Document of The World Bank Report No: ICR3053 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80800) ON A SERIES OF 2 LOANS IN THE AMOUNT OF US$500 MILLION TO THE REPUBLIC OF COLOMBIA FOR A FISCAL SUSTAINABILITY AND GROWTH RESILIENCE DEVELOPMENT POLICY LOAN SERIES April 10, 2014 Poverty Reduction and Economic Management Colombia and Mexico Country Management Unit Latin America and the Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 10, 2014) Currency Unit Colombian Pesos US$ 1.00 COP 1,931.09 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activity CCT Conditional Cash Transfer COP Colombian Peso CPS Country Partnership Strategy DPL Development Policy Loan DPO Development Policy Operation ECB European Central Bank FDI Foreign Direct Investment GDP Gross Domestic Product GOC Government of Colombia ICR Implementation Completion Report IMF International Monetary Fund OECD Organization for Economic Cooperation and Development p.a. per anno / per year p.c. per capita PDO Program Development Objective SDR Special Drawing Right TSA Treasury Single Account USD United States Dollars WBG World Bank Group Vice President: Hasan A. Tuluy Country Director: Gloria M. Grandolini Sector Manager: Auguste Tano Kouame Sector Leader: Samuel Freije-Rodriguez Task Team Leader: Bárbara Cunha ICR Team Leader: Bárbara Cunha ICR Primary Author: Konstantin M. Wacker COLOMBIA Fiscal Sustainability and Growth Resilience Development Policy Loan Series CONTENTS Data Sheet A. Basic Information........................................................................................................ i B. Key Dates ................................................................................................................... ii C. Ratings Summary ....................................................................................................... ii D. Sector and Theme Codes........................................................................................... iii E. Bank Staff .................................................................................................................. iv F. Results Framework Analysis ...................................................................................... v G. Ratings of Program Performance in ISRs ............................................................... viii H. Restructuring (if any) .............................................................................................. viii 1. Program Context, Development Objectives and Design ......................................... 1 2. Key Factors Affecting Implementation and Outcomes ........................................... 8 3. Assessment of Outcomes ....................................................................................... 11 4. Assessment of Risk to Development Outcome ...................................................... 18 5. Assessment of Bank and Borrower Performance .................................................. 18 6. Lessons Learned..................................................................................................... 21 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........ 22 Annex 1 Bank Lending and Implementation Support/Supervision Processes.............. 23 Annex 2 List of Supporting Documents ....................................................................... 25 Annex 3 Summary of Fiscal Rule Implementation....................................................... 26 MAP .............................................................................................................................. 28 A. Basic Information Program 1 First Programmatic Fiscal Sustainability Country Colombia Program Name and Growth Resilience Development Policy Loan Program ID P123267 L/C/TF Number(s) IBRD-80800 ICR Date 03/18/2014 ICR Type Core ICR MINISTRY OF Lending Instrument DPL Borrower FINANCE AND PUBLIC CREDIT Original Total USD 300.00M Disbursed Amount USD 300.00M Commitment Implementing Agencies Ministry of Finance and Public Credit Cofinanciers and Other External Partners Program 2 Second Programmatic Fiscal Sustainability Country Colombia Program Name and Growth Resilience Development Policy Loan Program ID P129465 L/C/TF Number(s) IBRD-82230 ICR Date 03/18/2014 ICR Type Core ICR Lending Instrument DPL Borrower Original Total USD 200.00M Disbursed Amount USD 200.00M Commitment Implementing Agencies Ministry of Finance and Public Credit Cofinanciers and Other External Partners i B. Key Dates First Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P123267 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/02/2011 Effectiveness: 11/10/2011 11/10/2011 Appraisal: 06/08/2011 Restructuring(s): Approval: 07/21/2011 Mid-term Review: 03/12/2012 04/13/2012 Closing: 06/30/2012 06/30/2012 Second Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P129465 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/10/2012 Effectiveness: 12/21/2012 12/07/2012 Appraisal: 09/24/2012 Restructuring(s): Approval: 11/13/2012 Mid-term Review: 04/30/2013 Closing: 06/30/2013 06/30/2013 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Low or Negligible Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance ii C.3 Quality at Entry and Implementation Performance Indicators First Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P123267 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Highly Satisfactory Closing/Inactive status Second Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P129465 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status D. Sector and Theme Codes First Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P123267 Original Actual Sector Code (as % of total Bank financing) Central government administration 40 40 Compulsory health finance 20 20 Non-compulsory health finance 40 40 Theme Code (as % of total Bank financing) Debt management and fiscal sustainability 40 40 Health system performance 40 40 Tax policy and administration 20 20 iii Second Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P129465 Original Actual Sector Code (as % of total Bank financing) Central government administration 29 29 Compulsory health finance 28 28 General agriculture, fishing and forestry sector 7 7 Non-compulsory pensions and insurance 36 36 Theme Code (as % of total Bank financing) Debt management and fiscal sustainability 21 21 Macroeconomic management 21 21 Natural disaster management 15 15 Public expenditure, financial management and 29 29 procurement Tax policy and administration 14 14 E. Bank Staff First Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P123267 Positions At ICR At Approval Vice President: Hasan A. Tuluy Pamela Cox Country Director: Gloria M. Grandolini Gloria M. Grandolini Sector Manager: Auguste Tano Kouame Oscar Calvo-Gonzalez Task Team Leader: Barbara Cunha Lars Christian Moller ICR Team Leader: Barbara Cunha ICR Primary Author: Konstantin M. Wacker Second Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P129465 Positions At ICR At Approval Vice President: Hasan A. Tuluy Hasan A. Tuluy Country Director: Gloria M. Grandolini Gloria M. Grandolini Sector Manager: Auguste Tano Kouame Auguste Tano Kouame Task Team Leader: Barbara Cunha Lars Christian Moller ICR Team Leader: Barbara Cunha ICR Primary Author: Konstantin M. Wacker iv F. Results Framework Analysis Program Development Objectives (from Program Document) Enhanced fiscal sustainability and strengthened resilience of economic growth. Revised Program Development Objectives (as approved by original approving authority) First Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P123267 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Indicator 1 : The Central Government overall fiscal deficit. Value (quantitative or 3.9 (% of GDP) 3.2 (% of GDP) Qualitative) Date achieved 12/31/2010 12/31/2013 Comments Indicator was revised in the context of the second operation (and the targeted (incl. % indicator was achieved). achievement) Indicator 2 : Central government non-oil, tax revenue as a share of GDP. Value (quantitative or 12.1 (% of GDP) 12.5 (% of GDP) 12.9 (% of GDP) Qualitative) Date achieved 12/31/2010 12/31/2013 12/31/2013 Comments (incl. % 100 % achievement) Publication of an annual evaluation report detailing the implementation of the Indicator 3 : medium-term debt management strategy. Value (quantitative or Not available. Report published. Qualitative) Date achieved 12/31/2010 12/31/2013 Comments Indicator was revised in the context of the second operation because the related (incl. % indicative trigger was not transformed into a prior action. Nevertheless, achievement) progress was made on the indicator. Share of payments in the National Budget System effectuated through the Indicator 4 : TSA. Value (quantitative or 80 % 90 % Qualitative) Date achieved 12/31/2010 12/31/2013 Comments Indicator was revised in the context of the second operation because the related (incl. % indicative trigger was not transformed into a prior action. Nevertheless, achievement) progress was made on the indicator. v Reimbursements to health insurance companies from Indicator 5 : FOSYGA for medical services (procedures and medicines) outside the Mandatory Benefit Package of the contributive regime (recurrent expenditure). Value COP 2,400 (quantitative or COP 2,400 billion COP 2,385 billion billion or lower Qualitative) Date achieved 12/31/2010 12/31/2013 12/31/2013 Comments 100 % (actual expenditures were slightly above target but excess expenditures (incl. % are not recurrent). achievement) Number of financial instruments implemented to mitigate national disaster Indicator 6 : risks. Value (quantitative or 2 3 3 Qualitative) Date achieved 12/31/2010 12/31/2013 12/31/2013 Comments (incl. % 100 % achievement) Second Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P129465 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years The central government structural fiscal balance is reduced to -2.4 percent of Indicator 1 : GDP in 2013. Value (quantitative or n.a. -2.4 (% of GDP) -2.4 (% of GDP) Qualitative) Date achieved 12/31/2011 12/31/2013 12/31/2013 Comments (incl. % 100 % achievement) Central Government non-oil tax revenue is increased to 13.2 percent of GDP in Indicator 2 : 2013. Value (quantitative or 12.45 (% of GDP) 13.2 (% of GDP) 12.9 (% of GDP) Qualitative) Date achieved 01/01/2011 12/31/2013 12/31/2013 Comments 60 % (The final outcome of 12.9 was 0.45 percentage points higher than the (incl. % baseline of 12.45 [2010 and 2011 baseline average] and hence 60 % of the achievement) targeted 0.75 percentage