Republic of Bolivia DRAFT: COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT

Transcription

1 Report No BO Republic of Bolivia DRAFT: COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT June 24, 2004 Document of the World Bank and Inter-American Development Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be disclosed without World Bank and Inter-American Development Bank authorization.

2 Bolivia Country Financial Accountability Assessment REPUBLIC OF BOLIVIA FISCAL YEAR January 1 December 31 CURRENCY EQUIVALENTS (as of May 1, 2004) Currency Unit = (Bs) Bolivianos US$1 = 7.91 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BCB CAS CBO CDF CFAA CENCAP CG CGE CGR COSO CPA CUT DGCP DMFAS/ SIGADE DUF EBRP EC FNDR FPS GDP GFS GoB HIPC IAU IBRD IDA IDB IEHD IFAC IGR IIA IMF IMT INE INTOSAI Central Bank of Bolivia Country Assistance Strategy Congressional Budget Office Comprehensive Development Framework Country Financial Accountability Assessment Training Center of the Supreme Audit Institution Contralor General, Auditor General Accountant General Contraloría General de la República, Supreme Audit Institution Committee of Sponsoring Organizations Country Procurement Assessment Report Single Treasury Account Directorate of Public Credit Debt Management System Unified Directorate Fund Bolivian Strategy for Poverty Reduction European Commission National Fund for Regional Development Social and Public Investment Fund Gross Domestic Product Government Finance Statistics Government of Bolivia Heavily Indebted Poor Countries Internal Audit Unit International Bank for Reconstruction and Development International Development Association Inter-American Development Bank Hydrocarbon Product Special Tax International Federation of Accountants Institutional and Governance Review Institute of Internal Auditors International Monetary Fund Transfer Tax for Real Estate and Motor Vehicles National Statistics Office International Organization of Supreme Audit Institutions IPBI IPSAS IPVA IRP ISO LAC MAFP MCS MDG MDBS MNCS MoE MoH MTEF NDSA NGO PER PFM POA PRF SAFCO SAI SAYCO SBEF SIDUNEA SIGMA SIIF SIN SINCOM SNA SNC SNII TGN UDAPE UPF USAID WB Urban Real Estate Tax International Public Sector Accounting Standards Motor Vehicle Property Tax Institutional Reform Project International Standards Organization Latin America and the Caribbean Public Financial Administration Reform Program Mecanismo de Control Social Millennium Development Goals Multi-Donor Budget Support Social Control Mechanism Ministry of Education Ministry of Health Medium-Term Expenditure Framework National Dialogue 2000 Special Account Non-Governmental Organization Public Expenditure Review Public Financial Management Annual Operation Plan Plan de Readecuación Financiera Financial Administration Law Supreme Audit Institution Administrative and Control System Superintendency of banks and Financial Entities National Customs Systems Integrated Financial Management System Integrated Financial Information System National Tax Service Municipal Integrated Accounting System Customs Agency National Road Service Revenue Collection Agency National Treasury Unidad de Análisis de Políticas, Sociales y Económicas Fiscal Programming Unit United States Agency for International Development World Bank Vice President Country Director Sector Manager Task Manager World Bank David de Ferranti Marcelo Giugale Roberto Tarallo Rajeev Swami Regional Deputy Manager Sector Chief Co-Task Manager Inter-American Development Bank Luisa Raines Orlando Reos Lynnette Asselin

3 Bolivia Country Financial Accountability Assessment Acknowledgments The report was prepared by a team led by Rajeev Swami (WB) and Lynnette Asselin (IDB). Core team members were: Lourdes Linares, WB (internal control/internal audit); Hernan Pfluecker, consultant (treasury); Enrique Cosio-Pascal, consultant (debt management and HIPC); Maximiliano Marques, IDB consultant, (transparency/civil society); Vagn Mikkelsen of the European Commission and Alfonso Garcia Salaues of the Embassy of the Netherlands (municipalities and prefectures); Koosje-de Vries of the Embassy of the Netherlands and Gregers Juel Jensen of the Embassy of Denmark (SIGMA); Carmen Palladino, consultant (accounting and financial reporting). Also contributing to the report were Patricia Alvarez, Ruth Llanos, Jose Roberto Lopez-Calix, and David Tuchschneider (World Bank), Oscar Antezana (DfID), Markus Steinich (GTZ), Stefan Zeeb (KfW), Simon Cueva (IMF), and Marta Villarta (USAID/Partners of the Americas). World Bank Bolivia Country Manager John Newman, WB Lead Economist/Sector Leader Vicente Fretes Cibils, WB Senior Country Officer for Bolivia Marianela Zeballos and WB Advisor to the LCR Financial Management unit Jamil Sopher provided special support to the team. Suzanne Snell edited the report, Gilma Unda and Marianella Rivadeneira provided production support. Peer Reviewers: Sara Calvo, WB (LCSPS), Carlos Mollinedo, WB (LCSPS) and the IDB Management Review Committee. The CFAA Team would like to thank the Honorable Vice Minister of Public Investment and External Financing (VIPFE), Mr. Luis Arnal, for his collaboration and support. Mario Camacho and Claudia Cardenas (VIPFE) coordinated the CFAA on behalf of the Government of Bolivia. The team gratefully acknowledges all the support received.

