Colombia 2011-2014 Country Program Evaluation

May, 2015

Context

Colombia is an upper middle-income country with the third largest population and fourth largest economy in Latin America and the Caribbean (LAC). Since 2000, Colombia has experienced relatively high and stable growth rates (annual average of 4.2%, compared with 3.5% for LAC) and relatively low inflation rates (annual average of 4.8%). After a countercyclical response to the 2008-2009 world economic crisis, Colombia’s fiscal position has strengthened in recent years: the deficit of the combined public sector narrowed from 3.3% of GDP in 2010 to 1% in 2013, reflecting the impact of high oil prices, fiscal reforms, improvements in tax administration, and curtailed spending. In March 2011, as a result of the sound policy framework and the credibility generated by the government’s rigorous macroeconomic management, Colombia regained the investment grade status that it had lost in 1999.

The poverty rate in Colombia has declined substantially over the last decade, owing to favorable economic performance, progressive income redistribution through fiscal reform, and the introduction of social safety net programs targeting low-income and displaced segments of the population. This trend has been accompanied by significant achievements in terms of reducing unemployment and crime rates and improving access to health and education services.

Despite these gains, Colombia faces structural hurdles that have led to slow productivity growth, with an adverse impact on competitiveness, such as deficiencies in infrastructure and education quality, along with safety issues that affects the business climate. Other challenges are inefficiency in the public sector at the national and subnational levels, the large size of the informal economy, and regional disparities. There are also weaknesses in the institutional capacity of subnational governments, as well as in their ability to exploit their own sources of revenue (including oil royalty revenues). Problems with the national pension system also need to be addressed. In addition, peace negotiations and the post-conflict reconciliation process will probably create fiscal pressures and growing demands for a regional presence by the State, among other challenges. However, the peace process also offers significant opportunities to reduce regional disparities and improve social and economic benefits (especially in agriculture, tourism, and mining).

Colombia has gained access to sources of finance other than the multilateral development banks in recent years, including bond issues on favorable terms in the international financial markets. The Colombian government’s plan to accelerate growth is focused on improving the country’s infrastructure (expanding public-private partnerships) and supporting the peace process, while its plan to continue addressing inequalities is based on social expenditure programs.

The Bank’s country program, 2011-2014

In general, the Bank’s country program with Colombia was broad and timely. Approximately two thirds of the program was focused on policy-based loans (PBLs), supported by significant amounts of technical cooperation. The Bank’s 2011-2014 program with the Government of Colombia, approved in 2012, was prepared in the wake of floods caused by the La Niña phenomenon, which affected more than 60% of national territory. The program was influenced by the country’s interest in expanding Bank support, in particular through fast-disbursing PBLs. The government uses the Bank’s financial and technical assistance in a strategic manner, drawing on its technical capacity and the country’s access to international financial markets.

In addition to significant financing, the government appreciates other aspects of its relationship with the Bank. In particular, it values (i) the Bank’s role as a source of countercyclical lending in times of crisis; (ii) the technical assistance and knowledge transfer that the Bank offers through lending and nonlending operations, as well as through interactions with its specialists; (iii) the Bank’s convening power, especially in the area of PBLs; (iv) the continuity that Bank support provides to reform projects amid institutional changes; (v) the Bank’s understanding of the region and Colombia’s political economy, as well as its willingness to address priority development challenges, which also have political roots; and (vi) the high fiduciary, social, and environmental standards that the Bank’s name lends to projects.

The Bank’s country strategy with Colombia was aligned with the National Development Plan (PND), and the Bank’s program was responsive to country demand. The country strategy centered on 11 sectors in which new operations were approved. Policy reforms focused on five areas: health, labor markets, institutional capacity of the State, transportation, and risk management and climate change. Substantial disbursements were also made through investment loans in the areas of transportation, institutional capacity of the State, access to financial services, social protection, and housing. The Bank used much the same results matrix in its strategy as the PND. Although use of much the same matrix for the current strategy offers benefits in terms of efficiency and consistency of measurement, the evaluation indicators for a number of sectors were reduced to overly general measures for the specific interventions within the Bank’s portfolio, which complicated evaluation of the sectors in the strategy.

