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The World Bank Colombia Institutional Strengthening for Territorial Development DPL (P170728)

Document of

The World Bank

FOR OFFICIAL USE ONLY Report No: PGD113

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT FOR A

PROPOSED LOAN

IN THE AMOUNT OF US$ 400 MILLION TO

THE REPUBLIC OF COLOMBIA

FOR THE

COLOMBIA INSTITUTIONAL STRENGTHENING FOR TERRITORIAL DEVELOPMENT DEVELOPMENT POLICY LOAN (DPL)

January 30, 2019

Governance Global Practice Latin America And Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official

duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Republic of Colombia

GOVERNMENT FISCAL YEAR

January 1-December 31

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of January 22, 2020)

Currency Unit=Colombian peso (COP)

US$1.00=3,146.43 COP

ABBREVIATIONS AND ACRONYMS

ADR Rural Development Agency (Agencia de Desarrollo Rural) ANT National Land Agency (Agencia Nacional de Tierras) CAD Current Account Deficit CONPES National Economic and Social Policy Council (Consejo Nacional de Política Económica y

Social) CPF Country Partnership Framework DANE National Administrative Department of Statistics (Departamento Administrativo Nacional

de Estadistica) DNP National Planning Department (Departamento Nacional de Planeación) EAT Territorial Association Schemes (Esquemas Asociativas Territoriales) ESAP School of Public Administration (Escuela Superior de Administración Pública) FNEA National Agricultural Extension Fund (Fondo Nacional de Extensión Agropecuaria) FUT Single Territorial Form (Formulario Único Territorial) GDP Gross Domestic Product GNP Gross National Product IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IGAC The Geographic Institute Agustin Codazzi (Instituto Geográfico Agustín Codazzi) IMF International Monetary Fund LDP Letter of Development Policy LVC Land Value Capture MTEF Medium-Term Expenditure Framework MADR Ministry of Agriculture and Rural Development (Ministerio de Agricultura y Desarrollo

Rural) MADS Ministry of Environment and Sustainable Development (Ministerio de Ambiente y

Desarrollo Sostenible) MHCP Ministry of Finance and Public Credit ((Ministerio de Hacienda y Crédito Público) NDP National Development Plan OCAD Governing Councils of Administration and Decision (Órganos Colegiados de

Administración y Decisión) PER Public Expenditure Review PEMOT Strategic Metropolitan Land Use Plan (Plan Estratégico Metropolitano de Ordenamiento

Territorial)

POD Department Land Use Plan (Plan de Ordenamiento Departamental) POT Territorial and Land Use Plan (Plan de Ordenamiento Territorial) RAP Regional Administrative Partnership (Región Administrativa y de Planificación) SCD Systematic Country Diagnostic SGR General Royalties System (Sistema General de Regalías) SGP General Revenue-Sharing System (Sistema General de Participaciones) SNIA National Agricultural Innovation System (Sistema Nacional de Innovación Agropecuaria) UPRA Rural Agricultural Planning Unit (Unidad de Planificación Rural Agropecuaria) VAT Value-added Tax WB World Bank

.

Regional Vice President: Humberto Lopez (Acting)

Country Director: Ulrich Zachau

Regional Director (s): Robert Taliercio, Anna Wellenstein

Practice Manager (s): Adrian Fozzard, Ming Zhang

Task Team Leader (s): Alberto Leyton, Alexandra Ortiz


i

REPUBLIC OF COLOMBIA

COLOMBIA INSTITUTIONAL STRENGTHENING FOR TERRITORIAL DEVELOPMENT DPL

TABLE OF CONTENTS

SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3

1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5

2. MACROECONOMIC POLICY FRAMEWORK ....................................................................................7

2.1. RECENT ECONOMIC DEVELOPMENTS ............................................................................................ 7

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 13

2.3. IMF RELATIONS ............................................................................................................................ 15

3. GOVERNMENT PROGRAM ........................................................................................................ 15

4. PROPOSED OPERATION ............................................................................................................ 16

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 16

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 17

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 30

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 30

5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 31

5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 31

5.2. ENVIRONMENTAL ASPECTS ......................................................................................................... 31

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 32

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 33

6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 34

ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 36

ANNEX 2: FUND RELATIONS ANNEX .................................................................................................. 39

ANNEX 3: LETTER OF DEVELOPMENT POLICY ..................................................................................... 43

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 52

ANNEX 5: POVERTY AND SOCIAL IMPACT ANALYSIS ......................................................................... 54

ANNEX 6: REFERENCES ..................................................................................................................... 73

The Institutional Strengthening for Territorial Development Development Policy Financing Loan was prepared by a team comprising Alberto Leyton (TTL, Lead Public Sector Specialist, GGOLP); Alexandra Ortiz (TTL, Lead Urban Development Specialist, GSU10); David Ba ringo (Senior Social Development Specialist, GSU02); Jose Antonio Cuesta Leiva (Senior Economist, ELCPV); Irina Klytchnikova (Senior Economist, GFADR); Nancy Lozano (Senior Economist, GSU10); Ivonne Moreno (Senior Land Administration Specialist, GSULN); Sergio Olivieri (Senior Economist, GPV04); Carolina Rojas (Senior Environmental Specialist, GENLC); Cristina Savescu (Senior Economist, GMTLC); Jeannette Estupinan (Senior

Financial Management Specialist, ELCG1); Gabriela Grinsteins (Counsel, LEGAL); Pablo Valdivia (Senior Agribusiness Specialist, GFA04); Daniela Felcman (Public Sector Specialist, GGOLP); Julian Lee (Senior Environmental Specialist, GENLC); Maja Murisic (Environmental Specialist, GENLC); Ana Maria Torres (Senior Operations Officer, CCER2); Marcela Portocarrero (Consultant, GENLC); Vanessa Velasco (Urban Development Specialist, GSU10); Adrienne Hathaway-Nuton (Research Analyst, GGOLP); Rafael Corral (ET Consultant, GSU04); Giuliana de Mendiola (Consultant, GSU10); Julieth Pico Mejia (Consultant, GPV04); Maria Virginia Hormazabal (Finance Officer, WFACS); and Claudia Lorena Trejos (Consultant, GSU10).


Page 3

SUMMARY OF PROPOSED FINANCING AND PROGRAM

BASIC INFORMATION

Project ID Programmatic

P170728 No

Proposed Development Objective(s)

The objective of this operation is to support policies to: (i) strengthen institutions for regional planning, resource allocation, coordination and investment prioritization, and (ii) enhance the efficiency of land management in rural and urban areas.

Organizations

Borrower: REPUBLIC OF COLOMBIA

Implementing Agency: NATIONAL PLANNING DEPARTMENT

PROJECT FINANCING DATA (US$, Millions) SUMMARY

Total Financing 400.00 DETAILS

International Bank for Reconstruction and Development (IBRD) 400.00

INSTITUTIONAL DATA

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Overall Risk Rating

Moderate .


Page 4

Results

Indicator Name Baseline Target

Number of Territorial Pacts subscribed [0] [2019] [4] [2021]

Share of SGR resources approved for investment projects in each biannual

cycle and amount of climate and environmental protection-related

activities funded with the SGR special allocation

[62.6%][2019] [0][2019]

[79.8%][2021] [43,302 million][2021]

Percentage of the budget of the territorial governments (department and

municipal governments) formulated and tracked using the new

harmonized budget classification system [0%][2019] [100%][2021]

Percentage of category 5 and 6 municipalities that implement merit-based

processes to promote public career employments [20%][2019] [30%][2021]

Sub-national entities that manage their own cadaster [6][2019] [17][2021]

Formalized titles that grant access to land [850][2019] [16,171][2021]

Number of Productive Chain Development Plans formulated [1][2019] [3][2021]

Number of municipalities that have included the new financing

instruments in their POTs [0][ 2019] [3][2021]

Number of territorial entities that use the methodological instruments for

the incorporation of disaster risk analysis and adaptation to climate

change aspects in public infrastructure projects financed by royalties

[0][2019] [10][2021]

.


