Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6691-BO

STAFF APPRAISAL REPORT

BOLIVIA

PUBLIC FINANCIAL MANAGEMENT OPERATION

May 6,'1987

Projects DepartmentLatin America and the Caribbean Regional Office

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

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CURRENCY EQUIVALENT

Currency Unit a Bolivian Peso ($B) - until 12/31/86m Boliviano ($B) - after 01/01/87

$b 1,923,000.00 - US$ 1.00 - at 12/31/86$b 2.00 = US$ 1.00 - at 03/31/87SDR 1.00 = US$ 1.278 - at 03/31/87US$ 1.00 = SDR 0.113 - at 03/31/87

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS

BAB - Banco Agricola de BoliviaBCB - Banco Central de Boliv.aBANEST - Banco del EstadoBAMIN - Banco Minera de BoliviaCGR - Contraloria General de la RepublicaCOFADENA - Corporacion de las FF.AA. para el Desarrollo NacionalCOMIBOL - Corporacion Minera de BoliviaENDE - Empresa Nacional de ElectricidadENFE - Empresa Nacional de FerrocarrilesENAF - Empresa Nacional de FundicionesENTEL - Empresa Nacional de TelecomunicacionesFONEM - Fondo Nacional de Exploracion MineraINE - Instituto Nacional de EstadisticaIDB - Interamerican Development BankLAB - Lloyd Aereo BolivianoSIDERSA - Siderurgica SociedadSAFCO - Sistema de Administrdcion Financiera y ControlUNDP - United Nations Development ProgramUSAID - United States Agency for International DevelopmentYPFB - Yacimientos Petroliferos Fiscales Bolivianos

POR oMcIAL USE ONLy

STAll APPRAISAL REPORT

BOLIVIA

PUBLIC PINANCIAQ OPUATION

TABLE OF CONTENTS

Is PROJECT SUNNARY oeCee.o,,ee,.,e.og..eo,e.e..e,.. 1

II. WOLIVIA'S PUBLIC SECTOR ................. * .... e o.. 3

A. Policy Framework ................. 3..............., 33. Size and Structure of Public Sector ..... e.,o.e.,e.e 4C. Key Central Entities 7,***..*****.. 7

III. THE PROJECT wo *.eate*e* eev04e****4. 10

A. Project Origin and Objectives ......................... 10B. Rationale for Bank Involvement .... e............... 10C. Project Components *.....e.. .................... e 11

(i) Financial Administration and Control System *. 11(ii) Tax Adminisiration .......................... 13(iii) Banking System Reforms ................. 14

D. Project Cost and Financing .......................... 16E. Justification ....... .................................. 18F. Project Risks ....... .........................,...... 18

IV. PROJECT EXECUTION ....,..........................e.eo,.. 20

A. Organization and Management ........................ 20B. Procurement and Consultant Services ................... 21C. Effectiveness, Disbursements, Accounts and Audits ..... 21

V. RECODUNDATIONS . 22

This report is based upon the findings of an appraisal mission whichvisited Bolivia in January 1987. The appraisal mission comprised N.Barry, B. Buyck, E. Gomez-Eernandini (LCPPS), Messrs. T. Fauquier and C.Vallejo (Consultants). Mr. J. Rosenblut (LCPPS), Mr. N. Carter and Ms.E. Javier (LC2) participated in preparation missions.

This document has a restrcted distribution and may be used by recipients only in the pefformaoceof their officil duties. Its contents may not otherwise be disclosed without World Bank authofltion.

Page no.

Sise and Structure of Public Sector

1.1 Organizational Chart of Major Government Entities ,,..... 24

1.2 Organizational Structure of Key Central Entities *o****400 25

1.3 Salary Structure - Government of Bolivia,Monthly Salary for Selected Entities * **********.* 27

1.4 Number of Public Sector Employees ..................... 28

Financlal Administration and Control Systen

2.1 SAFCO - Summary Implementation Schedule.....,............. 29

2.2 SAFCO - Expected Results..............................,... 34

2.3 SAFCO - Summary of Consultants by Qualificationsand Rssponsibilities............................. 38

2.4 SAFCO - Suimary Terms of Reference.e....................o.. 42

2.5 SAFCO - Main Problems with Accounting and AIS Systems in 18Decentralized Entities Analyzed Under PPF .o....... 51

2.6 SAFCO - Breakdown of Estimated Costs andSources of Finance ................. oo ooooo..oo 52

Tax Administration

3.1 Analysis of Bolivian 1986 Tax Reform ... ................... 53

3.2 Tax Administration, Phase IIActivities and Summary TOR .................0.......... 60

3.3 Tax Administration, Phase IIConsultants Requirements and Costs ........., ......... 66

3.4 Tax Administration, ,Phase I - PPF Inputs .................. 68

EgAmk4 system

4.1 Central Bank of Bolivia - Key Actions in Reorganization ... 73

4.2 Central Bank of Bolivia - Introduction ofNew Accounting Systems ****..*.*.............,. 74

4.3 Central Bank of Bolivia - Action Program forEconomics Department ........ 76

4.4 Central Bank of Bolivia - Action Program forBank Inspection e 77

4.5 Banking System Reform Component -Consultancy Requirements and Costs ......... ,........ 78

4.6 Banking System Component - DiagnosesFinanced under PFF * *.**....,,.*.*.**,* .. ,, *¢ 79

Overal1 Project

5.1 Estimated Disbursement Schedule ... ,.......,..e.....,..*. 83

5.2 Summary Cost Table e 84

5.3 Summary of Procurement Procedures ............ e........ 85

BOLIVIA

PUBLIC lIIUNCIAL $AM&GRNKW OPKRhTION

1. PROJBC( SUNAY

Borrower: Goverrment of Bolivia

Execuitig Central Hinistries, Controller General's Office, and Central4 encies: Bank of Bolivia

Amount: SDR 9.0 million (US$11.5 million equivalent)

Terms: Standard IDA terms

Project The proposed operation is designed to implement key improve-Descrilptio: ments in the structure, staff and systems for public sector

resource mobilization and use. Specific objectives are to:(a) install financial information, administration and controlsystems, and build related staff capabilities in the mostimportant ministries and public entities; (b) improvefinancial intermediation, through reorganization andimprovements in the Central Bank of Bolivia and the develop-ment banks; and (c) overhaul tax administration, to enablesuccessful implementation of the 1986 tax reform. IDA wouldfund consultants, core fixed contract personnel, foreignequipment and materials to support implementation of agreedaction programs.

Benefits: The institutional reforms and systems improvements incorpora-ted in the proposed Public Financial Management Operation areessential to sustaining the success of the New Economic Policyof the Government of Bolivia. In the project period, centralministries and about 12 public entities which account forabout 60% of public financial flows would have basic, reliableand timely accounting, cash management and budget systems inplace, and a core of at least 300 qualified staff operatingthese systems. The severe weaknesses in these basic functionsmake systematic economic management virtually impossible atpresent. The reform in tax administration are expected toresult in dramatic increases over historically poor taxcollections. The major restructuring being implemented in theCentral Bank and planned for the development banks, combinedwith financial policy measures taken and planned, shouldrationalize and strengthen the banking system substantially.

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liamb: The Public Financtal Management Operation is vulnerable to thesame Institutional weaknesses which the project is designed toaddress. Also, the success of the operation depends on thelevel of commitment and leadership present in thisGovernment. These risks have been reduced by limiting thisinitial operatlon to a relatively short period, with mostmajor activities planned for the first two years. Projectpreparation has been Intensive, with detailed action programsagreed and already initiated. The project scope has beenpruned to match implementation capabilities. Stableorganisational arravngements have been incorporated to reducethe project's vulnerability to personnel changes. The PublicFinancial Management Operation is given top prlority by theGovernment of Bolivla.

10131 LOCAL TOTALstilmted Costs:

i) Financial Administration 5,910 8,100 14,010and Control System

iI) Tax Administration 2,120 2,530 4,650

iii) Banking System Reforms 1,330 2,620 3,950

vi) Project Preparation 1,150 350 1,500

v) UNDP-OPE Administration 450 -- 450

Total ProJect Cost: 10,960 13,600 24,560

nsing Plan:

Government - 8,400 8,4GO/IDA 9,450 2,050 11,500IDB/UNDP (parallel) 1,510 90 1,600USAID (parallel) - 3,060 3,060

Total: 10,960 13,600 24,560

IDA n SCAL YEARSEstimated Disbut!emtet 1988 1989 1990

Annual 3,400 4,800 3,300Cumulative 3,400 8,200 11,500

1/ Less than 4% of Government contribution, for staff and facilities, isincremental.

2/ Conservative disbursement schedule utilized due to historical experiencein technical assistance operations. Actual implementation programsreflect implementation periods of about two years.

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it. BOLIVIA' S PUBLIC SECTOR

A. Policy Framework

2.01 When the Paz Estenssoro Government took office in August 1985, theeconomy of Bolivia was in chaos. Inflation had been over 24,0001 in the priortwelve months. The official exchange rate was severely overvalued; by August1985, the parallel rate was over fifteen times the official rate. The accumu-lation of arrears on public external debt had reached US$1 billion, over 201of GDP. Imports had dropped to less than two-thirds of the average 1979-81level. GDP, exports, and investment had declined for four years; from 1980 to1984, GDP fell by 162 and per capita GDP by 272. With inflation and a weekapparatus for tax collection, central tax and customs revenues dropped toabout 3% of GDP in 1984 and 1985. From 1983 to 1985, the public sectoroperated without budgets; spending was uncontrolled, accommodated by monetaryexpansion.

2.02 The role of the state increased markedly in the 1980 to 1984 period.Efficiency of key public entities deteriorated steadily, with frequentGovernment changes eroding controls and support. Public enterprise output andtransfers to the Central Government declined, and the burden of publicexternal borrowings increased dramatically. Public employment continued torise by about 8% annually, reaching about 237,000 in 1985. The public sectorsalary bill grew to dominate public expenditures, contributing significantlyto the deficit. By the end of 1984, the consolidated public sector deficithad reached 29% of GDP. At the same time, real public sector salariesdeclined precipitously, leading to a serious deterioration in staff morale andproductivity. Many qualified civil servants joined the private sector, local-ly and abroad. These public sectcor management problems resulted in reducedGovernment revenues, uncontrolled current expenditures, and poor projectimplementation.

2.03 New Economic Policy (NEP). Beginning in August 1985, the newGovernment adopted a bold economic reform program, the New Economic Policy, tostabilize the economy and to launch structural reforms which would lay thefoundatio,a for resuming economic growth. The primary objectives of theprogram are to control inflation, cut fiscal deficits, restore externalbalances, improve the efficiency of a reduced public sector, and create thesetting for private sector growth. A market-oriented exchange adjustmentmechanism was established. Reforms in the trade regime included a uniform 20Ximport tariff. Important measures taken in 1986 included a major tax reformand legislation on public employment.

2.04 Performance. The record of the Government's first 20 months inoffice is extraordinary. The stabilization policies introduced in August 1985have been implemented with vigor. Growth in the public sector wage bill andGovernment spending has been checked. The deficit of the non-financial publicsector has been reduced from 29% of GDP in 1934 to an estimated 4% in 1986.The exchange rate is stable and unified, with the gap between the official andparallel rates virtually eliminated. Inflation has averaged 2% during thepast 12 months, down from 60% per month in the first half of 1985. Signifi-cant progress has been made in freeing prices, and some steps have been takento improve the efficiency of public sector operations.

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2.05 Instituticaal Measures. With incisive stabilization policies inplace, Government now' is addressing tk.e severe institutional constraints whichthreaten to undermine implementation of the economic program. The historicalpattern of increasing the number and reducing the salaries of civil servantshas been reversed. In addition to reductions of redundant staff, 1986 legis-lation fixes the total salary and wage bill for a public entity as a means ofencouraging reduced numbers and improved salarieR. Tight fiscal constraintspreclude significant across-the-board increases in public sector salariesuntil the tax reform and staff reduction programs are implemented successful-ly. In the short term, the Government is instituting a program to paytrained, qualified managers and technical specialists more as a means toimprove management capabilities and performance. Particular attention will begiven to improving financial management systems and capabilities-accounting,cash management, budget programming and execution-in key ministries andpublic entities. These basic moves are prerequisites to building coherentfinancial decision-making, control, and restructuring programs in Bolivia.

2.06 Another top priority is to implement the May 1986 tax reform. The1986 tax legislation embodies: major simplification in the number of taxes,focussing on value added and wealth; use of the banking system network forcollections; and more effective auditing and non-compliance actions. Expedi-tious implementation of the tar. reform is crucial if stabilization measuresare to be sustained and growth resumed. The Government's success in balancingrevenues and expenditures has been achieved by vtrtual elimination of publicinvestment, sharp reduction in counterpart funding, and tight central cashmanagement as a means of meeting government payrolls. The third institutionalreform area encompasses major restructuring of the banking system, toestablish a sound framework for deposit mobilization and lending. In February1987, GOB initiated this reform with a major overhaul of the Central Bank to:limit its role to central banking functions; reduce staff to efficient levels;install sound accounting and internal control systems; and establish a solidbanking inspection function. The proposed Public Financial ManagementOperation has been designed to: improve public financial management andcontrol systems and capabilities; implement the tax reform; and restructurethe main public financial institutions.

B. Size and Structure of Public Sector

2.07 Annexes 1,1 to 1.4 provide organizational charts of the Governmentof Bolivia and relevant data on the size and structure of the public sector.,/Beginning with the 1952 revolution, the state assumed a major role in theeconomy. Public enterprises dominate key sectors, notably in mining, energyand communications. On average three entities, principally in the decentra-lized sector, have been created annually since 1969; the number of publicentities has grown to approximately 520. The prevailing structure of centraland line ministries, the decentralized sector and regional administration wasestablished in 1972. In 1973, the administrative career and the national

1/ Data presented in this chapter are based upon the limited and often incon-sistent inform&zion available on structure, staffing, salaries and expen-ditures in the Bolivian public sector.

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personnel system were installed. Performance of key entities has deterioratedsteadily due to frequent political and management changes, erosion in bothsalary structures and controls, and inadequacies in basic financial andoperating systems. Many Government entities operate without coherentstandards and norms; most lack reliable and timely budgetting, cashmanagement, and internal control systems, The scarcity of trained andmotivated staff at middle levels has become a serious constraint to efficientpublic financial management.

2.08 Central Government. Policies are made by the President and fiveMinisterial Councils.'/ Bolivia has 16 ministries, a large number given thesize of the economy. The Office of the Controller General of the Republic isresponsible for external control and auditing functions and for establishingnorms for interual controls,

2.09 The decentralized sector consists of public institutions, whollyowned and mixed enterprises. Decentralized entities fall under the relevantsectoral ministries but have been established as separate juridical bodies,with legal and administrative autonomy and their own capital base. The numberof decentralized public entities grew rapidly between 1977 and 1985, publicinstitutions from 89 to 103, and wholly or partly owned Government enterprisesfrom 48 to 70.

2.10 Public service institutions include the Central Bank of Bolivia, theBolivian Social Security Institute (IBSS) under which 27 independent socialsecurity funds operate, the National Institute of Statistics (INE), theNational Institute for Preinvestment (INALPRE), the National Institute ofInvestment (INI). Mixed and wholly owned public enterprises are expected toprovide gcods and services at a profit. The Government controls 100% ofmineral exploration (ENAF), railways (ENFE), and telecommunications (ENTEL);80% of the hydrocarbon sector (YPFB); 70% of air transport (LAB) and of theelectrical energy sector (ENDE); between 65% and 70% of the mining industry(COMIBOL) and over half the assets of banking system. COMIBOL, YPFB, LAB,ENDE, ENFE, ENTEL and ENAF are the most important public and mixed enter-prises. They are major investors and exporters, and important sources offoreign exchange and tax revenues.

2.11 Regional Administration. Bolivia's nine regions-in La Paz,Chuquisaca, Cochabamba, Potosi, Oruro, Santa Cruz, Tarija, Beni and Pando-each operates with regional, departmental and local administrations. In 1986,the Bolivian Development Corporation (CBF) was dissolved; its 22 subsidiaryenterprises were transferred to the Regional Development Corporations in aneffort to decentralize enterprise operations and increase commercialpressures. The Regional Development Corporations are operating agribusiness,cement and textile plants, with mixed results. Government is consideringmeans to sell or liquidate several of these enterprises.

I/ Council of Ministers of State; Council for Economic Affairs and Planning(CONEPLAN); Council for Political and Social Affairs (CONAPOL); NationalSecurity Council (CONASE); and Reactivation and Stabilization Council,created by the present Government.

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2.12 Number of Employees, From 1971 to 1985, the total Government workforce more than doubled, from 115,061 to 237,130 (Annex 1.4). The CentralGovernment accounts for 56%; the decentralized entities, 38%; and regional andlocal administration, 6%. Growth has been most rapid in the CentralGovernment. The expansion of public sector employment was arrested in thefirst half of 1986, when the total number of public employees was reduced byabout 40,000 persons or 17%, falling to 197,000. About 25% of these lay-offswere in COMIBOL, the mining company. While some have found employmentelsewhere in the public sector, the Ministry of Planning indicates that totalpublic sector employment4is still under 200,000.

2.13 Salary Structure and Level. While information is inconsistent andincomplete, indications are that salaries, wages and emoluments equal roughly80% of total public expenditures. Yet, real salaries in the public secto.have deteriorated substantially with hyperinflation. The lowest civil servicewage is B$43 (US$21) per month; the highest Central Government sala:y is B$380(US$190), paid to a director. Wage and salary levels differ among ministries,public institutions and public enterprises. The decentralized sector has moreflexibility in determining pay scales; a profit sharing provision was intro-duced for selected public enterprises in July 1986. Wages and salaries in themining company, COMIBOL, range from US$40 to US$430 equivalent and in thenational airline (LAB) from US$74 to US$677. The Director of Public Adminis-tration, Ministry of Planning, estimates that the salaries for equivalent jobsin the private sector are on average 300% higher than public sector salaries.

