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Public Disclosure Authorized Documentof The World Bank Public Disclosure Authorized Report No: 19325-BO PROJECTAPPRAISALDOCUMENT ONA Public Discl...
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Public Disclosure Authorized

Documentof The World Bank

Public Disclosure Authorized

Report No: 19325-BO

PROJECTAPPRAISALDOCUMENT ONA

Public Disclosure Authorized

PROPOSEDADAPTABLEPROGRAMCREDIT IN THE AMOUNTOF SDR 23.7 MILLIONEQUIVALENT (IN THE AMOUNTOF US$32 MILLIONEQUIVALENT) TO THE REPUBLICOF BOLIVIA FOR AN INSTITUTIONALREFORMPROJECT IN SUPPORTOF THE FIRST PHASE OF THE PUBLIC SECTORMODERNIZATIONPROGRAM

Public Disclosure Authorized

May 20, 1999

Poverty Reduction and Economic Management Country Managing Unit for Bolivia, Paraguay and Peru Latin America and the Caribbean Regional Office

CURRENCYEQUIVALENTS (ExchangeRate EffectiveMay 13, 1999) CurrencyUnit = Bolivianos(Bs) 1 Bs = US$ 0.17 US$1 = Bs 5.76 FISCAL YEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS APC APP ARI CAS CDF CGR CNI CSAR

FSD GDP GTZ HIPC IBRD IDA IDB ILACO IMF INE IRP IRS LACI LCR MOF NCB NIP NIR NPV PAD PCD

PCU PER PMR PPF

PSM SAFCO SOE SIIF WBI WDR

-

-

Adaptable ProgramCredit Annual Project Plans Acuerdo de ReformaInstitucional(OrganizationalReform Agreement) Country AssistanceStrategy ComprehensiveDevelopmentFramework ComptrollerGeneral's Office National IntegrityComrission Civil Service and AdrninistrationReform Project Financial Service Department Gross DomesticProduct German Technical AssistanceAgency Highly Indebted Poor Countries InternationalBank for Reconstructionand Development InternationalDevelopmentAssociation Inter-AmericanDevelopmentBank Integrated FinancialManagementProject InternationalMonetaryFund National StatisticsInstitute InstitutionalReform Project Internal Revenue Service Loan AccountingChange Initiative Latin Americaand CaribbeanRegion Ministry of Finance National CompetitiveBidding National IntegrityPlan National InstitutionalReview Net Present Value Project AppraisalDocument Project Concept Document Project CoordinatingUnit Public ExpenditureReview Project ManagementReport Project PreparationFacility Public Sector Modernization Financial Administrationand Control System Statement of Expenses Software System of Integrated FinancialManagementProject World Bank Institute World DevelopmentReport Vice President: Country Manager/Director: Sector Manager/Director: Task Team Leader/TaskManager:

Shahid Javed Burki Isabel Guerrero GuillermoPerry Ronald E. Myers

Bolivia Institutional Reform Project CONTENTS A. Project Development Objective 1. Program purpose and program phasing......................................................................... 2. Project development objective.......................................................................... 3. Key performance indicators...........................................................................

2 3 3

B. Strategic Context 1. 2. 3. 4.

Sector-relatedCAS goal supported by the project..................................... , Main sector issues and Governmentstrategy................................................................... Sector issues to be addressed by the project and strategic choices.......................................... Program description and performance triggers for subsequent loans.......................................

4 4 9 10

C. Project Description Summary 1. 2. 3. 4.

Project components.......................................................................... Key policy and institutional reforms supported by the project............................................... Benefits and target population.......................................................................... Institutional and implementation arrangements.................................................................

12 12 12 13

D. Project Rationale 1. 2. 3. 4. 5.

Project alternatives considered and reasons for rejection..................................................... Major related projects financed by the Bank and/or other development agencies......................... Lessons learned and reflected in proposed project design.................................................... Indications of borrower comrnitmentand ownership.......................................................... Value added of Bank support in this project....................................................................

15 15 16 16 17

E. Summary Project Analyses 1. 2. 3. 4. 5. 6. 7.

Economic....... Financial....... Technical....... Institutional....... Social....... Environmental....... Participatory approach.......

17 17 17 18 18 18 18

F. Sustainability and Risks 1. Sustainability.......................................................................... 2. Critical risks.......................................................................... 3. Possible controversial aspects..........................................................................

19 19 20

G. Main Loan Conditions 1. Board presentation condition..................................................... 2. Other...........

20 20

H. Readiness for Implementation........................

20

I. Compliance with Bank Policies........................

21

Annexes Annex 1. Annex 2. Annex 3. Annex 4. Annex 5. Annex 6. Table A. Table Al. Table B. Table C. Annex 7. Annex 8. Annex 9. Annex 10. Annex 11.

Project Design Summary Detailed Project Description Estimated Project Costs Fiscal Impact Analysis Financial Summary Procurement and Disbursement Arrangements Project Costs by Procurement Arrangements Consultant Selection Arrangements Thresholds for Procurement Methods and Prior Review Allocation of Loan Proceeds Project Processing Budget and Schedule Documents in Project File Statement of Loans and Credits Country at a Glance Letter of Development Program

Bolivia Institutional Reforn Project

ProjectAppraisalDocument Latin Americaand the CaribbeanRegionalOffice LCC6C Date: May 20, 1999 CountryManager/Director: Isabel Guerrero Project ID: BO-PE-62790 Sector: Public Sector Management Lending Instrument: AdaptableProgramLending Program Financing Data APC

PhaseI Phase2 Phase3

Programof TargetedIntervention: No

IndicativeFinancingPlan

IDA US$million Credit 32 Credit 30 Credit 30

Total

Task Team Leader/TaskManager: RonaldE. Myers SectorManager/Director:GuillermoPerry ProgramObjectiveCategory:EconomicManagement

%

Others US$million 40 20 20

92

Project Financing Data

80 []

EstimatedImplementationPeriod (Bank FY)

Total Commitment Date US$million 72 2000 50 2004 50 2006

Borrower

ClosingDate 2005 2008 2009

172 Loan

[XI Credit

[]

Guarantee

[

Other [Specify]

For Loans/Credits/Others:

AmountSDR 23.7 million/US$32 millionequivalent Grace period (years): 10 Years to maturity: 40 Commnitment fee: .75%less any waiver Service charge: .25% Financingplan (US$m): Source Government Cofinanciers(Denmark,Germany,Sweden) IDA

Local 21 17.2 27.7 65.9

Foreign 0 1.8 4.3 6.1

Total 21 19 32 72

Total Borrower: Republicof Bolivia Responsibleagency(ies):Vice Presidency,Ministriesof Financeand Presidency,Office of the ComptrollerGeneral. Possiblepilot agenciesfor organizationalreformincludeMinistriesof Finance(with Internal Revenueand Customs Services),Agriculture,Housing,SustainableDevelopment,Education,and a prefecturegovernmentto be determined. Estimateddisbursements(BankFYIUS$M): Annual 5.8 7.2 844.0 3.3 3.3 Cumulative 5.8 13.0 21.4 25.4 28.7 32.0 Project implementationperiod:6 years Expectedeffectivenessdate: July 1, 1999 Expectedclosingdate: June 30, 2005 Contact person: AlbertoLeyton, Advisorto the Vice Presidentof the Republicand NationalProject Director Address: Vicepresidenciade la Republica,Ex-BancoCentral,Piso 2, Calle Ayacuchoy Mercado#208, La Paz, Bolivia Tel: 591-2-391680 Fax: 591-2-392606 E-mail:[email protected]

ProjectAppraisalDocument Country:Bolivia

Page2 ProjectTitle: InstitutionalReformProject

A: Project Development Objective 1. Program purpose and program phasing (see Annex 1): This Public Sector Modernization (PSM) program seeks to improve the effectiveness, efficiency, and transparency of the Bolivian public administration in order to strengthen the country's ability to implement its economic and social development programs and thus combat poverty. The program builds on the substantial reform of the state, including privatization and decentralization initiatives, undertaken by successive Bolivian Administrations since 1985. That effort has significantly reduced the size and scope of the central government, permitting the proposed program to aim at strengthening the remaining core public sector. The purpose of the program over ten years is to improve the quality of service delivery and client orientation of government operations by creating more honest, cost-effective, results-oriented organizations. It would establish in fact the institutional framework anticipated by Bolivia's comprehensive and visionary Financial Administration and Control System (SAFCO) law approved in 1990. This project has been designed in close collaboration with the current Public Expenditure Review (PER) and National Institutional Review (NIR). The latter (being piloted in Bolivia for the LCR region) is an innovative and comprehensive assessment of formal and informal governance rules and practices. It is being conducted, in close coordination with the Government, by senior experts in the Bank covering such areas as the civil service, budgeting, and institutional behavior. At the end of the program period the public administration of Bolivia would be significantly improved. In contrast to today, most civil servants in the central government, including the nine regional departments, would be hired and promoted on merit and paid by the government based on coherent market related salary schemes rather than significantly underpaid or financed on an ad hoc basis by external donors. A more defined and secure career path based on evaluated performance would sharply reduce staff turnover and promote sustained quality improvements, professionalism, and esprit de corps. Public employment will have fallen in the Central Government from around 13,000 to 9,400 and it would be seen more as a legitimate career option for educated Bolivians rather than a non-productive job with little prestige and less pay for the least qualified, or a source of patronage for political parties. Honesty and transparency in the collection and use of public resources and provision of public services would be more the norm than the exception. Financial management would have been deconcentrated to line agencies through the parallel integrated financial management project, with accountability enhanced through modern information systems and adherence to uniform regulations and procedures. The budget process would have become a more reliable and powerful tool for medium term strategic planning. Ministries and agencies would have more coherent legal mandates, primary responsibility for managing their human and financial resources, streamlined organizational structures, smaller staff with a significant shift in skills balances, and be subject to publicized performance criteria. Their service delivery would be measured and their budgets adjusted according to the results achieved. While the reform agenda would not be complete, major and demonstrable gains would have been achieved and citizens and leaders alike will view the public sector more as a national resource capable of enhancing the general welfare rather than a source of corruption, private gain, or an impediment to development. The Adaptable Program Credit (APC), along with substantial co-financing from bilateral donors (Denmark, Germany, Japan, and Sweden) would provide the Government of Bolivia the increased ability necessary to pursue these ambitious goals. It would allow the authorities, donors, and the Bank to gauge the achievement of critical milestones, re-appraise program activities as necessary, rapidly introduce lessons learned, and adjust the long term program. It would provide the time to create and demonstrate successes and thus build the political support and consensus needed to sustain the reforms. The effort would be phased in three operations over a ten year period. The expectation of continued Bank financing through the APC should increase the confidence of Bolivian citizens, investors, and civil servants that the fundamental reforms undertaken will be sustained through changes in administrations. The program would build on existing Bank projects (integrated financial management and judicial reform) and complement the efforts of other international financial institutions and bilateral donors to promote improved governance in Bolivia. Indeed the authorities may incorporate several projects within the structure of this state modernization effort.

ProjectAppraisalDocument Country:Bolivia

Page3 ProjectTitle: InstitutionalReformProject

The first operation (Institutional Reform Project) would reform the basic institutional framework for the public sector and pilot those institutional reforms along with organizational strengtheningin several key agencies. Those agencies identified for reform in Phase 1 tentatively include the ministries of Finance (including its Internal Revenue and Customs Services), Agriculture, Housing, Sustainable Development, Education, and a regional prefecture government to be determined. Bank support for the two subsequent phases of the program, which would address the remainder of the central government and the nine regional departmental governments, would be decided after a thorough evaluation of the preceding phase by the Government, donors and the Bank, based on trigger indicators which would assess both policy changes and the implementation record for each program activity. If approved, Bank financing of the subsequent phases would be re-assessed based on updated costs of program activities taking into account government and other external financing. Total cost of the project is estimated at US$172 million over 10 years. The cost of the first phase (the proposed project) is estimated at $72 million, and the subsequent phases are estimated at somewhat lower amounts assuming that: (i) the basic design and implementation of the horizontal reforms (creation of rector institutions, legal framework, and operating procedures) are largely completed during Phase 1; and (ii) the costs of implementing the reforms in state governmentsdo not exceed those of central ministries. 2. Project development objective (see Annex 1): The first phase Institutional Reform Project (IRP) aims to create the institutional framework for a modern public sector as well as to build several model agencies. It would focus on: (i) horizontal reforms in the areas of human resource management, national integrity, budgeting by results, and performance evaluation for both personnel and organizations. These institutional reforms would seek to change the legal and regulatory framework as well as incentive structures for public sector operations and would be applied to the extent possible to all agencies; and (ii) vertical implementationof these reforms in an integrated fashion in pilot agencies designed to create effective, efficient, and transparent organizations. The change process in agencies would be fostered by organizational restructuring and strengthening, the implementation of the new horizontal systems, and explicit processes of change management and staff renewal. The latter would include the selection of professional and managerial level staff through a competitive process of recruitment open to existing staff and external candidates. During a five year period, IDA and other financiers would support on a declining basis market-related salaries for the new staff positions. At a minimum the authorities expect that the project would: (i) establish the legal and institutional foundation for a merit based and de-politicized civil service; (ii) create the regulatory and organizational framework for increased integrity within the public sector; and (iii) significantly improve budgetary and financial management practices within the Ministry of Finance complemented by more transparent and effective tax collection by the Internal Revenue and Customs Services. Within the limits of the Government's budgetary capacity to fund increased civil service pay as well as the advances in project implementation, these reforms would be extended to the other pilot agencies. 3. Key performance indicators (see Annex 1): Key performance indicators of progress towards program objectives over the course of the APC would be the following: *

Operation of integrated financial management system (building on the existing IDA financed project) in rector institutions (Ministry of Finance-MOF and Office of the Comptroller General-CGR) and line agencies indicated by expanding application of accounting, cash management, and internal auditing procedures; and operation in agencies of the integrated financial management software system.

*

Results oriented budgeting and medium term budget programrning in operation in pilot agencies.

*

Modern, merit based, and decentralized civil service system established (in law and key systems) in rector institution and pilot agencies indicated by percentage of staff incorporated into the new Civil Service Regime hired through competitive processes and paid market related salaries; and percent of current wages of the Civil Service financed by the Treasury.

ProjectAppraisalDocument Country:Bolivia

Page 4 ProjectTitle: InstitutionalReformProject

*

National Integrity Plan functioning(in law and key systems) in rector institution and pilot ministries indicated by functioning of Asset and Income Declaration system;

*

Performance evaluation system functioning (in law and key systems) indicated by annual publication of national performance evaluation reports.

*

Results oriented agencies indicated by: restructuring of agencies under Organizational Reform AgreementsARIs (including updated mission statements, revised structures, increase in proportion of professional and managerial staff); agencies assuming increased responsibility for decentralized financial management systems and medium term budget planning; agencies assuming increased responsibility for decentralized human resource management; functioning evaluation systems leading to modifications in agency budgets and policy priorities stemming from evaluation results; and improvements in critical performance indicators (identified during preparation of ARIs) measuring service delivery in each agency.