Although the Bank’s program quickly adjusted to shifts in government priorities and needs, the effectiveness of its actions was reduced in some areas. Given that only two of the six programmatic series were completed as planned, several medium-term policy reforms were left pending; this reduced the effectiveness of the interventions and the Bank’s value-added as a development partner. Of seven programmed investment loans prepared at a cost of US$1.279 million, six were not approved, and one was approved and immediately canceled. As a result of changes in financing requirements and, in some cases, the substitution effect, the originally programmed loan amounts also fluctuated significantly, particularly in the case of PBLs. A health PBL originally planned for US$100 million was ultimately approved for US$250 million, while the parallel investment loan for that sector was not approved. The same occurred for labor markets: a PBL originally planned for US$100 million was ultimately approved for US$400 million, while the US$100 million investment loan was prepared but not approved.

During the period evaluated, Colombia received the largest number of technical cooperation operations of any country (82). Around 70% of these were executed by the Bank. Colombia ranked third (after Brazil and Peru) in terms of the amount of technical cooperation funding. While Bank execution of technical cooperation operations can lead to greater efficiency, it also imposes high administrative and fiduciary costs on the Bank and reduces the program’s impact on country institutional capacity development. Around 40% of the total value of technical cooperation was tied to the PBL portfolio, providing significant technical and institutional inputs to policy reforms, as well as direct support for PBL policy conditions and sector support in the five areas.

The Bank has limited to options in working directly with the country’s departments and municipios since loans to subnational governments require a guarantee from the national government, which is not always available. As an alternative, the Bank approved a conditional credit line for investment projects (CCLIP) for Fiscal and Public Investment Expenditure Strengthening in Subnational Entities (CO-X1018), in the amount of US$600 million. Financiera de Desarrollo Territorial S.A. (FINDETER), a state-run second tier bank that enjoys a sovereign guarantee, channels the resources through first-tier banks. This instrument clearly represents a source of finance for subnational governments, yet the eligibility requirements for the program rule out the municipios most in need, which are those with limited institutional capacity.

Implementation and outcomes

The Bank supported several sectors relevant to the country’s development challenges. This support included investment and policy-based loans, as well as technical assistance, and yielded development benefits, particularly in the transportation, fiscal and municipal management, health, and social protection sectors, which have also been a focus of the Bank’s long-term commitment to the Government of Colombia. In other areas, the results were more limited: labor markets, education, access to financial services, housing, and water and sanitation. Loans in trade or science and technology had a low level of execution, so it was not possible to evaluate their outcomes.

Bank support in the transportation sector was highly relevant. It focused on supporting modernization and institutional capacity building, promoting public-private partnership arrangements, and implementing public policies for national logistics, urban transportation, and road safety. This new focus on public policies, institution-strengthening, and innovative financing partnerships represented a significant shift with respect to previous country strategies. It was an innovative set of coordinated interventions with an emphasis that went beyond the traditional approach of financing investment in transportation networks. Despite these gains, the programmatic policy-based loan (PBP) series was not completed after the first loan. Nonetheless, the Government of Colombia has made progress on a number pending reforms. At the same time, although there were achievements in the areas of infrastructure, institution-strengthening, financing, and sector policies, implementation of the urban transportation portfolio was subject to delays owing to a number of factors that limited the results achieved thus far in this area.

Bank support was aimed at improving efficiency in government, focusing on defense of the State against lawsuits, transparency and accountability in the royalties system, and building the capacity of subnational governments through the creation of fiscal stability. The PBP series supported fiscal stability through the consolidation of subnational fiscal responsibility based on greater efficiency in the funds transferred to these governments, improved quality of subnational fiscal data, and an increase in subnational tax revenue intake. The two supporting technical cooperation operations helped to produce major inputs for the technical and policy work of the Fiscal Support Department (DAF) of the Ministry of Finance. Investment loans in institutional capacity of the State faced execution difficulties on account of a number of factors, including problems with budget allocations. Disbursements have not yet begun under the new fiscal programmatic PBL (loan CO-L1142) approved in December 2014.