point increase.) vi The Consultative Committee concludes in its annual statement that fiscal rule Indicator 3 : implementation is satisfactory by 2013. Value (quantitative or n.a. n.a. Yes Qualitative) Date achieved 12/31/2011 12/31/2013 12/31/2013 Comments (incl. % 100 % achievement) Reimbursements to health insurance companies from the Solidarity and Guarantee Fund (FOSYGA) for medical goods and services outside the Indicator 4 : Mandatory Benefit Package of the contributory regime do not exceed COP 2,400 billion by 2013 (recurrent expenditure). Value COP 2,400 billion (quantitative or COP 2,345 billion COP 2,385 billion or lower Qualitative) Date achieved 12/31/2010 12/31/2013 12/31/2013 Comments 100 % (actual expenditures were slightly above target but excess expenditures (incl. % are not recurrent). achievement) The Ministry of Finance and Public Credit (MHCP) has implemented three Indicator 5 : financial instruments to mitigate natural disaster risks by 2013, consistent with the recommendations of the national Disaster Risk Financing Strategy. Value (quantitative or 1 3 3 Qualitative) Date achieved 12/31/2011 12/31/2013 12/31/2013 Comments (incl. % 100 % achievement) The coverage of agricultural insurance is increased to 1.2 percent of area Indicator 6 : cultivated. Value (quantitative or 1.0 % 1.2 % 2.16 % Qualitative) Date achieved 12/31/2011 12/31/2013 Comments (incl. % 100 % achievement) vii G. Ratings of Program Performance in ISRs First Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P123267 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 10/19/2011 Satisfactory Satisfactory 0.00 2 05/02/2012 Highly Satisfactory Satisfactory 300.00 Second Programmatic Fiscal Sustainability and Growth Resilience Development Policy Loan - P129465 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 12/15/2012 Satisfactory Satisfactory 0.00 2 07/10/2013 Satisfactory Satisfactory 200.00 H. Restructuring (if any) viii Implementation Completion and Results Report for a Fiscal Sustainability and Growth Resilience Development Policy Loan Series to the Republic of Colombia 1. Program Context, Development Objectives and Design 1. This Implementation Completion Report (ICR) describes the results of the Programmatic Fiscal Sustainability and Growth Resilience Developing Policy Loan (DPL) series to the Republic of Colombia. The programmatic series consisted of two loans amounting to a total of US$500 million (US$ 300 million and US$200 million, respectively). The World Bank Board of Executive Directors approved the first operation on July 21, 2011 and the second operation on November 13, 2012. The operation was closed on June 30, 2013. 1 2. The overall aim of the program was to enhance fiscal sustainability and strengthen resilience of economic growth. The program supported reforms that should lead to a higher level of stability and predictability of expenses in the three interlinked areas of fiscal revenues and expenses, social security liabilities, and disaster risk spending. 1.1 Context at Appraisal Appraisal of the first and second operation took place on June 8, 2011 and September 24, 2012, respectively. 3. Prior to appraisal of the first operation, a new government assumed power with high public support. President Juan Manuel Santos Calderón from the Social Party of National Unity was elected by 69.13 percent of the popular vote in the second round and inaugurated on August 7, 2010. He resumed the center-right coalition of his predecessor Álvaro Uribe, maintaining an absolute majority in both chambers of the parliament and high popularity, which favored the implementation of policy reforms. At the time, the political landscape was also influenced by the long-lasting armed conflict with guerilla groups (FARC, ELN). 4. Growth was strong and inflation contained. Colombia experienced relatively high GDP growth rates in the decade prior to appraisal (4.3 percent average annual growth). Even during the global financial crisis, growth rates stayed positive and rebounded strongly in the course of 2010 and 2011 (see Figure 1). Inflation stayed below 4 percent after mid-2009 and thus in line with the goal set under the Central Bank’s flexible inflation-targeting regime. 2 Colombia runs a persistent current account deficit of tolerable magnitude (mostly below 3 percent of GDP, see 1 This would have required an ICR by December, 2013. However, as most outcome indicators of the operation target values at the end of 2013, an extension of the ICR submission deadline to April 10, 2014 has been granted. 2 Besides from maintaining low and stable inflation over a longer-term range, the Central Bank tries to stabilize output around its natural level and monitors financial stability issues. The Banco de la Republica 1 5. Table 1) that is mainly financed through FDI flows, especially in the extractive sector, which have been a relatively stable source of international finance. Export competitiveness also suffered from an appreciation of the real exchange rate of almost 35 percent in the decade prior to appraisal of the first operation. 6. The recent economic developments should be viewed against the backdrop of a decline in poverty rates and robust progress on shared prosperity. Colombian official extreme poverty drop from 17.7 to 10.4 percent between the years 2002 and 2012. Poverty reduction has been accompanied by progress in shared prosperity, with the income growth of the bottom 40 percent of the population reaching 7.9 percent over the period 2008-2012 compared to 5.2 percent for the total population. Colombia also improved with respect to multidimensional poverty. 3 Colombia’s Multidimensional Poverty Index (MPI) declined from 49 percent in 2003 to 27 percent in 2012. Transfers played an important role in the observed reduction in extreme poverty over the decade. While the income from transfers accounted for 5.7 percent of income for the bottom quintile in 2002, it represented 16.1 percent of income for the same group in 2012. The observed increase in the relative size of income from transfers coincides with the expansion of conditional cash transfer programs, such as Familias en Accion (which expanded from 514,000 households in 2005 to about 2.79 million households in 2012). These statistics suggest that the expansion of safety nets was both well targeted and effective in reducing poverty, particularly extreme poverty. However, it is worth noticing that overall Colombia’s fiscal policy is still very weak as a redistribution tool, and inequality excluding taxes and transfer is almost the same as after including it. 7. Commodities, especially oil, were becoming increasingly important. In 2011, fuel exports accounted for 68 percent of total merchandise exports (up from 41 percent in 2002); the share of food exports was almost 11 percent (down from 23 percent in 2002; see Table 1). Figure 1 also highlights that Colombia’s GDP growth broadly moves in line with changes in the oil price. 4 Commodities also contribute to about 12 percent to total fiscal revenues in 2011 (up from 5 percent in 2003). also intervenes in foreign exchange markets with the objective to smoothen excessive short-term volatility in the exchange rate. See BIS Paper 57. 3 Measured by the government since 2011. 4 This does not necessarily mean that all correlation between oil prices and growth has a causal nature, as the latter also reflects developments in global economic activity, foreign demand and financial conditions. 2 Figure 1: Growth and oil prices Figure 2: Central government indicators 9% 100% 4 45 8% 40 7% 60% 2 35 6% 5% 0 30 20% 20001 20011 20021 20031 20041 20051 20061 20071 20081 20091 20101 20111 20121 20131 4% 25 3% -2 -20% 20 2% 1% -4 15 0% -60% 10 -6 5 -8 0 GDP growth Budget Balance Debt (right axis) Source: WBG staff calculation and Haver Analytics. Source: Haver Analytics Quarterly GDP changes calculated on a year-on-year basis. 8. Growth moderated around appraisal of the second operation. In early 2012, economic activity showed some signs of potential slowdown that materialized around appraisal of the second operation: as year-on-year quarterly growth fell below 4 percent in the second half of 2012, but recovered since (see Figure 1).The slowdown happened against the background of a tightening cycle of the Central Bank, 5 weakening commodity prices, increasing guerilla attacks on oil pipelines, and major strikes in the oil, mining, coal, railway, and agriculture sectors in the fall of 2012. The domestic construction sector, retail and—especially—manufacturing sales also experienced a slowdown in activity. In addition the COP continued to appreciate vis-à-vis trading partners between appraisal in June, 2011 and end of 2012 (by approximately 3.5 percent in real terms), putting pressures on export competitiveness. 5 As annual real GDP growth surged to nearly 6 percent in 2011 and the output gap closed, Colombia’s Banco de la Republica raised its policy rate from 3 to 5.25 percent between end-2010 and February 2012. 3 Table 1: Main economic indicators 2009 2010 2011 2012 1st 2nd appraisal appraisal GDP per capita, PPP 8,241 8,450 8,890 9,143 Latin America and the Caribbean 9,776 10,208 10,507 10,713 GDP per capita growth (annual %) 0.2 2.5 5.2 2.8 Latin America and the Caribbean -2.8 4.2 2.7 1.9 Inflation, consumer prices (annual %) 4.2 2.3 3.4 3.2 Latin America and the Caribbean 2.6 3.7 5.1 3.9 Current account balance (% of GDP) -2.2 -3.1 -2.9 -3.3 Food exports (% of merchandise exports) 15.5 11.9 10.7 NA Fuel exports (% of merchandise exports) 50.7 60.4 68.2 NA Manufactures exports (% of merchandise exports) 28.5 22.5 17.3 NA Central Government Balance (% of GDP) -3.7 -3.5 -2.0 -1.9 Central Government Revenues (% of GDP) 15.9 13.8 15.2 16.1 Central Government Expenses (% of GDP) 19.2 17.3 17.2 17.9 Central Government Debt (% of GDP) 35.0 34.9 33.4 32.1 - thereof percent in domestic currency 56.6 60.1 57.4 59.0 Source: WDI and Haver Analytics 9. Colombia has accumulated a strong record of fiscal reforms that contributed to a decline in the central government debt since 2002. Colombia introduced Law 358 in 1997 to better control sub-national debt levels, approved a fiscal responsibility law in June 2003 (Ley 819) that also underpinned the formulation of a medium-term fiscal framework, adopted reforms to strengthen the management and distribution of oil and mining royalties in 2011 (constitutional articles 360 and 361), 6 and added a fiscal sustainability principle as a constitutional criterion in the same year (articles 334, 339 and 346). 