B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 17890-BO Date of latest CAS discussion: June 16, 1998 The Bank's Country Assistance Strategy targets poverty reduction as its primary goal, focusing on three development themes identified by the Government: (i) Opportunity-to attain higher sustainable private sector led growth with better distribution; (ii) Equity-to raise the standards of living of the poor; and (iii) Institutional Reform-to strengthen the institutional framework for better justice and more efficient and corruption-free administration. To support this latter pillar of the Government's development program, the CAS proposes to help (i) modernize the state, and the legal and institutional framework for the private sector; (ii) implement judicial reforms; and (iii) assure an integrated framework for municipal and regional government strengthening. State modernization would include augmentingresponsibility and accountability, increasing transparency, developing a professional and stable civil service, improving internal processes, and refining the responsibilities and competencies of agencies. The proposed project would directly support the objectives of the Institutionality Pillar by changing systemic rules and incentive structures, consolidated through modernized organizations at the central and regional government levels. 2. Main sector issues and Government strategy: Weak human resources. The quality of human resources within the central administration is weak. Pay is insufficient to attract or retain quality staff in adequate numbers, career development and training is almost nonexistent, institutional memory and esprit de corps are lacking, and there is no focus on performance evaluation. There is excessive rotation of employees (during changes in Administration some ministries suffer a 90 percent turnover) and indeed the importance of the central government as a source of patronage may have increased due to the privatization of state owned enterprises over the last decade. Good staff within the government are frequently financed by donors, leading to large discrepancies in pay, potential conflicts of interest, and lower morale for non-donor financed staff. Ostensibly hired to implement projects, such staff frequently fill line positions and often disappear when donor funding ends. Recognizing these problems, the Bank and several donors worked with Bolivia in the mid-1990s to design a Civil Service and Administration Reform (CSAR) Project which aimed to finance on a declining basis the salaries of competitively recruited civil servants placed in key positions throughout the central government. Some 260 recruits were hired for positions in several agencies, financed in part by contributions from bilateral donors and a Project Preparation Facility (PPF) advance. However the new Government asked the Bank in 1997 to suspend preparation of CSAR project, preferring to undertake a more fundamental reform of human resource management within a broader public sector modernization effort. Creation of a new merit based and professional civil service at the technical and managerial levels throughout the central government is a major objective of the IRP. The new system for human resource management would be

ProjectAppraisalDocument Country:Bolivia

Page5 ProjectTitle: InstitutionalReformProject

operationally decentralized, giving line managers greater autonomy in hiring, firing, and performance incentives, but within guidelines and structures promoting merit and transparency. It would be promoted by: (i) enactment, prior to credit effectiveness, of a new Civil Servant's Statute containing key reforms establishing the framework for a merit-based civil service; and (ii) establishing a civil service entity to serve as the rector institution for modern human resource management government wide. The responsibilities of this entity would focus on establishing and adapting the regulations relating to the Civil Servant's Statute, supporting the human resource units in line ministries, and overseeing the integrity of the government-wide human resources system. A small independent appeals tribunal would be established to review personnel actions, in exceptional cases, particularly relating to firings and selection of higher level career staff. Its aim would be to ensure appropriate processes and the development of clear case law to protect the interests of the public as well as employees, without becoming a bottleneck for personnel decisions or damper on agencies' responsibility to meet their performance targets; (iii) creating up-to-date position descriptions and job classification capabilities, establishment registers, and personnel data files; (iv) proposing improved salary schedules and pay adjustment schemes which would be transparent; (v) establishing a uniform salary scale with equivalent remuneration for similar administrative levels, with the possibility of specific incentives in particular institutions and/or positions. The Civil Service Rector Institution will oversee any deviation from the uniform standard. The standardization of the salary scale will be implemented gradually at the pace of project execution; (vi) improving training prograrns, career development, and personnel evaluation processes; and (vii) sharply reducing the rotation of staff due to political considerations. All these horizontal reforms are expected to be implemented in the pilot institutions during phase 1 of the APC. The government will also seek to improve human resource management policies and practices within the reformed framework in non-pilot agencies utilizing national and donor resources as available. Deficient budget and financial management systems. The budget process in Bolivia is seriously flawed. Although a legal framework for a decentralized system exists and strict cash management within the Ministry of Finance (MOF) promotes adherence to fiscal targets, the goals of allocative optimization and efficient resource use are not being achieved. The budget appears to be based on inertial line item adjustments by the Finance Ministry from the previous year's amount, without sufficient regard to medium term strategic priorities, institutional requirements, or prior year outturns. It is further undermined as a strategic planning tool by long delays in congressional approval, upward adjustments during the legislative approval process which are frequently rendered meaningless due to overriding cash limits, and unpredictable spending caps, inter-agency redistribution, and daily payment authorizations/denials by the Finance Ministry due to cash constraints. Moreover, there are serious accounting, computational, and information system problems. Despite implementing an Integrated Financial Management (LACO) project since 1987 (an effort which has sparked similar reform efforts throughout Latin America) Bolivia has not met program goals of operational decentralization and normative centralization, due to several factors including bureaucratic resistance, lack of ownership of the project, and weak implementing capacity. The broader management and planning systems and regulatory framework contemplated in the 1990 SAFCO legislation have yet to be applied. As a consequence of all of the above, line agencies do not have an appropriate level of responsibility over their own budget planning, formulation, and implementation, with negative results on effectiveness, efficiency, and results orientation, the Ministry of Finance has serious concerns about the agencies' abilities to properly utilize resources, and senior officials and especially the Congress are hampered in making strategic decisions on national resource allocation. The Government is committed to a comprehensive budget reform. A two track process will involve: (i) reinvigorating the integrated financial management effort; and (ii) initiating a comprehensive budgeting by results program. The first aims to establish during 1999/2000 a public sector financial management system that integrates, through uniform standards and procedures as well as modern information technology, the sub-systems of accounting, budgeting, cash management, public investment, and control/audit in order to provide decision makers with accurate, and timely financial inforrnation. As the entire system is developed, tested, and staff in the MOF and agencies are trained, line ministries will be able to increase their responsibility for budget, accounting, treasury, and internal audit functions. This would improve their ability to design and execute activities more in line with client needs and agency capabilities, but with appropriate transparency and accountability. Modem information technology systems will permit this deconcentration while maintaining appropriate oversight by the rector institutions (MOF and CGR). To this end the Finance Ministry has supported a fundamental reassessment of the integrated financial management project and adopted an action plan to promote its full implementation

ProjectAppraisalDocument Country:Bolivia

Page6 ProjectTitle: InstitutionalReformProject

throughout the public sector. This effort will be supported by the existing ILACO project as well as the IRP through the organizational restructuring program described below. This effort will entail close coordination among the MOF, CGR, and the two Bank projects. The budgeting by results effort is designed to increase the use of the budget as a tool of strategic planning and efficient resource use. It will involve reforms within the MOF, line agencies, and the legislature. Its aims to: (i) improve the quality of budget decision making by incorporating a result oriented budget, performance indicators, goal setting and performance evaluation system; (ii) enhance congressional analysis and decision making in the approval of budgets by improving the quality of budget presentation and fostering legislative competence in budget review; and (iii) strengthen long term budget execution by making budgets more transparent and predictable. This would include gradually replacing case-by-case cash authorizations with cash flow programming as well as using multiyear programming to promote more rational inter-temporal planning. The IRP will support this effort through the organizational restructuring efforts within the MOF and other pilot lines agencies. This involves reforms in the structure and functioning of the MOF's substantive national budget operations. To initiate this process the Ministry is already conducting a zero-based budgeting exercise for 2000 to better identify current spending activities and future priorities. Delegation of responsibility over the budget will increase as the oversight capabilities provided by the new financial management systems are developed and the MOF gains confidence in these reformed line agencies. Limited Accountability. There does not exist in most agencies a focus on performance and results. Evaluation of staff in an organized and objective manner is non-existent, and agency performance likewise is rarely assessed or reflected in national budget decisions. The lack of incentives undermines performance and efforts to improve service delivery. A tradition of excessive centralization, bureaucratic rules, and distrust of citizens and civil servants alike further inhibits initiative and performance. To reinforce the reorientation toward results and client service facilitated by the financial management and human resources reforms of the IRP, the Government plans to create a national evaluation system to explicitly promote a performance culture. Located in the Ministry of the Presidency and reporting directly to the President and the oversight National Integrity Commission, a core group of staff will seek to identify key performance indicators for each agency in collaboration with those agencies and the Ministry of Finance. Emphasis would be placed on indicators that are monitorable, and critical to the attainment of the agency's mission. Performance would be measured by ministries' annual operating plans, budget outturns (supported by implementation of the ILACO project), agency reports, and through citizen and customer surveys. A National Evaluation Report would be published annually. The evaluation system would support a budgeting by results approach, help track the implementation of the IRP supported organizational reforms, and increase citizen awareness of their rights for service delivery. It is anticipated that implementation of the evaluation system would be initiated in a positive and cooperative manner with line agencies with the aim of increasing confidence in the use of such indicators as a management tool. Poor performance in meeting indicators would be used to trigger remedial measures and increased efforts, not necessarily reductions in budget allocations. The goals are positive reinforcement of initiatives and risk taking, and a degree of competition within the public sector, without creating disincentives to ambitious goal setting and honest reporting. This national evaluation effort will be especially relevant in the pilot agencies which will be rationalizing their missions, reorganizing their structure and functions, and reorienting their operations toward client service and results. Corruption. Corruption appears to be rampant within certain sections of the public administration, confirmed by surveys financed by WBI and internal Bolivian studies. Citizens regularly complain about the police and low level government staff while the business community targets Customs and Internal Revenue as rife with corruption with serious implications for confidence,fiscal performance, and macroeconomic stability. The Government is working to design and implement a National Integrity Program (NIP). On September 21, 1998 an inter-institutional agreement (Vice Presidency, mninistriesof the Presidency, Finance, and Justice, Attorney General, Comptroller General's Office, President of the Senate, President of the House of Representatives, Supreme Court, and Judicial Council) established a high level National Integrity Commission (CNI) chaired by the Vice President to oversee a major anti-corruption effort. A national integrity workshop was

ProjectAppraisalDocument Country: Bolivia

Page 7 ProjectTitle: InstitutionalReformProject

held in November, 1998 with representatives of civil society and the government, with strong support from WBI to devise a comprehensive NIP aiming at changing public and civil service attitudes and behavior. This program encompasses a series of reforms, specific anti-corruption initiatives, and in general a redefined relationship between the government and society. To aid this effort the IRP would support legal reforms, public education, streamlining of bureaucratic procedures, procurement reform, capacity building in the Ombudsperson's office to encourage denunciation of corruption, institutional strengthening in the Comptroller General's Office to improve its capacity in forensic audits techniques, and the establishment of information systems to disclose assets and incomes of public officials. An important aspect of the IRP will also include a social communication effort to encourage ethical behavior and explain citizens their rights and responsibilities, the scope and character of the changes being initiated, the progress achieved and the challenges remaining. Poor service delivery by organizations. With a few notable exceptions (the Central Bank, the Office of the Comptroller General, and the Electoral Commission among others) public sector agencies do not perform adequately in delivering services to citizens or other units of government, providing policy advice, or regulatory oversight. State organizations suffer from serious structural deficiencies. Key among them are: (i) many ministries are not fulfilling their stated missions nor ensuring that their activities reflect current Government priorities; (ii) legal mandates are confusing and sometimes overlapping; (iii) human resources are weak and subject to high turnover; (iv) core management systems are absent, facilitating organizational fragmentation within agencies with large numbers of autonomous "management units" pursuing independent agendas; (v) inadequate mechanisms for target setting and performance measurement, poor information systems, and the lack of feedback into the budgetary process attenuate performance and accountability; (vi) various administrative services are provided within agencies and would be best out-sourced to the private sector; (vii) a high proportion of donor funding to total resources available to some ministries increases the influence of donors' interests and objectives, which may diverge with those of the Government,heightening confusion and fragmentation; and (viii) excessive resort to the creation and elimination of ministries depending on the perceived short term political needs of the Government's coalition of parties. Given the widespread demand for improved and honest service delivery, the Government has decided to embark on this phase of state modernization by seeking to implement in a coherent fashion all of the critical systemic reforms in specific organizations. As such, organizationalreform would be at the heart of the state modernization program and the proposed APC/IRP. It would aim at creating results oriented organizations which would provide improved services and act as tangible models for expanding reform to other agencies. The goal, under the philosophy of the SAFCO law of normative centralization and operational decentralization, is to increase the functional discretion of line ministries to meet their mission goals, subject to improved accountability systems and oversight by the rector organizations. The success of the model agencies in terms of public awareness of improved service delivery would be the best guarantee that the specific adjustments in individual agencies (including the recruitment and retention of qualified staff) and the overall APC focus on behavioral and institutional reforms will be maintained through changes in national administrations. The Government has identified possible candidate agencies to initiate the reform process in this first phase project, including the Ministries of Finance (including Internal Revenue and Customs Services), Agriculture, Housing, Sustainable Development, and Education. They were carefully selected through a matrix process, with input from bilateral donors, giving primary emphasis to the criteria of agency leadership and commitment to reform, and the agency's critical role in the institutional reform process. In addition, given the importance of the decentralization process in Bolivia, a prefecture government will be selected, with the assistance of bilateral donors and the Bank, taking into consideration synergy possibilities from existing institutional capacity strengtheningprojects, as well as leadership commitment and potential for success. The number of organizations to be restructured will depend on several factors including the government's fiscal capacity to fund on a sustainable basis increased salaries in the pilot agencies, project implementation capacity and experience, emerging reform opportunities, additional donor financing, and the costs of reform derived from the ARI process. The Government has indicated its intention to initiate the restructuring process in the Finance Ministry given its importance to financial management, budgeting reform, and revenue collection. The project currently estimates total (Government, bilateral donor, and Bank) funding sufficient to fund the Ministry of Finance (including Internal Revenue and Customs Services) plus four of the remaining candidate ministries and one prefecture.

ProjectAppraisalDocument Country:Bolivia

Page 8 ProjectTitle: InstitutionalReformProject

Organizational reforms are aimed at three key elements: (i) legal framework reform relating to the mission and functioning of the organization including the elaboration and implementation of the regulatory structure envisioned under the 1990 SAFCO law; (ii) organizationalrestructuring and strengthening including completing job descriptions of all positions, changed management layering and reporting responsibilities, management information systems, business process reengineering; and (iii) human resources renewal. The process would commence with diagnostic reviews of the mission, structure, and function of the agency, with a view toward identifying and eliminating duplication and fragmentation, contracting out or privatizing functions wherever appropriate, strengthening program formulation, human resources capacity, and financial management, reengineering business processes, and creating evaluation programs within the agency to strengthen the institution's ability to execute a well defined mission. Based on such studies the pilot agency would design an Organizational Reform Agreement (ARI) laying out specific actions to be undertaken to reform the agency with the aim of achieving measurable improvementsin program effectiveness (including three key services per agency to be tracked as APC performance indicators). The ARIs would be reviewed and approved by the policy level National Integrity Commission, as well as the Bank. They would be used as operational documents whose design and negotiation as well as implementation over an anticipated three year period would require the conmnitment and ownership of the pilot ministry. They would also serve as transition instruments, acclimating the agencies to more rigorous development, achievement, and evaluation of performance results, and serve as yardsticks to trigger disbursements from the IRP and subsequentphases of the APC. The restructuring process would put particular emphasis on change management in order to spark the culture change permitted by new management systems, staff, and compensation levels. Explicit change management efforts, drawing on the wealth of experiences from private sector and other organizations inside and outside Bolivia, would be pursued in individual agencies and supported by the CNI across all reforming agencies. Service evaluations in conjunction with the National Evaluation system would track the process of reform, provide feedback, and help implant a focus on service delivery. Advisory groups representing clients of pilot agencies (for example the Customs Council with respect to the Customs Service) would also give feedback, and reinforcement, to each pilot agency. The project would provide explicit incentives to pilot agencies meeting ARI targets by providing them greater scope for budgetary formulation and execution, increased responsibility for human resource management, improved pay, and increased training. Specifically, the project would fund technical assistance, training, and informationtechnology within the ARI process. The Bank and bilateral donors would also finance, on a declining basis, a portion the incremental recurrent costs for increased salaries for managerial and professional positions. Professional salaries are projected to more than double on average to a level equal to the 64th percentile of private sector wages. The Government believes that the non-monetary benefits of public service will reduce the remaining gap somewhat, but within the fiscal constraints explained below will seek to adjust salaries further if possible. Salary decompression will also be promoted in order to better reflect market prices for skilled managers and scarce skills such as information technology specialists. This investment is critical to ensure that the new organizations can attract and retain adequate staff to implement the systemic reforms and create sustainable results oriented organizations. By providing funding for salaries through the government (rather than through the facade of widespread "consultancies"), the process would address the key human resources problem without the current complications of internal inequity and low morale, donor driven staffing patterns, and inappropriate incentives to staff performance. External funding would be provided on a declining basis designed to disappear fully at the end of the project when the salaries would be fully financed by the Govemment. The precise extent, phase in, and funding implications of these personnel decisions will depend in part on the results of diagnostic studies determining the staffing needs and existing skill mixes in each agency. The fiscal implications of the expected higher salaries have been carefully analyzed by the Government and Bank, and reviewed by the 1MF. An indicative plan has been prepared to raise salaries in a manner consistent with prospective bilateral and Bank financing, the Government's macro-economic targets and fiscal capacity, as well as the pace of agency reforms (see Annex 4). In light of the expected reductions in staffing the overall wage bill for the central government is expected to decline from 0.77 percent of GDP in 1998 to 0.62 percent in 2008. This projection, which takes into account inflation, the Government's liabilities under its social security reform, as well

ProjectAppraisalDocument Country: Bolivia

Page 9 ProjectTitle: InstitutionalReformProject

as improved revenue collection and efficiency gains, is deemed to be realistic and sustainable. Credit disbursement to support the new civil servants and their enhanced salaries would be conditioned on semiannual performance and financial audits of agencies' adherence to ARI targets and staffing levels. Care will be taken in these audits to review the hiring and maintenance of qualified staff without regard to political, gender, or ethnic background. The ARI process would be undertaken in all pilot agencies seeking broad based institutional/organizational reforms and not addressing specific sectoral issues which may go beyond the funding capacity of the IRP, policy mandate of the National Integrity Commission, or absorptive capacity of the project officials. In the case of the Customs Service, however, the IRP would fund some substantive reforms and investments in line with a comprehensive program developed by the Government, Bank, and IMF, and supported by several bilateral donors. These investments are considered justified given their critical impact on Customs Service and its importance to the Government's (and IRP' s) revenue and anti-corruptiongoals. The extent of the ARI process for the selected prefecture government may also diverge slightly from the ARI model. Decentralization is a major national goal in Bolivia, authorized by landmark legislation in the mid-1990s. Its ultimate shape and the precise nature of relations and responsibilities among the central, prefecture (a regional unit whose governor is appointed by the President), and independent municipal governments are being debated and refined through various national initiatives and projects financed by donors and international agencies, including the Bank. The National Integrity Commission plans to pilot the ARI process in a prefecture (to be determined in consultation with donors which have ongoing projects in several candidate regional governments) during this first phase of the APC. This effort will be preceded, however, by a careful assessment of the changing legal and policy framework for prefectures so as to minimize the risks of duplication, policy confusion, or waste. 3. Sector issues to be addressed by the project and strategic choices:

The proposed project builds on several projects and sector work. The projects include the existing integrated financial management and judicial reform projects, sectoral projects financed by the Bank and other donors, and considerable diagnostic work for a Civil Service and Administration Reform (CSAR) Project. Sector work includes WBI's work with the National Integrity Program, the 1999 Public Expenditure Review, and the National Institutional Review. Several strategic choices were made: 1. The government faced an early decision whether to proceed with the CSAR, which aimed to finance on a declining basis the salaries of competitively recruited civil servants placed in key positions throughout the central government. In fact some 260 staff had already been hired competitively and placed in a variety of agencies, financed in part by contributions from bilateral donors and a Project Preparation Facility (PPF) advance. After careful consideration the new Government asked the Bank in 1997 to suspend preparation of the CSAR project. It viewed the project as fiscally unsustainable, too narrowly focused on human resources without the complementary reforms in management systems, culture and organizational changes, as well as dependent on an overly centralized personnel management system. The Governmentdecided to significantly change the approach and to include the missing aspects by implementinga new human resources system in organizations undergoing a restructuring process. This would direct new staff into reforming agencies to better ensure a critical mass of qualified employees subject to the new incentive structure of performance evaluation, national integrity, and decentralized financial management. The Government is seeking to maintain bilateral donor funding for key civil service positions outside of the pilot ministries during the interim period before these agencies are restructured. 2. Concerns were raised regarding the need to embark on a costly and possibly disruptive program of staff recruitment requiring all staff to reapply together with outside candidates in a process of merit recruitment. The Government recognized, however, that the low capacity of existing staff in many agencies (and sometimes with serious concerns regarding their honesty) required a sifting process to ensure the credibility of the program. It is anticipated that, in order to achieve quality and promote transparency,private sector personnel firms would assist in the identification and testing of candidates. Comprehensive and landmark legislation to be approved by the Congress prior to credit effectiveness mandates a merit based civil service providing for an administrative career track based on results and performance evaluation, and an independent appeals process. The aim of the law is to signal a broad based commitment to end the patronage system within the government and to establish a new

Project Appraisal Document Country: Bolivia

Page 10 Project Title: Institutional Reform Project

human resources regime focused on employee efficiency, operational effectiveness, enhanced transparency, and protection of the public interest. 3. The pilot ministries were selected from agencies with a proven leadership committed to reform and/or critical to the project's success. Potential candidate agencies already identified include rector (Finance) and line (Housing and Agriculture) organizations and government priorities (revenues needs dictating reform of the tax administration agencies, and poverty alleviation prompting support for the Sustainable Development and Education ministries). The project design encourages agencies not currently designated as pilots to enter into the ARI process if and when additional financing from the Government, bilateral donors, other Bank projects, or the IRP itself are secured. Bilateral donors which are co-financing the project were most concerned to extend the reform process to the Ministry of Sustainable Development (an agency with important responsibilities in the areas of indigenous development, gender advancement, and environmental protection) as well as the Ministry of Education. 4. The bulk of public employees (especially teachers and health workers) are under separate employment schemes. The Government is addressing their salary issues through sectoral reform programs supported by the Bank designed to decentralize education and health workers to municipal governments. 4. Program description and performance triggersfor subsequent loans: The APC contemplates three separate projects over a ten year period. The first phase Institutional Reform Project would initiate fundamental institutional reforms (changes in the legal and incentive frameworks) in the key areas of human resource management, budgeting, national integrity, and personnel and organizational evaluations. The integrated implementation of these reforms plus accelerated deconcentration of functional responsibilities would be tested and consolidated in the pilot agencies, including at least one prefecture government. Subsequent operations would extend these organizational reforms to other entities (and deepen the institutional changes as needed) while applying lessons learned in the preceding phase. Phase II is expected to address all remaining prefecture governments plus the Ministry of Health and several smaller agencies, and Phase III will complete the reform process in the remaining entities.

TriggerIndicatorsfor Phase2 *

Full operation in five pilot agencies of integrated financial * management system (ILACO) accounting, cash management, and internal audit procedures and (SIIF) information system. *

*

Use of budgeting by results and medium term budget framework * in five pilot agencies. *

*

Full operation in all pilot agencies of civil service system with at * least 60 percent of their professional staff incorporated into the * new regime; and the Treasury fully meeting its share of additional salary costs.

*

National Integrity Plan operating in pilot and rector agencies indicated by functioning of Asset and Income Declaration system, forensic audit system functioning in Comptroller General's Office, and three major bureaucratic procedures revised to reduce average service delivery time by 50 percent.

*

Performance evaluation system functioning indicated by publication of annual National Evaluation Reports.

*

Results oriented agencies indicated, in at least five agencies, by: restructuring and staff adjustments completed under ARIs;

Meansof Verification Annual meetings with technical staff of ARI agencies Annual National Evaluation Reports Project progress reports Reports from rector and pilot agencies National budgets CGR reports

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Page 11 Project Title: Institutional Reform Project

Trigger Indicators for Phase 2 agencies managing the hiring, promotion, pay, and evaluation of their human resources; performance oriented management and evaluation systems operating; and 20 percent improvement in at least three of five critical performance indicators (identified during preparation of ARIs) measuring service delivery in each agency. *

*

*

*

Means of Verification

Revenue collection in 2003 from Internal Revenue and Customs at 8.7 percent and 6.4 percent of GDP respectively. Trigger Indicatorsfor Phase 3 Full operation in all Phase 1 and two thirds of Phase 2 agencies * of integrated financial management (ILACO) accounting, cash management, and internal audit procedures and (SIIF) * information system. * Full operation in all Phase 1 and two thirds of Phase 2 agencies * of budgeting by results and medium term budget framework * Full operation in all Phase 1 and Phase 2 agencies of civil service * system with 100 percent of Phase 1 and 60 percent of Phase 2 * agencies' professional staff incorporated into the new regime; and the Treasury fully meeting its share of additional salary costs.

*

National Integrity Plan operating in all Phase 1 and Phase 2 agencies indicated by functioning of Asset and Income Declaration system, forensic audit system functioning in Comptroller General's Office, and three major bureaucratic procedures revised to reduce average service delivery time by 50 percent;

*

Performance evaluation system functioning indicated by publication of annual National Evaluation Reports.

*

Results oriented agencies indicated, in all Phase 1 and two thirds of Phase 2 agencies by: restructuring and staff adjustments completed under ARIs; agencies managing the hiring, promotion, pay, and evaluation of their human resources; performance oriented management and evaluation systems operating; and 20 percent improvement in at least three of five critical performance indicators (identified during preparation of ARIs) measuring service delivery in each agency.

*

Revenue collection in 2006 from Internal Revenue and Customs at 9.6 percent and 7 percent of GDP respectively.

Means of Verification Annual meetings with technical staff of ARI agencies Annual National Evaluation Reports Project progress reports Reports from rector and pilot agencies CGR reports National budget Regional government budgets

Project Appraisal Document Country: Bolivia

Page 12 Project Title: Institutional Reform Project

C: Program and Project Description Summary 1. Project components (see Annex 1): Component

Performance Evaluation . * *

Create legal framework Design evaluation systems Rector unit capacity building

National Integrity * . * * . .

Legal frameworkreform Development of prevention policies and mechanisms Ombudsperson's Office Streamlining of bureaucratic procedures Procurement reform Social communication

Civil Service * * *

Legal frameworkreform Personnel systems development Rector institution capacity building

Organizational Reform . * *

Restructuringlstrengtheningof pilot agencies Support for professional cadre positions in pilot ministries Budgeting reform

Reform Management .

Project coordination unit

Category

Indicative Costs (US$M)

% of Total

Bankfinancing

% of Bank-

(US$M)

financing

Policy, Institution Building

1.8

2.5

1.2

3.8

Policy, Institution Building

5.7

7.9

4.0

12.5

Policy, Institution Building

2.4

3.3

1.7

5.3

Policy, Institution Building

59.3

82.4

23.2

72.5

Program and Project Management

2.8

3.9

1.9

5.9

Total

72.0

100.0

32.0

100.0

2. Key policy and institutional reforms to be sought: Covered in parts B.2 and B.3

3. Benefits and target population: The benefits of the project will be the creation of a more effective, efficient, and transparent public sector. Systemic reforms in human resource management, budgeting, results oriented financial and program management, and reductions in corruption within the context of modernized agencies will enable the Bolivian Government to better meet its poverty alleviation goals. The primary beneficiaries will be the restructured government agencies. Secondary beneficiaries will be Bolivian citizens and investors who will receive improved services at lower cost from the public sector.

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Page 13 ProjectTitle: InstitutionalReformProject

4. Institutionaland implementation arrangements: Project Coordination and Management. The Government has created a National Integrity Commission (CNI) to oversee its program of state modernization as well as its anti-corruption effort. The explicit linkage between these two efforts highlights their close interrelationship and should provide momentum, synergy, and practical integration. The Vice President of the Republic chairs the commission, which is comprised of the Minister of the Presidency, the Minister of Finance, the Minister of Justice, a delegate from the Senate, a delegate from the House of Representatives, a delegate from the Supreme Court, the Comptroller General of the Republic, the Attorney General, and a representative of the Judicial Counsel. Consultative groups representing civil society (including the Church, media, labor unions, and the private sector) and external donors are being established to advise the CNI and a series of conferences organized during 1999 with these groups to help support the design and implementation of the National Integrity Plan. The Commission is expected to play a key role in critical policy decisions relating to IRP implementation, review and approval of ARIs, and oversight of implementation of horizontal project components. It will serve as the focal point for state reform, ensuring that other programs and projects under the supervision of the Government support the policy guidelines of the NIP. A Project Coordinating Unit (PCU) reporting directly to the CNI will be responsible for administration of the project, as well as serving as the Secretariat to the CNI. The PCU will manage the procurement and disbursement aspects related to contracting of consultants, financing of salaries, and the provision of goods and equipment under this project. The PCU will coordinate the provision of technical assistance services to the beneficiary agencies in accordance with procedures specified in a project implementation manual. The comprehensive scope of the project necessary to effect the interrelated systemic reforms will require significant use of both international and national consultants. A primary task of the PCU will be to carefully monitor such activities. Beneficiary implementing agencies will be responsible for drafting terms of reference and submitting these to the PCU for review. The PCU will ensure that bidding, procurement, contracting, and disbursement takes place within Bank guidelines and the IRP credit agreement. The PCU will also be responsible for preparing or reviewing specifications for all equipment purchases. The PCU will be headed by a Project Director, and include a procurement expert, chief financial officer, and experienced professionals assigned to oversee the following project activities: State Modernization, National Integrity, and Social Communications. In addition, the PCU will work closely with the management of the LACO (integrated financial management) and Judicial Reform projects to ensure their integration into the PSM program. Each agency implementing restructuring agreements would have change management teams to oversee the restructuring effort. These teams in large agencies would manage and coordinate their respective project components through small individual units, reporting to the PCU. The PCU would provide more direct support to teams in the smaller agencies. In line with Bolivia's status as a pilot under the Bank's new Comprehensive Development Framework (CDF), a joint Government/Bank team is expected to be created to support the Institutionality Pillar of the Government's development program. A full time Bank co-leader of this team will reside in La Paz with the aim of helping supervise the integration of all project components involving institutional change and capacity building including integrated financial management, judicial reform, decentralization, and reforms within sector ministries in addition to the IRP. Bilateral donors (including Denmark, Germany, Japan, and Sweden) have played an important role in the development of the project by providing financing, and/or participating in missions, and in project negotiations. Representatives of co-financiers will participate in the supervision of the IRP through the Institutionality Pillar work. This will include quarterly joint meetings between the Government and its financiers as well as joint annual reviews of the project. Funding expected to be provided by Denmark and Sweden will be administered by the Bank with the aim of minimizing the transaction costs of the Government and PCU. Accounting, Financial Reporting and Auditing. While the PCU has gained experience in managing accounting and procurement matters through the execution of the Project Preparation Facility effective since June, 1996 the current financial management system needs to be reinforced and expanded. The PCU will have a financial department headed by a qualified financial officer and staffed by an accountant to keep adequate records and

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Page 14 ProjectTitle: InstitutionalReformProject

prepare the financial statements, and auxiliary staff to execute financial operations and provide control over project assets. The PCU will have a double entry automated accounting system comprising a general ledger and supporting subsidiary records. The account structure used to record expenditures will comprise 3 classifications: the government budget classifications; the component and sub-component of the project document; and the cost categories. The automated accounting system will be Y2K compliant and contain the required security features. The PCU will develop and document the detailed procedures of all financial operations: cash receipts, disbursements, control over advances, replenishment procedures, account reconciliation and controls, and reporting requirements. These procedures and job descriptions will be included in the Operations Manual. The manual will also provide the application of the SAFCO laws. Each unit would prepare six-monthly progress reports with procurement and financial indicators required for Bank review during the execution of the project. The PCU will have in place, by effectiveness, both the staff and financial management systems satisfactory to the Bank. It has undergone an assessmentby a Bank Financial Management Specialist and has presented to the Bank a satisfactory action plan to develop its capacity to prepare quarterly Performance Management Reports within 12 months. External audits in accordance with the terms of reference acceptable to the Bank will be engaged annually and the opinion with the related statements presented to the Bank within 4 months of the fiscal year end. In addition to the financial year end audit two concurrent audits will be conducted yearly to ensure acceptability of project financial management, pilot agency adherence to ARI conditions, and incremental recurrent costs associated with pilot agency salaries. Monitoring and Evaluation Arrangements. In line with the APC concept, special emphasis will be placed on continuous monitoring and project supervision, identification and incorporation of lessons learned, and consensus building. Performance indicators to measure inputs and process, and outputs and outcomes are defined in Annex 1. Schedule 4 of the Development Credit Agreement (attached to Annex 1) includes annual performance benchmarks to justify continued credit disbursements. Diagnostic assessments of pilot agencies undertaken as part of the ARTprocess as well as surveys to establish baseline data, conducted during the first year of project implementation under the direction of the Performance Evaluation Unit, would help identify additional performance indicators which will validate continued disbursements to pilot agencies. Subsequent surveys, as well as the National Evaluation Reports and national budget documents, would measure the evolution of service delivery, transparency, and efficiency of pilot agency operations. Using these sources of information plus intense project oversight by the PCU and CNI, the coordinators of each component in the PCU would be responsible for gathering and sharing information from pilot agencies and rector institutions. To promote project integration and learning across agencies, semi-annual workshops with all entities participating in the project would be held to review progress achieved and decide on necessary adjustments, discuss the draft progress reports, and review proposals for the following year. The oversight provided by the CNI, plus its consultative groups from civil society and external donors, offer additional vehicles for feedback and development of broader political consensus during project execution. Annual Project Plans (APP) prepared for each forthcoming project year would include an evaluation of lessons learned in the past year plus detailed activities and costs, and expected government, Bank, and donor contributions. They would be discussed and agreed with co-financiers, and then submitted to the Bank for review each year no later than November 30. Joint semi-annual project review missions would be supplemented by project supervision visits, oversight from the resident mission by the Institutionality pillar team leader, as well as quarterly meetings in La Paz of the authorities, Bank, and donor representatives. Specific trigger indicators (see B.4 above) would be used to assess achievements at the end of each phase and to decide on the financing for subsequent phases. A project launch workshop consisting of the PCU, rector institutions, and pilot agencies would be organized by the PCU to reinforce implementation and define monitoring responsibilities. Upon project completion the CNI would submit to the Bank, six months before the closure of the credit, the project implementation completion report and a plan for the subsequent phase of the APC.