2.14 The Paz Estenssoro Government has taken several measures to rationa-lize public salary structure and levels. Expenditures on salaries and wageswere frozen initially and agencies were required to prepare programs forreduction of employment. New legislation established incentives for voluntaryresignation of workers with severance pay equivalent to three months salary ifpaid at once, or six months salary if paid over a six month period, inaddition to normal social security. In November 1985, a Decree was issued tobring the structure and levels of public sector salaries and wages in linewith the financial capacities of the Central Government and public enter-prises. The minimum wage was doubled to the equivalent of about US$15 permonth. The Decree also abolished the system for providing bonuses and phasedout payments in kind through subsidized foodttores. Until May 1986, a ceilingwas set on the expenditure bill on salaries and wages at the nominal July 1985level plus 25%. This formula had the positive feature of encouraging publicentities to reduce staff as the only means to achieve individual salary andwage increases, In July 1986, a scaled salary increase was granted, wherebythe workers in tae lowest wage levels received a 33% increase, and thoseearning more than US$150 equivalent per month would get no increase. Agenciesinterpreted the Decree loosely, with several granting increases beyond theestablished limits, thus threatening the fragile fiscal balance. As a conse-'quence, the Government's economic team decided in August 1986 to tightencontrols on salary and wage expenditures. In particular, salary increaseswill be reviewed and those which exceeded legal provisions will be adjusted.Payrolls of public entities now are controlled by the Treasury.

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C. Key Central Entities

2.15 Ministry of Finance. Organization charts on the key CentralGovernment entities--Ministries of Finance, -Planning and Coordination, Officeof the Controller General of the Republic, and Central Bank-are provided inAnnex 1.2. The Ministry of Finance has five major divisions: General Coordi-nation, Financial Policy, Treasury, Budget Accounting and Management Control,and Tax Collection. Employment totals 2,032. The primary functions of theMinistry of Finance, as outlined in the 1972 executive branch law and otherlegislation, are to: develop the Government's financial policy and manage thestate's financial resources; program, execute and evaluate public sectorbudgets; perform treasury functions of cash and debt management; and overseepublic accounting and controls of public entities.

2.16 Actual responsibilities and operations of the Ministry of Financediffer markedly from its lega'ly established functions. By default, somefunctions are performed by others. The Central Bank of Bolivia possesses whatcapabilities and systems exist in foreign debt monitoring and management. Asa result of its irregular roles as commercial banker for public enterprises,the Central Bank also has (unreliable) cash flow data on decentralized publicentities. Financial sector policies are being determined by the economicteam, under the Minister of Planning and Coordination. The function ofoverseeing public accounting practices and consolidating public accountinginformation is not being done. Internal allocation of responsibilities forthose functions which are being performed by the Ministry of finance are notdelineated clearly. Extreme fiscal constraints and determination in sectoralstrategy formulation, investment planning, and project monitoring (para. 2.19)has given the Ministry of Finance nearly complete de facto responsibility forprogramming and execution of the Central Government budget. The Ministry ofFinance reinstated an Annual budget in 1986. However, inadequacies ininformation on budgets, operations, and financial performance of publicentities make efficient resource allocation and coherent budget programmingdecisions extremely difficult. Also, while responsibilities for budget restwith the budget Division, actual expenditures are determined by continuousnegotiations between the Treasury and public entities, with decisions basedupon short-term cash flow concerns, The Government of Bolivia intends torationalize and strengthen functions of the Ministry of Finance, with aninitial emphasis on building basic systems and capabilities in accounting,cash management, budget programming and execution in the Ministry itself andin the most important public entities. The proposed Public FinancialManagement Operation would support these measures.

2.17 The Office of the Controller General of the Republic (CGR) isresponsible for external control and auditing functions, and for establishingnorms for internal control systems in public entities* The controllerGeneral, appointed by the President, has completed about half of his 10-yearterm. During the last 18 months, CGR staff was reduced by 50Z from 1,186 to592. Under the present Controller, the CGR's ex-ante control functions, whichrepresented major operational bottlenecks, have been removed. The Controllerhas taken the lead in preparing the government's program to improve financialinformation, administration and control in public sector entities.

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2.18 The Ministry of Planning has four divisions: Planning, PublicAdministration, Legal and Administrative Affairs, and Economic Policy. Theprimary functions of the Ministry of Planning and Coordination, as defined inits organizational law of the Ministry of Planning and Coordination of 1974,are: co.rdination and control of national planning and project evaluationsystems; formulation of economic development plans; with the Ministry ofFinance, preparation of public investment and annual operating plans and theannual capital budget; installation of project monitoring systems; andestablishment and application of basic organization and methods for the publicsectore The Ministry of Planning and Coordination is the main link betweenthe Presidency and the Ministries.

2.19 Programming and monitoring mechanisms are weak. While in theory allprojects of the central and decentralized sectors are subject to review by theNational System of Projects (SNP), most projects, particularly those withpowerful political proponents, move directly to the Council for EconomicAffairs and Planning (CONEPLAN) without intermediate technical screening.Regional projects are not reflected in the SNP. Planning and budgettingsystems are not well integrated; projects are approved and included in thebudget as financing becomes available, rather than on the basis of soundevaluation and established priorities. Improvement in these systems willbecome particularly important with anticipated increases in domestic andforeign resources, The FY87 Public Sector Expenditure Review (PSER) is incor-porating assessments of: sector strategies and programs; means to developsuitable investment projects, and institutional mechanisms for project identi-fication, screening and monitoring. The proposed Public Financial ManagementOperation will help improve operational programming, budgeting and executionsystems. Support for improvements in sectoral strategies project evaluationand monitoring are envisaged under a subsequent public fiaancial managementoperation.

2.20 Tax Administration. The immediate objective of the 1986 tax reformis to prevent the past pattern of deficit financing through monetary emissionwith resultant hyperinflation. The drop in fiscal revenues, which contributedto this spiral, resulted from: the collapse of export prices for main commo-dities; inefficiency and irregular practices in Government collections oftaxes and customs; and tax evation in the private sector. In addition tousing taxes for stabilization ends, increased tax revenues are essential ifinvestment is to be resumed and reasonable salaries paid to a smaller civilservice. The 1986 tax reform simplifies the number and types of taxes, focus-sing on value added and wealth. In addition to the one time regularizationtax in 1986, th^. six permanent taxes are: value added tax, complementary taxto value added, transaction tax, corporate profit tax, luxury consumption tax,and property tax. Under the new tax system, the commercial banking networkwould be used for collections, to improve ease and efficiency of payments andto distance Internal Revenue personnel from collection activities.'/

1/ The use of commercial banks for tax collections has been tested inBolivia, is used successfully in other Latin American countries, and isencouraged by the Fiscal Affairs Department of the IMF.

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Government tax administration would focus on auditting, statistics andnon-compliance functions; the 1986 legislation provides for simplification andstrengthening in these areas. With these arrangements, substantial reductionsin Government tax administration personnel are possible and planned. Annex4.1 provides an assessment of the 1986 tax reform.

2.21 Collections under the 1986 regularization tax exceeded expectations,and provided a successful testing ground for using commercial banks as collec-tion agents. In 1986, moves on regulations, administration and systems forthe six permanent taxes were stalled due to indecision on whether a newMinistry of Taxation would be created to provide the necessary impetus toimplementing the reform. In early January 1987, the new Minister of Taxationwas appointed. The Subsecretariat of Tax Collections, Ministry of Finance,the Internal Revenue Department and Customs Administration now fall under thisMinister. The Minister plans an extremely lean Ministry and significantstreamlining of tax administration personnel. The new Hinistry would have theduration of the present Minister, with tax administration responsibilitiesshifted back to the Ministry of Finance in two to three years, once the newsystem is operating successfully. While this arrangement is unusual, it isjustified in the context of Bolivia to attract the type of personnel needed toimplement the reform and to make the major organizational changes required inthe tax administration apparatus. With the decision now taken, work onregulations, organization, and systems has been accelerated with IDB/UNDP andIDA Project Preparation Facility (PPF) support. The proposed Public FinancialManagement Operation complements IDB/UNDP inputs in support of this program.

2,22 Banking System. The Paz-Estenssoro Government encountered a bankingsystem in chaos. An audit of the Central Bank of Bolivia, sponsored by theController General's Office in late 1985, exposed the absence of basicaccounting and operating systems. Central banking functions were not beingperformed adequately, and the Central Bank had assumed the roles of commercialbank for public enterprises and second tier development bank, with heavyinvolvement in evaluation of individual projects. The major development bankssuffered from serious arrears and defaults, with management weaknesses, poorportfolio performance and heavy reliance on external financial sources. Normsand controls on the 24 private commercial banks have been inadequate to ensuresound financial and operating standards. Significant actions have been takenand are planned by the Governm(ent and Central Bank of Bolivia to build a soundfinancial intermediation system. A major restructuring of the Central Bank ofBolivia is being implemented with a focus on strengthening bawic centralbanking functions, removing CBB from commercial and development banking,building reliable accounting systems, and strengthening economic research.Redundant staff resigned in February 1987. Central Bank staff has beenreduced from 1,200 to about 200. Most cuts were in the 1,000 non-professionalstaff which had bloated the Central Bank. Qualified new staff are beingrecruited, building to the desired staff strength of about 450. Rules of thegame for private commercial banks have been formulated, external audits willbe completeA by mid-1987, and the banking inspection function is being built.Action programs for restructuring Banco del Estado and Banco Agricola havebeen developed. The proposed Public Financial Management Operation providessupport for strengthening core functions in the Central Bank and majorrestructuring development banks (paras 3.14 to 3.17).

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III. THE PROJECT

A. Project Orign and Objectives

3.01 Objectives. The proposed Public Financial Management Operation(P?mO) is designed to build the bsqic systems and institutional capabilitiesneeded for efficient resource mobilization, use, and implementation of policyreforms (para 3.05). The three main objectives of the PFMO are to: (a)install financial information, administration and controls, and build relatedstaff know-how in the most important central and decentralized entities; (b)improve the financial intermediation system by restructuring the Central Bankof Bolivia and the development banks; and (c) overhaul tax administration toenable implementation of the 1986 tax reform. The project scope reflects theurgency of the measures, the strength of the leadership for each component,and the demonstrated ability of the Government to take decisive action.Project preparation assistance has been intensive. The scope, design and timeframe of this first operation have been tailored to reflect Government imple-mentation capacity, and to focus on core actions needed over the next twoyearso

3.02 Project Origin. At the request of the present Controller General ofthe Republic (CGR), a mission was fielded in 1984 to help diagnose weaknessesin public accounting and auditing, and to identify technical assistance needs.In late 1985, a small UNDP-financed, IBRD-executed project with the CGR wasinitiated to help design legal changes in the CBR's role and guidelines fortraining accountants and auditors. Audit work by the CGR made it clear thatpriority had to be placed on building financial information, administrationand controls in key central and decentralized publie entities, to provide afoundation for effective policy, financial and operating decisions. CGR auditwork on the Central Bank of Bolivia (CBB) and the public sector developmentbanks dramatized the disarray of Bolivia's financial system. In early 1986, anew CBB President arrived with a commitment and mandate to restructure thebanking system.

3.03 A US$500,000 Project Preparation Facility (PPF) advance was usedfrom June to November 1986 to help define the content of the new FinancialAdministration and Control System (SAFCO), and to diagnose and make recommen-dations for restructuring the Central Bank and the largest two developmentbanks. An additional PPF advance of US$1 million, covering the periodNovember 1986 to August 1987, also incorporates tax administration, and isdesigned to ensure that momentum is maintained in the period prior to crediteffectiveness.

S. Rationale for Bank Involvement

3.04 The Government of Bolivia and IDA country strategy attach highpriority to the proposed Public Financial Management Operation. The PFMOwould help establish the institutional infrastructure for implementing the NewEconomic Policy, by tackling three critical constraints to improvingperformance of the public sector: (a) the lack of basic financial

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administration and control systems and capabilities needed for efficientmanagement of scarce financial resources; (b) poor internal tax generationprior to the May 198, tax reforms, and urgent need to install organization atdsystems needed for the new tax regime; and (c) extreme weaknesses in thebanking system. The key Government players responsible for theseinstitutional retorme have prepared systematic, detailed institutional reformprograms, with assistance under the PPF. The relative political stabilitycombined with the demonstrated commitment and competence of the economic teamprovide an unusual opportunity to make institutional reforms.

3.05 Bank sector work and lending support to Bolivia have expanded sharp-ly in response to major policy improvements made by the Paz Estensorro'sGovernment. Objectives of Bank Group assistance include support in:strengthening key institutions to enable execution of reforms, management ofthe economy, and efficiency of a more limited public sector; and reactivatingthe public and private sectors, through financial sector reforms, internal andexternal resource trobilization, and rehabilitation of productive capacity.After a six year hiatus in lending, an SDR 48.4 million (US$61.0 million)reconstruction import credit and an SDR 12.8 million (US$16.0 million) gasrecycling operation were approved in 1986 to support Government stabilization,liberalization and restructuring moves. A second policy-based operation, anemergency social fund credit, and a power rehabilitation project are program-med for FY87. A financial sector adjustment operation and a municipalstrengthening project are at advanced stages of processing. The proposedPublic Financial Management Operation has been designed to assist GOB inimplementing institutional reforms needed to sustain the economic program, andto translate policy decisions into action and results. The PPF and full PFMOalso support major institutional reforms in the financial system which, withpolicy measures taken and planned, form the bases for the proposed financialsector loan. Key institutional changes in the financial system beingsupported under the PFMO include the Central Bank reorganization, strengthen-ing of bank inspection, and restructuring of the two largest developmentbanks. The PFMO will fund the technical assistance requirements needed forand in parallel to the fast-disbursing financial sector adjustment operation.

3.06 Preparation and implementation of the proposed Public FinancialManagement Operation provide a vehicle for ensuring a coherent approach by themajor aid agencies in supporting improvements in the key institutions respon-sible for public resource mobilization and use. Project preparation hasinvolved intensive coordination with USAID, IDB, UNDP and IMF. USAID funded aportion of the preparation of the Financial Administration and Control (SAFCO)component, and USAID has committed to funding most incremental local expendi-tures to install SAFCO. In mid-1986, IDB/UNDP reshaped a public sector opera-tion to assist in implementing the tax reform. IDA will continue to workclosely with IDB in supporting improvements in tax administration. The IMFaccounting advisor to the Central Bank has shaped the Central Bank accountingcomponent and is the leader of the IDA-financed accounting team. The IMFCentral Banking Department has provided important technical inputs in thepreparation of the Banking System component; IMF will continue to reviewconsultant selection and reports of Central Bank activities of the full PFMO.

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C. Project Coponents

(i) Financial Administration and Control Systew-SAFOO

3.07 The proposed PFMO would initiate the overhaul in norms, systems, andstaff dealing with financial administration and control in key ministries andpublic entities. The main objective is to ensure the timely flow of reliableinformation needed for policy decisions, financial management and correctiveaction in Bolivia's public sector. Priorities for this first operation willbe to install, in the most important ministries and public entities: (a)reliable accounting, internal control and financial reporting systems; (b)adequate cash management systems; (c) effective operational programming,budgetting and execution systems; (d) an adequate financial audit capabiliy;and Ce) a core of qualified staff to manage and operate these systems.

3.o08 A detailed implementation program for this Financial Administratiorand Control System (SAFCO) was prepared with agreement in substance reachedduring negotiations (Annex 2.1). The three-pronged approach of the SAFCOprogram involves: establishing norms; training and rewarding key staff; andinstalling systems in the key ministries and entities, Annex 2.2 provides theresults expected outputs during the initial 21-month phase covered under thePFMO. At the end of Year I, major outputs of the new Financial Administrationand Control System (SAFCO) would include:

- SAFCO laws, principles and standards developed and approved

- At least 150 trained and qualified financial personnel

- Accountant General's Office in the Ministry of Finance organizedand staffed to produce Central Government accounts for CY88

- First formal Annual Audit Plan prepared

- National Treasury system installed and staffed to provideeffective cash management for the Central Government, and tomonitore cash flows in largest public entities

- Detailed design of Budget Manual, with Budget Office of Ministryof Finance staffed to begin effective monitoring of CY88 budget,and preparation of the CY89 Budget of the Central Government

- Nine major public entities producing reliable financialinformation, operational budgets and cash management information.

3.09 In Year I, the SAFCO program would focus on introducing basicsystems of accounting, internal controls and cash management in nine publicentities. Year II would be devoted to deepening and refining systems andcapabilities in these entities, expanding coverage to a total of 12, andbuilding solid budgetting, cash management and related operating systems. Theoriginal action program outlined an expansion of coverage to 30 publicentities in Year II, with financial statements, accounting and control

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This scope has been reviewed and reduced to 12 entities. which represent about60% of public financial flows. Other outputs expected at the end of 21months, as detailed in Annex 2.2 include: (a) reliable Central Governmentaccounts prepared by the General Accounting Office of the Ministry of Finance;(b) a CY89 Central Government Budget prepared, utilizing data supplied byentities and ministries employing the new budget systems; and (c) functioningcommitment, expenditure and payment cor-rols, and reliable revenue,expenditure, and cash flow statements prepared by the Ministry of Finance. InYear II, the CGR would prepare or sponsor audit reports on at least theentities covered under SAFCO.

3.10 Organization and Staffing for SAFCO. A SAFCO Council (CONSAFCO),composed of the Ministers of Planning, Finance and Taxation, and theController General and other members acceptable to IDA, is being establishedto oversee the implementation of the SAFCO program. A SAFCO ExecutiveSecretariat-with membership and functions acceptable to IDA-will report tothe Council, and be responsible for management of the component. A strongCONSAFCO President and Executive Secretary have been appointed. In January1986, the Controlller General presented the concept, organization, design,implementation plan, and resource requirements of the SAFCO program to thePresident and key economic Ministers. The program was endorsed strongly, andthe creation of the SAFCO Council and Executive Secretariat was approved.Targetted central entities will be the Ministries of Flnance and Planning, andthe CGR; other entities targetted will be determined by CONSAFCO, will need tobe approved by IDA. The final SAFCO implementation program will contain thefinal list of the nine entities to be covered in Year I and a tentative listfor Year II. Criteria for selection will be the financial importance of theentity. The tentative list discussed during negotiations included: YPFB,COMIBOL, the Municipalities of La Paz and Santa Cruz, the Ministries ofHealth, Agriculture and Transport; IBSS (Social Security), ENDE (electricity),and the main regional development councils, CORDECRUZ, CORDETAR, and CORDECH.ENTEL and ENFE (telephones and railway) are being covered under an IDBproject, and entity-level assistance in accounting, budgetting and cashmanagement is expected for YPFB, COMIBOL and ENDE under other IDA projects. Amajor function of the SAFCO program will be to ensure consistency andcompatibility in all financial administration and control system development,regardless of sources of funds. The SAFCO teams will focus initially ongetting basic, reliable financial information in and from the major publicentities; when more substantial support becomes available, the SAFCO Counciland Executive Secretariat will ensure that systems developed conform withSAFCO norms and are compatible. About 20 long-term consultants and 30analysts will be required to help develop norms, train staff, and design andinstall basic financial administration and control systems. A detailedassessment of consultancy needs has been made for each activity andparticipating entity. Qualifications, terms of reference and expected outputof each consultant have been developed and are summarized in Annexes 2.3 and2.4. About eight of the consultants would be assigned to the ExecutiveSecretariat to help develop SAFCO norms and systems which cut across entities,and to provide the needed coordination of training and entity level technicalassistance, and provide substantive leadership on Ministry of Financesystems. The remaining 12 consultants willk be assigned to the Ministry ofFinance, Ministry of Planning, Contraloria, and other major entities.

