colombia: country strategy with the idb (2003-2006)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

COLOMBIA

THE B ANK' S COUNTRY S TRATEGY (EBP)

AUGUST 2003

This document was prepared by the project team consisting of: Jean Marc Aboussouan (PRI); Geovana Acosta (RE3/OD5); Raimundo Arroio (RE3/SC3); Fernando Cossío (COF); Amanda Glassman (RE3/SO3); Luis Giorgio (RE3/OD5); Roberto Manrique (RE3/FI3); Josefina Monteagudo (INT/ITD); Fernando Montenegro (COF); Gabriel Montes (RE3/EN3); Mariana Orloff (RE3/OD5); Carlos Perafán (SDS/IND); Patricia Reyna (RE3/OD5); Raúl Sánchez (PRI); and Javier León (RE3/OD5), Team Leader.

CONTENTS

EXECUTIVE SUMMARY AND STRATEGY MATRIX INTRODUCTION I.

KEY DEVELOPMENT CHALLENGES .................................................................................1 A. B. C. D. E. F.

Reduce poverty and inequality...............................................................................1 Revive the economy and jump-start growth...........................................................5 Reduce and contain the fiscal deficit ......................................................................7 Containing the conflict...........................................................................................9 Strengthen governance.........................................................................................11 The government’s strategy...................................................................................11

II. EVALUATION OF THE PREVIOUS STRATEGY AND PORTFOLIO ISSUES .............................12 A. B. C. D. E.

The previous strategy ...........................................................................................12 Policy-based and emergency lending ...................................................................16 Portfolio performance overview...........................................................................18 Lessons learned and good practices .....................................................................19 Colombia country program evaluation, 1990-2002: main findings and recommendations .................................................................................................20

III. THE BANK’S COUNTRY STRATEGY...............................................................................23 A. B. C. D. E. F. G. H.

Lay the foundations for economic revival and jump-starting growth....................25 Reduce poverty, inequality, and social exclusion.................................................31 Strengthen governance and further modernization of the State.............................34 Support to alleviate the identified constraints .......................................................36 Implementation of the 2003-2006 strategy ...........................................................37 The country strategy: Monitoring of implementation indicators...........................40 Risks for the country strategy’s implementation ..................................................42 Country dialogue agenda .....................................................................................43

ANNEXES

Annex I

Economic and financial indicators, 1998-2002

Annex II

Debt sustainability

Annex III

Implementation of the 2003-2006 operations program

Annex IV

Summary of the Bank’s 2003-2006 operations program

Annex V

Nonlending products, 2003

Annex VI

Implementation of the Bank’s Country Strategy and active loans

Annex VII

Active portfolio by the Bank’s country strategic BCS area

Annex VIII

Fund flow scenarios, 2003-2004

Annex IX

Bank’s Country Strategy: Monitoring of implementation indicators

Annex X

Nature and agendas of consultation events

Annex XI

Consultations with civil society

Annex XII

References consulted for background in developing the Bank’s Country Strategy

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ABBREVIATIONS

BCS CAF CPE CONPES DANE DNP FINDETER FTAA GDP IIC IIRSA IMF INURBE MDG MSMEs NAFTA NDP ODA OECD OVE PBL(s) PRI SBA SENA UNDP

Bank country strategy Andean Development Corporation Country Program Evaluation Consejo de Pol铆tica Econ贸mica y Social [Economic and Social Policy Council] National Statistics Department National Planning Department Financiera de Desarrollo Territorial Free Trade Area of the Americas gross domestic product Inter-American Investment Corporation Initiative for the Integration of South American Regional Infrastructure International Monetary Fund Instituto Nacional de Vivienda Social y Reforma Urbana [National Social Housing and Urban Renewal Authority] Millennium Development Goals microenterprise and small and medium-sized enterprises North American Free Trade Agreement National Development Plan Official development assistance Organization for Economic Cooperation and Development IDB Office of Evaluation and Oversight policy-based loan(s) Private Sector Department IMF Standby Arrangement Servicio Nacional de Aprendizaje [National Apprenticeship Service] United Nations Development Programme

EXECUTIVE SUMMARY AND STRATEGY M ATRIX Colombia is one of Latin America’s most established democracies, distinguished by continuity in presidential succession, stable economic policy management, and steady improvements in the caliber of its human capital. Paradoxically in such a democratic setting, the country is plagued by problems with violence that are standing in the way of social and economic progress and institutional development. This creates special challenges for Bank support to Colombia, not just because of the impact on the country but impacts on neighboring countries as well.

The Bank’s country strategy (BCS) identifies three overarching objectives that constitute the frame of reference for Bank activities: (i) lay the foundations for economic revival and jump -starting growth; (ii) foster social progress and make sure society’s most vulnerable are protected; and (iii) strengthen governance and further modernization of the State.

To help reinvigorate the economy the Bank will: (i) foster competitiveness and (ii) support agricultural development and natural resources management. The aim of Bank actions to foster social progress and ensure that society’s most vulnerable are protected will be to improve: (i) social protection systems, to leave low-income groups less vulnerable, and (ii) the coverage, quality, and efficiency of essential social services, including employment avenues. In the governance and modernization of the State sphere the Bank will support: (i) national public sector reform, (ii) local management capacity building, (iii) initiatives to foster transparency and combat corruption, and (iv) judicial branch reform.

Two constraints for the strategy’s viability are the country’s fiscal shortfalls and the escalating armed conflict. Fiscal deficits have made it difficult for Colombia to tap the markets, heightened its economy’s sensitivity to external and domestic shocks, and diminished the space for public investment programs. The second constraint, the armed conflict, is hurting the private investment climate, weakening the State’s national presence, exacerbating fiscal problems, and fraying the social fabric. From the Bank’s standpoint these twin constraints have implications for the size of the lending program, the mix of lending and nonlending products, and prospects for achieving the strategy objectives.

Within its possibilities the Bank will help mitigate these constraints . To help redress the fiscal deficit it will provide funding to ease the fiscal accounts and help purs ue reforms that, in the medium term, will lessen pressures on the fiscal balance and debt stock.

Given the political nature of some actions entailed in settling the conflict and combating drug trafficking, the Bank will confine itself to complementary activities —consultative group coordination, strengthening of the justice system, support for development of the conflict zones, and fostering of peaceable coexistence.

Lending program. Seven operations totaling US$2.04 billion have been identified for 2003 in line with the thrust of the BCS. Two quick-disbursing loans for US$1.65 billion for structural reform programs will pursue the aim of easing public-finance constraints.

Three investment loans totaling US$246 million and a policy-based loan for policy reform consolidation have been identified for 2004. Considering the dynamic nature of the development process, a 10-operation pipeline has been assembled for 2005-2006 and other operations developed during the annual programming exercise will be added subsequently to the pipeline.

Sequencing of the strategy. Priorities in 2003 are to: (i) cushion the impact of the stalled economy on vulnerable groups and continue supporting reforms needed to assure the delivery of social services; (ii) support Colombia’s efforts to stimulate its economy by way of small operations with strong catalytic potential; and (iii) alleviate fiscal constraints and implement reforms to make for more balanced management of the public finances and a sustainable debt stock. Assuming that satisfactory progress is made on structural reforms and with the conflict resolution strategy, in 2004 the Bank will support further efforts in the areas of: (i) governance and a heightened State presence across the country; (ii) assistance to vulnerable groups, and (iii) government actions to jump -start the economy and make it more competitive. In 2005-2006, assuming the State has asserted its presence in the national territory and the public accounts have improved, enabling the government to boost public investment spending, the emphasis will be on: (i) national infrastructure works projects, (ii) support for other initiatives to make Colombia more competitive, and (iii) support for agriculture sector restructuring. Given the complex set of circumstances at work in Colombia, an expanded version of the programming memorandum will be produced before the end of 2004 for consideration by the Programming Committee of Management, with an in-depth examination of: (i) the country’s economic performance and political developments, (ii) state of the conflict, the referendum outcome, and state of the debt profile and of the public finances; (iii) progress made in implementing the core strategy areas and a review of their relevance; and (iv) adjustments needed, if any, to the 2005-2006 operations program. These findings will be presented also in the annual country strategy update sent to the Board of Executive Directors for consideration.

Coordination with other multilateral organizations. The BCS has been developed and will be pursued in continual coordination with the International Monetary Fund, the World Bank, and the Andean Development Corporation.

The strategy’s implementation risks have to do with how successful the country is in remedying fiscal shortfalls and tackling the escalating conflict, which will entail achieving a political consensus around the reforms. A further contingency is the performance of world economies and global markets.

STRATEGY MATRIX Page 1 of 5

THE BANK’S COUNTRY STRATEGY M ATRIX Objectives

Government strategy

Country targets

Activities of other donors

Bank strategy

In progress

Bank activities Programmed

Strategy implementation

I. Lay the foundations for economic revival and jump-starting growth Foster competitiveness.

Infrastructure development

Transportation: Lower transportation costs and increase safety. § Reorganize and redelineate transportation -sector responsibilities to avoid overlaps and duplication. § Program of integrated transportation systems in midsized cities. § Complete Transmilenio expansion in Bogota.

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Energy: § Spur private investment in oil industry. § Dismantle fuel subsidy. § Create a new regulatory framework for petroleum products. § Expand electricity service in on-grid areas.

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Improvement of 59 of the 170 regional airports.

35% reduction in accident rates in targeted corridors.

35% reduction in public transport operating costs in targeted corridors.

US$500 million increase in private investment.

WB: Halt road infrastructure deterioration.

Create mechanisms to maximize private investment in the various sectors. Lower transportation and communication costs.

CAF: Road systems program. Restore navigab ility of Magdalena River. Airstrip repairs.

Urban transit in Cali, Bogota, Pereira and other cities.

3% increase in electricity coverage in on-grid areas, from 88% to 90.8%.

1.4% increase in electricity coverage in off-grid areas, from 33.3% to 34.69%.

85.6% increase in number of natural gas customers in areas on the piped distribution system, from 230,000 consumers to 427,000.

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Foster competitiveness.

Enlarge markets and improve the competitive supply of goods and services

Integration: § Strengthen negotiating capacity of public and private institutions. § Revamp export development policy and tax treatment of free zones. § Assess macroeconomic impacts. § Identify social adjustment needs ensuing from integration processes. § Policy to help SMEs share in integration’s benefits.

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US$1 billion increase in exports to the U.S.A. of products benefiting from the Andean Group tariff preference agreement, from US$841 million to US$1.841 billion.

CAF: Development of ground, river and air transportation infrastructure, which will have a strong impact on Colombia’s domestic and external markets.

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Rehabilitate non concessionable roads and bridges.

Work with subnational governments for feeder and local road maintenance.

Institutional strengthening of Superintendency and Regulatory Commission.

Improve urban transit in midsized cities.

Help develop IIRSA regional projects.

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Support the natural g as industry liberalization process.

Assist in reforms of Public Utilities Superintendency and Energy and Gas Regulatory Commission.

Support government initiatives to expand service in off-grid rural areas.

Support finalization of electricity sector privati zations.

Ensure that the different negotiations operate concurrently and are mutually complementary.

Build technical capacity for interagency coordination.

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Privatization and concessions Cundinamarca roads and institution-strengthening program MIF: Improvement of airport security

Privatization and concessions

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MIF: Internet-based export information system.

Foreign investment promotion.

TC: Strengthening of External Relations Ministry

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Privatization and concessions program II Urban transit Arterial and feeder roads

Privatization and concessions program II Public utilities sector program

MIF: Competitiveness and productivity policy.

Creation of an export culture. Strengthening the. industrial property system NLP: Public debt and raising of external funds.

Comparative analysis of sectoral competitiveness programs.

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3.22% average annual GDP growth in 2003–2006 (baseline: 1.6% growth in 2002) with a continued rise over that interval.

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Increase in total investment as a percentage of GDP from 15.1% of GDP in 2002 to 16% in 2006.

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Increase in overall exports from 21.7 % of GDP in 2002 to 23.9% of GDP in 2006.

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Improvement of Colombia’s position in the World Economic Forum’s Global Growth Competitiveness Index, rising from 10th place among the Latin American countries ranked in 2002 to 6 th place in 2006.

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Improvement of Colombia’s position in the technology subindex of the World Economic Forum’s Global Growth Competitiveness Index, rising from 12th place among the Latin American countries ranked in 2002 to 8 th place in 2006.

STRATEGY MATRIX Page 2 of 5 Objectives

Government strategy Microenterprise and SMEs : Modernize legislation. § Develop consistent complementary credit reporting system. § Create legal mechanisms to expedite fund recoveries. § Enhance efficiency in microenterprise and SME loan administration.

Country targets §

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WB: Enhance the business climate and foster productivity.

Bank strategy §

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Science and technology: § Institution -strengthening in the sector to increase efficiency and attract private capital. § Increase funding to regain 1995 investment levels.

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Financial sector: Rationalize the role of government as financial intermediary. § Train oversight agency staff. § Make private capital a part of capital market growth. § Improve reporting systems and foster good corporate governance.

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Agricultural development: § Improve productivity and competitiveness by adopting modern technology. § Help small-scale farmers adopt modern business forms to play a larger role in transforming agricultural production patterns and agricultural export trade. § Restructure the coffee market.

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Support agricultural development and natural resources management

367,480 million pesos in microlending via the financial system.

Activities of other donors

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Increase in number of researchers, from 125 per million population to 160 per million.

Increase in public and private investment in science, technology, and innovation activities, from 0.44% of GDP in 2002 to 0.6% of GDP in 2006.

367,480 million pesos in microlending via the financial system..

Increase, from 412,353 million pesos to 968,838 million pesos, in loan recoveries and sale of Central de Inversiones S.A. property.

WB: Technology development and innovation in rural areas.

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WB : Restructuring and privatization of Stateowned financial institutions. Capital market development.

Pension and social security system reforms.

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27,000 campesino households engaged in legal activities in medium- and long -range agroforestry and agricultural projects; at least 76,35 0 hectares kept free of illicit crops.

50,000 families acting as forest monitors; at least 60,000 hectares in the targeted areas kept free of illicit crops.

Increase in coffee exports from 0.9% of GDP in 2002 to 1.4% of GDP in 2006.

380,000 hectares reclaimed for agriculture and consequent creation of 150,000 new permanent rural jobs and 75,000 jobs in allied activities.

WB: Strengthen local leadership and local organizations. Assist small farmers hurt by the coffee crisis. Promote change in production patterns in coffee-growing areas. Support rural education and training programs.

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Revamp microenterprise and SME regulation.

Provide technical support to the financial system to heighten its presence in the microenterprise sector.

Develop innovative project clusters.

In progress §

Bank activities Programmed

MIF: Advisory support and technical training for microenterprises.

Technical training for the paper industry.

Accounting and financial information.. Environ mental quality co ntrol in SMEs. Marketing company for microenterprise owners, Atlantic region. Business clusters in graphic industry. Support for business development

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Improvement of science and technology legislation Continue supporting creation of national technology development funds.

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Science and technology program

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Financial sector regulation Legal uncertainty and guarantees Financial development for handling of remittances

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Technology transfer and productive innovation policy Restructuring of coffee industry Support activities for smallscale agriculture, in areas of technology transfer, infrastructure works, and development of nontradi tional agricultural products.

Business training in agricultural and agribusiness topics

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MIF: Strengthening of credit union system.

Credit institution administrative and operational efficiency.

Cutting red tape for business. Institutional strengthening Financiera Compartir. Institutional strengthening Finamérica.

Promotion of cooperative ventures. Capital market strengthening Land management Alternative development Titling and registry modernization MIF: Assistance for Cauca Valley agriculture.

Isabella grape agribusiness project

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Microenterprise and SME program Sectoral competitiveness program MIF: Plan to create a business culture. Integration of small business owners into the production chain via the government procurement system TC: Network of tropical seed producers and marketers. Female-owned fish processing and marketing enterprises.

Development of Colom bian youth entrepreneurs Science and technology program II

MIF: Remittances and increased use of bank services by lower -income populations NLP: Economic importance of remittances.

Development bank reform.

Diagnostic assessment of financial sector

Program of support for coffee sector Rural development program TC: Sustainable coffee industry in Colombia

Strategy implementation

STRATEGY MATRIX Page 3 of 5 Objectives

Government strategy Natural resources: Redelineate and manage forest reserves. § Build management capacity in agencies comprising the National Environmental System (SINA) and tighten interagency coordination.

Country targets §

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One million hectares of natural forests zoned and being managed.

120,000-hectare increase in protective and productive forest plantations in basins that are potable-water sources, from 130,000 to 250,000 hectares.

165,000-hectare increase in National Parks System protected areas, from10.3 million to 10.5 million hectares.

Activities of other donors WB: Sustainable development. Technical assistance for restructuring of SINA. Improvement of environmental protection laws.

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Support SINA institutional development process.

Help develop a facility for natural disaster prevention at subnational government level.

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Bank activities Programmed

Environment program MIF: Environmental management, clean technologies TC: Pilot socioenvironmental program. Solid waste management in coffee-growing region.

System of environmental accounts

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Strategy implementation

Environmental investment program Manizales program NLP: Prioritization of environmental investments

II. Foster social progress and make sure society's most vulnerable are protected Strengthen social assistance programs and make sure society's poorest are protected

Expand coverage and increase quality and efficiency of social service delivery

Social protection system: § Gradually decentralize program management. § Protect internally displaced persons through programs to help them return home, secure housing finance, and receive loans for rural productive activities. § Institutional strengthening of SISBEN beneficiary-targeting system.

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100% of nutrition programs targeted using the SISBEN system.

840 new social infrastructure works in violence-plagued mu nicipalities.

500,000 new jobs created through social protection system.

500,000 increase in number of school lunch program beneficiaries, from 800,000 to 1.3 million

WB: Support strengthening of the social protection system and foster human capital development and job creation programs.

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Support actions to cushion the social impact of fiscal adjustment and of the conflict.

Reorganize and strengthen the organizational apparatus of social sector agencies.

Improve social -expenditure protection and targeting instruments.

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Education: Modernize national, departmental, and municipal education administration. § Increase enrollments and improve quality of preschool, basic, and secondary education. § Improve quality and relevance of post -secondary education programs for the low-income population.

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Health: Improve the contributory and subsidized insurance systems. § Improve access and service delivery. § Execute priority public health and institution-strengthening actions.

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Increase in preschool, basic, and secondary education enrollment ratio from 82% to 92% by creating 1,500,000 school places.

59.8 percentage point increase in municipalities that have administered skills assessment tests to grades 5 -9, from 32.5% to 95%.

3 percentage point reduction in labor force participation rate of youth aged 12 to 17, from 12.7% to 10%.

50% reduction in evasion and avoidance of social -insurance health system (SGSSS) obligations, from 36% to 18%.

Modernize hospitals , from 275 to 480.

44.2% increase in subsidized plan enrollment, from 11.3 million to 16.3 million members.

WB: Support education system decentralization and promote enrollment increases and quality improvements.

CAF: School plant investments in Bogota.

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WB: Foster SGSSS financial sustainability and efficiency and support restructuring of public hospitals.

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Improve quality and increase enrollments in basic and secondary education.

Support implementation of Law 715 and subnational government management.

Reform of education for internally displaced population in urban areas Employment training for lowincome youth.

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Support for health reform

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Social Support Network Pacific Coast sustainable development Social reform TC: Social reform Peaceful coexistence and citizen security Social infrastructure and community-based management for peace TC: Design of social protection program.

Reform of drug treatment centers. Domestic violence prevention models. Social reform program. Business activities for low-income women. Pacific Coast sustainable development New school system program TC: Intercultural bilingual education program

TC: Reorganization of health care networks.

System of health satellite accounts.

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Emergency social program Health and social security reform program Social Support Network II TC: NGO information system NLP: Market for family benefit associations.

Poverty strategy. Social impact of the armed conflict

Local governance program Support for national information and census system

Modernization of health care networks Health and social security reform program

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Decline in overall poverty rate from 60% in 2000 to 58% in 2006.