Project Appraisal Document Country: Bolivia

Page 15 Project Title: Institutional Reform Project

D: Project Rationale 1. Project alternatives considered and reasonsfor rejection: The main alternative considered was to design a traditional Technical Assistance Credit rather than an Adaptable Program Credit (APC). The Government, project team, and Bank management concurred that the APC was the more suitable instrument. First, the Public Sector Modernization program is less amendable to the traditional input driven technical assistance project as there is a need to address broader issues of civil service pay as well as to ensure a flexible and long term commitment by the borrower and Bank to this process. The program would support a complex and comprehensive reform effort covering a wide range of stakeholders with differing interests (citizens, civil society, government agencies, civil servants, donors, several Admninistrations)and must provide for a range of possible interventions. The APC would give the flexibility to adapt program design and financing using the pilot agencies as learning tools. Given the challenges involved, a ten year program is better suited to achieve development objectives at the borrower's pace and capacity. As experience builds and institutional capability increases during the implementation period, the program can be accelerated. Likewise, the use of the APC would help build consensus and ownership among critical stakeholders as to the importance of moving ahead with public sector modernization. Finally, the APC would serve as a useful vehicle for coordinating donor activities and enlisting their support for the program. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sectorissue

Project

LatestSupervision (Form590)Ratings (Bank-financed pro ects only) Implementation Progress (IP)

Development Objective(DO)

Bank-financed

Overlycentralizedand cash-basedfinancial managementsystemslimiting responsivenessof executingagencies

Public Sector Financial Decentralization(integrated financialmanagement)

S

S

Weak,non-transparent,unresponsive judicial system

JudicialReformI and II (the latter in preparation)

S

S

Deficient legal framework,weak rector organizations,and excessivestate role in the financialsector

RegulatoryReformand Privatization

S

S

Weak municipalgovernments

MunicipalDevelopmentn

In Preparation

Otherexternaldevelopmentagencies Improvingcustomsadministration Improvinginternalrevenue administration

IMF, IDB,Japan, Sweden IDB

Strengtheningcapacityof the Sustainable DevelopmentMinistry

GTZ

Developingcapacityof selectedprefectures Denmark and municipalities Strengthengovernance

IDB

Improvethe administrationof justice

USAID

Fundingof new Civil Servicepositions

Denmark,Germany, Sweden

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory),U (Unsatisfactory), HU (Highly Unsatisfactory)

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Page 16 ProjectTitle: InstitutionalReformProject

3. Lessons learned and reflected in proposed project design: Key lessons learned in World Bank projects and applied in this operation include the need for borrower commitment, strong project leadership, and an appropriate macro-economicframework. As indicated above the Government has established a high level oversight commission and created a strong project coordinating unit within the CNI. Project supervision will also be intense by the joint institutionality pillar team to be created under the CDF initiative. Applying lessons from Bank's experience is more problematic given the rudimentary state of global knowledge of successful public sector modernization projects. The lessons and behaviors internalized in the developed world after decades of experience and governanceexperimentation are unlikely to be replicated quickly, even if deemed to be appropriate models. Technical assistance, duplication of model laws, imported information technology, however necessary, have been insufficient in many operations to effect a sustainable change in behavior. This is reflected in the key messages emerging from the 1997 World Development Report and the 1998 Latin America and Caribbean Region Study "Beyond the Washington Consensus--InstitutionsMatter". In line with the WDR, the project: (i) builds on the redefinition of the role of the Bolivian state, by supporting decentralization, contracting out, and privatization in the pilot agencies; (ii) seeks to match the role of the state to its capability, in this case a small state with a normative role in economic development seeking to assure the transparent rule of law, (iii) building a better public sector in the remaining core activities by strengthening service delivery through various measures including modernized and open financial management, results-oriented policies for organizations and personnel, and explicit evaluation initiatives based in part on citizen inputs; and (iv) sequencing reforms cautiously by targeting key rector and line agencies, rolling out reforms as capacity increases, and using a ten year program to test, refine, and expand the modernizationeffort. The Bolivian authorities, anxious to strengthen the country's ability to compete in the global economy, are dedicated to creating political and economic systems that respect rules. Reflecting the Bank's regional experience, they recognize that merely changing formal rules, within a culture and incentive structure that values informality, is doomed. Therefore the project aims at changing incentives to affect behavior. The strong focus on civil service selection, contracted tenure, and pay, budgeting by results, personnel evaluation systems, practical measures to prevent and prosecute corruption, and targeted information technology investments all aim to create new results oriented organizations. A key challenge will be to ensure that these beachheads are then expanded rather than become isolated. The emphasis placed on learning lessons and building consensus, citizen surveys and published evaluations, as well as the presence of the Bank and donors through the ten year period should help expand these successes. Lessons from credit administration in Bolivia have also been addressed. Delays in the procurement of goods and services have been experienced in previous projects due to weaknesses in the project unit, the organization of procurement, and/or the payment system. This project will aim to remedy this through the training of professional staff in Bank procedures and the development of operational guidelines prior to project effectiveness. Particular attention will be placed on the nexus of disbursement procedures, financial reporting, and auditing in light of the proposed partial funding of salaries. While problems with the prompt delivery of audit reports have been experienced in some projects, holding the audit firm accountable directly to the project unit and the Bank has largely resolved this difficulty. The joint institutionality pillar team is expected to significantly strengthen supervision and the ability to identify and overcome problems, to take advantage of emerging opportunities, and to promote synergy among separate Bank projects with capacity building and institutional reform components. 4. Indications of borrower commitmentand ownership: The Government identified institutional strengthening at the beginning of its tenure as a key pillar in its development program. It has created a National Integrity Commission and National Integrity Plan to help guide its implementation. The most senior officials of government have been actively involved in the design of this project, including drafting of this PAD. A strong counterpart team has been established. Passage of the landmark civil service legislation will confirm a broad based buy-in by key stakeholders and political parties for fundamental institutional reform. The Government intends to submit Customs reform legislation to make the

Project Appraisal Document Country: Bolivia

Page 17 Project Title: InstitutionalReform Project

agency more autonomous, self financed, and with leadership nominated by the President (from a list of candidates proposed by a mixed public and private sector council) and approved by the Congress (a significant change from current practice). Similar reforms will be proposed for the Internal Revenue Service. The Government's Letter of Development Program signed by the Vice President and Minister of Finance carefully lays out the Government's vision for public sector modernization over the next 10 years (see Annex 11). The Government also signaled its commitment to the operation and the broader reform program at the Consultative Group meeting held in Paris in April 1998. In La Paz the authorities have met on a regular basis with a broad group of donors who strongly support the Government's program and who will provide co-financing for the project. Finally, the government is seeking to expand participation in the national integrity program to stakeholders from throughout the country, including various political parties, the media, civil society and external donors. 5. Value added of Bank support in thisproject: Catalytic Role in Project Design. Bank staff have played a catalytic role in the design and implementation of the reform program. The presence of the project team provided an impetus to bring stakeholderstogether. The most important value added by the Bank would be the program credibility and consistency offered by the Bank's presence during the ten year period of APC implementation. The Bank's leading role in public sector modernization in Bolivia reflects its comparative advantages in: (i) technically sound advice; (ii) rapid transfer of innovations and lessons learned from similar experiences elsewhere; (iii) ability to address cross cutting issues with projects in several line ministries, integrated financial management,judicial reform, as well as in its relations with the IMF. The funding to be provided by the Bank in the area of staff salaries, albeit on a declining basis, will be essential for creating the critical mass of staff necessary to effect a change in service delivery, in giving confidence to Bolivian professionals to seek public employment in the restructuring organizations, and in catalyzing resources from external donors. E: Summary Project Analysis 1. Economic: Economic evaluation methodology: [ ] Costbenefit

[ ] Costeffectiveness

[X] Other[FiscalImpact]

The project is expected to have a substantial positive fiscal impact resulting from the reforms aimed at improving effectiveness in internal revenue and customs collection. With regard to the other components it is difficult to quantify the potential fiscal impact. In the area of Civil Service reform, substantial allocative efficiency gains are expected from the strengthening of human resource policy and management. The anticipated increased wage bill stemming from adjusted salaries would be partially offset by anticipated reductions in the work force. The Government is expected to fully fund increased civil service salaries by the end of the APC as the wage bill falls as a percentage of GDP. In the area of organizational restructuring,it is expected that the diagnostic studies of the pilot agencies will provide the government with sufficient basis for identifying and eliminating duplication and obsolescence in public sector programs. Services to the public offered by these agencies are expected to improve as result of the project's efforts to redefine functions, increase capacity, and rely more heavily on market mechanisms. The project could also provide support to the government's intention to streamline the number and composition of ministries with further positive impact on fiscal savings. 2. Financial: Not Applicable 3. Technical: The tasks to be undertaken under this program are demanding and will require substantial input from high quality consultants with experience in organizational restructuring, the design of a modern civil service, anti-corruption activities, and social communications. The work program will rely on internationally experienced and national consultants working closely with government counterparts. Key terms of reference for consulting assistance to be

Project Appraisal Document Country: Bolivia

Page 18 Project Title: Institutional Reform Project

undertaken under the project have been completed. 4. Institutional: a. Executing agencies: Under the guidance and oversight of the National Integrity Commission chaired by the Vice President, the separate project components would be executed by several agencies. The Commission itself, supported by the PCU, would execute the national integrity component. The Ministry of Finance would be responsible for civil service reform (at least pending creation of the rector organization), oversight of the extension of integrated financial managementto pilot agencies, budget reform, and organizational restructuring of the Ministry. The Ministry of the Presidency would develop the National Evaluation system as well as certain aspects of the national integrity program including simplification of bureaucratic procedures. The Comptroller General's Office would take the lead within the National Integrity Program for forensic audit and asset declaration initiatives. Each pilot agency would execute its own restructuring program with close support and supervision provided by the Commission and PCU. b. Project management: The Secretariat to the National Integrity Commission, headed by a permanent project director, serves as the Project Coordination Unit (PCU) The PCU will play an active coordinating and oversight role between responsible agencies, the Bank, and consultants. Project implementation will be helped significantly by the fact that Government staff have had a lead role in the development of this reform strategy. Agreements have been reached on the staffing of the PCU. Both a project implementation plan and operations manual have been prepared and a workshop is planned soon after credit effectiveness to support project launch. 5. Social As organizational restructuring progresses, employees in pilot agencies who do not meet professional or integrity standards, skill mix requirements or fit within reduced staffing limits will be redundant. Although there are neither strong unions nor indemnification requirements in the Bolivian public sector, the authorities have indicated their intention to manage the staffing adjustments in a manner to limit disruptions, possibly including the provision of training resources. The Bank will review these plans with the aim of ameliorating social costs. Significant and positive social benefits are expected as the restructured and strengthened agencies provide more efficient, effective, and transparent public services to citizens. They will also provide more market related compensation and increased job security to their staff. 6. Environmental a. Environmental issues: Environmental Category [ ]A The proposed project is expected to have no environmental impact.

[ ]B

{X] C

7. ParticipatoryApproach a. Primary beneficiaries and other affected groups: As described above (section D.4), project preparation and initiation has involved key stakeholders as a critical element for success. These include senior Executive Branch authorities including the President, Vice President, and several Ministers, staff of pilot agencies, donors, and, through the CNI, representatives of civil society and other branches of Government including the judiciary and legislative branches. The national evaluation reports, citizen surveys undertaken by the CNI, and feedback to social communications campaigns will provide critical information on performance and reform results as perceived by the public. The successful design and implementation of ARIs will depend greatly on the commitment and ownership of the process by the affected agencies. The emphases on learning and consensus building necessarily will require wide participation in, and review of, project execution with the aim of applying successes across agencies and reacting quickly to reform opportunities. It is expected that the program will seek its first models from existing successful agencies in Bolivia, eschewing the automatic importation of external models which could risk reform realism or sense of ownership so needed for a national public sector modernization effort. b. Other key stakehold'ers: Citizens, investors and the business community, bilateral donors.

Project Appraisal Document Country: Bolivia

Page 19 Project Title: Institutional Reform Project

F: Sustainabilityand Risks 1. Sustainability: The Government's goal of improving the delivery of services to citizens is ambitious and requires a well coordinated and interrelated series of legal, institutional, and procedural reforms. The sustainability of the project will depend on: (i) the Government's commitment to implementing the proposed fundamental reforms in public sector operations; (ii) its ability to overcome active and passive resistance and the inherent difficulties of change; and (iii) the quality and productive utilization of the technical assistance provided. Longer term sustainability will depend in part on: (i) maintenance of macro-economic and political stability necessary for increased business confidence and investment; (ii) its success in creating a momentum for reform and credible examples of improved performance that survive the next change of Government; (iii) the success of parallel programs to reform selected public sector operations and to improve the rule of law; and (iv) the government's ability to convince the public through word and deed that the reforms are in fact improving prospects for a majority of the population. The project will facilitate directly the sustainabilityof reforms through a social communications campaign, which will be designed to promote public understanding of and consensus among stakeholders on the objectives and benefits of the proposed reforms. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk

Risk Rating

Risk Minimization Measure

Resistance from special interests and changes in senior officials prevent or reverse advances in creating results oriented organizations.

H

Commitment of the Bank and donors through ten year APC program provides leverage for consolidation and continuation of reform after change in administrations. Focus on organizations with best chance of being "winners". Emphasis on performance evaluation and feedback mechanisms to adjust reform effort. Use of change management to promote culture change and reduce resistance.

Lack of support by key non-public sector stakeholders of institutional and organizational reforms.

S

Publication of performance evaluations, use of citizen surveys, social communication campaigns, focus on reforming high profile bureaucratic processes and corrupt organizations.

S

Fiscal constraints should be eased by reforms in tax administration, efficiency gains in restructured agencies, and ongoing structural adjustments supported by a Bank Structural Adjustment credit. Careful phase in of higher salaries in line with fiscal limits.

M

The active support of the Vice President and key cabinet ministers. The role of the National Integrity Commission to oversee and enforce consistency and coordination. Hiring of qualified project director and PCU staff in consultation with the Bank. Close coordination with Bank through frequent project supervision and direct oversight from the institutionality pillar team leader in the resident mission.

Annex 1, cell "from Outputs to Objective"

Annex 1, cell "from Components to Outputs" Inadequate availability of counterpart funds.

Insufficient implementationcapacity to coordinate interrelated tasks and supervise project components, complicated by turnover of key project staff.

ProjectAppraisalDocument Country:Bolivia Risk Risk Rating Lack of sustained commitment and vision for S reform, or political ability to: * create and sustain merit based civil service * overcome resistance to anti-corruption measures * adhere to results of performance evaluations * implement restructuring of pilot agencies * prosecute successfully corruption and tax evasion * implement integrated financial management reforms in pilot agencies in timely manner

Page 20 ProjectTitle: InstitutionalReformProject Risk Minimization Measure Project has strong Government support. Vice President is among its key architects. Civil service reforrn program has been underway for 24 months and is already being funded in part by external donors. Passage of Civil Service legislation prior to credit effectiveness provides framework for civil service reformn. Anticorruption program, supported by WBI, has attracted widespread interest from civil society. Pilot agencies have been selected based largely on prospects for successful implementation of restructuring and focus on results. Judicial reform being pursued through a separate Bank project. Reprogramming of ILACO project is under preparation.

Overall Risk Rating S RiskRating- H (HighRisk),S (SubstantialRisk),M (ModestRisk),N (Negligibleor Low Risk) 3. Possible ControversialAspects Several possible controversies sparked by resistance to change by special interests including political parties desirous of protecting patronage system, smugglers and tax evaders opposing tax administration reform, corrupt public officials and employees seeking to maintain illegal income, and public employees with inadequate skills resisting exit from public service. G: Main Loan Conditions 1. Board Presentation Condition: -

Initiation of action plan satisfactory to the Bank to redirect the integrated financial management project.

2. Other Credit Effectiveness Condition: *

Approval of Civil Servant's Statute, satisfactoryto the Bank, which creates an independent civil service comrnission, independent appeals body, and establishes a Government Ethics Code.

Disbursement Conditions: * *

Adoption of an ARIs in each pilot agency acceptable to the Bank and satisfactory compliance with its targets. Satisfactory compliance with global project performance benchmarks.

H. Readiness for Implementation [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation.[X] Not applicable. [ ] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] The following items are lacking and are discussed under loan conditions (Section G):

Project Appraisal Document Country: Bolivia

Page 21 Project Title: Institutional Reform Project

I. Compliance with Bank Policies [X] This projectcomplieswithall applicableBankpolicies.

Task TeamLeader/TaskManager:Ronal.

My

SectorManager/Director:

Guillerm

Country Manager/Director:

Isabel Guerrero

Page 22 Project Title: Institutional Reform Project

Project Appraisal Document Country: Bolivia

Annex 1 Institutional Reform Project Project Design Summary Narrative Sumrnary Sector-related CAS Goal:

Key Performance Indicators Sector Indicators:

Monitoring and Evaluation Sector / Country Reports:

To lay the institutional foundations to make development programs effective and to combat poverty on a sustainable basis

Institutional strengthening indicators drawn up by international cooperation experts and the Government

*

Program Purpose: 10 YearAPC

End-of-ProgramIndicators

Annual reports of INE and Ministry of Finance

Critical Assumptions (from Goal to Bank Mission) Political and economic stability Government capacity for setting and maintaining coherent policy priorities

To improve the delivery of public services in terms of effectiveness, efficiency, quality, and transparency

Program Reports:

* * Public satisfaction with public services increasedby * 20% from the base line * Public perception of * corruption reduced by 30% from the baseline * Unqualified CGR financial * e audits for 75% of pilot agencies issued for 2009 * 75% of agencies operating at levels of performance in line with objectives agreed with national evaluation system and national budget * 75% of Central Government and prefectures staff incorporated into the Civil Service regime * Tax collection in 2008 from Internal Revenue and Customs at 10% and 7.4% of

Polls on satisfaction with public services Domestic and external surveys of corruption Reports by the Comptroller General National Evaluation Report Reports by Civil Service entity

(from Purpose to Goal) Continuous commitment of the Bolivian Government to the public sector modernization program

GDP respectively

Project Development Objective: Phase 1 To improve the delivery of public services in terms of effectiveness, efficiency, quality, and transparency in rector agencies and pilot agencies

Outcome / Impact Indicators:

Project Reports:

(from Objective to Purpose)

*

*

Strategy for Phase II of the program is successfully developed

*

*

*

Public satisfaction with services of pilot agencies increased by 20% from the base line by 2003 Unqualified CGR financial audits for five pilot agencies issued in 2003 Five pilot agencies operating at levels of performance in line with objectives agreed with national evaluation system and national budget by 2003 Tax collection in 2003 from Internal Revenue and Customs at 8.7% and 6.4% of GDP respectively

* *

*

Initial and annual polls on satisfaction with public services in pilot agencies Reports by the Comptroller General Evaluations of pilot agencies Finance Ministry revenue reports

Project Appraisal Document Country: Bolivia

Page 23 Project Title: Institutional Reform Project

Narrative Sunmnary Outputs:

Key Performance Indicators Output Indicators:

*

*

Performance oriented evaluation system established and implemented in pilot agencies

National Evaluation Reports published annually beginning in 2001 based on preestablished performance indicators

Monitoring and Evaluation Project Reports: *

National Evaluation Reports

Critical Assumptions (from Outputs to Objectives) Restructured and results oriented organizations and rector agencies maintained despite resistance from special interests and changes in senior officials Acceptance by key nongovernmental stakeholders of institutional reforms (civil service, integrity, results orientation)