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3.11 At least 300 staff would be qualified under the SAFCO formal and on-the-job training program over the initial 21-month period, assuming a 65%success rate for the training. Once staff pass basic courses, they return totheir ministries or entities, are monitored for results and, subsequently, areadmitted to more specialized courses. The intensive formal and on-the-jobtraining of Bolivian staff during the initial period is designed to enablethis personnel to replace all but the most specialized consultants by the endof 30 months in the entities covered. Annex 2.2(c) summarizes the content andcoverage of SAFCO training programs.

(il) Taz Aduiniatratiou

3.12 The proposed PFMO would support vOB in implementing the May 1986 taxreform. The simplified new regime is to be complemented by major improvementsin the tax administration system, notably the use of the banking system ratherthan the Internal Revenue Department as agent for tax collection; thisarrangement, which has been tested in Bolivia, successful in several LatinAmerican countries, and managed by the IMF, is judged appropriate for Boliviadue tol (a) the extreme weaknesses and history of irregular practices in theInternal Revenue Department, and (b) the relatively strong branch networks ofthe banks. The tRD would focus on audit and statistical functions, which isexpected to reduce corruption, increase efficiency and enable substantialreduction in staff. Beginning in September 1986, IDB has financed a team of19 consultants to assist in a first phase of design and installation ofsystems to implement the new tax reform.

3.13 Under the leadership of the new Minister of Tax and Customs,decisive actions on tax administration have been taken and planned. A summaryof the status is provided in Annex 3.1. The Government has requested that theIDA PPF advance and full PFMO finance: the core local team; diagnosis andimplementation support for the overall organization and for property taxes;and about 40X of the external financing requirements of Phase II, includingboth consultants and equipment. During appraisal, IDA worked closely withIDB, UNDP and the Government to ensure a coherent approach. Phase I(September 1986 to end May 1987) is proceeding on schedule. An action programand summary TORs for Phase 1I were prepared and agreed in substance duringappraisal (Annex 3.2). Consultant requirements, costs and sources of fundsalso were developed jointly (Annex 3.3), Annex 3.4 outlines PPF-financedinputs for the initial phase.

(iit) &ntien S Rte Reforms

3.14 Reorganization of Central Bank. In July 1986, the new President ofthe Central Bank prepared a draft scheme for reorganizing the Central Bank ofBolivia (CBB). From July 1986, technical assistance funded under the PPF hasbeen provided in assessing reform options and structural implications, and indeveloping and beginning implementation of programs in four key areas:accounting and internal controls, banking inspection, debt monitoring systems,and economic research. The plans were endorsed by the President and Cabinetin January 1986, and discussed in a public forum in late January. ThePresident signed a Decree in early February, enabling the reorganization,

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including compensation for staff resigning. Redundant staff have retired,with staffing reduced from 1,200 to about 200. Qualified staff are beingrecruited with about 450 professional and support staff needed for smoothoperation of the 'new Central Bank". The major changes include:

a) separation of Central Bank activities into threedistinct functions: Banking Supervision, CentralBank as monetary authority, and Central Bank asoperating entity--with major rationalization oforganization, staffing and functions within thesekey activities;

b) gradual removal of Central Bank as entity fordirect lending to non-financial publicenterprises;

c) strengthening of Banking Inspection to supervise,operations of the banks; once established,Banking Inspection may be spun off into anindependent Superintendencia de Bancos;

d) organization and systems for strengtheningaccounting and internal controls, which bothcomply with generally accepted accountingprinciples as well as meet the informationrequirements of a monetary authority; and

e) strengthening of economic and debt-managementorganization, systems and capabilities.

3.15 A detailed organizational chart, description of functions andreporting relations, and staffing plan were prepared for each major unit,prior to the reorganization. A set of key actions to implement thereorganization of the Central Bank was prepared and has proceeded on schedule(Annex 4.1). PFIMO inputs focus on implementing 'the reorganization in banksupervision, accounting, and monetary policy (Annexes 4.2 to 4.4). Asubstantial amount of technical assistance designing programs in each of theseareas was provided in the first phase PPF. Under the second stage PPF,assistance is being provided in initial implementation of each program (Annex4.6). Technical assistance requirements under the PPF and full PFMO areprovided in Annex 4.5. 0

3.16 The diagnoses and recommendations were developed by top LatinAmerican consultants, with successful experience designing and implementinginstit'tional reforms in central banks (Annex 4.6). The action program forCentral Bank accounting was developed by an IMF-financed advisor, working onCBB accounting systems since June 1986 (Annex 4.2). This IMF advisor isleading the accounting team under the PPF and full PFMO. All reports havebeen discussed with the IMF. The IMP Central Banking Department will continueproviding two advisors to the CBB. Close coordination with the IMF willcontinue during project implementation, with IMF Banking Department providingtechnical backup to IDA supervision activities.

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3.17 Development Banks. In addition to building Banking Inspection as ameans to monitor and ensure that private and public banks comply with soundfinancial and operational standards, the PFMO would assist in therestructuring of Banco Agricola de Bolivia (BAB) and Banco del Estado(BANEST), the major public financial intermediaries in Bolivia. Under thefirst stage PPF, preliminary diagnoses of the organization, operations andfinancial performance of the Banco Agricola de Bolivia and the Banco delEstado were performed. These two development banks are the most importantpublic sector financial intermediaries in Bolivia; serious collection problemsand operational weaknesses in these institutions have resulted in severefinancial drains and an absence of sound public sector credit channels foragricultural, industrial and commercial lending. Various restructuringoptions-including closure-have been considered by Central Bank and Ministryof of Financeo The CBC President wishes to deepen the analysis of differentoptions and implications under the second stage PPF, with an agreed actionprogram to be finalized by January 1, 1988. The PFHO would provide TA supportin making agreed restructuring moves. The PFMO-financed inputs arecomplementary to support by USAID to finance external audits, support thecreation of a Deposit Insurance Fund, and improve project evaluation andsupervision capabilities in private commercial banks. IDB has committedassistance to the Development Credit Department (DCD) of the Central Bank.PFMO would provide TA support in making agreed reorganization moves, to berefined and finalized in mid-1987. A draft action and TA program has beenprepared (Annex 4.6). The PFMO-financed inputs are complementary to supportby USAID to finance external audits, support the creation a Deposit guaranteeFund, and improve project evaluation and supervision capabilities in privatecommercial banks. The Central Bank of Colombia provided technical assistancein restructuring the Development Credit Department (DCD) of the Central Bank.With the reorganization, the development banking functions of the DCD havebeen reduced and staffing cut to less than half of the previous levels; thesemeasures are prerequisites to a systematic transfer of second-tier developmentbanking functions to Banco del Estado or another financial intermediary.

D. Project Cost and Financing

3.18 The estimated cost of the operation is SDR18.6 million (US$23.8million), the non-incremental Government contribution for counterpart staffand facilities is excluded, project costs total SDR12.9 (US$16.5 millionequivalent). Foreign exchange content is about US$10.8 million. The proposedIDA credit would finance US$11.5 million (including the US$1.5 million PPF),or about 70 of incremental and 50X of total project costs. IDA financingwould be utilized for: foreign and local consultants; foreign equipment andmaterials; and fixed contract personnel of the Executive Secretariat and thenew Ministry of Taxation. IDA financing for core fixed-contract personnel,totalling about US$960,000, represents the critically important, non-recurrentlocal fixed contract personnel inputs to initiate the SAFCO and taxadministration components. The costs of training and technical assistancecomponents were estimated in accordance with prevailing costs of materials andservices. Estimated man-month costs are US$8,000 to US$10,000 for foreignconsultants, US$4,000 for local and regional analysts, and US$1,000 toUS$2,000 for local professionals.

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3.19 The summary of PFM0 costs and IDA financing is provided in thefollowing table. Reductions in project scope were made at appraisal, based ona review of content and phasing, to help ensure manageability. USAID hascommitted to financing about US$3.0 million for local costs for the first 21months of the SAFCO program; USAID will fund rehabilitation of facilities, andtraining stipends, most local professionals, and incremental salaries forstaff trained and qualified under the SAFC0 program. Total costs incorporateUS$1.6 millicon in IDB and UNDP inputs for Phase II of tax administrationprogram; IDF/UNDP provided about US$1.0 million in technical assistance fundsfor Phase I. IDB, UND? and IDA-financed inputs are being coordinatedclosely. Total project costs do not incorporate IDB and USAID technicalassistance to the financial intermediaries; this technical assistance iscomplementary but not directly linked to IDA-financed inputs. USAID hascommitted about US$2.Omillion to finance external audits of the 24 privatecommercial banks, help design and install a deposit guarantee fund, and traincommercial bank staff in project evaluation. IDB has committed about US$1.0million in technical assistance to the Development Credit Department of theCentral Bank and to build project lending capabilities in financialintermediaries.

Project Costs Estimate and Flancinge(US$000)

FEC IDAForeign Local Total

I. wooa) Consultants, Analysts 5,100 400 5,500 93 100b) Core Fixed Contract 0 1,400 1,400 0 30

Personnelc) Counterpart Staff 0 4,350 4,350 0 0d) Equipment, Materials 810 450 1,260 80 80e) Facilities, Training 0 1,500 1,500 0 0

Subtotal 5,910 8,100 14,010 42 48

U. Tax Administrationa) Consultants 1,860 190 2,050 91 35b) Core Fixed Contract 0 540 540 0 100

Personnelc) Counterpart Staff 0 1,800 1,800 0 0d) Facilities and Equipment 30 30 60 50 0e) Administration - IDB 200 0 200 .100 0

Subtotal 2,060 2,560 4,650 42 28- -- - mm

III. Reforms in Bankiag Systema) Consultants 1,130 220 1,350 84 100b) Counterpart Staff 0 2,400 2,400 0 0c) Equipment 200 0 200 100 100

Subtotal 1,330 2,620 3,650 40 40_o u =_ _RM-

IV. Project Preparatlon, 1,250 250 1,500 83 100

V. Administrative Services 450 0 450 100 100

TOTAL 11,000 13,530 24,360 51 55"_~~~~~m -

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3.20 Proposed IDA financing incorporates a Project Preparation Facilityadvance totalling US$1.5 million; about US$700,000 already has been disbursedThe PPF advance is being used to fund consultancy and fixed contract personnelinputs: US$610,000 for SAFCO; US$525,000 for Tax Administration; andUS$365,000 for Bank.ng System improvements. The first stage PPF of US$500,000covered the June to October 1986 period; disbursements of the second stage PPFare expected to be completed. in August 1987.

8. Justification

3.21 Each of the three PFMO components is expected to have substantialpositive impact on the financial performance of the public sector. SAiCO isdesigned to improve financial administration systems and capabilities whichare prerequisites of sound economic decision making and public sector manage-ment. Improvements in cash management, budget programming and execution,public accounting and controls, and project execution are central to moreefficient utilization of Bolivia's extremely scarce resources, and areessential in regaining the confidence of international financial institutions.Work to provide reliable and timely financial information on the major publicentities and enterprises will inform GOB's continuous restructuring measures.Over the next two years, solid accounting, budgetting and cash managemenzshould be installed in about 12 major ministries and public entities; at least300 officers would be qualified and working with basic financial managementtools; and norms, standards, and manuals would have been established to enablesuccessive extension of SAFCO to all public entities. The implementation ofthe tax reform is expected to generate substantial increases over the extreme-ly low historical baise.

3.22 The restructuring of the Central Bank of Bolivia will result insubstantial expenditure savings due to reduction in redundant staff. Moreimportantly, by installing decent accounting systems and focussing on essen-tial Central Banking functions, Bolivia is expected to have a sound CentralBank for the first time. The creation of the Banking Superintendency, comple-mented by USAID funded external auditing of the private commercial banks andby legal changes in rules of the game, should result in significant strength-ening of the private banking system. The restructuring of Banco del Estadoand the Agricultural Bank of Bolivia will cut the drain of public developmentbanking, and build a netwerk for rural savings mobilization and lending.

F. Project Risks

3.23 While the project is viable because of the competence,. andcommitment of the present Government, the success of the operation could beundermined were a major political shift to occur in the next two years. Theproject is designed to improve the depth and professionalism of publicfinancial management and to reduce the vulnerability of the civil service topolitical swings. However, the success of implanting SAFCO, restructuring thebanking system, and installing improvements in tax administration depends onkey players staying in place. These risks have been reduced by: focussing on

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basic changes over a relatively short period; agreeing on detailed blueprintsfor each component, as reflected in the agreed action programs, and creatingstable organizational mechanisms, such as CONSAFCO and the SAFCO ExecutiveSecretariat, to protect the technical integrity of the program from politicalswaings. Also, action programs establish time bound benchmarks on expecteddecisions, activities and outputs to enable monitoring and remedial measuresif required. The Financial Administration and Control System requiresorchestration of inputs to establish norms, train staff, and install systems.The program has been pruned to reflect implementation constraints and to focuson basic building blocks during the initial two-year period covered under thefirst Public Financial Management Operation.

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IV. PROJECT EXECUTION

A. Organizatiod and ?anagmut

4.01 The Public Financial Management Operation will be handled as threeseparate subprojects, with complementary objectives but independent implement-ing arrangements. As outlined in para. 3.10, SAFCO would be governed by aCouncil composed of the Ministers of Finance, Planning, Taxation, theController General, and other members acceptable to IDA. An ExecutiveSecretariat is being established to coordinate operations. Consultants andanalysts would be assigned to the Executive Secretariat, the Ministries ofFinance and Planning, the CGR and the selected central and decentralizedentities. The tax administration component would operate separately, directlyunder the Minister of Taxation and in close cooperation with IDB. The BankingSystem Component falls under the leadership of the President of the CentralBank, who has appointed coordinators for overall restructuring and for eachsubcomponent.

4.02 Selection of Administrative Agent. As with other Public SectorManagement Operations in LAC, UNDP has financed seed capital for projectpreparation, under a UNDP-financed, Bank-executed project (para 3.07). Thisproject in turn became the vehicle for the Project Preparation Facilityadvance, This arrangement during project preparation has several advantages.Being a UNDP Project, delays caused by Government procedures for approvingforeign and local consultants are avoided. Also, as UNDP has a large localoffice, logistical arrangements are facilitated. UNDP bridge funding can beprovided to cover any lags between PPF advances and credit effectiveness.These advantages can be retained after effectiveness by utilizing UNDP'sOffice of Project Execution (OPE) to perform administrative functions underthe PFMO. UNDP-OPE serves as a procurement agent, contracting and payingconsultants on behalf of Government. IDA retains all normal technicalsupervision functions. The draft contract, fees and arrangements for such anadministrative services contract were discussed during negotiations, withagreement in substance reached. Due to the detailed definition of all projectinputs, it was possible to estimate administrative services cost moreprecisely than is normally possible. UNDP-OPE has indicated that fees will benot more than US$400,000, equivalent to about 42 of the amounts to beadministered by UNDP-OPE. Signing of a contract, satisfactory to IDA, wouldbe a condition of credit effectiveness.

4.03 Reporting, Supervision, Monitoring. Quarterly progress reports willbe required for each component. Annual action programs, acceptable to IDA,will be prepared by the implementing agencies. The action programs providedin Annexes to this SAR provide details on Year I activities. Substantialsupervision is necessary for this type of operation. In addition to Bankstaff supervision, specialists would be employed to monitor the SAFCOcomponent every six months, and the IMF Central Banking Department wouldprovide technical support in supervision of Central Bank activities.

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S. Procuremut and Cosultant Services

4.04 All goods, services and consultants would be procured and selectedutilizitg procedures provided in Bank guidelines. The Bank will review andapprove the terms of reference, selection procedures, qualifications and feesfor all foreign and local consulting positions. It is expected that consul-tants for the Banking System and Tax Administration components would be indivi-duals. In the case of the major SAFCO program, a principal contract forproject management covering consultants assigned to the Executive Secretariatwould be utilized; the invitation to bid and related documentation have beenprepared. This contract would include a maximum of eight consultants. Thefirm winning the management contract will be precluded from winning other SAFCOcontracts. The objectives of dividing SAFCO into several contracts are to:encourage firms to offer highly qualified and experienced staff, which would bedifficult for any firm to supply for the entire program; reduce the project'svulnerabililty to performance of a single firm; and encourage a set of account-ing and consulting firms to develop know-how and a presence in Bolivia,reduv.ing Bolivia's present dependence on one or two firms. To avoid losingtime in initiating the SAFCO program, the invitation for proposal process wouldbegin in April; the award of at least the principal management contract wouldbe made initially for the PPF II period, with the understanding that contractswould continue under the full PFHO. Procurement of all goods, principallycomputers and their corresponding software and office technology equipmentwould be carried out through international shopping, including quotations fromat least three suppliers in conformity with the Bank guidelines for procurementof goods. As the average goods contract is expected to be under US$100,000,this arrangement is judged more appropriate than international competitivebidding; all contracts of US$50,000 or more will be subject to prior review byIDA. A special account will not be required, as advances provided under theUNDP-OPE Administrative Services Contract serve the same purpose.

C, Effectiveness. Disbursements, Accounts, and Audits

4.05 Effectiveness and Disbursements. The disbursement schedule reflectsa three-year disbursement period, shorter than actual disbursement patterns forpublic sector management technical assistance loans (Annex 5.1). This scheduleis judged realistic due to the intensive preparation process, resulting in atechnical assistance operation which focusses on specific, agreed actionsrather than diagnostic studies. Also, since the majority of the consultantsare to be fielded early in the project and remain for the duration, the logis-tical difficulties of fielding large numbers of short term consultants areavoided. Most individual consultants for the banking and tax administrationcomponents already have been identified. The IDA credit would disburseagainst: 100% of the costs of consultants and analysts (excluding specifiedIDB inputs on the tax administration component); 100% for imported equipmentand materials; 100% of fixed term personnel costs of the SAFCO ExecutiveSecretariat and the core fixed term personnel of the Ministry of Taxation; 100%of the UNDP-OPE administrative services contract; and repayment of the PPPadvance. In addition to a US$1.5 million in PPF advances (US$500,000 before

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and US$1.0 million after appraisal), up to US$500,000 of retroactive financingcould be required and is reflected in the legal documents. The PPF II coversIDA-financed technical assistance elements from November 1986 to August 1987; ascredit effectiveness is expected in September/October 1987, a small amount ofGovernment or UNDP bridge financing may be required, with eligible expendi-turesreimbursed from credit proceeds.