7 Prudent fiscal management resulted in a decline in central government debt over the past decade (Figure 2). Central government debt decreased considerably in the years prior to 2008. Even after the challenges of the global financial crisis, central government debt stood at 33 percent of GDP at the time of appraisal of the first operation (see Table 1). More than half of this debt is denominated in domestic currency which reduces exchange rate risk. Debt Sustainability Analysis prepared at the time of appraisal suggested that the public debt was sustainable in the medium term, although vulnerable to a slowdown in economic activity. In fact, the growth moderation in mid-2012 affected non-oil tax revenues from record high levels in 2011. 6 At the concept stage of the operation, it was planned to support the royalties reform of the GOC with the program as well. However, it was not kept in the policy matrix because of uncertainties and potential risks related to the legal implications of the reform and its precise social impact. See also the discussions at the Concept Note Review Meeting held on May 2, 2011 in the respective Decision Note. 7 Savings of this fund can be used to a limited extent to finance counter-cyclical stimulus during years in which the output gap is 2 percentage points below potential. 4 10. At the time of appraisal of the first operation, certain structural factors posed risks to longer-term fiscal sustainability and effectiveness of the fiscal policy. Although well managed and balanced, Colombia’s fiscal accounts were exposed to different sources of contingent liabilities. For example, existing social security obligations, demographic change and rising health care costs constituted serious challenges. 8 Colombia is also considerably exposed to natural disasters which can cause a shock to fiscal spending and debt levels. 9 Furthermore, expenditure rigidities put a restrictive limit on prioritizing expenditures or implementing fiscal adjustments. On the income side, the outlined economic reliance on commodities is reflected in fiscal revenues and raises concerns about budget volatility and predictability. 11. The Fiscal Sustainability and Growth Resilience DPL series supported the government’s reform agenda aimed at addressing the above-mentioned fiscal risks. Given the outlined longer-term pressures on fiscal expenses, the shorter-term risk of budget volatility, and the need to invest in structural change and expanded social transfers to sustain economic growth, the government of Colombia considered fiscal reform a development priority. This is also reflected in Colombia’s Development Plan and Country Partnership Strategy, which explicitly refers to the improvement of fiscal and social risk management. 10 The DPL thus supported necessary but country-owned long- term oriented reforms in the area of fiscal adjustment, where the political economy is usually difficult. Furthermore, the DPL built upon a strong relationship between the GOC and the Bank in the area of fiscal management 11 and could hence rely on relevant analytical work to support the operation. 8 One reason for pressures in health costs was growing health service provisioning outside the Mandatory Benefit Package that was thus subsidized by the government. This development also be seen in the context of a jurisprudence of the Colombian Constitutional Court that often favored citizens’ protection of fundamental social rights—especially the constitutional right to health—via a relatively easy to access system (‘tutelas’). See, e.g., Ely Yamin, A. and O. Parra-Vera (2009): “How Do Courts Set Health Policy? The Case of the Colombian Constitutional Court.” PLoS Medicine 6(2) 9 As an example, shortly before appraisal of the first operation, in April 2011, Colombia suffered a rain- induced flooding and related landslides that killed more than 100 people and left approximately 69,000 homeless. Another wave of flooding happened in fall 2011. 10 PD1 (p. 36) and PD2 (p. 16) link the DPL to the Development Plan’s themes “Sustainable Growth and Competitiveness” and “Environmental and Disaster Risk Management.” However, it can also be seen as a contribution to the “Good Governance” objective. Similarly, PD1 (p. 36/37) and PD2 (p. 17) relate the operation to the CPS themes “Inclusive Growth with Enhanced Productivity” and the long-term outcome of improved fiscal, financial, and social risk management but it should also be supportive to the outcome of improved public sector management and the CPS theme “Sustainable Growth with Enhanced Climate Change Resilience” (with the related long-term outcome enhanced disaster risk management). 11 See e.g. PD1 (p. 7, and tables 4 and 7) 5 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved in DPL 1) PDOs: Enhanced fiscal sustainability and strengthened resilience of economic growth. Key Outcome Indicators (at the time of the first operation): • The Central Government fiscal deficit is reduced to 3.2 percent of GDP in 2013. • Central Government non-oil tax revenue is increased to 12.5 percent of GDP in 2013. • An annual evaluation report of the medium term debt management strategy has been published by 2013. • 90 percent of payments in the National Budget System are effectuated through the Treasury Single Account in 2013. • Reimbursements to health insurance companies from FOSYGA for medical services (procedures and medicines) outside the Mandatory Benefit Package of the contributive regime do not exceed COP 2,400 billion by 2013 (recurrent expenditure). • The Ministry of Finance and Public Credit has implemented three financial instruments to mitigate natural disaster risks by 2013, consistent with the recommendations of the national Disaster Risk Financing Strategy. 1.3 Revised PDO (if any, as approved by original approving authority) and Key Indicators, and Reasons/Justification 12. PDOs remained unchanged but key outcome indicators were revised during the preparation of the second operation in the series. Changes are summarized below: Two key outcome indicators were revised: I. Instead of targeting a fiscal deficit of 3.2 percent of GDP in 2013, the indicator was changed to a structural fiscal balance of -2.4 percent of GDP. II. The targeted non-oil tax revenue in 2013 was increased from 12.5 to 13.2 percent of GDP. Two key outcome indicators were dropped because the associated indicative triggers were not transformed into prior actions: III. 90 percent of payments in the National Budget System are effectuated through the Treasury Single Account in 2013. IV. An annual evaluation report of the medium term debt management strategy has been published by 2013. Instead, two new key outcome indicators were introduced: V. The Consultative Committee concludes in its annual statement that fiscal rule implementation is satisfactory by 2013. VI. The coverage of agricultural insurance is increased to 1.2 percent of area cultivated. 6 Justification and Recent Developments: 13. Targeting the structural fiscal balance (I), which is the more appropriate indicator than the fiscal deficit per se, became possible only before the second operation. As part of the implementation of the fiscal rule, the government agreed on a methodology to track the structure balance. This indicator was not available before the first operation because of unsettled discussions about measurement and methodology issues. 14. The indicator concerning the non-oil tax revenue (II) was revised upward in view of strong revenue performance in 2011 against the background of the exceptionally strong cyclical growth performance in the forerun of the second operation, which did not prove to be sustainable. 15. Indicators III & IV above, which related to the TSA and the evaluation report of the medium term debt strategy were dropped because the associated indicative triggers were not transformed into prior actions in the context of the second operation. Despite these reform areas being no longer part of the results framework of the operation, the government made progress, confirming their high commitment to reform: 16. Reforms of debt and cash management turned out to be technically more demanding than expected. Accordingly, the indicative triggers for this area were not turned into prior actions and it was no longer reasonable to keep payments in the TSA as an indicator (indicator III above). The delay in implementation did not reflect unwillingness of the GOC to reform. In fact and the Ministry of Finance has issued Decree 2785 in November 2013, which sets the TSA implementation path. It requires the entities that form part of the TSA to transfer their resources to the TSA by December 31, 2014 and aims for full implementation in July, 2015. 17. Similarly, the ambition to develop a ‘state-of-the-art’ medium-term debt management strategy has resulted in a slower-than-expected trajectory of completing this task, making the annual evaluation report (indicator IV above) inadequate. Nevertheless, the government approved the country’s medium-term debt management strategy in late 2012, shortly after the operation. Currently, the Government produces an annual evaluation report that was classified confidential and circulated internally but it is planned to be publicly released within the next months. 18. The newly introduced indicator on the fiscal rule implementation (V above) helped ensure that the government sticks to the implementation of the overall important fiscal rule. As, conversely, progress in social security and disaster risk management was quicker than expected, new prior actions have been introduced in these areas and were also reflected in the newly introduced outcome indicator (VI above). 1.4 Original Policy Areas Supported by the Program (as approved): 19. The operation supported reforms in the area of budget predictability and stability. Besides from measures directly relating to fiscal management, this also included management of social security liabilities and disaster risk financing. 