*

Mechanisms for preventing and combating corruption implemented

*

*

*

* *

*

New human resources management scheme in force in pilot agencies

*

*

*

Results oriented operating systems installed in pilot agencies

*

*

*

*

Regulatory frameworkon * government ethics (including regulations for Civil Servant's Statute and Ethics * Code) issued by 2001 At least 25 qualified forensic * auditors working in CGR by 2001, and 50 such auditors * by 2003 Three major bureaucratic * procedures revised to reduce service delivery time by 50% by 2003 New transparent procurement system established by 2001. Assets declared by 20% of pilot agencies' staff by 2001 and 80% by 2003 All pilot agencies have * established human resources regulatory framework acceptable to the rector institution by ARI year 2 Establishment register covering all pilot agencies created by 2002 5 pilot agencies have effected * at least 50% of changes * identified in their ARIs by 2002, and 80% in all pilot agencies by 2004 * Medium term budget * framework and budgeting by results operating in 5 pilot * ministries Performance improved in 5 pilot agencies 20% in at least three critical performance indicators (identified during preparation of ARIs) measuring service delivery 35% of pilot agencies'

Publication of the Civil Servant Statute and Code of Ethics Reports of the Comptroller General's office Reports of the Public Ministry Domestic and external corruption surveys Publication of the regulations governing administrationof goods and services

Reports of Civil Service entity, agencies, and quarterly audits

Project reports Reports on recruitment and rehabilitation of staff in 6 agencies Annual staff payrolls Evaluation of the ILACO project Tax agency reports

Project Appraisal Document Country: Bolivia Narrative Summary

Page 24 Project Title: Institutional Reform Project Key Performance Indicators professional staff incorporated into the Civil Service by ARI year 2, and 80% by year 3, and all overall staff ceilings met * 100% of the current wages of the Civil Service financed by the TGN by the end of phase

Monitoring and Evaluation

Critical Assumptions

1

*

Project components/Subcomponents:

Two pilot agencies applying integrated financial management systems by end of 2001, 3 agencies by end of 2002 Inputs: (budgetfor each component):

Performnance evaluation

$1.2 million

* * * *

Design of performance evaluation system Adjusting the regulatory framework Establishing results dissemination system Strengthening the performance evaluation unit

National Integrity * * *

*

Establishment of the regulatory framework System for Income and Assets Statements Strengtheningof the Office of the Ombudsperson and Public Ministry Modernization and simplification of procedures and public registries

Project Reports:

* * *

$4.0 million

Semi-annual project reports Supervision mission reports Initial and annual polls on satisfaction with public services in pilot agencies

(from Components to Outputs) Adequate availability of counterpart funds Sufficient implementation capacity to coordinate interrelated tasks and supervise project components, including low turnover of key staff. Sustained commitment and vision for reform, and ability to * create and sustain merit based civil service * overcome resistance to anti-corruption measures * adhere to results of performance evaluations * implement restructurings of pilot agencies * prosecute successfully corruption and tax evasion * implement integrated financial management reforms in pilot agencies in timely manner

Project AppraisalDocument Country: Bolivia Narrative Summary * Procurement system reform * Citizen education campaign Civil Service Adaptationof the regulatoryframework * Establishingcivil service rector institutions * Creation of a human resourcesregistration system * Reform of training system Organizational Reform

Page 25 Project Title: Institutional Reform Project Key Performance Indicators

$1.7 miilion

*

*

$23.2 million

Setting up change management units * Organizational diagnoses * Implementation of SAFCO systems * Implementation of medium term budget framework and budgeting by results * Financing of Civil Service positions * Evaluation of institutional performance * Within revenue agencies increased assistance to taxpayers, modification of the tax code, improved audit and information systems Reform Management $1.9 million * *

Project Coordinating Unit Evaluation of results

Monitoring and Evaluation

Critical Assumptions

Project Appraisal Document Country: Bolivia

Page 26 Project Title: Institutional Reform Project

Annex 1 (a) Development Credit Agreement Schedule 4 Performance Indicators

Performance Benchmarks(Per Fiscal Year) Baseline

2000

2001

2002

2003

2004

0

3

5

7

7

7

5.65%

5.8%

6.0%

6.2%

6.4%

6.6%

7.48%

7.8%

8.1%

8.4%

8.7%

9.0%

13,000

13,000-

13,000-

13,000-

13,000-

13,000-

(FY 1998)

1. Number of ARIs entered into and operational

2. Customs Revenues

(as a

percentage of GDP)

_

3. Internal Revenues (as a percentage of GDP)

4. Total number of Central

_

Government Employees ***

5. Total number of Central Government Employees incorporated into the civil service under Part D (c) of the Project 6. Number of Pilot Agencies evaluated as satisfactory under

216

410

691

704

866

150

736

1,332

2,116

2,323

2,531

0

2

4

5

6

6

the provisions of the ARIs

Definitions I. "Central Government Employees" means the employees of the Borrower's ministries, national services,

departmental prefectures, departmental services and autonomous agencies (other than education and health personnel, and Security Staff [as hereinafter defined]), in a given Fiscal Year, as established by INE (as hereinafter defined);

2. "Customs Revenues" means the Borrower's total receipts for GAC, ICE-Imports, IEHD-Imports and IVAImports (all as hereinafter defined), in a given Fiscal Year, as established by UDAPE (as hereinafter defined); 3. "GAC" means the Borrower's consolidated customs tariff (GravamenArancelario Consolidado); 4. "GDP" meainsthe Borrower's gross domestic product in a given Fiscal Year as established by UDAPE (as hereinafter defined); 5.

"ICE" means the Borrower's specific consumption tax (Impuesto a los Consumos Especificos);

6. "ICE-Imports" means the ICE applicable to import transactions; -Figures subject to revision, as requested by the Association,whenever: (i) there is a change in the rates of GAC, ICE-

Imports,IEHD-ImportsandIVA-Imports;and (ii) Importsas a shareof GDPdeviatein a givenFiscalYear by morethan 2% fromprojectionssatisfactoryto the Association. Figuressubjectto revision,as requestedby the Association,wheneverthereis a changein the ratesof ICE-Internal,IT and IVA-Internal. *** Figures subject to revision, as requested by the Association,as per the final results of the Borrower's Central GovernmentEmployees inventory.

Project Appraisal Document Country: Bolivia

Page 27 Project Title: Institutional Reform Project

7. "ICE-Internal" means the ICE applicable to domestic transactions; 8. "IEHD" means the Borrower's special tax on hydrocarbons and hydrocarbon derivatives (Impuesto Especial de Hidrocarburos y Derivados); 9. "IEHD-Imports" means the IEHD applicable to import transactions; 10. "Imports" means the Borrower's total imports of goods, in Dollars, in a given Fiscal Year as established by BCB; 11. "INE" means the Borrower's national institute of statistics (Instituto Nacional de Estadistica); 12. "Internal Revenues" means the Borrower's total receipts for ICE-Internal, IT (as hereinafter defined), and IVA-Internal (as hereinafter defined), in a given Fiscal Year as established by UDAPE (as hereinafter defined); 13. "IT" means the Borrower's transactions tax (Impuesto a las Transacciones), other than the one collected by YPFB (as hereinafter defined); 14. "IVA" means the Borrower's value added tax (Impuesto al ValorAgregado); 15. "IVA-Imports" means the IVA applicable to import transactions; 16. "IVA-Internal" means the IVA applicable to domestic transactions, other than the one collected by YPFB (as hereinafter defined);; 17. "Security Staff' means the Borrower's staff of the police and the armed forces; 18. "UDAPE" means the Borrower's social and economic policy analysis unit (Unidad de Andlisis de Politicas Sociales y Econ6micas) within the Ministry of Finance; and 19. "YPFB" means the Borrower's oil company (Yacimientos Petrol(ferosFiscales Bolivianos).

ProjectAppraisalDocument Csountry:Bolivia

Page28 ProjectTitle: InstitutionalReformProject

Annex 2 Institutional Reform Project Project Description .Bolivia's public sector modernization effort seeks to improve the effectiveness, efficiency, and transparency of the Bolivian public administration in order to strengthen the country's ability to implement its econornic and social development programs and thus combat poverty. The purpose of the program over ten years is to improve the quality of service delivery and client orientation of government operations by creating more honest, costeffective, results-oriented organizations. It would establish in fact the institutional framework anticipated by Bolivia's comprehensive and visionary Financial Administration and Control System (SAFCO) law approved in 1990. This first operation would reform the basic institutional framework for the public sector and pilot organizational strengthening and those institutional reforms in several key agencies. It has four substantive components: (i) horizontal reforms including a national system of performance evaluation; (ii) national integrity program to address corruption; and (iii) the creation of a new human resources system; plus (iv) vertical reforms aimed at strengtheningseveral rector and pilot agencies. Project Component 1 - $1.8 million (total component cost including contingencies) Performance-orientedManagementand Evaluation This component will establish and launch a performance-orientedmanagement and evaluation system in the Bolivian government. It is being initiated because the administrative systems now in place focus more on accounting and budget controls while the cornerstone of the National IntegrityPlan (the overarchingframework for state reform and increased institutional strengthening)is an emphasison results and performance. Performance-orientedmanagement and evaluation aims to improve the effectiveness and efficiency of resource allocation and raise the sense of public service through ongoing assessments of pubic administration. It seeks to promote: greater use of careful goal setting; analytical techniques in budget and administrative decision-making; increasing autonomy for administrators (accompanied by incentives and increased accountability); improved statistical and accounting information systems; and broadened public awareness of citizens' rights and enhanced societal control. The national evaluationsystem will require public institutionsto set targets, expressed in terms of monitorable indicatorsconduciveto the measurement of costs and practicalresults. In mid-yearand at the end of the management period the level of efficiency and the degree to which goals have been met will be evaluated on the basis of the previously established target indicators. Low performance would trigger corrective measures. The analysis of results will be based on existing statistical and accounting information systems, supplemented by evaluation techniquessuch as systemsanalysis, cost-effectivenessappraisal, and cost-benefitanalysis. The Directorate of GovernmentCoordination,located within the Ministry of the Presidency,will serve as the rector unit for the National Evaluation system. It will need to coordinate closely with several agencies including the Ministry of Finance and National StatisticsInstitute. The unit will need to be technically sound and enjoy high level political support. The developmentof the evaluation system and efficiency and effectiveness standards will be a gradual and selective process, given the need to acquire experience in applying evaluation techniques,determining the appropriate standards, as well as promoting a positive attitude by public officials to the use of such a tool as a feedback mechanism. Overall, the evaluation system should be seen by the pilot agencies adopting it as a management tool that will help them fulfill their mission: as a self-evaluation instrument. The IRP will fund technicalassistance,equipment,and training needed to create the system in the followingareas: Designing of performance evaluation system: This includes developing evaluation indicators, instruments for monitoringresults, as well as the data-processingand follow-up system. Adjusting the regulatory framework: Technical assistance servicesrequired to adapt the regulatory framework as needed to establish and run the system.

Project Appraisal Document Country: Bolivia

Page 29 Project Title: Institutional Reform Project

Establishing results disseminationsystem: Promoting the public dissemination of the results of the evaluation carried out by the Performance Evaluation Unit, in order to provide feedback to individual agencies, relevant data for the Government's internal oversightagencies, and to facilitate supervisionby public opinion. Strengtheningof the performnance evaluationunit: The project will provide funds to strengthenthe institutional capacity of the unit responsible, within the Ministryof the Presidency,for evaluationof the targets agreed upon with public sector institutions. Project Component2 - $5.7 million (totalcomponentcost including contingencies) National Integrity/CombatingCorruption The component will support a comprehensiveeffort to develop effective prevention, education, and enforcement mechanismswith which to combat corrupt practicesin public administration,as well as to instill ethical values and a spirit of public service in government employees. Corruptionis widely perceived to be one of the gravest threats to Bolivia's future. It undermines macroeconomicstability and investor confidence, damages the country's incipient industries, and adds to the cost of doing business. Corruption also undermines democratic institutions and social stability by damaging the credibility of the political system. A National Integrity Commission, composed of the Vice President of the Republic(chairman),the Minister of the Presidency,the Minister of Economy, the Minister of Justice, a representativeof the Senate, a representativeof the Chamber of Deputies, a representativeof the Supreme Court, the ComptrollerGeneral of the Republic, the Attorney General, and a representativeof the Judiciary has been established to help design the anti-corruptioneffort. A National Integrity Plan is being developed with the support of civil society which envisagesthe followingactivitiesin the fight against corruption: a)

Complying with the Inter-American Convention Against Corruption.

b)

Enforcing the new Civil Servant's Statute, which is based on the constitutional principle that government officials and employees are dedicated exclusivelyto serving collective interests, and not vested interests or those of any political party.

c)

Establishing rules with which to implement a system of statements of assets and income for government employees,with a view to promotinggreater transparencyin public service.

d)

Strengtheningthe offices of the Ombudsperson,ComptrollerGeneral, and Attorney General.

e)

Reforming the government's system of procurement, in order to promote cost efficiency, transparency, credibility and protection of the public interest.

f)

Modernizingand cleaning up internal revenueand customs services.

g)

Streamlining and simplifying red tape and registration procedures in public institutions, and ensuring that they serve the needs of citizens.

h)

Conducting a massive and sustained educational and public awareness campaign highlighting respect for public property and citizens' rights.

The IRP will fund technical assistance,equipment,and trainingneeded to promote national integrity in the following areas: Mechanisms to prevent corruption: Regulatory framework. The project financed (through the PPF) the drafting of a comprehensiveCivil Servant's Statute establishing the incentives, rights, and obligations of government employees of every rank and level. The incentives envisaged include: increased job stability, clear regulations governing wages, improved working conditions, and the creation of a formal civil service career. Obligations are defined in terms of the integrity,

ProjectAppraisalDocumient Con ^y: Bolivia

Page30 ProjectTitle: InstitutionalReformProject

hcnes.sZanoddedicationexpected of ci-il servants servingthe general public. The law sets standardsfor recruitment, re iYo'Val. apromotion. nd It includes an Ethics Code for civil servants. 'i,fAatemeintsof assets and income for government officials. The IRP will promote efforts by the Office of the Co-.nnptroller General to develop specific rules regarding a system of sworn statements of assets and income piesenied by go ernminent officials, to make them obligatory at every level, and to establish an information system .fcr muu ierification. Citizens with a legitimate interest shall be able to access the system, thereby making it possible for society to monitorpossible cases of illicit enrichment. The project will finance the consulting services, eiou-s-1ient,and!traiing needed to carry this out. ,.ki.;riei,cn$ g f institu 'otis to facilitate denunciation and prosecution of corruption. Strengthening of the Office of the Oinobdspersonthrough creation of a complaints counter where citizens can report cases of corruption in oublic administration. This involves building a specific institutional capacity to receive such complaints, to undertaikea preliminaryinquiry in order to deterrine their validity, and to further process rapidly those with merit. SCrCgme-5£1niOf the Office of the Comptroller Genieral's ability through a forensic audit unit to prepare and

document lawsuits againstpersons implicatedin cases of corruption. Strengtiheing of the Attorney General's Office [Ministerio PPblico] through the creation and strengthening of a national Pt!iblicAffairs Prosecution Unit to endow,that Office with sufficient technical and operational capacity to handle court cases. Specifically, the project will provide funding for the specialists and equipment needed to consohlate the Unit, Bilateral resources are financing complementaryefforts in other operations of the Attorney -eneral'sOffice. Sireai^mfiningof procedures (cuttirng red tape). The aim is to simplify public sector procedures to reduce discretion (and the opportunitiesfor corruption),speed processes,and improve services to citizens. Design of a new regulatory frameworkencouragingapplicationof the "good faith" principle and the "administrative silence means appr-oval"approach to processesand public registries. This new frameworkwill also oblige entities to provide the general public with reliable informriation or. steps to take, time limits, and the responsible officials, as well as on th,emechanismsat the public's disposalto denouncecases of non-observanceof the rules or abuse. Procedural reengineering through a pilot scheme to sirnplify and deregulate certain key procedures with visible impacts on citizens and which have been identified as sources of corruption. This will require reengineeringstudies, equpmnent,training, and dissemination of new procedures, and will be supported by a temporary office within the Ministry of the Presidency, devoted to simplifying procedures and promoting complementary efforts in line a-encies.

The National Integrity Plan aims to make public sector procurement procedures Mnoretiansparent. The IRP, buildingon efforts financedby WBI and others, will finance:

Procureuinent system reform.

Reiiew of the basic rules and procedures govemiingthe purchase and administration by the public sector of goods and services. A new system including legal framework,procedures,and rector institution will be established, to be linked to the gove-rnment'sintegrated financial managementsystem. Among other innovations, the new framework edil establish Arbitration and Appeals Tribunals, ensure adequate disserminationof the rules to both suppliers and governmientofficials and pmake the publishing of bid results obligatory. A database registering bidding processes and contractsawarded will be open to the public. Citizen Education Campaign. The NIP considers that instilling certain values and ethical principles in the population is a key factor in the st-ruggleagainst corruption. To that end, the project will finance a public education campaign in the mass and specialized media. The campaign will be geared toward developing respect for public property, condenmation of illicit enrichment by persons in authority, and respect for the rights of citizens by the state.