4.06 Given the importance of the SAFCO component, establishment of CONSAFCOand the SAFCO Executive Secretariat would be conditions of credit effectiveness.The legal establishment of the Council for SAFCO (CONSAFCO) and appointment ofthe Executive Secretary is expected in May 1987. The passage of the SAFCO Law isanticipated in September, at th2 time of Congressional approval of the PFMO. Asa condition of disbursement on each respective component, an acceptable ComponentImplementation Program and Year I Action Plan would need to be presented by thehead of each implementing agency. Prior to disbursing on the SAFCO component,all conditions precedent to the first disbursement of parallel USAID fundingwould need to have been met, and the SAFCO Program would need to have beenestablished in a manner satisfactory to the Association. The Government ofBolivia is expected to secure parallel IDB fundlng for the tax administrationcomponent in July 1987, and is required to obtain the funding not later than oneyear after the date of IDA credit effectiveness. Agreed action programs will berequired for Years II and III; dates for preparation. and discussion wereestablished during negotiations. IDA would need to concur with any substantialrevisions in the annual action programs.

4.07 Accounts and Audits. The Borrower and implementing agencies wouldestablish and maintain consolidated project accounts for all expendituresfinanced under this credit in a clearly identifiable manner. These accounts andsupporting records pertaining to the goods and services financed under thecredit would be audited annually by independent auditors acceptable to IDA.

V. RKCOMVENDATIONS

5.01 Agreement on the following areas were confirmed during negotiations:

i) Component implementation program and Year I actionplan for each component agreed in substance (paras3.08, 3.09, 3.13, 3.15, 3.17, Annexes 2.1 to 2.3,3.2, 4.1 to 4.4);

ii) Terms of reference for main consulting positions(paras 3.10, 3.13, 3.15, Annexes 2.4, 3.4);

iii) Procedures for selection of consultants consistentwith Bank Guidelines, notably for the SAFCO componentin which firms will be utilized (para 4.04);

iv) Costs, financing plan and arrangements for USAIDlocal currency funding, for SAFCO (paras 3.18 and3.19);

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v) Cost distribution and coordination arrangements withIDB, UNDP and GOB on implementing the tax reform(para 3.13, Annex 3.3);

vi) Content of UNDP-OPE administrative services contract(para 4.02); and

vii) Annual action plan, reporting, accounting, auditingrequirements, procurement and disbursement procedures(paras 4.03-4.07).

5.02 The following would be conditions of credit effectiveness:

i) legal and operational establishment of CONSAPCO andthe SAFCO Executive Secretariat, with composition andfunctions satisfactory to IDA (para 4.06, Annex 2.1);

ii) contrettual agreement, satisfactory to IDA, foradmin.strative services under the project, probablywith UNDP-OPE (paras 4.2 and 4.06);

Wi) contractual arrangements, satisfactory to IDA,between the Borrower and the Central Bank of Bolivia,to carry out the banking system component (para4.06); and

iv) compliance with the legal approvals necessary inBolivia (para 4.06).

5.03 The following conditions of disbursement will be attached toindividual components:

i) For SAFCO, satisfactory establishment of SAFCOProgram, compliance with requirements for USAIDfunding, and commitment letter from CONSAPCO (para4.06); and

ii) For each component, a Component ImplementationPtogress and Year I action plan, acceptable to theAssociation (para 4.06).

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A. MISfl(T FROM (2034) 1/

Generalt Firmcal Rcy Treasury (SabAccrutting .get hc2r/( de (5 de del Tsoro ral de la I_¢ trol ( Zen n lra)(329) Politica Finwriera (47) Nacm) (397) de '(113)g~~~~~~~~~~~~~~~~~~~bldd . ntroP,de

8 &Sbdivisixn 6 Subdivisi I Central and Gesti; ). (129)wea Reioa Office- 2 -tms (piaic - 5 bt (r trtrelati-m; public lirt policy, tax poLicy, made, Divided aLg ieIforuati).

ofernal finae, netay of ptad- 2 tecbmtcal -miats policy). emcidon by sector "Adistratse(adnI secretariat (pWductve sectos, - la Paz(statistics). p-sicalE..u.r - El Alto- 4 depa s

de , social - Obr(jeslep affairs, iell cmrl, SwrlaW.)

inadfineanc, pAUbc and

).m etrirs)

Source: G?oermait of BDlvia

I/ Huber of employees (1986 figres) pwovided In p.

2/ In Jauay 1987, Tat C1ctia r t feerred frnm MUnistry of FinP'ce to nw Ministry of Tfairm IOft

SJn[RE CF I! CNSAL ENrIm

B. MY OF P}D A)M RDN (267)

Plamgt 5 S1t l 8 oof T1al I ERnc Raicyde Affairs 9 use At-

r) ( de Coordi- (Asmto Juridicos y a der~iai 1ntemlnisterlal) Mffdistrativos) Politica _ Pmni)

6I 21

- Mobal Plaming Dlrectorate£of Riblic - Iegal Affairs- Pomductive Sectors Fwictiocs and Administrative - hnrat- Pvscal fIIs:rwubtre RatlonalizationI- Socil t-I8giAd nalPannn- Muinistrative ePlal

C. (FFI(E CF IIE ctmuW GEMAL (492)

OQXrwUar Cneral

Wputy Qooamral

3 Asst. C ntroller cnwala - h,it- - -PM, S

_____________________I . i ___________________________8 DEIepatBua ~btro2rs fw

SALARY SLCII - AOF OMLNIAMMEX SALARY FM SEX) RNfn/

(IKL MO0)W

RamlY Nimber SAlARY R*ANE (Before DC 21316) lUGIL kfllLY WMiYE BILL AVEYUAE SALARIY IMSEAof EDyike"Bas Mtinlpm= maxiwma (After DS 21316) (Z) D.S 21316

Presida9smy 213 30,000 85,000 13,815,915 30.0MXiikstry of Finanxe 984 30,000 380,000 120,689,622 15.4I41nistqy of Plamialg 267 43,500 275,000 32,826,696 15.3Controler Geunral 604 76,000 480,000 118,395,124 7.5

RJNLIC ]a1TUiG

Cbnral fBaik 1,411 111,453 1,524,700 576,000,000 0.0del Estado 815 60,0UD 960,000 255,249,917 7.5

INUALEM 45 40,000 129,500 4,523,988 23.0ISAP 53 45,000 330,000 6,106,193 18.0

AlELIC W1 PRI

CltHIMTL 24,077 60,000 720,000 2,434,127,,686 20.7EBnom Agricda 350 60,OD 650,000 87,741,500 7.5EAF 1,642 60,000 656,503 247,861,141 7.5YPFB 6,959 60,000 960,000 3,507,866,213 7.5aEn 441 60,000 960,000 171,691,375 0.0ENFE 6,480 60,000 960,000 1,065,474,425 7.5COYXm. 105 60,000 486,000 15,389,919 8.7

ENTE 1,500 126,000 610,000 386,394,646 7.5

MX ENTIVS

LAB 1,455 137,950 1,258,930 376,276,875 7.5(qjDIAB0L 30 68,310 405,900 13,204,000 7.5

Ra~IL AMUAlt

CHXKEPAZ 402 60,0w 720,0UO 122,609,125 7.5

Agvrce: Mlinstry of Finance, Budget Division*te: D6 z1316 Mecreto Supreim 21316 dated June 1986

1/ In Bolivian Pesos (prior to 1987 shift to Boliviakem)

- 28 - Annex 1.4

BOLIVIA

NUMBER OF PUBLIC SECTOR EMPLOYEES

1971 1975 1981 1985 1986- ~~(Sept.

Total 115,061 153,022 194,266 237,130 197,000

Central Government 53,287 76,814 101,364 132,080 **

Decentralized Sector 54,096 67,316 80,685 89,368 **

(Public Institutions) (13,543) (21,!22) (23,999) (27,854)

(Public Enterprises) (39,630) (44,724) (53,460) (58,347)

(Mixed Enterprises) (923) (1,070) (3,226) (3,167)

Regional Administration 432 1,098 3,079 4,377 **

Departmental Administration 572 531 591 610 **

Local Administration 6,674 7,263 8,547 10,695 **

* Source: 1971-1985: Ministerlo de Trabajo y Desarrollo Laboral, OficinaSectoral de Estadistica.

1986 figures: Ministerio de Planeamiento y Coordinacion,Direccion de Funcion Publica.

NOTE: This does not include university personnel (9 government universities)1981 6,005 employees1985 9,238 employees

** Not available.

- - ~~~~~Annex 2.1Page 1 of 5

SAFCOSUMMARY IMPLEMENTATIONSCHEDULE FOR 21 MONTHS

ACTIVITY MONTH

ORGANIZATION AND MANAGEMENT

Organize the CONSAFCO and appoint the ExecutiveSecretary May 1987

Tender the principal contract May 1987

Select firm for principal contract July 1987

Startup of principal contract August 1987

Begin organization of the Executive Secretariat may 1987

Complete organization of the Executive Secretariat August 1987

Prepare tender documents for other contracts June to August 1987

Tender other contracts, select individualconsultants and evaluate analysts August to October 1987

Have appropriate and competent branches of theExecutive review the SAFCO law and present it toCongress August to September 1987

Hold seminars for consultants to the principalentities and entities' financial managers to reviewnorms, interim guidelines, and SAPCO program October 1987

Review and approve implementation programs inprincipal entitiep and organize follow up of same April 1988

Prepare SAFCO report on first nine months ofimplementation May 1988

Compatibilize norms, standards, principles, policiesand procedures, establish a system of quality controland carry out the monitoring of implementation andadministration of training April 1988

Prepare SAFCO report on Months X to XXI. May 1988

NORMS AND STANDARDS

Prepare official coding of revenues and expenditures July 1987

Draft the SAPCO Law June to August 1987

- 30 - Annex a2.Page 2 of 5

SAFCOSUMMARY IMPLEMENTATIONSCHEDULE FOR 21 MONTHS

ACTIVITY MONTH

Develop principles and standards of accounting andinternal control August to September 1987

Prepare standards, policies and procedures for theadministration of funds, public credit, budgetexecution, and develop the interim guidelines onfinancial administration in order to begin systemsimplementation August to October J987

Commence preparation of regulations on procurement andthe administration of public property November 1987

Commence preparation of the Guide on OperationalProgramming and Budgetting March 1988

Commence preparation of government auditing standardsand for the qualification, selection and contractingof independent audit firms April 1988

Commence preparation of interim regulations onpersonnel administration April 1988

Commence preparation of directive on projectadministration and control May 1988

Commence preparation of standards and procedureson automatic data processing June 1988

TRAINING

Pritit and distribute the Guide on Accounting May to June 1987

Prepare the exaination on accounting and internalcontrol August 1987

Prepare and give Course I, Principles of SAFCO September 1987

Select participants of Course III-A, Standards ofFinancial Administration November 1987

Prepare and give Course III-A, Standards ofFinancial Administration November 1987

Prepare and give Course III-B, Accounting andInternal Control

Prepare and give Course IV-A, Automated AccountingSystems

31 - Annex 2.1Pae 3 of S

SAFCOSUMMARY INPLEMENTATIONSCHEDULE FOR 21 MONTHS

ACTIVITY MONTH

Prepare and give Course III-C, Operational Program-mining and Budgeting May 1988

Prepare and give Course II, Fundamentals ofFinancial Administration May 1988

Prepare Course III-D, Project Administration andControl July 1988

Prepare and give Course IV-B, AutomatedAdministrative Systems July 1988

Prepare and Course V-A, Government Auditing August 1988

IMPLEMENTATION - SYSTEMS OF CENTRAL FINANCIALADMINISTRATION AND CONTROL

Develop and distribute the directive to principalentities to prepare closing balances for fiscalyear 1987 September 1987

Establish the General Accounting Office in Ministryof Finance and commence preparation of centralagencies accounting manual October 1987

Prepare manuals on programming and administrationof funds, publicicredit and budget execution forCentral Government agencies and organize the Officeof Public Credit'within the Treasury January 1988

Commence mechanism of accounting systems of thecentral administration (including Treasury andbudget execution) January 1988

Organize teams !or the physical inventory taking andvaluation in principal entities January 1988

Strengthen the Treasury, Budget Office, GeneralAccounting Office and Office of the ControllerGeneral with selected graduates from Course IlI-A January 1988

Distribute the revised Guide and Standards ofFinancial Administration to ministries andprincipal entities so that they may commencesystems implementation February 1988

- 32 - Annez 2.1Page 4 of 2

SAFCOSUMMARY IMPLEMENTATIONSCHEDULE FOR 21 MONTHS

ACTIVITY MONTH

Strengthen the Treasury, Budget Office, GeneralAccounting Office and Office of the ControllerGeneral with graduates from Course III-B March 1988

Complete the reorganization of the Audit Division ofthe Office of the Controller General April 1988

Distribute manuals on financial administratlon tocentral government agencies for systems implementa-tion purposes April 1988

Initiate installation of systems in selectedministries and public entities June 1988

Open a registry and qualify independent audit firmsand prepare an audit manual June 1988

Prepare and execute the annual audit plan of theOffice of the Controller General for principalentities and borrowers of international lendingagencies June 1988

Coordinate thte follow-up of the planning and execu-tion of cash management in Government entities July 1988

Record opening balances and track budget executionand cash flows at the central level and implementthe accounting manual July 1988

Organize the Systems Division of the Office of theController General to comence evaluation of andassistance to entities not included in theImplementation Program for Principal Entities (PIEP) September 1988

Implement the Treasury (cash management) system October 1988

Place approved graduates from Courses III-B, III-C,IV-A and IV-B as they become available April 1988 to May 1989

IMPLEMENTATION - CENTRAL GOVERNMENT OPERATING SYSTEMS

Initiate operational programming and budgeting July 1988

Organize the Office of Personnel and advise on theapplication of the interim regulations on personneladministration August 1988

Assist in review of budget for the followingfiscal year September 1988

- 33 - An=ex 2.1tage 5 of 5

SAFCOSUMMARY TRII41ENTATIONSCHEDULE FOR 21 HNONTIS

ACTIVITY MONTH

Initiate project administration and control November 1988

Integrate approved graduates of Courses III-C andIV-B as they become available April 1988 to May 1989

IMPLEMENTATION - PRINCIPAL ENTITY SYSTEMS

Commence Emergency Program in nine entities November 1987

Commence Emergency Program flow of information tothe National Treasury on availability and useof funds in nine entities January 1988

Prepare systems implementation programs for nineentities by managers and their analysts and broadenthe Emergency Program to 12 entities March 1988

Strengthen Principal Entities with approved graduatesof Courses III-A and Ill-B March 1988

Expand information flows to 12 entities April 1988

Prepare manuals on the programming and administrationof funds, public credit, budget execution andaccounting April 1988

Put into effect cash programing and management, budgetexecution according to the Guide on Financial Adminis-tration sending periodic reports to the Ministry ofFinance June 1988

Determine and verify opening balances of assets,liabilities and equity and record financial transac-tions according to manuals in effect June 1988

Expand Emergency Program to 15 entities July 1988

Begin introduction of automated financial andadministrative systems into public entities August 1988

Commence operational programming and budgettingfor the following year September 1988

Commence preparation of basic financial statements,in accordance with systems manuals October 1988

Commence project administration and control November 1988

Integrate approved graduates of Courses III-B, III-C,IV-A and IV-B according to their availability June 1988 to Harch 1989

SAFOD - EXPECTED RESULTS CENTER

A. Information to be Generated

ASSISTED BYPRINCIPAL WITH OTHER MINISTRIES SYSTES EVELOPM -

R E S U L T S ENTITI FINANCING AND CM OMCE OF JR TOTAIL -END OF9 21 9 21 9 21 9 21 9 21

Mo. tMo. Xebo. MW. Mo. MO. moo Mo. Mo.

-- NU OF ENTITIES

1. Anual budgets based on operatingprograms - 9 - 6 -3 - - - 18

2. Periodic statements of sources anduses of funds, pending commitmentsand income, and budget execution 9 15 3 6 - 10 - 4 12 35

3. Basic financial statements - 9 - 4 - 3 - - - 16

4. Continuous information flow onpersonnel, government property andcontracts - 9 - 6 -3 - - -18

5. Periodic reports on progress,problems and delays, reprogrammingand adjusted project budgets - 5 - 3 - 2 - - - 10

6. Reports of internal audit units - 5 - 4 - 3 - 3 - 15

7. External Audit - CGR: cash and ONbudget statements - 12 - 3 - 5 - - - 20 N

-35 - A£nez 2*2pae 2 of 4

w uMMi wMIAMI -I n c sni mmc

^ ~ ~ ~ ti O~ wrmR -

i - i 1b zi W-7 aHiD X - iX a

- -laM OF * =xw -~~

Eq - X_t1ans nKIt1 to *tfbPd eqti id of PI= an co

pC's _ -1 no=, psymme 9-12 15 3 6 - - - - 12-15 21

(4mrstaffic and cam *A operattimil uPOinI4hidptayfri aid pr_ereaumlbudpt - 9 - 6 - 3 -- - 18

Paprt. to tde V1A atd P1an-rdvg hlnlstrtaa CopwaTtioOIIaA d umy - 9 - 6 - 3 - - - 18

?ij.ct u.iq ardotV aeol - 5 - 3 - 2 - - - 10

&ie &itaet1 - 12 3 6 - 10 - 4 3 32

aRtO to cf PiWAn MIaUya_bstnt moit1m - 12 3 6 - 10 - 4 3 32

TceYWy Pm _pmaW aiA cmotixn of--- h amgw= - 15 3 6 - 10 - 4 3 35

Repor ts c cia fUinm ?fliUscancash , pla sdatual - IS 3 6 - 10 - 4 3 35

bkq Aof£pOf ic cu6at - 12 - 4 - 10 - 4 - 30

iA1zwut Riqe1tyof f1wA1 op_udi - 12 3 6 - 10 - 4 3 32

Pepwatim aiA tradtt offiawcta statuimt - 9 3 6 - 3 - - 3 18

Oertinal wSystc EAbc peooaat ad wopet - 15 3 6 - 10 - 4 3 35

Preu _niqt - 12 3 6 - 10 - 4 3 32

QMwC t0 tral Iaterol trol - 15 3 6 - 10 - 4 3 35

awrnadaitlAg - 5 - 4 - 3 - 3 - 15

e/ 1e 11ur arA 0wti= (1D-MUBD)Csml Buk and AplcAal iak (MD)on - on lS ) )

- 36 - Annex 2.2Page 3 of 4

C. eMAR OF SYSg L D A IN M CEAL WlTILES

SYSTeI3 wrlVrIrlS MONTIHS MONrS MONTHSI - 9 10 - 21 22 - 35

Operational Assist in Central Review of OperationalaDd Hxdgetary and Budgetary Programming

Projects 'Monitoring ........