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Increase in preschool, basic and secondary school enrollment ratio from 82% in 2001 to 92% in 2006.

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Increase in number of municipalities in which skills assessment tests have been administered to grades 5 -9, from 35% of the total in 2002 to 95% in 2006.

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Increase in number of financially viable hospital networks delivering efficient service, from 21 in 2002 to 54 in 2005.

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44.2% increase in participants in subsidized health insurance plan, from 11.3 million in 2001 to 16.3 million in 2006.

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Decline in under-five mortality rate from 23 per 1,000 live births in 200 0 to 18 per 1,000 in 2006.

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Increase in population with piped water service from 91% in 2001 to 95% in 2006; 30% increase in rural population with sewer service, from 2.9 million in 2002 to 3.9 million in 2006.

STRATEGY MATRIX Page 4 of 5 Objectives

Government strategy

Country targets

Water and sanitation: Expand and improve water service. § Prevent and curtail pollution with sewage management plan. § Design sewage discharge assessment approach, sanitation and waste management plans. § Develop National Water Resources Law.

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Low-income housing: § Improve targeting, subsidy, and programmed savings systems. § Institution -strengthening in the sector.

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Double the number of municipalities employing adequate waste management practices, from 350 to 700.

184 community providers of water and sewer services.

1 million increase in number of rural dwellers with sewer service, from 2.9 million to 3.9 million.

Activities of other donors WB: Extend the water system and improve sanitation in remote areas.

CAF: Water and sanitation sector operation

Bank strategy § §

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40,000 low-cost dwellings financed.

67,300 increase in housing loans disbursed, from 40,300 to 104,000.

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Strengthen regulatory system.

Create direct subsidy system for low-income customers (end crosssubsidies).

Improve operation of FINDETER. Step up technical assistance to utility providers.

Heighten private-sector participation in the sector.

Delivery of subsidies Strengthening of housing policy and oversight agencies

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Bank activities Programmed

Environmental sanitation upper Bogota River basin Pereira water supply and sanitation Cartagena sewer system MIF: Bucaramanga water supply TC: Development of water subsidy program

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TC: Housing sector modernization in Manizales

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Strategy implementation

National Water Plan Southwest Bogota sanitation program Public utilities sector program

National social housing program TC: Housing market indicators

III. Strengthen governance and further modernization of the State Support reform of the national p ublic sector

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Strengthen local management capacity

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Vertical reforms: improve efficiency and organizational effectiveness.

Horizontal measures: rationalize public sector employment, streamline bureaucracy and national information system. Improve legal defense of the State and asset management.

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Create an incentives system to spur local authorities to boost their revenue collection capacity.

Solidify local governments’ administrative and institutional capacity.

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10% or greater reduction in current expenditures of national executive.

Improvement in Colombia’s ranking in the Institutions and Efficiency subindex of Transparencia por Colombia’s Integrity Index of Public Institutions, in the form of an increase in number of agencies scoring over 90, from 2 agencies in 2002 to 5 agencies in 2006.

Institutional strengthening of 126 subnational governments (raising the total from 17 to 143), with revenue increases, adjustment of financial information and of pension system and recording Sustainability assurances for adjustment processes previously launched in 364 subnational governments.

At least 30 decentralized agencies restructured.

WB: Budget management, government procurement, rationalization of tax revenues.

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Rebuild governance capacity.

Improve the public finances.

Increase efficiency of service delivery.

Improve information systems that underpin public policy making and social expenditure targeting.

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TC: Second phase of the project bank. Diagnostic assessment of Superintendency of Industry and Commerce

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National public sector reform program

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Support for national information and census system TC: Modernization of national public sector NLP: Country financial accountability assessment

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Improve subnational government revenue management and continue supporting development of new revenue sources.

Institution -strengthening with an emphasis on planning and management capacity in government agencies

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PBL for subnational fiscal reform Subnational development program Strengthening subnational government financial information system Subnational development program II Institutional reform, Bogota District Cundinamarca roads and institution-strengthening program TC: Comprehensive renewal of historic districts. Control of government external borrowing.

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Support for local governance TC: Downtown Bogota zoning plan NLP: The unfinished decentralization agenda.

Royalties: Allocation, use and public efficiency.

Bogota city paper

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Improvement of Colombia’s position in Transparency International’s Corruption Perceptions Index, rising from 9th position among the Latin American countries ranked in 2002 to 6 th place in 2006.

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Improvement of Colombia’s position in transparency subindex of Transparencia por Colombia ’s Integrity Index of Public Institutions, in the form of an increase in number of agencies scoring over 90, from 4 in 2002 to 8 in 2006.

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Improvement of Colombia’s position in Institutions and Efficiency subindex of Transparencia por Colombia ’s Integrity Index of Public Institutions, in the form of an increase in number of institutions scoring over 90, from 2 in 2002 to 5 in 2006.

STRATEGY MATRIX Page 5 of 5 Objectives Foster transparency and curb corruption

Government strategy §

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Justice system reform

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Revamp the government procurement and contracting system.

Strengthen State and citizen oversight bodies.

Improve information transparency.

Foster actions to enlist the private sector in the anti corruption drive.

Broaden access to justice.

Consolidate operational, administrative, and budget autonomy of the judicial branch.

Mechanisms to discipline judicial public servants.

Advisory assistance to the high courts.

Reporting on state of the public sector.

Activities of other donors

Country targets §

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Improvement of Colombia’s ranking in Transparency International’s Corruption Perceptions Index, moving from 57th place in 2002 to 45 th in 2006.

Publish a monthly corruption index to track changes by sector and geographically.

WB: Curb political and economic cronyism in government

Shorten average time for property appropriation/confiscation rulings from 8 years to 1 year.

Start up 40 community “Houses of Justice” with budgets.

WB: Remedy the problem of congested courts and sentencing backlogs and improve the quality and productivity of judicial business.

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In progress

Support fiscal oversight, criminal justice, and disciplinary agencies.

Assist in development of the Integrity Index at the national and local levels.

Foster good corp orate governance in the private sector.

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Strengthen judicial branch.

Technical assistance to the high courts.

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Bank activities Programmed

Strengthening of Comptroller General’s Office TC loan Modernization of justice administration

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Program to strengthen the Attorney-General’s Office MIF: Good corporate governance TC: Expansion of the Integrity Index NLP: Anti -corruption mission

TC loan Modernization of justice administration TC: Coordination of indigenous jurisdiction and the legal system

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Justice sector reform program

Fiscal reform sector program Social reform program TC: Support for Government Revenues Mission

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Emergency social program Health and social securit y reform program Modernization of health care networks Public sector reform program Sectoral competitiveness program Public utilities sector program

Strategy implementation §

Improvement of Colombia’s position in Oversight and Disciplinary Action subindex of Integrity Index of Public Institutions developed by Transparencia por Colombia , with an increase from 28 agencies scoring over 90 in 2002 to 38 in 2006.

Risks and mitigating actions – Fiscal shortfalls Fiscal shortfalls

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Launch a package of reforms to contain growth in inflexible budget expenditures and stabilize revenues.

Resolve the problem of shortterm finance.

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68.7% increase in tax recei pts thanks to management efficiency gains, from 1.6 billion to 2.7 billion.

Drop in central government operating expenditures as a percentage of GDP from 4.37% to 3.01% .

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Quickly and effectively complement financial support provided by other multilateral organizations to cushion external and domestic shocks.

Support implementation of government spending reforms.

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Reduction in the public sector deficit from 3.6% of GDP in 2002 to 1.2% of GDP in 2006.

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Reduction of the public debt from 48.9% of GDP in 2002 to 47.7% of GDP in 2006.

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50% reduction in number of municipalities rated as having “medium” or “low” levels of violence, from 252 in 2002 to 126 in 2006.

Risks and mitigating actions – Escalation of the conflict Escalation of the conflict

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CAF MIF NLP TC WB

Control the national territory.

Combat drug trafficking and organized crime.

Strengthen justice administration.

Develop depressed areas and conflict zones.

Protect human rights.

Strengthen civic coexistence and values.

External relations and international cooperation policy.

Andean Development Corporation Multilateral Investment Fund Nonlending product Technical cooperation World Bank

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157 police stations reopened in municipalities where they had been destroyed.

1 million Colombians trained in dispute resolution and values.

300 municipalities supplied with libraries, benefiting 4 million people.

5,000 persons trained as reading promoters.

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The Bank will work closely with Colombia and donor countries to organize consultative groups to elicit political and financial backing for initiatives to bring an end to the conflict and minimize its impact on the population.

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Pacific Coast sustainable development program Peaceable coexistence and citizen security Social Support Network Social infrastructure and community-based management for peace TC: Peaceable coexist ence. Urban crime and impunity in Colombia.

Creation of Investment Fund for Peace.

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Social Support Network II Support for local governance Coordination (consultative) group NLP: Analysis of crimeand violence-prevention activities

INTRODUCTION The object of this paper is to identify Colombia’s key development challenges and establish a new strategy and operations program by way of which the Bank can effectively deliver support to the country. The strategy’s 2003-2006 life span coincides with the administration of President Álvaro Uribe Vélez, who in August 2002 began a four-year term in office.

Considerations in deciding on overarching BCS focuses for Bank support were the Bank’s institutional strategy, the evaluation conducted of the previous country strategy, recommendations from the Bank’s Office of Oversight and Evaluation (OVE), and Colombia’s National Development Plan. The operations program was developed with due regard to the country’s borrowing and implementing capacity, the Bank’s comparative advantages, complementarity of proposed Bank activities with those of other multilateral and bilateral agencies, and lessons learned from the Bank’s Colombia portfolio performance in recent years.

Two facets in the BCS’s development were a series of diagnostic assessments and analyses of Colombian issues and extensive consultations with the government, other donors, and civil society. The following were among the main activities in those areas:1 (i) macroeconomic, social, institutional, and sector-specific diagnostic assessments; (ii) dialogues with representative political groups, academics, and business and financial sector representatives; (iii) sectoral meetings with government officials, and (iv) Bank, MIF and PRI programming missions and portfolio review missions. An early draft of the strategy paper was reviewed in civil-society consultations in four Colombian cities (Bogotá, Medellín, Cali, and Cartagena) and with the government. The government’s comments on a preliminary draft have been taken into account in this paper.

The Bank has kept up a continuous coordination dialogue with staff of the International Monetary Fund, World Bank, Andean Development Corporation, and bilateral agencies such as the United States Agency for International Development, the Japan Bank for International Cooperation, and the European Community. These consultations created synergies and enabled the agencies to coordinate their priority focuses to make sure their activities would complement one another and avoid overlaps in the key strategy areas. There has been ongoing dialogue as well with OVE as it prepared the country program evaluation (CPE) document. Pertinent CPE (RE-208) recommendations have been incorporated into this strategy paper.

The paper is divided into three sections. The first examines Colombia’s recent economic performance, identifies the most pressing challenges facing the country, and outlines the government’s strategy. Section II assesses the Bank’s current country strategy and discusses the most serious portfolio execution problems. The third section presents the proposed 1

See Annexes X, XI, and XII.

strategy and the operations program developed to carry it through, the implementation sequencing, monitoring arrangements, and associated risks.

I.

KEY DEVELOPMENT CHALLENGES

1.1

Colombia is one of Latin America’s most established democracies, distinguished by the continuity of presidential succession, stable economic policy management, and steady improvements in the caliber of its human capital. Paradoxically in such a democratic setting, the country is plagued by problems with violence that are constricting population patterns and holding back social and economic progress and institutional development. This creates special challenges for Bank support to Colombia not just because of the impact on the country but impacts on neighboring countries as well.

1.2

On the social and economic front Colombia has posted no gains in social indicators of poverty, inequality, or access to services; in some areas it has lost ground. It has experienced negative per capita GDP growth and amassed huge fiscal deficits that have created a public debt problem. Meanwhile, the legitimacy of the State and governance have been eroded by the armed conflict, corruption and cronyism, a management crisis, and the fragmentation of Colombian territory.

1.3

The following are Colombia’s current development challenges: (i) reduce poverty, income inequality, and social exclusion to make sure that all Colombians receive their fair share of the fruits of development; (ii) revive the economy and jump-start growth to take economic growth rates back up to historic levels; (iii) reduce and contain the fiscal deficit to make growth sustainable; (iv) control the escalation of the armed conflict which is limiting the State’s presence in some parts of the country, and (v) improve governance, to make the aforelisted objectives workable.

A.

Reduce poverty and inequality

1.4

In the early 1990s Colombia made impressive strides in improving the lives of its people. Thanks to rapid increases in education enrollments—particularly at the secondary school level—and in health care coverage between 1993 and 1997, and as more and more of the population gained access to utility and other public services, the percentage of Colombians with unmet basic needs shrank considerably. There also was a significant improvement in expenditure targeting, reflected in the income distribution.

1.5

Poverty and inequality and the 1998 crisis. The 1998-1999 economic crisis put an end to the above- mentioned gains, and in more than one sphere the country lost ground. As growth slowed the unemployment rate climbed (19% in December 2002), particularly among youth and women. When household income plummeted, many families had to cut back on human capital investment and lost some of their assets. Between 1997 and 2000 the number of people surviving below the poverty line mounted, as did the numbers living in extreme poverty, especially in urban areas (Table I-1). Income inequality measured by the Gini coefficient worsened between 1996 and 2000 from 0.540 to 0.566.

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Table I-1 Poverty and inequality indicators, 2000 Population below poverty line Population below indigence line Unmet basic needs (% of households) Gini coefficient Source: National Planning Department

Urban 51.0% 15.8% 16.4%

Rural 82.6% 43.4% 40.0%

Total 59.8% 23.0% 23.0% 0.566

1.6

Conflict and internal displacement. The worsening of strife in the last two years and forced internal displacements have exacerbated social problems in Colombia, dramatically altering the population distribution pattern and adding to social demands. According to National Planning Department (DNP) figures, approximately 939,000 persons were forcibly displaced between 1996 and 2002.

1.7

Minority groups . Though there are no conclusive statistics on Colombia’s Afrodescendant and indigenous populations, 2 their quality of life is worse than in the rest of the country. Illiteracy rates are high in these communities; only a small percentage of them have access to schooling or basic infrastructure services. Most have tenuous access to health care. They also face problems involving land tenure, the spread of illegal crops, and internal displacements triggered by the armed conflict.

1. Social spending

1.8

Increases in social expenditure over the course of the 1990s attested to Colombia’s resolve to protect social sector funding, particularly for health care and education. 3 However, the increase was not enough to cushion the effects of the late-1990s crisis on the welfare and human capital accumulation of the poor. In recent years social program expenditure targeted to vulnerable groups has declined, reducing coverage precisely at a time when it would need to be protected if not increased. 4 The country will need to strive to deliver services more efficiently and sharpen expenditure targeting. Recent reforms such as Law 715 of 2001 and pension reform are creating an enabling environment for a reorganization of sector finances and moves to ensure that essential social services are duly delivered.

2

According to the 1993 national census, Colombia’s black community numbered 4.8 million (12.8% of the total population). Estimates in the DNP document Hacia una Nación pluriétnica y multicultural 1998-2002 (“Toward a Pluri-ethnic and Multicultural Nation, 1998-2002”) presented in December 1998 put the total at 10.5 million (26.2% of the population). The National Statistics Department estimates the indigenous population at 700,000 (1.75% of total population).

3

Government social spending climbed from 8% of GDP in 1991 to 13% in 1999.

4

Among the variables that have made for inefficient spending are politicization, violence, corruption, inadequate targeting, and management shortcomings.

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2. The Millennium Development Goals: Status report and challenges5 1.9

A look at the millennium indicators shows that, except for the objective of eradicating extreme poverty, Colombia is on track to attain the Millennium Development Goals (MDG). The achievement of these goals was a priority in the previous country strategy and remains a priority in the strategy proposed here. The gains posted to date are the result of initiatives to protect vulnerable groups, advance education and health reforms, and fund water and sanitation systems. The government’s National Development Plan charts even more ambitio us targets for the education and health sectors and protection of vulnerable groups over the next four years. However, efforts on that front will have to be balanced with the government’s ongoing fiscal adjustment moves.

1.10

Eradicate extreme poverty and hunger. The percentage of Colombians living in extreme poverty climbed from 20.4% in 1991 to 23% in 2001. To halve the proportion of people whose income is less than one dollar a day the economy would need to grow approximately 3.4%, on average, until 2015.

Colombia reduced its under- five malnutrition rate from 10.1% in 1990 to 6.7% in 2000.

1.11

1.12

Achieve universal basic primary education. Despite the economic crisis, enrollments of children aged 5 to 11 continue to rise, the strongest increases being among females and urban residents. Between 1990 and 2000 the net primary enrollment ratio jumped from 68.7% to 83.6%, though repetition and dropout rates continue to be a concern.

Eliminate gender disparity in primary and secondary education by 2005 and at all levels of education by 2015. The sharp rise in enrollment and literacy rates in Colombia over the past two decades has considerably narrowed gender and urban-rural gaps. 6 However, increases in female enrollment ratios in the last ten years have not necessarily translated into higher incomes for women. One of the reasons

% population living in extreme poverty

25

20

15

10

Goal Progress

5

0

1990

2001

2015

% enrollment basic primary education 120

100

80

60 40

Goal Progress

20

0

1990

2000

2015

Ratio girls/boys primary and secondary education 120 115 110 105 100 95 90

Goal Progress

85 80

1990

2000

2015

5

The MDGs, embraced by 189 nations at the 2000 United Nations Millennium Assembly, are a set of goals, targets, and indicators to be attained by 2015 to achieve substantial improvements in the areas of poverty reduction, health care coverage and education enrollments, and environmental protection.

6

Between 1978 and 1998 the female urban enrollment ratio rose from 55% to 70%. The rural enrollment rate climbed from 37% to 51%.

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Maternal mortality per 100,000 live births

for this behavior is that the country’s internal conflict has had an extremely adverse effect on women.

140 120 100 80 60

1.13

1.14

Reduce the maternal mortality ratio by three quarters . An increase in the number of medically assisted births in the second half of the 1990s is one factor in the declining maternal mortality rate.

40

Goal Progress

20 0

1995

2000

2015

Reduce the under-five mortality rate by two thirds . Colombia has posted impressive gains in child mortality figures and Child mortality rate per 1,000 per live births prenatal care. 7 However, late-1990s cuts in funding for public health programs and initiatives dramatically lowered immunization rates. Between 1997 and 2001 immunization coverage for tuberculosis dropped from Goal 97.9% to 84.8%, for DPT from 83.9% to 77.6%, and Progress for polio from 84.8% to 80.5%.

1990 2000 2015 35 30 25 20 15 10 5 0

1.15

1.16

Halt and begin to reverse the spread of HIV/AIDS and the incidence of malaria and other diseases. In 2001 the incidence rates of AIDS and malaria in Colombia were 2.3 and 766 per 100,000 population, respectively. By the late 1990s the country had brought malaria under control, but in less than four years—1999 to 2002—the number of reported cases doubled from 71,000 to 139,000.

Rural parts of the country are at greatest risk for this disease. 8

Recorded AIDS cases 1000 900 800 700 600 500 400 300

1990

1992

1994

1996

1998

2001

Develop a world association for market development and access. While the poor countries are committed to better governance in order to mobilize and administer resources more effectively and equitably, the rich countries are committed to providing more aid, promoting debt relief, and facilitating market access and technology transfer. Specifically, the commitments that these countries have assumed are (i) to adopt an open, regulated, and nondiscriminatory trade system; (ii) to address the issues of access to free trade and export quotas on goods from less developed countries; (iii) to respond to the development needs of landlocked states; (iv) to take up the issue of developing country debt in order to ensure their sustainability; (v) to prepare and apply strategies that accord young people decent and productive work; (vi) to provide access to emergency medicines; and (vii) to ensure that these nations can tap the benefits of new technologies.

7

Between 1990 and 2000 the mortality rate dropped from 30.4 to 19.5 per 1,000 live births.

8

The data show an increase in recorded AIDS cases, but this attests also to improvements in reporting and tracking systems.