Page 5

IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA

1. INTRODUCTION AND COUNTRY CONTEXT

1. The proposed standalone Development Policy Loan (DPL) in the amount of US$400 million supports the Government of Colombia’s (GoC’s) efforts to strengthen institutions for territorial development. Building on previous efforts to address development challenges linked to disparities at the territorial level, stagnating productivity and inefficiencies in public expenditures, the GoC has embarked upon the next phase of implementation of structural reforms to strengthen territorial development focusing on measures to address institutional constraints. Over the long term these reforms are expected to strengthen sub-national institutions to help narrow gaps in human development indicators, increase regional economic competitiveness, improve socio-economic conditions in remote areas of the country, and protect Colombia’s natural endowments. The proposed operation supports Government institutional reforms prioritized in the 2018-2022 National Development Plan (NDP) that seek to promote greater integration and collaboration among territorial entities, strengthen institutional capacity, develop strategic investments at the regional level, and support a more effective and sustainable use and management of land in both rural and urban areas. The reforms are also expected to contribute to peace-building in Colombia.

2. Colombia’s strong economic growth performance over the past decade has not benefitted all its territory in an even manner. Colombia is a unitary state with 32 departments and 1,102 municipalities. The country is divided in six regions which are not official jurisdictions but are widely recognized as natural developmental spaces sharing common geography, culture, endowments and challenges. While Colombia has been one of the stronger performers in Latin America during the past decade in terms of economic growth, there remain large spatial gaps in GDP, poverty rates and standards of living across regions, within departments and municipalities and between urban and rural areas. Poverty rates vary from as high as 59.3 percent in Chocó and 50.7 percent in Cauca to as low as 8 percent in Santander and 7.3 percent in Cundinamarca. While most of the poor population lives in urban and sub-urban areas, extreme poverty is three times higher in rural areas, and moderate poverty is 50 percent higher. Urban areas also face challenges because they are growing rapidly and have a poor population almost 2.5 times higher than in rural areas. There are large spatial differences in access to basic services. In 2016, access to adequate water sources ranged from 98 percent of the population in municipal capitals to less than 75 percent in other areas. Continued progress in poverty reduction and shared prosperity at the national level – between 2012 and 2017 mean income growth of the bottom 40 percent of the population was 3.5 percent compared to 1.1 percent for the overall population – will require interventions that tackle the differences in development outcomes observed across the country. The social dissatisfaction motivated in part by perceived inequalities and poor government responses, has resulted in large-scale protests and triggered an extensive national debate the government is currently leading involving several stakeholders.

3. Weaknesses in the institutional framework for territorial planning and subnational public management have become a binding constraint for a more balanced regional development in Colombia. Institutional challenges include: weak coordination arrangements among the many national and subnational institutions with roles in territorial development; lack of effective mechanisms to facilitate and incentivize cooperation in public investment; ineffective land use management that results in conflicting and inappropriate land uses in rural and urban areas; and persistent management capacity and information gaps at the subnational level.


Page 6

4. These challenges are exacerbated by observed and anticipated climate change impacts. Coastal areas in particular face a high incidence of extreme weather and disasters associated with climate conditions and vulnerability. Climate change will have significant, long-term impacts on fragile and unique ecosystems. It will accelerate the pace of land degradation, impact water quality and agricultural production, contribute to the decline of biodiversity and increase the exposure of its citizens to tropical vector diseases, such as malaria and dengue. These issues place further burdens on sub-national public management and the service delivery that such systems support. Colombia’s contribution to climate mitigation depends in large part on the effective integration of appropriate land use management, territorial and sectoral investments and governance.1 Agriculture, forestry and land use accounts for 62 percent of Colombia’s greenhouse gas

1 Financial Management Committee of SISCLIMA. August 2018.

Box 1. Intergovernmental Fiscal Relations in Colombia

Colombia has laid out the foundations of a fiscally sustainable intergovernmental framework but has yet to advance the institutional capacity of territorial governments to manage expenditure responsibilities and mobilize own-source revenue. Reforms have sought to discourage excess spending and borrowing; provide for performance monitoring; and adopt bankruptcy procedures for subnational governments. Weak management capacity limits the impact and results from decentralized spending. Subnational governments account for a significant share of public spending but improving the quality of public spending remains challenging for most territorial governments.

Public spending by subnational governments (SNGs) accounted for approximately 6.6 percent of GDP in 2018, of which about 2.9 percent comes from own revenues and the remainder from central government transfers. The General Participation System (Sistema General de Participaciones, SGP) and the Royalties System (Sistema General de Regalías, SGR) are the two main central government’s transfer systems to SNGs. The SGP funds are transferred to SNGs pursuant to articles 356 and 357 of the Constitution to finance services under the SNGs’ jurisdiction—mainly health, education, and water and sanitation. The SGR includes the systems of revenues, transfers, institutions, procedures, and regulations that, according to articles 332, 360, and 361 of the Constitution (amended by legislative Act on December 2019) and Law 1530 of 2012, govern the distribution and transfer to the SNGs of revenues from nonrenewable natural resources. Transfers account for over 65 percent of total subnational revenues, the bulk of the resources come from the heavily earmarked SGP. These transfers are governed by a set of rules that leave little space for local discretion.

Subnational tax mobilization is relatively modest compared to other countries with similar levels of expenditure. Decentralization and local revenues are concentrated in a few jurisdictions. Subnational taxes represent about a fourth of total tax revenue, of which approximately two-thirds is earmarked for specific sector expenditures as these taxes were devolved by the Central Government. Municipalities and departments raise 3.5 percent of GDP in tax revenues. Colombia's property tax collection is 0.55 percent of GDP, compared with 2.6 percent of GDP in OECD countries.

Colombia’s subnational governments have recorded fiscal surpluses in recent years. The subnational government has undergone an important fiscal consolidation starting in late 1990s, following the efforts to restructure liabilities and to strengthen the fiscal situation. More recently, increased tax collections, following reforms to the consumption tax of cigarettes and alcohol, higher transfers from the central government, limits on operating expenses, and higher royalty revenues due to recovery in the price of oil, among others have played a key role in strengthening subnational finances.

Source: Adapted from Colombia Policy Notes.

https://colaboracion.dnp.gov.co/CDT/Ambiente/Finanzas%20del%20Clima/Documento%20CPEIR.pdf


Page 7

emissions, 26 percent from agriculture and 36 percent from forest conversion to other land uses.2 Colombia was among the top four countries in terms of loss of tropical primary rainforest in 2018.3

5. GoC has undertaken an ambitious and sustained territorial development agenda. GoC’s 2014-2018 NDP outlined a program of reforms that established the institutional and regulatory framework for integrated territorial development at the national level.4 In that context, GoC has identified key constraints in urban and rural areas through the Misión del Sistema de Ciudades and the Misión para la Transformación del Campo, comprehensive reviews of public policies on urban and rural development. These exercises emphasize the need to move beyond the traditional rural-urban classification typically used in planning instruments, towards one that recognizes the diversity of place, with the final objective of bridging gaps in living standards across the regions, through an integrated territorial development approach. More recently, the 2018-2022 NDP continues to focus on improving the fiscal decentralization framework to enhance collaboration and coordination among territorial entities for increased regional impact. With the ongoing Misión para la Decentralización (a review of fiscal and political decentralization policies), GoC seeks to strengthen the role of territorial entities, providing them with sufficient fiscal, administrative and political capacity and authority to play a leading role in territorial development.

6. The proposed operation builds on a portfolio of Bank operational and analytical work that supports GoC’s efforts to strengthen its institutions for territorial development. The First Colombia Territorial Development DPF (P158520), was approved on December 8, 2016 with financing of EUR716.5 million (US$800 million equivalent), focused on strengthening the institutions for land management and territorial planning; and improving subnational financial management and investment prioritization. The DPF was originally designed as part of a series that was discontinued due to the change of government in Colombia in 2018. The proposed Institutional Strengthening for Territorial Development Development Policy Loan (DPL) is a standalone operation that supports this agenda by addressing institutional constraints related to coordination, planning and resource allocation at the regional level and efficient rural and urban land management systems.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

7. Colombia maintains a robust macroeconomic policy framework and growth continues to accelerate at a moderate pace. Key components of Colombia’s solid macroeconomic framework include the adoption of a full-fledged inflation-targeting regime, a flexible exchange rate, a Fiscal Rule (2011) for the central government, and a Medium-Term Fiscal Framework. The solid macroeconomic framework helps build buffers and strengthen resilience to external shocks. Adequate macroeconomic policies have ensured gradual external and fiscal adjustments, with growth accelerating gradually from 1.4 percent in 2017 to 3.1 percent in the first three quarters of 2019. Accommodative monetary policy, credit supply at lower real interest rates, and the large migration inflows of Venezuelans have supported private consumption. Fiscal incentives boosted investment in machinery and equipment. However, spending on civil works, investments in commercial real estate and residential buildings remained soft. Government consumption has slowed largely due to consolidation efforts. Import growth accelerated sharply, boosted by robust domestic demand,

2 IDEAM (2016): National and Departmental Greenhouse Gas Emissions Inventory. 3 Weisse and Dow Goldman, “The World Lost a Belgium-sized Area of Primary Rainforests Last Year,” Blog. World Resources Institute. April 25, 2019. 4 These efforts were supported by the previous Programmatic Territorial Development DPF (P158520).

https://www.wri.org/blog/2019/04/world-lost-belgium-sized-area-primary-rainforests-last-year


Page 8

while lower import demand growth from Colombia’s main trading partners and supply side shocks weighed on exports. Commerce, transport, storage, and food services contributed the most to growth, followed by public administration. Manufacturing activity continued to recover, supported in part by more dynamic oil refining activity, while the construction sector continued to contract, affected by transient shocks.

