. Therefore a new regulatory framework and fiscal measures have been implemented by the Colombian Government to open up the sector which led to increased investment in oil and gas. Under the new regulatory framework, the country has signed 32 E&P contracts out o f an expected 30 E&P inFY06. Crude production this year has risen to around 600,000 barrels per day (bpd) up from 500,000 bpdlast year. 66. The IFC's strategy for oil and gas in the next years aims to support local medium sized companies via equity and long term financing, while assuring that the projects meet high environmental, social, and governance standards, andthat revenues from the projects are usedtransparently and effectively. Inthe gas sector, IFC plans to support opportunities for private investment that have been created by a new contract model that reduces the state's share o fhydrocarbonproduction. 67. IFC provided equity and debt to two oil and gas companies (Petrotesting and Kappa) to support their expansion plans. IFC i s also providing technical assistance to improve the municipal management o f oil royalties in the regions where Petrotesting and Kappa operate. Supporting o f Ecopetrol, Kappa and Petrotesting, IFC has launched a project for effective municipal management of oil royalties. IFC is also assisting Petrotesting to develop an Annual Sustainability report, and to upgrading its environmental and social systems. 68. Municipal development (extractive industries revenue sharindmanagement) - WB is preparing decentralization study (including analyzing "regalias" issue) where IFC could also collaborate with its own revenue management experiences at the client level inthe oil sector. In addition, Colombia offers interesting opportunities to replicate the study on Environmental and Social Impacts o fthe Miningindustry, done jointly with IFC inPeru. 6. HumanCapitalandthe CompetitivenessAgenda 69. Better health and education improves the competitiveness o f the private sector. While private sector investment opportunities maybe more limited in health and education, the private can play a role in improving the quality o f and access to health and education, especially in the realm o f PPP where joint IBRD/IFC work can add value. Continued support for loans for students to finance higher education (with IFC advisory inputs and potential investments notably via private bank commercial lines) will help increase the skill level o f the workforce-aligned with actions to improve the quality and coverage of secondary education at the departmental level. 70. IBRD is implementing a student loan operation through ICETEX, a public sector institution that plans to turn to private markets in the mid- to long-term. IFC may accompany this process and/or finance expansions o f higher education capacity. Furthermore, IFC has offered the Ministryo f Social Protection support to facilitate the sale o fpublicly owned health facilities to private operators. 45 CPS Annex B GovernanceChallenges Introduction 1. This annex presents some o f the key governance challenges being faced by Colombia, as well as the current efforts at addressing them and their potential implications for World Bank group operations in the country. For the purposes o f this annex governance i s defined as the traditions and institutions by which authority in a country i s exercised. This includes the process by which governments are selected, monitored and replaced; the capacity o f the Government to effectively formulate and implement sound policies; and the respect o f citizens and the state for the institutions that govern economic and social interactions amongthem.6 MainGovernanceChallengesin Colombia 2. The single most influential challenge not only to governance but also to economic and social development inColombia i s the armed conflict, which has pitted democratically- elected governments against left-wing guerrilla movements (the FARC and ELN). Over the last two decades paramilitary forces have evolved from self-defense groups assembled by landowners, into organized armies living off extortion and drug trafficking. The growing economic and political influence o f illegal armed groups, coupled with ruthless violence and intimidation, gradually opened up opportunities to capture the Colombian State, most notably at the municipal and departmental levels. 3. National-level institutions o f every kind are also susceptible to capture from illegal armed groups as well as more traditional mafias such as drug-trafficking cartels. Institutions such as Congress and the national intelligence service have been seriously underminedby alleged linkages with paramilitary groups, and recent investigations by the Ministry of Defense have discovered a significant level o f penetrationo f drug cartels into the armed forces, and cases are being prosecuted. This level o f state capture disrupts governance at every level, undermining democratic institutions. 4. Proper control o f campaign financing is important to at least partially reduce the influence o f illegal groups on public policy. According to the 2006 annual report o f the Colombian chapter o f Transparency International, transparency inthe financing o fpolitical campaigns i s the single major challenge to combating corruption inthe country. The same report highlights the major influence o f paramilitary and drug-trafficking interests in the 1994, 2002 and 2003 elections, as well as allegations o f illegal financing o f congressional campaigns in2006.' 5. The lawmaking process itself has frequently been singled out as a major obstacle to good governance in Colombia. Weak party discipline and fragmentation o f political representation arising from low vote thresholds for access to Congress were serious challenges to orderly, transparent, and programmatic lawmaking. Reforms to the 'WBI:Transparencia Governance Matters 2007. La en la Financiacidn de la Politica, inCorporacibn Transparencia por Colombia: Informe Anual2006. 46 governance o f political parties and voting thresholds have taken place, but their impact seems to be less than anticipated. Furthermore, Congress voting rules are not transparent, makingit difficult to track individual voting records and ensure accountability to voters. 6. Interms ofrules that control the properuse ofpublic funds, Colombiahas advanced considerably in the modernization o f key national-level institutions. The national tax administration has undergone dramatic improvements over the last five years, not only in the combat o f tax evasion but also in the implementation o f internal probity regulations. Public expenditure is in turn subject to controls through a comprehensive integrated financial management system. There i s still, however, room for streamlining transactional controls through the ongoing implementation o f risk management tools. Capacity to implement these new financial management and control frameworks can vary among entities, particularly at the subnational level. 7. However, there i s a widespread public perception among Colombian society that corruption in Colombia's country procurement system is abundant. The regulatory framework on fraud and corruption exists, but corrupt practices are still present within the system and often mixedwith local politics. Lack o ftraining o f auditors and narrow political motivations are important obstacles to the scope and credibility o f their work. There are also issues with the institutional framework, as there is no dedicated, centralized agency in charge ofprocurement regulation, control and supervision. The Government'sStrategyto Address These Challenges 8. Reestablishing State control over the entire Colombian territory i s a key element o f the Government's Democratic Security Policy. As established in the current National Development Plan, the Government will continue its frontal fight against drugs, terrorism, kidnapping and all forms o f organized crime, as well as strengthening the support mechanisms for populations displaced by violence and for the reintegration o f demobilized members of illegal armed groups into society. 9. This last point is one o f the most important components o f the policy to deal with all forms o f violence and organized crime. Reintegration o f demobilized combatants i s done through two types o f actions: (a) a peace dialogue with those groups that are willing to cease hostilities and (b) a path for individuals who decide to give up arms on an individual basis. The final aim o f these actions i s to "create a virtuous circle o f recovery, presence, and consolidation o f state control." The Justice and Peace Law (Law 975) provides the legal framework for the Government to demobilize illegal armed groups and to guarantee the right to truth, justice and reparation for victims whose humanrights have been seriously violated. 10. Congress recently reformed the Procurement Law, making considerable improvements to the procurement system, such as the application o fmerit evaluation as the sole criteria for selection o f consultant's services, thus creating an opportunity to converge with international best practices. Framework contracts are also foreseen, which should translate into important savings interms o fpublic procurement. However, there are several aspects o f the reform which are still underway and will need to be fully evaluated as their implementation progress. 47 11. The National Development Plan contains a number of other important initiatives to consolidate the model o f democratic governance. Some of its most important elements are: e Consolidation of the democratic model, including initiatives in personal identification o f Colombian citizens, strengthening the political and electoral systems, promotion o f civil society participation and social control, and support to local and sub-national democratic institutions. e Improvedjustice systems. e Combating corruption, including initiatives contained in the proposal for a State anticorruption policyprepared by the PresidentialAnticorruption Program. e Ongoing improvements to public management, including the areas o f budgeting, legal defense o f the State, asset management, procurement, internal control, and results-based management. The WorldBankGroup's RoleinHelpingAddress These Challenges 12. The Bank has been engaged with Colombia for many years inthe improvement o f public sector management. Through several investment and policy-based operations, the Bank has supported the implementation o f reforms in justice administration, tax administration, financial management, procurement, asset management, legal defense o f the State, public investment and results-basedmanagement, among others. Alternatives are also being explored with the Government on how the Bank can support next-generation efforts to promote good governance; these elements, which are part of the Bank's L A C region governance strategy, include initiatives in civil service, external control, evaluation and social monitoring, public asset and income disclosure and combating money laundering, among others. 13. Specifically in the area of procurement, the Bank has been supporting improvements to the national procurement law and the strengthening the institutional framework for procurement through a technical assistance loan and direct advice from its regional procurement specialists. Support i s being provided to the National Planning Department to develop implementing regulations for the amendments to the law, andjoint efforts with other MDBs are being carried on for the harmonization o f biddingdocuments. Finally, the Bank is financing "quick gains" studies in the country to promote more efficient and cost-effective procurement incertain sectors. Effect of the Overall Governance Context on the Bank's Portfolio and Individual Operations 14. Ingeneral, Bankoperations implementedthrough entities oftheNational executive branch or major local governments have faced relatively low risks associated with the governance challenges mentioned above. Despite the ongoing armed conflict, key entities such as the National Planning Department, the Ministry o f Finance, and sector ministries involved with Bank projects have maintained a clear orientation reflected in publicly- available policy and strategy documents, several of which have been extensively reviewed 48 and commented by Bank staff. This open process reduces the probability o fthe interests o f illegal groups filtering into the design o f Bank-financed operations. Implementation of these operations hinges upon a careful review of the capacity of executing agencies to properlyimplement financial management andprocurement processes andcontrols. 15. Colombia has made progress over time in the enhancement o f public financial management (PFM) regulations and systems, particularly through the development of the integrated financial management system (SIIF). These improvements are reflected in improved financial management arrangements for Bank-financed projects, which now make extensive use o f SIIF for accounting and reporting purposes at the national level. Looking ahead, it would be advisable to strengthen the country's external audit h c t i o n and its application in Bank-financed investment projects and introduce a framework o f PFM performance measurement against internationally recognized benchmarks, contributing to the design of future reforms and to the Paris harmonization targets'. The framework could also be adapted to the specific needs o f subnational governments. 16. Interms o fportfolio-specific issues, progress has beenmade inreducingthe use o f project implementation units, find administrators and private external auditors. The Bank and Government have agreed on a decision framework that promotes capacity building with exceptional use of separate structures when these are justified in response to documented risks. 17. While procurement in Bank projects i s relatively safe and conducted under Bank Guidelines, International Competitive Bidding (ICB) and National Competitive Bidding (NCB) are usually not competitive enough due to the lack o f bidder participation, especially in civil works tenders. In most projects, procurement capacity in the executing agencies i s weak, and project staff who have benefited from procurement training and experience often leave after one or two year o f practice, switching to different activities both inthe Government system or the private sector. The risk o f confusion as to how and when to apply national procurement law or Bank Guidelines is, therefore, not unusual in Bank-funded projects. 18. The recent amendments to the Procurement Law include the mandatory registration o f bidders, which may create an obstacle for the use o f country systems as it could constitute a barrier for the participation o f foreign bidders, and, interms o f procurement o f goods and civil works, there are still legal provisions that are not consistent with Bank's confidentiality andbid evaluationpolicies. 19. Bank-financed projects implemented by local or sub-national entities that are susceptible to capture by illegal groups face a different set o f challenges and require particular design considerations. These must be made on a case-by-case basis and must balance the achievement o f quality results at reasonable costs and times with the need to establish increased control mechanisms that protect the project from external influences. Often, these mechanisms will go against the tendency o f reducing reliance on external administration or execution agencies and adopting country systems where possible, inorder to ensure as much independence as possible from captured Government entities and "ring fencing" the flow o f h d s under special procedures with abundant external oversight. * ProgressonHarmonization targets i s found at the end of this Annex. 49 20. Possibly the highest profile case has been the L a Guajira Water and Sanitation Infrastructureand Service Management Project (P09695), approved by the Bank's Board o f Directors in 2007. The Department o f L a Guajira, in northeast Colombia, has been regularly singled out as one o f the most severe cases o f capture o f a sub-national government, and linkages between elected officials at the departmental and municipal level and illegal armedgroups are often cited. Many millions o f dollars have been spent there to improve basic public services over the last decades but have not borne fruit, likely reflecting serious problems o f capture andcorruption. 21. The L a Guajira Project aims to improve the quality o f basic services in the water and sanitation sector throughout the Department. L a Guajira, like many departments in Colombia - and particularly in Colombia's Caribbean coastal area - has a reputation for weak governance, corruption, and the continued presence o f parallel institutions which have prevented public sector efforts to meet citizen needs in an equitable and effective manner. Analysis undertaken during preparation - and the clear messages which emerged through dialogue with stakeholders at all stages o f Project preparation - clearly indicates that corruption, public sector malfeasance, capture by elites and special interests, and the paucity o f accountability and transparency in L a Guajira are among the greatest obstacles to economic and social development in the Department. The Department is historically among the worst performing inthe country as regards sectoral achievements. 22. To address these obstacles to achieving the Project Objectives, the operation includes 10 concrete design elements which aim to ensure the project benefits reach their intended beneficiaries and that the Bank and central Government authorities are well positioned to take action inthe case o fmalfeasance: i. NoBankfundswillpassthroughthehandsofapublicofficialatthenational, departmental, or local level. All Bank loan proceeds will pass from the Bank, though a commercial fiduciary account Wduciaria), and direct to contractors. The use o f fiduciaries - specialized trust banks supervised by the banking regulator in Colombia and with extremely high levels o f financial management capacity - has been used successfully in other Bank and internationally-financed operations in Colombia. The fiduciary would be a commercial entity, competitively selected to play the role o f financial intermediary. .. 11. All project funds, including royalty revenues, are ring fenced. Under the operation, royalty (regalia) revenues will be passed directly to theJiduciaria, without passing through the departmental budget. Such an approach not only enhances the creditworthiness o f the Department and ensures the availability of cash flow for investment and repayment but adds an important measure of transparency in an environment in which the ineffective use o f royalty revenues has been a major impediment to achieving poverty reduction and equity enhancing outcomes. ... 111. The key project implementation entity i s an independent management team, contracted through a competitive bidding process, which brings independent technical management skills from outside o fthe Department. This unit, staffed 50 by qualified Colombian professionals with experience inthe sector, inpublic procurement, in financial management, and project management, brings key technical knowledge as well as independent management to the Project. iv. The technical management unit will maintain a public website which will include all relevant contract award information, including the publication o f comparator prices for similar works. The team believes that a key corruption risk imbedded in the Project is the risk o f inflated bid prices which might reflect the cost of doing business in L a Guajira including the payment o f kickbacks, protection, and patronage. The technical management o f the Project will publish comparative prices for similar public works in other departments to makepublicly known any major cost variations. v. The Bank's procurement approach for the operation includes several specific actions identified during preparation to enhance both transparency and control, including: (a) all N C B contracts will include audit rights for the Bank as well as standard Bank fraud and corruption clauses; (b) the prior-review threshold will be set to capture all N C B and ICB contracts; (c) the annual investment plans will be reviewedby the Bank with special attention to the risk o f contract splitting and opportunities for packaging o f contracts will be given regular review; and (d) information related to all bids - including non- winning bids - will be included in agreed-upon reporting formats to enhance the identification o fpatterns which might indicate collusion, among others. vi. The Project includes a strong role and presence o f central Government institutions. Stakeholders interviewed during preparation repeatedly referred to the credibility which Central Government institutions bring to the operation. As such, representatives o f the Ministry o f Environment, Housing, and Territorial Development and the National Planning Department sit on both the Project's Executive Committee - which provides overall supervision and oversight to the Project, as a whole -and the Technical Committee, which i s involved in the detailed technical review o f the investment plans prepared by operators. vii. The Project includes explicit avenues for citizen participation and accountability. In addition to specialized social staff within the Program ImplementationUnit, an ongoing campaign of public outreach, dissemination, and feedback will be financed. This community oversight mechanism complements the existing robust regulatory framework for water and sanitation but allows for a Project-specific mechanism under which citizens can voice concerns about Project implementation and the performance o f utility operators. ... v111. In advance of the formal contracting of the technical management unit, a broad Communications Strategy was launched with the objective o f informing stakeholders as a whole, with particular emphasis on interested groups, public opinion shapers, and the media, on the strategic objectives o f the project and the detailed design elements which aim to reduce corruptionrisk. 