&Bdget Prepare Budgets for Next Fiscar Year

Execution Central Government ..........Monitor Execution of Other Entities

Pragaf. Program.ing and Management of Treasury Funds. .....

Programming and Administration of Fundsby Other Entities

MaUnagement of Public Credit !........ ....

nconnting Reg4stry of Central Government FinancialOperations

Review Financial Statements of CentralGovernment

Review Financial Statements of Other Entities

Compliance with EDP Standards

Operatioal Monitor of Pablic Procurement and .... ... ....syste Property

Monitor Personnel Administration Structuraland Functional Organization

External Audit Governmental External Audits

Syst_ 11 11S .... t .1e X

- 37- Annex 2.2Page 4 o£ 4

D. SAPW - TRAININGAND QUALIFIED PERSONNEL TARGET SCHEDULES

TRAINING SUIKAY

Nusber of CoursesEnd 10- 22-

Period 9 21 SUB 35Na of the Course Weeks No. Ho. TOTAL 1X. TOTAL

I SAFCO Principles 1 40 35 75 25 100II Financial Management

Fundamentals 4 - 6 6 2 8III-A Financial Management Standards 4 4 - 4 - 4[II-B Accounting and Internal

Control 10 2 14 16 9 25III-C Operational and Budgetary

Programing 4 - 5 5 9 14III-D Project Management and

Control 7/5* - 4 4 3 7TV-A EDP Accounting 4 - 18 18 13 31IV-B EDP for Administrative Systems 4 - 4 4 4 8V-A Govw-nment Auditing 9 - 3 3 4 7

*Shortened course for those who have taken III-C.

SU-ARY OF QUALIFIED PERSONNEL UNDER SAFCO

End End End9 21 35

llo. No. Ilo.Auditing:

Supervisor 45Senior Auditor 55 145

Subtotal 55 190

Financial Administration:Supervisors - 45Administrators 50 80Accountants with EDP - 70 85Accountant 120 25 -

Subtotal Professional Staff 120 145 210

General Services Officer - - 50

Subtotal 120 145 260

Project Execution:Project Supervisors - 30 60Project Administrator 70 b0

Subtotal: 100 120

TOTALS 120 300 570_ _

38- A38" 2.3

A. SACO

SUOMMY OF CONSULTANTS

B Q&ALIMIC1TIONS AND RESPONSIBILITIES

EXECUTIVE ______A_ T ALIFICATIONS/tESPONSIBILITY

Advisory Director Coordinate and monitor programs and work ofconsultants and advise on norms/standards

Training Consultant Coordinate training programs

Technical Assistance Organize and monitor methodology development andConsultant implementation of systems, and review financial

management programs in public entities

Automatic Data Processing Automation of systems implementationConsultant

Prime Consultant Contract Reporting and communications between GOB and IDAManager I for project management contract

MINSTRY OF FINACE

Public Sector Accounting Government accounting systems development andConsultant implementation

Treasury Consultant Cash management

Budget Consultant Budget systems development and implementation

Public Finance/Credit Public debt managementConsultant

om i OOTHL

Consultant in Systems Systems development and training in governmentControl accounting and internal control

Auditing Consultant #1 Systems-based audit methodology training anddevelopment

Auditing Consultant #2 Systems-based audit methodology training anddevelopment

Auditing Consultant #3 Office reorganization and development of annualaudit plans

- 39 ~kAinex 2.3Page 2 of 4

SAFCO

SMMRY OF CONSULTANTS

IY QUALIFICATIONS AND RESPONSIBILITIES

MINIST!Y OF PLANNNG ABILITY/RESPOISIBILITT

Consultant in Procurement, Procurement and administration of governmentAdministration of Govern- property and advice on project managementment Property and Project and controlManagement

Consultant in Personnel Personnel systemsAdministration (CAP)

Consultant in Operational Methodology development and training inPrograming and Budgeting operational programming and budgetary and

systems implementation

Consultant in Project Project execution and controlAccounting and Control

Consultant in Advice and assistance in preparation ofAdministrative Law legislation for congressional approval

and key regulation

PRINCIPAL UYITIE

Program Managers (3) Managers of Principal Entity ProgramImplementation (including Emergency Program)

-40 - Annex 2.3* ~~~~~~~~~Pate 3 of 4

B. SAFCOConsultant and Analyst bansonth Iglrmnts

(Twenty-oin HWutGs

Year Month Consultants Analysts(Nan Months) (Man Months)

Preparatory 3 71987 August 7 4

September 7 4October 9 4November 14 17December 14 18

1988 January 14 18February 14 21March 14 21April 15 21may 19 32June 19 32July 19 32August 19 35September 19 35October 19 35November 35December i8 35

1989 January 18 35February 18 35March 18 35April 18 35Short Term 9 -

343 546

Rounding 350 550_-

-41 Annex 2.3

C. CONSULTNT AID ANALYST REQUIRNHNTB DY ENTITY

Consultants Analysts Totalm No. m No. m No.

Executive Secretariat -SAFCO Management 94.0 5 112.0 6 206.0 11

Principal Entities 54.0 3* 282.0 18 336.0 21

Ministry of Finance 76.0 4 106.0 7 182.0 11

Ministry of Planning 60.0 5 31.0 2 91.0 7

Office of the Controller General 66.0 4 19.0 2 85.0 6

350.0 21 550.0 35 900.0 56

* Three consultants, each supervising up to five entities in the PrincipalEntities Program, ire responsible to the Executive Secretariat.

- 42 - Annex 2.4Page 1 of 9

SU 1TO aOF

ManmontehPersonnel and Activities Month Cons. Anal. Sr.

. . . . . s ~~~~~~~~~~~~~~~~~~Prof .

I. EXWETIVE SECRETARIAX

- Executive Secretary 25

Plan, organize, direct and control the activities -3 to XIIof the Executive Secretariat to provide leadershipIn building the functions of Financial Administra-tion and Cbntrol System (SAFCO) and to serve asthe Secretary of CONSAFOD

Prepare bidding documents for finms and identify -3 to XIIIand help select individual consultants for SAFCO

- Director of Standards Compatibility -2 to XXI 23

- Director of Training -1 to XMI 22

- Director of Implementation in DecentralizedEntities (includes Emergency Program) -1 to XXI 22

- Legal Advisor -2 to XXI 23

- Chief, Administration -2 to XXII 24

II. PRJECT MANAGEMENT AND CENTRAL FINANCIALMANAGEME SYSTEMS

- Manager of Prime Consultants Contract I to XXII 4

Management of consultancy; evaluate externalconsultant candidates, make periodic visitsto evaluate progress and do reprogramming

Give Course I, SAFCO Principles IV

- Director of Technical Assistamce (DTA) I to XXII 22

Help prepare the draft SAFOO Law, and help I to IIIorganize the Executive Secretariat

Make SAFCO norms/systems compatible. Give I to XXIICourse I. Assist the Executive Secretariat inmanaging the SAFCO project, guide and evaluatethe work of SAFCO consultants and continuouslyadjust the program

Ensure compatibility of SAFCO norms and monitor I to XXIIsupervision and implementation

1/ Mbnth I is August 1987.

- 43 A Annex 2.4Page 2 of 9

,SAD

-LG TM. OF R40

ManmonthsPersonnel and Activities Ltonth Cons. Anal1. Sr.

_____ _____ ____ _____ _____ ____ _____ _____ ____ ____ _____ ____Prof.

- Analyst, Executive Secretariat 23

Assist the Directors of Technical Assistance and -2 to XXIStandards Compatibility in ensuring that normsand systems are compatible

- Senior Professional, Executive Secretariat -3 to XKI 24

Assist Executive Secretary and 3TA, principallyin programming activities

- Consultant in Training I to XXI 21

Prepare and organize all training, including Iexamination on the Accounting Guide and alltechnical aspects

Select participants for Course III-A, onnorms for Financial Administration II

Organize Training Center III

Prepare and give Course III-A and instructiontechniques for the courses IV

Give Course III-B on Accounting and Internal VI1Control

Prepare and give Course II, on Fundamentals ofFinancial Administration XI

Give Course V-A on Government Auditing XVI

Manage the training program, control its qualityand serve as advisor for the Training Director I to XOXI

Consultant, Technical Assistance for the I to XXI 21Emergency Program and Implementation inDecentralized Entities

Prepare interim Guidelines for FinancialAdministration and advise on selection ofmanagers and analysts for Emergency Program I

Prepare and give seminar with managers and IVanalysts for the Emergency Program, organizesystems, Implementation in the Principal PublicEntities, to assure the adoption of common metho-dologies, and advise the Director on Imple-tation of the Emergency Program and systems

Annex 2.4Page 3 of 9

-AA lMg OIP UWM

ManmonthsPersonnel and Activities ffonth Cons. Anal. Sr.

- -IProf.

Prepare the quality control system, monitor,and ensure the compliance with the program andimplementation in the major public entities

Two Analysts 36

Assist Director and consultant in implementa- IV to XXItion/monitoring of the Emergency Program andsystems in principal public entities

Consultant in Accounting and Interal controlSystems (SIS) I to XXI 21

Prepare technical norms for internal control I

Prepare and give Course 1, SAFCO Principles II

Prepare and give Course III a, Accounting and IVInternal Control

Prepare regulations for registering, qualifying,and contracting independent auditing firms X

Organize the Subcontroloria of Systems develop- XVwent to evaluate and advise less complicated,smaller entities not included in theemergency program

Prepare and give Course V A, on Government XVIAuditing

- Analyst on System Development (OCR) XV to XXI 7

- Two Senior Professionals 14

Organize and conduct the activities of the XV to XXIAssistant Controller of Systems Development

- Consultant in Government Accounting (MINFIN) I to XXI 21

Prepare generally accepted accounting princi- Iples, applicable to the Bolivian public sector,and technical accounting norms

Prepare accounting manual for entities in IVCentral Administration

-45 - Annex 2.4

MsnantnhsPersonnel and Activities Month Cons. Mnal. Sr.

.____________________________________________ _ _ ____ Prof.Distribute and Implant, revise and adjust the Xaccounting manual for the entities In the centraladministration, and advise on the organizationand functions of the General Accounting office,MINFIN

- Analyot on Accounting (MINFIN) 19

Plan, organize, direct and control the activi- III to XXIties of the General Accounting Office

- Two Senior Professionals on Accounting (MINFIN) 36

Assist the General Accountant, MINFIN, in IV to X1icomplying with the activities of this Office

- Three Analysts - Accountin% (MINFIN) 30

Help establish systems in 15 central government VII to XXIentities compatible with the overall SAFCO system

- Consultant to the Treasury I to XXI 21

Complete the conceptual design of tie Treasury ISystem V

Prepare technical norms and instruction for the IITreasury System

Prepare and give Course III A, Norms for IVFinancial Administration

Develop Manual for the Treasury VII

Install the Treasury System in the Central XGovernment

Effect Auditing of the System's Implementation XVI

- Analyst to the Treasury (MINFIN) I to XXI 21

- Two Senior Professionals - Treasury (MNNFIN) VII to XXI 30

Assist in performing the activities of theSub-secretariat of the Treasury

- Consultant on Budgeting (MINFIN) I to XKI 21

Prepare Technical Norms and Systems for the Budget I

- 4W6 - FoAane 2.4

SW

ar ~ ~ ~ ~ ~ arwh

. M~~~~?anconthsPersonnel and Activities fonth Cons.T -ia, sr,

- - ~Prof.

prepare instructions for Budget Execution II

Prepare and give Course III-A, Norms for IVFinancial Adlmnistration

Develop the manual for budget execution V

Participate in the preparation of regulations ixon operational Progasming and Budgeting

Distribute and Implant the manual for budget Xexecution

Assist in preparing the budget for thefollowing year XVII

- Analyst - Budgeting (MINFIN) I to XXI 21

- Three Senior Professionals - Budgetin (MINFIN) ix to XXI 39

Help conduct activities of the Budget Sub- I to XVIIIsecretariat

INDIVIDUAL CONTRACIS FOR FINANCIAL SYSTEMS

- Consultant for Public Credit (MINFIN) IV to XVI 13

Prepare Technical Norms for Public Credit IV

organize office for Public Credit, MINFIN VI

Prepare Instructions for Public Credit VII

Prepare Manual for ?ublic Credit VIII

Distribute and implant Hanual for Public Credit X

- Senior Professional for Public Credit (MWIFIN) 16

Assist the consultant in main activities, and VI to XXIhelp conduct of Public Credit Office

- Consultant in Government Auditing I (CGR) IV to XXI 18

Give Course I - SAFGO IV

-47- Annex 2.4Page 6 of 9

uamIAI TMi orBoa

Mman MnthsPersonnel and Activities Month Cons. Anal. Sr.

- - Prof.

Prepare and give Course Itl 8, Accounting Vand Internal Control

Prepare regulation for registry, qualification, Xand contracting of independent accounting firms

Develop Auditing Standards and Manual for XIContraloria

Prepare and give Course V A, Governnent Auditing XIII

- Consultant in Government Auditting II VII to XXI 15

Prepare and give Course III B, Accounting andInternal Control VII

Prepare Government Auditing Standards X

Develop Auditing Manual for Coittraloria. XII

Give Course V A, Government Auditting. XVI

- Consultant in Government Auditing III X to XXI 12

Finish reorganization of the Subcontraloriaresponsible for Auditing X

Prepare Auditing Plan for Contraloria for currentfiscal year xII

Assist in conducting audits and in presenting XIVreports

- Analyst for Central Auditi Division X to XXI 12

- 5 Senior Professionals 60

Conduct audits according to corresponding X to XXIannual plans

- Analyst for Regional Audits XIX to XXI 3

- 2 Senior Professionals 6

Conduct audits of the Regional Contraloriasaccording to corresponding annual plans XIX to XXI

-4 - Anuex 2.4Fag e 7 orf -9

Man MonthsPersonnel and Activities Month Cons. Anal. Sr.

- Prof.

IV. DIVIDUAL OR CONTRACTS WITH FWSG FOROPERATIONS SYSTEMS

Consultant in Electronic Data Processing, EDP VII to XX1 15

Mechanize the Accounting System for Central Admin-istration Entities (includes Treasury and BudgetExecution) VII

Prepare and give Course IV A, EDP for AccountingSystems X

Prepare Technical Standards for Electronic DataProcessing XI

Prepare and give Course IV B, EDP for Administra-tive Systems XIII

-1 Analyst 1

Assist the EDP Consultant in preparing, devel-oping and installing Electronic Data Processingfor General Accounting Office VII to XI

- 2 Analysts

Assist the EDP Consultant in preparing and giveCourses IV A and IV B IX toXXI 26

- Consultant in Procurement, Goverment PropertyAdministration, and Project M n ement IV to XXI 18

Prepare procurement regulations for the public IVsector

Assist the Contraloria in organizing teams forinventory taking and valuation by principal VIIpublic entities

Assist in preparing operational programming Xregulations

Assist in preparing aid giving Course III-C,Budget and Operational Programming Xi

Prepare Instructions for Project Administrationand Control xi

~ 49 - Annex 2.4

Page 8 of f9

Man MonthsPersonnel and Activities Month Cons. Anal. Sr.

Prof.

Analysts IV to XXI 18

- Senior Professional IV to XXI 18

- personnel Consultant X to XXI 12

Prepare Interim Personnel e des x

Assist in preparing and giving of Course III-C XI

Organize Personnel Office and advise on the imple-meutation of Interim Personnel Rules

- Senior Professional 12

Assist the personnel consultant in completing his X to XXItasks

Consultant in Operational and Budget XPrograming

Prepare and dictate Course III-C, Operational a-d XIBudget Programing

Assist in preparation of the Public Sector XIVBudget for the next fiscal year

- Analyst IX to XXI 13X to XXI

- Two Senior Professionals XI to XXI 22

- Consultant in Project Accounting and Control X to XXI 12

Prepare instructions on project administration Xand control

Prepare and give Course III D, Project Adminis- XIItration and Control

- Senior Professional XII to XXI

- Lawyer SFecializing in Administrative Law I to XII 5

Assist in the preparation of the Law for an Inte- Igrated Financial Administration and Control System

Assist in the preparation of the Procurement Regu- VIlations of Goods and Services by the Public Sector

-50- Annex 2.4Pa ge 9 of 9

SLUM i or ami

Man MonthsPersonnel and Activities Month Cons, Anal Sr.

___________ __________ __________ __________ __________Prof.

Assist in the preparation of regulations for XIOperational and mugdet Prograrming and InterimPersonnel Instructions

v. CONTRACrS (3) FOR EMERGENCY PROGRAM AND IMPLEMEN-TATION IN PRINCIPAL ENTITIES

3 Maners and 12 Analysts IV to XXI 54 216

Conduct seminar to establish comwn procedures, IVadjust Interim Guide for Financial Administra-tion and prepare Energency Program

Carry out cash flow programming and execution IVand budget execution according to the Guide forFinancial Administration, submitting periodicreport to the Ministry of Finance (9 entities)

Prepare manuals on programming and administra-tion of funds, public credit, budget execution Xand accounting

Determine and register opening balances forassets, liabilities and begin registery of finan-cial operations according to manuals prepared XIII

Produce periodic financial reports XIII

Begin operational and budget programming XV

Begin preparing basic financial statementsaccording to Accounting Manuals, XVI

3 Analysts in Electronic Data Processlng EDP 27(one for each tes)

Assist managers and other analysts in mechani-zation of financial and administrative systems XII to XXIfor entities

3 AnalystsIX to XXI 39

Tasks similar to those of the 12 originalanalysts

Mu uauI mm AOMin as mg rnm

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* Paem £ of as d r vaie valuatim, ,sstm, X X X X X X X OK Ltqid. X X X X X X X X X

aid pentation, or mof fiscal auti usbe it Serious X SagsSer iom fl Fsal al Serlms Serious Flscaldiffilt to jmOe qum rlts, a8wd1sU toOaUY yted yatiij jriad4ma.

