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ReportSo. 15159

PKOJECT COM.PLETION REPORT

BOLIVIA

PUBLIC FINANCIAL MANAGEMENT OPERATTON IiCREDIT 1809-BO)

DECEMBF.R 11, \995

Public Sector Modernization and Private Sector Development DivisionCountry Department IIILatin america and the Caribbean Region

This document has a restricted distribution aod may be used by recipients ody in tbe performance oftheir official duties. Its conteots may not otherwise be disclosed withoul World Bank authonzation.

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Currency Equivalent

Currency Unit: Boliviano:($B)$84.77 = 1 US$ (as of 06/09/95)

Fiscal Year

January I to December 31

Abbreviations

AGS: Accountant General of the StateBAB: Banco Agricola de Bolivia (Agricultural Bank of Bolivia)BANEST: Banco del Estado (State Bank)BCB: Banco Central de Bolivia (Central Bank of Bolivia)CGR: Contraloria General de la Rephblica

(Controller General of the Republic)CONSAFCO: Council for SAFCODGRI: Direcci6n General de la Renta Intema (Internal Revenue

Department )EMSO: Economic Management Strengthening OperationFSAC: Financial Sector Adjustment CreditGOB: Government of BoliviaIDA: International Development AgencyIDB: Interamerican Development BankILACO: Implantaci6n de la Ley de Administraci6n y Control

(Implementation of the Law of Administration andControl)

IMF: International Monetary FundIRD: Internal Revenue DepartmentNEP: New Economic ProgramNFPS: Non-Financial Public SectorPCR: Project Completion ReportPIU: Project Implementation UnitSAFCO: Sistema de Administraci6n Fmianciera y Control

(Financial Administration and Control System)SAR: Staff Appraisal ReportSOEC: Sistema de Informaci6n sobre Operaci6nes Efectivas de

Caja (Cash Operations Information System)UNDP: United Nations Development ProgramUSAID: United States Agency for International Development


THE WORLD BANKWashington, D.C. 20433

U.S.A.

Office of Director-GeneralOperations Evaluation

December 11, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Bolivia - Public Financial ManagementOperation I (Credit 1809-BO)

Attached is the Project Completion Report (PCR) for the Bolivia Public Financial ManagementOperation I (PFMO I) (Credit 1809-BO, approved in FY87), prepared by the Latin America and the CaribbeanRegional Office, with an excellent Part II contributed by the Borrower.

The main objectives of this SDR 11.5 million technical assistance project were to: (a) improve financialadministration and control of public sector ministries, enterprises, and agencies; (b) facilitate implementation oftax reforms and strengthen tax administration; and (c) reorganize the Central Bank of Bolivia and the state-owneddevelopment banks. The overriding goal was to rehabilitate the public sector's capacity to control budgeting andexpenditure, increase taxation, and improve financial intermediation as part of a wide-ranging program ofeconomic stabilization and adjustment implemented during the latter half of the 1980s and early 1990s.

The PCR notes that budgetary controls have been tightened significantly since PFMO I was approved,the share of tax revenues has increased several-fold, and the Central Bank has restructured its operations to focuson the conduct of monetary and exchange rate policy, jettisoning its involvement in promotional credit. AlthoughPFMO I disbursed well ahead of schedule, its efficacy was blunted by delays in the passage of enabling legislationand in the establishment of key institutions, by inadequate incentives for skilled public servants leading to rapidturnover and the consequent loss of training benefits to the public sector, and by a waning of Governmentalcommitment to project objectives during its final stages. In a number of instances, the quality of the informationgenerated by the new systems remains deficient and the new norms and procedures have not been widely adoptedwithin the public sector. Credit for the successful reforms must be shared with several other Bank and non-Bankoperations, including support from the IMF, IDB, USAID, and the UNDP.

Based on the findings of the PCR, the project outcome is rated as satisfactory, institutionaldevelopment impact as modest, and sustainability as uncertain. Bank performance is rated as satisfactory, andBorrower implementation and compliance with covenants as satisfactory.

The quality of the PCR is strong in all areas, except in measuring the project's impact. For example,although the SAR provided an admirable listing of specific project outputs expected, with one exception, these arenot discussed in the PCR.

A follow-up operation (PFMO II, Credit 2279-BO, approved in FY91) is currently underway. Anaudit of both operations may be undertaken upon its closing.

Attachment "

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents rmynot otherwise be disclosed without World Bank authorization.


BOLIVIAPUBLIC FINANCIAL MANAGEMENT OPERATION - I

CREDIT: 1809-BO

PROJECT COMPLETION REPORT

TABLE OF CONTENTS

Page No.

PrefaceEvaluation Summary iii

PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1

1. Project Identity 12. Background 13. Project Objectives and Description I4. Project Design and Organization 25. Project Implementation 36. Project Results 37. Project Sustainability 68. Bank Performance 79. Borrower Performance 810. Project Relationship 811. Consulting Services 812. Project Documentation 8

PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 9

1. Component A: Financial Administration and Control (SAFCO) 92. Component B: Tax Administration 133. Component C: Banking System Reform 16

PART III. STATISTICAL INFORMATION 19

1. Table I Related Bank Loans/Credits 192. Table 2 Project Timetable 203. Table 3 Credit Disbursements 204. Table 4 Project Implementation 215. Table 5 Project Costs 236. Table 6 Project Financing 237. Table 7 Project Results 248. Table 8 Studies Included in Project 269. Table 9 Status of Legal Covenants 27

10. Table 10 Use of Bank Resources: Staff Inputs 28II. Table I I Use of Bank Resources: Missions 28

This reporl was prepared by Messrs /Mne. lit B.S. Gill (Task Manager, LA3PS); John Pollner (LA3PS) and Carmen Machicado (Consultant).I Mlessrs lKrishn.a Challa. Robern Crown and Yoshjaki Abe were, respectively, the managing Division Chicef, Project Adviser and Departmnt Director.

This document has a restricted distribution and may be used by recipients only in the performance of theirofficialduties. Its contents may not otherwise be disclosed without World Bank authorization.

BOLIVIAPUBLIC FINANCIAL MANAGEMENT OPERATION -I

CREDIT: 1809-BO


PREFACE

1. This project Completion Report (PCR) reviews the performance of the Bolivia: PublicFinancial Management Operation - I (PFMO-I) for which Credit 1809-BO in the amount of SDR 9.0million (US$ 11.5 million equivalent) was approved by the Board on May 28, 1987. The credit becameeffective on December 15, 1987. Most of the project activities were completed in 1991. However, theclosing date of the credit was extended, first to June 30, 1993 and then to June 30, 1994, to enable theengagement of consultants in key positions in the Ministry of Finance and the Office of the ControllerGeneral of the Republic, so as to facilitate the implementation of the Second Public Financial ManagementProject (PFMO-II). The project was closed on June 30, 1994 with total disbursements of SDR 8.998million.

2. Parts I and III of the PCR were prepared by the Public Sector Modernization and PrivateSector Development Division, Country Department III, Latin America and the Caribbean Region (LA3PS).These Parts were sent to Government of Bolivia (GOB) for their review and comments. Part II has beenprepared by GOB. The Government used local funds, amounting to about US$ 3.2 million, generated fromthe USAID Economic Support Fund, to finance incremental local costs related to the FinancialAdministration and Control component of the project. The IDB/IUNDP provided parallel financing of US$1.47 million for the Tax Administration component. The IMF provided technical assistance in design andsupervision of the Tax Administration and Banking System components. The draft PCR, including Part IIwas also sent to USAID/IDB/IUNDP/IMF for their comments.

3. The PCR is based on the Staff Appraisal Report (SAR) and the Memorandum of thePresident, dated Mav 6,1987; the Development Credit Agreement, dated July 31, 1987; supervisionreports; internal IDA memoranda; correspondence between IDA and the Borrower; the Final Report, datedDecember 1990, regarding the Financial Administration and Control component produced by the concernedconsultants; the Final Report regarding the Tax Administration component produced by IDBIUNDP; andinterviews conducted by the IDA Mission to Bolivia in June 1994.

iii

BOLIVIAPUBLIC FINANCIAL MANAGEMENT OPERATION -I

CREDIT: 1809-BO


EVALUATION SUMMARY

Background

1. In August 1985, when a new Government took office, the economy of Bolivia was in achaotic state. Inflation in the preceding twelve months exceeded 24,000%; the official exchange rate wasgrossly overvalued; accumulated arrears of public external debt had reached US$1 billion (over 20% ofGDP); from 1980 to 1984, GDP fell by 16% and imports, exports and investment also experienced asteady decline; on account of high inflation and weak tax administration, central tax and customs revenuesfell to about 3% of GDP in 1984 and 1985. The public sector operated without budgets from 1983 to 1985and spending was uncontrolled. The new government effectively implemented a bold macro-economicreform program. At the same time, it undertook to revamp public financial management through thePublic Financial Management Operation - I (PFMO-I).