51 i x, A major risk o f corruption ininfrastructureprojects comes from the upstream use o f inappropriate technology and technical designs and from poor supervision and technical oversight during construction which can result in such problems as poor quality works or the fraudulent use o f substandard materials or inputs, etc. The Project thus relies on a redundant system o f technical oversight. X. The World Bank will employ a more-intensive-than-usual supervision approach to the Project, including (a) the contracting o f a full-time local staff to work exclusively on the supervision o fthe Project; (b) quarterly, rather than the usual biannual, supervision missions; and (c) the use o f a multi- disciplinary team which will include dedicated fiduciary, social and environmental specialists to complement the technical water sector team. Procurement Yes Yes 100% Peace andDevelopment (IADB-EU);"Familias en Acci6n" (IBRD-IDB),Higher EducationICETEX(IBRD- IFC) 79% Environment(IBRD- HumboldtInstitute),Peace: (IBRD-EU), - Education: (IBRD-ICETEX), MonitoringandEvaluation: (IBRD-Universidadde Los Andes) 8b. Percent of AAA products(or ESW)completedinFY07that were prepared jointly with one or moredonors 100% Managing for Results 9a. At the nationallevel, does the countryhaveperformanceassessmentframework for assessin ro ess a ainst the nationaldevelo ment strate 9b. At the sector programlevel, does the countryhaveperformanceassessment framework for assessin ro ess a ainst its sector strate Mutual Accountabili 1Oa. Was there a mutualor independentassessmentof progress inimplementing a eedcommitmentson aid effectivenessaccountabili undertakeninFY07? 52 CPS Annex C Colombia at a Glance Colombia at a dance 10118107 Latin Lower- POVERTYand SOCIAL Amerlca middle- Colombla 8 Carlb. Income Developmentdiamond' 2006 Population,mid-year(millions) 45.6 555 2,276 GNIper capita (Aflas method, US$) 2,740 4,767 2,037 Lifeexpectancy GNi (Atlasmethod, US$billions) 124.8 2.650 4,635 7 Average annual growth, 200006 Population(%) 1.5 1.3 0.9 Laborforce (%) 2.5 2.1 1.4 GNI Gross per prima? Most recentestimate (latest year avallable, 200006) capita enroilmenl Poverty(% ofpopulationbelownationalpovetfy line) Urbanpopulation (% of totalpopulation) 73 78 47 Lifeexpectancyatbirth(years) 73 73 71 Infantmortality (per 1,Wolive births) 17 26 31 Childmalnutrition (% of childrenunder5) 7 13 Access to imorovedwater source Access to an improvedwater source (% ofpopulafion) 93 91 81 Literacy (% ofpopulation age 15+) 93 90 89 - Gross primaryenrollment (% ofschod-age population) 112 118 113 Colombia Male 113 120 117 Lower-middle-incomewouo Female 111 116 114 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1986 1996 2005 2006 Economlcratlo$* GDP (US$ billions) 34.9 97.1 122.9 135.8 I Gross capitalformat1onlGDP 18.0 22.2 20.4 19.4 Exportsof goods and services1GDP 18.8 15.2 21.4 20.8 Gross domesticsavings1GDP 24.9 16.5 19.3 20.2 Gross nationalsavingdGOP 23.2 15.1 18.2 18.2 Cunentaccount balancdGDP 1.8 -4.8 -1.8 -1.2 InterestpaymentslGDP 2.8 1.8 2.1 Total debtlGDP 44.0 29.7 30.6 Total debtservicelexports 32.0 36.9 35.3 Present valueof debtlGDP 33.2 Presentvalue of debtlexports 141.6 indebtedness 1986-96 199646 2005 2006 2006-10 (averageannualgrowth) - GDP 4.2 2.3 4.7 6.8 4.1 Colombia GDP per capita 2.2 0.7 3.3 5.4 2.6 __Lower-middle-incomegroup Exportsof goodsand services 7.4 4.2 5.5 4.4 4.5 STRUCTUREof the ECONOMY (% of GDP) 1__ Growth of capital and GDP(X) Agriculture 18.0 13.8 Industry 37.3 30.8 Manufacturing 23.2 15.5 15.5 14.4 Services 44.7 55.4 53.3 54.3 Householdfinal consumptionexpenditure 65.3 65.0 61.9 72.2 Generalgov't final consumptionexpenditure 9.8 18.5 :w Imports of goods and services 12.0 20.8 22.2 19.9 :; 1986.96 199606 (averageannualgrowth) Growth of exports and Imports (X) Agriculture -0.1 1.4 3.1 Industry 3.5 2.5 5.1 Manufacturing 0.2 2.8 3.9 Services 4.7 2.3 3.8 Householdfinal consumptionexpenditure 3.9 2.2 4.7 10.2 Generalgov't final consumption expenditure 7.6 1.3 4.8 -10.1 -10 Gross capitalformation 7.7 2.7 25.6 7.2 -Exports -9-imports Importsof goodsand services 14.7 3.0 21.7 2.4 PRICES and GOVERNMENTFINANCE 1986 1996 2005 2006 Domestic prices (% change) Consumer prices 189 20.2 5.0 4.3 ImplicitGDP deflator 29.2 16.9 5.7 5.3 Government finance (% of GDP,includescurrentgranfs) O i I Current revenue 9.6 11.8 15.0 01 02 @3 W 05 06 Current budgetbalance 2.2 0.0 -4.0 -GDP +CPI Overallsurplusldeficit deflator TRADE 1996 2005 2o06 (US$millions) ~xportand import leveis (US$ mill.) Total exports(fob) 5,467 10,648 20,815 23,941 Coffee 2.988 1.578 1.471 1.712 30.0w 1 Petroleumproducts 463 2,945 5,559 6,434 Manufactures 817 3,430 7,687 8,453 20'0w Total imports(cif) 3,852 13,684 21,204 22,492 Food 187 1,440 1,874 1,907 Fueland energy 143 413 544 496 Capitalgoods 1;393 4,586 7,702 8,314 0 Export price index (2000=100) 10 51 44 48 Importprice index (2000=100) 9 50 36 37 Terms of trade [2000=100) 109 101 122 128 BALANCE of PAYMENTS lsS6 2005 '996 20°6 (US$millions) current account balanceto GDP (Y.) Exportsof goods and services 6,542 13,158 24,392 27,342 Importsof goodsand services 5.326 16.443 24.887 26.256 ' T Resourcebalance 1,217 -3,285 -495 1,085 1 Net income -1,371 -2,062 -5,525 -5,910 Net currenttransfers 784 706 4.089 3,203 O Current accountbalance 630 -4,642 -1,930 -1.622 -, Financingitems (net) 872 2,920 202 494 Changes in net resewes -1,502 1,721 1,729 1,128 -2 Memo: Reservesincludinggold (US$ millions) 3,512 9,939 14,957 13,659 Conversionrate (DEC, local/US$) 194.3 1,036.7 2,320.8 2.361.1 EXTERNAL DEBTand RESOURCEFLOWS I 1986 1996 2005 [US$ millions) Total debt outstandingand disbursed 15,362 28,896 37,656 IBRD 3,261 2,177 3,896 IDA 17 10 4 Total debt service 2,252 5,401 10,172 IBRD 489 520 392 IDA 1 1 1 Compositionof net resourceflows Officialgrants 26 61 157 Officialcreditors 655 -111 -722 Privatecreditors 964 4,167 -272 Foreigndirect investment(net inflows) 674 3,112 10,375 Portfolioequity(net inflows) 0 292 86 20966 World Bank program Commitments 640 334 953 E Bilateral - Disbursements 529 152 705 Princip'alrepayments 253 351 219 Netflows 276 -199 486 683 interestpayments 237 170 174 210 Nettransfers 39 -369 312 473 Note: This tablewas producedfrom the DevelopmentEconomicsLDB database. 10116/07 54 CPS Annex D Key Economic Indicators ~ Actual Estimate Indicator 2003 2004 2005 2006 2007 Vational accounts(as YOof GDP) 3oss domestic product a 100 100 100 100 1O( Agriculture 13 12 12 12 1( Industry 32 34 34 36 2! Services 59 57 53 52 6( rota1Consumption 83 81 60 79 7' 3oss domestic fixed investment I 17 19 21 23 2: Government investment 8 6 6 7 Private investment 9 13 15 16 It 3xports (GNFS) 21 21 22 22 l! mports (GNFS) 22 22 22 25 2( 3ross domestic savings 17 19 40 21 2: jross national savings 17 18 39 20 Memorandum items 3oss domestic product 85,434 115,154 122,937 136,008 174,245 US$million at current prices) 3NI per capita (US$,Atlas method) 1,910 2,230 2,600 3,120 3,300 teal annual growth rates (%, calculated from 94 prices) Gross domestic product at market prices 3.9 4.9 4.7 6.8 6.6 Gross Domestic Income 4.5 6.4 7.1 8.0 11.0 teal annual per capita growth rates ("A, calculated from 94 prices) Gross domestic product at market prices 2.3 3.3 3.3 5.4 5.2 Total consumption 0.2 3.3 3.4 4.1 0.c Private consumption 0.8 4.5 3.6 5.2 -1.6 3alanceof Payments(US$) Exports (GNFS) 14,855 18,698 23,482 27,303 30,071 Merchandise FOB 12,934 16,442 20,8 18 23,930 25,049 Imports (GNFS) 16,152 19,259 24,197 26,829 31,733 Merchandise FOB 12,792 15,324 19,43 1 23,976 26,2 14 Resource balance (1,298) (561) (715) 474 (1,662) Net current transfers 3,052 3,455 3,822 4,450 Current account balance (974) (906) (1,881) (3,222) (6,077) Net private foreign direct investment 1,720 3,016 10,240 6,463 4,884 Long-term loans (net) 369 (823) (882) 901 2,396 Official 2,052 84 (722) 1,114 (526) Private (1,683) (907) (161) (213) 2,922 Other capital (net, incl. errors ommissions) (932) (3,828) (9,206) (4,165) 657 Change inreserves (184) 2,541 1,729 23 (1,860) [emorandurn items Lesourcebalance (% o f GDP) -1.5 -0.5 -0.5 0.3 -1.1 Leal annual growth rates ( YR94 prices) Merchandise exports (FOB) 27.1 26.6 14.9 4.7 6.4 Primary 22.7 31.6 13.6 -14.5 7.7 Manufactures 34.4 19.2 17.1 -2.0 7.0 Merchandise imports (CIF) 19.8 26.8 23.4 9.3 11.2 55 Actual Estimate Indicator 2003 2004 2005 2006 2007 'ublic finance (as % of GDP at market prices) e Current revenues 30.0% 30.3% 30.8% 32.8% 33.3% Current expenditures 32.6% 33.3% 25.1% 26.9% 27.0% Current account surplus (+) or deficit (-) -2.6% -3.0% 5.7% 5.9% 6.3% Capital expenditure 7.5% 7.2% 5.8% 6.9% 7.1% Foreignfinancing 1.7 -2.4 -0.5 0.7 0.5 rlonetary indicators M2/GDP 32.6 34.5 36.7 38.5 41.; Growth o f M2 (YO) 10.6 19.2 18.0 18.0 21.5 Private sector credit growth / 56.9 54.8 47.7 -276.3 -29.; total credit growth (YO) 'rice indices( YR94 =loo) Merchandise export price index 329.5 342.2 354.4 385.5 366.f Merchandise import price index 345.2 331.7 308.9 320.4 254.7 Merchandise terms o f trade index 95.5 103.2 114.7 120.3 143,s Real exchange rate (USWLCU) 84.9 92.8 105.3 103.6 98.5 Real interest rates Consumer price index (% change) 6.5 5.5 4.9 4.5 5.; GDP deflator (% change) 8.1 7.6 5.7 5.4 5.1 .. GDP at factor cost .. "GNFS" denotes ''goods and nonfactor services." Includes net unrequited transfers excluding official capital grants. Includes use o f IMFresources. . Consolidated central government. "LCU" denotes "local currency units." An increase inUS$/LCU denotes appreciation. 56 CPS Annex E IFC/MIGA ProgramSummary 2005 2006 2007 2008* ?CCommitments(US$ million) Gross 59.2 291.5 374.3 336.4 Net 59.2 291.5 274.3 206.4 et Commitmentsby Sector (YO) Oil, Gas, Mining 6% 11% 16% Pulp, Paper 85% 62% 65% 61% Utilities 7yo 9% Industrial and Cons. Products 11% Finance and Insurance 15% 21% 17% 14% Total 100% 100% 100% 100% et Commitmentsbv InvestmentInstrument (%) Equity 18% 42% 38% Guarantee 15% 7% 1% 1% Loan 60% 47% 33% 50% Quasi equity 7% Quasi loan 25% 21% 24% 11% Total 100% 100% 100% 100% 4IGA OutstandingExposure(Gross ExposureUS$ million) ectoralDistribution Infrastructure 62.4 62.4 62.4 62.4 [IGA'sRiskProfile Transfer Restriction 20.0 20.0 20.0 20.0 War & Civil Disturbance 62.4 62.4 62.4 62.4 [IGA'sGross ExposureinCountry 62.4 62.4 62.4 62.4 % Share Exposure inCo 1.2% 1.2% 1.2% 1.2% MIGA Net Exposure inCo 31.2 31.2 31.2 32.2 % Share ofMIGA'sNet Expos. 1% 1% 1% 1% 57 CPS Annex F Summaryof LendingandNowLendingServices Investment AAA BogotaUrban Services 100 Gender PortfolioReview Higher Education - ImprovingAccess 200 RuralFinance 3oo Coffee Sector Work ~ y 0 3 Adjustment Voices of the Poor Colombia Program.Fiscal and Instit.Adj. I 300 The Economic Foundationof Peace(policy Notes) Program.Financ.Sector Adj. I 150 Social Sector Adj. 155 605 Total FY03 905 Investment AAA Peace and DevelopmentAPL I 30 Improvement in PublicExpenditure IntegratedMass Transit Systems 250 Land Policy in Transition CundinamarcaEduc.Quality 15 PublicTraining ReformIssues 295 ColombiaCFAA FY04 Adjustment Agricultural Competitiveness Labor and Social ReformPSAL I 200 RuralFinanceI1 Program.Fiscal and Instit.Adj. I1 150 Afro-Colombians, Social Inclusion,and MDGs 350 Recent Economic Developmentsin Infrastrattucture Total FY04 645 Investment AAA TAL to support2nd PSAL 2 Labor ReformAgenda Agricultural Transition 30 EducationStudy Water and SanitationSupportAPL I 70 CO CEM DisasterVulnerability ReductionI 260 CO CPAR 362 :yo5 Adjustment Labor and Social ReformPSAL I1 200 2nd Program.FSAL 100 Sustainable DevelopmentDPLI 150 Prog.Fiscal and Instit. SAL I11 100 550 Investment CountryEnvironmentalAnalysis AAA Social SafetyNet 86 SustainableDevelopmentTAL 7 Competitiveness Study DisasterVulnerability ReductionI1 80 Policy Notes FY06 173 PeaceProgrammatic(Desmobilization) Adjustment Business Prod.And Efficiency DPLI 250 Total FY06 423 Investment AAA La GuajiraWater Supply 90 RegionalCompetitiveness Social SafetyNet (Add. Financing) 105 Decentralization IntegratedMass Transport Systems (Add. Financing) 207 PeaceProgrammaticI1(Reparation) FY07 402 Informality Adjustment PLaRSSAL I11 200 Business Prod.And Efficiency DPLI1 300 Sustianable DevelopmentDPLI1 200 700 Total FY07 1102 58 CPS Annex G Indicatorsof BankPortfolioPerformanceandManagement Indicator* 2005 2006 2007 200 Portfolio Assessment NumberofProjects Under Implementatiofi 20 20 20 1 Average Implementation Period(years$ 2.8 2.9 3.2 3. Percent of Problem Projects by Numbdl C 10.0 0.0 0.0 5. Percent of Problem Projects by AmourA, C 3.5 0.0 0.0 4. Percent of Projects at Riskby Numb&) d 10.0 0.0 0.0 5. Percent o f Projects at Riskby Amou&l d 3.5 0.0 0.0 4. DisbursementRatio (%y 21.0 29.5 38.3 27. Portfolio Management CPPR during the year (yes/no) Supervision Resources(total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Evalby OEDbyNumber 123 21 Proj Evalby OED by Amt (US$ millions) 9,551.6 1,272.1 % of OED Projects RatedUor HUbyNumber 24.0 15.0 % of OED Projects RatedUor HUbyAmt 19.9 10.1 a. As shown inthe Annual Report on Portfolio Performance (except for current FY). b. Average age ofprojects inthe Bank's country portfolio. c. Percent o f projects rated Uor HUon development objectives (DO) andor implementation progress d. As definedunderthe Portfolio ImprovementProgram. e. Ratio o f disbursements during the year to the undisbursedbalance o f the Bank's portfolio at the * beginning o fthe year: Investmentprojects only. All indicators are for projects active inthe Portfolio, with the exceptiono f Disbursement Ratio, which includes all active projects as well as projects which exited duringthe fiscal year. 59 CPS Annex H FiscalSustainability andDebtManagement 1. A debt sustainability analysis was conducted for boththe public and external debt. At 38.3 percent of GDP at the end o f 2007, Colombia's Government has a fairly substantialgross debtburden.' To reduce risks associated with this debt, the Government has reduced the foreign currency exposure by issuing a greater share of debt in local currency and entering into "swap" contracts. The foreign currency component of public debt has been reduced to 28 percent o f public debt, and average maturity has been increased to about 3.7 years. Total external debt i s fairly moderate at about 27 percent o f GDP at the end o f 2007. Public Debt 2. We analyzed the public debt prospects in three different ways: i)abaseline projection with historical average values o f key parameters; ii)an analysis o f policy responses that would be necessary for the Government to meet the debt reduction target of 30 percent of GDP by 2012 in the face of possible economic shocks; and iii) projections o f what would happen to debt ratios ifthere were no fiscal policy response to economic shocks. Debt Sustainability with Shocks and Policy Adjustment Primary surplus required to achieve Baseline/ Shock scenarios the target debt ratio (30.0 percent by 2012) Baseline scenario (see above) 2.0% Real effective exchange rate depreciation of 15 percent in 2008 with maintenance of other variables 2.3% at the values described inthe baseline scenario GDP growth shock: in 2008 of historical growth average minus two standard deviations (implies -0.8 percent growth). In 2009, historical average minus one standard deviation (implies 1.6 percent growth). 2.9% In2010, agrowthrateof2.5 percentisassumed, with 2011 of 3.5 percent. Afterwards the historical growth rate i s assumed. All other variables are kept at the values of the baseline scenario. Real interest rate shock. In 2008, we assume a real implicit interest rate of 9 percent. Afterwards, it gradually declines to 6.8 percent. All o f the other 2.8% variables are kept at the values described in the baseline scenario. Combination of all three shocks 4.1% 9Public Sector Debt net o f financial assets i s on the order of 28 percent of GDP. 60 3. Ifthese shocks materialized and policy remainedpassive, with primary balances unchanged at 2.0 percent, debt ratios would jump initially and then decline, but the Government would not achieve the target for reducing the debt ratio to 33.2 percent o f GDP. With each of the individual shocks, the debt ratio would be below 36 percent by 2012. With the combination o f all three shocks, the ratio would peak at close to 44 percent o f GDP in2009, and then slowly fall to about 41.5 percent in 2012. This level o f debt is certainly highand would put considerable fiscal pressure on the Government, but it is not explosive and could be contained by maintaining a primary balance o f 2.0 percent o f GDP,which i s within the historical experience o f Colombia. Figure 1:PublicDebtSustainabilityEvenWithout a PolicyResponseto Shocks. 55.0% 50.0% 8n 45.0% i.-340.0% n z 35.0% 30.0% 25.0%4 2005 2006 2007 2008 2009 2010 2011 2012 4. The previous exercise showed us how policy could respond to certain dynamics that could occur in the economy. However, in reality, the Government i s affected by these dynamics. For this, we created a "worst case" scenario, in which the Government could not respond by using fiscal policy during the time period o f the shocks. This i s a plausible scenario because o f the extent o f the expenditure rigidities, and also the shocks to the growth rate would have a negative impact on Government revenues. We will assume that the primary balance falls to 0 percent in 2008, and then will gradually increase to 2 percent in 2011. We found that even under this scenario the debt i s not explosive, given the mediumterm resumption o f economic growth. 61 Colombia Public Debt Sustainability Framework (In percentages of GDP, unless otherwise indicated.) 2005 2006 2007 2008 2009 2010 2011 2012 Gross Public Debt 45.7% 43.1% 38.3% 37.4% 35.6% 33.9% 31.8% 30.0% Interest Payments 4.1% 4.4% 4.7% 5.8% 5.1% 5.1% 4.2% 4.0% Key MacroeconomicAssumptions Inflation 4.9% 4.5% 5.7% 4.5% 4.0% 3.8% 3.5% 3.0% GDP growth Rate 4.7% 6.8% 6.6% 5.2% 5.0% 5.0% 4.8% 4.0% Nom. Exchange Rate (COP/USD)Av . 2,320.8 2,361.1 2,076.6 2,170.0 2,256.8 2,342.6 2,424.6 2,497.3 Nom. Exchange Rate (COP/USD)EO ' 2,284.2 2,225.4 2,014.8 2,213.4 2,299.7 2,383.6 2,460.9 2,534.8 BoundTests Baseline 45.7% 43.1% 38.3% 37.4% 35.6% 33.9% 31.8% 30.0% Shock RER 45.7% 43.1% 38.3% 38.8% 37.0% 35.4% 33.2% 31.5% Shock Growth 45.7% 43.1% 38.3% 39.6% 39.4% 38.5% 36.8% 35.2% Shock Interest Rate 45.7% 43.1% 38.3% 38.9% 38.4% 37.3% 35.6% 34.3% Combo Shocks 45.7% 43.1% 38.3% 42.8% 44.1% 44.0% 43.0% 41.5% Worst Case Scenario 45.7% 43.1% 38.3% 45.4% 49.0% 50.0% 49.5% 48.8% Source: Bank Staf Projections ExternalDebt 5. Analyzing the sustainability o f the external debt requires a model that incorporates a different set o f key macroeconomic variables, such as Colombia's current account, and allows us to model another set of different shocks, for example, a reduction innet international capital inflows. External Debt has fallen from a higho f about 52.3 percent of GDP in2002 to more manageable levels o f around 27 percent o f GDP in2007. 6. Despite a sharp increase in the current account deficit this year, Colombia's total external debt profile (public and private) i s likely to be sustainable, given that the recent external imbalances have been financed largely by non-debt flows. Total external debt i s expected to decline to about 27 percent o f GDP under our baseline scenario. A potential risk associated with external debt sustainability is a sharp exchange rate depreciation. A depreciation o f the real exchange rate in excess o f 15 percent within one year would increase the total external debt to GDP ratio from about 27 percent at end-2007, to over 30 percent o f GDP, which is manageable level. In a worst case scenario, where the current account deteriorates to more than 5 percent o f GDP while the non-debt flows decline would put considerable pressure on external indebtedness. Under this scenario, external debt will jump from about 27 percent o f GDP up to 35.2 percent o f GDP. Althoughthis represents a sharp increase, it is not likely to generate a crisis. 62 I I I I I I I I m 00 9 -7m v! m+ hl v!o z- 110 o\ op 09 P 9 P 9 I mo cy9 $8 mo 99 mo 99 mo 99 m 900 go -4 v)m 20 3 a! c;' q P 9 I -099 m a 3 .3Y0 1 cd e .3 VI88 c Q a w aY cdYe3 ;ff c, .I I0 3a a 0 0 h .II \22 a u 3 5.I B CI0 a m2 z U cd .3 F 0 > 0&3 8 Y Ux d rn .I? Y a a a rn E 0 w m Q) a El $a BE Y 0.3 K! 3 UW U a2 0 n Q) # 39 E 8 Y YU Colombia Key Exposure Indicators - CPS Annex J Actual Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 2009 2010 Total debt outstandingand 40,553 43,030 43,832 44,520 44,800 49,300 50,300 51,300 disbursed(TDO) (US$m)a Net disbursements(US$m)a 163 -227 -1781 -1352 2100 2500 500 500 Total debt service (TDS) 8645 7688 10172 10640 5904 6282 5310 6190 (uS$m)a Debt and debt service indicators (%.) TDOIXGS~ 219.6 190.9 157.3 136.1 125.5 128.8 127.1 125.1 TDO/GDP 47.5 37.4 32.8 29.0 28.8 27.5 27.2 26.4 TDS/XGS 46.8 34.1 36.5 32.5 16.5 16.4 13.4 15.1 Concessional/TDO 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRD exposureindicators(%) IBRD DS/public DS 6.4 10.9 6.0 8.2 12.4 10.7 11.3 12.6 Preferredcreditor DS/public 28.8 38.7 39.5 27.0 41.6 36.5 35.0 33.1 DS (%)' IBRD DS/XGS 1.9 1.8 1.4 1.4 1.2 1.1 1.1 1.3 IBRD TDO (US$mld 3241 3490 3896 4563 4835 5626 6124 6234 Ofwhich presentvalue of guarantees (US$m) 80 81 81 41 Shareof IBRDportfolio (%) 2.8 3.1 3.7 4.6 4.8 5.9 6.3 6.1 IDA TDO (US$m)d 5.3 4.6 3.9 3.2 2.5 1.8 1.1 0.4 IFC (US$m)* 72.0 27.0 58.0 290.0 274.0 207.3 300.0 325.0 Loans 115 92 103 Equity and quasi-equity /c 175 182 104 *Fy 2008 as of February 2008 MIGA MIGA guarantees (US$m) 62.4 62.4 62.4 62.4 a. Includespublic andpublicly guaranteed debt, private nonguaranteed,use of IMFcredits andnet short- term capital. b. "XGS" denotes exports of goods and services, includingworkers' remittances. c. Preferred creditorsare defined as IBRD, IDA, the regionalmultilateral developmentbanks, the IMF, and the Bank for InternationalSettlements. d. Includespresent value of guarantees. e. Includes equity and quasi-equity types ofboth loan and equityinstruments. 