7 1.5 Revised Policy Areas —none— 1.6 Other significant changes —none— 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 20. All required policy actions were satisfied in a timely manner, with no delays in effectiveness or disbursement (see Table 2). Table 2: Prior actions of the series First Operation in a Programmatic Series List prior actions from Legal Agreement/ Program Document Status I-1. The Borrower has presented to Congress, for approval thereby, the Fiscal Rule met by approval Bill of Law. I-2. The Borrower has: (i) promulgated Law No. 1430, dated December 29, 2010 met by which, inter alia, reduced tax exemptions, closed tax loopholes and phased-out the promulgation Borrower’s financial transaction tax; and (ii) issued Presidential Decree No. 4825, dated December 29, 2010 which, inter alia, increased the rate and the base of the and issuance wealth tax. I-3. The Borrower has promulgated Law No. 1438 dated January 19, 2011 which met by inter alia strengthened primary health care and established the criteria for updating promulgation the Mandatory Benefit Package. I-4. The Borrower’s Ministry of Social Protection has issued: met by issuance (i) Resolution No. 4377 dated October 29, 2010, which, inter alia established a reimbursement system that allows more predictability in the reimbursement rates for selected high-cost medicines; and (ii) Resolution No. 1020, dated March 31, 2011, which, inter alia, established a reimbursement rate ceiling for the reimbursement of forty seven pharmaceutical active ingredients not covered by the Mandatory Benefit Package of the Contributory Regime. I-5. The Borrower’s Ministry of Social Protection has issued Resolution No. 1083, met by issuance dated April 5, 2011, which established a committee to monitor and analyze the trend of reimbursements paid by FOSYGA for health care goods (including pharmaceuticals) and health services not covered by the Mandatory Benefit Package of the Contributory Regime. Subsequent Operation(s) (add more rows, if needed) List prior actions from Legal Agreement/ Program Document Status I-1. The Borrower, through its Ministry of Finance and Public Credit has taken key steps to met by implement the Fiscal Rule Law, including: (a) the publication of the 2012 Medium Term Fiscal Framework Report; and publication (b) the issuance of Decree No. 1790 dated August 28, 2012 (duly published in the (June, 2012) and Borrower’s official gazette on August 28, 2012), which, inter alia, established a consultative issuance committee to monitor the implementation of the Fiscal Rule Law by the Borrower’s Executive Branch. II-2. The Borrower’s Ministry of Finance and Public Credit has issued the Implementing met by issuance Regulations of Law 1430, to increase the Borrower’s tax revenue, enhance the Borrower’s tax system efficiency and improve the competitiveness of its economy. II-3. The Borrower, through its Health Regulatory Commission, has issued the Accord met by issuance (Acuerdo) No. 29 dated December 28, 2011 (duly published in the Borrower’s official gazette on December 30, 2011), which, inter alia, 8 (a) updated the Mandatory Benefit Package of both the contributory and subsidized regimes for purposes of expanding the coverage of health goods and services under said regimes; and (b) introduced a list of healthcare goods and medical services to be excluded from said Mandatory Benefit Package. II-4. The Borrower, through its Ministry of Health and Social Protection, has issued Decree met by issuance No. 4107 dated November, 2, 2011 (duly published in the Borrower’s official gazette on November 2, 2011), which, inter alia, established a contingency fund for the Borrower’s health insurance system for purposes of ensuring the availability of sufficient funds available for contingencies, including health emergencies stemming from different types of natural and biological epidemics or disasters. II-5. The Borrower, through its Ministry of Finance and Public Credit, has approved and met by approval published a disaster risk financing strategy, dated May, 2012, to reduce the Borrower’s fiscal vulnerability against the occurrence of natural disasters. and publishing II-6. The Borrower, through its Ministry of Finance and Public Credit, has issued Decree No. met by issuance 4865, dated December 22, 2011 (duly published in the Borrower’s official gazette on December 22, 2011), which, inter alia, modified the reserve requirement of private insurance firms providing insurance against earthquakes. II.7. The Borrower has improved the institutional framework for its private agriculture met by insurance market, through: (a) the promulgation of Law No. 1450, dated June 16, 2011 (duly published in the promulgation Borrower’s official gazette on June 16, 2011) which, inter alia, established a risk and issuance management framework to integrate adaptation and mitigation strategies to improve production risks; (b) the issuance by the National Agricultural Credit Commission of: (i) Resolution No. 1, dated August 23, 2011 (duly published in the Borrower’s official gazette on September 2, 2011), which inter alia, expanded the type of risks that qualify for public subsidies for agriculture insurance premiums; and (ii) Resolution No. 1, dated May 16, 2012 (duly published in the Borrower’s official gazette on May 16, 2012), which, inter alia, preserved the voluntary access to insurance. 2.2 Major Factors Affecting Implementation: 21. Economic growth moderated during the implementation period amid receding tailwinds. Commodity prices remained at overall elevated levels but did not rise further. After starting a decline in 2011, oil prices remained essentially flat after mid- 2012, and Colombia’s agricultural, coal and coffee exports experienced similar or even less favorable price developments over the same period. The extractive industry sector also experienced a number of short-term supply shocks due to the strikes and attacks mentioned above. Furthermore, the construction sector, in which public projects are an important component, stagnated in fall 2012 after rapid expansion in the preceding year. The combination of these factors, together with sluggish export developments due to the strong peso, weighted on growth and revenue collection in 2012 and early 2013. This had an adverse impact on fiscal revenues due to their exposure to commodity income but also weighed on the non-oil/GDP revenues through earning declines in the formal sector and slowing consumption. 22. Despite the initial change in its composition the government continued to implement important reforms that contributed to upgrades by rating agencies and an invitation to start OECD accession process. A reshuffling in the cabinet in mid- August 2012 took place but did not significantly alter reform progress as most reform actions by then have already been implemented. Generally, reform implementation speed was heterogeneous as reforms of debt and cash management took longer than expected while progress in social security and disaster risk management was quicker and compensated for the former. The overall commitment to fiscal reform nevertheless 9 remained high, which was also reflected in an upgrading of Colombia’s foreign-currency bond credit rating to investment grade in 2011 by all three major rating agencies and further upgrades by Moody and Fitch in the second half of 2013. The relevance of fiscal reform to the government can also be inferred from the fact that progress has been achieved concerning indicators that were initial indicative triggers but had to be dropped in the curse of the second operation because progress was slower than initially expected due to technical difficulties (see section 1.3). Finally, Colombia’s overall reform progress is also reflected by its accession to the OECD, which resulted in a formal roadmap for future membership in September, 2013 and by an IMF Article IV mission that praised Colombia’s “strong fiscal framework” in March 2014. 23. Implementation was positively affected by complementary World Bank activities. Building on analytical work and prior consultations were supportive to implementation. The operation was not detached from other World Bank engagements or government reform plans but well-integrated into a wider fiscal management program. This included a wide range of analytical work (tax expenditure study, pension studies, open source risk assessment) and close consultations with the GOC on planned reforms. This facilitated the design of the operation in a manner that was consistent with the expected implementation progress. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 24. Design: The results framework comprised 6 indicators that were partially modified in course of the second operation. These indicators were generally well-selected in that they are relatively easy to measure and reasonably linked to the prior actions. Most of the indicators were economically relevant and precise. The only exception is the indicator requiring the implementation of three financial instruments to mitigate natural disaster risks by 2013, which was relevant but not so precise. It possesses a level of flexibility needed in this sector at appraisal stage. 25. Implementation: The operation’s arrangements defined the Ministry of Finance and Public Credit (MHCP) and the National Planning Department (DNP) as responsible for coordinating actions among the concerned agencies. The Department for Public Credit within the MHCP was responsible for collecting and reporting the necessary data to assess the implementation progress in the areas of MHCP’s responsibility. Similarly, the Sub-directorate of Public Credit within the DNP was responsible for collecting and reporting the information necessary to evaluate the implementation progress in areas for which the Ministry of Social Protection is responsible. Together, these institutions collected most of the data necessary to assess and report on implementation progress and achievement of the outcome indicators. 2.4 Expected Next Phase/Follow-up Operation (if any): 26. The consultations between the Bank and the GOC during preparation and implementation of the program supported an expansion of initiatives in Colombia’s fiscal sector. In parallel, taking advantage of the policy discussion generated by the preparation of the DPL, the Bank engaged in a series of analytical and convening 10 activities that helped to inform a sequence of reforms (such as the comprehensive 2012 tax reform and the implementation of the Agriculture Financing and Risk Directorate). These activities also supported other follow up lending operations. Reforms linking fiscal policy and redistribution have been supported by the follow-up DPL “Enhancing Fiscal Capacity to Promote Shared Prosperity” that targeted equity aspects in the fiscal sector, while an agenda of structural reforms to further support growth resilience are being discussed as part of a new “Growth and Competitiveness” DPL that potentially tackles the pillars of innovation, external trade facilitation, human capital, and access to finance. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 27. Relevance of Objectives: Significant. The program development objectives were to enhance fiscal sustainability and strengthen resilience of economic growth. As outlined in section 1.1 and subsection 3.4(b), the operation addressed exigent problems of Colombia’s development process: sustaining the growth momentum, achieving further progress in poverty reduction, and avoiding a ‘middle-income trap’ will require public goods provisioning and an adequate fiscal framework. Furthermore, the fiscal position had to be shielded from volatility in commodity prices and long-term spending pressures in the areas of social protection and natural risk. The operation supported the GOC in tackling these challenges. It thereby built on long-lasting relations with the GOC in the public management sector and on the governments’ reform priorities in the field of public sector management, sustainable growth, and competitiveness, which are evident in the National Development Plan and the CPS. 28. At the time of the DPL preparation the World Bank goals of ending poverty and promoting shared prosperity had not been defined yet, therefore the operation does explicitly deals with these issues. Nevertheless the operation was prepared within a broader engagement between the government and the Bank on the redistributing and growth promoting roles of fiscal policy (these analytical and convening works supported the preparation of the “Enhancing Fiscal Capacity to Promote Shared Prosperity” DPL in 2013). Furthermore, the GOC prioritized macro-fiscal stabilization as a first step and the relevance of this objective for poverty reduction can be substantiated. 12 Against the background of sustaining growth momentum and a pending OECD accession, the GOC also put growth and competitiveness issues center stage and meeting this demand might have helped implementing the follow-up operations with higher equity relevance. 29. Relevance of Design: High. The policy measures supported by the program and the targeted indicators were well in line with the outlined objectives and chosen with rationale. The program supported areas where the Bank was well-positioned to contribute 12 See the discussion in section 3.4(a) and, for example, Gavin, M., R. Hausmann, R. Perotti, and E. Talvi (1996): “Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness.” IADB Working Paper 326. Crespo-Cuaresma, J., S. Klasen, and K.M. Wacker (2013): “Why We Don’t See Poverty Convergence: The Role of Macroeconomic Volatility.” Courant- Research-Centre: Poverty, Equity, and Growth – Discussion Paper 153. 11 finance, knowledge, and convening services. The design focused on a well-defined set of reforms without overburdening the program with other ongoing reform efforts in the area that were accompanied by other Bank instruments (e.g. the royalties reform). This led to a framework of clear prior actions and outcome indicators. The programmatic design of the operation emphasizes the GOC and the Bank commitment with the program’s objectives. The design as a two-program operation allowed putting more emphasis on legislation in the first and on implementation in the second operation. This approach can generally help to avoid potential implementation slippages. 3.2 Achievement of Program Development Objectives 30. The overall PDO of enhancing fiscal sustainability and strengthening resilience of economic growth was achieved. The fiscal framework of Colombia has certainly improved over the last years with the help of the implemented program, together with supporting and follow-up operations and other government reforms. As mentioned, these achievements have been recognized through sovereign debt rating upgrading by three rating agencies. 31. There are solid linkages between the PDO, prior actions, and outcomes in the design of the operation. The focus on a limited number of actions and indicators has potentially added to achieving this linkage and corresponds to a recent trend in Development Policy Lending. 13 These indicators do not exhaust all the different dimensions of the PDO, they represent a select sample of critical dimensions that were complemented by a broader government strategy. This complementarity with other activities and reforms beyond the results framework is discussed in more details in the “Lessons Learned” section. The outcome indicators supported by the operation and their development are summarized below: 13 According to OPCS’ 2012 DPL Retrospective (p. xii/xiii), the average number of prior actions per operation equals 10, whereas the average number of indicators has come down from 28 to 14. 12 Table 3: Targeted indicators and their actual development Unit of Baselinea Actual Target Indicators Measure 2010 2011 2012 2013 2013 The central government structural Percentage N.A. N.A. -2.4 -2.4 -2.4 fiscal balance (percent of GDP) The Consultative Committee issues a pending Satis- Yes (for statement on the annual fiscal rule (due factory: - - Yes 2012 implementation report prepared by the June Yes/No statement) Ministry of Finance and Public Credit. 2014) Central government non-oil Percentage 12.0b 12.9b 12.3 12.9 13.2 tax revenue (percent of GDP) Reimbursements to health insurance companies from the Solidarity and Guarantee Fund (FOSYGA) for COP COP COP COP ≤ COP Number medical goods and services outside the 2,345 2,103 1,944 2,385* 2,400 (bn COP) Mandatory Benefit Package of the billion billion billion billion billion contributory regime (recurrent expenditure). Number of financial instruments in place to mitigate national disaster Number 2 1 2 3 3 risks. Coverage of agricultural insurance Percentage 1.0% c 1.0 % c 2,06 % 2,16 %d 1,2 % (percent of area cultivated) Notes: *: These are recurrent expenditures. Actual expenditures were 2,649 bn COP, including 265 bn COP that FOSYGA reimbursed for previous years in which the reimbursement request had not been presented on time. This amount shoud hence be allocated to the previous years. (a) Baseline values are taken from the Program Document of the second operation. They reflect the estimates at the time of appraisal and not necessarily the actually realized numbers. Particularly: (b) The realized non-oil tax revenues were 11.7 and 12.5 percent of GDP in 2010 and 2011, respectively. (c) The actually realized coverage of agricultural insurance was 0.86 and 0.91 percent of cultivated area in 2010 and 2011, respectively. (d) This number is an estimate. Data on area cultivated is not available before April/May 2014. The estimate assumes an increase of area cultivated of 7 percent which would equal the highest increase in the last decade and largely corresponds to the increase of activity in the agricultural sector in 2013. Only an increase of more than 13.4 percent would imply that the indicator would not be met, a quite unrealistic assumption. (a) Improved budget predictability and stability 32. Outcome Indicator 1: The central government structural fiscal balance is reduced to -2.4 percent of GDP in 2013. 14 – Achieved. The program supported the legislation of the Fiscal Rule Bill of Law as the centerpiece of fiscal reform, as well as the establishment of a committee monitoring its implementation (Decree No. 1790) with 14 This indicator initially requested that “The Central Government fiscal deficit is reduced to 3.2 percent of GDP in 2013.” As outlined in section 1.3 it was changed to the above-mentioned indicator due to progress in fiscal management and associated data availability. 13 the aim of improving fiscal discipline and counter-cyclical fiscal policy. Since the fiscal rule targets a central government structural deficit of 1.0 percent of GDP by 2022, including an interim target of 2.3 percent of GDP in 2014, the indicator clearly relates to the supported reforms. As part of its implementation, the government agreed on a methodology to calculate and track the indicator. The central government structural deficit goal of -2.4 percent of GDP was met both in 2012 and 2013 in line with the long- run deficit trajectory and the outcome indicator. Implementation of the Law was complicated by finding adequate methodologies for measuring the structural balance. As the Report on the Fiscal Rule Implementation in 2012, which is summarized in Annex 3, concludes, formally setting up the Consultative Committee and the technical expert groups for calculating the structural balance in the first half of 2013 was an essential step for the implementation of the Fiscal Rule Law. 33. Outcome Indicator 2: Central Government non-oil tax revenue is increased to 13.2 percent of GDP in 2013. 15 – Partially achieved. The program supported promulgation of Law No. 1430 and issuance of Presidential Decree No. 4825, which implement tax administration measures expected to increase tax revenue by 0.6 percent of GDP per year in 2011-2014. These measures aimed at closing tax loopholes and increasing the rate and base of the wealth tax to hence support the achievement of a sustainable budget path (as targeted with outcome indicator 1). The supported actions thus have a strong connection to the targeted outcome indicator and had a significant positive impact on non-oil revenues in the context of the first operation. 16 In fact, the indicator targeted in the context of the first operation (12.5 percent of GDP) was already achieved in 2011. This gave rise to an upward revision of the indicator by the Bank in the context of the second operation. However, the observed growth slowdown in 2012 led to a drop of non-oil revenues to 12.3 percent of GDP in 2012. While non-oil revenues recovered to 12.9 percent of GDP in 2013 and thus met the target set at appraisal of the first operation, the revised target of 13.2 percent of GDP was not fully met. However, it should be mentioned that the upward revision of this indicator in the context of the second operation was probably over-ambitious. Furthermore, this indicator is clearly subordinate to the more important outcome indicator 1 which it is supposed to support and which was fully achieved. 34. Outcome Indicator 3: The Consultative Committee concludes in its annual statement that fiscal rule implementation is satisfactory by 2013. 17 – Achieved. The program supported Decree No. 1790 which, inter alia, mandated the creation of a consultative committee to monitor the implementation of the Fiscal Rule Law. Such monitoring is relevant to avoid reform slippage in de facto policy implementation of de jure legislation supported by the program. The consultative committee held its first 15 This indicator was initially set to 12.5 percent of GDP in the first program but then revised upwards to 13.2 percent at the second program in view of progress achieved thus far. 16 It is estimated that tax collection actually improved by 1.3 percentage points of GDP in 2011 and estimates that about a quarter can be attributed to the reforms concerning the wealth and financial transaction tax supported by first operation. 