Project Objectives and Description

2. The objectives of the project were to (a) improve financial administration and control ofministries and public entities; (b) enable the implementation of tax reforms and improve tax administration;and (c) improve the national banking system, strengthen the Central Bank and restructure the maindevelopment banks. The Financial Administration and Control component included the establishment of ahigh level Council (CONSAFCO) and its Executive Secretariat for the overall management of the financialadministration and control system (SAFCO); and the design, development and implementation of effectivesystems for operational programmlling, budgeting, budget execution, cash and debt management,accounting, internal control, financial reporting and auditing. An important activity of this component wasthe "Emergency Program" that sought to provide reliable budgetary and cash flow data pertaining to themajor non-financial public entities to the Central Government. The Tax Administration component soughtto facilitate the implementation of tax reforms enacted in 1986 through organizational strengthening of theInternal Revenue Department and establishment of systems for taxpayer registration, tax collection,monitoring and control of non-compliance, selection of cases for audit, and preparation of tax statistics.The Banking System Reform component aimed to improve the organization, systems and capabilities of theCentral Bank, especially in banking inspection, accounting and internal controls, economic research, policy,operational procedures and debt monitoring; and to restructure and strengthen two major developmentbanks - Banco Agricola de Bolivia (BAB) and Banco del Estado (BANEST).

Project Design and Organization

3. The project covered a wide spectrum of activities that were developed after detaileddiagnosis of institutional constraints. It was designed to enhance accountability, transparency andefficiency; separate incompatible functions; and integrate connected activities. Although the projectinvolved a number of government entities and international donors, suitable coordinating mechanisms werecreated to ensure smooth implementation.

Project Implementation

4. On the whole, project implementation was satisfactory. Some bottlenecks were, however,encountered. In the Financial Administration and Control component, delays were experienced in

iv

appointmenet of consultants, passage of the SAFCO law and establishment of the office of the AccountantGeneral. In the Tax Administration component there were delays in creating a separate Ministry of TaxCollections. In the Banking System Reform component, the main deficiency was the inability to carry outthe reorganization of the two development banks due to a lack of consensus on the restructuring plan.

Project Results

5. Under the Financial Administration and Control component, the Emergency Programgreatly enhanced the treasury's ability to manage public finances by providing valuable income, expenditureand cash flow data. The program covered almost 95% of resource flows in the non-financial public sector,by the end of the project. The SAFCO law created a modem normative framework for effective publicfinancial management . The Ministry of Finance (MOF) and the Office of the Controller General of theRepublic (CGR) were re-organized and the office of the Accountant General was created. Norms andprocedures were established for budgeting, budget execution, public credit, accounting, internal control andauditing. Four finanicial managemenit computer systems were commissioned. Finally, about 3000 officialswere trained in financial managemenit. In Tax Administration, the Internal Revenue Department wasreorganized: divisions to monitor large taxpayers were created; tax collections were transferred tocommercial banks; and systems for taxpayer registration. control of delinquents and statistical reportingwere developed. Domestic tax collections increased from about 1% of GDP in 1984 to 7.8% in 1992.Under the Banking ,yslem Reform componient, the Central Bank was reorganized, its core divisions werestrengthened and accounting systems were computerized. An autonomous Superintendency of Banks wascreated. Technlical assistance was provided for the supervision of audits of commercial banks.

Sustainability

6. The conceptual foundation of the reforms supported by the project is strong and is backedby legislative and administrative authority. Therefore, the formal structure created by reforms appears tobe sustainable. The project's impact on day to day financial management ma' be adversely affected bydimiiinished govermiuent commitment to the principles underlying the project: lax enforcement of the relevantlaws and regulations: and deterioration in staff skills due to attrition, transfers and the inability to recruitqualified new staff due to low salaries. Some slackening of high level involvement in the successor project,PFMO-II, was observed in the recent past, possibly due to other pressing priorities. Remedial measureshave since been instituted. The successful implementation of PFMO- II, which seeks to improve upon thesystems developed by PFMO-I and extend these to other public sector entities, is the key to thesustainabilitv of the latter's achieveiimenits.

Findings and Lessons Learned

7. The project was successful in achieving most of its objectives. Its success was the resultof thorough1 preparation: strong political support by the government; effective implementation andsupervision-: and positive project relationships. The major lessons learnt may be summarized thus: (a)Complex institutionl building projects require long-term govemment commitment at the highest level, atleast until the refomis are fimnly rooted. (b) When institutional changes depend on changes in the legalframework. it wvould be preferable to enact the requisite legislation before the project starts. Delays, suchas those observed in the passage of the SAFCO law, create ambiguity and confusion amongst the agenciesand officials likely to be affected by the legal changes. This has an adverse impact on projectimplementationi. (c) Staff turnover adve.sely affects the sustainability of reforms. Suitable humanresource policies should, therefore, be devised to ensure staff continuity in important positions, and theability to attract and retain qualified staff. (d) Given the rapid rate of obsolescence of computertechnology, it is necessary to devise sustainable financing arrangements for the regular upgrading ofsystems developed under a project in the post-project period. (e) In attempting tax administration reform, itwould be preferable to reform both tax and customs departments simultaneously, especially when the lattercollects VAT oii imports.

BOLIVIAPUBLIC FINANCIAL MANAGEMENT OPERATION I

CREDIT: 1809-BO


PART - I PROJECT REVIEW FROM BANK'S PERSPECTIVE

Proiect Identity

1. Project Name: Public Financial Management Operation-I (PFMO-I)Credit Number 1809-BORVP Ullit: Latin America and the Caribbean RegionCountrv: BoliviaSector: Public Sector ManagementSub-Sector: Public Financial Management

Backaround

2. In August 1985, when a new Govenmment took office, the economy of Bolivia was in achaotic state. Inflationi in the preceding twelve months exceeded 24.000%; the official exchange rate wasgrossly overvalued: accuLmlulated arrears of public external debt had reached US$1 billion (over 20% ofGDP): from 1980 to 1984. GDP fell by 16% and imports, exports and investment also experienced asteady decline; on accoullt of highi inflationi and weak tax administration, central tax and customs revenuesfell to about 3% of GDP in 1984 and 1985. The public sector operated without budgets from 1983 to 1985and spending was unlcontrolled.

3. The new government effectively implemented a bold economic refonn program. the NewEconomic Policy (NEP), to conitrol inflation, cut fiscal deficit, restore external balances, improve theefficiency of a reduced public sector and create conditions for private sector growth. Further, it undertookto revamp public finanicial managemiienit.

4. IDA had helped GOB initiate major changes in its fiscal and financial systems as early as1984 when it assisted in the diagniosis of weaknesses in public accounting and auditing. In order to supportthe NEP, IDA collaborated with the Controller General of the Republic (CGR) in designing a program toimprove financial m1anlagement. This developed into the present project which addressed institutionalconstraints in three important areas: public financial management: tax administration: and banking.

Proiect Obiectives and Description.

5. The objectives of the project were to (a) improve financial administration and control ofministries and public entities; (b) enable the implementation of tax reforms and improve tax administration;and (c) improve the nationial banking system, strengthen the Central Bank and restructure the maindevelopment banks.

6. Accordingly'. the project consisted of three components. The Financial Administrationand Control (hereafter also referred to as SAFCO) component, which accounted for 57% of total projectcosts, included the establishment of a high level Council (CONSAFCO) and its Executive Secretariat forthe overall management of the financial administration and control system (SAFCO); and the design.development and implementation of effective systems for operational programming, budgeting. budgetexecution, cash and debt management, accounting, internal control, financial reporting and auditing. Animportant activity of this component was the so called "Emergency Program" that sought to address the

2problems caused by poor financial management and reporting systems in the core ministries and stateenterprises by providing a continuous stream of reliable budgetary and cash flow data pertaining to themajor non-financial public entities to the Central Government. In addition to IDA financing. thegovernment used local funds generated from the USAID Economic Support Fund to finance incrementallocal costs to the extent of about US$3.2 million.