71 c QnU8 a mc,n ILII I CPS Annex L COLOMBIA CAS COMPLETION REPORT EXECUTIVE SUMMARY Introduction This report presents the self-evaluation by the Bank Group Colombia country team o f the Country Assistance Strategy for Colombia for FY03-FY07. It refers to the original CAS, number 25129-C0, dated December 24, 2002, and the CAS Progress Report, number 32999-C0, dated September 9,2005. CAS Obiectives The Bank Group's 2002 CAS was gearedto support the country's quest for peace by helpingto: (1) achieve fast andsustainable growth; (2) sharethe h i t s o fthat growth; and (3) buildefficient, accountable, and transparent governance. Operations were expected to have a tangible impact on poverty reduction, help Colombia meet its Millennium Development Goals, restore macro-stability and sustainable growth, and incorporate lessons o f ongoing pilott interventions with important demonstration effects. The 2005 Progress Report extended the CAS by one year, while consolidating and expanding the original focus on the peace process and on a result-based culture inthe public sector. The results o fthe CAS are presented below. Country Context An important dimension o f this self-evaluation is to position the 2002 CAS in the context of conditions in Colombia when the CAS was prepared. First, a new administration was taking over, just after peace negotiations with the main insurgency force broke down. President Uribe was elected with a sizeable majority and a mandate to address Colombia's ever increasing levels o f violence and armed conflicts. Second, the economy has not yet recovered from the deep difficulties confronted in 1999. Markets for emergingmarkets were shaken by the crisis inArgentina; Colombia's growth in2001 was still weak; and poverty and unemployedremained high. Fiscal discipline, at the end of the previous administration, had deteriorated significantly in the first half o f 2002. Third, constitutional changes, adopted in 1991, had been transforming Colombia's administrative andjudicial structures, giving fiscal and administrative responsibilities to sub-national governments and empowering independentjudicial bodies that increasingly acted as checks on executive powers. These three factors influenced considerably the shape o f the CAS with respect to the Bank's role and the planned support for Colombia. Country Outcomes Incontrast to the start of the CAS period, conditions inColombia have substantially 73 improved, even though many indicators are no better today than they were inthe early 1990s. The greatest gain has been in the area o f peace and security. As shown in the 2005 Progress Report and in the Government's evaluation o f its 2002-2006 National Development Plan, violence has fallen sharply, even though the situation remains fragile. On the side o f economy, growth, employment and poverty reduction have seen sizeable gains. Still, Colombia faces very high levels o f poverty and, despite recent progress, income inequality remains pervasive. The country advanced in meeting its Millennium Development Goals, providing the poor with a more extensive safety net and expanding access to social services. Interms o f fiscal performance, a combination o f strong global markets, high oil prices, falling interest rates, increased domestic confidence because o f the quelling o f violence, and the Government's own fiscal andtax reforms, supported by the Bank and the other IFIs, the situationhas much improved. The main text o fthe report provides details on these outcomes. The Group Bank's Contribution The 2002 CAS outlined a program o f US$3.3 billion, more than doubled average annual Bank lending to Colombia, peakingat close to US$1billion in FY05. Similarly, IFC's support grew rapidly, especially as the economy revived. The CAS was not resulted based but geared towards realizing a series o f measures expected to contribute towards the overall goals which, in turn, were to support the country's realization o f its National Development Planand its MDGs on the long term. Interim MDGs were set. As shown in the 2005 CAS Progress Report, and updated here, Colombia has done well in implementing its development plan and has progressed in meeting most MDGs. However, there were few quantitative benchmarks set inthe CAS and little direct linkage between the Bank's interventions and the MDGs per se. As a result, the Bank's contribution and its performance are assessed on the basis o f country level indicators, feedback, product outcomes, and available quantitative data. Evaluation of CAS Performance With the above limitations in mind and taking into account the weight that can be attributed to different dimensions o f the Bank's work in Colombia, the country team concludes that the Bank Group's CAS performance was satisfactory, Based on the evidence found, the Bank Group has had a positive impact on Colombia's overall macro- situation, the solidness o f its financial sector, the promotion o f the private sector, and access to better quality and affordable transport, water and sanitation services. The Bank was also influential in shaping new public policies and programs for sustainable development and disaster vulnerability reduction. Importantly, the Bank helped shape Colombia's emerging social policy framework, improving the coverage and quality o f social services, and devising a more cohesive social safety net for the poor. The Bank has further had a positive impact, via pilot operations, on finding workable solutions for Colombia's long-standing problems of conflict: a notable example i s the scaling up of the Peace and Development Program. Also, although the route taken by the Bank to demonstrate how to incorporate equity and inclusion into public policy analysis took a different turn, the approach of incorporating M&E and the concerns o f marginalized 74 peoples into specific operations, most notably inthe social sectors and GEF, has spurred attention to these groups. These accomplishments are described inthe main text. That i s not to say that there are not areas that did not advance as originally planned. The Bank's support for the third pillar o f the program-building efficient, accountable and transparent govemance-showed the least progress even though there have been advances in establishing a results-based management culture and inrealizing other areas o f the Government's Administrative Reform Programnot directly supported by the Bank. There was little contraction o f the public sector and/or reduction in mandated spending per se, one of the goals set under the macro- program. Yet, spending has been controlled especially at the sub-national level; there has been a shift in spending towards the social sectors, US$1 billionper year or roughly 3.4 percent o f total spending; and the quality of this spending has fhrther improved via targeting. Moreover, the efficiency o f public services, such as tax administration, has increased considerably. Further, the Bank's plannedsupport to address corruption did not advance, nor did anticipated Bank support for SMEs. Programs focused on the rural sector were less ambitious than planned, while progress in the pilot judicial sector development project has been slow to trigger more widespread reforms. The portfolio, consisting o f 23 operations, has confronted few problems during implementation. All performance indicators, including project outcomes, are better than Colombia's historical average and above the average for the Bank as a whole and for the Latin America and Caribbean Region. The introduction o f country systems has been welcomed by the Government and has facilitated implementation. Generally, Bank financing has been more selective than originally planned. Some areas identified for support, mentioned above, fell by the way side. Responding flexibly to opportunities as they arose, new thrusts were added, buildingon those areas inwhich the Bankhas a long standing presence. Lessons for FutureCountry Partnership Strategies This evaluation demonstrates the benefits o f solid analytical work and effective and flexible country collaboration. Lessons that might be usefhl for the preparation and design o f the coming Country Partnership Strategy are as follows: Exercising Fiducialy Responsibilities 0 The Bank, along with the IMF, has a fiduciary responsibility, especially on debt sustainability, fiscal performance, the financial sector, and monitoring o f public expenditures, poverty and the MDGs to whichthe Bank should remain committed. In the case of Colombia, the Bank was effective in keeping issues on the front bumer once the worst o fthe 1999 crisis was over. Tempering Zeal with Realism New administrations tend to have ambitious plans, as was the case o f the first Uribe 75 Administration's initial approach to fiscal and institutional reforms. Inretrospect, it may not have been realistic to agree-in the early months o f a new administration- to policy triggers, covering action four years ahead. Infact, many reforms confronted serious legal and political hurtles and have taken longer than originally anticipated. On the other hand, the Bank cannot stand in the way, so this lesson is nuanced to specific country circumstances. Setting Targets and Carving out IntermediateEvaluations of Programmatic Loans Programmatic operations may pose a challenge in terms o f agreeing ex-ante to triggers and measuring impacts. To the extent possible, expected outcomes shouldbe established at the start. Ex-post, individual evaluations o f each loan in the series as they are completed might be too short term a time frame for impacts to be realized. Some form o f mid-way, intermediate assessment and/or ESW might be needed to reconfirm the direction and/or make mid-term corrections. Buildingon What Worh Looking broadly at where the Bank has been effective in Colombia, working in sectors with a history o f Bank involvement and with established institutional responsibilities and capacities seem to work best in Colombia. This argues for continuing an evolving, programmatic approach and concentrating on and deepening those areas with continuity from one CAS to another. Building Consensusand Institutional Homesfor New Initiatives The lack of progress in areas such as anti-comption and judicial reform calls for rethinking the Bank's approach to new initiatives. The analytical ground for an initiative needs to be solidly and convincingly established and the institutional base established ex-ante. For the new CAS, the lesson might be prior ESW and consensus building plus continuing investment to inform policy makers and the public during implementation o fpilot operations so that the growing evidence o f what works can be sharedwith a larger audience. Refocusing on the Rural Sector: Closing the Gaps A new approach to the rural sector, with attendant attention to Colombia's extremely poor and marginalized, may be timely, as the security picture improves. It was a priority in the 2002 CAS but little materialized in terms o f specific lending. Nevertheless, the Bank undertook ample analysis o f the sector: the policy notes for the CAS and other analytical work have provided evidence that the rural sector was important, dynamic, and disadvantaged. Importantly, the Bank has supported a number o f successful pilot rural development and peace initiatives which could be scaled up. Looking ahead, it may be helpful to segment strategies across rural and urbansub-groupsas was done ineducation. Other sectors amenable to this approach are housing, water and sanitation-typified by the La Guajira Project now under 76 preparation-and transport. Relying on Local Capacity 0 Colombia, as a Middle Income Country, is capable o f assuming the lead in developing and implementing the CAS inways that other countries mightnot. This is particularly the case in participation. The Bank can `piggy-back" on those efforts rather than do own parallel exercise. Moreover, the case of Colombia demonstrates that MICs with solid institutional capacity can be entrusted to use country based systems. Retaining Flexibility Another hallmark o f working with a Middle Income Country i s flexibility. The Bank has been flexible i s responding to Colombia's changing economic and social conditions especially as the country's conditions improved beyondwhat was expected and when some aspects of the original CAS were not feasible andor did not enjoy full ownership. The CAS Progress Report is an example o f how to accommodate M I C needs and conditions. This i s an attribute which should be carried over to the next CAS. Synchronizing Timing and Monitoring of Development Planning Instruments The 2002 CAS was prepared at a critical moment in Colombia, compounded by transitions at senior levels in both the Bank and the Government. The benefit o f preparing the CAS quickly was its timely assistance to the country. But the cost was a lack o f internalization and reinforcement among the key development strategy instruments that the country employs, notably the National Development Plan, and a lack o f common monitoring definitions, tools and benchmarks. Admittedly, development i s an evolving process and new needs can be address over time. The new CAS is the opportunityto avoid the gaps intiming andto focus on results. Internalizing Equity and Meaningfully Measuring Poverty 0 The Bank's efforts at internalizing equity considerations into its operations and analytical work, while taking a different track, seem to have energized Bank staff and local authorities to take up the concerns o f the extremely poor and marginalized as part o f a growing M&E culture. This momentumcan be elevated to the next stage by generalizing analysis o f equity, not just in social sector and GEF operations, but in other proposed policies. In addition, agreement on targets presumes agreement on methodologies for measuring poverty, among other indicators, which i s now lacking. The focus o f targeted programs, moreover, can be tightened with continued refinement of Colombia's system o f classifying eligible beneficiaries. 77 COMPLETION REPORT THE WORLD BANK GROUP'S COUNTRY ASSISTANCE STRATEGY COLOMBIA FYO3-07 1. Introduction This report assesses the experience o f the World Bank Group in implementing the Country Assistance Strategy for Colombia, number 25129-C0, dated December 24, 2002, and discussed by the Board o f Directors on January 16, 2003. That CAS has been updated in the Progress Report, number 32999-C0, dated September 21, 2005, and discussed by the Board on September 29, 2005. The original CAS covered the period FY03 to FY06 but was extended under the Progress Report to include FY07. A new Country Partnership Strategy i s anticipated before the end o f this fiscal year or early FY08. 2. Colombia's DevelopmentStrategy At the start of his Administration in August 2002 (after elections in May 2002), President Uribe announced a comprehensive development strategy for his term. This strategy, entitled "Towards a Communal State", laid out the broad goals for the Government from 2002 to 2006. It was reinforced by more detailed programs in the national investment program covering the authorized investments to be financed with public resources, including borrowings from the World Bank and other multilateral development banks. Colombia's development strategy was further enhanced by the MillenniumDevelopment Goals Action Plan and the results of the 2004 Commission on the Strategy to Reduce Poverty andInequality. The strategy emphasized the following: (a) delivering, in a democratic context, safety and security for the people, including enhancing military and investigative capacities, strengthening judicial services, reinforcing values and peaceful ways of coexistence, securing control over and developing the areas o f the country affected by conflicts, andprotectinghumanrights; (b) promoting sustainable growth and employment, including housing, infrastructure, public services, science and technology, competitiveness, trade policy, naturalresource use, conservation and `green" production; (c) constructing an equitable society, with emphasis on improving the quality, efficiency and access to education, social security and health, recovering 78 losses in vaccination rates, advancing the public health agenda, developing small and medium enterprises, improving the quality o f urban life, enhancing planning and protection against natural disasters, rural development and strengthening ethnic groups; and (d) instilling transparency and efficiency in the public sector, covering public administration reforms, fiscal adjustments, public enterprise/entity restructuring anddecentralization among other things. These priorities reflected Colombia's situation as o f 2002 and were designed to address those factors keeping Colombia from realizing its development potential. The first was the breakdown of peace negotiations with the main insurgency group in February 2002, after three years of negotiations, and the continuing escalation o f violence. Disappointment and frustration were widespread. Many indicators demonstrated the worsening conditions: the landdevoted to growing coca, the number o f persons displaced by conflicts, the number o f armed combatants, kidnappings, murders, attacks, and stealing o f cars. All had increased during the 199Os, especially after 1999. Second, the economy, while doing better than in 1999 when Colombia faced its worst economic crisis in 70 years, was still struggling: in 2001, growth was only about 1.4 percent and decelerated inthe first quarter o f 2002; unemployment was inthe range o f 15 percent; and poverty reached 60 percent of the population as compared to 50 percent in 1997. Moreover, the fiscal and debt situation was on a downward spiral, exacerbated by the economic crisis in 1999, increased costs relating to security, and the slow economy recovery. Importantly, the 1991 Constitution, optimistically looking ahead to an inflow o f petroleum revenues, had set in motion a new dynamic that increased mandatory spending for pensions and decentralized social programs. As a result, the gap between revenues and expenses stood at more than 6 percent o f GDP as o f 2000, with a commensurate increase inColombia's public debt. It should benotedthat Colombia's MillenniumDevelopment Goals (MDGs)were not explicitly referenced inthe National Development Plan. Indeed, the Government's action plan to meet those goals by 2015 was only prepared in March 2005, well after the National Plan was approved. Further, the country's Strategy to Reduce Poverty and Inequality was elaborated in a subsequent stage and was approved in September 2005. As a result, there was considerable evolution on the side of the Government on its development priorities since the 2002 CAS was prepared. While many MDGs were addressed at that time, such as education, vaccinations and other public health issues, several areas, notably reducing maternal mortality, were not explicitly addressed. These are areas where the Government's MDG Action Plan indicates that a more aggressive and concerted stance needs to be taken. 3. The WorldBankGroup's Assistance Strategy The original CAS, covering FY03-06 and an anticipated US$3.3 billion in new lending, was supportive of the Government's strategy and was designed inparallel to the preparation o f the National Development Plan. Both documents shared a number o f 79 common analyses and benefited from the policy notes prepared by the Bank in anticipation o f the new administration. There was congruence in many areas. Nevertheless, there was discontinuity in timing, with the CAS finalized before the National Plan. This created a gap between the CAS and the Government's specific plans and limitedthe ability to gain a common appreciationo fwhat it would take to advance in new areas, such as anti-corruption, where there was not already a track record and an established institutional base. Finally, there were significant changes in senior positions inboth the Bank and the Government that coincidedwith the preparationo fthe CAS. It i s therefore not surprising that the CAS program was modified during implementation as described in subsequent sections. Nevertheless, the core o f the program, especially its focus on policy reforms, remainedintact. The 2002 CAS established the following four pillars: (a) Achieving Fast and Sustainable Growth Macro-economic framework: correcting fiscal imbalances and monitoring debt sustainability Financial Sector: restructuring public banks, developing capital markets, strengthening banking supervision and banking resolution, easing judicial and procedural impediments, reforming the pension system and developing sustainable banking systems for the rural areas Infrastructure to Foster Competitiveness and Improve Services for the Poor: expanding and improving mass urban transport, water and sanitation, reducing logistic costs, management and mitigation o f national disasters, analyzing the knowledge framework Private Sector Development: supporting reactivation o f the economy, fostering a conducive business environment, promoting SMEs, facilitating investor response, especially by underserved segments Rural Development: boosting competitiveness o f Colombia's agricultural sector, promoting productive alliances, strengthening local leadership and community development, supporting small-holders, increasing access to land and to credit, and improving landmanagement andforestation Environmental and Natural Resource Management: mainstreaming sound environmental management, reforming the licensing system, and capturing value- added from environmental assets (b) Sharing the Fruits of Growth Education and Health: enhancing quality, coverage, equity and efficiency, increasing completion rates o f primary students, piloting decentralized school management in vulnerable areas, expanding rural education, and restructuring hospitals, transforming health financing to demand side subsidies Social Protection: pioneering new approaches to cash transfers, workfare, child protection, developing a risk management system o f social protection, revamping targeting and delivery systems 80 Empowerment and Inclusion: opening a dialogue with government on implementing targeting programs, continuing to focus on indigenous and Afro-Colombians inGEF and Bank-financed operations, and emphasizing disaggregated analysis o f marginal groups inpublic policy Forced Displacement: supporting efforts to fulfill preventative and coordination responsibilities at the local level, creating incentives for displaced people to return to their homes (c) BuildingEfficient,AccountableandTransparentGovernance Anti-corruption: helping to broaden the focus and scope o f the country's anti- corruption program and assisting in other related areas such as procurement, budgeting, financial management, and information systems Judicial Reform: transforming competencies, improving the information base, enhancing the timeliness o f conflict resolution services while piloting resolution methods The 2005 CAS Progress Report extended the timeframe o f the original CAS by one year to FY07, adding a net of about US$800 million in Bank lending and bringing total potential lending to US$4.1 billion under the high case scenario. The program's extension provides for continuity while giving more time for the incoming administration and the Bank to develop the next CAS. The progress report also introduced modifications to the thrust o f the original CAS, adjusting to the latest country conditions andnew emphases. Inthe case o f the IFC, its updated strategy centered on: (i) strengthening and deepening o f financial sector institutions and local financial markets to better serve the needs o f local companies, including SMEs and micro enterprises; (ii) the development o f infrastructure, including potential public-private partnerships and support to sub-national entities in the provision o f infrastructure, in coordination with the Bank; (iii)investment in extractive industries; and (iv) the modernization of Colombian businesses to help improve their competitiveness and support their expansion both domestically and abroad. On the side o f the Bank, the first change was to expand the agenda for supporting improvements to Colombia's competitiveness, with a new series o f DPLs, not anticipated in the original CAS. In addition, the Progress Report added a component under the Governance pillar to strengthen and systematize the Government's approach and capacity to monitor and evaluate public programs. This new component fit well within the CAS'S original emphasis on instilling results-based management in the public sector. The other modificationwas to add anewpillar explicitly to support the Government's peace effort. Ineffect, this new pillar consolidated actions anticipated under other CAS pillars and provided continuity to programs that have aimed to support peace and development under prior CASs. This change gave an explicit focus to the peace process and an enlarged scope ofpotential Banksupport as follows: e Peace and Development: scaling up o f the community focused pilots that have proved to be successful, protecting assets o f displaced people, integrating delivery o f 81 social services for the displaced, sharing knowledge and studies to develop viable strategies, studying the impacts on particular groups, such as women, children, and ethnic groups 0 Rebuilding the Presence of the State: exploring options for strengthening local governmentcapacities andpromoting security 0 Demobilizationand Reintegration of Ex-Combatants: tapping into international experience anddocumenting what i s happening on the ground inColombia. 