4 Bolivia Country Financial Accountability Assessment BOLIVIA COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT Contents EXECUTIVE SUMMARY...i I. BACKGROUND AND CONTEXT...1 Country Background...1 Participating Banks Country Assistance Strategy...2 Relationship with Other Sector Work...3 Objectives...3 Scope and Coverage...3 Methodology...6 Follow-up and Dissemination...7 II. CFAA ANALYSIS: CENTRAL GOVERNMENT...8 Legal Framework...8 Integrated Financial Management System: SIGMA...8 Budget Preparation, Execution and Reporting...11 Internal Controls...15 Internal Audit...17 Treasury...18 Single Treasury Account...19 Revenues...20 Accounting...21 Financial Reporting...23 Debt Management...24 External Audit...28 Transparency and Oversight...33 III. CFAA ANALYSIS: SUBNATIONAL GOVERNMENT...37 Municipalities...37 Prefectures...43 IV. PFM PERFORMANCE MEASUREMENT FRAMEWORK...48 V. CONCLUSIONS AND POLICY RECOMMENDATIONS...55 Main Conclusions...55 Constraints to Proposed PFM Improvements...57 Programs for Improved Financial Management...57 Annex 1: References...xx Annex 2: CFAA Questionnaires...xx Annex 3: List of persons interviewed...xx Annex 4: Current Transparency Projects...xx Annex 5: PFM Performance Measurement Framework...xx Annex 6: Note on Fiscal Decentralization in Bolivia...xx Annex 7: Municipal Budget Realism: Revenue Collection and Expenditures...xx Annex 8: Prefecture Finances...xx

5 Bolivia Country Financial Accountability Assessment i EXECUTIVE SUMMARY 1. The 1999 Bolivia CFAA concluded that while a sound legal framework had been established, the Government s systems did not provide sufficiently reliable information to permit an evaluation of Government performance and that the Supreme Audit Institution (CGR) did not audit the Government s annual financial statements. Further, the report concluded that six elements (reliable reporting of budget execution; comprehensive and timely reporting of budget expenditure; quarterly presentation of aggregate public sector expenditure; annual audit reports on central government; government wide control of fixed assets; and pursuit of recovery of damages from malfeasance alleged by the Supreme Audit Institution, CGR) were essential to the development and strengthening of Bolivia s Public Financial Management (PFM) System. Over the past five years, the Government has made progress advancing the PFM reform agenda. 2. The implementation of the Integrated Financial Management System, SIGMA, aimed to advance the Government s efforts to improve budget and financial reporting, implement a system of internal controls and improve overall public expenditure management. The implementation of the Single Treasury Account (Cuenta Única) has improved public cash management and provides the Government with real-time fiscal account information. 3. Since 1999, the CGR has been working on improving the quality of its work by undergoing an institutional assessment to ensure that it has an appropriate quality management system for its products and services. The CGR is fulfilling its role as the independent supreme audit institution and has recently adopted an ambitious plan to improve follow-up of its audit recommendations with audited public sector entities in order to improve the financial management in those institutions. 4. Significant challenges, however, still remain and the principal findings of the 2004 CFAA are: SIGMA has been implemented in all but one central government agency, and is also in use at decentralized government institutions such as the DUF, Customs, SNC and state universities. At the subnational level (municipalities), only La Paz and Cochabamba have implemented SIGMA. Although provisions have been made for technical support to address this issue, work has not begun to customize the system to meet the needs of such agencies. Registration of budget expenditures are problematic at the point of data entry, due to high staff turnover and unfamiliarity with the system. From a PFM perspective, there are four critical limitations in the area of budget: (i) the budget as voted is unrealistic, based on systematic and persistent overestimates of revenue; (ii) the budget process has several weaknesses and the formulation of annual operation plans is more procedural than strategic, thereby

6 Bolivia Country Financial Accountability Assessment ii weakening the usefulness of the budget as a tool; (iii) since SIGMA does not currently include prefectures or municipalities, a significant portion of the budget is not monitored or controlled via SIGMA; and (iv) the use of HIPC resources is not monitored in a timely fashion. The analysis of internal controls by the CGR indicates that only about 25 percent of the recommendations of the different types of audits were implemented in 2001 and These results demonstrate that it is necessary to focus not only on the implementation of these regulations and enforcement of the use of SIGMA, but also to take into account that there is a considerable level of resistance to changing the internal control environment as well as a lack of capacity and/or understanding to implement the changes. According to periodic supervision and assessment of internal audit units and internal audit reports by the CGR, internal audit is weak. Factors that contribute to the ineffectiveness of internal audit are lack of managerial support, high levels of turnover and staff instability, low wages, and lack of technical competence. While the CGR has taken a more proactive role recently by providing training to internal audit staff (through the CENCAP), these efforts have not had the expected impact of sustainable improvement of the control environment. The underlying problem is that implementation of internal audit recommendations is dependent on the agency executive there is no incentive to improve internal controls or more generally, governance. The national Chart of Accounts was developed primarily for central government. However, advances in implementing decentralization have made it necessary to revise the Chart of Accounts. Annual published financial reports contain only statistical information. Consolidated annual financial statements for the public sector are not produced, in part due to the lack of financial reports from prefectures, municipalities and the decentralized sector. Congress does not have the technical capacity to manage budget monitoring and evalaution activities. There is clear need to establish an effective and competent oversight body, whether it is through a congressional budget office or separate institution. The financial management framework for municipalities is generally sound. However, there are basic weaknesses in its application, particularly in relation to internal controls and internal audit. The main shortcomings in accounting and financial reporting relate to a lack of capacity to generate financial information and the lack of knowledge of statutory requirements. Although the Administrative Decentralization Law provided the prefectures with an enhanced role in both regional development and service delivery, the prefectures have not been able to perform as intended. There are substantial