7. The Tax Administration component, involving 19% of total project costs, supplementedassistance being provided by the IDB/UNDP. It financed two modules of Phase I of tax administrationreform begun in September 1986 and about 40% of Phase II. This component sought to facilitate theimplementation of tax reforms enacted in 1986 through organizational strengthening of the InternalRevenue Department (IRD) and establishment of systems for taxpayer registration, tax collection,monitoring and control of non-compliance, selection of cases for audit, and preparation of tax statistics.The IDB/UNDP provided parallel financing of US$1.47 million for consultants for tax collection andcompliance monitoring systems.

8. The Banking Syslem Refbrm component, accounting for 16% of total project costs, aimedto improve the organiization. systems and capabilities of the Central Bank, especially in banking inspection,accounting and intemnal controls, economic researclh, policy, operational procedures and debt monitoring;and to restructure and strengtheni two major development banks - Banco Agricola de Bolivia (BAB) andBanco del Estado (BANEST). Project activities were complimentary to assistance provided by the USAIDfor external audits of commercial banks and improvement in project evaluation and supernision capabilitiesof commercial banks; and by the IDB for restructuring the Development Credit Department of the CentralBank.

9. Project preparation and adminiistration accounted for 8% of total project costs.

Project Desi2n and Or2anization

10. The project covered a wide spectrum of technical activities, ranging from resourcemobilization, expenditure management, accounting and auditing to Central Bank operations, supervision ofcommercial banks and development banking. These activities were designed after a detailed diagnosis ofinstitutional problems. The remedies proposed were based on sound concepts such as accountability,transparency, efficiency, separation of incompatible functions and integration of interconnected activities.Although, some of the concepts were innovative and represented radical departures from past practice, itappears that adequate consensus was built regarding their rationale and usefulness. The project was a verytimely intervention coming as it did at a time of acute fiscal and financial distress. It struck a balancebetween the immediate objective of bringing order to the prevailing chaos in public financial managementand the long-term need for sustainable institutional development in this area.

11. The project involved four major agencies: the Ministry of Finance (MOF), the CGR, theMinistry of Tax Collections and the Central Bank. A large number of Divisions and Departments in eachof these entities were affected. Also, project inputs and outputs needed to be coordinated with otherinternational agencies, viz. the USAID, the IDB, the UNDP and the IMF who were also assisting theGovernment in improving financial management. The project design aptly dealt with this complexsituation. Each component was designed as an independent sub-project. For the SAFCO component. ahigh level Council for SAFCO (CONSAFCO), consisting of Ministers of Finance, Planning and TaxCollect ions anid the CGR, was established and competent persons were appointed as Executive Secretary,CONSAFCO, and Teclnical Director. The tax administration and banking components were made theresponsibility of the Ministrv of Tax Collections and the Central Bank, respectively. This project structureensured inter-agency coordination, where it was needed, while allowing independent action in areas that layexclusively within the domain of one agencv. The nature and extent of the contribution of other donors wasalso clearly defined. To facilitate project management, UNDP/OPS was engaged to provide administrativesupport. Specific activities pertaining to each component were delineated at considerable length, along with

3the nature of inputs required, their estimated duration, timing and cost. Annual action plans and quarterlyprogress reports were prescribed to control and monitor project implementation. Realizing the complexityof the project, provision was made for extensive supervision in association with specialists. In retrospect,the project appears to have been well designed and organized.

Proiect Implementation

12. On the whole, project implementation was satisfactory. Disbursements were faster thanexpected. By 12/31/91, 94% of the credit had been disbursed and most of the project activities had beencompleted. The closing date of 06/30/92 was extended first to 06/30/93 and then to 06/30/94 to enable theengagement of consultants in key positions in the Ministry of Finance and the Office of the ControllerGeneral of the Republic, so as to facilitate the implementation of the Second Public Financial ManagementProject (PFMO-II). Legal Covenants were complied with, although there were delays in preparation ofannual action plans and audits. No major problems in procurement or availability of parallel financingfrom other donors were encountered. Thle main variances in project implementation are indicated below.

13. For the Financial Administration and Control component startup activities were affectedby delays in appointment of the project management team and in contracting consultants. The passage ofthe crucial Government Administration and Control Act (hereafter also referred to as the SAFCO Law)was delayed for almost two years. This affected systems development to some extent since both the oldlaws and regulations as well as the new law had to be taken into account. Also, Government officials at theoperational levels could not become fully committed to the philosophy of the new law until it was passed.The establishment of the Accounting Office also experienced delays. The implementation of the auditingsub-component lagged behind others because, in the absence of adequate accounting systems, there was notmuch to audit. Notwithstanding these difficulties, on the whole, the implementation of the component wassatisfactory.

14. In the Tax Administration component all the planned activities were completedsuccessfully. However, there was a significant delay in deciding the new institutional framework for taxadministration. Although, the Tax Reform Act was passed in May 1986, a separate Ministry of TaxCollections was created only in January 1987. This affected the pace of implementation of Phase Iactivities. Some of the other problems experienced during implementation were: less than expectedefficiency of commercial banks in handling collections; staffing constraints in the Internal RevenueDepartment (IRD), primarily due to low salaries, that affected processing of information received from thebanks and monitoring of large taxpayers, shortfalls in collection of VAT on imports due to continuinginefficiencies in the Customs tax collection system which was not covered by the project (customsadministration reform was, subsequently, undertaken under the Economic Management StrengtheningOperation - EMSO, Credit 1977-BO).

15. Most of the planned activities in the Banking System Reform component wereaccomplished. However, the reorganization of the two development banks, BAB and BANEST, could notbe carried out because of the lack of a consensus in this regard. The presentation of acceptablerestructuring plans for the two banks was made a condition for the release of the second tranche of theFinancial Sector Adjustment Credit (FSAC), Credit 1925-BO. Weaknesses in the organization andmanagement of the Central Bank; inadequate inter-departmental coordination; and high staff tumoveraffected the institutionalization of new norms and procedures as well as the development of new systems.

Proiect Results

FinancialAdministration and Control

16. The Emergency Program was highly successful. Against the original target of 35 entities,it was extended to more than 73 entities, covering almost 95% of resource flows in the Bolivian non-

4financial public sector. The consolidated reports produced by the Program, on the income, expenditure andcash flow of these entities, became an important tool for managing the Treasury's resources and controllingpublic expenditures. Most entities started producing the data on their own and using it for their internalfinancial management as well. The Emergency Program, however, still continues and there is a need tointegrate its activities into the mainstream functions of the entities.

17. The passage of the SAFCO Law, which set the normative framework for country-widepublic financial management, in July 1990, was an important milestone. Replacing antiquated andconflicting rules and regulations that had accumulated over time, the law provided a coherent, modernframework for achieving accountability, transparency and efficiency in the management of publicresources. The law established administrative systems for Planning and Capital Investment; OperationsProgramming; Budgeting; Treasury and Public Credit; Accounting; Internal Control and Auditing;Administrative Organizationi; and Acquisition, Management and Disposal of Goods and Service. The roleand responsibilities of different govenmnent agencies, viz. the MOF, the Ministry of Planning andCoordination, the Central Bank, the Banking Superintendency and the CGR, for development and operationof these systems were clearly defined. Major improvements included the elimination of pre-control ofbudget execution by the CGR; and the transfer of the judicial functions of CGR to the judiciary, thusending the former's dual role as prosecutor and judge. The Law, unequivocally, made every public servantaccountable for not only achieving the objectives for which public resources were entrusted to him/her, butalso for the manner and results of the usage of the resources. Administrative, executive, civil and criminalliabilities were established for official misconduct and the CGR was given extensive powers to initiateactions against erring public servants.

18. Wide-ranging project activities were completed to facilitate the implementation of theSAFCO Law. The MOF and the office of the CGR were reorganized in accordance with the functionsassigned to them by the law. Budget execution was transferred from the Budget Office to the Treasury.The Office of Accountanit General of the State (AGS) was created and integrated accounting wasestablished in the central administration. Detailed manuals of norms and procedures for preparation,modification and execution of the budget; administration of public credit; accounting; internal control; andauditing were prepared. Four computer systems were commissioned viz. Cash Operations InformationSystem (SOEC), under the Emergency Program; system for budget formulation; integrated financialinformation system (SIIF) for budget execution and accounting; and system for administration and controlof payroll. Training courses, of varying intensity, were organized for more than 3,000 GOB officials.These courses covered Principles of SAFCO. Operations Programming, Budgeting, FinancialAdministration, Accounting, Financial Reporting. Government Auditing and Electronic Data Processing.Finally, the project helped in refurbishing and equipping the offices of the CGR, the AGS and theEmergency Program as well as the training school.