4. Colombia'sProgresstowards itsGoals The Government has made very good progress inrealizing the goals of its 2002-2006 National Development Plan. Its own evaluation shows that 85-90 percent of the measures and resources under the Plan have been realized. The Government has pursued close monitoring of the Plan's execution and undertook dedicated evaluations of major social programs, with Bank support. Such focus i s evidence o f the growing culture o f monitoring and evaluation within the Government. Highlights o f the results of the National Development Plan are listed below. Citizen Safety andSecurity The Uribe Administration has had striking success in reducing the level o f violence and conflict insociety and inreinvigoratingthe peace process. Examples are: 0 Homicides fell from 66 per 100,000 inhabitants in2001 to 39 in2005. 0 Kidnappings decreased from almost 3000 in2002 to 800 in2005. 0 Attacks fell from an average o f about 1,400 per year from 1997 to 2003, to just over 600 in2005. 0 Persons displaced by conflicts had risen sharply from 1999 to 2002, peaking at more than 400,000 new refbgees annually. Since 2002, the number o f new refbgees has fallen to about 140,000 persons per year. 0 Area dedicated to coca cultivation reduced from about 160,000 hectares in 2001 to 80,000 in2004. SustainableGrowth andEmployment The economy responded to the greater sense of peace and stability. Solid macro- policies and positive international economy conditions also helped. Reactivation has been most noticeable in the jump inprivate sector investment. As a result, the economy has grown faster from 2003 to 2006 than it had since the early 199Os, with attendant effects on unemployment, poverty, and income equality. At the same time, the Government has advanced in its agenda for natural resource management and environmental protection and expanding infrastructure services. Some indicators o f progress are: Growth in2005 reached 4.7 percent, up from 1.4 percent in2001. 0 Spreads on Colombian public debt (EMBI) fell from 1043 basis points inmid2002 to 82 about 200 basis points as of the end o f2006. Investment by the private sector rose from 7.8 percent o f GDP in2002 to 14.9 percent in2005. Unemployment fell from 15.6 percent in2002 to 11.8 percent in2005. About 5.8 millionhectares o f landwere placed under the system o f protected areas, a 50 percent increase over the amount in2002. Equity and Social Reactivation After seeing the effects o f the 1999 crisis on the poor, the Uribe Administration made a concerted effort to consolidate and expand its social protection network, focusing on the Familias en Accion Program which provides conditional grants to poor families. It also invested considerable resources in expanding access to education, decentralizing educational services, adding to the rolls o f the poor who obtained subsidized health insurance, expanding nutritional support and focusing more attention to displaced populations. Major achievements are: The percentage o f the population below the poverty line fell from 57 percent in 2002 to 49 percent in2005. The Ginicoefficient peaked in 1999 at over 0.59 but fell to 0.55 in2005. Some 70,000 families have been added to the Familias en Accion, not including displaced families. Intotal, 515,000 families benefited as o f 2005. By 2005, 8 million more poor people have been added to the subsidized system o f health insurance since 2002, bringing total coverage o f the bottom two income rungs to 73 percent, up from 47 percent in 2002. 5.8 million beneficiaries receive 100 percent subsidy, as compared to 400,000 before 2002. The rate o f vaccinations, which had fallen during the 1999 crisis, recovered and increased from 82 percent in2002 to 89 percent in2005. One million poor children are now served breakfasts, up from only 78,000 in 2002, and400,000 poor elderly benefit from nutritional support, a new program since 2002. About 1.6 million poor rural families benefit from nutritional support, another new program since 2002. Education has been expanded, covering some 1 million new primary students and 200,000 new secondary students. Professionhechnical training has expanded to 3.9 million students, up from 1.1 million in2002. Transparency and Efficiency of the Public Sector The fragile fiscal situation, growing debt, and worries about competitiveness and the quality o f public services put the reform o f the public sector at the fore of the Administration's agenda in 2002. The Government embarked on a program o f Administrative Reform in order to consolidate ministries, reduce staffing, put in place information systems, reinforce internal controls and reorient the bureaucracy's culture towards results. While progress was uneven and expenditures have remained relatively fixed as a percentage of GDP, pension surpluses have increased as have tax collections, 83 thanks to reduced evasion, increased rates andgreater efficiency. There has beenprogress inanumber ofareas, as follows: Administrative overheads reduced from 4.4 percent o f GDP to 4.1 percent from 2001 to 2005, albeit short o fthe goal o f 3 percent. Almost 30,000 civil service positions havebeen eliminated since 2002. Red-tape and bureaucracy has been reduced: the number o f steps to export products and the steps to start a new enterprise has fallen from 29 to one and from 17 to one, respectively. The average time to secure an environmental license dropped from 130 days in2001to 16 days in2005. The share o f public investments evaluated ex-post rose from 4 percent in2001 to 24 percent in2006. Tax collection efficiency has gone up with overall taxes increasing by 34 percent in real terms from 2002 to 2005. 750,000 new tax payers were added as o f 2006. The cost o f collections has been reduced by about 10percent. About US$lOO million inassets have been recovered as part o f the asset management program. 10,000 buildingshave beeninventoried. More than 175 public entities now use the electronic portal for bidding and processing procurement. 5. CAS Outcomes: The WGB's Contributionto Colombia's Progress The 2002 CAS was designedto support the Government's overall development plan. The CAS was broadly linked to the realization o f country-level interim MDGs and did not contain many specific monitorable indicators o f CAS outcomes. Most benchmarks were stated in qualitative terms, as actions or general progress in implementation. As a result, this section relies on a mix o f country-level indicators, including those from the Government's evaluation o f its National Development Plan summarized above, outcomes o f operations completed during the CAS period, data on the MDGs, and other quantitative and qualitative assessments. A synthesis i s presented inthe following. 84 CAS PILLAR DIAGNOSTIC AS OF 2002 PROGRESSDURING CAS AchievingFastand Large fiscal imbalances The Bank Group's mainfocus was on SustainableGrowth Increasingdebt burden encouragingsoundmacro-fiscalpolicies, Public banksneedto be stimulatingasupplyresponse, and shoring Macro-framework restructuredandor up the financial sector after the 1999 crisis. privatized The economy has respondedwell and so has FinancialSector Slowjudicial procedures the financialsector. The Banksupported, Capitalmarkets via aseries of FiscalandInstitutionalDPLs underdeveloped andaTAL, improvedfiscal management. Infrastructure Gaps inregulatory The results were most evident ontax policy frameworkandbanking andadministrationandkeepingspending in- supervision check. Pensionreformshaveled to higher PrivateSector Lack of water and sanitation surpluses, transfers to sub-national Development roads, electricityand governmentscurbed, and the public debt telephone burdenhas fallen as ashare of GDP. The Impedimentsto private Bankworkedto strengthenbanking RuralDevelopment sector supervisionandresolutionandencourage Lack of integratedsupply development of the regulatoryframework chains inrural sector for the insuranceindustryandcapital Environmentand Natural Lackof opportunitiesand markets. Continuedsupport for financial Resource Mgt. access to land sector reform,basedonrecentanalytical Slow legalframeworkfor work, is providedunder the Business environmentallicenses EnvironmentandCompetitivenessDPLs which also addressways to bolsterthe Countrynot preparedfor privatesector, complementingIFC and majordisasters MIGA. IFC continuesto have arobust level of activity, supportingcapitalmarkets, SMEs, manufacturing, water andsanitation services, andoil and gas. The Bankhas further providedsupport to improveand expandurbaninfrastructure, especially in transport,water and sanitation, environmentalmanagement, disaster planningandmitigation. There was less progresson expandingthe rural development agenda, despitethe extensive analysis ofits problems. Still, rural programsunder implementationare performingwell and offer potentialfor scaling up. Continued.. . 85 CAS PILLAR DIAGNOSTIC AS OF 2002 PROGRESSDURINGCAS Sharing Fruitsof Growth Scope for enhancingquality While levels are still high, andnobetterthan andcoverage of education they were inthe early 199Os,povertyand Education Needto reinforce inequalityhave fallen since 2002. Building decentralization on the Bank's earlier work on mitigatingthe Health Financialsustainabilityof socialconsequencesofthe 1999crisis, the healthinsurance Bankengagedthe Governmentinan Social Protection Needto implement a extensive policy dialogue and financed comprehensivesafety net series of Social andLabor Adjustment DPLs Labor Markets Afro-Colombiansand that encouragedadoptionand indigenouspeopleleft out implementationof acomprehensive Labormarketrigidities approachto social protection,andsupported Gapbetweenformal and reformsinhealth, education, andlabor informal labor markets training. Inaddition,it complementedthis support with financingfor expansionof higher education,rural education, decentralizingeducationservices, andthe social safety net. Building Efficient, Successiveattemptsto curb There has beengeneralbut unevenprogress Accountable and corruptionnot effective inthe Government's PublicAdministration Transparent Government Introductionof oraljudicial reformprogram, partofwhich hasbeen proceduresneedto be supportedunder the FIALs, TAL and Anti-corruption complementedwith investmentprograms. Efficiency of some organizationaland logistical public services (e.g. tax administrationand Judicial Reform reforms education) seems to havegone up andthere Ambitiousprogramof has beena shift to targeted social programs. ResultsOriented Mgt. reformsadopted to address Accordingto the Bank's Governance HRmanagement, indicators,Colombia'srelativeratinghas procurement, performance improvedduring the 2002-2005 period. The budgetingand evaluation. Transparency Internationalindexof corruptionhasalso movedinthe right direction. However, progressinthe specific areas identified for support from the Bank hasbeenmixed. Progresshasbeenslow on pilotingjudicial reformsandBank support hasnot materializedfor anti-corruption. On the other hand, there hasbeenprogressin results-basedmanagement. The Bank's support for these effortshas beenvia the ongoingFinancialManagementI1TAL and the newM&E operation. Promoting Foundations of As of 2002 The Governmenthas beeneffective in Peace Peacenegotiationswith reducingthe levelofviolenceinthe country leadinginsurgencygroup andhasmadeprogressinreaching Peaceand Development brokedown agreementswith para-militaryforces. The Increasingnumberof people Bank's contributionover the years, starting Restoring Local Presence displacedfrom their homes inthe mid-l990s, hasbeento build upa andlivelihoods knowledgebaseon the natureofthe Demobilization Violence, murders,and conflictsandto focus on the peopleaffected kidnappingrampant by the conflicts. The successfulapproach, Forced Displacement pilotedunderthe two MagdalenaMedio As of2005 projects, has scaled upto six regions. The Security conditions vastly Bank also helpedfocus attentionon improved integratingsocialprogramsfor displaced The pilot Peaceand persons. More recently, work hasbegunon Developmentprogram an expandedagendaagreedwith the proving successful Government inthe CAS ProgressReport. Negotiationsopenedwith However, the situationremainsfragile andit paramilitaryforces, agreeing is too soonto measurefurtherprogressin to demobilization implementingthe peacepillar. 86 Pillar One: AchievingFast and SustainableGrowth Overall. Increasing the pace o f economic growth was a highpriority inthe 2002 CAS and country results have been encouraging. As shown in Table 1, the growth rate steadily increased over the 2002-2005 period with exports, especially non-traditional ones, almost doubling the level o f exports in 2006 as compared to 2002. Growth has beenbroad based, led by the petroleum-mining sector, construction, telecommunications and agro-industries. While the agriculture sector was not among the fastest growing sectors, it showed positive results with a substantial increase in both production and the total area cultivated: due to the lack o f security, the amount o f landbeing cultivated had sharply dropped since the early 1990s. Increased economic growth had positive impacts on unemployment, poverty and income equality. Source: IMF,DNP, Ministry of Finance, Central Bank Macro-economic Performance. Restoring the macro-underpinnings o f Colombia's growth strategy was a fundamental consideration when framingthe 2002 CAS. Without solid fiscal management, it was concluded that growth could not be sustained and, without greater growth, the public's lack o f confidence and the grinding effects o f poverty and violence would undermine a successful outcome o f the country's efforts to achieve peace. Two dimensions stood out in the 2002 CAS: the fiscal deficit and the public debt burden. Public spending had increased almost 10 percentage points o f GDP since 1990, the result o f constitutional changes that mandated transfers for pensions and to sub-nationals and rising interest charges, without commensurate increases in revenue, resulting in growing deficits. On a functional basis, the sectors seeing the largest increases in public spending were education, health, defense, security and justice. The rising public sector debt burden further aggravated the fiscal situation by increasing interest expenses. There has been considerable progress on both fronts, thanks inpart to the IFIS'support over this CAS period andthe previous one. 87 Source: Bank Staff First, on the deficit, Table 2 shows the fiscal space created since 2002. These data demonstrate that much o f the reduction inthe overall fiscal deficit has been generated by the Government's reform effort: improving the tax system, reforming the social security system, and strengthening sub-national finances under the Constitutional Amendment in 2001 and the 2003 Fiscal Responsibility Law. These areas were the focus o f Bank support under the FSAL (FY02) and the series o f Fiscal and Institutional Adjustment (FIAL) DPLs (see Box 1). Improved tax collection alone is estimated to represent one percent o f GDP (see CEM 2005). This table further shows that: (1) while the Government was not able to reduce current expenditures as a share o f GDP, it held the line after even allowing for a modest increase o f 0.2 percent o f GDP for military expenditures; (2) changes to Colombia's cost o f borrowing did not have an appreciable affect on the net result; and (3) increased revenues from petroleum royalties and oil profits, while having a positive effect, were not the determining factor in explaining the positive outcome o f Colombia's public finances in the 2002-2005 period. It i s also important to note that, although expenditures did not increase significantly as a share of GDP, there has been a shift inthe sectoral distribution ofthat spending, with about US$1 billion per year or about 3.4 percent o f total expenditure redirected in favor o f spending inthe social sectors, as described inlater sections. 88 Box 1: Outcome of Fiscal Adjustment and Fiscal and Institutional Adjustment (FIAL) DPL Series A cornerstone o f the 2002 CAS was a series o f Development Policy loans to support fiscal and institutional reform. The Bank has supported such reforms since the 1999 crisis. The first operation, the FSAL, was a two-tranche, US$400 million loan, approved December 2001 and closed March 2003. It acted as a bridge between the two CASs and the two administrations, and formed the basis for a new series o f loans: FIAL I,US$300 million, approved March 2003 and closed April 2003; FIAL 11, US$lSO million, approved November 2003 and closed February 2004; and FLAL 111, US$lOO million, approved March 2005 and closed June 2005. The FSAL also laid the basis for reforms inhealth and education supportedby the other DPLs addressing social and labor concerns. The original intentionin the CAS was to have four FIALs, totaling US$900 million, but the program ended after the third loan, with total support reduced to US$550 million. The reason for this was that the Government was not able to meet fully the triggers for the 31d operation: as a result, the fourth operation was dropped and the amount o f the third reduced from US$150 to US$lOO million. The two unmet triggers were adoption o f an organic law to enhance budget management and a new procurement law. Both measures had languished inCongress and neither was likely to see passage ina reasonable time-frame. As a result, at the end o f 2005, the Bank and the Government decided to shift resources to other reform efforts with chances for timely implementation. Nevertheless, the Government continues to pursue expenditure reforms, o n both budget management and procurement, as well as other aspects o f the FIAL-supportedprogram. These operations have been individually rated as satisfactory or moderately satisfactory with the exception o f the last one, FIAL 111, rated moderately unsatisfactory by IEG. A comprehensive evaluation by IEG o f the whole series i s pending. There are several sticking points: (1) whether Colombia's improved fiscal position is the result o f reforms or cyclical factors such as oil prices; (2) whether or not some tax measures are o f the desired quality in terms o f their distortionary and social impacts (the extension o f the VAT to cover food, health and educational services was declared unconstitutional so alternatives such as a tax on bank transactions and a wealth tax were adopted to close the fiscal gap); (3) whether or not the caps o n sub-national spendingltransfers will be sustainable, since the constitutional measure expires in 2008; and (4) whether or not the lack o f progress on the expenditure side, blocked by the courts and not endorsed in the 2003 referendum, outweighs the positive results on the revenue side. That said, and despite the set backs, the end results are a much improved fiscal situation which, in turn, has created fiscal room for new priorities and reduced crowding out o f the private sector. This has likely contributed towards a virtuous circle o f increased confidence, investment, growth and poverty reduction, the ultimate goal. Thus, from the perspective o f this CAS Completion Report, the Bank's overall support for improving Colombia's macro-economic situation and restoring growth under the first CAS pillar is considered moderately satisfactory, acknowledging that there is still much to do to address the misalignment between the central and decentralized levels o f governments and to build better budget and expenditure management processes. The experience under the FIALs i s rich with lessons. First, severe austerity measures, such as a freeze on civil service salaries-even if proposed by a popular executive-may not be supported by the legislature or the general public, especially when the sense o f urgency has dissipated. It also shows that a public referendum on a complex reform package, containing 15 measures, may prove to be impractical for gaining support for reforms, despite the intention o fpromoting direct democracy. Also, as development partners, the Bank and the Government may not have been realistic incommitting to a series o f measures, extending over a four year period, so early in the life o f a new government. It should be noted that the first FIAL, like the CAS, was approved before the presentation o f the National Development Plan to Congress and that the FIAL I1loan, six months later, was negotiatedjust before the October 2003 Referendum. Moreover, the intent o f the reforms and the tools used need to be clear: conceptual and semantic difficulties, notably on the notion o f fiscal rigidity and inflexibility, remained. Finally, the FIAL series demonstrates that changing roles may be very hard in a country such as Colombia with entrenched institutional responsibilities. Source: IEG, Bank documents 89 Improvement in the fiscal balance combined with a growing economy has had a marked effect on Colombia's public debt burden. Under the slower economic growth predictions contained in the original CAS, Colombia's gross public debt burden was expected to reach 52.9 percent o f GDP by 2005, up from 50 percent in 2001. In 2002, given disappointing fiscal performance at the start o f that year, gross public debt burden jumped to 53.9 percent of GDP. Since then, thanks to improved debt management, use o f alternative financing sources, and better fiscal performance, the rate o f growth in Colombia's public debt stock has slowed and its share o f GDP has fallen to 45.8 percent o f GDP as of 2005. At the same time, the composition o f Colombia's public debt has changed with a shift to domestic currency denominated instruments, reducing exposure to foreign exchange risk: foreign denominated, non-financial sector gross public debt has fallen from 30.5 percent o f GDP in2002 to 18.7 percent o f GDP in2005. The Bank provided technical advice for improved debt management. Under the