Am m of usi ti msyszi, ddic I w K KX K X X X X OK I X K X X X X X X X_3 ffecj, djgsijjgu a at1 aeinj _-II btAl Kbmly sic Serious Sod s.ria Salim- SeriSoa

of polly and volak& oeraWting ad fimca dal ta - I*uittodiWin am of bup, opmaiam. ad hoe 1nfrzmboo of rahwoftwints, for pcfle nlota OP

A amx1mAflsystmd om rt Iqxd fx u ti4g X X X X K (K X (GK X K K X (XK X X

zIpdirits cf the <utitdma e.g., mudtod' omplete Seritu Seri & Serbs.- Serias

caomoIAtial .f tb Acct. ND AhCt.

* La aof alt tr otsts difflAit to ban K X X X X X X XK X X X X K X X X X

#f1d t i c=sMg or MIS t dat. Seuria. NM 66 "Mat.

L ack f seXatLo of function. h ar wk X X (1K X X OK X (K OK UK X X X OK UK X X X-

_ udzatiaul axtrols.

e lb 0orserla *wkms Iantrols an (K (K OK X (K X (K UK X X X X X X X X X

Lamint fls., aidi opm defit to Serieus SeerimIxqr antrl a p.dhzf and pumt wts.

e onb X X X X X K X X X X X X X X X

patim lizetbcy tl p 4*t. Serliam

e lb infai or atol o a oisidiarbes. X

* .iadu fiactiXt1IA Of intlenl ai due to X X X X X (OK X X X X X OK

In jmraxu. Syste trabt, ( SriUm eAIdig

aldrv1aIM of tass.

Cotrl . 0lo

o Uitm MBS waLInbe not poerly utiilsd for X Xdda esmiz or aatzul.

-52 - Annex 2.6

(m)

PIIU Djjg~ IGI0 lCAL iumA IDA USAL TOTAL CUr

Consultants 3,300 - 3,300 3,300

Analysts 1,800 450 2,250 2,250 -

Executive Secretariat - 600 600 390 210

Other Senior Professionals - 640 640 - 510 130 130

Salaries and Increments - 4,340 4,340 - 790 3,550 70

Equipuent, Materials,Facilities, Training 810 1,480 2,290 810 990 490 90

PPF Advances 660 540 1,200 610 560 30 30

Subtotals - SAFCO 6,570 8,050 14,620 7,360 3,060 4,200 320

- 53- Annex 3.1Page 1 of 7

ANALYSIS OF 3OLIVIhN1986 TAX REI OtN

Background

1. An essential component of the New Economic Policy Is the 1986 TaxReform Law, through which the Government radically changed the taxationsystem as a means of addressing the fiscal desequilibrium and buildingtoward reactivation*

2. The critical objective of the reform is to reduce the high accu-mulated fiscal deficit; until recently, this deficit was financed throughmonetary emission, with the mounting deficit fueling the hyperinflationwhich plagued Bolivia until last year.

3. In addition and related to the inflationary process, the deficitresulted from a pronounced reduction in fiscal revenues, which can beattributed to four factors: i) fall In the international price of Bolivia'sexports; ii) corruption by public officials in charge of Internal Revenueand Customs collections; iii) lack of administrative organization in theseentities; and iv) general evasion by the private sector, which stoppedpaying taxes. As a result, fiscal earnings from taxes, customs and socialsecurity, which previously equalled 10% of GDP, fell to less than 2X of GDP.

4. One of the most important reasons for tax reform is to enableGovernment to continue avoiding use of monetary emission as the fundingsource for public expenditures and to help enable a healthier mix of publicinvestment and recurrent expenditures. Presently, public investment ispractically nonexistent. The government's current expenditures are beingfinanced by taxes on gasoline and government. Employees' salaries have beenreduced drastically in real terms. In many segments, the private sectorpays eight to ten times more for the same work. The number of employees wasby 40,000 or 17% in 1986. While such reductions were necessary, the severefiscal pressuee will keep public sector salaries and investments untenablylow, unless domestic and foreign revenues can be mobilized.

Content of the 1986 Tax Reform

5. Responding to characteristics of the Bolivian economic situation,the 1986 Tax Reform Law shifts from the concept of taxing incomes to taxingconsumption and property by establishing six kinds of taxes: value added;complementary to value added; transactions; specific consumption; estimatedprofit by enterprises; and estimated profit by asset owners. As atransition phase, the reform also established a one time regularization tax,by which contributors could meet all outstanding tax obligations incurreduntil December 31, 1985.

6. All collections will be through the banking system. In placeswith no financial entities or where banks do not meet minimum requirements,collection will be by Internal Revenue Offices, except for taxes on assetsor estimated profits which would be collected by the municipalities.

-54- Anne- 3.1Pge 2 of 7

7. Value Added Tax represents 10% of total value of sales and ofimports; moveable property imports; realizations from civil works andservice operations; and rental of personal property and real estate. Therewill be a 10% discount for all purchases and inputs. Monthly collectionswill be in the first 10 days of the subsequent month. Any favorable balancefrom previous sales tax policies which taxpayers may have when the new VATbecomes effective will be considered tax credits.

8. Complmentary Tax to the VAT Is to be paid by all Individuals anddividend earners. The payment will be 10% of monthly income fromdepen-dents, professional honoraria, rental and interest receipts, cashreceipts, dividends payment, distribution or liquidation of stocks andbonds. Income from dependents will be exempt for the equivalent of at leasttwo months minimum salary. Payments on rents from abroad will not betaxed. Monthly collections will be done in the first ten days of thesubsequent month. Taxpayers will be able to compute as payment of this tax10% of the amount of purchases and contracts subject to the VAT.

9. Tax on Luur Consumer Goods covers manufacture and import ofalcohol, cigarettes, perfumes and cosmetics, precious gems and jewels, andintroduces progressive taxation rates which should reach 30X (50% forcigarettes and jewelry) in three years. Monthly collection will be done inthe first ten days of the subsequent month. Any favorable taxpayer balanceswill be used in future fiscal periods.

10. Transactions Tax consists of a 1% tax on transactions involvingsales, construction, services and rentals. Monthly collection will be donein the first fifteen days of the subsequent month. The notaries or notaryagents should use the price established by Article 75 of Law 843. In thecase of sales made over a period of more than twelve months, the tax shouldbe paid at the same time as each purchase installment, inputing the relevantamount for that fiscal period.

11. Tax on Estimated Profits by Enterprise replaces the current pro-fit tax regime and consists of a 2% annual tax on additions to net worthover the year. This tax will be collected annually before 120 days fromthe end of the management period established by type of enterprise,specifically:

March 31 - Industrial enterprisesJune 30 - Agroindustrial and livestock enterprisesSeptember 30 - Mining enterprisesDecember 31 - Banking, insurance, comercial and service

companies and others

From this tax, the tax on estimated profits for asset holders will bededuced. Any positive balances to taxpayers will be consolidated in favorof the Treasury.

12. Taxes on Estimsted Profits of Asset Owners, together with theComplementary Tax to' the VAT, replaces the present personal income taxsystem. It consists of an annual tax on owners of rural or urban realestate, automobiles, boats and airplanes. Annual collection will be before

-SS- AnQe 3.1Page 3 of 7

February 28. Payment will be through the banking system. Revenue will bedistributed in the place of collection according to "coparticipation' asestablished by Law 843. On rural real estate, 75Z of collection will go tothe Regional Fund for Rural Development and with be abscribed to the placeof collection. Regarding taxes on other types of non-oveable property, themunicipalities will receive 0.35X of the value of said property. (This taxis kept from earlier laws). The tax reform replaces 411 other previousmunicipal taxes on goods.

13. !egularization Tax includes tax on company net worth up toDecember 31, 1985 and on owners of real estate, automobiles, boats andairplanes until this date. Replaces income tax due up to 1985 and includesa blanket tax amnesty up to December 31, 1985.

14. Coarticipation In Other Tazes. Earnings from other taxes createdby the reform plus customs rents will be distributed according to thefollowing percentages: Central Government, 75X; Departments, 102;Municipalities, 102; Universities, 52. The 10 corresponding to theDepartments should in no case represent less than 100% of the tax on beerconsumption for each producing Department. In case such a situation shouldemerge, the National Treasury will take the appropriate steps to ensure thetaxes are reintegrated.

15. In addition, the new law establishes prison sentences for taxevaders and introduces the idea of keeping tax debts current by indexingthem to the official US dollar rate. The law also stipulates that intereston tax debts can not be less than commercial bank rates.

16. The Reform annulled the former tax legislation except for muni-cipal-level taxes on urban inmovable property (0.35% of appraised value), onvehicles (12 of value) and on aspects which do not have correlation underthe new law. At departmental and national levels, taxes created byhydrocarbon and mining law and taxes on the exploitation and marketing ofrubber, chestnuts and wood are maintained; the latter would benefit theproducing areas.

Characteristics of the New Tax Law

17. The reform's pragmatism and simplicity permit confidence that, ifthe reform is implemented efficiently, tax collections should increaserapidly to their historical level of 102 of GDP. Under the new legislation,it is possible to design a highly automatic system which will permit:(a) tax collections to be handled by the banking system; (b) a simplified,smoother administrative process; (c) a substantial reduction in requiredpersonnel; and (d) greater ease in auditing and supervision tasks. Thesesteps, plus the seriousness of the new tax collection process in Boliviawill be the most effective tools against the historical tax evasion andcorruption.

1t. The change in the concept of taxation (taxation no longer onincome, but on property and consumption) corresponds to recent trends in tax

-56- Annex 3.1Page 4 of 7

18. The change in the concept of taxation (taxation no longer on income,but on property and consumption) corresponds to recent trends in tax legisla-tion which seek to neutralize the difficulties encountered with using Incomeand profits as the bases for taxation. The large number of "underground"activities and unregistered taxpayers and the practice of underreporting haveencouraged evasion and impeded effective taxation, As a result, the tax basedoes not respond to changes in GDP, and taxpaying companies are at a disadvan-tage in relation to their non-paying counterperts. By basing taxation onproperty and consumption, the margin for tax evasion is reduced, as propertyand consumption are more easily monitored than income. Also, indirect taxeshave been efficient instruments for economic stabilization* In this way, thenew tax legislation in Bolivia taxes what individuals and entities own andconsume, not what they earn, and turns consumers into tax agents under thecomplementary VAT.

19. The main disadvantages of the new system relate to the regressivestructure of consumption taxes. Progressive scales are provided for in thecase of taxes on vehicles and real estate. The system is only equitable withregards to the discount associated with Complementary Taxes to the VAT (if itis assumed that marginal propensity to save is a direct function of incomelevels).

Application of the Law

20. To implement the Tax Reform, work has been undertaken on threefronts. Administration of "regularization" tax. The June 30 date,established by law as a deadline to pay the tax was changed several times.Collection of the "regularization" tax has been through the banking system andhas surpassed initial estimates (an estimated $25 million were collected).The government sees the success of the regularization tax as a public vote ofconfidence and as a sign that the image of tax collection has begun to changein Bolivia. In 1986 the Internal Revenue did begin processing the data on theregularization tax, on recently acquired computer equipment. The deficienciesin the information received and produced by the banks (due to forms that wereimproperly designed) have produced enough inconsistencies so that only part ofthe data produced will be useful for design of the new system. To date thereis a one-month delay in data processing.

21. Regulation of the six basic taxes. A commission, presided over byMr. Ramiro Cabezas (now Minister of Taxation) and composed of Bolivian expertswho were not in the present tax administration system, developed the new taxregulations. The proposed tax regulations were scrutinized by expertscontracted especially for the system design. The Government's indecision inadapting a new institutional framework (Ministry without portfolio orcontinuing with Undersecretariat of Collections in the MOP) slowed the processof formulating the regulatory decrees for the Tax Reform Law in the period upto the decision to form the Ministry, taken in January 1987.

-57 Annex 3.1Page S of 7

22. System Design and Iuiplementation. A group of experts financed byBID/UNDP, has been working on the design of the new Bolivian tax administra-tion system since the end of September 1986. Nineteen foreign consultantswork with a group of about 20 Bolivian counterparts. The composition of thegroup is to guarantee that the system take into account the Bolivian realitywhile ensuring an effective technology transfer to the Bolivians who willadminister the system. The government's delay in selecting the Bolivian groupand in appointing a minister made coordination more difficult until January1987.

23. After the passage of the tax reform in May 1986, the governmentdemonstrated indecision in important organizational aspects of tax administra-tion. The government's delay in deciding on the leadership for tax adminis-tration resulted in a lack of coordination with the group of consultants,delays in the formation of local counterparts and weaknesses in work supervi-sion.

24. Corruption in tax administration (which is confirmed in the Boliviancase) stems mainly from the complex tax systems which make automatic processesdifficult, and require heavy contact between officials and taxpayers. InBolivia, an additional incentive for corruption is the inadequate salarystructure of the Internal Revenue: 98% earn less than US$65 monthly, with 70%earning iess than US$37. These salaries are ten times lower than correspon-ding private sector salaries. However, not all officials are corrupt, andcorruption is particularly heavy in the auditing department.

25. In Bolivia top officials display an excessive lack of confidence inthe civil service. This indiscriminate lack of confidence, which is particu-larly strong regarding Internal Revenue employees, means that the qualifiedstaff is not used and their initiatives not encouraged. During 1986 theInternal kevenue was practically paralyzed. Only two departments were dealingwith the regularization tax: demoralization and disorder prevailed.

26. The Internal Revenue has not been well managed in the past fewyears. Employees did not receive precise instructions nor were their taskswell-defined; a manual stating functions exist but few are familiar with it.As a result, there has been a lack of supervision and control of activities.

27. Also, there is no personnel policy that establishes incentives,promotion, and training criteria or procedures.

Recommndations

28. As a result of interviews made during the IDA's October 1986 visitto Bolivia and incorporating points raised here, the following recommendationswere made to speed the process of implementing the tax reform and make it moreefficient.

- 58 -Annex 3.1Page 6 of 7

29. Organization of the Process* In October 1986, the mission suggestedthat the Government decide as soon as possible if it will appoint a Ministerof Taxation to manage tax administration in the next few years, or if thisresponsibility would remain with the Undersecretariat of Collections in theMinistry of Finance. The proposed Ministry of Taxation would have a limitedduration and would be established by decree. Even though the creation of aTax Ministry runs counter to technical arguments for collection and expendi-ture under the same Ministry, in the Bolivian case a separation is justified.The Government took the decisionb to establish the Ministry of Taxation inJanuary 1987. The Ministry of Taxation will: (a) contribute to creating anew image which tax administration needs to win back taxpayers' confidence;(b) favor the technical orientation of a new system as opposed to thehistorical political orientation; (c) facilitate the contracting of highquality Bolivians (including Mr. Cabezas); and (d) confirm the Government'spolitical commitment to implementing the reform. Second, the October missionrecommended that priority be given to hiring: the group of Bolivians ascounterparts in the system's design to ensure a genuine technology transfer.

30. Regarding relience on banks for collections, the banks should beadvised in the process of purchasing equipment necessary for their newfunction. The banks were ready to cooperate and some in La Paz, Santa Cruz,Cochabamba and Oruro already have computer systems. The incentive which hasbeen provided to the banks by allowing them to hold tax collections for 10days seems a sufficient incentive to the bankers.

31. Consultant Work Program The program was reformulated in its twostages. Modules D and E were included in the first stage as well and workincluded on: completion of the taxpayers' registration systems, supervisionand collection by the banking system, control and auditing notification, andcoparticipation. The design of forms, procedural manuals, and computerprograms to facilitate electronic processing and the systematization of allthe tax administration are incorporated in the first phase. In this periodpublicity campaigns would also be designed and conducted.

32. Terms of reference related to the work to be done in Modules D and Ewere prepared. The organizational diagram for Internal Revenue shouldinclude: public information functions; computation; legal advice, billing,coordination of regional administrations; coordination of the banking system,analysis of statistics; supervision of information to the Government andformulation of tax policy; personnel policy and organization; documents andarchives; purchases; supervision and maintenance. The establishment of thebanking system should include organization units to inform and advise thetaxpayer; supervision and collection; magnetic data registration; coordinationwith Internal Revenue. In the case of Internal Revenue, the neworganizational diagram represents a substantial change from the existingsystem. The legislation established by the reform creates a simplerinstitutional structure, which concentrates on the above mentioned functionsand makes some the sections and divisions in the existing organizational.diagram obsolete.

-59- Annex 3.1Page 7 of 7

33. _uu Resource Polic.e A human resource plan Is being devised, andshould include the following:

(a) itrategy to reduce Internal Revenue personnel, taking advantageof the mobility resulting from low salaries and retirement.

(b) A *alary structure which will facilitate the appointment of ahig1lly qualified management group and motivated officials,including contracting fixed term appointments to encouragehigher salary payments.

(c) Design and implement a permanent system of training andrefresher courses.

34. Corruption will decrease if less contact is required betweenofficials and taxpayers, if processes become more automatic, if the bankingsystem participates more actively in the collection process, and if unions andprivate entities can increase their role in providing information and advisingtaxpayers. These objectives are possible to achieve only with a simple systemand with new kinds of taxes which discourage evasion.

-bO- Annex 3.2Page 1 of 6

BOLIVIATAX ADXI ISTATION

PHASE ItACTIVITIBS MND SUMARY TOR

I. Objective

The objective of the second phase of the tax administration programis to complete and consolidate the execution of the Tax Reform approved in May1986, and establish an efficient and effective tax administration.

IIe Schedule

This second phase will be executed between June 1, 1987 and December31, 1988.

III. Achievement

1. The taxes covered in the project are:

- Value added taxes (IVA)- Complementary taxes to the value added tax (RC-IVA)- Transactions tax (IT)- Special consumer goods tax (ICE)- Tax on enterprises' estimated profits (RPE)- Tax on estimated profits of asset owners (RPPB)

2. The tasks to be executed can be divided into the following areas:

a) Installation, follow-up and adjustments of the basic systemsdesigned in the first phase (September 15, 1986 to May 31,1987).

b) Design, programming and installation of subsystems for controlof compliance with formal tax obligations and payments bytaxpayers.

c) Design and implementation of procedures for tax auditing.

d) Improvements in legislation associated with the establishment ofthe Tax Reform and development of the system of fines, sanctionsand automatic payment.

e) Follow up actions on structural and organizational changes intax administration, as defined in the first phase.

f) Regulations for Chapter I of Title IV of Law 843 - RuralProperty Tax: basic design of systems for its application anddetailed design and installation of systems for collection andcontrol of the above tax for properties that are fiscally themost important.