7 Bolivia Country Financial Accountability Assessment iii shortcomings in the application of internal control functions, while both internal and external auditing functions are generally undertaken in a satisfactory manner. Follow-up on audit recommendations remain a problem. While the departmental administrations eventually comply with the basic reporting requirements established by the Ministry of Finance, there are often significant delays in the submission of financial statements, which are due not later than March 31 of the subsequent budget year. The annual financial statements of all prefectures are subject to a financial audit by the CGR. The 2002 audit results indicate a poor level of accounting, and the general unreliability of financial information. Bolivia s PFM Performance Measurement Indicators 5. While Bolivia s PFM indicators seem to be balanced (the average of the sub-ratings would indicate a moderate to substantial rating), the overall risk rating is still considered to be substantial. The overarching and deeply rooted weaknesses in the internal control framework (including poor budget execution controls), weak internal audit and an absence of an effective oversight mechanism outweigh the progress that has been made with regard to PFM systems design. The recommendations set forth in Chapter 5 (see section on Programs for Improved Financial Management) are built upon the 18 month time-frame leading up to the Constitutional Assembly, and address areas directly within the control of the Government. 6. The nature of these recommendations do not address compliance with controls or the internal control environment. The recommendations do not go far enough to reduce the risk from substantial to moderate. In order to do this, there would need to be an effort between the Government and the donors to address the issue of culture change to improve the rate of compliance with rules and regulations. Constraints to Proposed PFM Improvements 7. The Constitutional Assembly is scheduled to convene in approximately 18 months, where the political future of Bolivia, including broader legal, institutional and governance issues will be decided upon. As such, the CFAA recommendations have been framed within this 18 month time-frame given the political uncertainty beyond the completion of the Constitutional Assembly. The CFAA recommendations attempt to help the Government to complete the design or application of systems and process. Upon conclusion of the Constitutional Assembly, it is recommended that the donor community reengage the Government to design a second phase to this series of recommendations. The second phase of reforms should address deeper issues of governance, PFM accountability arrangements, and other policy related issues. Programs for Improved Financial Management 8. The framework of policies and Government decisions being sought in connection with Multi-Donor Budget Support Program (MDBS) will form the foundation for the successful implementation of a series of programs to continue to upgrade Bolivia s public financial management systems, practices and accountability arrangements.

8 Bolivia Country Financial Accountability Assessment iv 9. The policy decisions to implement these principles are those that would establish broader transparency and comprehensiveness in the budget, more timely, frequent and comprehensive budget and financial reporting, broad access to information, transparency and oversight of public financial management, and improved internal controls for public financial management. In addition to the systems improvements supported by the MDBS, these programs are designed to: Broaden the reach of the integrated financial management system (SIGMA) to include decentralized entities, all prefectures and the 10 largest municipalities. Improve financial reporting for all centralized and decentralized government entities, as well as for all prefectures and the 10 largest municipalities. Improve the implementation of internal control findings at the sector, prefecture and municipal levels.

9 Bolivia Country Financial Accountability Assessment 1 BACKGROUND AND CONTEXT 1.1 An initial CFAA for Bolivia was prepared in The joint WB/IDB team who prepared this 2004 CFAA began with an overview of PFM in Bolivia, based both on the findings of the 1999 CFAA and also on the knowledge gained through various initiatives in institutional development and public sector modernization over the past several years. The two participating banks will use the 2004 CFAA findings to design programs geared towards improving the country s fiscal management, and to coordinate more effectively with other development partners in the identification and prioritization of activities in public sector reform. Country Background 1.2 Bolivia is currently experiencing a period of tremendous social and political unrest, with serious conflicts in April 2000, September 2000, January 2002 and February These conflicts have resulted in the forced resignation of Gonzalo Sanchez de Lozada in October 2003 and the assumption (in accordance with the Bolivian Constitutional process) of then Vice President Carlos Mesa, as President. 1.3 The country remains one of the poorest countries in the Latin America and Caribbean Region with a GNP per capita of US$950 and a high incidence of extreme poverty in rural areas. 1 Lack of progress in poverty reduction and high income inequality, vulnerability to external shocks, and a precarious fiscal situation are the three prominent features of the Bolivian economy. The boom years of the early 1990s were followed by negative economic shocks in the late 1990s, a result of the international capital markets crisis. These shocks, combined with slower growth, slowing demand for Bolivian goods (particularly from Argentina and Brazil), a reduction in remittances, and a reduction in income as a result of coca eradication, have intensified the decline in the Bolivian economy. The lower external demand for Bolivian goods has led to a significant strain on the financial system, which despite recent improvements, continues to be plagued with a high rate of non-performing loans (20 percent and growing). The country s private sector is very weak, and private domestic investment represented less than 1 percent of GDP in The current government has formulated a two-phase plan to stabilize the country. The first phase would extend through the conclusion of the Constitutional Assembly (projected to convene in 14 to 18 months), and the second phase would extend from the conclusion of the Constitutional Assembly to the end of the constitutional term of the President (August 2007). The Mesa administration has declared three immediate political objectives: revising the hydrocarbons law; submitting the decision to export natural gas to a public referendum; and calling for a Constitutional Assembly to modify the existing Constitution. Given the clear limitation of the Government s ability to address broad- 1 Country Assistance Strategy, January 2004, page 63.