recently completed Financial Market TAL, the Bank assisted the Government in developing the market for domestic public bonds and other debt instruments (see Box 2). This was deepened under the series o f Financial Sector Adjustment Loans (see below). Moreover, the Bank has continued to analyze Colombia's debt sustainability and make recommendations on debt management in its periodic reports (e.g., the FY02 Policy Notes, the CAS and the CAS Progress Report) and kept the Government engaged in a dialogue on how to manage its debt burden. This dialogue has further evolved to informal advice on how Colombia can attain investment grade for its public debt. Financial Sector. Another area high on the agenda in the 2002 CAS was the continued restructuring o f the financial sector. After the 1999 crisis, the Bank worked with the Government on a series o f measures to strengthen the financial system, help resolve banking failures, especially among publicly owned banks, and strengthen financial markets. These efforts have largely been successful, especially on cleaning up portfolios and restoring the sector's financial viability, as evident in the indicators as presented inTable 3. Table 3: Financial Soundness Indicators I2002 I2003 I2004 I2005 12006I Capital Adequacy (percentage) 11.0 11.6 12.1 12.3 11.0 Non-performing Loans (percentage oftotal loans) 8.7 6.6 3.3 2.7 2.8 ReturnonEquity (percentage) 9.6 17.1 23.0 22.1 18.1 98 I 4.1 I 150 167 145 4.0 I 3.3 Source: IMF OUUlbG. LlVLL IFC has also been playing a key role in helping to shape a more efficient capital market in Colombia and in developing a sound regulatory framework, in collaboration with the Government, the private sector and the Bank. Programmatic support was provided through innovative ways, including initiating the FC's first Colombian Peso- denominated bonds, El Dorado, assisting the establishment o f Colombia's first secondary mortgage company, strengthening institutional investors, and consolidating the domestic capital market with partial credit guarantees for corporate bonds. In addition, IFC 90 supported housing finance, micro and SME finance, and domestic securities market, providing US$188 million in total for nine transactions, Financing was mostly local currency to better serve the nature o f those projects. Inhousingfinance, with the aimto deepenthe liquidityofthe mortgagemarketand foster Colombia's capital markets, IFC continued to back the transformation o f the mortgage sector which was badly hit when the housing price bubble burst during the 1999 crisis. Mortgage financing continues to decline as a share o f total loans. IFC's primary support was through partial credit guarantees, which amounted to US$46 million enhancing the rating and enabling the leverage in the size o f the bond issues. This included IFC's support for the issuance o f non-performing mortgage-backed securities, which was the first in the L A C region and received very favorable response from investors. IFC also assisted with a former savings and loans institution that was shifting the focus from financing mortgages to origination and securitization and repositioning itselfas a universalbank. As reflectedinthe CAS Progress report, IFC has also placed a greater focus on micro and SME finance, as compared to what was originally anticipated under the 2002 CAS, with the aim to help address underprivileged access to financial services among lower- income populations. Total financing o f US$57.5 million was provided to microfinance institutions and other well-established local players promoting SME and micro credit products through the formal banking system. In addition, in FY06, IFC partially guaranteed the first bond issue by a leading local brokerage company to help it reduce its reliance on commercial bank funding and fbrther facilitate market liquidity and activity in the domestic securities markets. The Bank has been an active partner in the sector, as noted above, building on the work that had been done at the height o f the banking crisis under the Financial Sector Adjustment operation (US$506 million, approved November 1999 and closed December 2001). During this CAS period, the Bank provided support under two programmatic Financial Sector Adjustment operations (FSAL I,US$150 million, approved April 2003 and completed June 2003, andFSAL 11,US$lOO million, approved September 2004 and completed March2005). Outcomes for the two programmatic operations have been rated satisfactory, as confirmed by IEG. Among other things, these operations made progress on instituting risk-based banking supervision, management o f intervened banks, norms for asset securitization, regulations on insurance, trust and pension firms, harmonization o f collective investment schemes, and auctions o f government T-bills. Grunuhorrur, an intervened bank that had been prepared for privatization under the initial FSAL, was finally sold in October 2006. Advance work on many o f these measures had been includedunderthe Financial Market TAL (see Box 2). Box 2: Outcomes of Financial Market Development TAL The Financial Market Development TAL (US$8.2 million, approved June1997 and closed December 2003) was rated satisfactory in achieving its objectives (this rating was subsequently downgraded in IEG's Project Audit to moderately unsatisfactory because it did not anticipate the 1999 crisis and was slow to restructure). While designed and largely implemented in the previous CAS period, the operation's benefits have camed over into this CAS. The operation was effective in: (1) revising the way inwhich the Government calculated its pension liabilities, helping to focus attention to the issues 91 o f the long run viability o f the system and gaining support for the reforms to the pension system enacted in2002 and 2005; (2) merging three stock exchanges and helping to draft a new security law, adopted in 2005; (3) facilitating the securitization of housing loans; (4) helping to set up the Government's system for monitoring financial transactions as part o f its efforts to reduce money laundering and financing o f terrorists; and (5) strengthening financial sector regulation and supervision. All o f these developments, as assessed in two FSAPs and Bank AAA, are considered positive. The operation, however, was not successful indeveloping the local capital market although it helped introduce regulations for the market for public sector debt. Source: IEG As pointed out by IEG, the primary accomplishment o f the Bank-supported work in the financial sector so far has been the establishment o f an appropriate legal and institutional framework for the financial markets, even though the effectiveness of these measures has yet to be tested under stress. The 2005 FSAP showed that the banking system continues to be dominated by financial conglomerates; the level o f provisioning o f non-performing loans was still relatively low; corporate restructuring remains biased against financial institutions; and the sector suffers from the taxes on financial transactions. The Bank's latest analysis, well received by the Government, confirms the continuing weaknesses. As part o f its ongoing reform program, the Government asked the Bank in FY06 to provide technical advice to assess the overall system, identify legal and regulatory bottlenecks, review creditor rights and insolvency procedures, credit reporting, the costs o f financial regulations, and the financial dimensions of reforms to the pension system. Thus, while there has been considerable progress, there i s more to do to strengthen regulation o f banking, insurance, pensions, and the security market along with measures to improve the payment system and reduce corporate sector vulnerabilities. These conclusions have beenincorporatedinto initiatives currently being taken by the Government, such as drafts of a new insolvency law and the habeas data law, and are being built into the package o f reforms supported by the Business Productivity and Efficiency DPLs (see below). Infrastructure to Foster Competitiveness and Improve Services for the Poor. During the CAS period, the Bank Group continued to support decentralized administrations and expansion o f basic public services, with an attendant impact on the poor (see Box 3). IFC's support for infrastructure included two projects undertaken by leading local players. A prominent part o f the Bank's efforts have been ongoing support o f the extension o f the Transmilenio rapidbus service under the Bogota UrbanServices project (FY03; US$lOO million), now being replicated in five secondary centers under the Integrated Mass Transit Project (FY04; US$250 million). These rapid bus lanes are considered a model for reducing commuting times, especially over longer distances from locations where poor people tend to live. Besides supporting investment in the Transmilenio system, the Urban Services project finances a time-slice o f investments in transport, air quality, solid waste management, and housing in Bogota's deprived neighborhoods. A follow up operation i s anticipated inFY07. Next to urbantransport, the water and sanitation sector has been an important area o f Bank Group activity. In the case of IFC, it supported an innovative public-private partnership company to develop water and sanitation services to the poorer areas in the southwestern part o f Barranquilla. As the company explored non-traditional hnding for 92 public infrastructure services in the domestic capital market, IFC provided a US$18 million equivalent partial credit guarantee to enhance company's local currency bond, aiming for possible demonstration effect. In the case of the Bank, besides several completed operations (see below), the Bank has on-going operations in the city o f Cartagena (approved FYOO; US$85 million); TA for the transformation o f municipal water utilities (approved FYOO; US$5 million); and a Water and Sanitation ALP (the first loan approved FY05; US$70 million) with the goal o f instilling sound management and operational efficiency in medium-sized and small municipalities. Overall, these Bank operations have been performing well and meeting their goals although the Cartagena project has been subject to a complaint to the Bank's InspectionPaneldiscussed later. Box 3: BankSupportfor UrbanInfrastructure Two urban infrastructure operations closed during the CAS period: the Santa Fe Water Supply and Sewerage (two loans totaling U S 1 4 4 million approved November 1995 and closed December 2003) and Urban Infrastructure (US$48.8 million, approved June 1998 and closed June 2004). Both operations, rated satisfactory, focused on broad institutional, legal, financial, environmental and operational improvements; the first on Bogoti's water and sanitation services and the second, on the water sector plus transport, telecommunications and other services (health, education, gas distribution) insub-national entities. Inthe case ofBogota, 1.8 millionnew consumers were added, many o fwhom were likely poor. Nevertheless, 600,000 potential consumers in informal settlements had yet to be served. A major achievement was with respect to environmental considerations: the water entity made considerable gains in adopting innovative and sound environmental and resettlement practices. Fundamental institutional reforms o f the entity as originally anticipated, however, were not achieved. These efforts have had a positive impact on access to basic infrastructure services. As the Bank's strategy in infrastructure has evolved over time-first supporting major urban centers and now reaching out to medium and smaller sized communities-services are now almost universal among the urban population. According to Bank statistics, improved water and sanitation reaches 99 and 96 percent, respectively, o f the urban population. Importantly, the rate o f improving coverage seems to be slowing with an increase of only one percentage point in water services, for example, since 2002, with water utilities keeping pace with population growth. The remaining uncovered populations are now likely to be living in extremely poor pockets. Quality o f services, however, can still be a problem that needs to be overcome as many locales continue to report shortages and interruptions in service. Meanwhile, the gap in service levels between urbanand rural populations continues: comparable figures for coverage o fwater and sanitation inthe rural areas are 72 and 66 percent, indicating considerable room for expanding access among rural populations. The L a Guajira Water and Sanitation APL, currently under preparation, i s an example o f growing attention to rural infrastructure. The third area o f emphasis in the 2002 CAS was support for improving Colombia's capacity to manage natural disasters. This priority emerged as a result o f the 1999 earthquake for which the Bank provided emergency assistance. The Emergency Recovery loan (US$225 million, approved March 2000 and closed August 2002) was rated satisfactory inproviding shelter, rehabilitating social and public infrastructure, and preparing new preparedness plans. An important contribution was to demonstrate the feasibility o f reducing housing construction costs and effective decentralized implementation. This positive experience led to a broader discussion between the Bank 93 and the Government on preventive measures, appropriate buildingcodes and contingency planning, and, as envisaged under the CAS, agreement to proceed with an APL for Disaster Vulnerability Reduction (first loan approved in FY05, US$260 million; the second in FY06, US$SO million). While it is too soon to measure progress and the new system has yet to be tested, these operations point to the potential for important gains. Unlikethe Bank, IFC has been active inthe oil and gas sector. Its strategy aims to support local medium sized companies while assuring that their projects meet high environmental, social and governance standards, and that revenues are used in a transparent and effective manner. Consistent with this strategy, IFC has supported, with a US$15 million equity commitment, a smaller, local company with significant experience in Colombia's energy industry, which i s dominated by large foreign and state companies. As the company demonstrated strong interest in long-term sustainable development, IFC is also providing technical assistance in: (i) enhancing the use o f oil and gas royalties paid to municipal governments, with the support by the hydrocarbon association, the state regulator, and the company, and (ii) helping company's adoption o f the best practice environmental and social program, with a hndingmobilized from IFC's Corporate Citizenship Facility. This technical assistance i s expected to bring about the impact beyond the company, at the sector level. IFC has also ventured into the area o f natural gas, with a US$50 million senior loan to a long-time client and one o f the few locally-owned, experienced gas transmission companies in Latin America. IFC i s supporting the company's expansion strategy in natural gas transmission and distribution business in Colombia as well as other investments in the region, which is expected to help achieve enhancement o f basic infrastructure services, promotion o f job-creating economic activities, and considerable environmentalbenefits. Other segments o f infrastructure received less support from the Bank Group during the CAS period for a number o f reasons but that situation i s starting to change. First, in transport, financing o f infrastructure, especially roads, has typically been shared by the Bank with CAF and the IDB, explaining in large part why the Bank has not had a presence since the 1990s. This situation has been reversed and the Government has currently requested financial support from the Bank for new road investments. In the case o f energy, which had been an important part o f the Bank-Colombia engagement in the past, the sector has been, by and large, privatized. As a result, the Bank has focused on strengthening the sector's institutional capacity under the Power Market Development and Energy TAL (US$15 million, approved June 1997 and closed December 2002; rated satisfactory). Interm of the electricity sector, Colombia has advanced in expanding electricity service, reaching 93.6 percent o fthe population accessible by the national grid. For those off-grid, largely isolated rural populations, 35 percent have electricity, only up one percentage point since 2002. Inthe case o f ports, the Bank has provided technical advice, under Colombia's first fee-for-service agreement, to review the regulatory framework for port concessions. This TA helped to define port policy and how to improve port contracts ifthe Government goes aheadwith renegotiations. There i s ample scope for more and better investment in infrastructure. These issues were brought to light in the Bank's FY04 flag-ship report, entitled "Colombia: Recent 94 Economic Developments in Infrastructure", not anticipated under the original CAS program but produced as part of the Bank's Global Infrastructure Action Plan. This report provides a comprehensive basis for developing o f approaches to expanding and upgrading Colombia's infrastructure base, from both the perspective o f social needs (basic water and sanitation, secondary/access roads, communications and other services) andthe needs for the productive sectors (roads, ports, airports, telecommunications). Increased Productivity Through Private Sector Development. This area o f the 2002 CAS was broadly intended to remove impediments to the private sector, addressing regulatory, environmental and administrative procedures. MIGA's activities are summarized in Box 4. In the case o f IFC, beyond the support for SMEs and micro- finance, cited above, IFC provided financing for three manufacturingprojects with two leading Colombian pulp and paper product manufacturers operating regionally. These companies needed long-term financing and faced challenges as they expanded domestically and abroad. To help with both dimensions, IFC provided US$142 million in financing and supported strengtheningcompetitiveness and financial fundamentals by assisting with multiple areas in operational sustainability, such as financial reporting and restructuring, corporate governance, and environmental, social, health and safety standards. On the non-financing front, IFC has placed special emphasis on helping improve corporate governance across different sectors in Colombia as an integral part o f strengthening country's capital market framework. IFC's assistance to promote higher-standard governance environment was provided directly at several o f its client companies in Colombia, as well as through training programs sponsored for senior executives incoordination with the local Chamber o f Industryand Commerce. Box 4: MIGA's Support for Private Sector Development Under this CAS period, MIGA's support for Colombia has evolved, reflecting the country's improved risk perceptions. MIGA only issued one new contract of guarantee in Colombia since FYO1. Currently, one project remains guaranteed by MIGA, with overall exposure to Colombia falling from 3.8 percent o f MIGA's gross portfolio in FYOl to 1.3 percent. In turn, MIGA has begun supporting Colombian investors in projects in the region. Two operations were approved inFY06: the Santo- Doming0 Samama Toll road in the Dominican Republic; and the Prodenvases Crown manufacturing facility in Ecuador. MIGA has further engaged local governments in strengthening their investment promotion capacities. Beginning in 2004, MIGA has been providing technical assistance to the Chamber o f Commerce o f Bogota in the creation o f an investment promotion agency. This was MIGA's first ever sub-national promotion initiative. The new agency, formally inaugurated in2006, is presently receiving advice on staffing, identification o f target sectors, and outreach. Similar assistance was launched in2006 to support Pro-Barranquilla intracking investors, facilitation, and partnerships in that city. Colombia is also participating in MIGA's Global Enterprise Benchmarking Program, with the aim o f providing the country with information on which industries it may most likely be able to compete internationally. Source: MIGA Turningto the Bank, the anticipated support for SMEs andmicro-finance inthe 2002 CAS did not come to fruition nor did the Bank carry out planned ESW on SMEs and knowledge management. Instead, the IDB took the lead on SMEs, with the Bank continuing to work on the setting up andor strengthening o f regulatory institutions for key areas such as telecommunications, road concessions, water supply, and the power sector under the US$ 12.5 million Regulatory Reform Technical Assistance loan 95 (approved February 1997 and closed August 2004). This operation was rated satisfactory, as confirmed by IEG, in increasing private financing and improve management o f infrastructure, including toll roads, water supply, power, natural gas distribution, and telecommunications. It accomplished this by strengthening the relevant legal and institutional framework for the different sectors and by promoting private participation. The project was successful in concessioning mobile telephone services, attracting US$ 1.2 billion, and shaping the stock issue by the Bogota Telephone Company. New priorities for Bank support for private sector development, however, emerged in the latter part o f the CAS period as competitiveness became a greater priority for the Government, especially as a free-trade agreement with the USA became a distinct possibility. As a result, the Bank and the Government have engaged in a wider examination o f Colombia's ability to compete internationally than was originally anticipated. First, the FY06 CEM deepened understanding of the issues, including those in the agriculture sector, one o f the most sensitive areas in opening markets to international competition. This assessmentwas further deepened via other AAA products that analyzed the nature and extent o f the different impediments to Colombia's competitiveness, including labor markets (see "Labor Market Adjustment, Reform, and Productivity", November 2005), logistics and the quality o f Colombia's infrastructure, andthe financial system. These studies have provided the analytical underpinning for reaching agreement in the CAS Progress Report on proceeding with a new series o f three proposed DPLs, bridgingwith the next CAS. This series is designed to address constraints inthe business environment, foreign trade and competitiveness, the financial sector, quality and standards, and logistics and infrastructure. The first such loan of US$ 250 million was approved October 2005 and closed May 2006. The second loan o f US$300 million was approved in December 2006 and closed January 2007. So far, there i s little tangible evidence o f the outcomes o f these operations but country