8. Strong domestic demand has resulted in a moderate widening of the current account deficit from 2018, while strong FDI inflows continue to finance the deficit. Strong domestic demand resulted in solid import growth. Non-oil export growth has been weaker than expected. The trade deficit increased to 3.8 percent of GDP in the first nine months of 2019, and the current account deficit widened to 4.4 percent of GDP, compared with 3.8 percent of GDP in the first nine months of 2018. The deficit is financed primarily by FDI inflows which surged to 4.6 percent of GDP during this period, up from 3.5 percent in the first nine months of 2018. International reserves increased to US$52.6 billion by October 2019, from US$47.9 billion at the end of 2018. The Central Bank stopped its reserve accumulation program in October 2019, but this program can be restarted when market conditions allow it. This level of reserves is more than enough to cover the outstanding external short-term debt at remaining maturity and the current account deficit.

9. Monetary policy remains slightly accommodative as inflation expectations remain anchored despite the recent depreciation in the Colombian peso. Inflation has remained within the targeted range of 3 percent ± 1 pp since early 2018, albeit accelerating slightly to 3.8 percent by December 2019 on account of closure of a key road and mild drought conditions. The Central Bank maintains a slightly accommodative monetary stance, due to well-anchored price expectations and a negative output gap. Since early May 2018 the Central Bank has maintained the policy rate at 4.25 percent. More recently, the Colombian peso has depreciated and has been more volatile in line with developments in other emerging markets.

10. The bank-dominated financial system is resilient amid less favorable external financing conditions as economic growth continues to recover. The banking system’s capital adequacy ratio at 17 percent in July 2019 is among the highest in Latin America and is considerably above the regulatory limit. Bank profitability remained strong, with return on assets (ROA) and return on equity (ROE) increasing to 1.7 percent and 13 percent, respectively, in July 2019 (compared with 1.4 percent and 11.2 percent in July 2018). The quality of the banking sector's loan portfolio has improved slightly over the past six months, with the NPL ratio reaching 4.6 percent in July 2019 - down 0.2pp year-on-year. Loan loss provisions remain robust with a coverage ratio of 129 percent as of July 2019. Liquidity buffers appear adequate. On June 10, 2019, Moody’s changed the credit outlook for the Colombian banking system to stable on improved operating conditions.

11. The financial system is dominated by a few large, complex financial and cross-sectoral conglomerates with operations spanning multiple industries and large single-name concentration for banks. Financial system assets increased to about 190 percent of GDP as of July 2019, with credit institutions accounting for 37 percent of assets. The top three banks hold about half of the sector’s total assets, a degree of concentration above that of Brazil, Chile, or Mexico. A wave of acquisitions by Colombian banks of systemically important Central American banks resulted in a high cross-border exposure to that region and exchange rate risks, given the countries’ high rates of dollarization. Foreign assets under management by Colombian banks represent about a quarter of the three main groups’ assets in Colombia, a major cross-border exposure with complex control and organizational models, exposing Colombian banks to volatile operating environments. The Law on Financial Conglomerates became effective in 2018, with complementary regulations issued in 2018. The remaining decreed of the Conglomerates Law are going into effect in early 2020.


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12. The authorities have maintained a fiscal adjustment path consistent with the fiscal rule, implementing tax reforms and expenditure containment measures. Since 2016, the country has experienced an important fiscal adjustment in response to the decline in oil-related fiscal revenues of nearly 3.3 percent of GDP (Figure 3). The fiscal rule allows for variations in the oil price cycle, which enabled the government to comply with the structural deficit targets despite lower revenue. In 2018, the central government deficit narrowed to 3.1 percent, with a structural deficit of 1.9 percent of GDP. Central government revenues increased to above 16 percent of GDP in 2019, in part due to better-than-expected VAT tax collections, import-related taxes, and improved tax administration. Meanwhile, central government general operating expenses were contained, and some capital spending was reduced while protecting critical social spending. The Government has frozen COP9 trillion in spending for 2019 (0.86 percent of GDP) (Decree 2412 issued on December 31, 2019). The Consultative Committee for the Fiscal Rule allowed an additional space of 0.5 percent of GDP to accommodate migration-related spending in 2019, thus allowing a deficit of up to 2.7 percent. However, the central government deficit is estimated at 2.4 percent of GDP in 2019, supported by stronger-than-expected tax revenues, oil-related revenues, and extraordinary central bank profits.

13. The Economic Recovery and Employment Law was approved in December 2019, after the 2019 Financing Law was declared unconstitutional.5 The law seeks to incentivize investment, reducing the effective tax burden on firms, and introduces some revenue measures to help meet the fiscal rule. Besides the original measures included in the 2019 Financing Law, the new law introduces value-added tax (VAT) refunds for the households in the poorest quintile starting with the second semester of 2020, VAT exemption for medicine, with the right to refund, a 3-day VAT tax holiday for selected goods bought with electronic means of payment, the gradual reduction in health contributions for pensioners with pensions equivalent to up to two minimum wages, and tax incentives for first-time youth employment. At the same time, it introduces a surcharge corporate income tax for financial institutions (4 pp in 2020, and 3pp in 2021 and 2022, respectively), while reducing the presumptive income tax to 0.5 percent from 1.5 percent and the marginal tax on dividends for residents to 10 percent from 15 percent. Moreover, additional regularization incentives for assets held abroad, allowing for a reduction of 50 percent in the taxable base at a rate of 15 percent, are expected to result in additional revenues. The overall estimated net fiscal impact of these measures is between 0.1 percent of GDP in 2020, to 0.2 percent of GDP in 2022 increase in the deficit. At the same time the Government plans to distribute Ecopetrol dividends from previous years that amount to 0.28 percent of GDP.

5 The Constitutional Court declared the government's 2019 Financing Law unconstitutional for errors in the formal process of adoption of the law. The court decided that the law will remain in operation until the end of calendar 2019 but will cease to operate from January 1, 2020.


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Figure 3. Central government deficit path Figure 4. General government tax revenues to GDP ratio, 2012-2016 average

Source: MTFF, Comité Consultivo de la Regla Fiscal 2019. Source: OECD.

Figure 5. External debt (% of GDP) Figure 6. Gross non-financial sector public debt (% of GDP)

Source: Central bank, IMF and World Bank staff calculations.

14. External debt has increased markedly in recent years, in part due to valuation effects and higher public sector borrowing requirements. External debt increased marginally to 42.9 percent of GDP by September 2019 from 39.9 percent of GDP at the end of 2018, mainly because of a 1 percentage point increase in external public sector debt to 23 percent of GDP. If foreign holdings of domestic public debt bonds (TES) are included, external debt increased to an estimated 49.5 percent of GDP by 2019 from 47 percent of GDP by 2018, as public sector debt increased to 29.8 percent of GDP from 29.1 percent of GDP. Private sector external debt increased by 2.3 percentage points to 20 percent of GDP over this period (Figure 5). Gross non-financial public sector debt declined to 51.6 percent of GDP by June 2019 from 52.8 percent of GDP in 2018 (Figure 6). In December 2017, S&P credit rating agency downgraded one notch the long-term foreign and local currency and the short-term foreign currency ratings – remaining at investment grade – on weaker than expected economic growth and underperformance in tax revenues.

-2.3-2.2-2.2-1.9-1.9-1.8

-1.6-1.3

-1.0-1.0-1.0-1.0-1.0-1.0-1.0-1.0-1.0

-2.4

-3.0

-4.0-3.6

-3.1-2.7

-2.3-1.8

-1.4-1.2-1.0-1.0-1.0-1.0-1.0-1.0-1.0-2.4

-3.0

-4.0-3.6

-3.1

-2.4-2.2-1.8-1.6

-1.5-1.4-1.3-1.2-1.1-1.1-1.0-1.0

-4.5

2014 2018 2022 2026 2030MTFF 2018Structural fiscal deficit 2019Comité Consultivo 2019

Percent GDP

0 10 20 30 40 50

France

OECD - Avg.