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1.17

According to the most recent United Nations Development Programme (UNDP)9 report, official development assistance (ODA) declined between 1990 and 2001 from 0.33% to 0.22% as a percentage of donor country gross national income.

Since the Millennium Develoment Goals were adopted in 2000 this trend has reversed Official development aid (ODA) and ODA rose by 5% from 2001 to 2002 due As a % of donor country GNP to the Monterrey Conference commitment to increase aid by US$16,000 annually to the year 2006.

0.40%

0.33%

0.30%

0.22%

0.20%

1.18

Nonetheless, with this increase total ODA is still only 0.26% of gross national income of the OECD Development Assistance 1990 2001 1990 2001 Committee’s 23 member states, well below To developing countries To less developed countries what is considered necessary to achieve the MDGs (approximately 0.43% of these countries’ gross national income).

0.10%

0.09%

0.05%

0.00%

B.

Revive the economy and jump-start growth

1.19

From steady growth to slow growth. Colombia’s average annual growth rate slipped from 5% in 1950-1980 to 3% in 1980-2000. Productivity declines were the chief reason for the early-1980s turning point in the growth trend, though the rise in drug trafficking and buildup of violent groups played a part as well.

1.20

Another set of factors at work in the late 1980s pushed up household, business, and government expenditures, notably: (i) the surge in illegal exports; (ii) the discovery of oil deposits which triggered heavy funds flows and also made it easier to secure external credit; (iii) an influx of highly speculative capital attracted by better interest rates in Colombia, and (iv) increased public spending on education, health, social security, and government operations to comply with mandates in the 1991 Constitution and associated laws.

1.21

The combination of steady productivity declines and rising spending that was outpacing revenues triggered structural imbalances and left the economy highly vulnerable. A string of external shocks starting in 1998 ushered in a recession.

Persistent deficits between agents (flows problem) were funded through new borrowings, swelling the debt and leaving the economy financially vulnerable (stocks problem).

1.22

Recession and stagnation. In late 1998, after a brief growth bubble in 1997, Colombia’s economy was plunged into its deepest crisis in 70 years (see Annex I).

Throughout 1999 and 2000 the country had to contend simultaneously with GDP

9

UNDP. “The Millennium Development Goals: A pact Among Nations to End Human Poverty”/Human Development Report 2003.

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declines, financial system upheaval and serious problems with mortgage borrowers, a fiscal crunch in the subnational governments, contingent liabilities for pensions and concessional infrastructure guarantees, a widening central government deficit, the dearth of external financing, and a sharp escalation in violent groups’ activities.

1.23

Trimming the private and subnational government deficits. The abovementioned events forced businesses and households to adjust their finances in light of their new liability and asset situation and to respond to new economic signals. By 2001 the private deficit had been largely erased, the financial crisis had passed, and the government was bringing in a program to put subnational government finances in order. Though the year had started off with a slow recovery, the growth rate ended up a modest 1.4%, the result of political factors and external events. In the political sphere, the stalled negotiations with violent groups and political clashes between the executive branch and legislature consumed the government’s attention.

Internationally, the downturn in the advanced economies and difficulties in the emerging economies depressed external demand. In these circumstances the government’s efforts to narrow the deficit (including tax reform) proved to be insufficient, with serious implications for the medium term.

1.24

The international environment and its impact on Colombia. An important consideration when examining Colombia’s situation is that as its economy has opened up in a globalizing world it has become increasingly sensitive to slowdowns in the industrial economies, instability and financial turbulence elsewhere in the region, fluctuating terms of trade, and volatility in capital flows. When Ecuador suspended payments to banks in 1999, for instance, it became more difficult to obtain external credit, and the recession in Venezuela affected Colombian exports.

Oil and coffee prices fluctuated sharply in 2000; in 2001 the global recession deepened in the wake of the events of September 11. Severe economic turbulence in Argentina, Brazil, Paraguay, and Uruguay in 2002 hurt international market borrowing prospects.

1.25

In short, the Colombian economy is sensitive to developments in the emerging economies, particularly in Latin America; to the growth performance of its trading partners, principally the United States, and to commodity price fluctuations. The moderate global growth forecast for the coming years thus has implications for economic recovery in Colombia.

1.26

With a new government, new expectations. The new administration that took office in August 2002 mapped out a strategy to deal with the conflict and a structural reform plan to rein in the deficit and stimulate the economy. This triggered a shift in expectations, with signs of productive-sector reactivation.

Though the economy grew barely 1.6% in 2002 (a slight improvement over 2001), expectations for the coming years are moderately positive and improving.

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C.

Reduce and contain the fiscal deficit

1.27

Fiscal shortfalls: the unfinished reform agenda. The sharp increase in government spending since the early 1990s is associated with moves to reform the Colombian State. For one thing, in a resolute effort to pay part of its “social debt” Colombia substantially increased education and health transfer payments to subnational governments. With the passage of Law 100, the government’s pension liability—now explicit in the public accounts—soared. 10 Defense spending also mounted as the conflict intensified. By virtue of these increases, public-sector current and capital spending as a percentage of GDP doubled in 11 years, from 16.8% of GDP in 1990 to 33.5% in 2001. Apart from steadily rising, these outlays became “inflexible” budget envelopes. On the revenue side, in the early 1990s current revenues had been high enough to defray expenditures, but because of a tax lag the government had to revamp the tax system six times in the space of ten years to boost tax receipts. As a result, the budget deficit widened from 0.3% of GDP in 1995 to 5% in 1999, then moved back to 3.6% of GDP in 2002.

1.28

The government funded the deficit chiefly through external and domestic borrowings. The nonfinancial public sector debt stock as a percentage of GDP more than doubled between 1996 and 2001, from 22.9% of GDP to 47.7%.11 In 2002 the government had to contend with a number of challenges: (i) difficulties in accessing domestic and international markets; (ii) an inflexible debt budget line;12 and (iii) uncertainty as to the sustainability of the public debt given the dynamic of “inflexible” budget expenditure, the magnitude of the debt relative to GDP, and the repayment profile.

1.29

Sustainability of the public debt. Between 2003 and 2006 an estimated 50% of Colombia’s aggregate public debt will come due. The most onerous years in terms of maturities will be 2003 and 2005. Such a repayment profile in a slow-growth environment has further jeopardized the sustainability of the public debt. According to the estimates, for the debt to be sustainable the country would need to post a primary surplus of between 1% and 3.5% of GDP, depending on assumptions about growth and interest rates (see Annex II).

1.30

Accordingly, Colombia is faced with both a flow problem and a stock problem.

The government is focusing its efforts on: (i) containing the growth of “inflexible” budget expenditures; (ii) eliminating the fiscal shortfall through changes to the tax structure and more efficient administration of tax reve nue; (iii) resolving the problem of short-term finance so the country can continue to service its debt;

10

The disproportion in benefits and shortfall in reserves to deliver on these pension obligations also were revealed.

11

Successive exchange-rate devaluations from 1999 onward had much to do with the increase in the debt stock.

12

Debt service payments in 2002 absorbed 42.5% of overall public sector revenues.

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(iv) improving the debt profile; (v) easing debt repayments, and (vi) stimulating economic growth with the aim of lowering the debt-to-GDP ratio.

1.31

Remedying fiscal shortfalls: Standby Arrangement (SBA) with the IMF. The US$2.2 billion IMF standby credit approved in January 2003 is the framework for Colombian macroeconomic policy for the next two years. The program assumes 2% economic growth in 2003 and 3.3% the following year. The inflation, currentaccount deficit, and fiscal deficit targets are shown in Table I-2.13 Table I-2 SBA targets 2002 Annual percentage change Real GDP Inflation Current-account deficit Overall public-sector deficit Source: IMF

1.32

13

1.6 6.0 As a percentage of GDP -1.7 -3.6

2003

2004

2.0 5.5

3.3 4.0

-0.8 -2.5

-1.6 -2.1

Medium-term economic outlook. Table I-3 presents IMF projections in the scenario discussed above, assuming successful implementation of the fiscal adjustment program and structural reforms. The forecast is as follows: (i) the overall public sector deficit will come down to stand at 1.1% of GDP in 2006; (ii) the external debt stock as a percentage of GDP will drop more than six percentage points over that interval and the public debt stock will trend down similarly; and (iii) external funding will once again be scarce in 2003 and, consequently, the current-account deficit as a percentage of GDP in 2003 (0.8%) will be less than half the 2002 figure of 1.7%; the situation will improve in 2004 and 2005 as more external finance becomes available, easing the currentaccount deficit.

Though the SBA is for two years, the IMF and other multilateral agencies are expected to be tracking the macroeconomic and structural targets throughout the entire period.

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Table I-3. Medium-range outlook 2003 2004 2005 GDP and prices (annual percentage change) Real GDP 2.0 3.3 3.7 Consumer prices 5.5 4.0 4.0 Saving and investment (percentage of GDP) Gross saving 12.2 12.4 12.8 Private sector 7.5 7.2 6.9 Public sector 4.7 5.2 5.8 Gross investment 13.0 14.0 14.6 Private sector 7.5 6.8 7.4 Public sector 4.7 7.2 7.2 Overall public sector (percentage of GDP) Balance -2.5 -2.1 -1.4 Balance of payments (annual percentage change) Current-account balance -0.8 -1.6 -1.8 Capital-account balance 1.2 2.0 3.2 Overall balance 0.3 0.5 1.4 Debt stock (percentage of GDP) External debt 51.3 48.2 46.7 Public 31.3 30.1 29.6 Private 20.0 18.1 17.2 Public debt 55.5 54.3 52.6 Domestic 24.2 24.2 23.0 External 31.3 30.1 29.6

2006 3.9 3.0 13.0 6.9 6.1 14.8 7.6 7.2 -1.1 -1.8 2.9 1.1 44.9 28.7 16.2 50.6 22.0 28.7

D.

Containing the conflict

1.33

Roots of the conflict. The armed civil strife that has been playing out in Colombia for close to 40 years has been characterized by successive rounds of violence of differing degrees of intensity. The two most powerful violent groups are Fuerzas Armadas Revolucionarias de Colombia [Revolutionary Armed Forces of Colombia] (FARC) and Ej茅rcito de Liberaci贸n Nacional [National Liberation Army] (ELN). In the first few years following the advent of these groups their numbers grew little if at all. They operated out of marginal areas of the country; they were small, poorly financed and ill-equipped for military confrontation, and had a meager community support base. Meanwhile, paramilitary bands with many different roots, funding avenues, popular support bases, and partisan leanings began to take shape.

1.34

The 1980s: the end of hibernation. In the early 1980s, following what could be termed a 20-year hibernation, there was a surge in growth of violent groups who moved into areas of critical economic and geostrategic importance to the country.

To sustain their growth these groups financed their operations with money from illegal activities (the drug trade) and from corporations associated with the

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extractive industries (oil, coal, gold) and export agriculture, and through extortion and kidnappings. 14 1.35

Recent escalation of the armed conflict and attempts at dialogue . The escalation of the armed strife starting in the 1990s attests to the military power these groups have gained and their growing self-sufficiency, notably on the funding side. 15 Between 1998 and 2002 talks were held between the government and these violent groups, with little progress of note. In February 2002 negotiations with the FARC broke down and the demilitarized zone was dismantled. The escalating conflict since that point has taken a severe toll on the civilian population and economic infrastructure.

1.36

Effects of the violence and strife. The conflict zone has broadened: in 1991-1994 it took in 223 municipalities; it now encompasses more than 400. In 2001 and 2002 an average of 115 municipalities came under attack. The civilian population also has paid the price of this escalation, with increased attacks on local communities, murders, massacres and kidnappings. Since 1995 the number of civilian casualties of the violence has tripled. According to National Planning Department figures, 75,730 families were internally displaced in 2002. The nation’s economic infrastructure—electricity, roads, and communications systems—also has been damaged in the fighting. Attacks on oil pipelines have doubled in the past three years, inflicting close to US$500 million in losses in 2001 alone. The worsening conflict and increases in drug-related violence have indisputably affected the economy, discouraging investors, leaving production centers in disarray, pushing up transaction costs, and eroding human and productive capital.

1.37

Defense and democratic security policy. The core objective of the government’s present defense and security policy is to restore security and reassert the State’s legitimacy where these conditions are absent. As the policy acknowledges, this will require a concerted effort with involvement of the armed forces and justice administration, education and health care delivery, and the capacity to create an enabling environment for productive activity. The policy is slated for implementation in three phases. First, the armed forces are to regain control of areas where violent groups are least active. Once the State has reasserted its presence, other government agencies will go into each area with aid and development programs, coordinating their work with law enforcement agencies. The final phase targets the most inaccessible areas, in which the same strategy will be pursued.

Thus, little by little, social investment, governance, and State legitimacy will be restored across the country.

14

The FARC financed its operations through its control of areas where illegal crops were grown, the ELN through the mining industry.

15

Paramilitary groups also have mushroomed in recent years, from 2,500 militants in 1996 to 12,500 in 2001.

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E.

Strengthen governance

1.38

Twin crises of the State . If Colombia is to rekindle economic growth and reduce poverty, inequality, and social exclusion at a time of fiscal restraint it will have to strengthen its governance and resource management capabilities. At present the Colombian State is contending with two crises—one involving its ability to make official decisions work on the ground, the other its inability to impose a basic social compact underpinned by legitimate institutions and respect for the law and rights.

1.39

Driving the management crisis are a shortage of human resources and the absence of the requisite financial and administrative conditions and regulatory framework for government agencies to discharge their responsibilities. Because of bureaucracy costs, mounting public spending, and inefficient management the State is unable to respond adequately to society’s needs. For another thing, the decentralization process is taking time. Many subnational governments have stabilized their finances since the 1998 financial crisis; the next step is to build capacity to manage their own development. There still are weak points in their institutional apparatus as well, in the areas of information flows, decision-making, and responsibility allocation.

1.40

At the heart of the governance crisis are corruption and cronyism which undermine the public’s trust in institutions. A compounding factor is that the country’s judicial apparatus does not have the necessary tools—institutional and management arrangements—for efficient and effective proceedings. The resulting court backlogs weaken the rule of law and foster impunity.

F.

The government’s strategy

1.41

The government’s official strategy roadmap is its National Deve lopment Plan (NDP), entitled “Toward a Communitarian State”. The government’s four prime action focuses for 2003-2006 are: (i) instilling democratic security; (ii) spurring sustainable economic growth and job creation; (iii) building social equity, and (iv) enhancing State transparency and efficiency. According to the NDP, the leading domestic causes of the nation’s sluggish economy and the halt in social gains are: (i) the intensification of the armed conflict, (ii) the burgeoning fiscal deficit, and (iii) deteriorating external conditions. In accordance with that diagnostic assessment, the starting premise for the Uribe administration’s strategy is that by quickly closing the fiscal gap and resolving the armed strife and security problems the country can move toward economic recovery and improve social conditions.

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II. EVALUATION OF THE PREVIOUS STRATEGY AND PORTFOLIO ISSUES 2.1

This section reviews the outcomes of the 1998-2002 strategy and lessons learned in its implementation. The conclusions drawn have served as inputs to improve the project programming, preparation, and implementation process for the 2003-2006 strategy. This exercise is all the more relevant given the continuity in the priority focuses of Bank support.

A.

The previous strategy

2.2

The country paper approved by the Bank’s Board of Executive Directors in August 1999 set out five thematic areas as priority focuses for Bank activities: (i) support for the peace process; (ii) poverty reduction and equity enhancement; (iii) consolidation of the decentralization process; (iv) furthering modernization of the State; and (v) fostering sustainable growth. As discussed in the first chapter of this paper, the keynotes of the economic and political backdrop for the previous strategy’s implementation were deep recession and a stalled economy that took a heavy toll on societal welfare; escalation of the armed conflict and breakdown of dialogue, and an adverse international environment. In those circumstances the obligatory focuses of attention for both the Bank and the country were the peace process, in light of the escalating strife; poverty, because of the toll the crisis was taking on the country’s most vulnerable, and decentralization because of the financial and management crisis in subnational governments. Meanwhile, as Colombia found itself shut out of external markets and its fiscal accounts deteriorated, it needed considerable volumes of funding to cushion the effects of the crisis.

2.3

On the operations side, the Bank’s 1998-2002 strategy was implemented by way of 31 projects, most of them (34% of approvals by lending volume) providing support for poverty reduction and equity enhancement programs. Operations to further sustainable growth, modernization of the State, and decentralization accounted for, respectively, 23%, 21%, and 16% of funding approved over that interval. The US$120 million approved to further the peace process made up the remaining 6%. 16

2.4

The country paper approved in 1999 marked the first attempt at defining outcome indicators for each priority action area. Referencing that exercise, the following paragraphs present a rough measure of the strategy’s implementation progress.

Table II-1 summarizes the goals set for each strategy focus, outcome indicators, progress made by the country in Bank-supported areas, and projects by way of which the support was delivered. Most of those programs are now in progress;

16

Though at first glance this figure might suggest that this area came in for little attention, in fact a sizable share of the Bank’s support for the peace process was delivered by way of nonreimbursable technical cooperation and consultative groups.

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many of the activities have contributed significantly to the achievement of the proposed objectives and thus warrant mention.

2.5

Strategy focus: support for the peace process. The Bank continued to participate actively with the international community in initiatives to further the peace process and help make it credible. Specifically, the Bank supported: (i) conceptual and institutional design of the Plan Colombia Investment Fund for Peace; (ii) organization of three meetings of the Consultative Group in Support of the Peace Process;17 and (iii) project identification and profile development for operations for the Investment Fund for Peace. Though the peace accord goal was not attained, these initiatives did facilitate the dialogue and involve the international community in the peace process. The urban violence prevention programs implemented in three of Colombia’s largest cities in pursuit of the peaceable coexistence objective have achieved substantive quality-of-life improvements in communities contending with violence and insecurity. 18 To help further reform of the State the Bank supported basic infrastructure programs for municipalities affected by the violence. Reducing impunity was a focus of support in the area of justice administration, through programs to strengthen oversight agencies and the criminal justice system. 19 No moves were made toward privatizing Colombia’s correctional services, the governme nt not having considered this a priority.

2.6

Strategy focus: support for poverty reduction and social equity enhancement.

Over half the Bank projects approved between 1998 and 2002 and 34% of the total volume of funding were poverty and equity targeted. In the education sphere the Bank focused on key improvements in education quality, the system of central government transfers to subnational governments, and employment training programs for low-income youth. Plans to revamp the National Apprenticeship Service (SENA) were deferred because of the political difficulty of putting through radical training-system reforms at a time of high unemployment. The emphasis of Bank support for the health sector was assistance to low- income groups, expansion of coverage of the subsidized and contributory health insurance systems, immunization programs, and social assistance for the low- income elderly and children. 20 What started out as a pilot initiative with hospital reform will need to be consolidated with the reform of health care networks and a shift from a supply-side

17

These meetings also served as a platform for presentation of the peace-building issue at the international level and to help the country access US$1.2 billion in funding for violence prevention programs.

18

Homicide rates in Cali and Bogota have been declining since 2000.

19

According to Transparency International, the corruption perception level in Colombia declined between 1997 and 2001, taking the country from the first decile of the countries ranked (those where the corruption perception was highest) to the fifth decile.

20

The percentage of Colombians covered by the Social Security Health System increased sharply in the latter half of the 1990s in both the contributory insurance plan and the subsidized plan. By 2001 these plans covered 25.7% and 30.9%, respectively, of the population.

- 14 -

to a demand-side subsidy system so the sector will become financially viable and deliver services efficiently.

Table II-1 Implementation of the Bank’s 1998-2002 strategy with Colombia Strategy focus

The peace process and its sustainability

Proposed objectives

Description

Civic coexistence

Facilitate dialogue on and implement a sustainable national accord

Reform of the State

Heighten the State’s presence as the decentralization process advances

Justice

(i) Strengthen Comptroller General’s Office and Attorney General’s Office; (ii) alternative dispute resolution methods; (iii) prison reform, probity and ethics policy

Outcome indicators

Progress

Loans approved 1998-2002

Signature of peace accord

-

Reduction in homicides and kidnappings

n.c.