The Bank’s vision for health sector reform emphasized preventive care, with support provided in the form of a PBP series comprising two loans (completed), and four parallel technical cooperation operations. An accompanying investment loan was canceled before it was approved. The four technical cooperation operations have generated high-quality strategic technical inputs for design and implementation of the health reform. The policy matrix conditions of the PBP series represent a relevant and appropriate selection of policies necessary to advance the sector reform. Nonetheless, one of the policy conditions in the matrix for the first operation (submission of draft Law 210 to Congress) was not followed up on in the matrix for the second operation (the law was not approved).

Bank support for the workforce training system focused on a reform to create a national human capital formation system, alongside a strategy for human capital management. It included a PBP for US$500 million, which was disbursed. However, preparation and execution turned out to be difficult, and outcomes to date have been very limited. The PBP series of three operations was canceled after the second program owing to institutional and coordination problems. The policy matrix for second operation, which originally contained policy measures of substance, underwent changes that diminished the depth of these conditions as a result of a lack of progress in execution. Reform of the Government of Colombia is based on a model from England, but the institutional capacity elements of this model do not seem to have received full consideration in the local design. Moreover, a parallel investment loan to assist the government agency responsible for technical and vocational training, the National Learning Service (SENA), in improving service effectiveness was canceled shortly prior to approval owing to a lack of political commitment. While the PBP series yielded limited results and the investment loan was canceled before going to the Board, the parallel technical cooperation operation (US$600,000) produced several major inputs for the reform process, including a pilot project for job skills and a national household survey module in the area of human capital formation.

Bank support to the environment sector centered on two programmatic PBL series—one in 2009 and another in 2011—for disaster risk and climate change management. Thus far, the PBL series on climate change and the PBL series on disaster risk management have been interrupted following approval of the first loans, limiting the impact of the full program of reforms. As an immediate response to the emergency caused by serious flooding in several parts of the country in 2010-2011, the Bank approved the second series of PBLs for institution-strengthening, as well as mitigation activities in line with international standards. In addition to the two PBL series, the Bank approved six related nonreimbursable operations (five technical cooperation operations and one Global Environment Fund project) for a total of US$5.65 million. Although both PBL series included policy conditions for the strengthening of coordination and knowledge transfer between the central and local governments, this policy has been particularly difficult, and there is little evidence that significant contributions have been made in the areas of climate change and natural disasters at the subnational level. However, the outputs of the technical cooperation operations helped to maintain sector dialogue and provided a certain continuity to reform programs.

Conclusions and Recommendations

Although Colombia has made significant progress in a number of areas, it faces development challenges and opportunities that will require diverse and innovative solutions at both the national and subnational government levels. Although Colombia enjoys access to international capital markets, the government values its relationship with the Bank, particularly the opportunity to combine financing with technical assistance.

OVE offers the following recommendations to make the Bank’s support more effective, as a development partner for Colombia:

1. Strengthen the design, monitoring, and completion of PBL series to avoid interruptions in the Bank’s comprehensive support for priority sectors, and ensure that development objectives are met in a sustainable manner. When PBL series are interrupted, it is recommended that these be removed from the lending program, and a project completion report prepared for the truncated series.
    
2. Strengthen risk analysis during project design and periodically reevaluate and reprioritize the lending program based on dialogue between the Bank and the Government of Colombia, with a view to lowering the cost of projects prepared but unapproved or canceled.
    
3. To lower the cost to the Bank of the program of technical cooperation operations, give priority to those linked to the Bank’s strategy and lending program and increase the proportion of new technical cooperation operations executed by the client. In providing technical assistance, “fee-for-service” instruments may be useful for meeting client demands that cannot be met using nonreimbursable technical cooperation operations.
    
4. Strengthen country dialogue and continue exploring ways to become operationally involved with subnational entities, seeking innovative options that utilize sovereign guaranteed and non-sovereign guaranteed, technical cooperation, and fee-for-service instruments.
    
5. Consider expanding the Bank’s involvement in rural development, given the persistence of regional disparities and the emergence of new work areas expected as a result of the peace process.