19. The outcomes of these activities were positive. The reliability and timeliness ofinfonnation generated by the Fmergency Program gave the government a better picture of the financialsituation in the public sector, thereby enabling it to manage public finances within the parameters of thestructural adjustment program. Freeing the Budget Office from the responsibility of administering budgetexecution allowed it to concentrate on budget formulation and evaluation. This facilitated the integration ofbudgetary policy with macro-economic and public investment policies. Program-based budgeting wasintroduced to create a clearer link between objectives and expenditures. The assumption of theresponsibility for budget execution by the Treasury upgraded its role from that of a cashier to that of themanager of public resources. The SIIF reduced discretion in expenditure management. This increasedtransparency and diminished opportunities for corruption. The streamlining of procedures and eliminationof prior control by the CGR sharply increased the efficiency of the disbursement process. In a majoradvance over the past, the project enabled the timely preparation of financial statements of the Government.Norms of internal control and government auditing contributed towards improving the control environmentin the public sector.

520. The SAFCO component established a strong foundation for sound public financialmanagement in Bolivia. At the time of completion of its major activities, however, much still remained tobe done. In the institutions covered by the project, the reforms needed to be deepened. Detailed regulationswere still to be developed for operations programming, personnel management, procurement andadministrative organization etc.. The information systems needed to be further refined so as to improvetheir capability and usefulness. These also needed to be integrated with each other and converted to anopen architecture. Also, the quality of infonmation generated by the systems needed to be improved and theerror rate reduced, in order to build user confidence. Additional systems needed to be developed for budgetevaluation, treasury, public credit and auditing. Further, the norms, procedures and systems had to bedisseminated to the other public entities at the national and local levels. The CGR still needed to develop acapacity for operational audits. Although, the project carried out extensive training activities, it was ableto reach less that 5% of potential trainees. Its efforts in this regard needed to be extensively supplemented.

21. A follow up operation, the Second Public Financial Management Operation (PFMO-II),Credit 2279-BO, was undertaken to deal with the continuing constraints mentioned above. This project,involving an IDA credit of SDR 8.5 million, is currently being implemented.

Tax Administration

22. This component contributed towards significant improvements in tax administration inBolivia. The 1986 Tax Refonn Law introduced a simple tax system based on value added and wealthtaxes instead of income taxes. As already mentioned, a separate Ministry of Tax Collections was createdfor a limited period to focus attention on improvement of domestic tax collections, which had fallen toabout 1% of GDP in 1984. and on the reform of tax administration (the Ministry was merged with theMinistry of Finance in September 1988). The IRD was restructured. Large Taxpayer Divisions werecreated in La Paz, Cochabamba and Santa Cruz to closely monitor compliance by large taxpayers, whocontributed about 80% of the tax revenues. A taxpayer registration system was developed and taxpayersliable to be registered were assigned unique registration numbers. The task of tax collection wastransferred to commercial banks and related svstems for control of monthly collections, bank reconciliation,adjustments, installments payments etc. were developed. Computer systems for control of non-filing ofreturns and non-payment of taxes; selection and assignment of cases for tax audit; and preparation ofstatistical reports for maniagement were developed and implemented. Various manuals and forms wereprepared to support the new systems. Regulations to give effect to the Tax Reform Act of 1986; strengthensanctions against non-compliance; and implement Rural Property Tax were formulated. Training in theoperation of the new systems was provided. Finally, a publicity campaign was conducted using differentmedia to educate taxpayers regarding their obligations under the new legal and administrativearrangements. These initiatives contributed towards the increase in domestic tax collections to 7.8% ofGDP in 1992.

23. The project dealt with the initial stages of tax administration reform. It contributed tocreating a good base for further improvements in tax administration effectiveness. The EconomicManagement Strengthening Operation (EMSO) continued IDA assistance, in conjunction with theIDB/UNDP, for consolidation of the reforms; their extension to regional tax offices and the CustomsDepartment; and publicity to enhance taxpayer awareness. As a result of PFMO-I and succeeding projects.the control of routine tax administration operations, based on obligations admitted by the taxpayers,appears to have improved significantly. However, taxpayer auditing and enforcement of tax laws againsttax evaders continues to be weak. Also, in some of the regional offices, corruption is understood to behigh. These issues need to be addressed by on-going and future reforms.

Banking System Reform

24. The SAFCO Law established the Central Bank as the only monetary authority in thecountry, independent of the MOF. At the same time, commercial and development banking activities were

6eliminated from its portfolio. The Central Bank was reorganized to emphasize the importance of keycentral banking functions such as economic research and analysis, balance of payments and external debtoperations. Personnel were drastically reduced, a small number of additional qualified professionals wererecruited and staff salaries were significantly increased. Substantial technical assistance was provided tothe Economic Studies and Research Department, Financial Systems Department and the External DebtDivision for defining their respective functions and organizational structure; preparing technical manuals;improving the quality of macro-economic, financial and external debt statistics; building analytical modelsand information systems. and training staff. The accounting systems for monetarv transactions, foreignexchange, credit, foreign trade, public enterprises and treasury transactions were computerized. Tostrengthen the monitoring of commercial banks, a Superintendency of Banks was created in November1987. The Superintendency was endowed with considerable autonomy, a streamlined organizationalstructure and well qualified personnel. Manuals for evaluation of accounts of banks; banking inspection;and financial analysis wvere produced. Technical assistance was provided for supervision of audits ofcommercial banks conducted by independent auditors. Legislation defining the respective roles andfunctions of BAB and BANEST was passed.

25. The measures indicated above improved the Central Bank's capacity to perfonr its coreoperations and significantlv strengthenied oversight over commercial banks. However, like the reformsintroduced through the other componenits of the project, these were, essentiallv, first steps that neededsignificant follow up action. The Financial Sector Adjustment Credit (FSAC) provided additional supportfor strengthening the Superintendency of Banks and restructuring of the development banks. Incompliance with the conditionalities of FSAC. GOB did submit restructuring plans for the two banks priorto the release of the second tranche, but these plans were never effectively implemented. The role of BABand BANEST remained uncertain till. in accordance with Board presentation conditions of the subsequentStructural Adjustment Credit (SAC). BAB was closed and the functions of BANEST were redefined.Some actions to reorg,anize BANEST were uLndertaken in 1991 and 1992. Eventually, in December 1993,the government decided to liquidate BANEST as well. Please see FSAC's PCR, dated June 24, 1994. forfurther details.

26. In sum, the project succeeded in achieving its objective of introducing far-reachinginstitutional changes in public financial management, tax administration and financial intermediation. Thenew legal, administrative and procedural frameworks changed the way the concerned entities performedtheir functions. The new infonnation svstems gave GOB a firmer grip over policy formulation andexecution. At the same time, these systems introduced greater efficiency, transparency and accountabilityinto the processes of raising and spending public resources. The level of technological sophistication ingovemment operations was also enhdaniced.

Project Sustainability

27. The conceptual foundation of the reforms supported by the project is strong and has beenbuttressed by the requisite legislative and administrative authority. Therefore, the formal structure createdby the reforms is likely to remain in force over the long-run. Sustainability of the project's impact on theday-to-day operations of Government could, however, be at risk. The major risks would be diminishedgovernment commitment to the underlying principles of the project, before they become firmly rooted in themanagement culture of public sector entities; lax enforcement of the relevant laws and regulations; anddeterioration in staff skills due to attrition, transfers and the inabilitv to recruit qualified new staff due tolow salaries.

28. Some slackeninig of high level involvement in the successor project, PFMO-II, wasobserved in the recent past. possibly due to other pressing goveniment priorities. This affected inter-departmental coordination and systems integration. GOB has, however, expressed its continuing supportfor the project and remedial measures have since been initiated. The successful implementation of PFMO-II, which seeks to improve upoIn the systems developed by this project and extend these to other public

7sector entities is the key to the sustainability of the results achieved by PFMO-I. Special attention needs tobe given to finalization, approval and implementation of norms and regulations in operations programming,budget evaluation, and treasury functions. To ensure that public servants intemalize the reforms and applythem while performing their official duties, the level of awareness about the new laws and rules amongstsenior managers and line staff needs to be raised. This would require periodic seminars, conferences andcontinuing technical training. Also, the problems caused by frequent staff tumover need to be addressed.Finally, GOB needs to strictly enforce compliance with the new legal and normative framework by allpublic servants. Deviations would need to be closely monitored and remedial actions envisaged by theSAFCO law, including sanctions against defaultilg public servants, would need to be vigorously pursued.For this purpose, it may be necessary to strengthen the judicial machinery.