10 Bolivia Country Financial Accountability Assessment 2 based PFM reforms, the CFAA recommendations are framed in line with the timing of the first phase of the President s political agenda. 1.5 The administration has also proposed three economic objectives for the first phase: restoring macroeconomic stability; reorienting public expenditure towards high-visibility programs that directly respond to factors underlying recent social conflict; and relaunching the institutional reform program and anti-corruption efforts. 2 Recovery of the economy now depends on increased gas and oil sales to boost tax revenues, and on increased trade earnings through the country s entry into international markets. 1.6 President Mesa, in his Economic address to the nation on February 1, 2004, in addition to reiterating fiscal austerity measures and the importance of stimulating growth, announced a plan to increase transparency through greater publication and dissemination of budget reports and by allowing the Contraloría de la Republica (CGR, Supreme Audit Institution) to oversee the use of previously restricted access expenditure reserves. Additionally, the President announced the creation of two new funds targeting poverty reduction expenditures which allocate resources to high impact projects in poor and sensitive areas and provide social safety nets. There still remains a risk that that opposition groups will not grant sufficient time to the Mesa administration to implement and complete a number of priority reforms essential to stabilize the country. It remains to be seen whether the Mesa administration will be able to deliver sufficient results quickly enough to maintain social peace. The Participating Banks Country Assistance Strategy 1.7 The World Bank s Country Assistance Strategy focuses on supporting the government in maximizing efforts to achieve sustainable economic and social development. It involves the following interrelated lines of action: reactivation of economic growth and competitiveness, poverty reduction and strengthening of human capital, and modernization of the State and governance. 1.8 Prior to the deterioration of the macroeconomic environment, the World Bank had scheduled Bolivia s graduation from IDA. The country will now remain a blend country (a mix of IBRD and IDA funds) through the end of the IDA 14 cycle. 1.9 The IDB Bolivian Country Strategy for is conceived as a process in which short-term interventions, in cooperation with other donors, reduce the risks of greater economic and social instability and avoid delays in the social achievements made in the last decade. The strategy focuses on three areas: improved government management and transparency, increased competitiveness and fairness in the private sector, and improved efficiency and equality in the provision of social services The CFAA is suitably intertwined with these strategies. First, the state of PFM in the country is of significant importance to the successful modernization of the public sector and improved governance arrangements. Second, the performance of PFM systems 2 Ibid., Para 42 and 46.

11 Bolivia Country Financial Accountability Assessment 3 of subnational governments is key to supporting efforts to improve voice, accountability and inclusion as drivers for poverty reduction and pro-poor growth. Relationship with Other Sector Work 1.11 The Public Expenditure Review (PER) evaluates the country s fiscal position, its expenditure policies and public expenditure management systems, with a deeper focus on upstream issues of budget construction and Government spending priorities, while the CFAA looks at downstream issues of budget execution, and reviews the PFM systems, practices and accountability arrangements in place that permit the Government to achieve its priorities. The Country Procurement Assessment Review (CPAR) examines public procurement institutions and practices. These three products provide a robust picture of overall governance and accountability in the public sector. A PER for Bolivia was carried out in 2004 and this 2004 CFAA is designed to complement the PER analysis in the area of budget. The CPAR for Bolivia was completed in Objectives 1.12 The overall development objective of the CFAA is to provide relevant information to the Government and the participating Banks and donors on PFM systems, practices and accountability arrangements in Bolivia, particularly where those inhibit government efficiency and economic growth. To this end, the CFAA includes a PFM Measurement Framework, and an action plan for addressing significant issues identified, incorporating appropriate capacity-building programs and mitigation measures. The CFAA builds on the first Bolivia CFAA completed in 1999 and updates existing analytical work such as the 2004 Public Expenditure Review (PER) The European Commission (EC) is also preparing to carry out its Test de Conformidad/Realidad/Ejecución del Gasto Público, which will use statistical sampling to test the efficiency and transparency of public expenditure and internal controls in various sectors. It was agreed during the initial CFAA planning mission of September 2003 that the budgeting and execution of investments would be the main focus of that Test, with special emphasis on the social sectors and Social Investment Funds, as the EC has a long tradition of financing social sector investment and is currently reorienting its aid towards budget support. The EC Compliance Test aims to complement the CFAA in areas of budget execution and internal controls, with a clear focus on improving the investment budgeting cycle Having supported the application of the Comprehensive Development Framework (CDF) for Bolivia, donors have had exposure to PFM-related risk in activating budget support or technical assistance programs and have gained an appreciation for the opportunity available to improve economic development through enhanced PFM. This CFAA is a product of extensive donor integration and collaboration. Scope and Coverage 1.15 As Bolivia is a Highly Indebted Poor Country (HIPC), the CFAA has built on the HIPC Tracking Action Plan and analytical work that has been carried out over the past