trends are inthe right direction. There have been modest improvements in Colombia's regulation-governance indicators as demonstrated in the Bank's Governance Indicators: in the case o f regulatory quality, Colombia improved its percentile rankingto 54.0 in2005, as compared to 50.2 in2002. To complement these broader efforts to spur Colombia's competitiveness, IFC is assisting the Municipality of Bogotil with improving and simplifying the system of municipal inspections. The project, which includes a comprehensive diagnostic o f the inspection procedures and a technical proposal for implementation o f the reform, aims to deepen the initial improvement that the Municipality had already achieved under a business procedures simplification program in 2004. Based on the considerable impact elsewhere in the L A C region, IFC's support with business procedures simplification in municipalities could double the businessesregistered inBogota. Rural Development. Rebirth of the rural economy was to have been a central feature o f the 2002 CAS, critical for the peace process and offering opportunity for the 12 million people who live in rural areas, o f whom 79 percent were poor and 37 percent 96 lived in extreme poverty as o f 1999. The CAS anticipated both analytical work and new lending. First, to inform the debate on what to do in the sector, the Bank devoted considerable resources to analyzing Colombia's rural sector, including the question o f land ownership: land ownership is extremely skewed with a Gini o f 0.86 (1988). The Bank carried out several pieces of ESW, starting with the 2002 Policy Notes and followed by reports on rural finance, coffee production, agricultural competitiveness, and land policy. As noted above, the FY06 CEM specifically analyzed the effects on Colombia's agriculture sector o f a Free Trade Agreement with the USA. Second, despite the fact that a much scaled-back loan was approved for the sector duringthis CAS period, the Bank continued to support innovative ways to address some o f the sector's key problems through on-going operations. Three examples stand out: the Peasant Enterprise Project, the on-going Productive Partnership Project, and the Magdalena Medio Peace andDevelopment Project (see Box 5). Inaddition, the Bankhas supported advances in agricultural technology under the completed Agriculture Technology Development Project (US$46.8 million, approved June 1997 and closed December 2003). This operation was rated satisfactory, citing achievements in increasing competitive funding of research, raising incomes o f 350,000 farmers and strengthening the decentralized planning process. It also provided the base for the new Agricultural Transition project (see below). lox 5: Pilot Peace and Rural Development Interventions PeasantEnterpriseZones DevelopmentProject(US$4.2million, approvedJune 1998 and closedDecember2003) This LIL was designed to develop replicable methodologies for operating in Peasant Enterprise Zones in conflict areas and areas adjacentto protectedrain forests and indigenous territories. Three zones were selectedfor the pilot, with assistance provided to local communities to plan and undertake small infrastructure investments, land titling, farming, and environmental protection,inan open, participatoryfashion. The ideawas to build local capacity and to demonstratethe viability of working together. The project was successful inrealizingits goals and the potentialfor scaling up exists. The approachdeveloped under the LILhasbeenadoptedby the Rural Development Institute, but hasyet to receivefull scale support for replication. SecondMagdalenaMedio RegionalDevelopmentProject(USSS million, approved September 2001 and closedMay 2004) This LIL, rated satisfactory, was also intendedto test new forms of managingand implementingthe region's development plan with the goal of increasing citizen influence, making institutions more responsive, and demonstrating concrete ways to increase economic and social returns. It built on the first LIL, approved in June 1998 and closed in December 2000 (also rated satisfactory), that laid the groundwork in establishing a non- governmental entity to lead the process. The idea for the second LIL was to complete the investment cycle, as investments plannedunder the first LILdid not have enoughtime to materialize, leadingto demand for a follow-up operation to test out those investments, and to reduce the dependence on the intermediary organization, the Corporation for Development and Peace Magdalena Medio (an NGO sponsored by the Catholic Church and Ecopetrol). The operation has been successful and mobilized funding from the EU. Since its closure, the concept has been adoptedby the Government and is being scaled up with Bank support under the Peace and Development APL insix regions. Productive Partnerships (US32 million, approved FY02, ongoing) This operation demonstrates the benefits of pairing small-scaleproducer organizationswith modernagro-businesses. The intentionis to transfer knowledgeand generate mutual benefits that made commercial sense in a demand-driven way with limited recourse to the public sector. So far, the approachhas beenworking with interim evaluationsshowing again of 20 percent in incomes and employmentfor farmersparticipatinginthe program. This resultis well above the 10percentgain anticipatedat the start. The operationhas been includedinthe Bank's Agricultural InvestmentHandbook as an example of promising innovation. Importantly, the Governmenthas adoptedthe concept as a main element of its strategy to stimulatethe agriculturesector. The totalnumber of hectares under the Government's programhas risen by more than 20 percent since 2002, to 1.1 millionhectares. Source: IEG, BankDocuments 97 The 2002 CAS anticipated that there would be an opportunity to move forward on a broadagenda o fissues inthe rural sector, related to access to land, landmarkets, forestry, and smallholder competitiveness. But the scope of the only new lending operation was reduced because a lack o f agreement over the vision for the sector, the limited fiscal space available for such an operation, and differences within Colombia over its response to the costs o f opening domestic markets. Instead, the Bank and the Government agreed to a narrowly focused program, the recent Agricultural Transition Loan (US$30 million, approved FY05), addressing phyto-sanitary standards, technology and other issues relating to Colombia's integration into global markets and meeting its obligations under the Free-Trade Agreement with the USA. Environment andNatural Resource Management. There i s considerable convergence between the Bank and Colombia on the important o f sound environmental management and sustainable development. The CAS envisaged a broad based reform o f environmental management, supported by a series of Sustainable Development DPLs. The first operation o fUS$l50 million was approved June 2005 and closed January 2006; the second operation o f US$80 million is pending meeting of triggers, including the passage o f a new Water Resources Management Law. A companion Sustainable Development Investment loan (US$7 million, approved October 2005), not anticipated under the original CAS, was added to support targeted investments (mainly monitoring equipment) and to strengthen local capacities to undertake reforms. These operations address a range o f concerns-urban pollution, water quality, environmental health, integrated water management-and target mainstreaming environmental sustainability and achieving a direct impact on meetingColombia's MDGs (notably the targets relevant to sustainable development and child mortality), implying attendant improvements in M&E. They also build on previous lendingthat encouraged the adoption o f sound environmental management policies and processes inmajor urban centers (see Box 6). The programs were reinforced by the recently completed Country Environmental Assessment, entitled "Mitigating Environmental Degradation to Foster Growth and Reduce Inequalities" (February 2006), which provided the analytical basis and priorities for the Sustainable Development DPLs. Again, it is too soon to assess results but the start i s encouraging, especially in the depth o f the reforms and the shared appreciation o fthe importance of sustainable development within Colombia. Box 6: UrbanEnvironmentalManagement The US$19.07million loan (approved January 1996 and closed December 2002) was rated satisfactory in strengthening the capacity of the Ministry o f Environment to provide policy advice and technical assistance to major urban centers and smaller communities. The focus was o n designing environmental management plans addressing solid waste management, land use planning, water resource management, waste water treatment, public awareness and education. Such plans were created for Colombia's four largest cities-Bogoth, Cali, Medellin and Barranquilla. In the case o f Bogotb, two thirds of the plan has been put into actual use and an Environmental Fund set up. Development o f a National Environmental Information System was not achieved, with the IDB eventually providing support for this component. Source: IEG 98 A specific goal set in the 2002 CAS was to address the delays inthe environmental licensing system. That goal has been achieved, with the average number o f days to receive an environmental license falling to 16 days in2005, down from 130 days in2001. The Bank helpedrevise procedures for issuing these licenses as part o f the preparationo f the Sustainable Development DPLs. In addition, as anticipated in the CAS, the Bank advanced the possibility o f reducing carbon emissions: several GEF and PCF operations have been approved and/or are in the pipeline with the expectation that they will demonstrate concrete ways to reduce carbon emissions. There i s no specific evidence as yet. A new opportunity arose to help Colombia prepare for climate change with the GEF grant for the Integrated National Adaptive Program. More broadly, the Bank and Colombia have a strong commitment to an active program o f GEF grants to address global environmental concerns as well as the inclusion o f indigenous and Afro- Colombian peoples (see below). PillarTwo: Sharingthe Fruits Overall. Economic growth has been the preeminent factor in explaining the reductions inpoverty and income inequality since 2002. However, credit also has to be given to the efforts by the Government, with Bank support, to share the benefits o f growth via increased opportunity, financial security for those facing medical problems, and greater public resources directed to those with insufficient incomes and/or facing temporary dislocations. The impetus for reforming the social sectors has been long standing, with fundamental reforms articulated in the 1991 Constitution. These changes were accompanied by extensive decentralization intended to improve the quality and quantity o f social services, particularly health and education. Unfortunately, these reforms were derailed by the 1999 economic crisis which cut funding and exposed deficiencies in social programs and the social safety net. That crisis set the stage for developingnew approaches to protect the poor andprovide a social safety net. The Bank's support has been critical in helping to shape and implement these new approaches under a series o f Labor and Social Sector Development Policy loans (PLaRSSALs), accompanied by targeted investment programs in education and social protection to put these new policies into effect. The results o f this work have been very positive. The first PLaRSSAL (US$ 150 million, approved September 2003 and closed June 2004), the second (US$ 200 million, approved November 2004 and closed March 2005) and the third (US$ 200 million, approved July 2006 and closing March2007) have continued and deepened the process o f reform initiated under the previous CAS, with the Social Sector Adjustment Loan (US$155 million, approved August 2002 and closed December 2002). A T A L o f US$ 2 million, approved in FY05, was added to provide technical backup to the local teams designing and executing these reforms. Like its companions inthe financial sector andthe fiscal adjustment, the initial Social Sector SAL was designed to carry forward the reform agendabetween administrations. The Social Sector SAL, the ensuing PLaRSSALs Iand I1 and the LaRSDPL I11 demonstrate continuity. According to IEG, the SSAL and two completed PLaRSSALs 99 were successhl inmeetingtheir goals, with the first PLaRSSALrated highly satisfactory. They contributed towards improving transparency and citizen oversight via M&E measures; developing a risk management approach to social protection; expanding health insurance coverage; improving the efficiency and equity o f resources devoted to the education sector; and enhancing labor market possibilities. The third loan in the series added child nutrition to the agenda along with the restructuring of public hospitals. Details o fthe accomplishments ineach o fthese areas are provided below. Education. The 2002 CAS anticipated that the first priority for Colombia inthe social sectors would be to meet its goal o f universal education at the primary level. Inworking towards that goal, the CAS set interim targets o f 90 percent for both primary completion andnet primary enrollment as o f2006. Additionally, supported by subsequent analytical work, attention was directed to reaching those in the 12-17 year age bracket which, according to the Bank's FY03 report, "Closing the Gap in Education and Technology" (FY03), was critical for Colombia's competitiveness. Beyond the expansion o f primary- secondary enrollment, the CAS also sought efficiency and quality gains, promotion o f innovative pilots in decentralizing education management, expansion o f rural education opportunities, and enhancing demand for higher education by providing student loans. Most ofthese goals have been met and insome cases exceeded. Country-level results are impressive. Data show that that enrollment in public primary and secondary education has increased from 7.8 million students in 2002 to 9.2 million in2006 (95 percent o f target). Of the new students, almost one-third came from lower income groups. Concerning primarycompletion rates, the CAS interim goal o f 90 percent as o f 2006 was surpassed, with 94 percent reached in2004. Preliminarydata for 2006 show that the goal for net enrollment was also surpassed, with the net enrollment close to 95 percent. It i s important to note that this latter figure i s based on the 2005 census data. When the CAS was prepared, then available information had net enrollment for primary students at 87 percent as o f 1998, up from 84 percent in 1992. By 2003, net enrollment had increased to 88 percent. However, these data were based on interim population estimates which were too high. As a result, earlier assessments have overestimated the gap in meeting these MDGs and it will now be necessary to reassess Colombia's progress inreachingthe 2015 MDGson the basis o fthe last census. A number o f Bank operations made important contributions to these achievements. The series o f PLaRSSALs focused specifically on expanding access and improving quality, with the number o f primary and secondary students surpassing the specific targets set under the PLaRSSAL, increasing by 743,000 between 2002 and 2004. Moreover, 90 percent o f students-some 9.5 million-are now subject to standard proficiency tests in language, mathematics, and sciences. It was also expected that 90 percent o f 9th grade teachers would be subject to performance evaluations, but the Constitutional Court rejected this measure. Almost 8,000 schools have prepared improvement plans, and 77 out o f 78 quality assurance centers had been set up as o f 2006. It should be highlighted that the cost o f expanding opportunities are largely financed by the fiscal space generated by increasing efficiency (Le,, teacher-student ratios) and savingsredirected from other sectors. Inaddition, one o f the driving forces in 100 expanding enrollment was the new incentive to local authorities to enroll students, when transfers from the central Government were changed to being based on the number o f students, instead o f the number o f teachers. This reform was adopted under the SFAL- FIAL development policy series and is being implemented by the National Planning Office via the criteria to distribute petroleum royalties to local governments. Inaddition to supporting the sector's policy framework, the Bank financed separate investment operations to test methods to stimulate decentralized education management and expand education at the municipal level. The goal was to demonstrate how local authorities could best make use o f the knds transferred to them from the central level. These operations were implemented under conditions o f conflict and/or the influx o f displaced persons and their record o f achievements is mixed: municipal-level management o f the educational system (brought about by the 1991Constitution) has been slow and difficult to implement (see Box 7). ESW (completed in August 2006) on the policy options and international experience on contracting out education services i s an example o fthe Bank's technical advice on improving decentralized services. Box 7: ExperiencesinMunicipalManagementof Education The first attempt at directly supporting decentralized education was the Antioquia Education Project (US39.5 million, approved November 1997 and closed December 2003). IEG rated this project as modestly satisfactory, in light of the mixed results as drop-out rates, repetition and student math achievements did not change. Communities were not able to assume management responsibilities as expected. However, enrollment went well up: pre-school by 14 percentage points (to 88 percent), primary by 7 percentage points (to 97 percent), and lower secondary by 16 percentage points (to 89 percent). Upper secondary enrollment decreased slightly, staying at about 63 percent. The results o f the Pasto Education Project (US$7.1 million, approved November 1997 and closed August 2003) were better and IEG c o n f i i e d a satisfactory rating. Gross enrollment targets were met, even though net rates fell; repetition rates went down as diddrop-out rates; and student test scores improved for grade 3 math, but fell for language. The Cundinamarca Education Quality Improvement project (approved FY04, US$15 million) started slowly and was subsequently canceled because the differences with the newly elected local administration, over the pedagogical model to be used, procurement, and the role o f the Secretariat o f Education. Source: IEG, Bank documents The Rural Education APL has also beenhardto implement but has beenreaching far more locales and students than originally anticipated. The first loan o f US$20 million, approved inFYOO, was designed to encourage greater enrollment and quality inup to 70 poor, rural municipalities starting with net enrollment o f as low as 30 percent. The goal i s to get enrollment eventually up to 60 percent, still well below that achieved in the urban centers. The second o f the series, originally expected in FY04, i s now programmed for FY07. So far, while it has been hard to reach rural communities, demand for participating in this program has been overwhelming: 582 municipalities have participated, exceeding the initial target eight-fold. Between 2002 and 2006, 241,000 new school places were created and 460,000 students in rural areas have benefited from the program. Another dimension of the 2002 CAS was to increase demand for higher education. Colombia experiences low enrollment in tertiary education as compared to other Latin American countries, with very low participation from the bottom income strata. To 101 address these concerns, the ongoing Higher Education Loan (US$200 million, approved December 2002) helpsto finance student loans and grants and expand the number o f post graduate students. It is also supporting ways to improve the quality assurance system, set up M&E to measure progress and develop Labor Market Observatories to track labor movements and employability. According to supervision reports, this operation has been surpassing initial expectations. Country data, combined with supervision reports, show that enrollment in higher education increased from 1 million students in 2002 to 1.3 million in2006 (about 85 percent o f target) andthat student loans rose to 88,000 in2006, doubling the number o f students receiving financial support. Surpassing the initial target, almost 60 percent o f beneficiaries are from income strata 1 and 2, up from 30 percent before the program started. The number studying at master or doctor level almost doubled to 13,000 in 2006. Equally, the efforts on quality assurance are progressing, with 432 programs now certified as high quality, and 3,600 programs (88 percent o f target) for minimum standards o f quality. A new loan, expanding the program, gas been requested. Health i s the second anchor o f the Bank's work in the social sectors, focusing on coverage o f Colombia's health insurance system, nutritional supplements for vulnerable populations, and overcoming weakness in public health services. The underpinnings o f Colombia's health care system were established by the 1993 law that set up a system for providing direct subsidies to those who could not afford health insurance. However, the pace o f implementation faltered for several reasons: decentralization became more difficult as conflicts increased during the 1 9 9 0 ~and ~ the resources to pay for insurance subsidies were in short supply, especially after the 1999 economic crisis. But, restoration o f growth and easing o f the fiscal concerns enabled the reactivation o f the reform effort under the current CAS. To support this effort, the Bank first seconded a senior Bank- staff health expert to Colombia for two years. That expert engaged in day-to-day problem solving and assistedthe Ministryo f Health to refocus the debate, engage a larger audience, and provide the technical assessments allowing decision makers, including members of Congress, to gain confidence in the reform's merits. Financial support for the reforms was then provided underthe series o f PLaRSSALs. These efforts are paying off. The principal achievement has been the number o f persons receiving subsidies to acquire health insurance coverage. According to country data, the number o f subsidized beneficiaries now amounts to 18.6 million persons as o f 2006, up from about 10.7 million in2002. Currently, 73 percent of the target population i s covered, as compared to 42 percent at the start o f the CAS period. An important change has been the shift to full subsidy (instead o f partial): 5.8 million beneficiaries now receive 100 percent subsidy, up from only 400,000 in 2002. According to an independent evaluation, this i s an outstanding result, as very few low and middle income countries have achieved almost universal coverage of their health insurance schemes. In terms o f health outcomes, as pointed out in the independent evaluation, the first-order result i s improved access to and utilization o f health services as insurance affiliates are more likely to use the health care system as compared to those without insurance. This holds true, for example, for children suffering from diarrhea andrespiratory infections. 