Bank Performance

29. The project was prepared very thoroughly. High caliber intemational consultants wereengaged to design project components. Bank staff involved in task management of the projectdemonstrated great enthusiasm for the project and a firm grip over its technical aspects. Supervisionmissions led by LA3C I drew on the expertise of various Divisions of the Bank, especially LA3TF,LATTF, LA3AG, IECIE and PBD. Project activities and supervision were extensively coordinated withthe IMF, IDB, UNDP and USAID. Mission members adopted a hands-on approach and dealt withtechnical and implementation issues in depth. Aide Memoirs and Back to Office Reports provided anexhaustive discussion of project activities undertaken, current status of different components and currentissues and constraints. Bank Missions adopted a problem solving approach and tried to find workablesolutions to the difficulties encountered. In most cases, concrete remedial actions were agreed to withcounterparts.

30. The main lessons leamed from the Bank's experience can be summarized below:

(a) Complex institution building projects require long-term govemment commitment at thehighest level. This may be difficult to sustain due to changes in govenmment or changes ingovenmment priorities. Yet, unless the reforms are perceived as ranking high in theleadership's priorities, it is likely that, after the initial thrust, they would loose their impact.Meclhaniisms, therefore, need to be found to sustain high level involvement in the reforms,at least until they can go ahead on their own steam.

(b) When institutional changes are subject to changes in the goveming administrative laws, itwould be preferable to enact the requisite legislation before the project starts. Delays,such as those observed in the passage of the SAFCO law, create ambiguity and confusionamongst the agencies and officials likely to be affected by the legal changes. This has anadverse impact on project implementation.

(c) Staff tumnover adversely affects the sustainability of reforms, especially, in technical fieldssuch as public financial management. Suitable human resource policies should, therefore,be devised to ensure that (a) staff remain in the positions for which they have been trainedfor a reasonable period and (b) the compensation system, at least for highly skilled jobs, issuch that qualified persons can be attracted and retained in public service.

(d) Rapid changes in information technology necessitate continuous upgrading of computersystems. Systems developed under the aegis of a particular project are likely to becomeout-dated soon after the project ends. To avoid this, it may be useful to devise mechanismsthat would enable the borrower to finance the regular upgrading of the systems, withoutdepending on a successor project that may or may not materialize. The PFMO-I had thePFMO-II to finance the enhancement of its systems. Other projects may not have thisadvantage.

8

(e) In countries where VAT on imports is a significant part of tax revenues, but is collected bythe customs department and not the tax department. it would be preferable to broaden thescope of tax administration reforn to simultaneously cover the customs department aswell. Restricting reforms only to the tax department, as was done in this project, leads tosub-optimal results as a major part of tax revenues continues to be collected in aninefficient manner.

Borrower Performance

31. The project enjoyed strong political support from GOB. This was one of the majorreasons for the project's success in implementing far-reaching institutional reforms. CONSAFCO metfrequently and effectively guided project implementation. The executive secretary of CONSAFCO and theTechnical Director provided excellenit leadership to the project at the operational level and enjoyed theconfidence of the Govenunient. Counterpart staff demonstrated enthusiasm for the reforms and the projectwas implemented with considerable speed and dispatch.

Pr-oiect Relationships

32. Project relationshlips were generally very positive. The Bank enjoyed a close rapport withGOB officials at tlle political and administrative levels. The project received continued support andcooperation from other inteniationial agencies mentioned above. Conflicts of interest appear to have beenavoided by a clear demarcationi of the respective areas of activity and extensive coordination at theimplementation stage. Counterpart staff had good relations with consultants working on different projectsegments. This contributed to the high quality of outputs and timely project completion.

Consultin2 Services

33. Since project activities were basically of a technical nature. international and nationalconsultants played a major role in its success. The quality of consultants deployed and their outputs wasvery high. The foreign firm engaged to develop the financial management systems did a good job. Thesuccess of the tax refonr and increase in tax collections was largely due to the consultant team working onthe tax administration component. The Banking System Reform component was designed by top latin-american consultants with successful experience in designing and implementing institutional reforms incentral banks.

Pro ject Documentation

34. The Staff Appraisal Report (SAR) provided a useful framework for the project. Besides agood diagnosis of the prevailing situation and design of proposed remedies, it clearly identified therespective roles of implemeniting agencies within GOB and of the international donors involved. Detailedimplementation schedules. tenns of reference and cost tables helped in monitoring and coordination ofproject activities. The Credit Agreement also was well-drafted and contained legal covenants for crucialactivities. Not much difficulty was experienced in gathering data for the Project Completion Report, exceptfor data on counterpart expenditures and on the break up of total costs between local and foreign costs.

9PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

1. On July 31, 1987, the Republic of Bolivia and the World Bank's InternationalDevelopment Association signed Credit Agreement 1809-BO to fund the Public Financial ManagementProject. The operation consisted of three separate components:

Component A: Financial Administration and Control System (SAFCO)Component B: Tax AdministrationComponent C: Banking System Reforms

2. This report will review and assess project performance for each of these componentsseparately.

1. COMPONENTA: FINANCIAL ADMINISTRATIONAND CONTROL (SAFCO)

Main Obiectives

3. The primary objectives of the SAFCO component were (1) to set in place a series ofsystems, namely: an integrated financial management and control system for government; accounting,internal control, and financial information systems and associated administrative systems; cashmanagement and public debt systems; and systems for programming operations, budgeting, and execution,and (2) to strengthen audit and systems development functions in the Office of the Controller General of theRepublic. These objectives were devised to tailor the project directly to Bolivia's economic circumstances.bearing in mind a number of specific realities:

* The demise of a growth model based on state capitalism and protection, which favoredinward-looking development.Inconsistent and contradictory rules for financial management and state fiscal control.

* Political instability and the ensuing weakness of basic democratic institutions.* The state of administrative and financial chaos inherited by the democratic

administration from a period of institutional instability.

4. The chief risk identified for implementation of the project was its vulnerability to changesin government. For this reason, it was assigned a relatively short time-frame for completion.

5. The attainment of these objectives was considered to be imperative if the country was tohave sound fiscal controls in place as the government implemented its New Economic Policy, launched inAugust 1985.

Achievement of Project Activities

6. The project's main objectives were substantially achieved. Its most importantachievements on the legislative front were the Government Administration and Control Act (Law 1,178)passed on July 10, 1990, which did away with the profusion of contradictory laws and regulations andestablished a basic framework of rules for developing systems and apportioning responsibilities andauthority among central government administrative bodies. Pursuant to a number of other legal directives(supreme decrees and ministerial orders), the Ministry of Finance was reorganized, regulations governingthe budget system were issued, and an Integrated Accounting Manual was put into effect. The governmentcontrol system was revamped, the Office of the Controller General was restructured, and rules fororganizing public-sector audit units and government audit standards were issued.

107. Significant among the practical accomplishments of this component was the start-up of thefollowing systems: Cash Operations Information System (SOEC), operated by the emergency program anddeveloped for decentralized agencies and public enterprises; the Budgeting System, for use throughout thepublic sector and monitored by the Budget Office; the Integrated Financial Information System, operatedjointly by the Treasury Office and the General Accounting Office; and the Wage Bill and PayrollManagement and Control System.

8. Some 3,000 persons received training in sessions organized by the Training Center of theOffice of the Controller General. Training was provided on the features of Law 1,178 and implementationof administrative systems, and courses were given in basic, intermediate, and advanced accounting.

Main Activities Completed

9. The following main activities were completed:

a. Government Administration and Control Act: The draft legislation wasreviewed and reworked with parliamentary committees, to come up with a finalversion that became law on July 10, 1990.

b. A series of administrative systems:

* Emergency Program: Methodological guidelines were devised forgathering and processing financial data from public entities to producefiscal statistics, including consolidated operations of the non-financialpublic sector (NFPS). Since 1988 monthly reports have been producedshowing actual revenues, expenditures, and financing of the NFPS, alongwith the pertinent analyses.

* Reorganization of the Ministry of Finance: Supreme Decree 22,106 ofDecember 29, 1988, revamped the organizational structure of the Ministryto develop its policy-setting and operational responsibilities, with duesegregation and coordination of its functions.

* Budgeting System: Basic regulations were devised (Ministry of FinanceOrder 704) to govem the budgeting, budget execution and evaluationprocess.