12 Bolivia Country Financial Accountability Assessment 4 few years. 3 The CFAA has been based on inputs from selected central normative entities and sub-national institutions,. Other stakeholders consulted include the donor community, and leaders from professional associations, private sector and civil society, in order to validate the findings of the CFAA team Central normative entities, selected on the basis of the major roles they play in the sectors supported by the participating Banks country strategies, include the Ministry of Finance, particularly its Budget, Accounting, Treasury, integrated financial management information system (SIGMA) and Economic/Fiscal Affairs Departments; Fiscal Programming and Development Fund Units (HIPC and fiscal transfers to municipalities); the Ministries of Health and Education; General Directorate of Revenues; Directorate for Fiscal Decentralization; the CGR (External Audit) and the Legislative Assembly The CFAA team also visited a sample of municipalities and prefectures in order to assess the effectiveness, efficiency and transparency of public financial management with regards to national laws and regulations. The role of municipal government financial operations is significant. Municipalities are responsible for about 16 percent of public sector expenditures (including both recurrent and capital expenditures), while prefectures manage another 8 percent. Twenty percent of national tax collections is distributed to municipalities, and 25 percent of the Special Tax on Hydrocarbon Products tax is distributed to prefectures. Locally elected officials are empowered to define local governments development and spending programs. However, limited quality information is available on municipal budget execution and borrowing/debt Budget execution and monitoring. The CFAA has reviewed the appropriateness of the internal control framework, the extent to which the internal control and accountability systems in place at the spending entities adequately support data and transactions entered in the information system, the arrangements for overseeing execution of budget transfers (e.g., to subnational governments), the effectiveness of the single treasury account for all government finances and overall cash management, managerial use of financial information, records management, and the capacity and effectiveness of internal audit (including a review of staffing and coverage of public institutions) The CFAA proposes actions to ensure that flows of all government funds are recorded in a systematic and timely manner, thereby helping to consolidate the Government s initiative of the single treasury account. Through this approach, the CFAA has attempted to examine expenditures targeted to poverty-reducing programs and to link these expenditures to the Government s strategic priorities. The CFAA also reviewed the overall control framework for the execution of resources and reviewed Government systems and practices for monitoring and analysis of the effectiveness of the execution of public resources targeted for poverty reduction. 3 The Management of HIPC Funds in Recipient Countries (European Commission); Tracking of Poverty- Reducing Public Spending in HIPCs (March 2001), Actions to Strengthen Tracking of Poverty-Reducing Public Spending in HIPCs (March 2002), Update on Implementation of Action Plans to Strengthen Capacity of HIPCs to Track Poverty-Reducing Public Spending (March 2003), and Status Report of Actions to Strengthen the Tracking of Poverty-Related Public Spending in Bolivia (March 2003) by IDA and IMF.

13 Bolivia Country Financial Accountability Assessment Revenue and cash management. The CFAA has reviewed the adequacy of revenue estimation procedures, comprehensiveness of the revenue estimates, effectiveness of collection practices, and the arrangements for monitoring revenue administration, as part of overall budget monitoring and cash management. This assessment did not cover issues of tax policy, as the upcoming Development Policy Review will address that issue in greater depth. 4 Through this approach, the CFAA has supported the Government s stated priority to enhance and sustain measures that promote economic growth Accounting and financial reporting. The CFAA reviewed the relative strengths and weaknesses of the procedures and institutional arrangements for financial reporting, comprehensiveness and quality of available financial information, controls on commitments (particularly in capital spending), existence of accounting reconciliation and subsidiary records, and the effectiveness of the framework and systems for access by the public and media to information on management of public funds. In that context, the CFAA reviewed and evaluated the appropriateness of adopted accounting standards and their compatibility and/or degree of convergence with the International Public Sector Accounting Standards (IPSAs), published by the Public Sector Committee of the International Federation of Accountants (IFAC), and the alignment of the national Chart of Accounts with internationally recognized classification systems (Government Finance Statistics, GFS). Work in this area was centered around the Office of the Accountant General, SIGMA, and Budget. This CFAA s recommendations aim to strengthen overall accountability of public financial management by recommending the timely and accurate generation of reports on budget execution and of financial statements, to be disclosed and presented to a broader audience, including civil society and the international community Debt Management. The CFAA evaluated the adequacy of institutional arrangements for debt management, the use of information systems for recording public debt, and incorporation of debt servicing into the budget. It also covered the extent to which contingent liabilities are monitored, evaluated and considered for budget strategies, and possible reporting procedures. This analysis supports the Government s priority to modernize key public institutions through reforms to make debt and cash management more efficient and effective. The CFAA centered its work in this area around the Office of Public Credit, the Central Bank, and the Treasury External Audit. The CFAA has updated the main findings of the institutional assessment of the Contraloría General de la Republica (CGR) reflected in 1999 CFAA. This 2004 CFAA focuses on the adequacy of the institutional arrangements for independent external audit, the institutional arrangements for follow-up and enforcement of compliance of external audit findings, and the clarity of roles and responsibilities of the internal and external audit function. The CFAA has identified additional actions for strengthening the performance of the public control system and its capacity for retention and upgrading of human resources, its effective coordination with internal audits, and the modernization of the quality of audit methodology and reporting, in line with international standards (INTOSAI). Through its recommendations to strengthen the 4 Bolivia Public Expenditure Review Update Concept Paper, March 2003