Annex 3e2

g) Design and establishment of tax statistics, and design ofmethodology for studies in the tax area*

h) Training needed for efficient tax administration, and operationof systems and procedures.

I) Development of diffusion and publicity functions to encouragevoluntary compliance with fiscal obligations.

3. The tasks to be undertaken are the following:

A. Installation, mitorims and adlutunit of baslc systems desimd in theFirst Phs.

A.1 Development and consolidation of Computing Center.

A. 2 Complete the installation, maintenance and adjustment of thecollection system by the banks (RPPB - excluding the rural propertytax and the Simplified Tax Regime).

A.3 Set up, maintain and adjust the system for handling tax evaders andthose having made errors In calculating payment (IVAq RC-IVA, IT,ICE).

A.4 Set up, maintain and adjust the system to handle those who havefailed to file or who have submitted incorrect declarations (RPE andSimplified Tax Regime).

A. 5 Maintain and adjust the systems for the census of taxpayers, and incollection procedures through banks (IVA, RC-IVA, IT, ICE and RPE).

5. DesitP, for g and Iumtallatlo of &ubsyste to Comtriol theCo29lance with Formi Tax Obligations and Pa!EnUts.

B.1 Develop a system to follow compliance by large contributors havingthe greatest fiscal impact (IVA, RC-IVA, IT, ICE and RPE).

The following tasks will be included:

- Design the data base for contributors according to their fiscalimpact.

- Set up the unit that will control the taxpayers having the largestfiscal impact.

- Design the legal instrument that will determine which contributorsare covered under the large taxpayer controls.

- Design the system for notifying and instructing contributorsbeing supervised/controlled.

- Development and install software for a timely control system thatwill allow for an, immediate check of the taxpayer's currentaccount including: submission of sworn tax statements; payment;deferred payment; and transfers and compensation.

-62 - Amuex 3.2

Be2 Design and install a system to register and control transactions notIncluded in the basic system. For example: transfers and compensa-tions stemming from taxpayer's use of disposable income (IVA, RC-IVA,IT, ICE and RPE); and the use of certificates for integrating paymntof expo,.t taxes against payment of other taxes. Work will Include:developing the software; procedural nomse; and training forestablishment of system.

3.3 Develop and set up a system to control submission of legal tax decla-rations by those taxpayers who have failed to meet the subssiondeadline (IVA, RC-IVA, IT, ICE and RPE). The followlag tasks will beIncluded: design, production and distribution of forms; developmentof system software; procedural norms; and training for set up.

S.4 Design and install a system for payment requirements from taxpayerswho did not pay according to sworn statements or who partiallycancelled payment.

5.4.1 Information on taxpayers who did not comply with payment or paidonly partially (RPE): design, productlon and distribution ofjudicial notice; development of system software; procedural norms;and training for set up.

5.4.2 Identification of taxpayers with outstanding tax payments afterlegal notification, to enforce mandatory compliance. The followingtasks will undertaken: development of system software; proceduralnorms; training for set up.

5.5 Develop and establish a system which enables Installment payments andrelated controls, determining installment periods and amounts, andconditions under which such an arrangement should be retracted, dueto noncompliance by taxpayers. The tasks will include: design of aproject setting up the legal framework for the system of tax paymentby installment; system to supervise plan according to set expirationdates; design, production and distribution of personalized paymentcards to cancel installments; development system softwarpm. proceduralnorms; and training.

Be6 Develop and install a system for payment and control of the followingareas: (IVA, JR-IVA, IT, ICE and RPE): value maintenance; interest;fine on interests; fine for noncompliance with legal obligations.

B56.1 Supervision system. The following tasks, will be undertaken:design, production and distribution of judicial notification forms;development of system software; procedural norms; and training.

5h6.2 Information system for taxpayers who did not pay legal taxobligation, for purposes of legal enforcement. The following taskswill be included: development of system software; proceduralnorms; and training In implementation.

-63 - Anne 3.2Page 4 of 6

C% esig and establisbut of Taz Audittng Procedre

C.l Develop and install tax auditing systems (IVA, RC-IVA, IT, ICE andRPE). Tasks will include:

C.1.1 Identification of economic sectors estimated to incorporate thelargest tax evaders. Objective and centralized selection of tax-oeyera to be audited, within the group of largest evaders in theisconomic sector analyzed.

C.1.2 Provision to auditors with relevant inforeation from existing datebases.

C.1.3 Design of procedural instructions for planning, execution andsupervision of tax audits.

C.1.4 Definition of personnel qualifications and needed staff for taxauditing.

C.1.5 Selection and integration of relevant personnel into the system.

C.1.6 Training of auditors to perform their specific functions.

C.2 Provide information to mayors' offices to ensure effective supervi-sion over taxes and to provide schedule of steps to be taken (RPPB,except for taxes on rural properties).

C.2.1 Taxes on Urban Real Estate. Planning of information transfers tomayors' offices; and design of supervision system that _l allowfor cross-checking between the information in the sworn tax andstatement the data that may be includee in land surveys.

C.2.2 Taxes, on Vehicles, Boats and Airplanes. Design of a supervisionsystem to be used by mayoral offices.

De Ehae Iu Legslatlon Related to Tax Reform Ielemntation and Develop-mnt of Sstem of Fin,e, Sanctions, and CoMlMery Payment.

Advise on the necessary changes to tax law. A first analysis shows thatthe following areas will be changed or added to during the course of projectLmplementation.

D.l Regulations for the System of Simplified Taxes.

D.k Regulations for the Complementary System to the Value Added Tax.

D.3 Definition of a precise procedure for determining the functions thatcan be carried out by the General Tax Directorate.

D.4 Definition of a s(stes to officially determine taxes according toprecise estimates.

-64- Annex 3.2Pa~ge - of 6

D.5 Incorporate into the tax code a rapid procedure allowing the taxadministration to determine estimated tax payments based on previoustax statements--in cases where no sworn tax declaration it made (RPEand ICE).

D.6 Review and changes of the system of fines, sanctions and compulsorypaymente

D.7 Evaluation of tax legislation based on results obtained during thereform's implementation.

B. Monitor and Completion of the OrSgaistios Reftorom as Defined Im theFirst Phae.

Eel Implementation schedule for proposed organizational structure.

E.2 Implementation of reform for organizational structure.

X.3 Evaluation of implemented structural reforms and needed additionalchanges.

Fe Regulatlons of hapter 1 of Title IV - Rural Prpert Taxesi Basie SystemDesign for Iuplrnntationto Detailed Design and ImieenaIon of Sytrnto Collect and Supervise this Tax In Areas of Greatest Winal Loortanne

P.1 Prepare project for regulations for Law 843, Chapter 1 of Title IV,Rural Property Tax.

F.2 Global design of tax collection and control systems.

F.3 Design and implement collection and control system for areas withgreatest fiscal impact.

P.4 Prepare a preliminary implementation plan that will define technicalassistance needs to develop a detailed tax collection and controlsystem, and the needed resources.

Go Design and Implenentatlon of Tax Statistics and Design of MaletdlogI forStudies In Tax Area.

G.1 Determine the information needs of the main users of tax information(MOP, Ta*ation Ministry, Planning Ministry INE, Bolivian CentralBank, General Controller of the Republic and Information Ministry).

G.2 Determine the statistical archives In the Tax Administration toincorporate existing information that can be used by differentministries.

- 5 - Annex 3.2

G.3 Produce the basic statistics to evaluate the progress of taxes in theMinistry of Tax Collection, such as:

- Collection by department and economic sector for each tax (IVA,RC-IVA, IT, CZ and RPE).

- Favorable balances by economic sector and geographic zone (IVA).- Collection by economic and administrative sectors divided into

categories of total payment and installment paymentl- Incidence of patrimony by economic sectors (RPE).- Collection according to kind of good and geographic zone (RPPB).- Collection by value scale and geographic zone (RPPB)a

The following tasks will be included: design of tables; development ofsoftware systems; instructions for reading tables; training for calculationand reading of tables; and manual fcr forecasting tax collection based onstatistics.

Be Trainin for X!Slemetatlon of Systeme and Procedures

Implementation of a new structure and procedures requires major effort fortechnical training and changes in the attitude of personnel involved in theprocess. Training should be on two levels: (a) initial training for imple-menting each one of tile project's activities; and (b) institutionalization oftraining as a permanent activity. A global training plan should be producedthat will include the creation of a Tax Administration Training Center whichwill have the necessary human resources and materials to fulfill this veryimportant function.

Presently, assistance is being provided in this area through the Sub-Component VI: training and advisory services according to Agreement ATN/SF2353-BO, from the IDB. This support is essential to the project. Additionalinvestments are needed in material, training equipment and training locationsin order to further develop the tasks.

I. Publicity Progras to Encourage Voluntary Coliance with Fiscal Obliga-tions.

To implement the Tax Reform effectively, it is essential that publicity bewell planned to inform the population about those aspects of the reform thatcan be implemented in a uniform manner. Publicity should continuously informand remind the population of its tax obligations, and the risks associatedwith noncompliance. To achieve this objective, the UNDP should continueproviding support, contracting local and foreign communications experts toassist the Collections and Information Ministries, which work closely with theconsultants in Tax Administration.

-66- Annex 3.3PaeI of

Oinmtt Rus sAreas Malmths Costs Financing

Forein/Local Forelin Local Total Cost Source

1. Imuplementation, Follow-upand Adjustments onFirst Phase Activities 16 128,000 - 128,000 IDB/UNDP

2. Subsystems for Comp UanceControl 62 109 496,000 109,000 605,000 IDB/ P

3. Auditing 45 34 360,000 34,000 394,000 IDA

4. Adjustmnt in Legislation 15 120,000 - 120,000 IDB/UMDP

5. Consolidation of Module E- Organization 12 5 96,000 5,000 101,000 IDA

6. Rural Property Tax 19 152,000 - 152,000 IDB/UNDP

7. Statistics & Studies 15 17 120,000 17,000 137,000 IDA

8. Training 12 - - - - IDB*

9. Diffusion & Publicity 6 - - - - Um4DP*

10. Coordination & Supervision 30 I/ - 255,000 - 255,000 IDB/UND?

11. Special Advisers 16 1/ - 136,000 - 136,000 IDB/UND

12. Other Consultants 7.5 60,000 IDA

230 165 1,863,000 165,000 2,088,000

Core Counterparts (30 x 18 xUS$10ooo) 540,000 540,000 IDA

Equipment and TrainingMaterials 60,000 IDB

TOAL COST 2,628,000

* Other support program financed by IDB.** Other support program financed by UNDP.

1/ US$8,5000 per Month.

IMW*L MU AN Om S 4W -M

05)

FnS PHASE

NES SCOD 1wrtLSOURCE As B. C, Ds TrASOUR(Z A, B, C, D, £E COUNTERPART 1~TLPHASE ODST

IDB 592,040 - 592,040 1,096,000 1,096,00(!2/

UDP 457,960 - - 457,960 300,000 757,960 g

IDA - 213,000 150,000 1/ 363,000 1,232,000 1,595,000

WEAL 1,050,000 213,000 150,000 1,413,000 2,626,,00 3,448,960

T irty people X 5 moaths X U5$1,OO0.

2/ 1JMW-OPS amnistrative costs and contingencies and cost of project coordwoator uld be added tosbase cots.

11

An68 3.4Pag 1 of 5

Tax Ads nistratlomPhase X - PrP IaUts

Module D: Istlated Costs(US$)

Activity ConsultantsForeign LocalManweeks Manweeks

Definition of Design 4.0 4.0

System Programming and Design (Processing,Contribution, Checking) 33.0 75.0

Design of Forms, Tnstructions 3.0 8.0

Training (Receipt and Processing) 3.5 12.0

Collection (Supervision, Assessment) 6.0 10.0

Consolidation and Analysis 3.0 9.0

System of Control of Missing Information(Sample Visits, Analysis) 6.0 24,0

Notification System 1.0 6.0

Recommendations for Official Land Register 0.5 1.0

TOTAL MANWEEKS 60.0 148.0

TOTAL MANMONTHS 15.0 37.0

CONSULTANT COSTS $120,000 $29,600

TOTAL COST: US$149,600

-69- Annex 3.4

Tax AdmiaistrationModule K: gstiiated Costs

Activity ConsultantsForeign Local

(manweeks) (manweeks)

Definition of Relevant Issues 2.0 5.0

Ceneral and Detailed Design 4.0 8.0

Selection of Administration 0.5 1.0

Determination of Number and Kind of Positions 1.0 5.0

Manual of Organization and Functions 3.0 14.0

Selection of Personnel 3.0 2.0

Training of Officials 3.0 11.0

Determination of Offices, Furniture, Equipment - 4.0

Selection of Banks and Assigning ofTaxpayers to Banks' Jurisdiction 1.0 5.0

Identification of Collection System in PlacesOutside Purview of the Banking System 1.0 3.0

Negotiation with Banks 1.5 2.0

TOTAL MANWEEKS 20.0 60.0

TOTAL MANMONTUS 5.0 15.0

CONSULTANT COSTS $40,000 $12,000

Costs of Service of Personnel Selectic'n - 10,000

Estimated Total Cost: US$ 62,000

-70 - ^Anua 3.4Page 3 of 5

Tax AdalaistratiouTerm of Reference - PPF II

Nodule D - Term of Reference

1. Objective - Design and implement the system of estimated rents of propertyowners.

2. Definition - Tax for motor vehicles and real estate which should be treatedseparately.

3. Expected results for tax on motor vehicles and real estate:

a) Programs for automatic processing of information (registration, processing,consolidation, checking and inconsistencies).

b) Design and printing of forms to be completed by taxpayer, and accompanyinginstructions.

c) Training and advising of bank officials in charge of receiving forms and oftax verification, registration and processing.

d) Training and advising of Internal Revenue and regional administrationofficials in charge of information processing, consolidation, and taxpayerlistings.

e) Advisors for information analysis.

4. Specific results for motor vehicles:

Design and printing of appropriate stamps to acknowledge tax payment.

5. Specific results for real estate:

a) The system should include a real estate register which would temporarilysubstitute for the official land registers and which would establish thebasis for a future project establishing official land registers.

b) Train and advise Internal Revenue officials in checking forinconsistencies.

c) Design and implement a system to check for missing information (includingthe training and advising of officials in charge of system operations).

d) Design and implement a system of tax notification, legal notification andbilling (includes training and advising of responsible officials).

e) Hlake recommendations so that future official land registers can contributeto and draw from information in the central system.

71- Annex 3.4

6* Obervationss

- Taxes should be collected via the banking system.

- In the case of motor vehicles, there is no need for a formal tax model.

7. Xaziuam Duration: 12 months

Nodsl K - Terms of Referece (1)

1. Oblective - Define the organizational structure of Tax Collection System ofBolivia and advise in its implementation.

2. Definitios:

a) The organizational structure establishes the functions of the TaxCollection System, identifies its interrelated functions, and assigns thefunctions to the various components of existing institutions to maximizethe efficiency of tax administration.

b) The Tax Collection System includes the collection entities (banks) andcentral administration entities, i.e., Internal Revenue and regional ordecentralized administrations.

3. l=iected Results:

a) Detailed design of the organizational structure of Internal Revenue.

b) Detailed design of the organizational structure of the regional anddecentralized tax administrations.

c) Detailed design of the planned organizational structure for collectingentities (Banks).

d) Determine the minimum number of positions in Internal Revenue, regional anddecentralized administrations, and banks (for collection purposes).

e) Determine functions for each organizational component of Internal Revenue,regional and decentralized administrations, and banks.

f) Preparation of manuals delineating above functions.

g) Determino the grading for each of the positions.

h) Determine appropriate mechanisms for selecting the persons. who will fillpositions and advise in their selection.

i) Provide basic instruction to officials in the specific functions for whichthey are responsible according to their position within the taxadministration system.

- 72 - ADu.z 3.4pag 5 of 5

J) Determine criteria for identifying the banks which would be eligible forcollection.

k) Determine the main requirements for buildings and equipment for InternalRevenue, banks, and regional administrations.

1) Advise the Government in negotiation with banks.

a) Devise collection systems for areas where there are no banks, and establishcommunication with nearest banks.

n) Identify the above areas and assign banks to those areas.

4. Observationa: The organizational structure should comply with the appropriateBolivian legislation.

The task at hand is to set up an organizational structure whichwill facilitate the luplementation of the reform, and whichshould be periodically evaluated and revised.

5. Maxim= Duration (not including the revision/adjustment period): four monthsstarting November 1, 1986.

73 Annex4e1

UANUIEG SYSTEM UKYORMLUT BANK 1 DOLfVMI -

IKI AC IONS IN RBORGMIZATOU(July 1Iva to Juuw 19y7)

J-O Nov DeC Jan Feb Kw Apr May Jua

- Design of the organizationalplan, functions for head-quarters and branches A

- DecisLon on organizationalplan, functions A ------A

- Legal changes - Central Bank

Drafted AEnacted A

- Determination of positions formanagers, others A-----A

Decision on adjustments inpersonnel, new salary structureand severance arrangements A ------ A

Supreme Decree-RatificationAnnouncement of above, afterpublic forum on Reorganizationof Financial System A

Design by stagea the transitionin functions/current accounts A

- Make organization changes, assign-ments, reductions A--A

- Close branches, as accounts ofPEs transferred A -- A

- Instructions, orientation,training, manuals A------A-- …

A - for actions implemented.

1 tR# OM OFW BI VIA

IUTRUMIPIOM F mys SMmUug SWITS.

CEC- - mt- -. 4 SEP~ i OS

2 3 * 4 * * 4 4 4 4 Xt MR my m i e

11 AOI0TIDI - C011RAL.M

Al bMlstatrhtlhs Spt

- Cistlaus lr.emitetios 04u accosts ragistretlos spstm sltlate to Otob IWA. s tarlCato r 1t tw lgiA tlog circuar.

_

- Oigs tfreip curruscy reglstrtlus system for COatral Bud raosacitlm * to. fmrelg earoescis.

- Propare for lstrdoctl<s ot _outerIsd tebstiwn. eel tIs?lag watless iprt las, aidcod4ftlwg te relevant occoutlag eatwlea sA* as beam, gull Ic stereas. lotoraetlmgagaslascas. relat" eatltlas, helag to slid t4e cosf Iguratlon of the tftre oatrlsaed"Spat.

- Oelgp no l.trsctls for tsetiCtlag eatrlas 0w catro). to ie used by tt0 wortIos opertalngomits _ds te i" sast.

-

- tplmastetlatts mad alterlg of te ctwutetrld latg Systas tfr bet te opertlag volts_d tu cstral accoamIag divIsica.