* Cash Management and Public Debt System: The Integrated FinancialInformation System (SIIF) was designed and put into practice in 1990. Itsimplifies expenditure processing through the exercise of programmingand quota control for expense accruals and disbursements.

* Integrated Accounting System: Manuals were produced to set outintegrated accounting procedures for the central govermnent, non-commercial public institutions, and regional development corporations.Working in concert with the Ministry of Finance, the GovernmentAccounting Office was set up in September 1989, with an accountsprocessing office and computer center.

* Non-financial Management Systems: A system was put in place to trackchanges in wage bills, work force, and salary scales for the entire publicsector. A survey was done of central government positions, with financial

11support from international organizations to the EMSO project as aprelude to the Public Sector Management Project.

c. Government control: A team of advisors for the Controller General's Office(CGR) was set up to address the areas of regulations, external audit, and internaloversight. Internal oversight standards were prepared for the organization andadministrative procedures for all public-sector entities.

d. Training: Instructors were selected and trained in teaching techniques. Theydelivered a series of basic training courses for professional-level staff, to ensurethat government administrators, accountants, attomeys, and auditors would befully capable of implementing and operating the SAFCO systems.

Six workshops were held on programming of budget execution, and fourworkshops on financial statement and management report preparation andpresentation.

e. Physical plant and equipment: Construction work on CGR facilities and theinstallation of fumiture were completed in 1990. Contracts were awarded for thepurchase of computer hardware and document reproduction equipment which wereinstalled along with other items needed for the following project components:technical oversight, emergency program, Budget Office, Treasury Office, GeneralAccounting Office, and National Training Center (CENCAP).

Sustainability

10. The SAFCO program has improved budgeting, operating programs, and otherorganizational areas in the Ministry of Finance. It has also led to changes in budget execution andspending procedures in the Treasury Department. Other benefits are an improvement in governmentaccounting, cash reporting svstems in the larger public entities, tighter internal oversight procedures andauditing standards in the wake of the reorganization of the Controller General's Office, and training inprinciples of financial management. These accomplishments indicate a strong motivation and ongoingcommitment on the part of the state and its institutions to move ahead, in future, with programs targetingfinancial management and improved control systems. In brief, it appears very likely that the project'ssuccesses can be sustained and, indeed, built upon in future operating plans.

Bank Performance

11. The Bank's performance was highly satisfactory at the project identification stage andthrough the assistance it afforded. The technical support furnished by the Bank's project officers was animportant element in its success; their continual monitoring of project activities helped the government tosecure effective execution of the measures needed to implement the various systems developed.


12. The government's performance throughout the project identification and implementationphases can be termed highly satisfactory, in light of the political will demonstrated in putting into practicethe systems developed to strengthen government financial management and control. The restructuring ofthe Ministry of Finance and Office of the Controller General attests to the importance that the governmentaccorded to the project.

12Results

3 . The main benefits that have ensued from the new systems described above, and which canbe considered permanent gains, are:

Reliable, timely, and relevant financial information generated by the CashOperations Information System (SOEC) and the Integrated FinancialInformation System (SIIF), which afford the government a clear overall pictureof the fiscal situation and developments in the non-financial public sector. Thesesystems have also enabled the government to (a) bolster its negotiating positionwith international organizations and (b) manage the consolidated liquidity of thenon-financial public sector and adopt measures to keep financial variables withinIMF program targets.

Transparency in the workings of government, thanks to the paring of thediscretionary element in the management of public moneys.

Less corruption and more efficient administration as a result of simplifiedprocedures for paying amounts owed to the Treasury.

Use of a quota system to allocate resources to public entities.

Adoption of a program budgeting system.

* 'The most salient achievement on the legislative front is the enactment of theGovernment Administration and Control Law. Its provisions have beenpublicized and analyzed in a number of quarters, and the objectives it seeksare generally acknowledged to be coherent and ambitious.

14. The results attained by virtue of the government control system are evident in thelegislation issued to tighten internal and external controls, and in the success of the training component.Thie latter is also considered as a permanent gain because training is now an institutionalized activity.

15. The training school, CENCAP, has offered training to 3,007 people, most of it centeringon implementation of the budgeting system and new cash management procedures. These were not formaltraining events but rather a limited on-the-job training activity, which was nevertheless essential forinstituting and carrying through the reforms.

Future Operations

16. In the short term, regulations under the Government Administration and Control Act willneed to be issued and its provisions brought into force. The efforts that this will entail in terms ofresources, activities, and decision-making will be even greater than those deployed to produce the gainsdescribed in this report. To that end, the Bolivian Government is currently executing a project forimplementation of the Government Administration and Control Act (ILACO)l .

17. In the years ahead there will be a need to generate savings in public finances so the countrycan increase social and infrastructure outlays. To do so, it will need to consolidate and build upon thegains achieved with this project.

ILACO is the same as PFMO-1I.

13II. COMPONENT B: TAX ADMINISTRATION

Main Objectives

18. The first stage of this project was carried out by the Ministry of Tax Collections and theremainder by the Ministry of Finance. The general objective of this component was to devise a new taxadministration model that would incorporate all of the reforms and taxation systems needed for efficientoperation.

19. In pursuit of that central aim. specific objectives were set for the Internal RevenueDepartment (DGRI) and Customs Department'. to bring in changes in three stages. which were embodiedin a series of agreemenits entered into by the Bolivian Government and the implementing agencies.

20. The following are the principal objectives achieved at each stage.

Stage I

Design development, and implementation of systems of taxpayer registration,automiiated data collection and capture through the banking system, and taxregulations.

First phase of the reorganizatioin of the DGRI. (the Spanish name of this office haschaniged from IDireccion General de la Renta Interna DGRI to Direcci6n Generalde Iimpuestos Internos DGII).

Stage 2

Designi of audit procedures: creation of a Large Taxpayer unit in La Paz; systems fortracking collections.

Stage 3

lDevelopment of supplemenitarv collection systems; systems to select taxpayers foraudits: development of part of the taxpayer current-account system andimplementation of same; assistance in the operation and consolidation of systemsdeveloped in Stages I and 2 and in implementing the new organizational structure.

A further objective of this stage was to develop and implement a revenuecollection svstem for the Customs Department.

21. The objectives of this project were devised to address the economic difficulties Bolivia hadbeen experiencing ulp to 1986. as deteriorating terms of trade left the country at a severe disadvantage andultimately witlh a balance-of-payments deficit, and to attempt to reverse the sharp downturn in economicactivity wlichi had cut into government revenues notably tax receipts.

22. Thle aim was to help the economy recover by bringing in a taxation system that wouldboost tax revenues.

23. Specific objectives were set for each stage; minor adjustments were made as needed in thecourse of the operation.

2 Editorial Note: The Customs Departmenit was not directly covered under the PFMO-I.

14Achievement of Proiect Activities

24. The project made considerable gains in implementing the proposed systems andconsolidating reforms of the country's tax administration. Its success is evident in the various performanceindicators (increase in the tax burden, simpler procedures, fewer taxes, streamlined tax administration,etc.). Nevertheless, a number of objectives proved too complex to be achieved in full in the time-frameenvisaged; the remaining elements will need to be addressed in future programs.

25. The following are noteworthy among the specific accomplishments of this component:

In the Internal Revenue Department:

Support for each of the national areas and regional offices, to help them reshapeand complete their organizational structures and perform their assigned functions.Training of employees in the main operations areas.The design, in the Department itself, of strategies to monitor the reforms instituted.At Headquarters, assistance in devising operating timetables for boosting taxreceipts, and coordination between the Department and the regional offices.In the Audit Office, development of audit systems, drafting and release of anumber of operations directives and institution of controls. Creation of LargeTaxpayer Units at the three main regional offices.In the collections area, setting up of a taxpayer register, development of a systemfor payment of taxes at banks, and follow-up and supplementary systems.In the Technical and Legal Affairs Office, preparation of procedural directives tostrengthen this area.In the External Affairs Office, publications and other information activities tofamiliarize the public with the new taxes being levied as part of the tax reform,and plans for further taxpayer education programs.In the Data-Processing Office, development and installation of computer systemsto track tax receipts. Gradual implementation of planned systems that had neverbeen brought into service, and adjustment of other systems (follow-up on taxnotices, register, etc.).In the regional offices, specialized technical support in the areas of collection,auditing, and technical and legal matters.Partial development of the taxpayer current-account system and implementationthereof.