Peaceful coexistence and citizen security program

Public investment in vulnerable areas

+

Municipal management and social infrastructur e for peace

Reduction of impunity

+

Strengthening of Comptroller General’s Office

Privatization of correctional services New school system program.

Education

(i) Improve education quality and strengthen the role of the school; (ii) employment training; (iii) reform of SENA

Financial autonomy of schools

+

Social Support Network program. Social sector reform program

Reform of SENA

Poverty reduction and equity enhancement

Consolidation of decentralization

Modernization of the State apparatus

Health

(i) Improve procedures for joining the subsidized insurance plan; (ii) selffinancing hospitals

Increase in subsidized-plan members

+

Social Support Network program. Social sector reform program

Sanitation

Support for mid-sized cities and for private-sector involvement in large cities

Contracts with private companies

n.c.

Pereira water supply and sanitation. Cartagena sewer system

Housing

(i) Institution-strengthening assistance; (ii) reform of Inurbe

Home loans

+

Earthquake in coffee-growing region. Program to rebuild that region

Agriculture

(i) Create production infrastructure; (ii) support science and technology; (iii) institutional reform

Investment in rural municipalities

Microenterprise

(i) Augment the supply of nonfinancial services; (ii) increase rural microenterprise finance

Rural microenterprise credit

Education

Strengthen the school as decision-maker and transfer recipient

Passage of Regional & Local Govt. Reform Law

n.c.

New school system program

Health

(i) Shift from supply-side to demandside subsidies; (ii) hospital autonomy

Revision of transfer criteria

+

Social sector reform program

Reform of the State

(i) Regional and local government reform; (ii) support for municipal institutions

Passage of tax reform law

+

Sector program for subnational fiscal reform

Reform of the State

(i) Fiscal adjustment; (ii) streamlining the State; (iii) process reform; (iv) public-spending efficiency; (v) bolstering regulation

Passage of State reform law Reduction of budget lag

+

Increase in tax burden

+

Sector program for subnational fiscal reform Social sector reform program

- 15 -

Table II-1 Implementation of the Bank’s 1998-2002 strategy with Colombia Strategy focus

Fostering of sustainable growth

Proposed objectives

Description

Outcome indicators

Infrastructure

(i) Increase in capital productivity with private-sector participation; (ii) design of innovative mechanisms to foster same.

Financial sector

(i) Reform of State-owned banks; (ii) technical assistance; (iii) strengthening of oversight

Agriculture

(i) Creation of production infrastructure; (ii) transformation of production infrastructure by region or crop group

Disbursements for rural municipalities

Environment

(i) Local government participation; (ii) water pollution control and solid waste disposal

Cuts in emissions and toxic pollutants

Progress

Loans approved 1998-2002

Concession and privatization contracts

n.c.

Electric power sector

Merger of second-floor banks

-

Financial sector reform program

Provisioning data

+

* Does not include canceled operations and other financial and nonfinancial products. + Positive progress Negative progress n.c.

There have been some initiatives but outcomes are not conclusive.

Shaded areas denote sectors in which no Bank loan operations were executed.

2.7

In the water and sanitation sector, actions were taken to modernize utility providers in mid-sized cities in order to facilitate private-sector participation in this area. Unfortunately no program to support this sector in small cities materialized. In the area of low-income housing, the Bank provided support for the government’s social housing policy, via subsidies, and funds were allocated for urban housing improvement projects using the SISBEN beneficiary-targeting system. A dialogue was launched to revamp the institutional apparatus and strengthen management in this sector. In the agriculture sphere, within the constraints posed by the fighting in rural areas, Bank activities supported regional production projects and fostered the creation of innovative small strategic partnerships. The Bank did not fund any microenterprise projects over this interval since the problem in that area was not one of demand but of improving nonfinancial services.

2.8

Strategy focus: support for decentralization. The Bank’s support for decentralization in Colombia took two forms. The first was assistance in implementing a legislative strategy to stabilize the finances of subnational governments and improve their financial viability following the 1996-1998 crisis in local government finances;21 the second was activities to help contain increases in government transfer payments to the subnational governments and revamp the education and health transfer payment system. One of the Bank actions contributing the most added value was its support for the complex, difficult decentralization process when local governments were in the throes of fiscal crisis. The Bank

21

The number of financially viable local governments more than doubled between 1998 and 2002, from 400 to 850.

- 16 -

contributed greatly to financial consolidation, gradual institutional reform, and dialogues on technical issues. It also provided support for development of basic legislation for a reform of the subnational government tax revenue system. The agenda for entrenching a decentralized institutional apparatus is a medium-range undertaking that will require continuous monitoring and support.

2.9

Strategy focus: reform of the State. The Bank supported a proposal to reorganize the national public sector but the project was not implemented owing to the Constitutional Court’s ruling that the reform bill was unconstitutional. The Bank also fostered initiatives to increase the tax burden, streamline the public sector, and make public spending more efficient. 22

2.10

Strategy focus: foster sustainable growth. The chief focuses of Bank support in this area were the financial and electric power sectors. To help remedy the systemic crisis in the financial sector, various measures were implemented to rewrite laws and regulations governing financial system institutions. In the electricity sector, regulatory and institutional machinery were strengthened, the involvement of private enterprise was facilitated, and a rural electrification policy was developed.

Because of the unfavorable investment climate no progress was made toward the concessions and privatization goal. The merger of second-floor banks was deferred, and agricultural initiatives with rural municipalities were constrained by the conflict. On the environmental side, there were no activities to reduce toxic residues.

B.

Policy-based and emergency lending

2.11

Between 1998 and 2002 the Bank approved three emergency loans and two policybased loans (PBLs) to supply government funding needs and help implement a set of structural reforms. These programs were an efficient countercyclical mechanism, furthering reforms primarily in the financial, local government, and social sectors.

22

Tax revenues climbed from 10.8% of GDP in 1997 to 12.4% in 2002.

- 17 -

Table II-2 Policy-based and emergency lending to Colombia, 1998-2002 Program Electric sector (1159/OC) Fiscal sector reform (1166/OC)

Financial sector reform (1231/OC)

Subnational fiscal reform (1335/OC)

Social sector reform (1381/OC)

2.12

23

Proposed actions (i) Help make the electric power sector financially sustainable; (ii) consolidate the electric sector regulatory function; (iii) devise a rural electrification policy for off-grid areas; (iv) facilitate private-sector involvement in national power distribution companies (i) Increase the tax burden; (ii) streamline the public sector and make public spending more efficient; (iii) modernize the social security system; (iv) minimize duplication in public spending; (v) help local governments balance their finances (i) Improve laws, regulations, techniques and procedures for bank failure resolution; (ii) build institutional capacity in agencies responsible for bank oversight and failure resolution; (iii) resolve the situation of State-owned first floor banks and of institutions under the control of or receiving assistance from the Deposit Insurance Fund (FOGAFIN). (i) Devise and implement mechanisms to strengthen local government (LG) finances; (ii) clarify responsibility allocation in order to minimize duplication in health and education spending; (iii) develop rules that will enable LGs to be fiscally viable; (iv) implement institution-strengthening programs for LGs. (i) Devise transparent countercyclical mechanisms to fund social protection programs and initiatives during episodes of crisis or emergencies; (ii) sharpen the targeting of social protection investments and make it more transparent, and establish rules to clearly delineate central and local government responsibilities for health and education.

Chief outcome Support institutional and regulatory improvements

Support fiscal strengthening at a time of crisis

Contain the financial system crisis

Strengthen subnational government finances and revamp the transfers system

Protect spending on social assistance for vulnerable groups

Though the US$1.095 billion in emergency lending approvals added significantly to the country’s 2003 and 2004 debt repayment profile (particularly with the Bank), the reforms supported by these operations and the timing of the funding were instrumental in containing the crisis in Colombia. 23 As Figure II-1 shows, the country received quick-disbursing funds from the Bank at the bottom of the economic slump. An important point here is tha t, despite the country’s fiscal constraints, investment loan disbursements have held steady in recent years.

Restrictions on Bank funds available for PBLs were a factor in the decision to use the emergency lending facility rather than PBL.

- 18 -

Figure II-1 Colombia, Economic performance and Bank disbursements

1000

6.00%

800

4.00% 2.00%

600

0.00% 400

-2.00%

200

-4.00%

0

-6.00% 1995 1996 1997 1998 1999 2000 2001 2002

Investment

PBL + Emergency

GDP Growth

C.

Portfolio performance overview

2.13

At 30 June 2003 the Bank had 25 active projects in Colombia totaling US$2.3 billion, being funded by 24 investment loans (45.6% of approvals by volume) and one emergency loan (54.3% of approval volume). As of 30 June 2003, 58% of the loan proceeds had been disbursed. Three of the 25 loans are classified as “problem projects”, 7 as being at risk, and the remaining 15 as on track. The size of the Bank’s Colombia portfolio has diminished over the last four years: the aggregate investment, reimbursable technical cooperation, and private-sector loan portfolio in December 2002 was down 53% from June 1998.

Table II-3 Active portfolio by 30 June 2003 No. of operations

Amount approved (US$ millions)

Amount approved (% portfolio)

Projects

25

2,300.0

98.3%

1334.7

58.0%

Investment

24

1,050.0

44.9%

584.7

55.7%

Emergency

1

1250.0

53.4%

750

60.0%

MIF

23

19.6

0.8%

5.8

29.6%

Projects in execution

Amount disbursed (US$ millions)

% disbursed

Nonreimbursable technical-cooperation operations

24

19

0.8%

11.1

58.4%

Country-specific

19

17.1

0.7%

11

64.3%

Regio nal

5

1.9

0.9

47.4%

0.1%

Small projects

4

1.2

0.1%

0.2

16.7%

TOTAL

76

2339.8

100.0%

1351.8

57.8%

- 19 -

2.14

The following are some indicators of portfolio performance between 1998 and 2002: (i) implementation times have become shorter, especially those relating to extensions of the term for final disbursement; (ii) on average, the pace of disbursements has increased, as have disbursements as a percentage of balances available from the previous period; and (iii) the percentage of operations rated as being on track has increased; the number classed as problem operations has declined.

2.15

The principal portfolio performance problems stem from: (i) weaknesses in the design of institutional arrangements for project execution; (ii) weaknesses in project monitoring and evaluation arrangements; (iii) problems in tendering and disbursement processes (the no-objection process; accounting for disbursements); (iv) budget constraints that slow project implementation; (v) turnover at the ministerial level and in senior officials of executing agencies; and (vi) problems of insecurity and unrest that complicate project monitoring and impede access to some parts of the country.

D.

Lessons learned and good practices 1. For country strategy design

2.16

Structural changes and institution-strengthening take time. In its country strategy and in the ensuing lending operations the Bank should preserve continuity of the process and work with interim targets to achieve the long-range objective.

Continuity and technical support are two of the most important forms of valueadded the Bank can contribute. Examples in which this kind of support can be valuable are financial sector reform, decentralization, and social-assistance spending policy.

2.17

The Bank’s strategy inevitably will be subject to multiple risks. Though these are contingencies over which the Bank has no direct control, it should bring its catalytic capabilities to bear to cushion their effects. The evolution of these risks needs to be carefully monitored as well.

2.18

The Bank’s nonlending products—research papers, internships, high-level policy dialogues (“encerronas”), administration missions, etc.—and technical assistance for project preparation and execution are forms of support that contribute net added value in its operations with Colombia.

2.19

Institutional strengthening of Colombia’s channel of communication with the Bank is crucial to improve programming and the implementation and evaluation of individual projects. In 2000 Bank assisted the National Planning Department (DNP) in arranging three internships in similar offices in Brazil and Mexico and one visit to Headquarters.

- 20 -

2. For portfolio execution 2.20

The annual review meetings that have been organized since 1999 have become a good practice for portfolio performance improvement. This arrangement owes its success to: (i) continual coordination between the DNP—the agency tasked with supervising the portfolio and preparing the investment budget, the Country Office, and Headquarters, and (ii) close monitoring of the agreements reached and measures decided on to improve portfolio performance.

2.21

One important step in improving the Bank’s relations with the government is the strengthening of national legislation governing the operations programming and execution processes. In 2001, with Bank support, the government approved the document “CONPES 3119” which sets out requirements and procedures for improving project development and execution. Specifically, the present document refers to the need for better institutional analysis and indicators for project design, monitoring, and evaluation.

2.22

An important consideration in maintaining portfolio quality is the effect of the political cycle on loan preparation and execution. During the most recent administration change the Bank felt it appropriate to defer loan approvals during the political transition, until it could hold consultations with the incoming administration.

2.23

Since 1998, impact evaluations have become an increasingly frequent feature of Bank loans. The information these evaluations have yielded on program execution and progress has been a key input in preparing new operations. In some instances, an in-progress impact assessment has made it possible to substantially rework a project.

2.24

Midterm reviews and midterm missions are an excellent tool for alleviating problems associated with turnover of senior agency officials (ministers and directors), insofar as these activities serve as bridging exercises.

2.25

The participation of civil society representatives in successive stages of the project cycle has yielded valuable diagnostic information for the programming, preparation, and implementation of Bank activities.

E.

Colombia country program evaluation, 1990-2002: main findings and recommendations

2.26

According to the country program evaluation (CPE) produced by the Bank’s Office of Evaluation and Oversight (OVE), the program implemented in the period 1990-2002 was relevant and in line with Colombia’s development priorities. On the ground, the program was coherent, employing a judicious mix of Bank products and very tightly coordinated with activities of other multilateral organizations. In terms of efficiency the performance of the Colombia lending program was similar

- 21 -

to the Bank’s other portfolios—albeit with greater agility through emergency and policy lending to supply the country’s urgent funding needs. The CPE comments that with this quick-disbursing financial support the Bank could have been feeding into debt dynamics for the country and for itself. On the matter of portfolio quality, the evaluation report speaks of systemic failures in the Bank’s monitoring and evaluation system in terms of verifiability and demonstrability of development outcomes. With respect to development effectiveness, the report concludes that there is not enough information to come to a definite conclusion, and uses as a proxy the country’s performance in the proposed strategy areas: improve macroeconomic performance, strengthen governance, and reduce poverty and inequality. The country outcomes indicate that only modest progress was made on those fronts and, consequently, that these development challenges remain on the agenda. On this point, the report recognizes the problem of attribution but does not discuss how Colombia would have fared in those areas without Bank support. 24 2.27

In its recommendations the CPE suggests that the Bank’s new country strategy: (i) analyze the dynamic of the debt and the Bank’s role; this will mean reviewing the state of the debt, the balance between economic growth, societal welfare and fiscal restraint, and the incidence of the future Bank program on fiscal adjustment; (ii) continue to help deepen reforms, particularly in the areas of decentralization, the pension system, social services, and the public sector, to make for sustainable public finances and enhance social equity; (iii) devise a set of metrics for each strategy area, clearly distinguishing between country goals and Bank goals; and (iv) assess progress made toward the objectives proposed in the previous strategy.

These recommendations have been addressed in the present strategy paper.

2.28

The OVE report also recommends that the Bank delve deeper into a number of issues identified during the evaluation exercise. Specifically: a. Systematically define outcome indicators at the project level and gather data to track their attainment. With respect to this recommendation, project-level indicators will be decided on as each operation is prepared, to build into its logical framework. b. Assess shortcomings of the system used to devise and gather data for outcome indicators and propose an action plan, involving the Bank and the government, to track these indicators at the operations in execution level and in programming.

With regard to this recommendation, the Bank is already working to improve outcome indicator design and monitoring and the approaches used to gather

24

Over the past decade the Bank has helped Colombia make its external debt profile manageable and secure capital market access. It supported reforms to help the country weather a financial crisis and spur private and public investment in a strife-torn setting; it helped develop social protection programs and safety nets for vulnerable groups affected by the violence and recession. The CPE does not examine how much the Bank did to assuage the economic and social costs of Colombia’s worst crisis in 70 years.

- 22 -

information to track their progress, in Colombia and elsewhere. Accordingly, this recommendation is being addressed as part of a larger plan that will take in all the countries in which the Bank works. c. Analyze the evaluability of project performance monitoring reports (PPMRs).

This recommendation, like the one discussed in the previous point, will be addressed Bank-wide in the context of the OVE document Oversight review of the IDB’s project monitoring review, the mid-term evaluation and the project completion report (RE-247). d. Explore the reasons for the small percentage of clean audit reports on disbursements and present an action plan to address this issue. During the 2003 portfolio review exercise the Bank will look in detail at the situation of audited financial statements and its implications. The findings and recommendations will be presented in the corresponding report.

- 23 -

III. THE BANK ’S COUNTRY STRATEGY 3.1

Colombia is facing five development challenges: a moribund economy, poverty, lack of governance and State presence, escalation of the armed conflict, and fiscal shortfalls. The first three challenges are the focuses of the Bank’s support in its medium-range strategy with Colombia: (i) lay the foundations for economic revival and jump-starting growth; (ii) foster social progress and make sure that society’s most vulnerable are protected; and (iii) strengthen governance and further modernization of the State.

3.2

The nature of the other two challenges (escalating strife and fiscal shortfalls) is such as to pose constraints for Bank activities, because there is limited scope for Bank action on those fronts and/or because these are problems that affect the Bank’s direct sphere of action and need to be addressed in the short term. The gradual removal of these twin constraints is a core assumption for attaining the proposed strategy objectives, and will affect the type of Bank operations and size of the lending program. The Bank will help alleviate these constraints as the government brings its resources and resolve to bear in gradually overcoming them.

3.3

The constraint relating to the dynamic of the fiscal deficit does not entail a development objective per se but it does affect what the Bank can accomplish in all the priority areas. To ease this constraint the Bank, coordinating closely with other multilateral organizations, will assist Colombia with funding and implementation of the necessary reforms. As for the escalating conflict, the Bank will provide complementary support for the government’s strategy as it has done in the past, given the political nature of this challenge and the kind of initiatives that will be needed to resolve it.

3.4

Consequently, the challenge for the Bank will be to make optimum use of its menu of products in order to attain the country strategy objectives and provide support where practicable to ease or remove the constraints discussed above. This will entail the following forms of Bank support for Colombia: a. Policy-based lending in key areas to back reforms intended to stabilize the public finances, improve social service delivery, protect spending on social assistance, strengthen institutions, and increase competitiveness. b. Investment lending to the national government in priority areas, with a catalytic effect to spur private investment.25

25

The investment lending program will need to be adjusted in line with changes in the country’s fiscal situation.

- 24 -

c. Lending to the private sector, especially in sectors that can stimulate the economy (local capital market, electricity sector, transportation). d. Investment lending to subnational governments and decentralized agencies which have borrowing capacity, to assist with public and social service delivery, institution-strengthening, and development of production infrastructure. e. Technical cooperation loans and nonreimbursable technical cooperation to assist with institution-strengthening, technical capacity building, and project preparation. f. Guarantees granted by the Bank so that the country can issue sovereign bonds in world markets, thus helping to finance the budget. g. Multilateral Investment Fund (MIF) operations, targeting competitiveness improvements, agricultural development, creation of production chains or industry clusters, promotion of microenterprise and small business. 26 h. Inter-American Investment Corporation (IIC) operations promoting exports of agribusiness products, pharmaceut icals, textiles, and manufactures, 27 and i.

3.5

Organization of coordination (consultative) groups government’s efforts to bring an end to the conflict.

to

support

the

Coordination by the Bank with multilateral and bilateral agencies is a key component of this strategy, especially in light of fiscal constraints, the multiple areas of reform that the government is tackling, and the experience of each entity.

Such coordination will make it possible to produce synergies, ensure complementarity, and avoid duplications of efforts in fundamental areas of the strategy (see the Bank’s strategy matrix with the country). The interagency coordination with multilateral agencies and the principal bilateral donors that existed during preparation of the BCS will continue at the operational and, if appropriate, project level. In addition, such coordination will be expanded in the early stages through an expanded review exercise with all donors. On the basis of this activity, the donors matrix will be reviewed to identify priority areas, financial resources, technical assistance, and projects that the donors would finance in the following four years. The consultative groups are also expected to use this coordination paper as a benchmark.