S1 Catrol trocedwres

- OCiag ead estallsast of procweres tfr asitear laid swrv isl4ag atroat Sr\w besl.c-s.

- Costi_s vita lapltatetiao. regular ast los ad adjustUbtS In pSt accostIng entries.

- bgs aid t lap mt procedres to roaclto acc- ts hl abrood. -

- iboo t oitrot procdu" o toertf p pleIt wpl Ite actostlag lestrutt_s.

- Propre _mala tlomof cdstrol rocodures. raitralot lag tI%" accrd)lg to clarectarlsticso@ tue _oapstet sptt_ to be Sotroduci. Cevlop 4u11 1 O$ c arraspodidag ceatreprocOduri.-

l-a.rnf laa sweltering 0t amowter Seed atccs t loag catro) proedures " set ou the ( _*el dad lestruct leas *or aperrttlass salt a"i Cutrol _a*tuest of *tee 4c t,ag

OlulalOs. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ * Jf o

si - - - m- m -. W cc my TT

a 3 * 4 a * * 4 4 4 Mm

es mmet p laterautig system

-owtiSm wIth tainl*tlam at plans tar Ile mowtarV acmtms accad is, fto ate eregistrotel. system S*ltelte I Oet_ w -

- Og and MteW I latarmtiea systm o*Il terolge webag. poltlo by eatamal cwrraClse.

- Osaip eed lastal# lato1utiam syetft co tiuctoatlea 1S _eay OWes a_ aQeterW soocAmts.

- cetom s| to __meiot of tMiaical ecovset doptuamt nos

* satarastla Sa ee o mit studies - -* OrtIh.e far allocatiag acconts eimaces to theamater belance shawl. -* 1br&ig an imedisclpl la town alto aalys t. pryamws _d syst *prtr. -

- fVaioItto the opt" tie..4 umtary, latdrmtlom to am cmutertle sysita. Wt lecuilylwIth r*nect to ieaestles to apew co aoter scam,. _d ltarastles as realMonetary #soma.-

- lWpiatattin a" nd .mltrla of aipwterlsei mWery lIatrmatlionsystem to camj1tat WIwIft d4ticl4.l and eVss Is eccmilc rasewa aSW cawU re. ".

- Assesm i .4 legal *rm r Md buge Saw.- _~~of < eiqpl trnwk _o1 too."I

- bana am proedre for prOWper lgthe Mgena budge and Central Book accoats.-

- Oneig ot t" system tr catral I lag buet toulon taklng lato ac_nt. far projcted sodmonted ueemdlt_e centrol of SeS oty d xpendlteros, and taternal control a-ospnIltures.

- tsip o at a spttc 4ceuatlng systam tfr bugetounts. amOco.ll1 perit tisty laear_ ti an floe atm. and which cam be roconci Sd daily with to Centra acasunts.

acceuntiag and ceatrols. Oith bfth roletkting the coa4iguratoam ot amutar systems to belatre g'a

''-

-Implementatien taa meitarlg ot system tr budget prara.l., cntrol t obdget exatica,.d btdget trle, rtSecttis ast coamteriad system.

ImIplametorton and moniteroIg ot canywrlard bdget ltooretlao system Sm conjuctloe withqt#i.c4ls and edVlses Ca the aIlstretlIO and cOter are.

-76 Annex 4.3

a*L 31K 01 3(I

Dcm RGRUI

1986 1987

A M J J A S O N D J F H A H J

Design

o Final Design Work *e port *

e Review by Board ** Final Plan *

Policies

* Monetary Program * *° SOP Projectionsmonitoring * * *

o Program AdjustmentsoReporting

Procedures

o Monetary Program * * * * * *° BOP Projections * * *Monitoring * * * * * * *Progam AdjustmentsReporting & Sditing * * * * * *

Manuals

o Policies * * *o Procedures * * * * *o Models * * * * * * * *

o Policies * * * *o Procedure * * * ** Models * * * *

o Reports * * * ** Monitoring * * * *

- 77- Amnex 4.4

CDin aNa Of BOLNI

BACNK fINSPIII

1987- --

D J F M A M J J A S O N D

Enactment of BankRegulations

OProvisions *°Interest Accrual *"Loan Concentration **Accounting Plan *"Audit Requirements *°Info. Requirements *

Audit Work

Long Forms **Audit Contracts *"Audit Work*Review of Audits * *°BCB Reports-definition ofcontent *-staff training * *-report writing * * *

'Info. to Public *

Superintendency &Deposit InsuranceFund

"Draft Law'Congress * *'Approval *'Enactment

Internal Organization

3y-Laws * * **Policies, Procedures,Organization - SB andBCB Fiscalization Dept. * * * * * * * * * *

°App. of New S.B. *ODesign, Implemaentation ofMIS *

*Training

- 78 - Annex 4.5

PPF, Phse I PPF, BwPse II Plbl PF O PMTotal(Jac)t 1986) (M, 1986-m 198?}7) (Jul 1987-JOu 19B9) (Jul IJ1m 19B9).Lb 12E! c !MLa1 l lMWI jeE L FC!j& )*btet_f e (a nmtht)- *

1) Gentral Bank (S) Porgmidzatin

° ugn - oeall Organizatia FUtioas, ktion mPrWau 3.0 - _ _ _ - 3.0 -°xwrdeation of zp1aemtatlon, TA - - 7.0 _ 12.0 - 19.0LnstaLlation of New Orgidtimo incluEd Pwoedtes - - 2.3 10.0 25.0 13.0 27.3 23.0ard Mtuwal8 for PersCmai, AdminiStration, nd (bntrolof Infomation Flow, aid JwelomtL of Tratzng Program

Sibtotal, Owerall PArganizatimn 3.0 - 2.3 17.0 25.0 25.0 30.3 42.0

2) Bankin Insectim

Design - Urgadzation, Ftnctions, Stafl, PtWra 4.0 - _ _ _ _ 4.0 -o 0,ordiatimi of B*plaetatcon _- 2.0 7.0 12.0 2.0 14.0 9.0o ganw law - B1dd% inspection _ - 1.7 3.0 - 3.0 1.7

0 Statutes _ _ _ 3.0 1.0 - 1.0 3.0P olicies aid Operating Proces - _ 9.5 - 6.0 6.0 15.5 6.0

0 FI ia,al aWlysts of lstrw:tixs - _ 2.0 9.7 6.0 6.0 8.0 15.7° inpaetation - Trasfer of mtlims - _ 1.0 - 3.0 1.0 4.0 1.0

eItakdx. _ - - 2.0 - 2.0 -e lnforsation Systm - - 4.0 4.0 4.0 4.0

oubtotal, !ni tspec 4.( - 14.5 21.4 37.0 19.0 55.S 40.4

3) tentral sffI&f

° 1is - Orgadzatiai 1.5 - _ 3.0 _ _ 1.5 3.00 coordination of boeaetatien _- -_ - 12.0 - 12.00 lmomic Sbxdies - Implsemefttai of Prwras to qrove - _ 2.0 - - - 2.0 -

System Capabilities for: malance of Payrts _- - - 4.0 - 4.0 -

?bbtary Program - - 6.0 - 6.0 -earch - -_ 12.0 - 12.0 -

StatIatics _ - - 6.0 - 6.0 -inforatii Base _ - - 2.0 - 2.0 -

9 mey aShd BnE _ - - 4.0 - 4.0 -0 Forelgn ade and 0hcwge _ - - - 3.0 - 3.0 -

SAbtotal, Cantral 8rg 1.5 - 2.0 3.0 37.0 12.0 40.5 15.0

4) Accounting and intermal ctrols

° Pmepration, Tmplane1ttion - 9uhS tas for 4.0 5.0 6.0 - - 9.0 6.0operatng tkits, internal Oztrols

0 oxnlterization of Systmes, OtroLs _- - 9.2 5.0 5.0 5.0 14.20 titoring of Accountirg System - -_ 3.0 2.0 3.0 2.00 amtrol of Balances _ - - 2.0 2.0 2.0 2.0

Predue for baonciling Orrent APccots _ - - 4.0 4.0 4.0 4.0° Systams tor ftietary inforation _ - - 5.0 3.0 5.0 3.00 liget System _ - - 12.0 - 12.00 Omimcaticns -_ _ _ 3.0 9.0 3.0 9.0

&ibtotal, Accnting 4.0 - 5.0 15.2 22.0 37.0 31*0 52.0

5) Banco Agricola, Banco del Estado

° ifrsis and Design 4.0 - _ _ 4.0 -° Uetailed Morga&ization Plns, 'iousoptions - - 3.7 3.0 - - 3.7 3.0e oIp0 eation - - - 21.0 18.0 21.0 18.0

Sjbtotal, BAB and BNEr 4.0 - 3.7 3.0 21.0 18.0 28.7 21.0

turAL, W1U SYSE a=L= M KtJUIS 16.5 - 27.5 59.6 142.0 111.0 186.01/ 170.61/

1/ .mersge total costs per emamuth of foreig consultants estimated to be US58,00;and for loca tvoatants, IJSS2,ooo. Ij fiancing aln includes USS20U,0O0 foroamp1ter Iurdiae and softwre.

- 79 - Annex 4.6page 1 of 4

BANKING SYSTEM COMPONENTDIAGNOSES

FINANCED UNDER PPF I

1. Under the first Project Preparation Facility (PPF), major advanceswere made in designing organizations, functions, and action programs for thereorganization of the Central Bank. The reports listed below are availableupon requesto

a) Central Bank Reorganization

- Report analyzing Central Bank, and prescribing new organiza-tion and functions (August-September, 1986).

- Visit to discuss recommendations with President and Board ofDirectors (October, 1986).

- Consultants helped prepare organization and staffing plan, andaction program for reorganization of Central Bank, includingTA requirements (October, 1986).

b) Accounting and MIS

- Preparation of report with recommendations on conceptualdesign of new accounting and management information systems(June-August, 1986).

- Revision of proposed system by CB President and DMF AccountingAdvisor, with new action plan developed (September-October,1986).

- Initiation of new system, development of new accountingdepartment, and calculation of TA requirements for PPF II andfull project (October, 1986).

c) Economics and Policy Department

- Completion of report with diagnosis and recommendations on newEconor I _, and Policy Department, including TA and trainingrequirements (August-September, 1986).

d) Banking Inspection Department

- Completion of diagnosis and recommendations on functions,organization, staffing, and artion program for new BankingInspection Department (September-October, 1986).

- Development of Supreme Decree by Bolivian Government settingout new rules of the game to ensure health of private banksand to pave way for Central Bank reorganization (passageexpected soon).

-80 - Anmex 4.6Page 2 of 4

Q) Development Banks

- Completion of diagnosis of financial and operating position ofBANEST and BAB, of their present roles and branch-leveloperations. Preliminary recommendations on closure of SANESTand set up of new BAB (July-August, 1986).

- Final diagnosis, recomendations and action plan for BANESTclosure and new BAB (September 1986).

-81 - nhAm 4.6* Pagi ~~~~~~~~~3 o f

amY so= or BOLriVT

PPP - cammsm

1. Sergio de la Cuadra - Minister of Finance, Chile, 1982.- President, Central Bank, Chile, 1981.

° overall CBB reorganization - Vice President, Central Bank,4 Chile,* structure, functions, staffing 1977-1980.° design of action program

2. Daniel Tapia - Chief Advisor to Board of Directors,Banco Industrial y de Comercio Exterior

° overall C8B reorganization (BICE) Chile.° structure, functions, staffing - Vice President, Central Bank,* design of action program Chile, 1982-1983.

- Director, Financial Policy, Central Bank,Chile.

3. Adolfo Diz - President, Central Bank, Argentina,1976-1981.

* Economic Policy Department - Deputy member and member of theo design of structure, functions, Intergovernmental Group on International

staffing, action program Monetary Affairs (Group of 24)1970-1973 and 1976-1981 respectively.

- Deputy Member of the Committee of Twentyof the IMF (1970-1973).

- Executive Director IMF (1966-1968).

4. Jose Maria Jimenez de la Iglesia - Banco de Espana, Spain. Last 21 years inin Bank supervision area, Sub-Director

-Baking Inspection - General 1982-1985.implementation

5. Julio Acevedo - Director of Analysis and Research, Superin-tendency of Banks and financial institutions,

o Banking Inspection - design of Chile, 1982-1986.structure, functions, staffing - In charge of Global, Individual and Risk

Analysis of all financial institutions;Norms and Regulations design andimplementation.

- In charge of interventions and laterre-privatization of some troubled banks.

6. Francisco Gil Diaz - Deputy Director of Economic Research,Banco de Mexico (Central Bank) Mexico,

o Economics Department December 1982 to date.* short-term advice on - General Director of Revenue Policy,

implementation Department of Finance and PublicCredit, 1978-1982.

- Director of Instituto TecnologicoAutonotm de Mexico, 1972-1978.

82A 4.6

pR? - -R TI

gman _one.ibit i

7. Alvaro Feller - Director of Financial Analysis and Researce.,Superintendency of Banks and other financial

o Banking Inspection - design of institutions, Chile, 1986 to date.structure, functions, action - In charge of Global, Individual and Riskprogram Analysis of all financial institutions; Norms

and Regulations design and lmplementation.- Deputy Director of financial analysis,

Superintendency of Banks and other financialinstitutions, Chile, 1983-1986.

- Senior Economist, Department of Research andPolicy Analysis, Central Bank, Chile(1977-1983).

8. Richard Webb - President, Central Bank, Peru, 1980-1985.- Economist, Development Economies Department,

3 Economic Policy Department World Bank, 1975-1980.program - Visiting Professor, Princeton University,

1971-1975.

9. Ramon Rosales - Deputy Director, Superintendency of Banks andFinance Companies, Peru, 1981 to date.

oanking Inspection program - In charge of financial supervision of Banks,other financial institutes Including Savingsand Loans.

- Intendente General de Mutuales, Peru,1976-1981.

- Intendente of State-owned Banks, Peru,1974-1976.

10. Jose Valderrama - Director, Economic Research, Central Bank,Peru, 1984-1986.

o Banking Inspection program - Economic Advisor to the Minister and GeneralDirector of Economic Affairs, Ministry ofEconomy and Finance,1982-1983.

- Chief, Monetary Sector and Global AnalysisDepartment Central Bank, Peru, 1981-1982.

11. Beatriz Casal - Chief, Accounting Department and other relatedactivities, Central Bank, Uruguay, 1970

o Strengthening of accounting - to date,CBB

-83- AnzLe 5.1

PUBLIC FINANCIAL OPERA0O

Mosthly . C~u.a1tive

Second Quarter 1,800 1/ 1,800Third Quarter 700 2,500Fourth Quarter 900 3,400

mS

First Quarter 1,000 4,400Second Quarter 1,200 5,600Third Quarter 1,300 6,900Fourth Quarter 1,300 8,200

O90

First Quarter 1,300 9,500Second Quarter 1,200 10,700Third Quarter 500 11,200Fourth Quarter 300 11,500

1/ Includes reimburseaent of Project Preparation Facility (PPF) Advancefor up to US$1.5 million,

- 84 - Ar 5.2

si=FDSM _WGD can

9~S a= mm

mmD/E2gJ Local TO*. Mt mmAI 13W (UT/D(3

LSUX

°suldtants 5,100 450 5,550 5,550 - - -0Senior Professiols - - 600 600 390 210 - -

Execitive Secretariat*Odtwr Sr. Ptofessionals - 640 640 - 510 - 130Salaries, Incra t - 4,340 4,340 - 790 - 3,550

rCAre CttpartsEquipaemt, Materials 810 200 1,00 810 100 - 100

OTraining, Facilities - 1,280 1,280 - 890 - 390"Project Preparation, 610 590 1,200 610 560 - 30

Initiations

Subtotal, WM 6,520 8,100 14,620 7,360 3,060 - 4,2001/

U. Tm

°nsaatants 1,860 190 2,050 710 - 1,340 -

o°e tDcal Teau- - 540 540 540 - - -Fixed Term

"Other Cbunterparts - 1,800 1,800 - - - 1,8003/"Equipaent, Materials 60 - 60 - - 60 -

Project Prepatiori/ 255 110 365 365 -

iAdministrative - UNDP/IDB 200 - 200 - - 200

Subtotal., Tax 2,375 2,640 5,015 1,615 - 1,600 1,801)- m _ _m

m. ~

Consultants 1,130 220 1,350 1,350 - - -core o - 2,400 2,400 - - - 2,4003/Equipxmet, Maerials 200 - 200 2w00

0Project Preparation 385 140 525 525 - - -

Subtotal, Banking System 1,715 2,760 4,475 2,075 - 2,400

IV. ^Atx tiwe Seim 450 - 450 450 - - -

ItML 11,120 13,450 24,560 11,500 3,060 1,b0u 8,400

1/ Oly us$320,000 equivalent of (bvermit cownterpart fundig of SAF0 is incremwal. OfWB's US$4,200 contribxtion, US$3,880 is in no-nr tl core staff salaries andfacilities.

2/ Excludes WBAWP finwicirg of REase I (Anex 3.3), IK-financed project preparation includesUSS215,00) for oasultants on overalU organization of tac administrRtion and property tax, andlS$150,000 for core fixed cotract personel of the Ministry of Ta1tln.

3/ All Gvwmmt contributions for the tax administration and bnldig syst anpnet are fornowiCrmsltaJ salary ecpditures.

-85 - Annez 5.3

Project Element Mrocurint IethodInternational Consultant

Shopping G idelines Other Total Cost

(UJS$ 000)

Technical Assistance - 8,950 - 8,950*(7,610) (7,610)

Fixed Contract Personnel - 1,780 - 1,780*(930) (930)

Equipment, Materials - - 1,280 1,280*(1,010) (1,010)

Civil Works, Training Stipends - - 1,280 1,280*(0) (0)

Salaries - - 8,540 8,540*(0) (0)

Project Preparation - 2,090 - 2,090*(1,500) (1,500)

Administrative Services - - 650 650*(450) (450)

- ~~12,820 11,750 24,570Total (10,040) (1,460) (11,500)

Note: Figures in parentheses are the amounts financed by IDA.

* Includes amounts for items financed by USAID, IDB and UNDP, procuredunder their respective procedures.

MA, Db

Category Amumt(US$ 000)

Technical Assistance 7,610Fixed Contract Personnel 930Equipment, Materials 1,010Project Preparation 1,500Administrative Services 450

Estimated IDA Disbursemets: EDA Fiscal Years1988 1989 1990

(iJSS 000)

Annual 3,4U0 4,800 3,300Cumulative 3,400 8,200 11,500

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