17 This indicator was newly introduced with the second operation to make up for the dropped outcome indicators. 14 meeting in May 2013. It produced its first annual evaluation statement in December 2013, in which it concludes that the report of first year of implementation of the fiscal rule (2012) was satisfactory. The report evaluating the year 2013, in which the targeted fiscal balance was met as well, is expected for June 2014. (b) Improved social security liability management 35. Outcome Indicator 4: Reimbursements to health insurance companies from the Solidarity and Guarantee Fund (FOSYGA) for medical goods and services outside the Mandatory Benefit Package of the contributory regime do not exceed COP 2,400 billion by 2013 (recurrent expenditure). –Achieved. The program supported an update of the Mandatory Benefit Package of the contributive and subsidized regimes, the legal criteria therefore (Law No. 1438), as well as certain legal regulations for FOSYGA reimbursements (e.g. Resolution No. 1020) and their monitoring (Resolution No. 1083) with the aim of establishing a comprehensive approach to ensuring a sound reimbursement policy for pharmaceuticals. There is hence a strong rationale why the supported reform should contribute to stabilizing FOSYGA reimbursements outside the Mandatory Benefit Package. Favorable developments were already achieved in 2011 and 2012 and recurrent reimbursements amounted to COP 2,384 billion in 2013. The Ministry of Finance expects the payments to decline again from 2014 onwards following the implementation of the statutory and ordinary Health Reforms approved in 2013. (c) Improved disaster risk financing management 36. Outcome Indicator 5: The Ministry of Finance and Public Credit (MHCP) has implemented three financial instruments to mitigate natural disaster risks by 2013, consistent with the recommendations of the national Disaster Risk Financing Strategy. – Achieved. The program supported the development of a national financing strategy for natural disaster risk management. This included the development of financial instruments, i.e. ex ante budgetary or market-based tools that contribute to increased financial protection of the state against disasters. Targeting the existence of three related financial instruments is quantitatively measurable and the fact that they were not explicitly classified allowed for flexibility to identify well-suited instruments. The government successfully put in place three instruments by 2013: a catastrophic DPL with a deferred drawdown option of 250 million USD was signed with the World Bank in 2012, a financial protection sub-account of the National Fund for Disaster Risk Management was put in place with Law 1523 of 2012, and mandatory standard terms and conditions for the insurance of road and infrastructure against disaster risk (such as flooding and earthquakes) entered into force in the context of the fourth generation of public private partnerships concessions. Furthermore, the Ministry of Finance and Public Credit and the Colombian Procurement Agency are currently developing a framework agreement for the collective insurance for central government buildings that should enter in force in the next months and the Ministry of Finance and Public Credit is conducting a cost-benefit analysis concerning a Catastrophe Swap. 37. Outcome Indicator 6: The coverage of agricultural insurance is increased to 1.2 percent of area cultivated. – Achieved. The program supported implementation of 15 Law No. 1450 which, inter alia, reinforces incentives for agriculture risk management instruments, in particular agricultural insurance. This should help raise insurance coverage, which initially was below 1.0 percent of cultivated area in 2010 and 2011. As evaluated during the last implementation status and results mission, insurance coverage rose to 2.06 percent of the cultivated area in 2012 already and is estimated to equal 2.16 percent by 2013. 3.3 Justification of Overall Outcome Rating Rating: Satisfactory. 38. The program supported an important longer-term development challenge of Colombia that was well-aligned with the country’s development plan and CPS. The choice of a programmatic DPO was adequate to track and support a medium term fiscal reform agenda. In addition, the operation was well-designed and aligned with the overall country program of the Bank and could hence also rely on a strong analytical underpinning to link Colombia’s development challenges to relevant prior actions and outcome indicators. Furthermore, the program allowed embarking on a deeper and wider cooperation between Bank and GOC (see section 6). The PDO was achieved even though one outcome indicator (2) was not fully met, which was mostly due to factors beyond the immediate influence of the operation and did not have an adverse impact on the more important overall development objective of achieving a sustainable budget path (indicator 1). Despite the strength of the program, the somewhat slower-than-expected reform progress on the TSA and on the implementation and evaluation of the medium-term debt management strategy, and the partial achievement of one indicator lead us to consider “satisfactory” as the overall outcome rating. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 39. Even though the DPL preparation did not include an in-depth PSIA of prior actions, 18 it considered the potential distributional impacts of the different actions and expected them be consistent with poverty reduction and social impacts. In the long run, the supported fiscal reforms are expected to improve Colombia’s capacity to pursue countercyclical fiscal policy with positive effects on poverty and income distribution, which were adversely affected by pro-cyclical policies in the past. 19 Moreover, macroeconomic volatility and instability disproportionally affect the poor, which have less instruments to protect against shocks. Therefore, the operation objective is well aligned with poverty reduction and shared prosperity, even if these goals were not explicitly mentioned during preparation. In the shorter run, there is a risk that fiscal consolidation can be achieved by cutting pro-poor spending. In the case of Colombia, 18 Concerning the update of the Mandatory Benefit Package, such an analysis has been made. 19 On these issues see, inter alia: Inter-American Development Bank (1995): “Overcoming Volatility in Latin America.” Report on Economic and Social Progress in Latin America. Gavin, M. and R. Hausmann (1996): “Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America.” IADB Working Paper 315. Gavin, M.et al. (1996) l.c.; Crespo-Cuaresma, J.et al. (2013) l.c. 16 however, legal constraints largely prevent this from happening and there was no indication that adjustment would take place through a reduction in pro-poor spending or that that the Government would cut social programs over the time period 2010-2014. 20In fact, social spending by the central government increased during the implementation period of the operation. Nominal spending in the social sector between 2010 and 2013 increased by 28.8 percent, 21 while spending for education and health increased by 28.8 and 40.8 percent, respectively. Growth was well above accumulated inflation for the period (11.5 percent). 22 40. The operation and the analytical work surrounding it also helped embarking on an ambitious agenda of equity-oriented fiscal reforms, supported by follow-up development policy operation “Enhancing Fiscal Capacity to Promote Shared Prosperity”. The operation supported, among other issues, the design and implementation of a comprehensive tax reform which intended to make the tax system more progressive and encourage formal job creation. However, stressing the linkages between the supported program and other World Bank operations in the country could have been further stressed during preparation. (b) Institutional Change/Strengthening 41. Colombia’s public sector capacity is key in the country’s development process. The DPL series supported many actions that strengthen its instructional framework. For example, the implementation of a fiscal framework ensures government responsibility and prioritization in spending. Actions supported by the operation also help mitigate potential pressures on the expense side in the areas of social and disaster risk management. Finally, tax administration measures helped to widen the tax base, to reduce tax evasion, and to improve public financial management. All these developments should have a positive longer-term impact on Colombia’s institutional capacity, and therefore on its development process. Despite progress being made, further challenges remain and there is potential scope for continued support. (c) Other Unintended Outcomes and Impacts (positive or negative) 42. No unintended negative effects have been identified by the team or the GOC. Bank staff from various sectors emphasized that the operation led to a strengthened policy dialogue with the GOC. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops —none— 20 Constitutional arrangements and Law 715 from 2001 prevent social expenditures from declining as earmarked spending—which mostly cover the social sector—may not be cut even in times of fiscal constraints. 21 This increase was well above accumulate inflation for the period (11.5 percent). 22 The Report on the Fiscal Rule Implementation in 2012 also concludes that more recent consolidation mainly took place through revenue increase, not expenditure cuts (see Annex 3). 