UK

Canada

Uruguay

US

Costa Rica

Colombia

Peru

Panama

Guatemala

0

10

20

30

40

50

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

Q3

-19

Public Private

0

10

20

30

40

50

602

00

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

19-J

un

Foreign currency Local currency


Page 11

Table 1. Colombia: Key macroeconomic indicators, 2016–2022

Proj.

2016 2017 2018 2019 2020 2021 2022

Real sector Annual percentage change, unless otherwise indicated

Real GDP 2.1 1.4 2.6 3.3 3.6 3.9 3.9

Contributions:

Consumption 1.4 2.0 3.3 3.7 3.2 3.1 2.8

Investment -0.7 0.4 0.3 0.5 0.8 1.1 1.2

Net exports 0.8 0.1 -1.1 -1.0 -0.6 -0.4 -0.2

Imports -3.5 1.2 7.9 6.8 6.0 4.5 3.9

Exports -0.2 2.5 3.9 3.7 5.4 4.2 4.7

Unemployment rate (nat. def.) 8.7 8.6 9.7

GDP deflator 5.1 5.1 3.7 3.6 4.1 3.5 3.8

CPI (average) 7.5 4.3 3.2 3.5 3.6 3.5 3.5

Fiscal accounts (Central Government)

Revenues* 14.9 15.6 15.3 16.1 16.1 16.0 15.9

Expenditures 19.1 19.4 18.4 18.5 18.2 17.8 17.6

Fiscal balance (CG) -4.2 -3.8 -3.1 -2.4 -2.2 -1.8 -1.6

Fiscal accounts (General Government) Percent of GDP, unless otherwise indicated

Revenues 24.3 24.5 26.5 29.8 28.7 27.8 27.6

Expenditures 27.4 26.9 28.8 31.5 30.1 29.2 29.0

Fiscal balance -3.0 -2.3 -2.2 -1.7 -1.4 -1.3 -1.4

Gross public debt** 48.1 49.2 52.6 51.6 50.1 48.4 46.5

Selected monetary accounts Annual percentage change, unless otherwise indicated

Base money 2.5 5.0 10.4

Credit to private sector 9.2 12.1 4.4

Policy interest rate 7.5 4.8 4.25

External sector Percent of GDP, unless otherwise indicated

Current account balance -4.3 -3.3 -3.9 -4.4 -4.3 -4.1 -4.1

Imports GNFS (% change, real) -3.5 1.2 7.9 6.8 6.0 4.5 3.9

Exports GNFS (% change, real) -0.2 2.5 3.9 3.7 5.4 4.2 4.7

Foreign direct investment (net) -3.3 -3.3 -1.9

Gross reserves (US$ billion, eop) 46.7 47.6 48.4

In months of next year's imports 9.9 9.1 8.6

As % of short-term external debt 314 290 239

External debt 42.6 40.0 39.9

Terms of trade (% change) -1.1 16.9 11.2

Exchange rate (COP/US$, average) 3,054 2951 2956

Memo items

Nominal GDP (US$ million, current) 282,825 311,790 331,047

Nominal GDP (COP billion, current) 863,782 920,194 978,477 1,046,973 1,128,585 1,213,939 1,309,554

Oil production (hundred thousand barrels/day)

886 854 865 886 862 855 857

Oil price (Brent spot price, US$/barrel) 44 54 71 64 61 62 63

* In 2019 includes extraordinary Ecopetrol dividend. Since 2019 includes profits of Banco de la Republica. **Includes Ecopetrol


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Table 2: Colombia: Key fiscal indicators for the central government, 2016-2022 (% of GDP)

Proj.

2016 2017 2018 2019 2020 2021 2022

Total revenues 14.9 15.6 15.3 16.1 16.1 16.0 15.9

Tax revenues 13.6 13.8 13.9 13.8 13.9 13.8 13.8

Net income tax and profits 4.7 5.7 6.5 6.5 6.3 6.3 6.3

Value-added tax 4.9 5.5 5.7 5.8 5.9 5.8 5.8

International trade 0.5 0.4 0.4 0.4 0.4 0.4 0.4

Financial transactions tax 0.8 0.7 0.7 0.8 0.7 0.7 0.7

Stamp and other taxes 2.8 1.4 0.5 0.4 0.6 0.6 0.6

Non-tax revenues 0.1 0.6 0.1 0.2 0.2 0.3 0.3

Capital revenues* 1.0 1.1 1.2 1.7 1.7 1.6 1.5

o/w Ecopetrol dividends 0.1 0.1 0.3 1.0 0.6 0.9 0.8

Other 0.2 0.2 0.2 0.5 0.3 0.2 0.3

Total expenditures 19.1 19.4 18.4 18.5 18.2 17.8 17.6

Current expenditures 15.5 16.0 15.7 16.0 15.9 15.5 15.2

Wages and salaries 2.4 2.2 2.3 2.3 2.2 2.2 2.2

Goods and services 0.8 0.7 0.7 0.7 0.6 0.6 0.6

Interest 2.5 2.6 2.5 2.9 2.9 2.7 2.6

Current transfers 9.6 10.1 10.2 10.2 10.1 10.0 9.7

Other 0.2 0.4 0.0 0.0 0.0 0.0 0.0

Capital expenditures 3.6 3.4 2.7 2.5 2.3 2.3 2.4

Fixed capital formation 2.3 2.1 1.5 1.4 1.3 1.3 1.3

Capital transfers 1.3 1.3 1.1 1.1 1.1 1.0 1.0

Primary balance -1.7 -1.2 -0.6 0.5 0.7 0.9 1.0

Overall fiscal balance -4.2 -3.8 -3.1 -2.4 -2.2 -1.8 -1.6

Structural fiscal balance^ -2.2 -1.9 -1.9 -1.5 -1.5 -1.3 -1.0

Financing needs 8.5 8.5 8.1 7.5 5.6 5.2 5.0

Overall fiscal balance 4.2 3.8 3.1 2.4 2.2 1.8 1.6

Amortizations 1.9 2.5 1.0 1.1 1.1 1.0 1.0

Other** 2.5 2.2 4.0 4.1 2.3 2.3 2.3

Financing sources 8.4 8.3 8.1 7.5 5.6 5.2 5.0

Domestic 4.5 4.3 4.3 3.4 2.7 2.7 2.7

External 1.7 1.7 1.2 1.1 0.9 0.9 0.9

Carryover and other 2.2 2.4 2.6 3.0 1.9 1.6 1.3

Memo items

Non-oil Central Government tax revenue 14.8 15.2 14.2 Regional and local government balance 0.3 0.5 0.6 0.1 0.3 0.2 0.2

Decentralized sector balance 1.6 1.0 0.2 0.2 1.0 0.8 0.8

Non-financial Public Sector (NFPS) balance -2.4 -2.7 -2.9 -1.8 -1.3 -0.9 -0.5

* In 2019 includes extraordinary Ecopetrol dividend. Since 2019 includes profits of Banco de la Republica.