26

The MIF has sector strategies (Technical Cooperation Facility, Human Resources Facility, and Small Enterprise Development Facility) and bases its programming in terms of how the demand for proposals conforms to these sectors .

27

The IIC also is exploring local-currency corporate guarantees for local bond issues.

- 25 -

3.6

The sections that follow outline the components and target sectors of the Bank’s country strategy, following the schema in Table III-1, as well as complementary activities planned by other multilateral organizations and the critical path for implementing the Bank’s strategy.

Table III-1. Structure of the Bank’s country strategy Priority focus

Components

Work focus

Lay foundations for economic revival and jumpstarting growth

Ø Foster competitiveness

§ Expand markets and improve competitive

Ø Support agricultural development

§ Agriculture sector

§ Infrastructure development

Foster social progress and ensure that society’s most vulnerable are protected Strengthen governance and further modernization of the State Constraints

supply of goods and services and natural resources § Natural resources management management Ø Strengthen social protection programs and ensure that society’s poorest are protected § Education Ø Increase coverage and improve § Health quality and efficiency of social § Water and sanitation service delivery § Low-income housing Ø Support national public sector reform and improve public utility regulation Ø Build local management capacity Ø Foster transparency and curb corruption Ø Support judicial branch reform

Mitigating actions

Fiscal shortfalls

Ø Contain the deficit and promote reforms

Escalation of the conflict

Ø Support initiatives to bring an end to the conflict Ø Support moves to bolster the State’s presence across the country

A.

Lay the foundations for economic revival and jump-starting growth

3.7

Though Colombia’s economy has grown steadily over the last 70 years thanks in large measure to prudent macroeconomic management, a loss of momentum in the past decade has created a saving- investment balance consistent with weak growth.

This can be attributed to several impediments: (i) the absence of highly competitive modern sectors; (ii) the slow pace at which the nation’s production and government apparatuses are adapting to the exigencies of globalization, and (iii) a loss of momentum in the agriculture sector, which has done little to adjust to new conditions in the marketplace.

- 26 -

1. Foster competitiveness 3.8

One of Colombia’s main growth deterrents is a combination of cross-cutting and sector-specific factors that are impairing competitiveness. Among the most important cross-cutting constraints are: (i) the macroeconomic environment; (ii) civil strife that has fragmented the country and destroyed lives and property, dimming market and output prospects; (iii) shifting ground rules, corruption in government, and judicial system weaknesses that have affected the investment climate and consumer decisions; and (iv) the need to improve human resources quality. Two avenues whereby Colombia could return to a stronger growth path would be to take advantage of the “demographic opportunity”28 and restore the balances of economic agents.

3.9

Other specific factors that are holding back growth and competitiveness are: (i) the lack of the requisite infrastructure and (ii) the need to expand markets and improve the competitive supply of goods and services. The first factor will involve activities in the transportation and energy sectors. To address the second issue the country would need to deepen trade integration, propel microenterprise and small business growth, foster technological innovation, and complete its financial system and capital market reforms. a. Infrastructure development

3.10

Transportation sector. The armed conflict and the slowing economy have affected road system investments and maintenance, pushing up transportation costs and isolating rural communities. This has been one reason for the country’s fragmentation and the worsening of poverty. As capital spending on roads and highways has declined (down 33% from 1998 to 2000) the system has steadily deteriorated. Major challenges in this sector are to: (i) increase public and private investment for road rebuilding and rehabilitation; (ii) delineate responsibilities and build management capacity in central government agencies (Ministry of Transportation, Transportation Regulatory Commission, Transportation Superintendency) and at the subnational government level, and (iii) increase safety and security.

3.11

Urban transit. The key challenge here is to provide quality service that can keep pace with the demands of a growing urban population. Bogota’s new Transmilenio system stands as a model for other cities. On a regional scale, the Initiative for the Integration of South American Regional Infrastructure (IIRSA) is designed to further integration in the areas of transportation, telecommunications, and energy

28

Demographic window of opportunity is considered to be the period (to approximately 2025) during which the dependency burden associated with the aging of the Colombian population will decline. This period could provide a space for improving the quality and coverage of different social services in education, health, pensions, and employment.

- 27 -

markets by: (i) spurring integration and development projects (integration and development hubs) and (ii) removing regulatory bottlenecks (sector-specific processes).

3.12

In the transportation sector the Bank will support: (i) institutional capacity building, focusing on regulatory and compliance monitoring systems, demarcation of agency responsibilities, and avenues for private-sector participation, and (ii) on the infrastructure side, rehabilitation of the main arterial roads, working also with the departments and the central government on the secondary and local road networks.

Other focuses of support will be urban transit projects in mid-sized cities and road improvements in Bogota. With respect to the IIRSA, the Bank will contribute to sector-specific processes and IIRSA regional projects. It also will provide funding and technical assistance for projects likely to have a strong integration impact in the identified hubs.

3.13

The World Bank will fund specific national urban transit operations and projects involving secondary roads. The Andean Development Corporation program includes road and river transport projects and runway construction and repair in small airports in remote areas. An operation (Transmilenio) involving a mass transit system for the cities of Bogota, and Pereira is planned as well.

3.14

Energy sector. This sector’s most pressing challenge is to create conditions for reliable, efficient energy delivery to the bulk of the population. This will mean: (i) generating investment; (ii) improving the current regulatory environment to attract private enterprise; and (iii) eliminating tariff distortions to make the system financially viable. In terms of coverage, the numbers of households with electricity service have been steadily rising; the challenge now is to redress disparities between regions. Since so many of the off-grid areas are the scene of violence and the State’s presence needs to be heightened in remote areas, attention to parts of the country that are not on the power grid, with due regard to financial sustainability, should be one of this sector’s priorities.

3.15

In the energy sector the Bank will support: (i) the completion of privatizations of energy distributors and generating companies; (ii) reforms of the Public Utilities Superintendency, the Electricity and Gas Regulatory Commission, and the regulatory framework; (iii) liberalization of the natural gas market, dispelling the uncertainty that is keeping away investors; and (iv) identification of suitable mechanisms to help take electricity to off- grid areas. In the World Bank’s strategy there are no plans for specific actions in the energy sector. b. Expand markets and improve the competitive supply of goods and services

3.16

Trade integration. In order to deepen integration and boost demand, Colombia currently is engaged in trade negotiations on various fronts. Implementation of

- 28 -

these arrangements will occasion swift, sweeping changes in domestic policy, legislation, local institutions, and private-sector participation. 29 Consequently, the challenges awaiting the country have to do with the form of its entrée into the global marketplace and how to cushion potential adverse impacts. Specific requirements in this respect are to: (i) bolster the negotiating capacity of public- and private-sector parties to the negotiations; (ii) redesign the nation’s export development policy in the matter of tax incentives and free-zone tax treatment; (iii) assess the macroeconomic impact of integration and identify social adjustment needs associated with deepening integration; and (iv) devise policies to help small and medium-sized businesses share in integration’s benefits.

3.17

To help deepen trade integration the Bank will support activities to: (i) keep the different negotiations running concurrently and ensure that they are mutually complementary, and (ii) build technical capacity in and heighten coordination among the various government agencies and between those agencies and the public and private institutions that are parties to or stand to be affected by the negotiations.

This support is being provided and will continue to be provided on the basis of technical dialogue, which will be supplemented with nonreimbursable technicalcooperation funding. The World Bank’s strategy envisages no specific action in this sphere.

3.18

Microenterprises and small and medium-sized enterprises (MSMEs). These commercial concerns, which account for roughly 94% of Colombian businesses and 33% of the employed labor force, have been hit hard by the economic turbulence in recent years. The main challenges to be able to improve their goods and services offerings are to give them access to funding and develop instruments to strengthen them, notably: (i) modernize laws that affect the credit supply; (ii) develop credit reporting systems; (iii) devise mechanisms whereby financial institutions can readily recoup their money in the event of payment defaults; and (iv) develop nonlending support products that can boost productivity, through training, technology development, and access to market intelligence.

3.19

The Bank will focus its support in this area on: (i) regulatory reform; (ii) helping financial institutions enter the microfinance arena; (iii) technical assistance to equip MSMEs to compete; (iv) development of innovative project clusters; and (v) organization of Inter-American Forums on Microenterprise, which will take up support for women entrepreneurs. The World Bank plans to focus on business climate enhancement and small business and microenterprise productivity.

29

Andean Community, MERCOSUR, Free Trade Area of the Americas, World Trade Organization, and other negotiations that take in Canada, the Northern Triangle (Guatemala, Honduras, and El Salvador), and Panama. Important negotiations are now under way with the United States on a bilateral trade agreement similar to the North American Free Trade Agreement (FTAA).

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3.20

Science, technology, and innovation. Advances in this area are a second requirement for increasing the supply of competitive goods and services. Here the main challenges will be to: (i) enhance the sector’s institutional machinery to make more efficient use of resources and encourage private-sector involvement, and (ii) increase the funding available to this sector, to regain 1995 investment levels.

3.21

The Bank’s support for this sector will center on: (i) improvements in science and technology legislation; (ii) continuing assistance for the creation of national technology development funds; and (iii) as a special focus of attention, the supply of information and technology services for SMEs. The World Bank’s strategy envisages technology development and innovation activities with an emphasis on the rural sector.

3.22

Financial system. Measures taken by the previous administration between 1998 and 2002 successfully staved off systemic crisis in the financial system, but a series of measures still are needed to improve system performance: (i) rationalize the role of government as first- floor financial intermediary; (ii) consolidate second-floor banking; (iii) train oversight-agency personnel to discharge their responsibilities; (iv) improve corporate governance and reporting systems; (v) foster financial deepening and regulatory improvements to pave the way for new products to address intermediation needs (e.g. remittances); and (vi) strengthen development banks.

3.23

The Bank will target its support to specific areas relating to: (i) financial sector regulation, with an emphasis on corporate governance issues and regulatory and oversight institutions; (ii) the lack of legal certainty and guarantees, and (iii) financial development for the handling of remittances. 30 The Private Sector Department (PRI) will continue to help promote the COLPATRIA model to local investors and institutions to bolster the mortgage bond market 31 and promote infrastructure projects and consumer lending or credit cards (asset securitization).

Since PRI projects are generated by demand, the projects that are likely to be candidates for assistance cannot be identified in advance. However, the huge demands associated with capital market development can be anticipated and insofar as the peace process and regulatory structures are strengthened a gradual increase in requests for infrastructure project support is expected. The Bank’s strategy in terms of promoting competitiveness will create the spaces that are needed to ensure that PRI participation is effective. AWorld Bank-funded operation to help make the

30

In accordance with the Vienna Convention it is a crime in Colombia to traffic in illicit drugs, be in possession of the proceeds of illicit drug trafficking, cultivate coca bush or opium poppy, help develop or finance opium poppy plantations, and launder money. The money laundering rules apply to financial system institutions.

31

Support is needed primarily for: (i) launching of bonds as real-value-unit assets acceptable to the capital market; (ii) technical assistance, monitoring, and information-sharing to help implement this approach in mortgage banking; and (iii) technical assistance to improve mortgage loan reporting systems.

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system financially sustainable and spur capital market development will complement these activities.

2. Support agricultural development and natural resources management a. The agriculture sector 3.24

Agriculture contributes 14% of Colombia’s GDP, accounts for 28% of exports, and gives employment to 27% of the labor force. Since the opening up of this sector in the early 1990s it has not managed to shift away from import-substitution to a focus on a robust, fast- growth exporting sector. The presence and activities of violent groups in virtually all rural parts of the country has hampered the process. The prime challenge to reinvigorate Colombian agriculture is to make it more productive and more competitive by: (i) bringing in modern technology; (ii) restructuring the coffee market, and (iii) helping small farmers adopt modern business forms so they can play a larger role in transforming agricultural production patterns and the agricultural export trade.

3.25

In the agriculture sector the Bank will focus its support on actions to: (i) implement a more proactive technology transfer and productive innovation policy; (ii) restructure the coffee industry through technology transfer, prospecting for new market niches, and rural development programs; (iii) target assistance to small-scale campesino farmers to assist with technology transfer, infrastructure works, and development of nontraditional agricultural products; and (iv) promote business training in agricultural and agribusiness topics for small and medium-scale producers.

3.26

The World Bank plans to support local leadership development and capacitybuilding in local organizations in rural areas. Other targets of support will be small producers hurt by the coffee crisis, to enhance their competitiveness and assist in the transformation of coffee-growing areas, and promotion of rural education and training programs. b. Natural resources management

3.27

The challenges in this sector are to: (i) solidify its institutional apparatus; (ii) restore degraded microbasins tha t are potable-water sources; (iii) halt the deforestation being caused by the pushing back of the agricultural frontier, and (iv) promote disaster prevention at the departmental and local level.

3.28

In pursuit of this strategy focus the Bank will help: (i) further the development of sector institutions; (ii) secure funding for reforestation work and to care for forest ecosystems; and (iii) improve disaster prevention at the departmental and local level. Targets of World Bank support will be the revamping of permit systems, improvements in environmental management legislation, lowering of carbon emissions, and technology transfer to the energy sector.

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Box III-1 Environmentally sustainable growth: a priority Bank focus Colombia is richly endowed with natural resources. It holds close to 10% of the world’s biodiversity and is home to diverse ecosystems. These natural assets are under threat on a number of fronts: (i) deforestation as the agricultural frontier is pushed back (to cultivate illicit and legal crops), urbanization, and use of wood as household fuel; (ii) water pollution caused by waste discharges, soil alteration, and erosion; (iii) air and soil pollution in large and mid-sized cities; and (iv) depletion of renewable natural resources (wetlands, fish s tocks, mangrove swamps).

B.

Reduce poverty, inequality, and social exclusion

3.29

Initiatives to stimulate growth, stabilize the economy, and strengthen governance are a sine qua non for poverty reduction, but on their own these will not be enough to achieve poverty reduction goals. Also required will be actions to enhance equity and maximize the poverty impact of economic growth. This will entail efforts on two fronts in urban and rural areas alike: (i) improvement of social protection systems to better equip low- income groups to weather economic or political upheaval or other crises 32 , and (ii) broadening of access to essential social services and productive infrastructure, including enhanced employment prospects through labor market information and training systems. This broadening of access will focus on young people and women.

1. Strengthen social assistance programs and ensure that society’s poorest are protected

3.30

The challenges for social security and social safety net33 programs are to: (i) strengthen institutions and tighten interagency coordination; (ii) gradually decentralize program management; (iii) refine the SISBEN beneficiary-targeting system; and (iv) ensure that social-program budget allocations are adequate. These challenges are all the more daunting because of the displaced population.

3.31

The Bank will promote activities to: (i) strengthen central government agencies in charge of social assistance programs; (ii) sharpen the targeting of social spending; and (iii) make sure programs designed to cushion the impact of fiscal adjustment and of the conflict are duly implemented. These activities will fit within a poverty strategy currently being developed with Bank support. The World Bank will help bolster the social protection system, focusing on social risk management, support

32

Vulnerable groups include children, young people about to enter the employment market, mother heads-ofhousehold, the unemployed, and the population displaced by the internal conflict.

33

Administered by the Colombian Family Welfare Institute, Social Solidarity Network, and Social Support Network.

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for decentralized service delivery, and an evaluation of Social Support Network activities.

2. Increase coverage and improve the quality and efficiency of social service delivery a. Education 3.32

Education-sector challenges fall into four main areas. Enrollments : (i) work toward universal preschool and primary education; (ii) create more places at the secondaryschool level, and (iii) improve programs to encourage young people to stay in school. Quality: (i) improve the organization of the education system and strengthen schools and advisory, regulatory, oversight and monitoring agencies; (ii) promote a school governance system; (iii) train teachers; (iv) improve school plant and the stock of educational materials, and (v) lengthen the school day.

Legislation: Continued efforts are needed to implement Law 715/2001 34 and reorganize schools. Efficiency: Funding for the university system needs to be allocated more efficiently; academic and scientific productivity needs to be enhanced, as do the subsidy and loan allocation systems.

3.33

Unemployment is one of Colombia’s top concerns. At the end of last year close to 2.97 million people—14.7% of the national labor force—were without work. 35 Though no segment of the population is immune, low-skills workers, women, youth and, generally, lower- income groups are the hardest hit. The trend toward stronger skills requirements has created a demand-supply gap in the labor market, in which those with the weakest skills sets lose out. The country’s employment training and development “system” is weak and sometimes ill-devised. Education quality is poor, the training apparatus is inadequate, post-secondary and employment training programs are underfunded, and there are weaknesses in labor market information in terms of skills needs, regions, and demand in different sectors. 36

3.34

The Bank will support activities to: (i) increase basic and secondary education enrollments, exploring ways of increasing basic education enrollments in excluded groups; (ii) implement Law 715/01; (iii) provide direct support to subnational governments; (iv) implement education reform programs in urban areas for internally displaced populations; and (v) operate employment training programs for

34

Under the terms of this law, transfer payments for public education finance will be pooled into a single envelope; municipalities with populations over 100,000 will have autonomy to directly administer funds; there will no longer be national supervisors; and local governments will have flexibility for school organization.

35

The unemployment rate in the 13 largest Colombian cities stands at 16.1%.

36

Labor market rigidities are another reason for the country’s high unemployment, especially as regards wages and benefits, severance costs, and nonwage costs. The government has launched a labor market reform in an effort to bring down the high jobless rate.

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low-income youth. The World Bank, for its part, will be supporting the expansion of basic education in rural areas and a post-secondary scholarship and loan program. The Andean Development Corporation plans to assist Bogota with investments in education plant. b. Health 3.35

The percentage of Colombians with compulsory health insurance coverage 37 has been climbing. 38 However, widespread evasion and problems on the revenue intake side are still fixtures of the contributory plan. In the subsidized plan the issue is one of coverage, which since 1998 has been affected by rising unemployment, evasion and avoidance of contributions to the system, and the time it is taking to move resources on the provider side into the insurance program, particularly at the departmental and local level. 39

3.36

Consequently, the most pressing challenges in this sector are to: (i) improve health system regulation, doing away with the large body of ambiguous laws that have ended up confounding or altering the principles enshrined in Law 100/93 and the mandates of government agencies; (ii) strengthen national and subnational agencies in charge of health sector management, oversight, and compliance monitoring; (iii) build institutional and management capacity in health care providers, including personnel rationalization initiatives; (iv) extend the coverage of the subsidized plan by increasing funding for it, effectively transferring Solidarity and Guarantee Fund monies and/or extending the partial or temporary subsidy arrangement; (v) implement reforms to make the Social Security Administration and public hospitals financially sustainable; and (vi) remedy shortcomings in public health and immunization programs.

3.37

The Bank’s support to Colombia in the health sector will target: (i) moves to remedy structural problems in the public hospital system; (ii) service quality improvements; (iii) extension of health insurance coverage; (iv) insurance for more of the country’s poor; and (v) sustainable balance of health system finances. Direct support also will be provided to strengthen subnational government agencies. The World Bank plans to support initiatives to make the hospital system financially sustainable and increase its efficiency.

37

The universal compulsory health insurance scheme ushered in with the approval of the Social Security Health System in 1993 features a mix of public and private providers. Consumers are divided into two groups: contributory (the employed and others with the means to pay) and subsidized (the low-income and poor population).

38

Between 1992 and 1997 the percentage of the population covered by the social-insurance health system jumped from 28% to 54.9%. In 1998 the trend began to turn around: by 2001 the coverage rate had edged down to 52%. First-income-quintile coverage soared from 4.2% in 1992 to 35% in 2000.

39

Owing especially to extant pressures to continue funding public hospitals regardless of their catchment population.

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c. Water and sanitation 3.38

The number of households with water and sewer service increased in the 1990s, albeit with sharp differences between urban and rural parts of the country.

Efficiency gains have yet to be achieved in utility providers and there has been no sustainable increase in investment in the sector. The challenges in these circumstances will be to: (i) extend water service to more of the population; (ii) prevent and curb pollution by developing and implementing a sewage management plan and improving solid waste management; and (iii) develop the National Water Resources Law, adjusting current laws and regulations as necessary.