17 4. Assessment of Risk to Development Outcome Rating: Low 43. Colombia has the fiscal space and institutional framework to accommodate most relevant risks. Political and macroeconomic risks seem mainly contained and progress has been made with respect to management of disaster risks which nevertheless pose a considerable challenge. • Political and Social Risks: The upcoming presidential elections (May, 2014) are not expected to result in a major change in the overall policy stance, especially with regard to fiscal issues. However, the country has been prone to protests and disruptions in key economic sectors. Intensification of such tensions could put the fiscal consolidation path under pressure because they can lead to a slowdown in economic activity while possibly requiring increased spending to maintain the social balance. Furthermore, the experience of social uprising in Brazil in the second half of 2013 demonstrates the increasing demand for public service provisioning of an increasingly self-confident middle class in Latin America. Similar developments in Colombia could also put pressure on public expenditures but it is worth highlighting the GOC commitment to fiscal consolidation. If such spending pressures were to materialize, the GOC would thus be likely to search for additional revenue sources in line with the fiscal rule. • Macroeconomic Risks: Macroeconomic risks worth mentioning continue to stem from high reliance on commodity prices and on external financing of the current account deficit—although the latter is modest in size and mainly financed by FDI flows which are considered relatively stable. These risks are unlikely to materialize at the same time: a potential slowdown in world output that would lead to an oil price decline would most likely be countered by monetary easing by industrialized countries. Nevertheless, financial market volatility remains high and turmoil in large emerging economies could have financial spill-overs to Colombia and also lead to a decline in international oil prices. So far though, Colombia remains well positioned and very resilient to recent shocks affecting emerging economies (balance of payment pressures in Turkey, India, Argentina; social upraises in Thailand, Ukraine, and Venezuela). However, very large commodity prices shocks could have implications not only to the external accounts, but to fiscal outcomes. Despite the recent progress, Colombia’s non-oil revenues are still low compared to similar countries in the region and the observed growth slowdown in 2012 highlighted that short-term indicators are prone to cyclical fluctuations although the structural long-term budget balance is on a desirable path. • Natural Disaster Risk: Colombia’s relatively high exposure to natural disasters continues to exercise some pressure on fiscal sustainability and growth resilience. While the program helped to mitigate some of them, insurance is far from perfect and occurrence of a major natural disaster would potentially affect private and public investment patterns and future insurance costs. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance 18 (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory. 44. The design of the DPL was appropriate, timely and responded to client’s financing needs. The operation focused on prior actions based on critical reforms supporting the client’s development goals and the Bank strategic priorities. In this context, the selection of a limited number of crucial prior actions was appropriate to ensure a clear focus of the reform program while still accommodating engagement in multiple sectors. In addition, the operation’s results framework established a meaningful mapping from PDO to prior actions to outcome indicators 23. 45. The programmatic design was also appropriate for the operation in general because it signaled medium-term commitment to the development objective. Furthermore, by shifting emphasis from legislative to administrative measures during the second operation, the operational design insured implementation of legal reforms and helped avoiding potential policy slippages. It also proved flexible in responding to heterogeneous progress in reform implementation by adapting the results framework (indicators and prior actions). 46. Bank analytical work and client consultation promoted quality at entry. This is reflected in a large body of supporting knowledge products 24 and later follow-up operations. 47. Nevertheless, the decision of the Bank to raise upwards the indicator of non- oil tax revenue between the two operations proved over-optimistic. While the indicator was strongly linked to the prior actions and supported reforms, it still depended on factors that are beyond the program’s influence or the government’s control. As external downward risks to growth materialized, the target could no longer be met even though the reform implementation was on track and consistent with government objectives. (b) Quality of Supervision Rating: Satisfactory. 48. Prior to the ICR mission, the Bank conducted mid-term reviews and ISRs of both operations (April, 2012 and July, 2013, respectively). Responsibility of data collection and action coordination was clearly defined and the responsible parts came through as agreed. The Bank team followed up on its responsibilities, and assured periodic monitoring of implementation. Finally, the decision to postpone the ICR, taken well before its expected delivery, was adequate as it allowed the team to gather the necessary data and take into account a more complete picture of developments in 2013. 23 Unfortunately, many DPOs lag behind in this aspect as OPCS’ 2012 DPL Retrospective (p. xiv) finds that “while all DPO PDs include a discussion of the analytical underpinnings, many could be strengthened by being more precise about the linkages between the Bank’s Analytical and Advisory Activities (…) and the design of the program.” 24 For examples, see the program documents of the first (table 8) and second (p. 2, Table 4, Box6) operation. 19 (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory. 49. Relevance of objectives and design were significant and high, respectively, performance at entry, and supervision was satisfactory and no significant shortfalls were reported during the operation period, resulting in an overall satisfactory rating. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory. 50. The government showed strong commitment to reform and took full ownership of the program. The government implemented an ambitious program of fiscal reforms, going beyond the actions supported by the operation. Such commitment is reflected in improved credit ratings by the most relevant rating agencies. However, in some areas, reforms proceeded slower than initially expected and indicative triggers and indicators had to be adjusted accordingly. It should nevertheless be mentioned that the government continued to make progress also on areas where indicative triggers and indicators were dropped. Given these small delays, we consider “satisfactory” as an appropriate rating. (b) Implementing Agency or Agencies Performance Ratings: Satisfactory 51. Implementation took place by different agencies coordinate by the Ministry of Finance and Public Credit, which helped provide the technical expertise necessary for the government to implement the program and reforms. The Ministry of Finance was the agency responsible for implementing actions under the first and third pillars of the operation and for coordinating the monitoring and evaluation activities. The Ministry of Health was responsible for implementing actions under the second pillar, while the Ministry of Agriculture implemented additional actions under the third pillar. Overall, performance of implementing agencies was strong. The actions supported by the DPL continue to be implemented as intend throughout the operations period and almost all targets were met. On the monitoring and evaluation side, there few minor shortcomings. While fiscal information was readily available, coordination with other agencies was not always effective and Bank specialist had to contact their counterparts directly in order to retrieve the information. Against this backdrop we consider “satisfactory” as an adequate rating. (c) Justification of Rating for Overall Borrower Performance Ratings: Satisfactory 52. The Ministry of Finance and Public Credit worked in close collaboration with the government to implement the supported reforms and, overall, served as a reliable counterpart in the operation. 20 6. Lessons Learned 53. The operation can be seen as a good example how DPLs can serve as a trigger to engage in more fundamental policy dialogue with client countries with medium income levels and where macroeconomic capacity is already high. Although Colombia examplifies that most of these countries have recently enjoyed relatively good access to global financial markets, the fact that consultations between the Bank and the GOC during preparation and implementation of the program led to an expanded dialogue highlights that these client countries can take benefit from packaging of Bank services. During reform implementation, there may arise very specific technical questions that might be beyond sight of the country and/or where the Bank is especially well-equipped to provide or facilitated expertise. To provide input on these topics requires extensive consultation and responding flexibly and timely to client needs and a DPO can be a pivotal point for such consultation. The discussed operation proved to be very helpful for accompanying and follow-up projects, both lending and non-lending (e.g. the tax expenditure study, fiscal incidence analysis, ex-ante tax reform simulations, or the equity DPL), brought equity considerations stronger into government focus, and opened important doors for deepening the policy dialogue in areas such as fiscal policy, health, and disaster risk management. 54. From the perspective of middle-income client countries, the Bank’s value- added in such operations might especially come from transaction costs reductions. More precisely, the Bank can offer a full package of consulting, technical advice, and finance that result in a continuous policy dialogue that effectively constitutes an option privilege for follow-up operations and where the initiation costs for each operation are accordingly low. While technical non-lending aspects were especially important in the context of the current operation, insecurity about future global financial developments also give a high value to the option to quickly engage in a follow up DPL operation. In this context, it is worth highlighting the more general importance of timely response to client needs and the evaluated operation highlights that DPOs can be an appropriate instrument for this purpose, as the loan was prepared and disbursed in a timely manner. 