In the Customs Department:

Design of a system for collection and control of customs duties and other levies onall imports, including value added and specific consumption taxes.Signing of an agreement with the banking system.Design of customs clearance forms and receipts and contracting out of same.Writing of instructions for completing new forms and procedures for inwardcustoms clearance of goods.Design and implementation of a new structure for the Data-ProcessingDepartment, and planning and control of an import levy system.Development and implementation of a control system for delivery of goods.Training of staff in customs administration operations.

15Main Activities Completed

26. A reasonable portion of the tax reforms sought has been achieved. A number of problems,none of them readilv surmountable, stood in the way of full implementation: persistently high inflationrates. a plethora of tax laws and regulations, a large number of taxes, and revenue earmarking. Otherproblem areas over wlich the govenmment had a somewhat greater measure of control were the shortage ofexperienced maniagers and a hlighly politicized tax administration, which meant frequent turnover ofemployees with needed skills.

Suistainability

27. Because this project is so important and can have a definitive impact on the process ofoverhauling thie country's tax administration. there is every likelihood that it will continue in the future.The current political clinate (a stable democracy) and stable economy, underpinned by the commitmentsmade and decisions taken in political quarters and by public institutions and international organizations,suggest that the needed teclnical resources and funding will be forthcoming in order to preserve the gainsachieved to date and expand the project's activities in the future.

Bank Performance

28. The World Bank played a satisfactory part in achieving the project's aims.


29. Given the constraints within which they had to work, the performance of the Governmentand the implemeneting agencies was highly satisfactory at the project identification and preparation stages.However. their achievements on the implementation side can only be termed satisfactory.

Results

30. The original objectives, as subsequently modified, were achieved on schedule andrelatively successfullv, so the project can be said to have been satisfactory.

31. The invigorated tax collection system brought in as part of the overhaul of the country'stax administration has proved to be highly efficient, leaving taxpayers with a new image of this governmentservice.

32. The computerized audit systems now in place have yielded optimum results, given theprecarious state of this area before their implementation.

Future Operations

33. There is a need to plan future activities to ensure that tax administration reforms will befirmly entrenclhed and to devise new systems to keep pace with an active financial sector and changingeconomy.

34. The following are some of the general tasks that will need to be tackled in the years ahead:

Optimization of the systems now in place, to use them to full advantage.Development of new systems, with due regard to technology and resourceconstraints.Building up of DGRI management capacity and institution of management controlsystems and tools.

16Consolidation and fine-tuning of the DGRI's organizational structure.Organization of an efficient, merit-based human resources management system.Restructuring of the Customs Department, to make the sweeping changes neededand bring in automated systems and management controls, with the ultimate ainof boosting customs revenues.

35. To this end, the Government of Bolivia and the World Bank should remain in closecommunication, as part of their normal arrangements, to maximize the benefits of the project.

11. COMPONENT C: BANKING SYSTEMREFORM

Main Objectives

36. The main objectives of the Banking System Reforms project were to improve theorganization of the Central Bank, the bank inspection system, monetary policy, and debt management, andto implement a program to reorganize two state-owned development banks.

Achievement of Probect Obiectives

37. The project's main objectives were achieved, with considerable gains made in the followingareas:

a) External debtb) Internal auditc) Money and creditd) Banco Agricola and Banco del Estadoe) Creation of the Superintendency of Banks

External debt

38. The groundwork was laid for design of a debt reporting system, through training of staff ina single operating system for report production, and administrative rules and projection systems. Thesesystems have bolstered Central Bank supervision capabilities.

Internal audit

39. A Financial Audit Manual was designed and management personnel were trained.

Money and credit

40. An accounting subsystem was instituted for open-market operations, to integrate with theCentral Bank's accounting system and set up a teamn of systems analysts and programmers.

Banco Agricola and Banco del Estado

41. A diagnostic study was completed of these two banks to address areas requiring action,such as a review of personnel and assessment of the viability of the provincial offices. Work began on aloan grading system. The Government adopted a political decision on the role of these institutions.

17Superintendent of Banks

42. Assistance was given to set up a Superintendency of Banks to regulate the nation's bankingsystem.

Main Activities Completed

43. Any problems that arose in the course of the project were rminor ones, and did not affect itsoutcome. Employees and consultants worked out uniform approaches that established a solid base forproject activities and helped achieve most of the project's aims.

Sustainability

44. The technical support received by the Central Bank of Bolivia under the Public FinancialManagement Project yielded gains in the areas mentioned above, tightening administrative and systemscontrols.

Bank Performance

45. The technical assistance furnished by the Bank was a major factor in the achievement ofthe primary objectives noted above.


46. The Govenuient's performance can be termed satisfactory, inasmuch as it assigned highpriority to financial refonms in its economic policy.

Results

47. The main aims of this component of the Public Financial Management Project wereachieved satisfactorily, making as it did for more efficient and more transparent administration of thebanking system.

Future Operations

48. Future activities in the area of banking system reform should include human resourcesdevelopment and new systems for the nation's banks.

19

PART 111. STATISTICAL TABLES

1. Table 1: Related Bank Loanis/Credits2. Table 2: Project Timetable3. Table 3: Credit Disbursemiienits4. Table 4: Project Implemiienitation5 Table 5: Project Costs6. Table 6: Project Financing7. Table 7 Project Results8. Table 8: Studies Included in Project9. Table 9: Status of Legal Covenants10. Table 10: Use of Bank Resources: Staff Inputs11. Table I 1: Use of Bank ResouLces: Missions

Table 1: Related Bank Loans/Credits

Loan/Credit Title Purpose Year of approval Status

Preceding operations

None applicable

Following operations

1. La Paz Municipal Related componenits: Financial 1987 DisbursingDevelopment Project managemenit computerization (includes

budgeting, accouniting, investmentplanning).

2. Economic Management Related components: Public investment 1988 DisbursingStrengthening programming, tax administration, regionalOperation and public sector management

strengthening.

3. Financial Sector Related components: Strengthening of 1989 FullyAdjustment Credit banking system including banking Disbursed

supervision/regulation.

4. Public Financial Related component: Project is continuation 1991 DisbursingManagement Operation of PFMO 1, with more emphasis on11 implementation of computerized IFMS.

5. Structural Adjustment Related components: Budget transfer 1991 DisbursingCredit mechanisms from central to local

govenuments.

20

Table2: Project Timetable

Item Date planned Date actualIdentification (Executive Project Summary) Feb. 86Preparation May 86

Appraisal Mission Feb. 87

Credit Negotiations April 87

Board Approval 5-28-87

Credit Signing 7-31-87

Credit Effectiveness Sept. 87 12-15-87

Credit Closing 6-30-92 6-30-94

Credit Completion Dec. 91 6-30-94

Table 3: Credit Disbursements: Cumulative Estimated and ActualDisbursements

(US$ thousands)

FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95Appraisal estimate 3,400 4,800 3,300 - - - -

Actual 3,510 4,790 1,950 850 380 170 140 70Actual as % of estimate

103 100 59 - - - -

Date of finaldisbursement: 8/05/94

21Table 4: Project Implementation

Indicators Appraisal ActualEstimate (or PCR Estimate)

Financial Administration andControl

1. Financial Monitoring of major 1. Establish Emergency Program to 1. The Emergency Program coveredpublic sector entities. collect financial statistics of 34 73 entities. About 95% of

major non-financial public sector resource flows in the non-financialentities. public sector monitored.

2. Development of norms and 2. Enact SAFCO Law and prepare 2. SAFCO Law enacted, althoughprocedures for effective public norms and procedures for after a delay of about 2 years.financial management. operational programming, Manuals of nonms for and

budgeting, budget execution, proceduies for budgeting, budgetpublic credit, accounting, execution, public credit,auditing, procurement and accounting and auditingpersonnel management. developed.

3. Organizational restructuring. 3. Establish Office of the 3. Office of the Accountant GeneralAccountant General and created. Ministry of Finance andreorganize the Ministry of Office of the Controller GeneralFinance and the Office of the of the Republic reorganized in lineController General of the with the SAFCO Law.Republic.

4. Develop and commission 4. Install computerized systems for 4. Computer systems for cashautomated systems for financial financial administration and management, budget formulation,administration and control. control in public entities. budget execution and accounting,

and control of payrollcommissioned.

5. Train staff in financial management 5. Train 300 officials through 5. About 3000 officials providedand control. fonmal and on-the-job training. training of varying intensity in

public financial management.

T ax Administration

1. Restructure the Tax Administration I. Create a Ministry of Tax 1. A temporary Ministry of Taxto improve its effectiveness. Collections and strengthen the Collections created. IRD

organization and management of restructured and revamped.the Internal Revenue Deptt..