ProjectAppraisalDocument Country:Bolivia

Page 31 ProjectTitle: InstitutionalReformProject

Project Component3 - $2.4 million (total componentcost including contingencies) Civil Service Reform This component would support the creation of a new merit based and professional civil service for the central government. Numerous studies have confirmed that the quality of human resources within the central administration is weak. Pay is insufficient to attract or retain quality staff, career development and training is almost non-existent, institutional memory and esprit de corps are lacking, and there is no focus on performance evaluation. There is excessive rotation of employees and good staff within the government are frequently financed by donors, leading to large discrepancies in pay, potential conflicts of interest, and lower morale for nondonor financed staff. The new system for human resource management would be operationally decentralized, giving line managers greater autonomy in hiring, firing, and performance incentives, but within guidelines and structures promoting merit and transparency. The IRP will fund technical assistance, equipment, and training needed to create the new system in the followingareas: Adaptationof the regulatoryframework.Preparingand implementingthe regulatoryframeworkand procedures conformingto the proposed Civil Servicelegislation. This will includebasic processes relatingto job evaluation, hiring, promotion,remuneration,and training. Establishing civil service rector institutions.Technical assistanceand informationtechnologyfor the design and establishment of the independent civil service commission (currently found in the Finance Ministry) and appeals tribunal to serve as rector institutions for the new human resource system. This includes support for institutional capacity building and basic business processes of the agencies. Creation of a human resources registrationsystem. Comprehensivediagnostic assessment of the government's human resources including up-to-date position descriptions, creation of a personnel database, and establishment registers. Reformof trainingsystem. Supportfrom bilateraldonors for a reformedtraining system for the public sector with a focus on public sector management,managementof institutionalchanges, and ethics. This includes the design of training courses for the pilot agencies as well as broader public sector,with an emphasisplaced on the outsourcing of training whereverpossible. Project Component4 - $59.3 million (total componentcost including contingencies) OrganizationalReform This component will finance the restructuring and capacity building with the aim of creating results oriented agencies. It will finance technical assistance,training, informationtechnology, and support for salaries in seven pilot agencies. Organizational reform would be at the heart of the state modernization program, grounding the institutional reforms in human resources and financial management, integrity, and performance evaluation within specific agencies. The reforms are aimed at three key elements: (i) organizational restructuring and strengthening including structural reform, completing job descriptions of all positions, changed management layering and reporting responsibilities, management information systems, business process reengineering, and limited physical improvements; (ii) legal framework reform relating to the mission and functioning of the organization including the elaboration and implementation of the regulatory structure envisioned under the 1990 SAFCO law; and (iii) human resources renewal. The goal, under the philosophy of the SAFCO law of normative centralization and operational decentralization,is to increase the functional discretion of line ministries to meet their mission goals subject to improved accountabilitysystems and oversight by the rector organizations. Organizational Reform Agreements (ARIs) would be the key instrument for guiding the process. Following intensive diagnostic assessments, each pilot agency would agree to a specific change program specified in an ARI. The ARIs would be reviewed and approved by the policy level National Integrity Commission, and the Bank, and used as operational documents whose design and negotiation as well as implementation over an

ProjectAppraisalDocument Country:Bolivia

Page32 ProjectTitle: InstitutionalReformProject

anticipated three year period would require the commitment and ownershipof the pilot ministry. The ARIs would aim at more than changes in structure or staff rotation, but will try to get to the heart of organizational functioning including corporate planning, streamlining processes, human resource development, strengthening of key managerial functions, stakeholder development, and a focus on results. The restructuring process would put particular emphasis on change managementin order to promote the culture change permitted by new management systems, staff, and compensation levels (and needed to achieve the desired results). Service evaluations (both client surveys and desk assessments)in conjunction with the National Evaluation system would track the process of reform, provide feedback, and help implant a focus on service delivery. Advisory groups representing clients of pilot agencies (for example the Customs Council with respect to the Customs Service) would also provide feedback into project implementationin each agency. As a quid pro quo to the pilot agencies, the project would provide explicit incentives to entities meeting ARI targets by providing them greater scope for budgetary formulation and execution, increased responsibility for human resource management, improved pay, and increased training. Specifically, the project would fund technical assistance, training, and information technology within the ARI process. The Bank and bilateral donors would also finance the incremental recurrent costs of professionaland managerialpositions. The Government has indicated that the Ministry of Finance (including Internal Revenue and Customs Services) would initiate the restructuring process. Other potential agencies include the ministries of Agriculture, Housing, Sustainable Development, and Education, as well as one prefecture. The Bank would finance technical assistance,information technology,training, and incrementalsalary payments on a declining basis. Organizationalrestructuring.Following structure and function reviews, the restructuring process will include organizationaladjustments, implementationof new human resources and financial management systems, training, and business process reengineering. The process will be supportedby technicalassistanceprovidedby international consultant firms. The focus will be on management and administration of organizations, with reforms in key operations to the extent possible left to separate sectoral reform projects and programs. Only in the case of the Customs pilot agency will the IRP explicitly be expected to finance substantive investments in an agency's operation. Adaptation of regulatory frameworks. The project will facilitate reform of the legal framework related to the mission and operations of each organization including the preparation and implementation of the regulations envisagedunder the SAFCO law. Remuneration. Funding on a declining basis with bilateral donors the incrementalrecurrent costs of increased salaries for technical and managerialstaff hired competitively(see Annex 4 for a more detailed explanation). The project will finance the renewal of the human resources in the institutions in the pilot scheme and establish mechanisms for transparent recruitment, promotion, and removal processes based on merit, competition, and performance. Project Component5 - $2.8 million (total componentcost including contingencies Reform Management This component will finance the costs of the Secretariat to the National Integrity Commission which also serves as the project coordinating unit (PCU). It will finance international and local staff, support personnel, operating costs, and equipment for the unit. The PCU would be responsiblefor the supervisionof the project, contracting of and monitoringof consultants, oversight of project finances, preparation of reports, and auditing of the project.

Page 33 Project Title: Institutional Reform Project

Project Appraisal Document Country: Bolivia

Annex 3 Institutional Reform Project Estimated Project Costs Project Component Performance Evaluation National Integrity Civil Service Organizational Restructuring Reform Management

Total Proiect Cost

Local

Foreign

Total

----------------------- US $ million-------------------1.7 0.1 1.8 5.7 5.5 0.2 1.5 0.9 2.4 4.8 59.3 54.5 0.1 2.8 2.7

65.9

6.1

72.0

ProjectAppraisalDocument Country:Bolivia

Page34 ProjectTitle: InstitutionalReformProject

Annex 4 Institutional Reform Project Cost Benefit Analysis Summary (Indicatecurrency, units, and base year)

Project Costs

NA

NA

Minimum increase in the tax ratio from tax adnministration measures

alone --internal revenue from 7.5% of GDP in 1999to 9.0% in 2004, and Customs receipts from 5.6%of GDP in 1999to 6.6%in 2004. Summary of Benefits and Costs The objective of the public sector modernizationprogram supported by a 10 year APC is to improve the delivery of public goods and services in terms of efficiency, effectiveness, quality and transparency. The proposed Institutional Reform Project, the first phase of the APC, aims to create the institutional framework for a modem public sector as well as to build several model agencies. Horizontal reforms in the areas of human resource management, national integrity, budgeting by results, and performance evaluation will be consolidated vertically through organizationalreforms in pilot agencies. The main benefits expected include the following: *

Improved public sector efficiency (speed and cost reductions) and effectiveness (impact) in reformed pilot agencies

* * *

Improved accountabilitythrough the developmentof a managementby results systems and culture Greater transparency in managementand visible reduction of corruption Increase in tax collections through improvement in tax administration

The main costs of the project are: * * * * *

Technical assistance Selected goods (including information technology) Training Information and disseminationcampaigns Incremental increases in civil service salaries

While real, many of the benefits expected from the program are of an intangible nature and therefore difficult to quantify for a cost-benefit assessment. Only the increase in tax efficiency is quantifiable. The government estimates that the increase in tax collections in the medium and long term will exceed the cost of the program. Collections from internal revenue are expected to increase from 7.5 percent of GDP in 1999 to 9.0 percent in 2004. Similarly, Customs collections are expected to increase from 5.6 percent of GDP to 6.6 percent over the same period.

Project Appraisal Document Country: Bolivia

Page 35 Project Title: Institutional Reform Project

Strengthening Tax Administration Based on a recent IMF evaluation of the tax system, the Public Expenditure Review (PER) reports that "Bolivia has made notable progress in increasing its non-oil tax revenue base since the mid 1980s (when revenues were well below 5 percent) to the point where tax revenues as a share of GDP compare favorably with the LAC average and are high for its income group. Nevertheless, there are a number of suggestions to improve the buoyancy, equity, and efficiency of the tax system, and to widen the base." The growth rate of tax collections in the last few years has declined as a direct consequence of evasion and persistent legal and organizational problems. As a consequence the IMF and Ministry of Finance estimate that evasion of the IVA tax alone reduced collection by approximately US$295 million in 1996. This is equivalentto 4 percent of GDP and represents about 39 percent of potential collection and 65 percent of effective collection. To address this problem the Governmentis undertaking fundamental reforms in tax administration to improve the effectiveness, efficiency,and transparencyof the Customs and Internal Revenue Services. Customs In 1999 the Customs Service is projected to collect US$500 million representing 5.6 percent of GDP.' Total imports are projected at US$3.1 billion, of which US$1.2 billion or 38 percent are estimated to be contraband. Customs collections have been increasing by an average 14 percent since 1992, above the average 11 percent estimated growth of imports (legal and illegal). Foreign trade is expected to continue growing (if not necessarily at double digit rates) due to increasing integration with the Andean Community,Mercosur, and the completion of a natural gas pipeline to Brazil. The comprehensive program of reform in the Customs Service will include institutional strengthening, a reengineering of processes, human resources renewal, reform of the legal and regulatory framework, and investments in information technology. The Government is proposing important new legislation which will increase the operational and financial autonomy of the Customs Service, permit the President to nomninateits Director (selected from a list prepared by a joint public/private sector council) to be approved by the Congress and serving for a five year term. Customs has been identified by the authorities as a first priority pilot agency for the ARI process. Moreover, with IMF support, preliminary plans have been developed to execute significant technical changes in Customs operations, including the following: * * *

Implementation during the first project year of an effective system of control over the transit of goods to Customs posts the country. Currently the Customs Service estimates that up to 5000 vehicles crossing the border do not arrive at Customs posts, resulting in annual losses of over US$28 million. Installation during the second project year of a modem software system to provide real time financial and physical accounting from all Customs posts. Strengtheningof ex-post auditingduring the third project year in order to increase the risk of detection by tax evaders.

Based on reasonable growth and trade projections (available on file) and no increases in tax rates:2 (i) Customs receipts over the 1999-2008 period increase due to improved collection efficiency by US$209 million in net present value (NPV) terms using a discount rate of 10 percent. Up to 2004, the NPV of increased revenues due to reforms totals US$75 million. Without reform Customs collections are expected to rise from US$500 million in 1999 to $981 million in 2008 compared to US$1,082 million with the reforms. This assumes the same level of total imports but a reduction of contraband from 66 percent of legal imports in 1998 to 41 and 55 percent in 2008 with and without the reforms.

IAll dollar figures are presented in constant 1998 dollars. projections are consistent with the IMF ESAF programfor the first three years. Long term projections are consistent with Bank and authorities projections. The increase in import share in GDP was a moderate 5 percent during the 10 year period.

2Growth

ProjectAppraisalDocument Country:Bolivia

1%8E 1999 23i0 201

Page36 ProjectTitle: InstitutionalReformProject

8Ei57 89E 9407

4,5 52

2CC3 2X4 2X!

54 57 57 57 57

9915 104K) 11078 11709 12376

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57 57

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?24'/o 2 9%/o 234%/o 2390/o 243% 248% 253% 258%/0

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579 625 675 7M 784 845 911

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Internal Revenue The Government is also undertaking a comprehensive program of reform in the Internal Revenue Service including institutional strengthening, a reengineering of processes, human resources renewal, reform of the legal and regulatory framework, and investments in informationtechnology. The Government will propose as part of the overhaul of the Tax Code to increase the operational and financial autonomy of the IRS (similar to the Customs reforms), to permit the President to nominate its Director (selected from a list prepared by a joint public/private sector council) to be approved by the Congress and to serve for a five year term. IRS has been identified by the authorities as a first priority pilot agency for the organizationalrestructuring process. Should the project reach its target, internal IVA tax evasion will drop 30 percent. With a discount rate of 10 percent, the NPV of the benefits of the reform until the year 2008 are US$380 million. NPV of increased revenues only up to the year 2004 are US$145 million.

Page 37 Project Title: Institutional Reform Project

Project AppraisalDocument Country: Bolivia

Internal Revenue: 1998-2008 With and Without

GDP Growth

Witut Measures With es GDP a Tax Tax AdT-ax Reveues.- Revenues- Revenues Revenues DOlars Revenue %/,GDP Dollar %GDP Dollars Dollar 661.5 0.0 8557 7.73 661.5 7.73 8942 7.48 668.9 7.48 668.9 0.0

1998 1999

4.5

2000 2001

5.2 5.4

9407 9915

7.66 7.84

720.2 776.9

7.76 8.05

730.2 798.6

10.0 21.7

2002 2003

5.7 5.7

10480 11078

8.02 8.21

840.5 909.3

8.36 8.67

875.9 960.8

35.4 51.4

2004 2005 2006

5.7 5.7 5.7

11709 12376 13082

8.40 8.60 8.80

983.8 1064.3 1151.4

9.00 9.28 9.57

1053.8 1148.4 1251.6

70.0 84.2 100.2

2007 2008

5.7 5.7

13828 14616

9.01 9.22

1245.6 1347.6

9.86 10.17

1363.9 1486.4

118.3 138.8

Totals NPV Additional Revenue (Dollars)

10369.98 380

11000.0

630.0

Dollars are in constant 1998terms.

Fiscal Impact of Funding of Incremental Recurrent Costs An important component of the IRP includes the financing, on a declining basis (80, 80, 60, 60, 30 percent), of the incremental recurrent costs of increased wage bill in the pilot agencies. This funding is considered critical to the achievement of the project's aims. While the pilot agencies will be able to fund the additional costs of information technologymaintenance, the sustainabilityof the new civil service positions requires a supplementary contribution from the government. Given the importance of the financial feasibility of this component for the project's sustainability,the following is an analysis of the fiscal impact of this component. Background Implementation of the civil service reform takes into account the re-dimensioning of the government and the application of a new public administration salary scale that is more competitive with the national labor market. The government will implement the new human resources system in a progressive manner in those agencies undergoing an integral process of restructuring and strengthening. Implementation of the civil service throughout the central and prefecture governments will be completed in ten years, carried out in three phases. Seven pilot agencies are projected to be incorporated during the first phase; two ministries and all the regional governments will be incorporated in the second phase, and in the final third phase the remaining central administration institutions will be incorporated in the program. At present the number of public officials in the central and regional governments amounts to nearly 13,000. Personnel costs represent US$65.5 million per year. The government finances consultants and temporary staff in line positions to the tune of US$13.8 million. Thus total personnel costs amount to US$79.3 million. Once implementation of the civil service program is completed, personnel should have been reduced by just over 25 percent (an estimate which may vary within individual agenciesas the institutional reform process develops). The cost of the new personnel structure after the reform will reach 92.2 million per year. This amount represents an increase of 40.8 percent over the amount of the 1998 payroll and 16.3 percent if the resources of allotment 252 are included. The increase is due to the increase in salaries over the current low salary levels.

ProjectAppraisalDocument Country:Bolivia

Page 38 ProjectTitle: InstitutionalReformProject

The fiscal impact of the Civil Service component has been estimated by projecting the salary cost of public officials to be contractedduring the period 1999-2008. Assumptions The projection of the project's fiscal cost is based on the following assumptions: * * * *

* * * *

Same macroeconomicestimates as in the benefits section. The salary scale to be adopted is the one proposed by the Civil Service Directorate in the Finance Ministry. The highest level in the career Civil Service will be Director General. No public servant will be paid for non-worked days, or receive premiums or supplementarywages (except in those cases establishedby the law). Civil service salaries will only be increased to compensate for exchange rate devaluation (Bolivian pesos versus US dollars). World Bank financing and bilateral assistance will decrease over time as a percentage of incremental costs of new positions (although the funding will be lumpy in aggregate reflecting the pace of reform and number of agencies). Government financing originates from increased tax collections;thus, it does not generate internal debt. The Government's contribution to civil service financing will increase annually based on the difference between the inflation rate and annual devaluation. The Government will progressively transfer funds from budgetary line 252 (Studies, Research and Projects) 3 to line 100 (Personnel Services).

The fiscal impact of the introduction of the Civil Service is largely dependent on two factors: i) the number of employees incorporated over time into the new civil service; and ii) the salary scale adopted. With respect to the first, the government projects a 27 percent cut in the number of staff in the central government from about 13,000 to 9,400 employees by the year 2008. This number should remain stable in the future. To attract the more qualified employees necessary to improve effectiveness and efficiency of government operations, the salary scale for professionals will be increased from a level of about 28 percent of wages in the private sector to 64 percent. The Government believes that the non-monetary compensation of public service will reduce the remaining gap somewhat, but within the constraints below will seek to adjust salaries further if possible. Annually the incremental costs rise from 2,8 million in 2000 to US$26.7 million in 2008. The total incremental cost of the civil service program is estimated at U$142.7 million over 10 years. The Government would contribute up to US$71.8 million of total incrementalcosts through increases in line with the expected growth of tax collections and the progressivereassignment of budget line 252 to line 100. To cover the remaining US$70.8 million, financing is projected from an increased effort of the government and from external sources including the IDA credit and bilateral grants. From 2005 on the Governmentwill be able to contribute the remaining resources needed as it will have absorbed the one time costs of pension reform. External financing needs for salaries will decline to zero as payroll costs decline in terms of GDP from 0.77 percent of GDP in 1998 to 0.62 percent of GDP in 2008. In sum, the civil service reform produces a permanent increase in nominal terms in the wage bill of the central government as the savings generatedby staff reductionsdo not fully compensate for the increase in costs resulting from higher salary levels. External financing (World Bank and bilateral assistance) will fund a portion of the additional civil service cost in the short term. Over time increases in tax collection, the progressive reduction in pension reform costs, and reduced external debt payments from the HIPC program will permit the Government to fully assume these incrementalcosts. The fact that civil service costs will decrease with respect to GDP provides further assurancethat the reform will be financially sustainable over the long term.