55. Given these considerations, it is difficult to assess the benefits of DPOs in high-capacity middle-income countries exclusively against the indicators outlined in the results framework. While a thoughtful design, monitoring, and evaluation of such indicators is indispensable for a results-based development operation, this operation itself might entail positive (but potentially also negative) consequences that are hard to anticipate and quantify. Furthermore, the impact of such operations on the domestic political landscape is limited or at least not intermediate. In the context of full government ownership of a reform program, it is difficult to argue that the achievement of short-term outcome indicators is the result of a DPO. On the other hand, longer-term effects on Colombia’s fiscal system and its equity implications via follow-up operations are beyond the classical results framework of DPOs. 56. A more technical lesson learned is to remain conservative with revising upwards targets that critically depend on the external economic environment in view of short-term cyclical fluctuations. Achieving a decent target for the non-oil 21 revenue indicator would probably have been a larger success than not achieving an over- ambitious target due to factors beyond the design of the program. 57. Finally, the operation shows that embarking on a sustainable fiscal path does not necessarily entail cuts in social spending that would have adverse impacts on poverty and shared prosperity. However, while the legal environment in Colombia nearly prevents this from happening, this does not mean such adverse effects cannot occur in other countries or contexts and it would be desirable to regularly study such potential social impacts upfront. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 58. The borrower/implementing agency did not provide any comments or raise issues with respect to this Implementation Completion Report. (b) Cofinanciers —none— (c) Other partners and stakeholders —none— 22 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending (First and Second DPL) Lars Christian Moller Lead Economist AFTP2 Task Team Leader Fabiola Altimari Senior Counsel LEGLE Diego Arias Senior Agriculture Economist LCSAR Carlos Enrique Arce Joao Pedro Azevedo Senior Economist ECSP3 Diomedes Berroa Lead Specialist OPSOR Diana Isabel Cardenas Consultant LCSHS Edith Cortes-Angeles Consultant LCSPE Elizabeth Currie Lead Financial Officer/Sovereign Debt FABDM Francis Ghesquiere Manager GFDRR Enrique Fanta Senior Public Sector Specialist LCSPS Arturo Herrera Sector Manager LCSPS Lead Disaster Risk Management Niels B. Holm-Nielsen LCSDU Specialist Karina M. Kashiwamoto Language Program Assistant LCC1C Irina I. Klytchnikova Senior Economist LCSEN Olivier Mahul Program Manager FCMNB Fernando Montenegro Torres Sr Economist (Health) LCSHH Xiomara A. Morel Sr Financial Management Specialist LCSFM Victor Ordonez Senior Finance Officer CTRLN Lead Financial Officer/Debt Capital Luis de la Plaza FABBK Markets & CBP Carolina Rendon Senior Public Sector Specialist LCSPS Oscar Bernal Consultant LCSHH Laura Boudreau Consultant LCMNB Eileen Browne Consultant LCSPE Senior Disaster Risk Management Ana Campos LCSDU Specialist Eric Dickson Sr Urban Spec. LCSDU Jeanette Estupinan Sr Financial Management Specialist LCSFM German Galindo Junior Professional Associate LCSPE Raul Felix Junquera-Varela Senior Public Finance Specialist LCSPS Guillermo Le Fort Varella Consultant LCSPE Maye Rueda Gomez Team Assistan LCCCO Laura dos Reis Consultant LCSAR Anna Maria Torres Consultant LCSDU 23 Responsibility/ Names Title Unit Specialty Supervision Barbara Cunha Senior Economist LCSPE Task Team Leader Jeannette Estupinan Sr Financial Management Specialist LCSFM Victor Ordonez Senior Finance Officer CTRLN Maria Virginia Hormazabal Finance Analyst CTRLN Lelia Sampaio Werner Senior Finance Assistant CTRLN Konstantin Wacker Young Professional LCSPE German Galindo Junior Professional Associate LCSPE (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) USD Thousands Stage No. of staff weeks (including travel and consultant costs) Lending First Programmatic 28.39 $153,161.05 Second Programmatic 33.85 $213,335.17 Total: 62.24 $366,496.22 Supervision/ICR First Programmatic 8.65 $46,966.62 Second Programmatic 12.02 $58,226.89 Total: 20.67 $105,193.51 24 Annex 2 List of Supporting Documents Departamento Nacional de Planeación (2011): Prosperidad Para Todos. Plan Nacional de Desarrollo 2010-2014. República de Colombia. World Bank (2011): Program Document for the first programmatic fiscal sustainability and growth resilience DPL. Report No. 58297-CO. Washington, D.C.: The World Bank Group World Bank (2011): Country Partnership Strategy for the Republic of Colombia FY2012-2016. Report No. 60620-CO. Washington, D.C.: The World Bank Group World Bank (2012): Program Document for the second programmatic fiscal sustainability and growth resilience DPL. Report No. 67622-CO. Washington, D.C.: The World Bank Group 25 Annex 3 Summary of Fiscal Rule Implementation Legal Background Law 1473 from 2011 requires the central government to comply with a Fiscal Rule from 2012 onwards. Article 5 of this law demands the government to meet a certain target for the structural budget balance (that the government sets) and that the government enforces an annually decreasing path for the structural deficit trajectory in the transition period. Article 12 of the law requires the government to present a report on the fiscal rule implementation to the Economic Commission of the Congress every June. Technical and Institutional Setup The structural balance corrects actual government income for effects of the economic cycle (via elasticities of different tax revenues to the business cycle) and the commodity cycle (calculated as deviations from expected long-run price and quantity developments) and purges actual expenditure from countercyclical stimulus packages. A committee of experts calculates potential output and the deviation of actual output to estimate the effects of the economic cycle whereas another group of experts estimates long-run commodity developments. A Consultative Committee affirms the methodology for calculating these numbers to the Ministry of Finance. The rule targets a structural deficit of 1.0 percent of GDP by 2022 and interim targets of 2.3 and 1.9 percent of GDP by 2014 and 2018, respectively. Main Findings of the Report on the Fiscal Rule Implementation in 2012: 25 • The report concludes that the correct and complete implementation of the Fiscal Rule Law was initiated with setting up the Consultative Committee and the technical expert groups (for calculating the structural balance) in the first half of 2013. • The structural budget balance of the Central Government was equal to 2.4 percent of GDP in 2012, in line with the Fiscal Rule Law. • A 13.6 percent increase of revenues in 2012 was the main factor explaining achievement of the envisaged structural fiscal balance. Besides from rising tax revenues, capital incomes of the central government contributed to this development. • Expenses grew slightly (from 18 to 18.4 percent of GDP) in 2012, mainly resulting from pension transfer increases equal to 0.3 percentage points of GDP. • Overall, the report does not identify important deviations from expected developments in 2012. 25 This annex summarizes the above-mentioned report that has been circulated by Colombia’s Ministry of Finance in June, 2013. 26 • GDP growth in 2012 was 4 percent, thus below the assumed potential growth rate of 4.6 percent. The resulting structural adjustment of the budget balance was relatively small (-0.1 percent). • Structural budget balance was 2.7 percent of GDP in 2011 which constitutes a major improvement over the initially foreseen structural balance of 3.7 percent and complies with the government target. • Although not obligatory for the 2011-12 period, the report notices achievement of a progressing fiscal adjustment path. • The improved investment rating lowers costs of public finance and allows for a better diversification of financing sources which further lowers costs and allows for more flexibility. • To support growth amid a period of economic slowdown in 2013, the government had to add adjustments to the initial budget. • Conservative estimates at the time of the report predict a structural balance of 2.4 percent of GDP for 2013 under the assumption that major downside risks would not materialize. Among those risks, the report inter alia identifies a further slowdown in the European Union and additional costs potentially arising from reparation payments or pending legal cases concerning the health and pension sector. 27 IBRD 33388R1 SAN ANDRÉS, PROVIDENCIA 75°W 70°W and SANTA CATALINA Puerto Bolívar Santa 12°35’ Catalina A San Andres J IR Ríohacha UA San G To LA Providencia Santa Marta Andres Maracaibo 13°20’ Barranquilla Pico Cristóbal Colón 0 MILES 2 0 2 AT L Á N T I C O (5,775 m) 12°30’ COLOMBIA A MILES Cartegena Valledupar N 81°40’ 81°22’ LE DA 10°N Maganqué CESAR Lago de C a r i b be an S e a AG Maracaibo M Sincelejo PA NA El Baneo SU Monteria M CR AR Acandí NORTE DE E Ocaña A SANTANDER LÍV Turbo A D OB To R.B. DE BO ÓR Mérida Cúcuta C VENEZUELA uca To Ca Guasdualito Cord Bucaramanga Yarumal na Arauca ale iller Socorro ANTIOQUIA agd M ARAUCA CÁ ER Atra AND a O Casanare PAC IF IC SANT YA to Medellin Puerto cci BO Carreño OCEAN dental Quibdo Chiquinquirá Puerto S CASANARE CHOCÓ LDA Tunja Nueva CA Manizales CUNDINA- Yopal 5°N RISARALDÁ Santa Rita 5°N Cartago Pereira MARCA BOGOTÁ Me ta VICHADA Atacavi Armenia QUINDIO tal San Pedro Gaviotas Ibaque Giradot en Villavincencio Chaviva Vich a da ri al Buenaventura Buga M A O ntr VALLE DEL LI a DISTRITO Puerto TO Palmira CAPITAL Inirída Ce er CAUCA Cali M E TA ill rd a San Juan er Co de Arama Guaviare ill Neiva GUAINÍA rd CAUCA HULA Mapiripana Tabaquén Co San José Guapí Popayan del Guaviare Brujas San Vicente Garzon del Caguán Patía Calamar Tumaco Neg Florencia G U AV I A R E NARIÑO ro San Rafael Miraflores Mitu Pasto Cagu Mocoa Vau pés án Yavarate To Ipiales PUTUM CAQUETÁ VA U P É S Puerto AY Ibarra Asis O Macujer Puerto Huitoto 0°N Puerto 0°N Leguízamo Puerto Lérida E C U A DOR Pizarro Caq u etá Puerto Santander Locas de Ptu Cahuinari ma CO LOMB I A yo La Pedrera AMAZONAS El Encanto CITIES AND TOWNS BRAZI L DEPARTMENT CAPITALS NATIONAL CAPITAL PERU RIVERS GSDPM Map Design Unit MAIN ROADS 0 80 160 240 320 Kilometers This map was produced by the Map Design Unit of The World RAILROADS Bank. The boundaries, colors, Leticia denominations and any other 0 40 80 120 160 200 Miles information shown on this map DEPARTMENT BOUNDARIES do not imply, on the part of The World Bank Group, any judgment on the legal status of INTERNATIONAL BOUNDARIES any territory, or any endorsement or acceptance of 75°W 70°W such boundaries. DECEMBER 2013