Colombia-National Level Public Financial Management and Procurement Report

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Report No.: 55113-CO

Colombia–National Level Public Financial Management and Procurement Report
Volume I Status of the Public Financial Management and Procurement System

June 30, 2009

Colombia and Mexico Country Management Unit Regional Operations Department

Operations Services Department Modernization of the State

Latin America and the Caribbean Region Inter-American Development Bank

The World Bank

Document of the Inter-American Development Bank and the World Bank


World Bank


Pamela Cox

Country Director

Axel Van Trotsenburg

Country Manager

Eduardo Somensatto

Sector Director

Elizabeth O. Adu

Sector Managers

Enzo de Laurentiis

Roberto Tarallo

Task Managers

Tomás Socías

Manuel Vargas

Inter-American Development Bank


Roberto Vellutini

Manager, Country Department, Andean Group

Alicia Ritchie

Chief, Operations Procurement Office

Katharina Falkner-Olmedo

Chief, Institutional Capacity of State Division

Xavier Comas

Representative, Colombia Country Office

Rodrigo Parot

Chief of Operations, Colombia Country Office

Humberto Gobitz

Task Managers

Felix Prieto

Rodolfo Gastaldi

Eugenio Hillman

Teodoro Noel

Héctor Rabade

This report summarizes the findings and recommendations of a study of Colombia’s public sector financial management and procurement performance against internationally recognized good practice. The Ministry of Finance and Public Credit (MHCP) and the National Planning Department (DNP) coordinated this review with the Inter-American Development Bank and the World Bank.
This summary is supported by, and should be read in the context of, the two volumes comprising the study:

  • Colombia Public Financial Management Performance Report; and

  • Status of the Colombian Public Procurement System.



The Status and Challenges Ahead


  1. The Government of Colombia has undertaken a number of reforms in public budgeting, accounting, financial management and information systems, public procurement, internal control models, and government auditing. These reforms have resulted in a mature public financial management and procurement system that performs well on most areas, but that still needs to close some gaps in order to excel per international standards. Ensuring the sustainability and trajectory of the reforms is critical, given the impact of the current global economic downturn on the country’s finances and the need to intensify the efforts to create additional fiscal space to meet the objectives of the government’s economic development plans.

    1. Public Financial Management Achievements and Challenges

2. In summary, the comprehensiveness of the budget system and of the budget documentation is exemplary. Tools for horizontal and vertical fiscal risk monitoring, as well as public access to key fiscal information, are of generally high quality. Expenditure classification by functions of government is being gradually introduced but is not yet fully operational.

3. Budget planning, in terms of multi-year perspective and annual formulation, reflects a functioning policy-based system, even though legislative counterbalance is not fully effective. Execution suggests a largely credible budget, but payment arrears should be managed better.
4. Revenue controls, such as those for taxpayer assistance, registration, declaration and assessment, are fairly effective, even in light of a highly complex legislation. There are important concerns, however, on the quality of revenue reporting and the level of un-collected receivables. Records and controls on cash flows, balances and public debt support sound fiscal risk management and provide entities with predictability of funding to execute their budgets in an orderly fashion.
5. Arrangements for expenditure controls and stewardship in the use of public funds are comprehensive and operational. But internal control risks should be further reduced in general, specific targets for payroll audit coverage should be established, and internal audits should conform to pertinent professional standards.
6. With the timely and regular production of both budget execution reports and consolidated accrual-based financial statements, Colombia is ahead of many countries. That said, the reliability of certain components of financial information, as reflected in the large number of qualified audit opinions, needs to be addressed. Moreover, the intricate constitutional and legal framework has generated several instances of duplicate and sometimes inconsistent fiscal reporting.
7. Government external auditing is well institutionalized and brings important checks and balances through comprehensive and opportune integral audits. Still, the large compilation functions that the supreme audit institution is -atypically- charged with, could get in the way of an audit function fully compliant with professional standards. Interestingly, while legislative oversight over financial statements and audit reports is rather well structured, its practical effects are minimal.

    1. Public Procurement Achievements and Challenges

8. The government undertook during 2006 and 2007 a major reform and modernization program of its public procurement system. One of the first concrete results of these efforts is the enactment in 2007 and 2008 of a law and its associated regulatory decrees that modernize the old regulatory framework. There is consensus that Colombia’s updated regulatory framework is a major improvement that brings the Colombian system close to internationally accepted practices. Other significant achievements in the same period were the creation of CINCO (Comision Intersectorial de Contratación Pública) to coordinate and oversee procurement policy and regulation and the development of electronic information systems. The GOC is aware that much work is necessary to further the reforms and consolidate them to prevent backsliding and ensure the capture of their full benefits.