3Allotment

100is the itemin the Nation'sGeneralBudgetthat accountsfor Stateofficials'wagesandsalaries.Allotment

252 accounts for consultant compensation (both permanent and temporary).

Page 39 ProjectTitle: InstitutionalReformProject

ProjectAppraisalDocument Country:Bolivia

Costs of Implanting the New Civil Service Over Ten Years

Constant 1998 US$ million Id Eenl. - :--: Year Costsof Costsof TowaCosts ARequlir Pu ruiidin Curren g Suppet Fundiag %OL$ Treasuy Fl System NewSystem

- -- -- -:

::

-- Resourc-

ToWa Cost % ofGDP

1998

65.5

65.5

65.5

0.0

0.0

0.0

0.00%

0.77%

1999

57.8

10.5

68.3

67.9

0.3

0.0

0.3

0.00%

0.76%

2000

49.9

20.4

70.3

68.4

1.9

0.0

1.9

0.02%

0.76%

2001

42.9

30.0

72.8

69.5

3.3

0.0

3.3

0.03%

0.75%

2002 2003 2004 2005 2006 2007 2008

36.1 29.8 23.4 17.4 11.5 5.7 0.0

75.3 78.4 80.7 83.7 86.6 89.4 92.2

70.6 72.4 73.6 75.4 75.9 76.3 76.8

4.7 6.0 7.1 8.3 10.7 13.1 15.4 70.8

0.0 0.0 0.0 1.2 3.9 7.0 14.9

4.7 6.0 7.1 7.0 6.8 6.1 0.6 43.8

0.05% 0.05% 0.06% 0.06% 0.05% 0.04% 0.00%

0.74% 0.72% 0.70% 0.68% 0.66% 0.64% 0.62%

0.0

39.3 48.6 57.3 66.3 75.1 83.7 92.2 ToFinance

Fiscal Impact of Incremental Recurrent Costs of Phase 1 A more in-depth assessment of the fiscal impact for Phase 1 looked at the current structure of personnel and salary scale of potential pilot agencies. Seven pilot agencies were selected for the analysis: Internal Revenue and Customs Services, the ministries of Finance, Housing, Agriculture, Sustainable Development, Education and the regional government of Oruro prefecture (this list is only for indicative purposes). The total number of public officials in the seven pilot entities currently amounts to 3,477. Once the implementation of the civil service program is completed, personnel will have been be reduced by 26.7 percent (to 2,550 public servants). The assumptions are the same as in the previous section; in addition: (i) salaries of the support staff are not financed by external resources; (ii) those salaries whose levels are currently above civil service levels are not reduced; (iii) during the first year, 100 percent of the professional staff of the following pilot agencies: Ministries of Finance (Internal Revenue and Customs Services), Housing, and Agriculture, will join the new regime, followed, in the second year, by 100 percent of the professional staff of the remaining pilot entities (Sustainable Development, Education, and the regional government of Oruro prefecture); (iv) in four years the Government will progressively transfer funds from budgetary line 252 to line 100 (20, 40, 60, 80 percent); (v) World Bank and bilateral financing will decrease over time as a percentage of incremental costs of new positions (80, 80, 60, 60, 30 percent) and finalize in the seventh year of the reform; from then onwards the Governmentwill finance entirely the cost of the civil service program. Without the project the wage bill of seven pilot entities during the 10 years of the reform program would reach US$ 196 million4 . With the project, this figure will be of US$ 275 million. Hence the incremental cost, i.e. the difference in the wage cost with or without the project, reaches US$ 79 million. The Government will finance Civil Service Reform with resources from budgetary lines 100 and 252 and additional domestic resources, (see table below). World Bank and bilateral donors support decreases over time. 4Total

currentsalariesexpendituresof sevenpilotagenciesmultipliedby 10.

Project AppraisalDocument

Page 40

Country:Bolivia

ProjectTitle: InstitutionalReformProject

The external financing of Civil Service in the pilot entities will conclude by the seventh year of the reform program. From that point onwards, the Government will fully assume the cost of the reform program. For the first phase the World Bank and bilateral cooperation contribute US$ 25 million and the Government of Bolivia will add the remaining US$ 54 million. The Civil Service Program, as defined by the government,is viable and sustainable. The fact that the wage bill of the pilot agencies, by the end of the 10 year, will decrease with respect to GDP provides assurance of the sustainabilityof the reform. In fact, the wage bili as a percentage of GDP reaches its initial level by the seventh year. In the short run, external financing (World Bank and bilateral cooperation), the transfer of allotment 252 and the additional contributions of the Treasury will finance the Civil Service Reform. In the medium term, the decline in the number of public officials, and the increase in fiscal revenues will enable the State to cover the additional costs. Indeed, the abatement of the costs of structural reforms, especially of the pension reform expenditures, will provide the Treasury some fiscal room to maneuver and absorb the Civil Service reform costs.

Costsof ImplantingtheNewCivilServicein theFirst Phase Constant1998US$thousands

0 0 19,586 1 5,353 20.592 2 0 29,346 3 0 28,728 4 0 28,144 5 0 27,858 6 0 27,575 7 0 27,295 8 0 27,018 9 0 26,744 10 0 26,422 TOTAL 24,939 269,722

19,586 19,586 25,946 20,038 29,346 20,659 28,728 21,062 28,144 20,976 27,858 21,100 27,575 21,112 27,295 21,124 27,018 21,138 26,744 21,152 26,422 21,128 294,662 229,427

0 1,182 1,737 2,365 2,867 3,824 5,590 6,171 5,880 5,591 5,294 40,501

0 19,586 4,726 21,220 6,949 22,396 5,301 23,426 4,301 23,844 2,934 24,924 874 26.701 0 27,295 0 27,018 0 26,744 0 26,422 25,085 269,576

0.23% 0.29% 0.31% 0.29% 0.27% 0.25% 0.24% 0.22% 0.21% 0.19% 0.18%

3477 1134 0 0 0 0 0 0 0 0 0

0 1758 2550 2550 2550 2550 2550 2550 2550 2550 2550

Project Appraisal Document Country: Bolivia

Page 41 Project Title: Institutional Reform Project

Annex 5 Institutional Reform Project Financial Summary Years Ending June (Indicate currency, units and base year) ImplementationPeriod 2000

Project Costs Investment Costs Recurrent Costs Total Financing Sources (% of total project costs) IBRD/IDA Co-financiers Government User Fees/Beneficiaries Total

4.0 3.6 7.6 Total Project 44.4% 26.4% 29.2% 100%

2001

7.5 6.0 13.5

2002

10.9 8.7 19.6

2003

1.6 8.9 10.5

OperationalPeriod 2004

0.9 9.3 10.2

2005

0. 10.6 10.6

ProjectAppraisalDocument Country:Bolivia

Page42 ProjectTitle: InstitutionalReformProject

Annex 6 InstitutionalReformProject Procurementand DisbursementArrangements Procurement Goods and works will be procured in accordance with Bank guidelines, "Procurement under IBRD Loans and IDA Credits" (dated January 1995, revised in September 1997 and January 1999). Consultants will be hired following the World Bank guidelines for the "Selection and Employment of Consultants by World Bank Borrowers" (dated January 1997,revised September 1997and January 1999). Procurement methods (TableA): Applicable project costs and procurement methods are summarized in Table A. Procurement of goods will consist mostly of computer hardware and software, training materials and public awareness literature. The first National Competitive Bidding (NCB) will be subject to the Association's prior review, irrespective of the estimated amount of the contract. NCB will use documents acceptable to the Association. Table A.1 provides a breakdown of selection procedures for consultant services and training. Prior review thresholds (Table B): The thresholds for the applicable procurement methods are identified in Table B. Approximately US$10.6 million of the procured goods and services will require the Bank's prior review.

Disbursement

Allocation of loan proceeds (Table C) The first phase of the project is estimatedto be disbursed over a period of six years in accordance with the table in Annex 5 laying out the disbursement schedule of IDA funds. The project will use a flexible disbursement mechanism, consisting a simplified Special Account procedure, which will allow decentralized management of funds by the agencies implementing various restructuring agreements. The overall oversight, monitoring and final accountability for the funds will remain with the PCU, which will be responsible for preparing disbursement applications for their submission to IDA. Replenishmentapplications for the Special Account(s) will be submitted at monthly intervals, irrespective of the volume of transactions in any month, or more frequently if needed for adequate cash flow. Use of statements of expenses (SOEs) Disbursementapplications will be submitted on the basis of Statementsof Expenditures, while a full PMR based disbursement system is being adopted, for (a) contracts which value does not exceed the equivalent of: US$ 200,000 for goods; US$ 100,000for consulting firms; and US$ 35,000 for individual consultants.

ProjectAppraisalDocument Country: Bolivia

Page43 ProjectTitle: InstitutionalReformProject

(b) all local training programs and incrementaloperating costs. All other expendituresin excess of these amounts or of any other type will be fully documented when submitted to IDA. All consolidated documentationrelevant to SOEs, will be available at the PCU for Bank missions and audit purposes. Special account One or more special deposit account(s), as may be required under the co-financing arrangements -- will be opened in a freely convertible currency under terms and conditions acceptable to IDA. The authorized allocation(s) to the Special Account(s) will be set at a level sufficient to cover about four months of estimated expenditures eligible for financing by IDA and any other donor whose funds are managed in trust by IDA. Replenishments of funds will be made on evidence of satisfactory utilization of the previous advance(s) as evidenced by the documentation submitted in support of disbursement applications. Deposits into the Special Accounts and their replenishments, up to the Authorized Allocation(s) will be made initially on the basis of Applications for Withdrawals (Form 1903) accompaniedwith the supporting and other documentation specified in the Disbursement Handbook. Once the accounting and financial management systems of the PCU are deemed compliant with LACI requirements, and are certified as such by IDA, a migration to a LACI type of disbursementsmay be implemented as described hereafter. Migration to LACI and Compliancewith OP 10.02 A Bank Financial Specialist has assessed the financial executioncapacity of the PCU. The Bank and the PCU have agreed on an action plan to develop the PCU's capacity to prepare quarterly Performance Management Reports within 12 months. The specialist certified the existence of reliable accounting systems that allow the preparation of annual financial audits by an external auditing firm, in accordance with Bank requirements. Following the Financial Specialist's recommendations,the PCU will have to modify its accounting system to be able to generate financial reports that conform with the requirements of the LACI disbursement system. The PCU will implement an Integrated Project Monitoring System, with accounting and financial information, disbursements, purchasing, procurement, and control of contracts will have to be implemented, to allow the generation of quarterly programmatic financial reports on the physical advance of each component, as well as financial information by disbursement category. This system will also establish the procedures for its own operation and maintenance throughout project implementation.The detail of these procedures are contained in the OperationalManual. The PCU will have in place accounting and internal control systemsthat accord with such accounting standards or agreed format and that (a) reliably record and report all assets and liabilities and financial transactions of the project and, as appropriate, the entity, including those transactions involving the use of Bank funds; and (b) provide sufficient financial informationfor managing and monitoringproject activities.

ProjectAppraisalDocument Country:Bolivia

Page44 ProjectTitle: InstitutionalReformProject

5 Annex 6, Table A: Project Costs by ProcurementArrangements

(in US$millionequivalent) ExpenditureCategory

ProcurementMethod ICB

N CB

Other

1.3 (0.76)

0.8 (0.5)

0.2 (0.04)

Total Cost (including contingencies) N.B.F

1. Goods 2.3 (1.3)

2. Consultants& Training 22.7 (15.9)

22.7 (15.9)

47.0 (14.8)

47.0 (14.8)

69.9 (30.74)

72.0 (32.0)

3. Salaries/RecurrentCosts

Total 1.3 (0.76) Note:

0.8 (0.5)

N.B.F. = Not Bank-financed(includes elements procured under parallel co-financing procedures, consultanciesunder trust funds, any reserved procurement, and any other miscellaneousitems). The procurementarrangement for the items listed under "Other" and details of the items listed as "N.B.F." need to be explained in footnotes to the table or in the text. NCB = National Competitive Bidding ICB = International CompetitiveBidding Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit

For detailsonpresentationof ProcurementMethodsreferto OD11.02,"Procurement Arrangementsfor Investment Operations."Detailson ConsultantServicescan be shownmoreeasilyin the TableAl format(additionalto TableA, where

5

applicable).

ProjectAppraisalDocument Country:Bolivia

Page45 ProjectTitle: InstitutionalReformProject

Annex 6, Table Al: ConsultantSelection Arrangements(optional) (in US$millionequivalent) Selection Method

Total Cost (including contingencies)

ConsultantServices Expenditure Category ______________

A. Firms

QCBS |QBS

10.0 (8.7)

|SFB

|LCS

Q

|Other

|N.B.F.

0.2 (0.2)

B. Individuals

Total 10.0 (8.7)

|

0.2 (0.2)

10.2 (8.9)

5.9 (2.1)

5.9 (2.1)

5.86 (2.1)

16.1 (11.0)

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-basedSelection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants'Qualifications Other = Selectionof individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan.

Page46 ProjectTitle: InstitutionalReformProject

ProjectAppraisalDocument Country: Bolivia

Annex 6, Table B: Thresholdsfor ProcurementMethods and Prior Review' Expenditure Category

ContractValue (Threshold)

Procurement Method

US $ Thousands

Contracts Subject to Prior Review / Estimated Total Value Subject to Prior Review US $ Millions

1. Goods 2 $200 < $200 and > $50 > $50

2. Services Firms

Individuals

ICB NCB Shopping(International or National)

> $100

QCBS

< $100

Least Cost Selection*

> $35: Will require

2.000 .100

6.500

2.000

prior review

Total value of contracts subject to prior review: US$10.6 This selection process will depend on the type of consultingservice in accordance with paragraph 3.6 of the Consultant Guidelines *

and differby countryandproject. ConsultOD 11.04"Reviewof ProcurementDocumentation" 6 Thresholdsgenerally contactthe RegionalProcurementAdviserfor guidance.

ProjectAppraisalDocument Country:Bolivia

Page47 ProjectTitle: InstitutionalReformProject Annex 6, Table C: Allocation of Loan Proceeds

ExpenditureCategory

Amount in US$

(1) Goods

1,200,000

(2) Consultants' services And Training

15,000,000

(3) Salaries

12,700,000

(4) Incremental Recurrent Costs

Financing Percentage 100% of foreign expenditures and 85% of local expenditures. 100%

Declining (80,80,60,60,30) percentage of incrementalcosts.

300,000

(5) Refunding of Project Preparation Advance

1,500,000

(6) Unallocated

1,300,000

Total

32,000,000

Amounts due pursuant to Section 2.02(b) of the Loan Agreement

ProjectAppraisalDocument Country: Bolivia

Page48 ProjectTitle: InstitutionalReformProject

Annex 7 Institutional Reform Project Project Processing Budget and Schedule A. Project Budget (US$000)

Planned

Actual 290,000

B. Project Schedule

Planned

Actual

10 3/1/1999 1/11/1999 1/26/1999 4/15/1999

13 3/1/1999 4/5/1999 4/15/1999 7/1/1999

Time taken to prepare the project (months) First Bank mission (identification) Appraisal mission departure Negotiations Planned Date of Effectiveness

Prepared by: Secretariat to the Commission for National Integrity Preparationassistance: PPF, PHRD Grant Bank staff who worked on the project included: Name

Specialty

Ronald Myers Jit Gill David Varela Roberto Panzardi Carmen Machicado Yasuhiko Matsuda Norma Rodriguez Enzo de Laurentiis Gisela Durand Paul Sisk Paul Vandenheede Carlos Mollinedo Jose Antonio Gonzalez Romulo Leon Gary Reid Rajesh Vidyasagar Malcolm Holmes Robert Crown Barbara Nunberg

Task Manager Tax Units/Anti-corruption Country Lawyer Org. Restructuring/LegalIssues Financial Management Institutional Assessment Procurement Procurement Assessment Project Financial Analyst Project FinancialManagement Disbursement Org. Restructuring/FiscalImpact Fiscal Impact Information Technology Civil Service Peer Reviewer Peer Reviewer Peer Reviewer Peer Reviewer

Project Appraisal Document

Page 49

Country: Bolivia

ProjectTitle: InstitutionalReformProject

Annex 8 InstitutionalReformProject Documentsin the ProjectFile* A. Project ImplementationPlan Borrowers ImplementationPlan Operations Manual B. Bank Staff Assessments Staff AppraisalReport and all related project documents - Civil Service and AdministrativeReform Project National InstitutionalReview Concept Document Public ExpenditureReview Procurement Assessment Financial Management Assessment C. Other Draft National IntegrityPlan OrganizationalDiagnosis - Internal Revenue Service OrganizationalDiagnosis - Customs Services Organizational RestructuringAgreement- Pre-Agreement(Ministry of Housing) Fiscal Impact Assessment- Customs Service Fiscal Impact Assessment- Internal Revenue Service Fiscal Impact Assessment- Civil Service Program Action Plan for Integrated Financial ManagementProject *Including electronic files.