102 Supply side problems, nevertheless, can have a negative impact on the quality o f services provided and the impact o f insurance coverage on health status. Thus, the continuing dual-track o f reforms in the health sector remains important. Accompanying the expansion o f health insurance are efforts supported by the PLaRSSALs to alter the way health care i s delivered. In 2001, a major decentralization took place, putting hospitals and primary care under the responsibility o f local governments. Hospitals were also expected to operate independently and compete with private providers: subsidies were increasingly to be shifted to the demand side. These reforms have been taking effect, hospital by hospital, with the results positive thus far, based on the experience o f 71 institutions under the IDB's program o f hospital restructuring: service levels have gone up, staffing got down, total costs reduced and deficits narrowed. Nevertheless, there i s a long way to go to eliminate operating deficits in public facilities. Under the PLaRSSALs, some 127 hospitals, as o f 2005, were under management contracts (target 100). More than 90 percent of third level public hospitals have been licensed (target 70 percent) as have 27 out o f 28 private insurers. The rate o fvaccinations-one of the MDGsinwhich Colombia falls short o f the CAS interim goal-has increased to about 87-90 percent as o f 2005, up from 82 percent in 2002. The interimtarget was 92-95 percent. World Health Organization statistics show that the rate o f vaccinations in Colombia fell during the 1996-2000 period, mostly likely because o f security concerns and the fiscal crisis. Under the PLaRSSALs, better performance has been hoped for as the resources had been sufficient to make the target; however, continuing conflicts and forced displacements have made it difficult to reach the interim goal. To strengthen further the incentives to vaccinate children, the Government made an immunization card a pre-requisite for participating in nutritional programs and school enrollment. Complementing the Bank's PLaRSSALs, the IDB has been active inproviding resources for the investmentsfor both hospital restructuring and vaccinationprograms, the latter area also receiving support from CAF. A disappointing area in terms o f realizing the interim MDGs set out in the CAS is Colombia's performance inreducing maternal mortality. The long term goal o f 45 deaths per 100,000 now seems out o f reach by 2015 unless there is concerted action to improve the situation. The maternal mortality rate, as of 2005, stood at 99 deaths per 100,000 women, with no improvement since 1998, according to the Government's assessment (the Bank estimates material mortality in Colombia to be 130 per 100,000, based on its own methodology). It i s now recognized that tracking maternal mortality has proven to be very difficult. An ongoing assessment by the Bank o f Latin America's system for collecting vital statistics shows considerable deficiencies in recording deaths, let alone accurately recording the cause o f death, in Colombia and elsewhere in the region. Reducing maternal mortality i s an area inwhich there was no specific Bank intervention anticipated underthe 2002 CAS. Social Protection. Another critical area o f reform supported by the Bank has been to restructure, refocus and expand Colombia's system o f social protection. As noted earlier, the 1999 economic crisis brought to light deficiencies in Colombia's tradition social safety net system (largely dependent on family and community assistance). At that time, 103 the Government, the Bank andthe IDBworked collaboratively to put inplace the Red de Apoyo Social (RAS), a temporary emergency support program financed by the Bank and IDB. The RAS consisted o f three programs: Familias en Accion, a new conditional grant program linked to child health check-ups, and regular school attendance, financed inpart bythe HumanCapitalProtectionProject (US$lSO million, approvedFYO1, closed November 2005; rated satisfactory); Jovenes en Accion, which provided scholarships and internships for poor youths (supported by a Bank-financed Youth Development LILY US$5 million, approved FY99, closed June 2003; rated satisfactory), and Empleo en Accion, a temporary workfare program, supported with the Bank-financed Community Works and Employment loan (US$lOO million, approved inMay 2000, closedNovember 2005; rated unsatisfactory). The first two programs have been incorporated into Colombia's institutional structures and scaled up. On the other hand, the third did not meet its goals (see Box 8). Box 8: Outcome of the Community Works and EmploymentL o a n This US$lOO million operation, approved inMay 2000 withjoint financing from the IDB,was one o f the three pilot social protection programs developed with Bank support in response to the 1999 economic crisis. It initially aimed at contracting the poor and unemployed to work in small public works at the municipal level, patterned after Argentina's successful workfare program, Trubujar. It also benefited from a number o f analytical studies that were helping to frame Colombia's a comprehensive risk based social safety net. Because o f the crisis, the operation was very quickly prepared and approved in four months. Implementation, however, spanned a frustrating four years before two-thirds o f the loan was cancelled and US$6 million redirected to a pilot o f a wage subsidy for private sector f i contracting those previously not employed. That pilot experience did not meet expectations either. Inthe end, 228,000 beneficiaries did participate inthe workfare program; ex-post evaluation shows that beneficiaries were largely poor or extremely poor and they did increase their incomes as compared to control groups. However, the way that program was implemented was unworkable: it took an average o f 28 months for municipal sub-projects to be prepared, evaluated and authorized (as compared to 9 months inArgentina). Rather than using simplified procedures to speed up disbursements, there was a tendency to centralize and create unnecessary steps, resulting indelays. This was opposite to what was done in Argentina, showing that the transfer o f a concept from one country to another must be matched by the attributes needed for implementation, effective decentralization and results-orientated management. That was not the case in Colombia. This experience also demonstrates the risks o f a large gap between the program designers, who tend to be highly qualified staff in central agencies, and the implementators from a broad array o f municipalities and NGOs. Source: Bank ICR Building on these experiences, the Government proceeded to deepen and refine its social safety net system with financial support provided under the series o f PLaSSRLs. Inalmost all areas, targets underthese programs arebeing surpassed. The underpinnings o f the system were further validated in the Bank's ESW, "Colombia's Social Safety Net Assessment (FY03) and facilitated by technical studies under a PHRD grant. Additional technical support i s now being provided under the Social Sector TAL (US$2 million, approved November 2004). Some o f the changes have been institutional, such as the merger of the Ministries of Labor and Health, to create the new Ministry o f Social Protection with responsibility for several autonomous agencies (the Social Security Institute, the Family Welfare Institute and the National Training Program). Successful pilot programs, such as Familias en Accion, have been scaled up and institutionalized, and a number o f new programs have been introduced, particularly inthe area o fnutrition. 104 Monitoring andtargetingo f social programs have been tightened. Colombia's restructure social safety net has expanded and improved targeting o f nutritional programs. Targeting was introduced for early child development and children breakfast programs whose coverage has been increased five fold to 300,000 families. Intotal, 1million children participate in the breakfast program as o f 2006 (up from 78,000 in2002) and 2.3 million children benefit from school lunches (up marginally from 2.2 million in 2002). A new nutritional program has been added for the elderly, with some 400,000 now served and the number o f elderly receiving cash assistance has tripled since 2002, reaching200,000 persons, As part o f the move towards results-based management, M&E procedures were introduced and ex-post evaluations have been undertaken o f the childbreakfast and community day care programs. A major part o f the effort on Colombia's social safety net has been to institutionalize and expand Fumilius en Accion, the successful program o f conditional grants to poor families. As a follow-on operation to the HumanCapacity Protection loan, the Bank is presently provided support for the transition o f the Families program, under the new Social Safety Net loan (US$86.4 million, approved FY06). Besides expandingcoverage from 320,000 to 568,000 families as o f 2006 (target 400,000), the loan is assisting the Government in concentrating resources on the extremely poor in marginal areas and in conflict zones and incorporating 100,000 displaced families (63,000 enrolled as o f 2006). The 2005 independent evaluation o f the Families program demonstrated its effectiveness intargeting the poor and improving social indicators. Some 91 percent o f beneficiaries are below the poverty line. Consumption o f basic goods increased by up to 19 percent. Increased intake o f protein was noticeable in both urban and rural populations. Chronic malnutrition reduced by 10 percent among children 0 to 2 years. School attendance by secondary students increased by 14 percentage points to 89 percent in rural areas and by 9 percentage points to 94 percent in urban areas with a commensurate reduction on the hours worked by children. Still, the evaluation showed that there could be further improvements in targeting and the design o f the SISBEN system, the methodology used byColombia to identify beneficiaries for social and other targetedprograms. Labor Markets. The goal in the 2002 CAS was to help make labor markets more flexible. Under the first PLaRSSAL, the Government made improvements to labor regulations in order to make it easier for hard-to-employ workers (youths, those over 50 years, the disabled, and unemployed heads o f households) gain access to the labor markets. Law 789, passedin2002, reduced the cost of firing and payroll taxes, provided incentives for businesses to employ more people and added a safety net for the unemployed. The Bank's assessment o f those reforms (see above mentioned EWS on labor markets) shows that these reforms resulted in greater employment o f young workers, less informality and higher wages for the unskilled. At the same time, the PLaRSSALs supported the transformation o f existing labor training programs, separating the regulatory, accreditation and service provision roles o f SENA, the National Training Institute. Reforms further made the provision o f training more competitive by allowing licensed private providers and firms to provide their own internal training. The changes inthe system haveresultedinadramatic increase ingraduates: according to Government 105 statistics, the number o f graduates from professional training institutes has more than tripled to almost 3.9 million as of 2006 (target was to double). Graduates from the Jovenes en Accion program (mentioned above) have increased eight fold. Empowerment and Inclusion, Colombia has important populations of indigenous and Afro-Colombians that tend to been marginalized. The approach adopted under the CAS was to heighten awareness among policy makers o f the specific hurtles faced by these groups. The CAS proposed to address ethnicity systematically in the Bank's own AAA program in order to demonstrate how and why such groups were important, and to incorporate indigenous and Afro-Colombian peoples as target populations under rural development, bio-diversity, and climate change projects, financedby the GEF. The Bank committed itself to have all analytical work include breakdown by ethnicity, undertake AAA on Colombia's indigenous peoples and Afro-Colombians and help Colombia include ethnicity inthe 2005 Census and household surveys. This action plan has by and large been accomplished. First, many o f the GEF operations do target these groups. Second, the Bank did carry out an analysis o f the status o f indigenous and Afro- Colombians: this report, entitled "The Gap Matters: Poverty and Wellbeing o f Afro- Colombians and Indigenous People" (July 2005) provided an overview of the current status o f these groups and the gaps in services. Third, the newly available 2005 census data now breaks down information on ethnicity with assistance provided under the MECOVI program supported by an IDF grant (US$290,000, approved FY04). The availability o f these data has encouraged the Colombians to carry out their own analysis of three disadvantaged groups-indigenous, Afro-Colombians and Roma (the latter, not covered in the Bank's work). But not all o f the Bank's AAA addressed exclusion. Instead, the Bank has taken an alternative route by usingthe analyses underpinning social sector operations to heighten the Government's interest, first, in targeting the poor- disproportionately members o f indigenous and Afro-Colombian groups-and inM&Ein general (see Box 9). Box 9: Mainstreaming Exclusion A good example of mainstreaming exclusion is the FY06 Social Safety Net operation. The analysis backing that operation showed that the SISBEN system, usedto target beneficiaries, might not capture well the socio-economic conditions o f indigenous and Afro-Colombian groups and that the M&E system inplace for the Fumilius program did not track their participation. This led to an indigenous action plan being prepared. Another example of an operation giving particular attention to the unique challenges faced by indigenous and Afio-Colombia groups is the Bank-financed Peace and Development APL (first loan US$30 million, approved FY04). A third example, now under preparation, is the La Guajira Water and Sanitation project. As o f now, it is too early to measure their impact but these examples demonstrate the scope for internalizing these groups into program design and for systemic changesto the way that the SISBEN works. Source: Bankdocuments Pillar Three: BuildingEfficient,Accountableand TransparentGovernance Overall. The goal o f this pillar was to support the Government's efforts to make governance more transparent and efficient and to stimulate accountability under its Public Administration Reform Program. Even though it did not have much margin for maneuver on the expenditure side, especially after the rejection o f austerity measures in 106 the 2003 referendum and the rulings by the courts on various measures, the Government embarked on a reform program to change how the central agencies operate- consolidating ministries, cutting authorized positions in the civil service, reducing bureaucratic steps, upgrading information systems, implementing e-procurement, and putting in place a results-based management culture. So far, progress has been quite good, even though the results are uneven andthe benefits are more evident on the quality and efficiency o f spending than on reducing spending per se. Among the quantitative indicators i s the drop inwages and salaries as a share o f total spending from 11.1percent in 2002 to 10 percent in 2006. Colombia's relative ratings on the Bank's Governance Indicators all show improvement: Colombia jumped from the 43rd percentile to 53rd percentile on government efficiency and from 36th to 53`d on the control o f corruption between 2002 and 2005. It tends to rank higher on government efficiency, regulatory quality, and control of corruption than other countries in its income category and countries in the L A C region. Rule o f law, voice and accountability, and violence- especially the last measure-are where Colombia falls short. As discussed above, the Bank's main vehicles to support this effort have been the FSAL, the FIAL series o f policy based loans and the Second Public Financial Management Project. Besides supporting the impressive record of improvements to tax policy and administration cited earlier, the last operation further helped to design and install Colombia's integrated financial management system, SIIF, and performance monitoring system, SINERGIA. The new series o f Business Environment and Competitiveness DPLs, also cited previously, picks up some o f these themes, particularly on those areas that affect the business environment, quality and standards. Beyond these instruments, the original CAS identified two specific areas, Judicial Reform and Anti- corruption, for attention. The CAS Progress Report expanded a third, Monitoring and Evaluation. Progress ineach of these areas is summarized below. Judicial Reform. The Government's National Development Planplaces considerable priority on improving the quality and relevance o f the country's judicial services. For many years, the high levels o f violence in society, the lack of physical presence o f the state in conflict areas, and perceptions of corruption and impunity have contributed to a low level o f use o f and trust in judicial services by the general public. The 1991 Constitution set inmotion a number o f changes to the way that the judiciary i s managed and structured. Under its development strategy, the Government placed particular emphasis on increasing access to community based, alternative dispute mechanisms, justice for the poor, via community tribunals and "houses o f justice". These initiatives havebeen support the IDB and USAID. The Bank orientedits support, via the Judicial Conflict Resolution Improvement LIL (approved FY02 and closed in June 2006, US$3.9 million), to test a comprehensive approach to judicial reform in civil courts. The intent was to devise new processes, human resource capacities, and organizational set-ups capable o f reducing processing times, increasing productivity and increasing demand for legal services, starting with a sample o f some 80 civil courts in five major centers (with some labor courts added subsequently). This pilot has moved slowly: the LILwas first to close by June 2004 but 107 has been extended by two years. Implementation was confounded by the intrinsic complexity o f the sector, the ambivalence o f the executive branch in dealing with the judicial branch, and the lack o f experience o f lead actors. Nevertheless, the experiment is starting to show some results: one o f the achievements has been the adoption of performance evaluation o f judges. Gains have also been experienced in overall efficiency, thanks inlarge part to new case tracking mechanisms: the participating courts were able to increase their resolution rate from 63 percent to 80 percent; lower their congestion rate from 3.2 to 2.1; and increase their case completion rate from 32 percent to 48 percent. While not uniform among the participating courts, average performance i s considerably better than that of non-participating courts. Qualitative feedback from users shows greater social legitimacy. Because of the priority placed on improving judicial services, and despite the difficulties so far, the Government i s committed to moving to a second phase o fthe process with a Judicial Sector Development Loan planned for FY07. Anti-Corruption. Since the 1 9 9 0 ~successive governments have placed highpriority ~ on reducing corruption in Colombia. In the first Uribe presidential term, the Vice President was mandated to spearhead the development o f the National Plan Against Corruption. The Commission's report and action planwas presented in September 2005, building on, among other things, the survey o f corruption carried out with the help o f WBI inApril 2001, the Bank's Governance Indicators, and technical input from WBIto the commission's work. During this period, perceptions concerning corruption have improved according to World Bank Governance Indicators cited above and Transparency International ratings. In the case o f TI'S rating, Colombia ranked 5gth overall in 2006, with a rating of 3.9, up from 3.6 in 2002. This is better performance than many other countries in Latin America. Nevertheless, these ranking are still low and corruption remains a serious concern: according to the WEF's Competitiveness Report (2004), corruptionwas rated the number one obstacle indoing business inColombia. Beyond the Bank's technical support provided to the Vice Presidential commission, the assistance envisaged under the 2002 CAS has failed to materialize. Earlier criticism by the Bank was that the Government's focus, to that point, had been narrowly on the quality o f legal and administrative controls, handling complaints, and the role o f control agencies and did not respond to the diagnosis revealed in the 2001 survey. This still seems to be the case, with the Bank continuing to look for a broader, more comprehensive approach. The alternative o f working at the sub-national level failed when central authorities would not agree to provide authorization for the sub-national government willing to collaborate with the Bank to take on additional debt. The situation i s complicated by the lack o f clear institutional home for any anti-corruption initiative. Nevertheless, the ongoing discussion on the Policy Notes (FY07), plus the conclusions o f pertinent AAA-Institutional Governance Review (FY07) and Decentralization (FY07)-may revitalize the dialogue. Monitoring and Evaluation. In contrast to the slow progress in the above areas, the Government and the Bank have advanced fkrther than anticipated in the 2002 CAS on instilling a results-based management culture in the public sector. As confirmed in a recent IEGevaluation o f M&Epractices and policies in Latin America, Colombia stands 108 out as a leading case. The mainstay o f this effort was a dedicated component o f the on- going Public Financial Management I1project, helping the Government to improve and extend Colombia's performance management system, SINERGIA, to all sector ministries and 170 public entities and to enhance monitoring by civil society. Under the National Development Plan, the Government set the goal o f increasingthe share o f the investment budget subject to ex-post evaluations, now