**Includes arrears, judicial claims, and savings.


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Table 3. Balance of Payments financing requirements and sources, 2016-2022 (US$ million)

2016 2017 2018 2019 2020 2021 2022

Financing requirements 35,960 40,998 46,355 49,469 51,806 53,752 53,983

Current account deficit 12,036 10,241 13,005 14,139 14,639 14,884 15,936

External debt amortization 23,759 30,212 32,164 31,504 34,262 35,712 34,664

Medium and long term 7,572 15,360 15,737 11,252 12,620 13,130 11,103

Short term 16,187 14,852 16,426 20,253 21,642 22,583 23,560

Gross reserve accumulation 165 545 1,187 3,826 2,905 3,155 3,383

Financing sources 35,960 40,998 46,355 49,469 51,806 53,752 53,983

FDI (net) 9,330 10,147 6,413 8,676 9,825 10458 11115

o/w inward (net) 13,848 13,837 11,535 12,669 13,900 14609 15335

External debt disbursements 32,259 33,474 40,297 37,752 41,588 42,577 42,983

Medium and long term 17,407 17,047 20,044 16,110 19,005 19,017 18,459

Short term 14,852 16,426 20,253 21,642 22,583 23,560 24,525

Other capital flows (net) -5,629 -2,623 -355 3,041 393 716 -116

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

15. Growth is expected to accelerate at a moderate pace over the 2020-2022 period, outperforming the LAC average, supported by accommodative monetary policy, stronger private consumption and a pick-up in investment incentivized by a lower effective corporate tax rate. Growth is expected to accelerate to 3.6 percent in 2020, and 3.9 percent by 2021, as private consumption remains robust and investment accelerates at a moderate pace. The dynamic private consumption is supported by large Venezuelan migration flows and higher remittances, while investment spending is boosted by lower effective corporate taxes and other fiscal incentives and an expected recovery in residential investment. 4G road infrastructure projects, the Bogota metro project, and improvements in investment planning and spending capacity at the subnational level should also support public spending. Export growth remains sluggish in part due to weak global demand, but also due to limited export diversification. Supportive commodity prices are expected to boost growth in the extractive sectors, and a pick-up in investment, especially in civil works, should support the construction sector. Meanwhile, growth in the agriculture sector is expected to strengthen over the medium term, supported by improvements in infrastructure that facilitate access to markets. Ongoing structural reforms will enhance competitiveness and foster diversification, thereby supporting the growth recovery over the medium term. Additional migration-related spending may provide a modest impulse to support growth.

16. We expect the Government to comply with the fiscal rule over the 2020-2022 period. Colombia’s fiscal rule mandates a reduction of 0.8 percentage points of GDP in the central government fiscal deficit between 2019 and 2022, which is equivalent to cutting the structural deficit of the central government to 1 percent of GDP by 2022. This will be achieved by containment in current expenditures, while safeguarding priority spending (including peace- and migration-related expenditure). At the same time, Colombia continues to have important development needs, and the need to ensure enough public investment to support medium-term growth might require further fiscal space. Improved expenditure targeting, efficiency-enhancing measures, together with additional efforts to increase tax revenues by fighting large tax evasion can help create this additional fiscal space.


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17. The current account is expected to remain above 4 percent of GDP due to strong domestic demand. The current account deficit is expected to narrow only marginally over the 2020-2022 period, supported by higher exports of oil and non-traditional goods and services. Given the dynamic domestic demand, the CAD will remain above 4 percent of GDP over the forecasting horizon, as outflows of factor incomes for foreign oil companies and the costs with the oil fleets offset the impact of oil exports. Non-oil exports are expected to grow at a moderate pace. Gross external financing needs will remain sizeable in 2019, comprised primarily of private short- and medium-term debt (Table 3). Net FDI will continue to finance most of the current account deficit.

18. Inflation is expected to remain within the Central Bank’s targeted range of 3 ± 1% aided by prudent monetary policy and anchored inflation expectations. In the November Central Bank survey, inflation expectations increased slightly to 3.9 percent for end-2019 and 3.4 for 2020, while excess productive capacity exerts downward pressure on prices. Core inflation has also decelerated to the mid-point of the central bank targeted range, driven by slower inflation in tradables. The Central Bank remains strongly committed to price stability.

19. The debt sustainability analysis of the general government indicates debt will stabilize and begin a downward trend in the baseline scenario. In the baseline scenario, the debt to GDP ratio will fall below 50 percent of GDP by 2021, declining further to below 45 percent of GDP by 2023 (Figure 7). With more than 65 percent of the public debt denominated in local currency and a large part at fixed interest rates, depreciation and interest rate shocks would not have a significant impact on the debt trajectory over the short to medium term. Slower than expected economic growth by one standard deviation in the short run would push public debt levels slightly above 60 percent of GDP, while a combined macro-financial shock - interest rate shock, depreciation shock, and lower growth - would cause public debt to rise to close to 69 percent of GDP by 2021, before declining from 2022.

Figure 7. Debt Sustainability Analysis (general government debt, % of GDP)

Source: WB staff estimates

20. The Colombian economy faces both external and domestic risks. On the external front, uncertainties related to the policy mix of major advanced economies could result in disruptions of trade and capital flows to emerging economies, including Colombia, whose capital markets have received significant

35

40

45

50

55

2017 2018 2019 2020 2021 2022 2023

Baseline

Constant Primary Balance

Historicalprojection


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capital flows over the past decade. As investors reassess risks in an increasingly uncertain global environment, borrowing costs could rise and reversals in portfolio flow are possible. Colombia continues to be vulnerable to such disruptions given important gross external financing needs over the short term. Migration from Venezuela poses a fiscal risk, alongside major social effects and risks, as large migration flows lead to spending pressures, due to increased demand for basic public services, which could make compliance with the fiscal rule more difficult. Other downside risks stem from a slower-than-expected implementation of the 4G infrastructure program, and a slower than expected recovery in the construction sector, given its important spillovers to the rest of the economy, including through employment.

21. The macroeconomic policy framework remains adequate for the purpose of the operation. Colombia has solid fundamentals and has built strong macroeconomic buffers that mitigate to some extent these risks. Colombia has solid fundamentals and has built strong macroeconomic buffers that mitigate risks to some extent. Furthermore, Colombia has ample reserves, and recently the Central Bank has announced a prudential strategy of acquiring additional reserves as a precautionary measure.

2.3. IMF RELATIONS

22. On April 29, 2019 the IMF concluded the Article IV Consultation with Colombia and on May 20, 2019, the IMF Board reaffirmed Colombia’s qualifications to access resources under the precautionary Flexible Credit Line (FCL) facility. Colombia has had access to FCL arrangements since 2009, renewed every two years. The FCL arrangement accommodates access in the face of increased global risk. The authorities treat the two-year SDR 7.848 billion FCL (equivalent to about US$11.4 billion) only as a precautionary measure. The IMF Board’s review concluded that Colombia’s economic recovery is gaining momentum, supported by very strong, well-executed policies. Furthermore, the authorities are firmly committed structural reforms to strengthen the resilience of the economy and support inclusive growth. The authorities have taken steps to prepare for a gradual phasing-out of the FCL line, to the extent that the reduction of the global risks affecting Colombia allows it. The 2019 Article IV report acknowledges that well-executed policies have supported economic recovery. It also acknowledges the structural reform agenda of the National Development Plan that aims to boost inclusive growth and enhance external competitiveness, while also recognizing heightened downside risks to the outlook. The staff indicated that the lower tax burden on corporates, while stimulating investment, might curb revenues in 2020 at a time when fiscal costs associated with migration flows are estimated at around 0.5 percent of GDP. The IMF and World Bank maintain close collaboration.

3. GOVERNMENT PROGRAM

23. Colombia’s 2018-2022 NDP “Pacto por Colombia, pacto por la equidad” is based on three pillars: legality, including protection of individual freedoms and public goods; entrepreneurship, including stimulation of entrepreneurship, formalization of the workforce and economic activities, and business in urban and rural areas; and equity, including social policy oriented towards social and productive inclusion. Together, these pillars seek to ensure that all Colombians have access to more equal opportunities through advancement in fifteen cross-cutting strategic pillars or pacts, addressing issues such as sustainability, quality and efficiency of public services, and construction of peace.

24. Advancing inclusive, sustainable and productive territorial development is one of the NDP’s salient objectives. This objective is articulated across ten of the fifteen pacts aimed at supporting integrated territorial development through the consolidation of fiscal decentralization and regional productivity and equity policies. The proposed operation supports actions aligned with Pacts 2, 3, 4, 15, and 16, which


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emphasize the territorial dimensions of policies related to productivity, decentralization, effective public management and sustainability. Pact 2 on entrepreneurship, formalization and productivity, aims to foster an inclusive, dynamic and sustainable economy that empowers all sectors with a focus on a territorial approach to development in rural areas. Pact 3 on equity aims for greater well-being, with less inequality of outcomes and with greater equity of opportunities, fostering greater access to housing and decent and inclusive environments in urban and rural areas as one of its main lines of action. Pact 4 on sustainability aims to balance production and conservation through a focus on: sectors committed to sustainability and climate change mitigation; biodiversity and natural wealth as strategic assets; knowledge and prevention for disaster risk management and climate change adaptation; and modern environmental institutions, social appropriation of biodiversity, and the effective management of socio-environmental conflicts. Pact 15 on effective public management, supports the strengthening of modern institutions, capable of promoting economic and social development, through a focus on the transformation on the public sector and effective public expenditures. And Pact 16 on Decentralization aims at connecting Colombia’s governments through an emphasis on policies and investments for regional development, the structuring and strengthening of associative partnerships (asociatividad), and by stimulating productivity and equity through connectivity and the links between urban and rural areas.