Page 50 Project Title: Institutional Reform Project

Project Appraisal Document Country: Bolivia

Annex 9 Bolivia: Status of World Bank Group Operationsin Bolivia OperationsPortfolio

original Project

Number

Fiscal year

ID

Projects:

Active Projects BO-PE-6180 BO-PE-6196 BO-PE-6190 BO-PE-6205 BO-PE-6197 BO-PE-6181 BO-PE-6206 BO-PE-6191 BO-PE-6186 BO-PE-6202 BO-PE-57396 BO-PE-40110

1992 1993 1994 1995 1995 1995 1996 1996 1996 1996 1998 1998

BO-PE-6204 BO-PE-55974 BO-PE-40085 BO-PE-57030

1998 1998 1998 1999

in U.S.$ millions

Purpose

Borrower

IBRD

of Closed

Amount

Difference between expected and actual disbursements

IDA

Cancel.

Undisb.

Orig

Frm Rev'd

Last Supervision

b/

Dev Obi

Imp Prog

55

Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia Ministry of Finance (MOF) Government of Bolivia Government of Bolivia Government of Bolivia Government of Bolivia

Road Maintenance Integrated Child Development Municipal Development Juudicial Reform Land Administration Education Reform Rural Water & Sanitation Power Sector Reform Ta & Env.Ind.& Mining Rural Communities De Reg. Reform Tac Fin Decen. & Acct

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

80.00 50.70 42.00 11.00 20.40 40.00 20.00 5.10 11.00 15.00 20.00 15.00

0.00 20.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

19.15 18.32 8.27 4.55 6.41 19.95 9.74 1.66 8.89 .82 20.22 11.47

16.92 30.82 7.63 3.65 -1.69 7.61 8.93 1.96 3.60 1.95 .93 -.42

8.07 0.00 0.00 0.00 0.00 0.00 .67 0.00 0.00 0.00 0.00 0.00

S S S S U S S RS S S S S

S S S S U S S S S S S S

Education Quality BO El Nito Emergency Rural Inv. Participatory Reg. Reform Adjustment Credit

0.00 0.00 0.00 0.00

75.00 25.00 62.80 41.78

0.00 0.00 0.00 0.00

72.33 16.06 60.98 19.81

11.25 2.54 -. 34 -2.30

0.00 0.00 0.00 0.00

S S S S

S S S S

0.00

534.78

20.25

298.63

93.04

8.74

Total

Active disbursed (IBRD and IDA): Of which has been repaid: Total now held by IBRD and IDA: :0.00 Amount sold : Of which repaid : Total undisbursed Total

Projects 212.68 0.00 514.53 0.00 298.63

Closed Projects 1,157.97 294.96 841.00 .05 .05 3.20

Total 1,370.65 294.96 1,355.53 .05 .05 301.83

to date as projected at appraisal. a. Intended disbursements to date minus actual disbursements S = satisfactory, (ARPP), a letter-based system was introduced (HS = highly Satisfactory, b. Following the FY94 Annual Review of Portfolio performance (SecM94-901), August 23, 1994. see proposed Improvements in Project and Portfolio Performance Rating Methodology HU = highly unsatisfactory):

Note: Disbursement

PSR Rating

data is updated

at the end of the first week of the month.

U = unsatisfactory,

Annex 10 Page I of 2

Bolivia at a glance Latin LowerAmerd"a middleBolivia &Carlb. Income

POVERTY andSOCIAL 1997 Poputioon,mid-year (tnilions) GNPpercapitafAtls rnefho&US$' GNP(Atlasnethod, US$b/fbns,

7.8 950 7.4

494 3,880 1,917

228 t,230 2,818

2.4 2.6

1.7 2.3

1.2 13

59

74

61 67 9 80 17 91 95

70 32

42 69 36

1011/98

Development diamond Ufeexpectancy

Averageannualgrowth,1991.97 Populationf%) LaborforceNo) Mostreceptestimabt (ltst yearavIlable, 19917Poveoy (%of populationbelownationra Poverylin, Urbanpopulation (%of tota poputatlion) Ufe.expectancyatitYeats) Infantmortait (pW1,0Wlivebilihs; Chid malnutrition Ofcddrennd 51 Accessto safe water(%ofpoputation) liiteraCV f% ofpopulationage 15+) Grossprimaryenrollnwt (%ofshol-apopPuation) Male

G GNP per capita

G Gross primary enrollment

67

Female

87

..

.-

73

84

111

1t'E

13 .. -

Accesstb safewater

19 olivia Lower-middle-income group

116 113

KEYECONOMiC RATIOS andLONG-TERM TRENDS GDP(US$billions) Grossdomesticinvestment/GDP Exportsot goodsandservices/GDP

1978

198$

1998

I997

2.2

4.0 13.6

7.2 16.6 22.9 11.2 166

7.8 19.8 21.0 123

-5.3 2.3 72.1 29.S 46.4

-8.3 2.2 67.8 30.5

.. . .. .

Gross domesticsavngs/GDP Grossnationalsavings/GDP

Currentaccountbalance/GDP Interestpayments/GDP TotaldebtGDP Totaldebtservice/exports Presentvalue of debtGODP Presentvalue of debtlexpors ...

-2.8 1.8 58.6 21,5 ..

.. ..

*8.1 2.5 f40.8 35.0 ..

-

197-86 19$797 (avrage annualp rowtlv GOP GNPpercapita Exports of goodsand services

21.3

-2.7 ..

-5.0

Economic ratios' Trade

T

15.0

Domestic Savings

241.4

Investment

Indebtedness

1996

1997

998-02

4.1 1.9

4A1 2.8

4.2 1.4

5.3 2.8

8.6

6.7

-0.5

8.7

1976

1986

1996

1997

boivia Lower-middle-income group

STRUCTURE of theECONOMY (%of GDP) Agriculture

Industr Manufacturing Services Privateconsumption Generalgovemment consumption Importsof goodsandservices

Growth ratesofoutputandinvestment (Y) 45

.. .. .. ..

28.5 51.9

14.1 29.2

14.1 27.9

19.6

17.0 56.7

..

81.4

75.6

.. .

9.4 25.7

13.1 28.3

15.7 58.0 74.0 13.7 28.5

1976-86 1987-97

1996

1997

3.6

4.9

20

3.4

3.5

i S4.5

4.3

3.9

4.2

10

3.9

4.4

4.5

5

3.0 2.9

2.4 1.0

3.9 o 3.8

0

7.8 6.0

20.9 9.7

23.8 10.3

4.4

5.1

3.8

..

30 15

o I15-

_ 92

g95

93

GDI

96

97

GDP

D19

Growth ratesofexports andimports (Y)

(averageannualgrowth, Agriculture Industry Manufacturing

. ..

Services Privateconsumption

-0.5

Generalgovemment consumption

-4.4 -4.1 1.6

Grossdomesticinvestment Importsof goodsandservices Gross nationalproduct

..

3.3

_

92

93

_

96

97

s

Exports

*Imports

Note:1997dataarepreliminary estimates. Thediamondsshowfourkevindicators in thecountrV (inbold)compared withitsincome-group average.If dataaremissing,the diamondwill beincomplete.

Annex 10 Page 2 of 2

Bolivia PRICESand GOVERNMENTFINANCE 1976

1988

1996

1997

.. ..

..

7.9

6.7 7.9

Inflation(%)

Domesticprices (% change) Consumerprices

ImplicitGDPdeflator Govemment finance (% of GDP,includescurrentgrants; Currentrevenue Currentbudgetbalance Overall surplus/deficit

20

211.4

8.9

18.7 1.4

24.1 3.0

-3.3

26.3 6.3 -2.0

1988

1996

1997

588

1,132

1,167

15

to o1-

.. .. ..

95

92

93

-

GDPdeflator

94

-3.3

e

96

97

CPI

TRADE 1976

Export andimportlevels(USSmillions)

(US$millions) Total exports (fob) Tin

..

Fuel Manufactures

Totalimports(cifl Food Fuel and energy

.. .. ..

104

86

81

334

153

200

144

183

1,568

1,810 188

..

674 .. ..

Capitalgoods

148 86

2,000

1,500 1,00 soo

349

586

734

156

104

106

50 310

109 95

110 96

623 656 -35

1988 704 816 -112

1996 1,318 1,779 -461

1997 1,362 2,050 -688

-2

Netincome Netcurrenttransfers

-36 14

-309 99

-168 245

-212 252

-4.

Currentaccountbalance

-57

-321

-384

-648

Financing items(net) Changes in netreserves

113 -56

432 -110

726 -342

751 -103

505 1.9

1,125 5.1

1,192 5.3

Exportpriceindex(1995-t00J Importpriceindex(1995=100J Terms of trade (1995-100)

.. .. ..

om 91

92

93

94

*Exports =

95

96

97

MImports

BALANCEot PAYMENTS (US$millions) Exportsof goodsandservices Importsof goodsandservices Resource balance

Memo: Reservesincludinggold(US$millions) Conversion rate(DEC,locatl/US$)

1976

..

3.OOE-5

Current account balance to GDPratio(V.) 0

111111

-o

-10

EXTERNAL DEBTand RESOURCEFLOWS 1976

1986

1996

1997

1,290 31 53

5,575 235 97

5,200 61 843

5,284 37 930

Totaldebtservice IBRD IDA

137 4 1

251 38 2

413 32 8

453 24 10

Compositonof netresourceflows Officialgrants Officialcreditors

11 104

394 196

220

44

-29

-8 0

147 229 -4 10 0

426 0

591 0

Commitments Disbursements Principalrepayments Net flows

68 16 2 14

72 7 19 -12

59 100 28 72

15 136 23 113

Interestpayments Nettransfers

2 12

20 -32

12 59

11 102

(US$millions) Totaldebtoutstanding anddisbursed IBRD IDA

Private creditors

Foreigndirectinvestment Portfolioequity

143

G:425 A 37 G4930

Com

millions) C:248

E:1,421 _

_

WorldBankprogram

Development Economics

A -IBRD B -IDA c - IMF

0 Othermuftilateral

E - Bilateral F -Private G -Short-term

10/1198

Page

Annex 11 Institutional Reform Project Letter of Development Agreement

-A* .vIs

BOLIVIA

Presidencia delCongresoNacional Vicepresidencia de laRcpublica

La Paz, May 19"' 1999 Mr. James Wolfensohn President

The World Bank Washington D.C.

DearMr. l'resident, With this DevelopmentProgranmLetter, we wish to inform the World 13nikabout thc objectives for Stato Modernization and Institutional Reform that our Governmentintends to purstueover the following years with the assistance of the Woild Bank. As you kniow,the Government of Bolivia has adopted as its prinmarypolicy goal dte mitigatiol of poverty and inproving the living coniditionsof all Bolivians. This objective shall bo achieved by irplementibg the policies designed unider the four pillars of our GovenmnemtProgran. These four pillars are: Opportunity, to establish the fouiidations of economic growth and its better distributio'n; Equity, to provide the majority of the population with the basic servicesrequired for a mnoreequitable devi1opmtant; Iinstitutiolality,to lay the foiundationsof viable and responsive Rtatcorganizations in ordcr ut assure a niore efficient and honcst public administration; aind Dignity, to witldraw Bolivia fiom -the drug trafficking circuit during the next five years. We havc identified the institutional strungtheningof government organizations as one of the piary areas where m-edium and long-tenn efforis are required, building on the institutional refoiin and modeTnizationstarted in Bolivia in 1985. Deepeniig this procwcsis a necessary coc dition for tle success of economic and social reform is) Bolivia being supported by international cooperation. In order to achieve this objective, 1he Governmenthas elaborated and initiated tSe National Integrity Plan (a strategy for institutional development and fighting agaillst corruption). Within this stratcgy an InistitutioralRcforn Project has beenldeveloped in order to promote the strengthening an(dtodernizatioil of Bolivia's public adninistration, through the establishment of an efficient, hoincstand result-oriented public service eultOlre. The InstitutionialReforn lroject bas been designed in three stages thattinitially contemplate a 10-year period. The Project would be supportedby the World Bank th}ough an Adaptabli Prograin Credit (APC.), joined by other donors and co-financiers. Theusegoalsand objc6tives ofibe project are well described iii the project docunientsprepared jointly with the Bank, but wc would highlight thc rollowing points. THE INSTITUTIONAL REFORM PROJECT 336ed on the proposals andl evaluaticns carried out betweoonthe Banik and the Government, 1he main components toxbe irnplcm.entedduring the tbtre stages of the Project have been identified:

1 of

4

Page

BOlIVIA

delCongresoNacional Prcsidencia de laRepublica Viceprcsidencia

Ilorizonlal Reforms The following reforms are ainmedat establishing ihe regulatory basis for institutional refonn as well as creating a system of iricentivcsthat prolote anibonaestresuIt-owientedadrministation: (i) Implementation of the mauagement systems establisbed by Law 1178 (SAECO), through the modcmization of thc budgetary procedures (biudgctingby results) anidthe creation of a pelornmance evaluaiion system for public agencies. it is exprectedthat at tdieend of tlie firstphasc of the Project specific noims that regulate tlhe functioninig:of 1hesesystems will have bceo establisled. A.lsq,it is expected thaltihe perfornance evaluation system lbr public agencies will be impilementedin the Ministries of tje executive in brhanh (ceniral.govermelit). During the second phase, tle systems will have been eWstablisbed the regional level (priafecturas). (ii)

Implementation of a modern policy of human-resource management in ihe piublicadministraiion by carrying out a rcform in the'Civil Servicc Systam to establish a piublic servIce admhiustrative career. To accomplish this goal, a Civil Servant's Statute (Estatuto dcl lFuncionarioPiblico) will be passed, see4in 1o withdraw politicaltinfleice andl uncourage professionalism: in the public administration. It is expected that at the caid'of the'firct phase at least 2080 civil selvants will h4vc career in at leasl7 public agencies through a' tranparent been incorporated to the&adminiitslra6iie and competitive process. Likewise, around 6000 civil servants will have been ,iotporated to tle administrative career by thIeend of Ihe second stage andl9,400 by the end of tbe'third stage.

(iii)

Inmplementationof specific anti-corruptionpolicies to proinoto an honest administration is in Our view a necessary condition to increuse effectiveness and efficiency in puHlic:services. Practical corruption control mechanisms will be estailished through sworn declaritions' of assets :and of puiblicservants,.ald 'modem nbnqn' and transparent instrumentsfor government in)conmes procuremiientwill be implemented. Public bureaucracy will be simplified' id specific effofrtAwill be made in orderto redut;o orrilptionin reveinueagencies (inte a1 revenues and customs). .

Additionally,the strengthening of independent organizations in clhargeof tlheinvestigation and prosccution of conuption aid fraud' in 'the public admini4itior "will be .enooulaged. Suih M institutions ire thlcOmbudpeson officc,tbo cnpiroileri(efieral nn'dthePblic Miristy. A. special cffort will be malde through a broad social cointnunicition and public education

cffcctivcsocialparticipationin st chngtheednationalintegritythrougha to en.lcourage camppaign, reinvigoration of ethical values and cr'aioibf a ZEi toleraxiccculture towads c6rilptipn.

2 of

4

Page

3 of

BOLIVIA

I'residencia delCongieso Nacional Vicepresidencia dc laRcptrblica

It is expectedthat, as a resultof these efforts,the perccptionof corrtptionregardingthe public administration prevalcntin publicopiiion (780°)willhavebeendiminishedby 10%by tie end of the firstpbaseandby 30%by the edxlof thoprogramperiod. VerticalReforms T'hesuccessof the horiomntal reformsdescribedabovewill dcpxndto a great extenton the ability of variouspublic agenciesto developand impilement specificmodemnization processeswithlintheir own administrativcstructures. Withthis in mind, comprehensive orgdnizational rceormswill be developed and inmplemented in pilot agcnciesof the centralGovemmcntand regionaladministration(Ministerios andPrefecturas). Thseprocesses of institutional reform will contemplatea comprehensivediagnosis of every agency to be

niodmerized, evaluatingthe formalandinformalfunctionsthat they perfonn.the claritywitl which their institutionalmission is percived, the rationalityof their organiizational stlrcture and.acnistrativec Systems,thsequantity and quality of their humanresourcesaid tlle strengthof their ffiancial.and budgetauymanagementsystens. Based on the aforementioneddiagnosis every agency shall prepare, with the assistatnceof the Project, an

in;itutional reform strategy ained at developinga service and restilts-orientedculture within the organization. This woild entail a revision of the agenicy'smission and objectivesas well as the. applicationof Imtodemn administrative tools that enable the organization to achieve its goals in a more officient and offectivemanner. After havingconsideredlhecomplexity of the institutionalreformprocess,it has beendecidedto carry out a gradual processduring dte three foreseen stages of the Project. Dwringthc fitst stage, an experimentalproemsswillbe startedin sevenpublicinstitutions.PotentialcandiLlates at thisstage include the ministriesof Finance,l4ousing andBasicServices,Agricultureand RuralDevelopment, Planningand SustainableDevelopment,and Eiducatiin;the InternalRevcnueService,the CustomsService, anida RegionalGovernment(Prefecture)whichwe are in the processof identifying. Otheragencieswill be able to join thc reformnas the necessary tochnicaland financial conditions become available.

It is expected that during tlie second stage of the Project the remaiuing eight regional govertunents (Prefecturas) will join the reform effort as well as the ministries of Health, Justice, and others. Finally, during the third stage, the implementationof the reform program will be completed in the remiaining public organizationsof the central administration. The nmaincosts involvcd with the executionlof the reforms described above are tlhose related to the competitive salarics of the civil servants (recruited under the new Civil Servant's Statute)'. Thiiiswill imply a nominal intcreasein current expendituresof the public sector. lthrottghstudiae of fiscal impact, it was shown that the Treasury will be, able to absorb this incremental changcs duriinga tcn-year period witliout raisinigtlhe.public deficit or modifyhig the distributio