3.39

Activities slated for Bank support in this sector are: (i) regulatory improvements; (ii) creation of a system of direct subsidies to low-income customers; (iii) technical capacity building for utility providers so they can modernize their operations and deliver services more efficiently; and (iv) creation of incentives to heighten privatesector involvement. The World Bank will support sewage management projects and initiatives to boost investment in the sector. Specific water and sewer programs will be implemented with the Andean Development Corporation. d. Low-income housing

3.40

Colombia faces several challenges to make its social housing policy work: (i) strengthen the sector’s institutional apparatus for planning, coordination, and monitoring; (ii) improve allocation, disbursement and monitoring systems for the family housing subsidy and the fiscal execution of these subsidies and ensure that the programmed savings scheme is duly implemented; and (iii) develop program reporting, supervision, and evaluation systems.

3.41

The Bank will support the government’s housing policy by way of: (i) subsidy delivery and (ii) support for capacity-building in sector institutions. There are no plans in the World Bank’s strategy for specific actions in this area.

C.

Strengthen governance and further modernization of the State

3.42

As enunciated by the Uribe administration, the main challenges in this sphere relate to: (i) reform of the national public sector; (ii) strengthening of local (municipal and departmental) governments; (iii) enhancing transparency and combating corruption; and (iv) improving administrative and court proceedings.

1. Support national public sector reform

3.43

The prime challenge with respect to the national government is to institute a comprehensive package of vertical and horizontal reforms. The aim of vertical reforms is to increase efficiency and organizational effectiveness within each ministry or national government agency. Horizontal or cross-cutting measures are

- 35 -

those that change rules, policies, and administrative institutions whose impact cuts cross national public sector operations.

3.44

To help address these challenges the Bank will support initiatives to: (i) make for more efficient service delivery; (ii) rebuild governance capacity in the country, and (iii) improve the public finances. In tandem with these activities the reform will enhance information systems to underpin public policy making and social service targeting. The World Bank will be providing parallel support for budget management and rationalization efforts in the area of tax revenues.

2. Strengthen local management capacity

3.45

Colombia has made strides toward political decentralization (popular election of mayors and governors) and fiscal decentralization (shareout of national revenues).

The current challenges are to: (i) devise an incentives system that will spur local authorities to augment their revenue-collection capacity and (ii) solidify local governments’ administrative and institutional capacity, to equip them to deliver services more efficiently while preserving fiscal discipline.

3.46

To help further these decentralization processes the Bank will continue to assist Colombia in two areas: (i) improving subnational government revenue management and ongoing support for the creation of new local revenue sources, and (ii) institution-strengthening to build planning and management capacity in subnational governments. No specific action in this sphere is envisaged in the World Bank’s strategy.

3. Foster transparency and curb corruption

3.47

Transparency and anti-corruption concerns figure prominently on the government’s agenda. The most pressing challenges in this area are to: (i) revamp the government procurement and contracting system; (ii) strengthen government and citizen oversight bodies; (iii) improve the transparency and quality of information on the workings of government and build capacity in the State to produce such information; and (iv) create incentives to enlist the private sector in the anti-corruption drive.

3.48

Focuses of Bank support in this area will be: (i) strengthening of fiscal oversight bodies; (ii) design and implementation of information and reporting avenues and systems to monitor and measure corruption and transparency (integrity indexes and “observatories”) at the central and subnational government level; and (iii) fostering of good corporate governance in the private sector. Among the World Bank’s proposed support focuses are programs to heighten civil society and regulatory oversight.

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4. Support justice system reform 3.49

The main challenges for improving the administration of justice in Colombia are to: (i) broaden access to the system; (ii) develop and promote dispute resolution avenues and articulate these with approaches that encourage non-judicial dispute settlement; (iii) build operational, administrative, and technical capacity in the judicial branch; (iv) implement mechanisms to discipline judicial public servants; (v) advise the high courts on decisions that have economic or social implications for the citizenry; and (vi) devise mechanisms for information dissemination about the sector and to assess its performance.

3.50

In this sphere the Bank proposes to support: (i) strengthening of judicial branch institutions and administration; (ii) technical assistance to the high courts; and (iii) increasing the transparency and quality of information on the workings of government and the government’s capacity to produce such information. The World Bank will continue supporting moves to relieve court congestion and sentencing backlogs and improve quality and productivity in the conduct of judicial business.

D.

Support to alleviate the identified constraints

3.51

If the Bank is to help Colombia tackle the challenges discussed above it will have to help alleviate two constraints: fiscal shortfalls and escalating civil strife. The two constraints are intertwined: implementing a strategy that can ultimately bring the conflict to an end will require more money from the treasury; in the near term this could become yet another budget “inflexibility.”

3.52

With respect to the shortfall in public finances, the Bank will quickly and effectively complement the financial support to be delivered by other multilateral agencies in 2003-2006.40 Bank funding is required in the short term for two main reasons. The first is to counter external shocks to the economy (decline in the terms of trade) and domestic shocks (heightening of the armed conflict) which are jeopardizing the country’s fiscal and financial sustainability. The second is to cushion the short-term adverse social impacts that the fiscal reforms could exacerbate.

40

Given the short repayment term and the higher interest rate, the emergency operations will have an impact on the country’s repayment profile with the Bank. This is the case of the Social Emergency Program for US$1.25 billion approved in March 2003. Repayments on this loan to the Bank will peak at approximately US$1.10 billion in 2007, with much the same effect as the repayment of approximately US$700 million in 2003, a level above Colombia’s average annual repayments. This emergency operations will be accompanied by policy-based loans to promote structural reforms that would help control the deficit and produce the savings the country will need to service its debt. These loans and the repayment schedule are shown in the debt sustainability study that the IMF carried out as part of the Standby Arrangment (see Annex II).

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3.53

Although financial terms and conditions of the emergency loan will affect the debt profile in 2007 and 2008, the Bank in cooperation with other multilateral agencies is supplementing this financial support with other operations to further structural reforms designed to reduce the fiscal deficit in the short term. Both emergency operations and policy-based loans are reflected in the IMF debt sustainability study, which appears in Annex II.

3.54

But funding is only one piece of the Colombia support effort: implementation of the reforms is another. In the latter area, as in others, the Bank is closely coordinating its activities with those of other multilateral organizations and the government. In the near term the Bank proposes to support government spending reform, including pension reform, modernization of the State, hospital rationalization, and restructuring of the Social Security Administration. The World Bank will be focusing on budget management and increased, and more effective administration of, tax revenues.

3.55

To help address the second constraint, escalation of the conflict, the Bank will work closely with Colombia and donor countries to organize consultative groups and other international forums to seek political and financial backing for moves to bring an end to the conflict and minimize its impact on the population. As in the past, and considering the Bank’s position as Technical Secretariat of the Investment Fund for Peace, the government will receive support in formulating a strategy paper, identifying and preparing proposals for consideration by the donors, and arranging a dialogue between civil society organizations, the government, and the donors.

E.

Implementation of the 2003-2006 strategy

3.56

The strategy implementation plan presented in Table III-2 was developed by reference to the core Bank support focuses and current constraints discussed above.

The proposal outlined in the following sections takes due account of the country’s deep fiscal crisis, its debt repayment profile, the escalating conflict, and the economic recession, all of which will impact the country in the near term.

3.57

2003 activities. It is proposed that the Bank focus on protection of vulnerable groups and continuing support for implementation of reforms in social service delivery (education and health). The Bank also will help Colombia strengthen its macroeconomy and public finances by supporting reforms to help contain spending in the medium term and providing quick-disbursing loans to finance the IMF-backed economic program. The emphasis in activities to further modernization of the State will be to provide the final needed support for oversight agencies to enhance State transparency and help the government modernize the workings of its departments and agencies.

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3.58

In pursuit of the economic revival objective, support will be provided beginning in 2003 to help Colombia jump-start its economy, promoting the construction sector.

A social housing loan is proposed to that end, along with investment loans for projects that have a strong catalytic potential to foster competitiveness and bolster Colombia’s negotiating position in the FTAA.

3.59

2004 activities. Assuming that structural reforms have been effectively implemented in 2003 and the conflict resolution strategy is working, the following areas will come in for further support in 2004: (i) governance and heightening of the State’s presence across the country; 41 (ii) continuing assistance for population segments hurt by the adjustment; and (iii) strong support for government moves to stimulate the economy (housing program, transportation and infrastructure projects).

3.60

2005-2006 activities. Assuming that the fiscal situation has improved enough for the government to boost public investment spending and solidify the State’s presence across the country, the focuses of Bank support during these two years will be the national water plan, agriculture sector restructuring, and support in other areas that can enhance competitiveness.

3.61

Given the complex set of circumstances at work in Colombia, an expanded version of the programming memorandum will be prepared before the end of 2004 for consideration by the Programming Committee of Management, with an in-depth examination of: (i) the country’s economic performance and political developments; (ii) state of the conflict, outcome of the referendum, and state of the debt profile and of the public finances; (iii) progress made in the key strategy areas and a review of their relevance; and (iv) adjustments needed, if any, to the 2005-2006 pipeline. These findings will be presented also in the annual country strategy update sent to the Board of Executive Directors for consideration.

41

Building local management capacity, fostering transparency and combating corruption, extending the reach and improving the efficiency of social service delivery nationwide, and infrastructure works.

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Table III-2. Implementation of the Bank’s country strategy Priority focus

Components

Work focus

2003

2004

2005

2006

2003

2004

2005

2006

Infrastructure development Lay the foundations for economic revival and jump -starting growth

Foster competitiveness

Support agricultural development and natural resources management

Enlarge markets and increase competitive supply of goods and services Agriculture sector Natural resources management

Strengthen social protection programs and make sure society’s poorest are protected Foster social progress and make sure society’s most vulnerable are protected

Education Increase coverage and improve quality and efficiency of social service delivery

Health Water and Sanitation Low-income housing

Support national p ublic sector and public utilities reforms Strengthen governance and further modernization of the State

Build local management capacity Foster transparency and curb corruption Support justice system reform

Constraint Fiscal shortfalls

Escalation of the conflict

Mitigating actions Contain the fiscal deficit and promote the reforms (flow problem) Support initiatives to bring an end to the conflict Help strengthen the State’s presence across the country

high

Strategy implementation intensity

medium

low

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3.62

Assistance in removing constraints. In the early part of the strategy cycle the Bank will bring limited instruments to bear to help the government alleviate constraints relating to the debt profile and escalating conflict. In light of Colombia’s market access constraints, within the context of the Standby Arrangement the Bank will help supply the country’s funding needs and further reforms aimed at trimming the deficit. The bulk of this support will be delivered in 2003 and 2004.

3.63

Given the political nature of some actions entailed in settling the conflict and combating drug trafficking, the Bank’s support will take the form of complementary activities to foster peaceable coexistence, reassert the State’s presence, strengthen the justice system, develop areas that are the scene of conflict, and organize consultative groups. These activities will take place in the first stage of the country strategy’s implementation.

3.64

Approval scenarios. Given that the magnitude of the constraints on public spending affecting the investment lending program and the country’s financing requirements, the approval scenario (see Annex VIII) is not very flexible. In each scenario emergency loans or PBLs are assumed to be constant. In the case of investment loans, the difference between the base scenario and the high and low scenarios is the marginal reduction in the narrow window for absorbing investment loans. In 2005 and 2006, depending on fiscal trends and the possibility of economic recovery, the approval scenario will be revised. The revision will be presented in annual updates of the operations program.

3.65

Products to implement the strategy. As was discussed in paragraph 3.4, the Bank will make optimum use of its full toolkit of support products to ensure that the country strategy objectives are achieved and help remove the constraints referred to above. The focus in the early phase of the strategy will be policy-based lending to improve social service delivery, preserve spending on social assistance, and further public finance reforms. Complementing these operations will be investment loans to help jump-start the economy, as the country’s budget permits. As constraints are removed or eased in successive phases of the strategy the Bank will increase the investment-lending proportion, focusing on operations at the national level or lending to subnational governments in areas pertaining to public utilities, institution-strengthening, and development of production infrastructure. However, given the state of the public accounts and the uncertainty created by the climate of insecurity, there will be a need for flexible responses and quick solutions, particularly in the use of investment loans.

F.

The country strategy: Monitoring of implementation indicators

3.66

This section provides further details on the indicators listed in the right- hand column of the Bank’s strategy matrix with the country and the monitoring process.

The government has set ambitious targets for itself and the present strategy supports the country’s efforts to supplement those of other multilateral and bilateral

- 41 -

agencies. The indicators are a yardstick against which to measure progress toward the three country strategy objectives subject to any constraints that could impede the strategy’s implementation. Annex IX provides a breakdown by indicator, showing the baseline, benchmark target, estimated timeframe to achieve the outcome, likelihood of reaching the benchmark target, frequency of calculations, which agency compiles the data, and which Bank activities contribute to the objective in question. 42 3.67

These indicators are derived from both international and Colombian sources. The selected global indicators are put out annually by the World Economic Forum and Transparency International. The Colombian indicators come from official data produced by the National Statistics Department and National Planning Department.

As part of the Bank’s monitoring of governance issues it is assisting Transparencia por Colombia in developing an Integrity Index of Public Institutions. All of these indicators are trackable annually.

3.68

Because of the importance of the two constraints discussed in this paper—fiscal shortfalls and the escalating conflict—indicators measuring progress on those fronts should be trackable quarterly. Selected activities intended to ease these constraints, such as the referendum, government moves to ease the debt repayment profile, and implementation of the democratic security strategy, will be monitored as well.

3.69

The following measures are planned to ens ure that these indicators are duly monitored: (i) the indicators will be included in both the portfolio review and programming exercises as a topic for dialogue with the government; (ii) an indicator monitoring action plan will be coordinated with the National Planning Department (DNP); (iii) portfolio review and programming mission reports are to contain a status report on the indicators; (iv) project performance monitoring reports (PPMRs) will be strengthened and improved, as one feature of the Bank’s action plan; and (v) a report will be provided to the Board of Executive Directors each year when the Bank’s strategy is updated.43

42

Comments in the OVE paper Country strategy evaluability (RE-253) were taken into account in selecting the indicators.

43

Because it is important to be able to gauge both the impact and outcomes of Bank-funded programs and their contribution toward the country strategy objectives, the Bank and the government have agreed that evaluation activities devised in concert with the DNP will be built into new projects at the preparation stage, satisfying mutually agreed technical requirements. The purpose of these activities is to come up with clearly measurable targets that will not just overcome certain observed evaluability problems but also assure greater feedback on project impacts, outcomes, and management. To that end, the Bank and the government have agreed that they will explore avenues of Bank support to the DNP to improve the National Public Sector Performance Assessment System (Sinergía).

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G.

Risks for the country strategy’s implementation

3.70

The two constraints discussed earlier in this paper constitute the chief risk for the Bank’s program, as potential impediments to achieving the strategy objectives. The strategy envisages a number of mitigating actions via which the Bank can help alleviate these constraints. Other unforeseeables having to do with the international climate are beyond the Bank’s control.

3.71

Difficulties in the fiscal adjustment process and stabilizing of macroeconomic accounts. This risk would arise in two scenarios: a. Failure to pass public finance laws necessary to rebalance the public accounts. Non-passage of the referendum would be the short-term manifestation of this risk, directly affecting the government’s ability to alleviate the fiscal situation and thus jeopardizing the Bank’s lending program, World Bank support, and achievement of the Standby Arrangement targets. Other reforms are equally important to see the fiscal adjustment process completed: restructuring of the national public sector, fiscal responsibility, hospital rationalization, the subnational taxation system, and more flexible budget spending. A political consensus will be necessary for the passage and implementation of many of these reforms. Mitigating action: The government is exploring several contingency measures were the referendum not to pass, among them an executive order freezing public sector salaries, a bill to levy the value-added tax across the board, and adding a cap on government borrowing to the political reform bill currently before Congress. Underpinning this contingency plan and other possible side measures is the government’s commitment to the fiscal adjustment and the general acknowledgment of the need for the reform. b. Insufficiency of the structural reforms . In this eventuality the fiscal deficit might not be trimmed and the sustainability of the debt in 2005 and 2006 would be jeopardized. Mitigating action: The Bank would continue to provide support for the government’s implementation of alternative reform measures.

3.72

Failure to make substantive progress toward resolving the armed conflict and heightening of domestic insecurity. This would have a twofold effect: (i) if no inroads are made into resolving the conflict and government spending has to increase, the deficit will come under even more pressure; (ii) if the conflict draws out it may further cloud the investment climate and thus put off economic recovery; and (iii) this situation could take an enormous toll on human capital. Mitigating action: Though the Bank can offer indirect support for initiatives on these fronts, this risk is beyond its control.

3.73

Financial market access constraints. This scenario could create problems for the private sector and the government’s 2004-2006 funding program. Mitigating action: Uninterrupted support for the government plan from multilateral organizations can

- 43 -

reassure the global markets. The Bank also could smooth Colombia’s access to these markets by way of a guarantee operation.

3.74

Economic downturns in trading partners or emerging economies. A decline in world growth rates and/or economic problems in Colombia’s principal trading partners could affect Colombian growth rates and put off a recovery. These risks have implications for the Bank’s support in each of the three country strategy priority areas, on the funding side (mainly owing to fiscal restraint) and as far as the impact of Bank-funded activities in some parts of the country is concerned (since the escalating strife is keeping the State out of some areas). The main risk with respect to the first strategy focus—laying the foundations for economic revival and jump-starting growth—has to do with escalation of the conflict, since this limits the Bank’s capacity to support infrastructure projects and rural development programs.

As for the fostering of social progress and making certain the country’s most vulnerable are protected, the chief risk lies in fiscal shortfalls that could limit the funding available for social-assistance spending and efficient social services delivery. Risks for the third strategy area—strengthening governance and furthering reform of the State—have to do with approval of the requisite reforms and the escalation of the conflict, which could constrain support to subnational governments.

H.

Country dialogue agenda

3.75

The following is a list of issues relating to the new strategy and the operations program developed to underpin it. These topics comprise the agenda for ongoing dialogue between the Colombian government and the Bank. a. General topics (i)

Progress toward reforms aimed at balancing the macroeconomic and fiscal accounts, including increases in current revenues and rationalization of government spending.

(ii)

Debt sustainability: diversification.

profile,

vulnerability,

reduction,

and

(iii)

Progress in implementing the government’s financial plan, with an emphasis on domestic borrowing and the government’s ability to raise funds in the global market.

(iv)

Monitoring of progress toward the Millennium Development Goals and of Colombia’s efforts to achieve them.

(v)

Continuity of civil society consultations regarding the Bank’s strategy and specific projects being developed or in progress.

- 44 -

(vi)

Monitoring of the process of political and administrative reform of the State and its implications for governance, fiscal discipline, and the public debt profile. b. Coordination issues

(i)

Monitoring of coordination between multilateral and bilateral organizations at the macroprogramming and project level (IIRSA).

(ii)

Close monitoring, in concert with the government and donor countries, of the organization of the Consultative Group in Support of the Peace Process, financing commitments that come out of that group, and implementation of the funded projects.

(iii)

Support for development of the poverty strategy. c. Portfolio issues

(i)

Identifying bottlenecks. In light of the reduction in investment lending and a variety of implementation problems it is worth exploring mechanisms to promote investment programs and identify bottlenecks for operations implementation. The object is to find ways of improving Bank and executing unit processes.

(ii)

Monitoring the national budgeting process (preparation, approval, and execution) focusing especially on budget lines for Bank projects and commitments of budget supplements.

(iii)

Devising a subnational strategy and lending program that takes account of subnational governments’ borrowing capacity.

(iv)

Periodic reviews of the Bank’s portfolio, as has been the practice since 1999.