4. PROPOSED OPERATION

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

25. The proposed operation supports territorial development objectives under Colombia’s 2018-2022 NDP. The objective of the operation is to strengthen the institutional framework for coordination, planning and resource allocation, promotion of strategic investments at the regional level, and fostering efficient rural and urban land management to leverage regional development. The operation recognizes that climate change-related actions taken at the territorial and regional levels are critical to the achievement of national objectives for sustainable development. Policies supported by the operation are organized around two pillars. The first pillar focuses on the consolidation of territorial level institutions, the deployment of incentives for effective coordination and collaboration among territorial entities and the strengthening of institutional capacity at the subnational level. The second pillar focuses on institutions and policies for land management implemented at the territorial level in both rural and urban areas, aiming at increasing productivity and sustainable territorial development.

26. The proposed operation builds on results achieved and lessons learned from the Territorial Development DPF (P158520), which supported reforms under the 2014-2018 NDP. The DPF supported important milestones including the approval of a new territorial planning policy and a comprehensive cadaster policy and the alignment of investment efforts between the national and subnational governments. Building on these achievements, the GoC is now implementing policies to strengthen the institutional framework and local capacity for territorial development under the 2018-2022 NDP. Lessons learned from the first operation include the need for a comprehensive, multi-sectoral program to address the complex challenges associated with territorial development and greater emphasis on the role of subnational entities in addressing climate change.6

6 World Bank. Implementation Completion and Results Report on a Loan in the Amount of EUR 716.5 million (US$800 million equivalent) to the Republic of Colombia for a First Programmatic Territorial Development Development Policy Financing. June 19, 2019. Report No. ICR00004725.


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4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

Pillar 1: Strengthening coordination, planning and resource allocation at the regional level

27. Colombia has made important advances in deepening fiscal decentralization and territorial development, as well as in developing supporting tools and incentives for subnational entities to deliver on their responsibilities and to align their objectives to those of the NDP. Nonetheless, mechanisms and incentives for these entities to work together in delivering services, carrying out regional investments, and solving common problems are still insufficient. Institutional constraints are aggravated by shortcomings in budgeting and planning information and persistent institutional capacity challenges within subnational public administrations resulting from, among others, the lack of permanent professional staff.

28. This pillar supports policies that encourage and enable territorial entities to work together in delivering services, carrying out regional investments, and solving common problems. Prior actions support: effective associative partnerships among subnational entities; expanded opportunities for regional financing; incentives for the alignment of inter-jurisdictional regional development objectives and integration of climate change related objectives; and strengthened management capacity and fiscal accountability at the subnational level.

Prior Action 1: The Republic of Colombia has: (a) promoted partnerships among territorial entities to plan and execute strategic regional development investment projects; (b) created the Territorial Pacts as a resource allocation mechanism for strategic regional development projects; and (c) has established the Regional Administrative Partnership in the Amazon Region to develop projects aimed at protecting and preserving ecosystems in the region.

29. Rationale. Colombia’s fiscal decentralization model and the approach to regional development laid out in the NDP 2018-22 emphasize coordination, complementarity, concurrence, and subsidiarity. Colombia has made important advances in the alignment of investment priorities around common objectives across national and subnational entities by operationalizing the concept of Regions in 2011 (Law 1454) and through the development of instruments such as the Contratos Plan (created in 2012 and reformed in 2014 into Contratos Paz) as a co-financing mechanism to promote multi-level investment coordination focused on specific regional priority areas. The Contratos Paz innovation allocated central government resources to municipalities affected by violence to complement compensation policies put in place under the Peace process. By the end of 2018, 16 departments and 436 municipalities were participating in the Contratos Plan and Contratos Paz programs, with investments of approximately US$7.8 billion in 2,432 projects. Notwithstanding the Contratos Plan, limited progress has been made applying a territorial vision that extends beyond departmental and municipal territorial boundaries and in the allocation of funds to multi-departmental and multi-municipal projects. The Contratos Plan and Paz had limited success in overcoming the atomization and fragmentation of small public investment projects. To date, 64 percent of projects financed under the Contratos Plan and Contratos Paz are valued at less than US$85,000. Atomization of investments has limited the ability of sub-national governments to address climate related challenges at a regional scale, especially in those regions confronting natural disaster risks that require more articulated and collaborative interventions among territorial entities or those called to contribute to the preservation of regional ecosystems typically extending across several subnational jurisdictions.

30. Substance of the action. To address these challenges and continue to strengthen inter-governmental coordination and the associated mechanisms, the Government has: enacted the Regions Law (Ley de Regiones 1962, 2019), which promotes financial and administrative associations at the regional level


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to strengthen strategic regional investments; advanced Articles 249, 250 and 251 of the NDP (Law 1955, 2019) to promote further concerted service delivery and coordinated investments among subnational entities; and developed Territorial Pacts (Pactos Territoriales) as an enhanced instrument to replace Contratos Plan. The Regions Law establishes the parameters and processes for strengthening the roles and capacity of the Regional Administrative Partnership (Región Administrativa y de Planificación, RAP) as an institutional mechanism integrated by several subnational entities (departments and municipalities) to develop regional plans and large investment projects. The law also determines the conditions and the process for the creation of Regional Entities as a new level of administration capable of aggregating planning and investment functions at a supra-regional level. The objective of the law is to operationalize the concept of the Region as the main focus for geographical, economic and functional planning purposes and, through that, prioritize investment projects with regional impact. Articles 249 and 251 of the NDP outline the legal requirements for the creation of territorial association schemes (Esquemas Asociativos Territoriales, EAT) to design and present regional development projects for funding, identify common public services to be integrated for regional delivery, and allow subnational entities to jointly finance investments beyond their own administrative boundaries, facilitating the development of regional investments projects. The new figure of Territorial Pacts – created through Article 250 of the National Development Plan (Law 1955, 2019) – explicitly contemplate multi-departmental investment programs and allow for the transfer of resources among subnational entities. This lies in marked contrast to the exclusively municipal or departmental focus of their predecessor Contratos Plan and Paz. It allows for associative partnerships to develop joint investment proposals and creates incentives for public and private entities to contribute resources with a focus on larger regional projects. As an immediate result of the strategic and collaborative approach promoted by these reforms, a new RAP has been created among four Departments of the Amazon region, with a focus on the preservation and protection of natural resources and ecosystems in the region.

31. Expected results. These policy reforms will help overcome the fragmentation and, in some cases, inefficient use of investment resources at the territorial level. It is expected that the number of signed Territorial Pacts subscribed would increase from 0 in 2019 to 4 in 2021.

Prior Action 2: The Republic of Colombia has: (a) approved the Legislative Act no. 05 which modifies Article 361 of the Constitution for the allocation and use of Royalties Fund (Sistema General de Regalías, SGR) including a special allocation of royalties resources for conservation and environmental protection activities, and (b) the National Financial Agencies have expressed willingness to support the deployment of a project structuring strategy to facilitate access to royalties funds by sub-national governments.

32. Rationale. Since its creation in 2011, the SGR has distributed revenue from natural resource exploitation more evenly across Colombia’s municipalities and has served as an important instrument for regional compensation and equity, contributing to an improvement in the inter-municipality Gini coefficient from 0.9 in 1995 to 0.46 in 2012. After more than eight years of operation, two important issues affecting the SGR’s efficacy and sustainability have been identified. First, the reduced attention to the so-called producer regions, where most extractive activities that generate royalty revenues are located, has resulted in limited allocation of resources to help these regions counter the negative social and environmental impacts of extractive activities. And second, bottlenecks linked to complex procedures to access SGR funds, have hindered less developed municipalities’ access to funding and resulted in the accumulation of approximately COP 4.5 trillion of unused funds in the period 2017-2018. In addition to the regional development and equalization objective, SGR funds have been used to support specific strategic developmental objectives through special allocations for, inter-alia, science, technology and innovation;


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savings for pension obligations by subnational governments; and, more recently, support to the peace process. Allocations to these strategic objectives proved to be an effective instrument that complemented the broader support to regional development and compensatory policies across territories. An emerging issue that has not received adequate attention from the SGR is climate change, which has important territorial implications and will impact on financing needs. Colombia’s National Strategy for Climate Financing7 estimates that there is an annual gap of around US$900 million to meet mitigation and adaptation needs. Financing this gap will require the mobilization of private resources and domestic and international public funds including those from the SGR.