2. Strengthen tax administration 2. Transfer tax collection to 2. Tax collections transferred tothrough reorganization of commercial banks, develop commercial banks. Divisions foroperations, development of nonns systems for control of control of large taxpayers created.and procedures, installation of compliance, registration of Computerized systems forcomputerized systems and training taxpayers, auditing a:d statistics. taxpayer registration, selection of

cases for audits, monitoring ofnon-compliance and generation ofreliable tax statistics installed.

22Indicators Appraisal Actual

Estimate (or PCR Estimate)


I. Reorganize and strengthen the 1. Reorganize the Central Bank to 1. The Central Bank made the soleCentral Bank. emphasize the key central monetary authority in the country

banking functions. and reorganized. EconomicResearch, Financial Systems,Debt Management & AccountingDivisions strengthened.Accounting systemscomputerized.

2. Improve banking supervision. 2. Separate central banking 2. An autonomous Superintendencyfunctions and banking of Banks created. Manuals forsupervision; and strengthen evaluation of accounts of banks.banking inspection. banking inspections and financial

analysis produced. Technicalassistance in supervision of bankaudits provided.

3. Restructure two Development 3. Restructure Banco Agricola de 3. Legislation defining the roles ofBanks. Bolivia (BAB) and Banco del BAB and BANEST passed.

Estado (BANEST). However, the banks could not berestructured due to a lack ofconsensus on the restructuringplan.

23Table 5: Project Costs

(US$ Thousands)

Appraisal estimate Actual/latest estimate

Local Foreign Local Foreigncosts costs Total costs costs Total3

Iteml 1. Financial 8,100 5,910 14,010 8,237 6,010 14,247

administrationand control

2. Tax 2,530 2,120 4,650 2,573 2,156 4,729administration.

3. Banking 2,620 1,330 3,950 2,664 1,353 4,017system reforms

4. Project 350 1,150 1,500 352 1,156 1,508preparation .

5. UNDP/PIU 450 450 481 481administration .

TOTAL 13,600 10,960 24,560 13,826 11,156 24,982

Table 6: Project Financing(US$ Thousands)

Planned (Credit Agreement) Actual

Local Foreign Local Foreigncosts costs Total costs costs Total

Source l

IDA 2,050 9,450 11,500 1,837 10,020 11,857

[DB/UNDP 90 1,510 1,600 337 1,136 1,473

USAID 3,060 - 3,060 3,252 3,252

Government of Bolivia 8,400 - 8,400 8,400 8,4004

Total 13,600 10,960 24,560 13,826 11,156 24,982

3 Distribution of total costs between local and foreign costs estimated due to insufficient data.4 GOB did not maintain separate accounts of counterpart contributions made by it. Therefore the actual

contribution has been assumed to be same as that originally planned at appraisal.

24

Table 7: Project Results

Indicators Estimated ActualFinancialAdministration and Control

1. Availability of reliable financial 1. Financial data of 35 public sector 1. Emergency Program providedstatistics regarding public sector entities to be available through data covering 73 public entitiesentities to facilitate financial Emergency Program. and 95% of resource flows in themanagement and policy formulation. non-financial public sector. The

program needs to be incorporatedinto mainstream functions of theentities.

2. Improved financial management 2. Preparation of budgets and 2. A modem normative frameworkcharacterized by greater control of budgetary for public financial managementtransparency, efficiency and expenditures using the new and accountability established.accountability. systems, preparation of timely Reorganization of the MOF and

and accurate accounts of the computerized financial systemsCentral Government, and increased efficiency, reducedenhanced accountability. discretion and enabled timely

preparation of governmentfinancial statements. Budgetsprepared using new norms andsystems. The internalization andenforcement of the norms needsfurther strengthening. Alsocomputer systems needed to beintegrated and further refined.This is being done by PFMO-II.

3. Strengthened internal and external 3. Improved external auditing and 3. CGR's role modified to focus oncontrol environment in the internal controls. ex-post auditing and prior controlgovernment. eliminated. CGR given extensive

powers to initiate action againsterring officials, but its judicialpowers transferred to theJudiciary. Norms for internalcontrol and auditing developed.External auditing strengthened.

Tax Administration

1. Tax Reform Act of 1986 1. Improved tax collections, 1. Domestic tax collections improvedimplemented and tax administration increased efficiency and reduced from about 1% of GDP in 1984effectiveness increased. corruption in tax administration. to 7.8% of GDP in 1992. Tax

administration's ability tomonitor compliance increased.Computerization increasedefficiency and reduced corruptionto some extent. However, taxauditing and investigation stillneed improvement.

25

Indicators Esfimated Actual


1. Capacity of Central Bank to perform 1. Increased efficiency and 1. Central Bank capacity andits core functions enhanced. effectiveness of the Central performance significantly

Bank. improved.

2.Banking supervision strengthened. 2. Improved supervision of 2. Supervision of commercial bankscommercial banks. tightened.

3. Two major development banks 3. Strengthened development banks. 3. The targeted development banksrestructured. could not be restructured.

26

Table 8: Studies Included in Project

Purpose as definedStudy at appraisal/redefined Status Impact of study

1. Various studies To put in place norms and Completed. The studies helped inconducted to principles with which to setting up the frameworkestablish/define norms implement for public financialfor different aspects of integrated/computerized management.public financial financial & administrativemanagement. systems.

2. Analysis of the To reorganize and Completed. Reorganization of the IRDorganizational structure strengthen tax helped improve itsof the tax administration and effectiveness. Transfer ofadministration and the facilitate tax collection tax collection totax collection system. through commercial banks. commercial banks

improved collections andenabled IRD to focus onmonitoring non-compliance.

3. Various studies To reorganize the Central Completed. Central bank reorganizedconducted to implement Bank and the two and strengthened.different aspects of the development banks, AutonomousBanking Reform strengthen central banking Superintendency of Bankscomponent. functions and create the created. Restructuring

new Superintendency of plans for the developmentBanks. banks could not be put into

effect due to a lack ofconsensus.

27Table9: Status of Legal Covenants

Deadline forReference Subject Compliance Status CommentsSection 3.01 Distribution of Continuous C

responsibility betweenImplementing Agenciesand ensuring that relevantpublic entities participateand assist in projectimplementation.

Section 3.02 Procurement of goods and Continuous Cconsulting services to bein accordance withSchedule 3 of theDevelopment CreditAgreement.

Section 3.03 Arrangements with Banco Continuous CCentral de Bolivia forimplementation of Part Cof the project.

Section 3.04 and 3.05 Project monitoring and July, 1987 Cimplementationarrangement

Section 3.06 and 3.07 Preparation of Component Annually/ CD Annual ActionImplementation Programs, quarterly Plans delayed.Annual Action Plans andquarterly reports.

Section 3.08 Alternative funding 12/87 C IDB fundsarrangements to be made were available.by GOB if IDB Grantfunds not available

Section 4.01 Accounts and Audits Accounting CD Audit Reportscontinuous. delayedAuditing significantly.Annual

Schedule I Non-financing of tax out Continuous CD Tax on foreignread with General of the credit. consultantsConditions initially paid

out of credit,butsubsequentlyreversed

Status: C= covenant complied withCD= complied with after delay

28

TablelO: Bank Resources: Staff Inputs

Stage of Planned Revised Actual

project cycle Weeks US$ Weeks US$ Weeks US$

Through appraisal 20.0 30,769 40.0 61,538 53.6 82,462

Appraisal through 16.0 24,615 16.0 24,615 13.1 20,154Board approvalBoard approval 6.0 9,231 3.0 4,615 0.6 923througheffectivenessSupervision 65.0 100,000 75.0 115,385 88.4 136,000

Completion 14.0 21,538 18.0 27,692 15.0 23,000

Tablel 1: Bank Resources: Missions

Stage of project MonW Number of Days Specialized staff TPerformance[ Types of problemscycle year persons in field J skills represented rating

Through appraisal 3/84; 10 29 Task management, n/a5/86; audit; accounting;

10/86 central banking;tax administration;legal.

Appraisal through 4/87 4 3 Task management n/aBoard approvalBoard approval I 0 Task management n/a ManagerialthrougheffectivenessSupervision 10/87; 16 77 Task management, I to 2 Managerial,

4/88; budgeting; Technical11/88; accounting;3/90; treasury; public1/91; credit; auditing.;2/92; institutional6/94 development;

- central banking;tax administration

Completion 6/94 1 10 Task management; 1tax administration I

IMAGING

Report No: 15159Type: PCR

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