reaching 24 percent as o f 2006, up from 7 percent in 2002. The Bank has supported this effort by financing individual evaluations in social sector operations, as a way o fbuildinga body of M&E experience that can be replicated and scaled up. The 2005 Progress Report responded to this growing interest by adding a new M&E component to the Governance pillar. The plan now is to proceed with the proposed US$ 1Omillion Monitoring and Evaluation Loan, currently in the lending program. This project is expected to increase the links between` results and budgeting, complete the institutionalization o f the SINERGIA system, and upgrade the quality o f information and data used inmeasuringperformance. Pillar Four: Buildingthe Foundationsof Peace Overall. The original CAS foresaw the peace process as an essential and integral part o f the Bank's program in Colombia with actions embodied inthe four pillars. There was no separate peace pillar per se. However, as the country conditions changed, it became apparent that the Bank could have a role in both dealing with the after-effects o f the peace negotiations as well as the dislocations caused the ongoing conflict. Thus, the 2005 Progress Report consolidated the various actions under separate pillars and added new activities to form a new Peace pillar. As highlighted inthe Progress Report and in the Government's assessment o f its National Development Plan, this i s an area o f considerable improvement, with numerous statistics demonstrating how security conditions have changed. The Bank's contribution to that process were indirect but important, both at the general level-helping to restore macro-economic confidence-and specific-the piloting o f new ways to collaborate peacehlly and to plan and execute community development programs, focusing on those most affected by the conflicts. The fact that approach developed under the two Magdalena Medio projects have been adopted by the Government as its national strategy and has attracted EU financing under its Peace Laboratories program attests to the impact o f these operations. The new Peace Pillar is tentative, subject to maintaining improved security conditions. It focuses on scaling up the Peace and Development approach and on learning. The following describes the main elements o f the Peace Pillar as it now stands: 0 Peaceand Development: The first operationunder the PeaceandDevelopment APL (US$30 million, approved FY04) expands the approach to collaborative community development piloted under the Magdalena Medio LILs. It extends the approach to six areas encompassing 3 million persons, as compared to 800,000 under the LILs. Withinthat population, it targets vulnerable, poor anddisplaced families andprovides support for restoringhuilding assets, accessing social services, and improving living conditions (e.g. basic food production, sanitation). So far, progress has been slow but 109 going in the right direction. It i s expected that the second phase, also for US30 million, will follow in the coming CAS. Further work is also anticipated on understanding better the needs of displaced populations and the impact o f violence on vulnerable groups. Integrating Former Combatants: The Government's strategy has focused on encouraging paramilitary groups to give up their arms and revert to civilian livelihoods, with the expectation that the reduced number o f combatants on one side will increase pressure on the guerrilla movement commensurately reduce its engagement. So far, the strategy has produced positive results, as described elsewhere, eventhough the situation continues to be fragile. However, the integration o f former combatants inColombia, as inother conflict situations, presents challenges. The Bank's response i s to help the Government devise a strategy based on AAA drawing out the lessons o f other countries and an assessment o f what Colombia has done so far. These lessons could form the basis for W h e r engagement. The study is currently underway. Rebuildingthe Presence of the State: One of the serious negative effects o f the ongoing conflict has been the retraction o f the state from areas o f conflict. People are left to their own devices. At this stage, the idea i s to study how best to build capacity o f local administrations previously paralyzed by violence and social capital. At this stage, no specific activity is underway. Forced Displacement: The 2002 CAS envisioned that the Bank would support a pilot intervention, using Japanese grant funds, to help the people displaced by conflicts and carry out ESW on their conditions. Most o f the 2.8 million displaced are poor (but not exclusively) and more than likely to be indigenous or Afro- Colombian descent. The Government faced a conundrum: was it better to support resettlement in new locations or to wait until it might be auspicious to return home? Another question was how to protect the assets that the displaced left behind. There was no generally accepted answer. As a result, the Bank andthe Government decided on three steps: first, to concentrate on integrating social services (including those supported under Bank-financed operations in the social sectors as discussed above) for the displaced persons; second, provide direct support under the Peace and Development APL; and, third, to start a systematic process o f knowledge building. So far, special quotas havebeen set for displacedpeople to be includedinthe conditional grant program, Familias en Accion, subsidized health insurance and school enrollment. Further analytical work is underway to sort out the best way to provide incentives for these people to return to their homes and/or to protect their assets duringtheir absence. MeasuringBankPerformance Overall, the Bank Group's performance under the 2002 CAS is rated satisfactory. This conclusion is based on: (i) positive country level indicators to which the Bank the and IFC have contributed directly and indirectly; (ii) quality of the outcomes of the the Bank's specific products and services; and (iii) continuing progress o f on-going the operations and investments. The strength o f the Bank Group's contribution rests in the overall achievements in the macro-economic sphere, contributing to poverty reduction, 110 strengtheningthe financial sector, promotion o f competitiveness and the private sector, delivery o f urban public services, improvements to access to social services, plus increased financing and targeting o f social spending and attention to social protection. Not least are the Bank's contributions to sustainable development and, indirectly, to the peace process. The scaling up o f Bank-financed pilot operations and the national adoption o fpolicies andprograms that have emerged from the results o f Bank support are particularly strong indicators o f the impact o f the Bank's work in Colombia. These achievements are off set by the persistent fiscal imbalances and misalignments, the lack of progress in reaching Colombia's rural and extreme poor, and slow progress in addressing the chronic problems o f corruption and deficient judicial services. Delivew o f Services. The 2002-2006 period has been one o f considerable expansion o f the Bank Group's support for Colombia. A variety o f instruments were used: DPLs, investment loans, TALs, grants, and AAA. Programmatic DPLs have constituted the mainstay o f the program, with quick disbursing funds representing about 60 percent o f total lending over the period. Inthe case o f the World Bank Institute, Colombia has not beena regional focal country; its activities have diminished duringthe CAS period, with the exception o f early technical support for the deliberations o f the Vice-presidential Commission on Anti-corruption. On the side o f the Bank, lending increased from average o f about US$370 million per year during FY97 to FY02 (including a substantial increase in FYOO to help cope with the 1999 crisis and the earthquake) to an average o f US$721 million per year from FY03 to FY06, peaking at US$ 912 million in FY05. Workingwithin the original CAS envelop o fUS$3.3 billion, the program has remainedin the high case. Total lending through FY06 amounted to US$2.9 billion, keeping the Bank's exposure in Colombia to about 4 percent of total Bank outstanding loans. The 2005 CAS Progress Report anticipated an additional US$1.2 billion o f lending in FY07. The quality o f the portfolio is excellent, as described below, and outcomes, as confirmed by IEG, are largely satisfactory with substantial contributions made to institution building. Business has similarly increased for IFC: between January 2003 and September 2006, IFC invested a total of US$ 413 million for its own account. The investment commitments in FY06 reached US$ 291 million, the highest level in any given year for Colombia, as investment activity picked up due to favorable domestic prospect and external conditions. IFC's total committed portfolio at the end-FY06 stood at US$ 504 million, the fourth largest country exposure in Latin America after Brazil, Mexico and Argentina. The quality o f the portfolio i s good with no non-performing loans (NPLs) and loss provisions during the last three fiscal years. MIGA, with only one outstanding guarantee, similarly does not face any portfolio problems. Oualitv of Products and Services. The record of Bank operations completed during the CAS period has been good, with outcome ratings higher than Colombia's historical experience and the Bank's overall average, and in line with experience in the rest o f the Latin American Region (ref: IEG's ARDE and Development Effectiveness Reports). There also appears to be synergy and mutual reinforcement between the Bank's lending operations and the AAA program. Several IEGproject evaluations have commented on 111 the importance of solid A4A underpinningthe success o f the Bank's lending operations. An area that warrants comment for the new CAS is the lack o f consistency inthe way the Bank measures and monitors poverty and other MDGs. Inthe case o f Colombia, there i s no consensus on the most appropriate poverty measure and there have been inconsistencies and mistakes in the Bank's analyses. The Bank's latest poverty assessment (ongoing) reveals differences between the way that the Bank calculates the absolute poverty (US$1 and US$2 per day). Different Bank documents, moreover, use different measures and these measures are not always consistent with country measures. The new CAS i s an opportunity to resolve these differences and to start on the basis o f population figures usingthe 2005 census. O f 24 Bank operations completed, thus far during the CAS period, only four operations have been rated as not meeting their objectives: the Community Works and Employment loan (unsatisfactory rating not yet confirmed by IEG), the FIAL I11loan, after two triggers for policy agreements to move forward with the series were not met, and the Financial Market Development loan and the Financial Sector Adjustment loan, both o f which had been originally rated as satisfactory or moderately satisfactory, but since been down graded to moderately unsatisfactory by IEG in its project performance audits. Five operations have been rated by IEG as having moderately satisfactory outcomes: the Antioquia Education loan, the FIAL Iand I1loans, the first programmatic Financial Sector Adjustment loan, and the Structural Fiscal Adjustment loan. One operation, the first PLaRSSAL loan, was rated as highly satisfactory. ICRs are pending for six closed operations: the PLsRSSAL 111, the Justice LILYthe Sustainable Development IDPL, the Business Productivity IDPL, the Cundinamarca Education Quality loan, and the Rural Education IAPL. Inthe case o f DPLs, there i s some lack o f clarity on whether or not these operations require simplified ICRs at the close o f each one, or only one comprehensive evaluation at the end of the series. Either option might not prove adequate for purposes o f validating the overall direction and scope o f the series and some form o f interim evaluation or accompanying ESW might be explored in the next CAS. Other measures o f performance are equally good. Bank operations are considered as having made modest to substantial or high impacts on institutional capacity and, where evaluated, all are considered likely or highly likely to be sustained with the exception o f the Santa Fe Water Supply loan, as the fimdamental institutional reforms were not forthcoming and the Community Works and Employment loan. Bank performance, with the exception o f the Community Works andEmployment loan andthe FIALI11loan, has consistently been considered satisfactory. As o f FY07, all 24 ongoing operations as o f FY07-15 Bank loans, 8 GEF grants, and one policy-based guarantee (approved under the previous CAS)-are performing well. In the case o f the Bank's exposure, there do not appear to be any implementation concerns, as demonstrated inTable 4. The portfolio i s relatively young, with an average o f 3.3 years since approval. Indicators o f the portfolio are positive, with a nil level of problem projects, rapid rates o f disbursement, few inherent risks-only four projects have any risk flags, mostly delays in implementation-and compliance with fiduciary 112 requirements. Feedback from the Bank's procurement group indicates that there are no major procurement concerns under Bank-financed projects. Interms of quality of entry, there do not seem to be any recurring, significant issues. Nor does there seem to have beenany adverse impacts o f Bank Group operations: inthe case o f the InspectionPanel complaint concerning the Cartagena Water Supply and Sanitation loan, as agreed with the Panel, steps were taken to further verify and strengthen the project's design and to take precautions to ensure that the needs o f a previously unidentified affected population were addressedbefore the sewerageplantwas completed. Implementation Policies andProcedures. One ofthe major changes that has occurred duringthe CAS period is the shift to country systems andto 100percent Bank financing. The Bank also dropped the requirement for no more than 60 percent quick disbursing financing and shifted to an upper limit on Bank exposure in Colombia to a maximumo f 4 percent o f the Bank's total loan portfolio. Colombia was the first Bank borrower to be eligible under the 2004 new Expenditure EligibilityPolicy. The Bank's reluctance to use special accounts, a chronic complaint from the Government, has also been reversed. At this point, the use o fcountry systems for procurement is still not feasible pending further reform o f the domestic procurement system to meet Bank criteria. The reaction o f local authorities to these changes has been positive and, while the evidence is not conclusive, the upwardtrend in disbursement since FY04 seems to support the conclusion that these changes have eased implementation procedures and processes. The greater fiscal space provided for investments in Colombia's budgets i s another factor facilitating the pace o f disbursement. Promam Costs. Table 5 shows that the cost o f the Bank's program in Colombia, as compared to other large countries in the region and countries with similar levels o f development and program size, is in the middle o f the road. It ranked 5th out of eight comparators interms of average costs of supervision, lendingandAAA products. 113 Table 5: ComparativeCosts of BankProgram(FY05-06) Country Dialogue and Aid Coordination. Colombia is a middle income country with strong institutional capacity in the core sectors o f its administration. This not only facilitates country dialogue, but means that the Bank's analytical contribution and knowledge sharing, via AAA and other instruments, tends to find a keen audience among public officials. It also means that the Bank's program tends to be demand driven. The central coordination and filtering functions are effectively carried out by the National Planning Department and the Ministry o f Finance, with lending programs and borrowing capacity divided among the Bank, IDB and CAF. Inthat context, the competitiveness o f the Bank both interms o f financial costs and its processing time and complexity can be a determining factor in the demand for Bank Group assistance. In addition, Colombia is highlycommitted to citizen participation and has a robust civil society, reducingthe need for the Bank on its own, to ensure that voice o f the people are heard. That said, the Bank still needs to hear for itself concerns and perceptions o f those directly affected by Bank financed operations and the design and implementation o fthe CAS. 7. Lessons for Future Country Partnership Strategies This evaluation demonstrates the benefits o f solid analytical work and effective and flexible country collaboration. Lessons that might be useful for the preparation and design o f the coming Country Partnership Strategy are as follows: Exercising Fiduciary Responsibilities The Bank, along with the IMF, has a fiduciary responsibility, especially on debt sustainability, fiscal performance, the financial sector, and monitoring of public expenditures, poverty andthe MDGsto which the Bank should remain committed. In the case o f Colombia, the Bank was effective in keeping issues on the front burner once the worst o f the 1999 crisis was over. TemperingZeal with Realism New administrations tend to have ambitious plans, as was the case o f the first Uribe Administration's initial approach to fiscal and institutional reforms. In retrospect, it 114 may not have been realistic to agree-in the early months of a new administration- to policy triggers, covering action four years ahead. Infact, manyreforms confronted serious legal and political hurtles and have taken longer than originally anticipated. On the other hand, the Bank cannot stand in the way, so this lesson is nuanced to specific country circumstances. Setting Targets and Carrying out Intermediate Evaluations of Programmatic Loans Programmatic operations may pose a challenge in terms o f agreeing ex-ante to triggers and measuring impacts, To the extent possible, expected outcomes shouldbe established at the start. Ex-post, individual evaluations o f each loan in the series as they are completed might be too short term a time frame for impacts to be realized. Some form o f mid-way, intermediate assessment and/or ESW might be needed to reconfirm the direction and/or make mid-term corrections. Buildingon What Works Looking broadly at where the Bank has been effective in Colombia, working in sectors with a history o f Bank involvement and with established institutional responsibilities and capacities seem to work best in Colombia. This argues for continuing an evolving, programmatic approach and concentrating on and deepening those areas with continuity from one CAS to another. Building Consensus and Institutional Homesfor New Initiatives 0 The lack of progress in areas such as anti-corruption and judicial reform calls for rethinking the Bank's approach to new initiatives. The analytical ground for an initiative needs to be solidly and convincingly established and the institutional base established ex-ante. For the new CAS, the lesson mightbe prior ESW and consensus buildingplus continuing investment to inform policy makers and the public during implementation o f pilot operations so that the growing evidence ofwhat works can be shared with a larger audience. Refocusing on the Rural Sector: Closing the Gaps 0 A new approach to the rural sector, with attendant attention to Colombia's extremely poor and marginalized, may be timely, as the security picture improves. It was a priority in the 2002 CAS but little materialized in terms o f specific lending. Nevertheless, the Bank undertook ample analysis o f the sector: the policy notes for the CAS and other analytical work have provided evidence that the rural sector was important, dynamic, and disadvantaged. Importantly, the Bank has supported a number of successhl pilot rural development and peace initiatives which could be scaled up. Looking ahead, it may be helpful to segment strategies across rural and urban sub-groups as was done ineducation. Other sectors amenable to this approach are housing, water and sanitation-typified by the La Guajira Project now under preparation-and transport. 115 Relying on Local Capacity Colombia, as a Middle Income Country, i s capable o f assuming the lead in developing and implementingthe CAS inways that other countries might not. This is particularly the case in participation. The Bank can `piggy-back`' on those efforts rather than do own parallel exercise. Moreover, the case o f Colombia demonstrates that MICs with solid institutional capacity can be entrusted to use country based systems. Retaining Flexibility Another hallmark o f working with a Middle Income Country i s flexibility. The Bank has been flexible i s responding to Colombia's changing economic and social conditions especially as the country's conditions improvedbeyondwhat was expected and when some aspects o f the original CAS were not feasible and/or did not enjoy full ownership. The CAS Progress Report is an example o f how to accommodate M I C needs and conditions. This i s an attribute which should be carried over to the next CAS. Synchronizing Timing and Monitoring of Development PlanningInstruments The 2002 CAS was prepared at a critical moment in Colombia, compounded by transitions at senior levels in both the Bank and the Government. The benefit o f preparingthe CAS quickly was its timely assistanceto the country. But the cost was a lack o f internalization and reinforcement among the key development strategy instrumentsthat the country employs, notably the National Development Plan, and a lack o f common monitoring definitions, tools and benchmarks. Admittedly, development i s an evolving process and new needs can be address over time. The new CAS is the opportunity to avoid the gaps intimingandto focus on results. Internalizing Equity and Meaningfiully Measuring Poverty The Bank's efforts at internalizing equity considerations into its operations and analytical work, while taking a different track, seem to have energized Bank staff and local authorities to take up the concerns o f the extremely poor and marginalized as part o f a growing M&E culture. This momentum canbe elevated to the next stage by generalizing analysis o f equity, not just in social sector and GEF operations, but in other proposed policies. In addition, agreement on targets presumes agreement on methodologies for measuring poverty, among other indicators, which i s now lacking. The focus o f targeted programs, moreover, can be tightened with continued refinement o f Colombia's system o f classifying eligible beneficiaries. 116 I a a a a a* 3 3co 20 c ii Q)N u2 z ed2e $ Q)u Q)P Q) LN 0 0R a E W VJ VJ 0 Lc,G3+.,Q)BP Q) LN 0 0 In n s BI .I E Q)c,0ad30 hc, ed L 3 c.l 0 0c g5:z 3 3 3 u L 9999 0 8 H r 99 z 4u:$1a 3a 43>f 20