33. Substance of the action. Given the need to align the objectives of the SGR to the recently approved NDP, the GoC has taken action to improve the effectiveness of the system through two parallel initiatives. First, the amendment of Article 361 of the Constitution, which modifies the distribution of SGR resources among subnational entities and establishes new allocations for strategic developmental objectives by partially reallocating SGR resources previously reserved for savings and coverage of subnational pensions obligations. The new distribution system increases the amount dedicated to investment activities by 20 percent, particularly in producer regions. According to government projections, all subnational entities, including non-producers, should receive a similar or higher allocation than before, as the only allocations affected are those previously reserved for savings and administration purposes. To partially compensate for this reduction, the reform establishes that 45 percent of additional SGR revenues (i.e. actual revenues above the budgeted amounts) will be allocated to savings.8 The amendment also establishes that up to one percent of the SGR’s total income (equivalent to around US$ 130 million per cycle) will be used for environmental investments in areas related to conservation of strategic ecosystems, national parks and water resources, and the national fight against deforestation, to be centrally managed as a special allocation. In addition, territorial entities would be able to finance this type of projects from their direct allocations as well. These investments are of particular importance for climate change mitigation given the role of primary tropical rainforests in storing carbon.

34. The second initiative, initiated in parallel to the constitutional reform, is the updating of guidelines and processes for territorial entities to access and use SGR funds, including development of supporting instruments, the deployment of targeted technical assistance programs for less developed municipalities, and other capacity building initiatives. The new program expands services provided by national public financial agencies that deliver direct support to subnational entities for project preparation and structuring that comply with standards and requirements for accessing SGR funding. At least two financial agencies have already confirmed their ability to participate in the program, which is ready to be launched during the first quarter of 2020. The renewed support programs incorporate lessons from previous periods that will allow more effective access and develop capabilities in subnational entities to significantly increase absorption and use of SGR resources and thus secure that regions benefit evenly from this important source of public investment funding.

35. Expected results. These reforms will increase SGR resources allocated to capital expenditures and to environmental protection activities. It is expected that the share of SGR resources approved for investment projects in each biannual cycle would increase from 62.6 percent in 2019 to 79.8 percent in 2021 and the

7https://colaboracion.dnp.gov.co/CDT/Ambiente/Finanzas%20del%20Clima/Estrategia%20nacional%20de%20financiamiento%20clim%C3%A1tico.pdf

8 This extra allocation, together with the already accumulated amount in the SGR savings and stabilization fund, estimated at US$3.3 billion, are seen by the government as sufficient to stabilize resource flows for the system in coming years and support pension liabilities in territorial entities.

https://colaboracion.dnp.gov.co/CDT/Ambiente/Finanzas%20del%20Clima/Estrategia%20nacional%20de%20financiamiento%20clim%C3%A1tico.pdfhttps://colaboracion.dnp.gov.co/CDT/Ambiente/Finanzas%20del%20Clima/Estrategia%20nacional%20de%20financiamiento%20clim%C3%A1tico.pdf


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amount of climate and environmental protection-related activities funded with the SGR special allocation would increase from COP 0 in 2019 to COP 42,302 million in 2021.

Prior Action 3: The Republic of Colombia has taken action to improve fiscal transparency and accountability, as well as the availability of standardized information to strengthen planning, monitoring and evaluation functions at the subnational level by launching the harmonized budget and accounting classification catalogue for subnational entities, which will be gradually implemented in departments and municipalities.

36. Rationale. Effective reporting by subnational governments ensures that resources from fiscal transfers are allocated according to their objectives and informs policy development at the national and sector levels. The latter is particularly important for those sectors with decentralized responsibilities for the delivery of public services, including education and health. The Government has improved the quality and comparability of fiscal information reported by subnational governments, and reduced the administrative burden associated with the reporting process9. In 2017, the Government introduced a new accounting regulatory framework aligned with International Public Sector Accounting Standards (IPSAS) which is mandatory for all budgetary public sector entities, including subnational governments. This reform helped address poor costing, misclassification of expenditures and improve benchmarking. The Government has introduced the Single Territorial Form (Formulario Único Territorial, FUT) for reporting on regional fiscal data. This reduced the number of reports required from subnational governments to central government and sectoral agencies, from 230 to 110.10 Challenges remain in tracing information between the accounting and budget systems and the cost of reporting continues to be high. Municipalities maintain their own budget catalogues and manually produce the significant number of reports required by central entities. This situation undermines fiscal transparency, reduces accuracy and timeliness of information, and complicates management of fiscal risks.

37. Substance of the action. In order to ensure consistency in financial reporting and reduce the administrative burden for subnational governments, the Government has introduced a single harmonized budget and accounting classification catalogue through a joint communication from the Ministry of Finance and Public Credit (MHCP) and the Office of the Comptroller General (Circular Conjunta 01 of March, 2019) and a MHCP mandatory Resolution (Resolución 3832 of October 18, 2019). The catalogue is aligned with international accounting and public financial management standards (IMF Government Finance Statistics Manual 2014). The Resolution establishes a mandatory timeframe for a phased roll out of the catalogue across the entirety of the public administration, with all subnational governments and their decentralized entities required to start the process in 2020, when harmonized budget classifications will be applied for the formulation of the 2021 budget. The harmonized catalogue is essential for improving the quality and credibility of national and subnational financial statistics. It is also a prerequisite for the development of the new financial management model for subnational entities which will be later developed by the MHCP.

38. Expected results. This reform will improve fiscal transparency and accountability at the subnational level. It will improve the quality, consistency and timeliness of subnational governments’ financial reports and reduce the administrative costs of reporting. It is expected that the percentage of the budget of the territorial governments (department and municipal governments) formulated and tracked using the new

9 The World Bank supported the accounting harmonization and municipal reporting simplification through the previous Programmatic Territorial Development DPF (P158520) and the Colombia Programmatic Approach- Public Sector Management and Governance ASA (P162068).


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harmonized budget classification system would increase from 0 percent in 2019 to 100 percent in 2021.

Prior Action 4: The Republic of Colombia has: (a) authorized the allocation of resources to accelerate the implementation of merit-based personnel selection processes in category 5 and 6 municipalities; and (b) increased opportunities and created mechanisms for merit-based promotions within the public administration at the subnational level.

39. Rationale. Professionalization of the civil service and development of a career system in the public administration has increased capacity in public sector institutions and contributed to policy continuity in Colombia’s central administration. These critical elements of a modern public administration are still missing in subnational governments. Today, Colombia has approximately 1.2 million public servants, 73 percent of whom work for the executive branch in the central government, and 18 percent for subnational governments. Subnational governments often lack the staff that they need or have staff without the required skills. At the subnational level, 61 percent of 135,045 positions are currently formally vacant, with non-career contractors performing in critical roles in subnational public administrations.11 The career and human resource management system does not provide incentives or mechanisms for merit-based selection and promotion. There are weaknesses in talent, position planning and the definition of competencies. This allows for rotation, promotion and appointments based on political patronage with little control of the quality of personnel. Lack of staff continuity hinders capacity building and training initiatives. 79 percent of vacancies are currently filled with temporary positions (cargos provisionales, and por encargo and no provistos) due to lack of planning, sufficient resources and political will to carry out selection processes. Weak institutional capacity undermines management effectiveness and accountability and deters coordination between central and sub-national governments and among them, representing an important obstacle for the implementation of Colombia’s NDP.

40. Substance of the action. Article 263 of the NDP mandates the National Civil Service Commission through the School of Public Administration (Escuela Superior de Administración Pública, ESAP) to accelerate the implementation of merit-based selection processes in the subnational public administration, with a focus on the smallest municipalities, and covers the costs of selection processes. The Government has signed agreements with 161 municipalities to implement this new mechanism in the selection process of 4,300 vacant positions. The Government has also approved Law 1960 of 2019 which increases opportunities and creates the mechanisms for merit-based promotions by establishing that 30 percent of civil service vacancies are to be filled through promotions following a merit-based test. Moreover, to improve gender equality and promote diversity and inclusion in the public administration, the NDP sets ambitious targets of 50 percent for the share of women in public sector management positions and appointment of 12,000 people with disabilities working in the public administration by 2022.

41. Expected results. This action will strengthen the capacity of subnational governments by increasing the share of professional staff selected through a merit-based process. It is expected that the percentage of category 5 and 6 municipalities that implement merit-based processes to promote public career employments would increase from 20 percent in 2019 to 30 percent in 2021.