14 Bolivia Country Financial Accountability Assessment 6 development of the CGR, this CFAA supports the objectives of institutional development and enhancement of the governance and accountability framework of public sector management Institutional and legal framework. The laws and regulations governing public expenditure in Bolivia are generally sound. Given that the institutional and legal framework is well documented, the CFAA worked directly with representatives of the Ministry of Finance, the CGR and met with the congressional Comisión de Finanzas mainly to identify major gaps with respect to actual practice, assess the levels of discretion, and evaluate mechanisms for enforcement and incentives for compliance. Where laws or regulations are lacking, obsolete or unenforced, this CFAA proposes solutions to strengthen the public sector financial management legal framework Human resources for public financial management. Highly qualified individuals can be found at certain managerial levels in the Bolivian public administration. The ability to attract and retain technically trained and qualified financial management personnel is central to the sustainability of any reform of public financial institutions. The CFAA reviewed professional public financial management staffing levels in both central and decentralized governments, the existence of constraints to meeting staffing needs, the requirements for designation of accounting professionals, and the capacity to design and implement public financial management and institutional reforms Areas not covered. The CFAA did not cover the operations of autonomous entities such as public universities and parastatals, which depend on earmarked allocations from the national budget. Nor did the CFAA review economic regulations or legislation for the promotion of private sector growth, such as the function of the Tax Service and Customs, or tax policy. Methodology 1.27 The CFAA team s main sources of information included existing documentation, questionnaires, and interviews with key staff. Documentation reviewed included (i) laws, regulations, manuals and reports provided by the Government and the Ministry of Finance, CGR, and the Office of the Accountant General; (ii) internal and project documents of the WB and IDB, particularly the Country Assistance Strategies; and (iv) other donor program and analytical reports. A full list of background and resource documents may be found in Annex 1. Preparatory questionnaires were distributed to the relevant central and spending entities, soliciting their views of the current financial management and their own practices. Additional questionnaires were submitted to prefectures and municipalities. Copies of these questionnaires may be found in Annex 2. During the main field mission, further interviews were conducted and additional data collected in order to address the issues mentioned in the scope section of this chapter. A list of interviewed representatives during the preparation and main field mission is provided in Annex The information gathered during the preparation and main field mission was analyzed so as to answer the issues spelled out in the scope section above; this analysis is

15 Bolivia Country Financial Accountability Assessment 7 presented in Chapters 2 and 3 of this report. The PFM Performance Measurement Framework is presented in Chapter 4. The summarized findings of the analysis and policy recommendations are presented in Chapter 5, accompanied by a prioritized action plan. The plan may include endorsement of interventions already underway, as well as supplementary actions agreed with the Government, and is consistent with other WB/IDB and donor activity currently in progress in Bolivia. Follow-up and Dissemination 1.29 The Government will be encouraged to form an inter-institutional steering committee to follow up on implementation of the CFAA action plan. The monitoring and evaluation strategy will be in line with that of budget support and Sector Wide Approach (SWAp) programs. The donor community has established a Multi Donor Budgetary Support Program (MDBS) to assist the Government to implement a strategic framework for poverty reduction. 5 As such, the MDBS has included the CFAA policy recommendations as an integral part of the program, and will serve as a basis for donors to monitor implementation of the Government s reform program and to progressively measure progress. Additionally, the Government has organized 5 GoB-donor working groups: PRSP and National Dialogue; Constitutional Assembly; Productivity and Competitiveness; Fiscal Deficit; and Harmonization. 6 The Harmonization working group will be involved in the preparation of SWAps and will also serve as an important forum by which to assist the Government to implement its reform program at the sector level A draft of this report will be discussed with the Government and the Government s contributions and comments will be taken into consideration. [The Government s official comments on this report may be found in Annex XX.] 5 Draft Memorandum of Understanding, Multi-Donor Budgetary Support Programme in Support of the Implementation of the Bolivian Poverty Reduction Strategy, April 30, Reunión de Coordinación Gobierno-Cooperación Internacional, March 26, 2004