Annex I Page 1 of 1

ECONOMIC AND FINANCIAL INDICATORS , 1998-2002 1998 1999 Growth rate Real GDP 0.6 -4.2 Exports (FOB) -4.8 4.9 Imports (FOB) 5.3 -26.3 Terms of trade (decline) -8.7 9.4 Real effective exchange rate (depreciation) -4.6 -9.5 Central government Revenue 9.8 8.1 Expenditure 25.4 20.5 Money and credit (M3) 7.8 6.9 Percentage of GDP Central government balance -5.4 -7.4 Overall public sector balance -3.8 -5.5 External borrowing 1.8 1.1 Domestic borrowing 1.9 3.7 Privatizations 0.1 0.7 Investment 19.7 12.9 National saving 14.4 13.3 Current account (deficit) 5.3 0.6 External debt stock 40.2 45.3 Public sector 20.8 25.0 Financial market indicators Stock exchange index 1,086 998 Ratings Moody’s (end of period) Baa3 Baa3 Standard & Poor’s (end of period) BBBBB+ Sovereign bond spread (end of period) 423 Source: IMF

2000

2001

2002

2.7 13.2 8.1 9.7 -2.4

1.4 -6.2 10.6 -5.3 5.5

1.6 -1.1 -4.5 2.2 -

25.7 11.9 3.6

20.8 17.3 9.3

9.2 12.2 5.0

-5.8 -3.4 1.6 1.4 0.3 13.4 13.8 0.5 46.7 26.4

-5.8 -3.2 2.3 0.9 -14.7 12.8 -1.9 48.7 28.4

-6.5 -4.0 1.0 3.1 -0.1 13.8 12.1 -1.7 52.7 31.3

713

1,070

1,493

Ba2 BB 755

Ba2 BB 514

Ba2 BB 686

Annex II Page 1 of 3

DEBT SUSTAINABILITY One of the country strategy’s implementation risks has to do with sustainability of the public debt. An estimated 50% of Colombia’s debt will fall due between 2003 and 2006. The most onerous years in terms of maturities will be 2003 and 2005. 1 Such a repayment profile in a slow-growth environment has further jeopardized the sustainability of the public debt.

According to the estimates, for the debt to be sustainable the country would need to post a primary surplus of between 1% and 3.5% of GDP, depending on growth assumptions, military spending scenarios, interest rates, and the concepts of debt included in the calculation.

Figure AII-1. Nonfinancial public sector debt stock as a percentage of GDP 85 Without reforms 80

75

Pension reform

Debt stock (% GDP)

70

65

60 Plus tax reform

55 Plus referendum 50

Plus State reform

45

40 2000

2001

2002

2003

2004

2005 Year

2006

2007

2008

2009

2010

Source: IMF

The government is currently carrying through a package of reforms to achieve convergence in the debt stock. One component of the agreed program on the fiscal policy side is tax reform, the aim being to boost tax receipts by 1.6% of GDP in 2003 by curbing evasion, broadening the tax base, and increasing temporary taxes. The highest- impact immediate measure to contain spending would be a two-year freeze (2003 and 2004) on current expenditures, primarily public sector wages, which requires approval by national referendum. This move is expected to yield savings equivalent to 0.7% of GDP in 2003 and 1.4% in 2004.

1

The year 2006 is not an onerous one for debt service but the country would have to begin repaying loan 1455/OC-CO for the emergency social program that year.

Annex II Page 2 of 3

Underpinning these near-term measures to boost revenues and control expenditures will be a series of structural reforms intended to ease current “inflexibilities” in spending and solidify the public finances. These include pension reform, amendment of the budget law, a modernization of the State program, rewriting of laws governing the civil service and government procurement and contracting (Law 80/1994), the transparency and fiscal responsibility law (which establishes national and subnational government fiscal requirements), and hospital system modernization. The anticipated medium-term outcome of these reforms is convergence of the nonfinancial public sector debt stock as a percentage of GDP at 48%. The only reform outstanding of those listed above is passage of the referendum (Figure AII-1).

IMF and Colombian Finance Ministry medium-range forecasts assume a base case scenario with a growth rate in line with the Standby Arrangement target, which eventually would stabilize at 4%, and a nominal exchange rate with 8% depreciation in 2003, then trending down to stabilize at 2%. In this base case scenario under these assumptions the conclusion is that the debt stock will peak at 55% of GDP in 2003, then converge at 48% in 2010. Figure AII-2 presents the findings of an analysis of the debt stock’s sensitivity to significant changes in the primary balance, interest rate, and growth rate. Though these are slowconvergence scenarios (especially in the case of the primary balance and interest rate) the assumptions of changes in the control variables are extremes that are highly unlikely to occur.

Figure AII-2. Changes in 2003-2004 in historic levels plus (minus) two standard deviations 70

65

Primary balance (-2STDV = 3.6%)

% of GDP

60

55 Real interest rate (+2 STDV = 22%) Real GDP growth (-2 STDV =6%) 50

45

Base case scenario 40 2002

2003

2004

2005

2006 Year

Source: IMF

2007

2008

2009

2010

Annex II Page 3 of 3

The reform package, which is being backed by IMF, IDB, and World Bank operations, is the centerpiece of the government’s strategy to attenuate this risk. Nevertheless, the government recognizes that there are risks that could jeopardize implementation of the fiscal adjustment measures and structural reform program and, consequently, the sustainability of the debt. Among these unforeseeables are volatility on external markets, an unanticipated increase in spending on security, and a scenario of less than solid support for the government’s economic initiatives, particularly the measures put to referendum (temporary freeze on government current spending and an end to special pension regimes).

To mitigate against these risks the Standby Arrangement includes contingency measures to contain the fiscal deficit and assure financial sustainability. These include raising taxes on products recently brought into the tax base and further efforts to cut spending, chiefly by way of adjustments in the national public sector. In the event of funding shortfalls the government will consider making temporary use of money in the Petroleum Stabilization Fund, which currently approximates 1.5% of GDP. If the combination of these additional funds and the aforementioned contingency measures proves to be insufficient the government would consider a long-term bond issue on concessional terms.

Annex III Page 1 of 1

IMPLEMENTATION OF THE 2003-2006 OPERATIONS PROGRAM Priority area

Foster competitiveness

Lay the foundations for economic revival and jump-starting growth

2003 Remittances and increased use of bank services by lowerincome populations MIF: Comprehensive action plan to create a business culture. Integration of small business owners into the production chain by way of the government procurement system.

TC: Network of tropical seed producers and marketers.

Female-owned fish processing and marketing enterprises NLP: Identification of fast-growth sectors. Economic importance of remittances. Development bank reform.

Who spends external resources and how are they generated

Support agricultural development and natural resources management

Foster social progress and make sure society’s most vulnerable are protected

Strengthen social protection programs and make sure that society’s poorest are protected

Expand coverage and improve quality and efficiency of social service delivery

2004

2005-2006

Privatization and concessions program II TC: Bogota urban transit. Development of Colombian youth entrepreneurs MIF: Competitiveness and productivity policy. Creation of an exporting culture. Strengthening the industrial property system Public utilities sector program Urban transit

Sectoral competitiveness program Arterial and secondary roads Science and technology program II Program for microenterprise and SMEs

Environmental investment program

Rural development programs

TC: Sustainable coffee industry in Colombia

Program of support for the coffee industry Manizales disaster prevention program Social Support Network II

Emergency social program TC: NGO information systems NLP: Demand for child care in Colombia Program to modernize health care networks

National water plan

Support for local governance

Health and social security reform program

Public utilities sector program

Support for the national information and census system

Southwest Bogota sanitation program National social housing program TC: Housing market—indicators. Study of teleradiology initiatives National public sector reform program

Support national public sector reform

TC: Modernization of national public sector

TC: Downtown Bogota zoning plan

Strengthen governance and further modernization of the State

Build local management capacity

Foster transparency and curb corruption

Support for the national information and census system

NLP: Country financial accountability assessment

NLP: Diagnostic assessment of subnational governments.

Subnational governance. Analysis of subnational government revenue and expenditure. Royalties: Allocation, use, and public efficiency. Governance in the Andean nations Support for strengthening Attorney General’s Office

NLP: The unfinished decentralization agenda. Subnational development: case study

Support for local governance

TC: Enlargement of the Integrity Index

MIF: Good corporate governance

Support judicial branch reform

Justice sector reform program

Constraints Emergency social program Contain the fiscal deficit and foster the reforms (flow problem)

Fiscal shortfalls

Public utilities sector program

Health and social security reform program Program to modernize health care networks National public sector reform program NLP: Public debt: Sensitivity analysis and profile

Escalation of the conflict

NLP TC

Social Support Network II

Help heighten the State’s presence across the country Support initiatives to bring an end to the conflict

Nonlending product Technical cooperation

Support for local governance Coordination (consultative) group

Annex IV-A Page 1 of 1

THE BANK’S OPERATIONS PROGRAM: 2003-2006 LENDING PROGRAM (millions of U.S. dollars)

Year

2003

2004

2005-2006 initiatives **

(a) (b) (c) (d) (e)

Project title

Amount

Emergency social program (a) Health and social security reform program Support for strengthening the Attorney-General’s Office (a) National public sector reform program (b) Program to modernize health care networks National social housing program Southwest Bogota sanitation program (c) Total 2003 Privatization and concessions program II (b) and (d) Public utilities sector program (e) Transportation program Environmental investment program Total 2004 (not including PBL) Program of support for the coffee sector Manizales program (c) Sectoral competitiveness program Arterial and secondary roads (b) Support for local governance Science and technology program II National water plan Support for national information and census system Program for microenterprise and SMEs Social Support Network II Rural development programs Justice sector reform program

1,250 400 14 56 100 170 50 2,040 21 To be determined 200 25 246 6 To be determined To be determined 100 60 40 60 75 20 To be determined To be determined To be determined

Approved operations.

These operations could be scaled back depending on fiscal possibilities and progress on institutional reforms.

Prospective loans to subnational governments with sovereign guarantees.

Could be moved up to 2003 depending on the government’s decision about combining this project with the national public sector reform program.

The government has requested a US$600 million quick-disbursing loan. Given the US$4.5 billion cap on Ordinary Capital policy-based lending in 2002-2004, Management will make every effort to ensure that, in the macroprogramming exercise in which resources are allocated to all countries, Colombia receives adequate funds to support the reforms program.

Annex IV-B Page 1 of 1

THE BANK’S OPERATIONS PROGRAM: NONREIMBURSABLE TECHNICAL-COOPERATION OPERATIONS, 2003 (US$000)

Project number

Project title

Amount

TC0201010

NGO information systems

71.6

TC0204001

Tropical seed producers and marketers network

145

TC0204002

Strengthening of the artisanal fisheries production chain in Chocó

225

TC0211033

Modernization of the national public sector

320

TC0301024

Housing market – indicators

500

TC0301025

Downtown Bogota zoning plan

225

TC0201014

Bogota urban transit

600

TC0201015

Development of Colombian youth entrepreneurs

370

TC0204005

Sustainable coffee industry in Colombia

748

TC0303022

Business opportunities in the recycling of waste lubricating oils

250

TC0303037

Development of food retailers network in Aguablanca, Cali

250

TC0301027

Enlargement of the Integrity Index

650

TC0306005

Social effects of population displacement in Colombia

200

TOTAL 2003

4,554.6

Annex IV-C Page 1 of 1

THE BANK’S OPERATIONS PROGRAM: MULTILATERAL INVESTMENT FUND (MIF), 2003

Project title Remittances and increased use of bank services by low-income populations Good corporate governance Comprehensive action plan to create a business culture Integration of small business owners into the production chain by way of the government procurement system Support for the competitiveness and productivity policy and creation of an exporting culture Strengthening of the industrial property system

Annex V Page 1 of 1

NONLENDING PRODUCTS, 2003 I. Lay the foundations for economic revival and jump-starting growth Diagnostic assessment of structure of financing of the real sector Environmental investment prioritization Diagnostic assessment of the financial sector Comparative analysis of sectoral competitiveness programs Business vision for the Andean corridor Economic importance of remittances Development bank reform II. Foster social progress and make sure society’s most vulnerable are protected Markets for family benefit associations Poverty strategy. Social impact of the armed conflict

III. Further modernization of the State Subnational development: The unfinished agenda Royalties: Allocation, use, and public efficiency City paper: Bogota Country financial accountability assessment - World Bank Expansion of the Integrity Index Anti-corruption mission Constraint I. Fiscal shortfalls Public debt and raising of external funding Constraint II. The armed conflict Analysis of crime- and violence-prevention activities General Analysis of Bank loan programming and execution

Annex VI Page 1 of 2

IMPLEMENTATION OF THE BANK’S COUNTRY STRATEGY AND ACTIVE LOANS Priority focus

Loans Science and technology program

Technical cooperation Strengthening of External Affairs Ministry

TC loan Privatization and concessions

MIF Advisory services and technical training for microenterprises Technical training for the paper industry

Cundinamarca roads and institutionstrengthening program

Strengthening of the credit union system Accounting and financial information Environmental quality control in SMEs Marketing company for microenterprise owners, Atlantic region Administrative and operating efficiency of credit institutions

Foster competitiveness

Cutting red tape for business Institutional strengthening of Financiera Compartir

Lay the foundations for economic revival and jump-starting growth

Institutional strengthening of Finamérica Business alliances in the graphic industry Promotion of cooperative ventures Improving business performance through the use of information and communications technologies Capital market strengthening Strengthening airport security Internet-based export information system Foreign investment promotion Support agricultural development and natural resources management

Land management program

Pilot socioenvironmental program

Assistance for agriculture, Cauca Valley

Alternative development program

Solid waste management, coffee-growing region

Isabella grape agribusiness project

Titling and registry modernization

System of environmental accounts Social Support Network program

Pacific Coast sustainable development program

TC loan Social reform program

Design of social protection program

Peaceable coexistence and citizen security

Reform of drug treatment centers

Social infrastructure and community-based management for peace

Domestic violence prevention models

Program for reconstruction of the coffee-growing region

Business activities for low-income women

Pacific Coast sustainable development program Foster social progress and make sure that society’s most vulnerable are protected

Strengthen social protection programs

Preparation of social reform program

Environmental management, clean technologies

Annex VI Page 2 of 2

Priority focus

Expand coverage and increase quality and efficiency of social service delivery

Loans

Technical cooperation

Environmental sanitation program upper Bogota River basin

Intercultural bilingual education project

Support for health reform

System of health satellite accounts

Cartagena sewer system

Development of water subsidy program

Pereira water supply and sanitation

Housing sector modernization in Manizales

New school system program

Project bank, second phase

Support national public sector reform

Diagnostic assessment of Superintendency of Industry and Commerce Institutional development of subnational governments

Strengthen governance and further modernization of the State

Build local management capacity

Reorganization of health care networks

Renewal of historic districts Control of governments’ external borrowing

Strengthening the subnational financial information system

Comprehensive renewal of historic districts

Second subnational development program Institutional reform Bogota District Cundinamarca roads and institutionstrengthening program Strengthening of Comptroller General’s Office

Foster transparency and curb corruption

Support judicial branch reform

TC loan Modernization of justice administration Support for strengthening of the Office of the Attorney General of the Nation TC loan Modernization of justice administration

Coordination of indigenous jurisdiction and the legal system

Constraints Fiscal shortfalls

Escalation of the conflict

Contain the fiscal deficit and promote reforms (flow problem)

Help heighten the State’s presence across the country

Social emergency program

Support for Government Revenues Mission

Pacific Coast sustainable development program

Support for furthering peaceable coexistence

Peaceable coexistence and citizen security

Urban crime and impunity in Colombia

Social Support Network program Social infrastructure and community-based management for peace

Support initiatives to bring an end to the conflict

Creation of Investment Fund for Peace

MIF Bucaramanga water supply

Annex VII Page 1 of 1

ACTIVE PORTFOLIO BY THE BANK’S COUNTRY STRATEGIC (BCS) A REA

Nane

Approved Disbursed % disbursed

Date of final disbursement

Loan #

Project

875/OC-CO

CO0134

Scientific research and technological development program- III

97.8

97.8

100.0%

Aug-30-2003

927/OC-CO

CO0179

TC loan in support of privatization and concessions in infrastructure

12.2

10.9

90.1%

Dec-22-2003

1443/OC-CO

CO0264

21.7

0.0

0.0%

Oct-04-2007

863/OC-CO-1

CO0055

Highway development and institutional strengthening program for Cundinamarca National land improvement program (PRONAT)

31.0

8.1

26.0%

Mar-22-2004

1027/OC-CO

CO0157

Land titling and modernization of the registry of deeds and cadastre

14.5

3.6

24.9%

Sep-15-2004

984/OC-CO

CO0196

Alternative development program

39.3

36.9

93.9%

Mar-16-2004

Setting the stage for economic revitalization and reactivation

Promoting social development and affording protection to the most vulnerable 926/SF-CO

CO0059

Pacific coast sustainable development program

1280/OC-CO

CO0247

Social safety net program

40.0

25.7

64.3%

May-27-2004

270.0

102.6

38.0%

Jun-19-2004

1382/OC-CO

CO0261

Parallel TC: Social reform program

1085/OC-CO

CO0213

Peaceful coexistence and citizen security

10.0

0.5

5.1%

Jun-20-2005

2.6

1.5

58.9%

Dec-31-2003

1086/OC-CO

CO0213

Peaceful coexistence and citizen security

10.0

7.6

75.8%

Feb-12-2004

1087/OC-CO 1088/OC-CO

CO0213

Peaceful coexistence and citizen security

10.0

3.5

34.6%

Jan-06-2004

CO0213

Peaceful coexistence and citizen security

12.8

2.7

21.3%

Jun-14-2004

1393/OC-CO

CO0234

63.0

0.0

0.0%

Apr-11-2006

852/SF-CO

CO0198

Social infrastructure and community management for peace Upper Bogota river environmental rehabilitation program

15.4

13.3

86.5%

Dec-31-2003

616/OC-CO

CO0198

Upper Bogota river environmental rehabilitation program

24.9

24.9

99.9%

Dec-31-2003

910/OC-CO

CO0088

Program to support health sector reform

1075/OC-CO

CO0058

Reconstruction of the coffee-growing region 863 & 774

1089/OC-CO

CO0227

1199/OC-CO 1202/OC-CO

38.0

27.5

72.5%

Mar-23-2004

134.7

132.5

98.4%

Aug-24-2003

Cartagena sewer system

24.3

16.2

66.6%

Mar-14-2004

CO0182

Pereira potable water and sanitation program

25.1

7.5

29.8%

Jan-03-2005

CO0142

New school system program

26.0

5.4

20.8%

Dec-20-2003

1455/OC-CO

CO0268

Social emergency program

1250.0

750.0

60.0%

Mar-23-2004

909/OC-CO

CO0036

TC loan for a program to modernize the administration of justice

8.9

8.2

92.3%

Feb-12-2004

1243/OC-CO

CO0244

23.0

9.2

40.0%

Mar-12-2005

1066/OC-CO

CO0138

Program for strengthening the Offices of the Controller General & the Auditor General Second municipal development program

28.5

19.6

68.8%

Jul-31-2004

1053/OC-CO

CO0226

Strengthening of the subnational financial information system

6.0

3.8

63.7%

Feb-12-2004

977/OC-CO

CO0155

30.4

14.3

46.8%

Sep-12-2003

1385/OC-CO

CO0251

Loan to Financiera de Desarrollo Territorial S.A. for a program to strengthen departmental and local governments Institutional strengthening for the District of Bogota

16.0

0.9

5.8%

Oct-05-2005

1459/OC-CO

CO0258

Program to strengthen the Office of the Attorney General of the Nation

14.0

0.0

0.0%

-

2202.2

1236.9

56.2%

Improving governance and supporting the decentralization process

Total

Annex VIII Page 1 of 1

FUND FLOW SCENARIOS, 2003-2004

Approvals

Total PBL Investment

(a) Disbursements Active loans

New operations

Investment* Emergency PBL Investment** PBL

(b) Amortizations (c) Net flow (a-b) (d) Interest and contributions (e) Cash flow (c-d)

Base case scenario 2003 2004 1,984.0 475.0 1,650.0 250.0 334.0 225.0 1,527.4 929.1 83.0 131.6 750.0 500.0 411.0 150.0 33.4 22.5 250.0 125.0 758.4 384.3

Low scenario 2003 2004 1,984.0 365.0 1,650.0 250.0 334.0 115.0 1,494.4 904.7

High scenario 2003 2004 2,040.0 862.0 1,650.0 600.0 390.0 262.0 1,620.0 1,107.8

50.0 750.0 411.0 33.4 250.0 778.4

118.2 500.0 150.0 11.5 125.0 384.3

170.0 750.0 411.0 39.0 250.0 778.4

131.6 500.0 150.0 26.2 300.0 384.3

769.0 200.3

544.8 211.2

716.0 200.3

520.4 211.2

841.6 200.3

723.5 211.2

568.7

333.6

515.7

309.2

641.3

512.3

(*) Assumes no change in the disbursement rate of active investment loans (10.7% projected for 2003). (**) Assumes disbursement of 10% of a loan’s proceeds the year it is approved.