Pillar 2: Fostering Efficient Rural and Urban Land Management Systems

42. Rural and urban land resources have been inefficiently allocated by national and subnational entities. Numerous land conflicts have arisen throughout Colombia’s history. Agricultural productivity is

11 Data from 2018. National Development Plan 2018-2022 “Pacto por Colombia, pacto por la equidad”. Page 1196.


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low and agricultural activities have extended to areas that should have been otherwise protected because of their high natural resource value. In urban areas, the development and maintenance of infrastructure has been unable to keep up with rapid urban growth. Access to land is unequal from the gender perspective: women are less likely to have documented and registered titles to property.12 Inefficient land allocation is, in large part, due to: the lack of reliable and current information about land parcel demarcation, land ownership, land prices and land environmental value at the local level; the time lag in the regularization of land tenure; the fragmentation of programs and information systems in the agriculture sector; the lack of financing of urban land use plans; and the lack of consideration of disaster risk management in infrastructure investments.

43. Policy reforms supported by the previous Territorial Development DPF addressed some of the underlying problems, including the issuance of the Cadaster Policy, the creation of the National Land Agency (ANT) and the Rural Development Agency (ADR), and the launch of a new territorial planning policy. This operation builds on these reforms, focusing on implementation and addressing the current challenges with more specific actions, as described in the next section.

Prior Action 5: (a) The Republic of Colombia has adopted new policies to improve land administration by decentralizing cadastral functions to selected local governments; and (b) ANT has streamlined land tenure formalization processes.

44. Rationale. In Colombia, the Geographic Institute Agustin Codazzi (IGAC) has been traditionally in charge of cadastral services. It has proved difficult to keep up cadastral coverage in an extensive and dynamic land market, with just 5.7 percent of Colombia’s territory having up to date cadastral information. Tenure insecurity has contributed to land disputes and is associated with poor land stewardship, increased rates of deforestation and ineffective disaster risk planning. The multipurpose property cadaster law approved in 2016, redefined the roles and responsibilities of land management agencies to separate regulatory and implementation functions. The law also defined the standards and methodologies for surveying, recording and valuing properties to transform the fiscal cadaster into a multipurpose cadaster, encompassing land use management functions. The law created the ANT as the specialized entity to manage land tenure formalization. The proposed action supports the gradual decentralization of the cadaster to qualified territorial entities,13 as established by the NDP (Law 1955 of 2019) and the recently issued regulatory Decree 1983 of 2019. Under decentralization, the cadastral mandate is transferred to those requesting territorial entities that comply with the legal, technical and economic and financial conditions established by Decree 1983 of 2019. The IGAC remains the ultimate authority regarding the cadaster and adopts a regulatory and supervisory role along with the Superintendent of Notaries and Registries (SNR). Decentralization of cadastral functions will help reduce the significant cadastral information gap. It will also allow IGAC to focus its efforts in supporting cadastral services in medium and small sized municipalities. Further, it will allow eligible territorial entities to manage and assume ownership of land information to: improve territorial planning,

12 USAID, 2019. https://banyanglobal.com/wp-content/uploads/2019/05/USAID-Colombia-Gender-Analysis-and-Assessment.pdf 13 Decree 1983 of 2019 establishes the legal, technical and economic and financial requirements for cadastral decentralization. The conditions are: (i) legal conditions: having accredited the legal representation of the requesting entity, within the process of delegating the cadastral functions established by the IGAC; (ii) technical conditions: having submitted a technical proposal to the IGAC in development of the process of delegating the cadastral management and to establish a short and medium term indicative plan in which the activities and the schedule that the applicant will follow for the provision of the castral public service in the conservation, training and updating activities; (iii) economic and financial conditions: medium to high management capability as measured by the DNP's Municipal Performance Index, or a score of 60% in the DNP's Fiscal Performance Index.

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land use management and disaster risk planning and reduction; strengthen fiscal management; improve the links between land management and related aspects like soil protection, landslide prevention, restoration of degraded lands; and clarify environmental obligations of land owners in relation to forest preservation. Streamlined regulations will allow more efficient land tenure formalization. This will result in a larger percentage of land parcels having clear and secure tenure. In turn this will increase investments in productive land use, strengthen land management, and facilitate the implementation of social housing programs. Land tenure formalization promotes more equitable access to ownership and control over land between men and women14 and facilitates the protection of natural areas. Lastly, improvements in land tenure also reduce the risks of future disasters to all landholders and in particular to those most vulnerable to climate change impacts.

45. Substance of action. This action supports the decentralization of cadastral functions to municipalities and territorial entities that have the capacity to manage and maintain systems and data, while the IGAC develops regulatory, surveillance, inspection and control functions to ensure that the coverage and quality goals in cadastral matters are achieved throughout the country. Just a few weeks after Decree 1983 of 2019 was issued, more than 50 municipalities had applied to obtain decentralized authority in addition to the already decentralized cases of Cali, Medellín, Bogotá, Antioquia, Barranquilla and Central West Metropolitan Area (AMCO). The decentralized multipurpose cadaster will accelerate progress in systematic land surveying and land administration, including in environmentally protected, significant and/or strategic areas and facilitate land formalization process, covering formal and informal land. Decentralization will follow national standards to make sure that it is implemented in a consistent way across the country and IGAC will continue to administer the cadaster for all municipalities. Participating municipalities will have to meet eligibility criteria that require capacity to manage a consultative process, ensure transparency, provide adequate dispute resolution and implement grievance redress mechanisms. Besides protecting property rights, a more robust cadaster also provides the information necessary to develop policies aimed at reducing deforestation and vulnerabilities to natural disasters, which in turn can enable a sustainable landscape and forest management, as well as development and implementation of disaster risk management and reduction plans and activities. NDP articles 276 and 277, and ANT’s resolution 12096 of 2019 focus on streamlining the land titling processes in urban and rural areas by: reducing the number of forms and variables requested in the documentation; streamlining notification procedures; and improving citizen engagement mechanisms15. The Colombia TA Support for Cadaster ASA (P168865) and the Multipurpose Cadaster Project (P162594) support the implementation of these policies through the development of technical requirements for stakeholder engagement and consultation, protocols for working with ethnic communities, indigenous peoples, afro-descendants, alternative dispute resolution mechanisms in land related matters, as well capacity building in approximately 50 municipalities. Technical requirements for cadaster and land titling processes developed with the Bank's support and consistent with the safeguards policies will be applied nationally.

14 Due to the high level of informality in land ownership in Colombia there is no analysis of gender patterns of ownership. However, according to a recent evaluation of formalization programs in Colombia, only 31 percent of beneficiaries of rural land titling were women (Evaluación del Instrumento de Titulación de Baldíos a Familias Campesinas, DNP, 2016). Rural women face particular challenges in accessing land and are more vulnerable in general than men and women living in urban areas. This leads to the situation where a very small percentage of rural women formally own land and property. In the recent process of large-scale land tenure formalization conducted by the Government of Colombia in the municipality of Ovejas, Sucre, from 1,000 titles of property issued, half were granted to women, which is quite positive. 15 The GoC is working to improve stakeholder engagement and consultation, protocols for working with ethnic communities, indigenous peoples, afro-descendants, and the development of alternative dispute resolution mechanisms.


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46. Expected results. With these policy actions more territorial entities are expected to decentralize their cadaster, which will in turn help accelerate progress in systematic land surveying and land administration in rural and urban areas, as well as enabling the creation of a geographically referenced land information system to keep a record of land rights, environmental restrictions and ensuing responsibilities. It is expected that the number of subnational entities that manage their own cadaster would increase from 6 entities in 2019 to 17 entities in 2021, and the number of formalized titles that grant access to land would increase from 85016 titles in 2019 to 16,171 titles in 2021.

Prior action 6: (a) ADR has strengthened the system of agricultural extension; and (b) the Republic of Colombia, through MADR, has strengthened the coordination of information platforms to improve land use planning in rural areas.

47. Rationale. The previous Territorial Development DPF supported the creation of the ADR as the national agency to support an integrated approach to rural development and contribute to a more effective use of resources. However, the sector17 continues to have structural problems that widen development inequalities between urban and rural areas and across regions, departments and municipalities. Inefficient and inadequate use of land contributes to differences in economic activity across regions, leading to uneven territorial development. The lack of provision of technical assistance and extension services18 to farmers has an important bearing on the adequate use of land and sector’s performance (DNP, 2016). According to the 2014 National Agricultural Census (DANE, 2014), only 10 percent of all agricultural producers have received extension services. This limi

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