16 Bolivia Country Financial Accountability Assessment 8 CFAA ANALYSIS: CENTRAL GOVERNMENT Legal Framework 2.1 The legal framework governing Bolivia s PFM is satisfactory. There are three laws that clearly document the fiscal functions of the Ministry of Finance, executing entities, the Legislative Assembly, and the CGR: the 1990 law for financial administration, SAFCO; 7 the Law of Popular Participation (1994); and the Law of Decentralization (1995). These laws are all recent, and they provide a solid foundation for PFM based on the current context. The challenge at this point is to ensure compliance with the letter and spirit of these laws, in an environment where institutional capacity is limited. Integrated Financial Information System: SIGMA 2.2 The vision to implement SIGMA was to create a single integrated system designed to administer, manage and report on public sector expenditure. The system implementation also sought to standardize and simplify public financial administrative procedures through improving the budget cycle, eliminating the application of subjective prioritization over payments, and promoting a results-oriented public administration. Clearly the implementation of SIGMA has produced significant improvements and benefits in public financial management in central government. SIGMA has established a method of real-time transaction and expenditure registration, produced a standardized presentation of central government financial information, and has also introduced tools for planning, programming and monitoring of public expenditure. Procurement and contracting transactions are managed by a well-functioning module within SIGMA that manages transactions processed by government entities with SIGMA coverage. 8 However, the implementation of SIGMA alone has not been able to completely reduce the non-observance of binding rules and regulations in expenditure management (see paragraph 2.4). 2.3 Coverage. The system has been implemented in all but one central government agency (see Table 2.1), and also includes decentralized government institutions such as the Unified Directorate Fund (DUF), Customs, National Road Service (SNC) and state universities. At the sub-national level (municipalities), only La Paz and Cochabamba have implemented SIGMA. Implementation delays have been common due to lack of available counterpart financing and budget, insufficient capacity to manage the implementation, and concerns regarding the sustainability of the system in the small and medium-sized municipalities. In 1995, the Ministry of Popular Participation developed a system (Sistema Integrado de Contabilidad Municipal, or SINCOM) that currently 7 Law No (SAFCO), Article 1calls for the implementation of subsystems for budget programming and organization; budget execution; personnel management; procurement management; treasury and public credit; accounting; external auditing and internal controls. 8 The SIGMA procurement module contains a registry of more than 10,000 vendors and is updated annually with the Plan Annual de Contrataciones. The database is integrated with vendor pricing and reduces the opportunity for secretive bidding/contracting procedures.

17 Bolivia Country Financial Accountability Assessment 9 operates in 240 small and medium sized municipalities (see section on municipalities for analysis of the SINCOM system). Table 2.1: 2003 SIGMA Coverage Institutions Central Administration (a) Decentralized Entities Budget in B$ millions (no. of entities) 12,509 (25) 4,241 (79) Prefectures 4,821 (9) Municipalities 2,315 (314) Non-Financial 1,212 Public (22) Enterprises Budget execution SIGMA online (no. of entities) 10,990 (24) 95 (27) - (0) - (0) 630 (2) Budget execution SIGMA off-line (no. of entities) - (0) - (1) 1,079 (1) - (2) - (0) Budget execution without SIGMA (no. of entities) 1,519 (1) 3,284 (51) 3,742 (8) 2,315 (312) 581 (20) % Coverage Budget Execution (no. entities) 88% (96%) 2.3% (35%) 22% (11%) 0 % (0.6%) 52% (9%) Non-Banking Public Entities 690 (6) 618 (3) - (0) 72 (3) 90% (50%) Banks (b) 466 (1) - (1) - (0) 466 (0) 0 % (100%) Total: 26,254 (456) 13,195 (57) 1,079 (4) 11,979 (395) 54% (13%) (a) The Judicial Branch has not implemented SIGMA (b) The Central Bank does not use SIGMA for Public Investment/Credit operations. Sources: Budget: Viceministerio de Presupuesto y Contaduría; No. of entities: Programa de Modernización de la Administración Financiera Pública. 2.4 Due to the inherent weakness in budget planning, there still are a great number of offbudget transactions that are executed outside of the system. This results in an overspending of certain budget and treasury accounts, a practice that is in contradiction with the Budget Law, which prohibits this manner of public expenditure management. While SIGMA does not permit off-budget transactions, by subverting the system through manually recording accounting transactions, institutions are then able to justify the expenditures later through the issuance of an Executive Decree System weaknesses. SIGMA is a critical tool to enhance the transparency and improve 9 Decreto Supremo (September 2002) established the practice of budget modifications via Ministerial Resolutions, which effectively allows transactions to be recorded in the accounting module but without recording the transaction in the corresponding budget line. In 2003, transactions worth approximately B$400 million were executed and recorded in this manner.

18 Bolivia Country Financial Accountability Assessment 10 the effectiveness of public sector financial management. However, besides coverage issues, weaknesses still remain. The system was designed to operate as a management implementation tool, but practice reveals that the SIGMA is used primarily as a payment system. SIGMA is a system that was designed for central government agencies, and the analysis shows that the information needs of decentralized agencies, such as the Superintendency of Banks and Financial Entities (SBEF) and National Regional Development Fund (FNDR), were not incorporated into the original design. Although provisions have been made for technical support to address this issue, work has not begun to customize the system to meet the needs of such agencies. Registration of budget expenditures is problematic at the point of data entry due to high staff turnover and unfamiliarity with the system. Also, perceived lack of clarity relating to administrative requirements to enter and manage budget data contributes to the weakening of the effectiveness of the system. Reforms to the budget classification and structure have not been implemented. 10 There are also certain risks that have been identified, which if unresolved, may hamper the effectiveness and sustainability of the system. These risks stem from both weak political support and weak financial and technical support for the management unit maintaining SIGMA. 2.6 Recommendations. Decentralized agencies. While the implementation of SIGMA and the single treasury account (Cuenta Única de Tesoro or CUT) has helped to improve expenditure management for centralized entities, the needs and budget autonomy of decentralized agencies within these systems need to be addressed. In order to satisfy the concerns of the decentralized agencies, the Government should initiate a broad-based assessment to identify how these systems can be adapted in order to ensure that the decentralized agencies can fulfill their respective mandates, while ensuring that institutional independence, transparency and accountability for expenditure management are not compromised. 2.7 Staff training. While incorporation of the technical unit maintaining SIGMA to the Accountant General s Office within the Government is seen as a positive step to ensure the sustainability of system maintenance, there has been a relatively high turnover of technical staff due to recent administrative and budget reductions. The extensive system training that was provided in the administrative units prior to incorporation has been lost and this now jeopardizes the long-term sustainability of the unit, and of the system. 2.8 Technical improvements. The system can also be improved through simple yet 10 World Bank, Institutional and Governance Review (Report No BO).

