The objective of the 2015 Colombia Public Expenditure and Financial Accountability (PEFA) assessment is to have an updated diagnosis of the performance of the public financial management (PFM) system in the country so as to (i) determine the progress made with the reforms implemented in recent years by the Government of Colombia (GoC), (ii) understand the impacts of these reforms, (iii) establish the tools and next steps necessary to consolidate the progress made, and (iv) promote long-term economic stability and sustainability.
This assessment was conducted, at the request of the Ministry of Finance and Public Credit (MFPC), by the World Bank (WB). The State Secretariat for Economic Affairs (SECO) of the Swiss Confederation and the Delegation of the European Union in Colombia (EU) collaborated throughout the process.
The assessment is performed using the 2016 PEFA methodology officially presented on February 1, 2016. The use of the PEFA methodology for this purpose records the progress made by the country’s public financial management from the PEFA Colombia 2009 assessment, and establishes a new baseline for future measurement of progress to be made, for example, regarding public investment, public asset management, fiscal strategy, and results-oriented information, which promise to be particularly useful for the reform agenda that the GoC is interested in promoting.
The scope of the PEFA Colombia 2015 exercise covers the Central Government and the assessment analysis period are the last three completed fiscal years (2012, 2013, and 2014), at the time of the assessment (December 2015). The field mission took place in Bogota between November 12 and December 18, 2015, and this report was prepared between January 4 and August 17, 2016, incorporating comments from the Government of Colombia and guest reviewers.
Colombia is located in northwestern South America, and has an estimated population of 48.2 million in 2015. It is the fourth-largest economy of South America, after those of Brazil, Argentina and Chile. Colombia has a substantial domestic market, a wealth of natural resources, and an average annual economic rate growth rate from 2005 through 2014 of 4.8 percent, underpinned by a strong macroeconomic framework.
PFM in Colombia has important strengths, primarily associated with the development of instruments that have allowed prudent fiscal management—such as the recent introduction of fiscal rules—that have supported major development initiatives. However, there are still some weaknesses related to the strategic allocation of resources, accountability, and efficient delivery of public services—areas where reform efforts are being made that are not yet fully reflected in the assessment. Among the most important of these ongoing efforts are (i) the inclusion in the budget of performance information, linking resource planning in the most appropriate manner; (ii) the convergence of national accounting to international accounting standards for the public sector, allowing consistency between the accounting and budgetary classifications; (iii) the strengthening
of the Office of the Comptroller General by improving the quality and efficiency of control measures; and (iv) promoting the transparency of information of public finances and citizen participation.
The measurement of the PFM system is performed from the valuation of 31 high level performance indicators (PIs) grouped in seven pillars of interest:
I. Reliability of the budget (PI-1 to PI-3) II. Transparency of public finances (PI-4 to PI-9) III. Management of assets and liabilities (PI-10 to PI-13) IV. Policy-based fiscal strategy and budgeting (PI-14 to PI-18) V. Predictability and control in budgeting execution (PI-19 to PI-26) VI. Accounting and reporting (PI-27 to PI-29) VII. Scrutiny and external audit (PI-30 to PI-31)
The 31 performance indicators are scored on an ordinal scale of seven points, A, B+, B, C+, C, D+, and D, according to the objective evidence obtained during the assessment process and report preparation. An “A” score states that national practice, as assessed by the PEFA methodology is compatible with international best practices; a score of “D” shows that national practice is far from best practice (or there is insufficient information or evidence to score).
Overall, Colombia’s PFM system exhibits reasonable alignment with international best practices at the Central Government level. The ratings obtained in the PEFA Colombia 2015 Assessment show that 24 of the 31 indicators (77.4 percent) scored between ‘A’ and ‘C+.’ The remaining indicators (22.6 percent) received scores between ‘C’ and ‘D,’ which suggests opportunities for strengthening PFM practices in the country.
The pillars that obtained the best scores are Pillar I “budget reliability” (PI-1 to PI-3), Pillar III “management of assets and liabilities” (PI-10 to PI-13), and Pillar IV “policy-based fiscal strategy and budgeting” (PI-14 to PI-18). In these cases, the great majority of the scores of the relevant indicators are located in the range of “A” and “B,” highlighting them as strengths of the PFM system in Colombia.
Particularly noteworthy is the positive performance of indicators PI-14 and PI-15, which measure the overall institutional capacity to establish a credible fiscal strategy and comply with it. These two indicators have recently been added to the latest revision of the PEFA methodology, precisely to reflect progress in this regard within international best practice. Colombia exhibits significant progress in this area. The same can be said of indicators PI-11 “management of public investment” and PI-12 indicators “management of public assets,” and where Colombia displays compatibility with international standards.