Annex IX Page 1 of 3

THE BANK’S COUNTRY STRATEGY MONITORING OF IMPLEMENTATION INDICATORS

Strategy objective: Lay the foundations for economic revival and jump-starting growth Indicator

Baseline

Benchmark target

Timeframe

Likelihood

Frequency

GDP growth rate

1.6% GDP growth in 2002

3.22% average annual GDP growth

2003-2006

medium

annual

Total investment as percentage of GDP

15.1% of GDP in 2002

16% of GDP in 2006

2003-2006

high

annual

Overall exports as percentage of GDP

21.7% of GDP in 2002

23.9% of GDP in 2006

2003-2006

medium

annual

Global Growth Competitiveness Index

Position 10 among Latin American countries in the ranking

Position 6 among Latin American countries in the ranking

2003-2006

high

annual

Technology subindex Global Growth Competitiveness Index

Position 12 among Latin American countries in the ranking

Position 8 among Latin American countries in the ranking

2003-2006

high

annual

Verification / Comments Calculated by DANE. Actions in the transportation, energy, financial, science and technology, microenterprise and SME, and agriculture sectors will help achieve the target.

Calculated by DANE. Actions in the transportation, energy, agriculture, and natural resources sectors will help achieve the target.

Calculated by DANE. Actions in the transportation, energy, microenterprise and SME, integration, and agriculture sectors will help achieve the target.

Calculated by the World Economic Forum.

Actions in the transportation, energy, financial, science and technology, microenterprise and SME, integration, agriculture, and government sectors will help achieve the target.

Calculated by the World Economic Forum.

Actions in the science and technology sector will help achieve the target.

Annex IX Page 2 of 3

Strategy objective: Foster social progress and make sure society’s most vulnerable are protected Indicator

Baseline

Benchmark target

Timeframe

Likelihood

Frequency

Overall poverty rate

60% in 2000

58% in 2006

2003-2006

high

annual

Preschool, basic and secondary school enrollment ratio

82% in 2002

92% in 2006

2003-2006

high

annual

35% in 2002

95% in 2006

2003-2006

high

annual

21 in 2002

54 in 2005

2003-2005

high

annual

Number of persons covered by the subsidized health insurance plan

11.3 million in 2002

16.3 million in 2006

2003-2006

high

annual

Number of rural dwellers with sewer service

2.9 million in 2002

3.9 million in 2006

2003-2006

medium

annual

Percentage of municipalities in which skills assessment tests have been administered to grades 5-9 Number of financially viable hospital networks delivering efficient service

Verification / Comments Calculated by DANE. Actions in the social protection, health, education, water and sanitation, and housing sectors will help achieve the target.

Calculated by DANE. Actions in the education sector will help achieve the target.

Calculated by the DNP. Actions in the education sector will help achieve the target.

Actions in the health sector will help achieve the target.

Calculated by the DNP. Actions in the social protection and health sectors will help achieve the target.

Calculated by the DNP. Actions in the water and sanitation sector will help achieve the target.

Strategy objective: Strengthen governance and further modernization of the State Indicator

Baseline

Benchmark target

Timeframe

Likelihood

Frequency

Corruption Perceptions Index

Position 9 among Latin American countries in the 2002 ranking

Position 6 among Latin American countries in the 2006 ranking

2003-2006

high

annual

Transparency subindex Integrity Index of Public Institutions

4 agencies scoring over 90 in 2002

8 agencies scoring over 90 in 2006

2003-2006

high

annual

Verification / Comments Index developed by Transparency International.

Actions in the public sector reform, local management capacity-building, transparency and anti-corruption, and judicial reform sectors will help achieve the target.

Index developed by Transparency por Colombia.

Transparency-enhancing activities will help achieve the target.

Annex IX Page 3 of 3

Strategy objective: Strengthen governance and further modernization of the State Indicator

Baseline

Benchmark target

Timeframe

Likelihood

Frequency

Institutions and efficiency subindex Integrity Index of Public Institutions

2 agencies scoring over 90 in 2002

8 agencies scoring over 90 in 2006

2003-2006

medium

annual

Oversight and disciplinary action subindex Integrity Index of Public Institutions

28 agencies scoring over 90 in 2002

38 agencies scoring over 90 in 2006

2003-2006

medium

annual

Verification / Comments Index developed by Transparencia por Colombia.

Actions in the public sector reform and local management capacity sectors will help achieve the target.

Index developed by Transparencia por Colombia.

Actions for public sector and justice reform will help achieve the target.

Constraint I: Fiscal shortfalls Indicator

Baseline

Benchmark target

Timeframe

Likelihood

Frequency

Verification / Comments

Public sector deficit as percentage of GDP

3.6 % of GDP in 2002

1.2 % of GDP in 2006

2003-2006

high

annual

Calculated by Finance Ministry.

Public debt stock as percentage of GDP

48.9 % of GDP in 2002

47.7% of GDP in 2006

2003-2006

high

annual

Calculated by Finance Ministry.

Indicator

Baseline

Benchmark target

Timeframe

Likelihood

Frequency

Verification / Comments

252 in 2002

126 in 2006

2003-2006

high

annual

Calculated by the DNP.

Constraint II: Escalation of the conflict Number of municipalities rated “medium” or “low” for level of violence DANE DNP

National Statistics Department National Planning Department

Annex X Page 1 of 1

NATURE AND AGENDAS OF CONSULTATION EVENTS DATE

February 2002

July 2002

November 2002

December 2002

February 2003

May 2003

PLACE

Bogota, Colombia

PARTICIPANTS IDB officials Presidential candidates and respective economic teams, universities, research centers, media, private sector

AGENDA Identify short- and medium-term issues and concerns.

Explore alternatives and proposals to remedy these problems.

Pinpoint areas in which the Bank could support these proposals and discuss how it could do so.

Bogota, Colombia

IDB officials Incoming government team

Present a sectoral diagnostic assessment, identifying main issues in each sector and specific potential targets for Bank support.

Address the government’s request for support in developing a national public sector reform strategy.

Review the status of active sector loans.

Identify government funding requirements for 20022003.

Identify areas targeted for reform.

Outline current status of projects being executed under Plan Colombia and offers received in donor consultative groups associated with the peace process.

Bogota, Colombia

IDB officials Officials of Colombian Finance Ministry and National Planning Department (DNP)

Agree on the 2003 operations program.

Continue developing the medium-range strategy, in the framework of objectives identified by the Bank and in the National Development Plan.

Agree on action to take regarding active loans given current fiscal constraints.

Bogota, Colombia

IDB officials Agencia Colombiana de Cooperación Internacional and DNP Representatives of business, Fedecamaras and Carvajal Foundation, microfinance institutions

Inform previously selected public and private sector agencies and organizations about the MIF. Review procedures for identifying and disseminating proposals between the government and the MIF. Hold bilateral meetings with representatives of public and private sector institutions.

Meet with executing agencies of active programs to hear their concerns and suggestions and record lessons learned.

Cali, Colombia Bogota, Colombia Cartagena, Colombia Medellín, Colombia

IDB officials Executive Committee of IDB Country Office’s Civil Society Advisory Council Local authorities and civil society organizations in the regions visited

Staging of regional workshops that elicited and recorded thoughts and views of a variety of civil society organizations and local authorities, and prospects, regarding challenges, constraints, work focuses and sequencing of proposed activities in the Bank’s Colombia country strategy in 2003-2004.

Bogota, Colombia

IDB officials Colombian Finance Ministry and DNP officials

Review with the government the country strategy draft approved by the Programming Committee of Management.

Annex XI Page 1 of 4

CONSULTATIONS WITH CIVIL SOCIETY Background Two components in developing the Bank’s country strategy were a series of diagnostic assessments and analyses of Colombian issues and extensive consultations with the government, other donors, and civil society. Four regional workshops were organized as part of this dialogue, consultation, and coordination process, by the Bank pursuant to its policy on citizen participation in its activities2 and the IDB Colombia Country Office’s Civil Society Advisory Council (CSAC) pursuant to that group’s terms of reference.3 A variety of civil society organizations and local authorities outlined their thoughts and views and discussed prospects regarding the challenges, constraints, action focuses, and sequencing of planned activities for the Bank’s 2003-2006 Colombia country strategy. This annex provides an account of four consultation workshops held in Cali, Bogota, Cartagena, and Medellín between 20 and 24 February 2003.

Workshop objectives and format The hope was that the workshops would yield ideas and specific inputs with which to refine the analysis and understanding of challenges and constraints, the country strategy focuses, and the proposed sequencing of activities. To that end each of the workshops was designed to elicit answers to the following questions: •

Challenges: (i) relevance of challenges identified and (ii) critical omissions.

•

Constraints: (i) relevance of the constraints identified and (ii) critical omissions.

•

Work focuses (issues) identified for each challenge and constraint: (i) relevance and (ii) critical omissions.

•

How can we prioritize Bank support to help the country tackle these challenges and constraints? Sequencing of the strategy.

•

Identification of opportunities and associated risks in the medium and long term.

2

See the document “Strategy Framework for Citizen Participation in Activities of the Inter-American Development Bank,” 1 November 2000.

3

The CSAC is one of the Colombia Country Office’s premier mechanisms for developing and solidifying its relations with civil society. The group’s core mandate is to set up permanent liaison and consultation mechanisms. Its objectives are to: (i) contribute to the strategic development of plans, programs, and projects by enhancing dialogue between the government, the Bank, and civil society organizations (CSOs); (ii) strengthen CSOs’ role in identifying, implementing, and evaluating Bank-funded projects in Colombia; and (iii) support participatory planning processes mandated by the Colombian Constitution.

Annex XI Page 2 of 4

To expedite this exercise and help achieve its goals, the following format was adopted for the four workshops.

•

Presentation to the plenary on challenges, constraints, issues identified, and sequencing of planned activities. The presenter was the Bank’s coordinator for Colombia.

•

Question period and first discussion in the plenary.

•

Working groups. Each group was formed so as to mirror the diversity of the workshop participants. Each produced a report summing up the discussions, the views expressed, and points of consensus and dissent.

•

Presentation of working group reports to the plenary and closing discussion.

Principal conclusions of the consultation workshops This section enumerates the ideas, thoughts, and views expressed at the four meetings by representatives of a range of CSOs and national, regional, and local officials. The information yielded by these gatherings regarding points of consensus and of disagreement is extremely useful to CSOs, the Bank, and the national government, making this a very valuable exercise.

General •

It was recommended that a long-range outlook be developed of the country’s prospects, beyond the four-year timeframe of the strategy paper presented.

•

Subregional, provincial, local, and national development should be addressed as an intertwined whole.

•

It was underscored that one important element in shaping the Bank’s country strategy should be in-depth work on the background for the current strategy and a thorough evaluation of previous strategies.

•

The analysis also should point up the country’s strengths. One of these is stable political institutions; another is the nation’s organized civil society and the publicprivate sector strategic partnerships in place.

•

The importance of harmonizing the IDB strategy development exercise with the National Development Plan’s formulation procedure was stressed.

Priority strategy focuses •

The participants concurred that the selected priority areas were relevant—rekindling of the economy, reducing poverty, inequality and social exclusion, and strengthening governance all being essential for Colombia.

Annex XI Page 3 of 4

•

According to many participants, a key facet of the challenge of “reviving the economy and jump-starting growth” should be equity and the recognition of the existence of regions and of inward-looking integration.

•

In its drive for global competitiveness Colombia cannot continue to rely nearexclusively on the exchange rate. Science, technology, and higher education play a strategic role.

•

There was broad consensus on the need to focus more heavily on agricultural development issues, not just land-related or rural issues.

•

Sector-specific and cross-sectoral strategic alliances and industry clusters are examples of private-sector participatory tools and avenues for business development.

•

Agriculture should be a priority in the proposed pro-growth strategies, given that all investments in the countryside contain displacements.

•

Social safety net programs (cushioning and social assistance) should be confined to society’s most vulnerable. Support for internally displaced population groups should be a priority of a coherent, effective social policy.

•

It is important not to drop programs and projects that have proved their worth, e.g. the "Families in Action” initiative. Colombia’s recent history is rife with cases of successful ventures being abandoned in the first flush of a new administration.

•

Investment in education, social protection, and essential health, water and sanitation, energy, and roads infrastructure should be articulated from a regional development standpoint.

•

The centerpiece of the quest for sounder governance is the strengthening and empowering of the citizenry and organized civil society and forging of a new citizenship model.

•

Governance entails public trust not just in the central government but in local government as well. Civic education as a cross-cutting strategy shapes a body of citizens who will share responsibility for planning, operation, and oversight of the work of government.

Constraints •

The constraints discussed in the strategy paper regarding the country’s fiscal shortfalls and escalating civil strife are real, they are serious, and they demand urgent attention.

However, the general feeling was that what the Bank views as constraints are priority challenges for the country and the government.

Annex XI Page 4 of 4

•

Given the country’s fiscal constraints and the multiple objectives and action focuses, it is essential that efforts be targeted to areas offering the most promising prospects for development impact, poverty reduction, and governance enhancements.

•

The armed conflict is indeed a constraint for the country; finding a solution to it also is a priority to jump-start growth.

•

From the country’s standpoint, bringing an end to the conflict is a priority to be able to lay the foundations for economic revival and growth, governance, and reducing poverty and exclusion.

•

The strengthening of community participation avenues should be a cross-cutting concern throughout the entire sequence.

Annex XII Page 1 of 2

REFERENCES CONSULTED FOR BACKGROUND IN DEVELOPING THE BANK’S COUNTRY STRATEGY Lay the foundations for economic revival and jump-starting growth Arbeláez, M., J. Echavarría, S. Zuluaga, and L. Burman (2001). “Impuestos a las transacciones financieras,” Fedesarrollo.

Leon, J., and M. Orloff. (2002). “Café: Situación actual y perspectivas.” IDB paper.

Lora, E. (2002). “Competitividad y nuevas tecnologías en Colombia.” IDB paper.

Lora, E. (2002). “Derechos de los acreedores.” IDB paper.

Melo, A. (2002). “Los problemas de competitividad en un país en conflicto.” IDB paper.

Montes, G. (2003). “La crisis del café en Colombia.” IDB paper.

Zapata, J., and J. Gonzales (2001). “Regalías y los impuestos a la actividad petrolera,” Fedesarrollo.

Foster social progress and make sure society’s most vulnerable are protected Borjas, G., and O. Acosta (2000). “Education reform in Colombia.” Fedesarrollo.

Farne, S. (2002). “Efectos ocupacionales de una reforma laboral en Colombia.” Bogota, Colombia.

Perotti, R. (2000). “Public spending on social protection in Colombia: Analysis and proposal,” Fedesarrollo.

Quiñónez, A. (2003). “Consideraciones de las minorías en Colombia.” IDB paper.

Further MODERNIZATION OF THE STATE Alesina, A., A. Carrasquilla, and J. J. Echavarría (2001). “Decentralization in Colombia,” Fedesarrollo.

Amaya, A. (2001). “Corte constitucional y economía. Análisis de fallos y propuestas para el caso colombiano.” IDB paper.

Amaya, A. (2002). “Evaluación de la política económica en Colombia: Una aproximación desde el análisis de las políticas públicas.” IDB paper.

Amaya, C. (2002). “Gestión y eficiencia de las Altas Cortes.” IDB paper.

Ayala, U., and R. Perotti (2001). “The Colombian Budget Process.” Fedesarrollo.

Ayala, U., and J. Poterba (2002). “Estudios y recomendaciones sobre la viabilidad de las finanzas públicas en Colombia.” Fedesarrollo.

Barrera, F., T. Rutherford, and M. Light (2001). “Actualización de tasas tributarias y estimación y determinación de elasticidades del modelo de equilibrio general computable del Ministerio de Hacienda para el análisis de sensibilidad de políticas tributarias.” Fedesarrollo.

Echavarría, J., and G. Zodrow (2001). “La estructura de impuestos y la competitividad internacional de la economía colombiana.” Fedesarrollo.

Kugler, M., and H. Rosenthal (2001). “Checks and balances: An assessment of the institutional separation of political powers in Colombia.” Fedesarrollo.

Levitt, S., and M. Rubio (2001). “Understanding crime in Colombia and what can be done about it.”

Fedesarrollo.

Neira, P. (2002). “El imperio de la Ley en Colombia: Debilidad y discrecionalidad institucional.” IDB paper.

Núñez, J. (2001). “Diagnóstico de la situación de los ingresos por impuestos del orden municipal en Colombia.” Fedesarrollo.

Palacios, H. (2003). “Referendo de reforma a la Constitución Política en Colombia.” IDB paper.

Rodriguez, J. (2003). ”Gobernabilidad de las entidades territoriales en Colombia.” IDB paper.

Annex XII Page 2 of 2 Roland, G., and J. Zapata (2002). “Colombia’s Electoral and Party System: Proposals for reforms.”

Fedesarrollo.

Vásquez, J. (2002). “Administración y estructura del sistema de impuestos en Colombia.” Fedesarrollo.

Constraints – FISCAL SHORTFALLS Acosta, O., and R. Bird (2001). “Evaluación de las recomendaciones sobre impuestos locales en la reforma estructural del sistema tributario colombiano y estudio y recomendaciones sobre la situación de los ingresos tributarios de los departamentos.” Fedesarrollo.

Arbeláez, M., and N. Roubini (2001). “Estructura del manejo de la deuda pública y su incidencia sobre las finanzas públicas en el largo plazo.” Fedesarrollo.

Flores, L., and R. Bonilla (2003). “El perfil de la deuda pública en Colombia.” IDB paper.

Gallardo, A. (2001). “La legitimidad de la política de los ingresos públicos en Colombia.” Fedesarrollo.

Palacios, H. (2002). “Análisis del referendo.” IDB paper.

Piffano, H. “Batería de indicadores para el seguimiento del proceso de saneamiento fiscal territorial en Colombia.”

Constraints – ESCALATION OF THE CONFLICT Echandia, C. (2002). “Diagnóstico sobre la actual situación de conflicto en Colombia y sus perspectivas.”

IDB paper.

Rangel, A. (2003). “Tendencias del conflicto en el mediano plazo y política de paz del nuevo gobierno.”

IDB paper.

Sector-specific and portfolio issues Garcia, N. (2003). “Comparación de estrategias y programas operativos BID, CAF y BM.” IDB paper.

IDB. Sector Dialogue Notes (Country Focus) Sectors (2002) - Water and basic sanitation - Agriculture sector development - Environment - Health - Education - Social protection - Transportation - Energy - IIRSA - Financial system - Competitiveness - Integration Leon, J., and M. Mendez (2001). “Ciclo político y tiempo de ejecución de los préstamos: El caso de Colombia.” IDB paper.

Leon, J., and G. Acosta (1998-2001, 2002). “Colombia. Informe de revisión de cartera.” IDB paper.

Moscoso, H., M. Alvarado, and C. Méndez (2002). “Administradoras de recursos de crédito externo en Colombia.” Bogota, Colombia.

Orloff, M. (2002). “El efecto de la rotación de funcionarios públicos sobre la duración del ciclo del proyecto.” IDB paper.