19 Bolivia Country Financial Accountability Assessment 11 important technical upgrades that should reduce the operating costs and improve its longterm viability. The system s operating platform should be upgraded and improved, which would allow for better configuration of the system to meet the changing business needs and also for greater efficiency. Modules that could be developed/incorporated include: Annual Operating Plan (POA), CUT in dollars; financial statements/accounting reports for central government; and external financing. 2.9 Migration of the system platform to an Internet-based network would not only improve connectivity but also reduce the network costs (currently, La Paz-based agencies are connected along a hard-wired network). The increase in the number of users has placed heavy demand on the servers that process government financial information. Furthermore, the contracts for server maintenance have expired and there is a pressing need to renew them in order to ensure continued system operations. Also, the system should have adequate backup storage for government financial information in the event of natural disasters or catastrophes. Currently there are plans to create a backup storage facility, although these plans should carefully consider the geographical location of the new facility to ensure that the Government can continue to operate in the event of a calamity. If these technical problems are left unaddressed, there is a serious risk of system collapse Funding. There is a considerable amount of funding available, through donorfinanced projects that are supporting the continued system implementation. The Government should re-evaluate the objectives and activities of these projects in order to prioritize the improvement of the basic system infrastructure and the complete implementation and improvements for centralized and decentralized agencies, the nine prefectures, and the 10 largest municipalities. Budget Preparation, Execution, and Reporting 2.11 The focus of the WB 2004 PER coverage of Bolivia s budget process is its impact on Bolivia s fiscal situation and on the challenge of moving towards a sustainable fiscal path and improving service delivery. Understanding Bolivia s budget process and the incentives of the multiple agents that participate in this process is a key ingredient for a fiscal reform seeking long-lasting results in terms of improvements in fiscal discipline and efficiency in the use of public resources. The PER review of the budget process was therefore detailed and thorough. The scope of this CFAA was designed to complement that of the PER in the area of budget by focusing on specific areas relevant to PFM: revenue estimation procedures, cash management, internal control and internal audit, the use of SIGMA and the single treasury account, and financial reporting. Therefore the more general description and analysis of the budget process in this CFAA leans heavily on PER coverage in this area From a PFM perspective, there are four main issues in the area of budget: (i) The budget as voted is unrealistic, based on systematic and persistent overestimates of revenue.

20 Bolivia Country Financial Accountability Assessment 12 (ii) The budget process is flawed and the formulation of annual operation plans (POA) is more procedural than strategic, thereby weakening the usefulness of the budget as a tool. (iii) Since SIGMA does not currently include prefectures or municipalities, a significant portion of the budget is not monitored or controlled via SIGMA. (iv) The use of HIPC resources is not monitored in a timely fashion Overview of budget process 11. Bolivia s budget process is weak. Improvements since the introduction of the Bolivia s Poverty Reduction Strategy have been modest, contrary to expectations. The budget process lacks any careful analysis of costs and benefits, takes place in a weak institutional environment, and is strongly influenced by lobbying pressures. Flaws in the budget process begin with routine overestimations by the Government of economic growth, fiscal revenues, and thus the overall size of the budget. During the approval process, Congress invariably increases expenditures further by simply raising the amount of debt needed to fund the budget After the budget is approved, spending is frequently increased during the year, with the changes approved ex post by Congress at the end of the year. Throughout the year, the Government engages in a complex process of cash management by disbursing budget allocations in a piecemeal fashion, not reflecting sound economic policy but rather shorter-term objectives (such as maintaining political support). The budget process is further negatively affected by the fact that Congress has neither the expertise nor the technical resources to adequately assess the budget, nor is it given sufficient time to properly debate and modify the proposed budget Planning and investment programming framework. The Ministry of Economic Development is responsible for capital spending and the Ministry of Finance for the current budget. The lack of coordination between the two weakens the budget framework. As a result, there is often a failure to include forward estimates of current spending implied by investments, which leads to underspending on maintenance and inefficiencies in provision. Government has indicated its intention to move to a multi-annual budget by the next fiscal year as a way to address its public expenditure problems, and in particular the open-ended budget negotiation process. However, experience elsewhere has shown that the usefulness of the multi-annual approach is seriously compromised when initial conditions such as effective program budgets and predictable execution are not in place. Seeking to improve budget formulation through a multi-annual budget is not a panacea and can pull attention away from the need to improve the basics Budget preparation. The fiscal year coincides with the calendar year. The budget process starts in July/August when the Ministry of Finance produces the macro forecasts, including the forecast of revenues for the upcoming year, based on estimated performance of the economy (growth) and the expected efficiency gains of the fiscal agencies (aduanas and impuestos internos). According to government officials 11 Details on stages of the budget process are provided in Annex 2.1 of the PER 12 PER, Annex 2.2