The PI-1 to PI-3 indicators as a whole measure whether the annual program of revenues and expenses included in the budget approved by the Congress continues without major variations during the implementation phase, both at overall and disaggregated categories of sectoral, functional, and economic classifications. In the case of Colombia, these indicators obtained scores between “B+” and “C+,” a suggesting that the General Budget of the Nation (GBN) is a reliable instrument that effectively guides the allocation of public resources to the priorities identified in national policy.
For Pillars II “transparency of public finances” (PI-4 to PI-9), and V “predictability and control in budget execution” (PI-19 to PI-26), performance was more mixed. Indicators on fiscal transparency are generally aligned with international best practices, except for those scoring the budget classification (PI-4) and the inclusion of performance information in the budget allocated to the direct delivery of public services to the population (PI-8). The scores of these two indicators confirm the decision of the GoC to focus a substantial part of the reform effort in these areas.
Pillar indicators on “predictability and control in budget execution” have practices adjusted to international standards in Treasury Management (PI-21) and Internal Control Management (PI25), in contrast with indicators that scored between “C” and “D+,” primarily Payroll controls (PI23) and Procurement (PI-24). The GoC has also initiated actions to strengthen the instruments required to foster improvements in these processes, with an aim to consolidating over the medium term.
Among the pillars there is less robust performance. Pillars VI and VII, “accounting and reporting” and “external scrutiny and audit,” respectively, indicate opportunities for improvement (i.e., all indicators that make up these two pillars [PI-27 to PI-31] have scores between “D+” and “C+,” which suggest the existence of gaps in relation to international best practices). If pursued diligently the ongoing reforms, especially those aimed at strengthening the consolidation of governmen financial information on the National Balance Sheet and inter-agency coordination of regulators and oversight agencies, may reverse these shortcomings over the medium term.
Effects on the Main Objectives of Public Finances
The potential impact of these overall strengths and specific opportunities for improvement is discussed with respect to aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery.
Aggregate Fiscal Discipline. The following system components contribute to achieving aggregate fiscal discipline: (i) a clearly defined fiscal strategy, along with monitoring and assessment of its results; (ii) the capabilities for the preparation of robust projections of macroeconomic and fiscal performance; (iii) budget reliability, particularly the scant variation reflecting the expenditures executed globally and as disaggregated by administrative, functional, and economic categories; (iv) good forecast of aggregate annual revenue, which does not suffer significant deviations during budget execution; (v) the proper reporting of revenue and expenditure operations that are outside the GBN; (vi) the management of fiscal and non-fiscal revenues; (vii) the relevant administration of public assets and liabilities; (viii) the predictability of resources to commit expenditures during budget execution; and (ix) the effective management of internal controls.
These positive factors are partially offset by the few weaknesses that are still prevalent in the PFM system, especially (i) the reduced capacity of fiscal risk oversight generated by public sector agencies as a whole; (ii) late payments; (iii) the difficulties remaining in the scheduling of mediumterm expenditures; (vi) the weak link between investment expenditures and the future recurring expenditures they generate; and (vii) limitations in coverage and comparability
Strategic Allocation of Resources. The strengths of the Colombia’s PFM system with respect to the strategic allocation of resources are (i) the existence of budgeting guidelines that assign credible budgeting ceilings, over the short and medium term; (ii) the timely submission of the draft budget for consideration by Congress; (iii) the delivery of complete and relevant information to Congress for analysis of the draft budget information; (iv) regular and timely approval of the budget law before the effective date of the corresponding fiscal year; (v) the preparation and adoption of a National Development Plan (NDP) every four years that focuses on priorities in the allocation of public funds among institutions; (vi) monitoring and assessment of performance information in the NDP; and (vii) assessment and regular monitoring that is performed on public investment projects.
However, the following weaknesses were found: (i) the difficulty of aligning planning and budgeting, as well as ensuring consistency of expenditures with budgetary ceilings over the medium term; (ii) budgeting classification that cannot be compared with international standards; (iii) the absence of performance information in the budget as a whole; (iv) the mechanisms of investment project costing; (v) the budget execution reports; (vi) preparation of financial and budgeting statements; (vii) monitoring performed on the external control recommendations; and (viii) the overall assessment of the results of fiscal management by Congress.
Efficient Service Delivery. Efficient (and effective) delivery of public services to the populace is an important PFM objective. The components of the PFM system in Colombia that favor this goal in satisfactory manner are (i) proper budgeting of revenue and fiscal impact analysis of economic
and social policies; (ii) the availability of funds for commitment to expenditures, facilitated by the use of the Treasury Single Account (TSA) system; (iii) the transfer of tax collections to the TSA without undue delay; and (iv) the transparency of key budgeting and fiscal information.
In 2015, however, there are weaknesses affecting the capability of the system to efficiently deliver public services, the most notable being the difficulties for integrated management on the one hand, and payroll on the other, and the purchasing and public procurement system. The internal auditing and monitoring that is performed on budgeting reports on the expenditures incurred by the frontline service delivery units are also important weaknesses.