9. The new legal framework introduces significant innovations to meet more closely international practices and to promote efficiency and economy in procurement. For example, the framework establishes that: the method of procurement to be used is linked to the object to be procured and not to the value (which now is used mostly to define minor purchases); electronic tendering (reverse auctions) is now regulated; consultants are selected exclusively on the basis of quality; bidders are permitted to amend their bids for omissions or deficiencies in formalities in their tenders related to verification of “matters of fact;” and evaluation can now be made on the basis of life-cycle costs or least evaluated cost. The regulation allows free participation of national and foreign firms in all procurement on an equal footing. The new regulations require a much more detailed planning of each procurement as all the detailed studies are now part of the published information.

10. The government is facing important challenges going forward with the implementation of the reforms. The role of CINCO, the body responsible for policy formulation and coordination, needs to be strengthened and expanded. There is a need to develop further the regulatory framework by issuing manuals, instructions, forms of contract and tender documents for use by public agencies. All of that requires the support of an ambitious and effective dissemination to public and private operators and their training in the use and interpretation of the new instruments. The various procurement information systems require integration and unification, including the coordination with the financial management and budgetary systems. There is a need to set up a robust monitoring system for procurement that emphasizes good management and results and the creation of the associated incentives to modify the behaviors of public officials and private suppliers.

11. Because the regulation covers all public procurement including sub national governments (except for justified exceptional regimes for some public bodies), a major dissemination and training effort of public officials is needed. The same is true for private sector suppliers. The major challenge in implementing the reforms is transforming the mentality and behavior of the actors to operate within the new framework. For instance, the old regime favored the use of complex formulas for award of contracts that eliminated any incentives to prepare the best offer and favored attempts to hit the “magic” number. Consultants were selected based on price and therefore prepared proposals on that basis with less regard to quality. Public official have now the task of developing new and better economic and technical evaluation methods, as opposed to the mathematical formulae used in the past and will now have more discretion in the selection of consultants. Many are afraid of exercising that discretion (much risk aversion in the system) and it would take some time for the auditors to focus more on outcomes and risks than on processes and to accept as normal the discretion available to the purchasing agencies.

    1. The Sub-National Picture

12. As a unitary country, the national-level public financial management and procurement framework applies or is replicated in departments and municipalities. Even though the study was not focused on sub-national governments, important differences in effective implementation of the national framework are evident. While some departments and large cities, such as Bogotá and Medellín, seem to perform similarly -or in some cases even surpass- central government performance, other entities struggle.

13. Particular areas of opportunity in mid-size sub-national governments are:1

  • Integration between finance and planning institutions on budget management.

of budget modifications.

  • Periodic and timely budget execution controls and reporting.

  • Cash flow planning and monitoring and control of cash balances.

  • Central collection and processing of information of resources in cash and kind received

by frontline providers, particularly schools.

  • Integrated information systems for budget, treasury and accounting (affects all of the


  • Information systems for taxpayer services and tax administration.

  • Procurement planning and contract management.

  • Procurement databases for micro controls and macro statistical analyses. Compliance

with the public procurement oversight information system. Interfaces for publication


  • Controls over use of limited competition.

  • Standardization of procurement documents.

  • Risk-based approaches to internal and external audits, including procurement processes.

14. In small cities, conversely, the analysis should focus on whether certain sophisticated national government tools, such as accrual accounting, are effective. A simplified regime, based on straightforward but firm budget execution controls, complemented with citizen oversight mechanisms, may be advisable.


15. The Public Financial Management Performance Report (PFMPR) analyzes the performance of Colombia’s public financial management (PFM) institutions, systems and processes. It documents areas where performance is close to or follows international good practice, as well as opportunities to further enhance PFM contribution to the goals of strengthening fiscal discipline, enabling more efficient allocation of resources, increasing operational efficiency, and fostering transparency.

16. It is expected that the identified opportunities will strengthen further the Government of Colombia’s programs of continuous PFM improvement, as provided for under the National Development Plan pillar regarding A State at the Service of its Citizens: Efficient and Effective Government. The main challenges cited in the report could also be an important reference to future development plans and PFM reforms. Ensuring the sustainability and trajectory of PFM programs becomes even more critical in the context of public expenditure policies to deal with the current international economic crisis.
17. The study is based on the 28 high-level indicators and 69 individual dimensions that compose the PFM Performance Measurement Framework. 2 Each indicator seeks to measure performance of a key PFM element against a scale from A to D. The highest score is warranted for an individual indicator if the core PFM element meets the relevant objective in a complete, orderly, accurate, timely and coordinated way. The indicators therefore focus on the basic qualities of a PFM system, based on existing good international practices.

18. As shown above, about two thirds of the indicators scored B or higher, with no flat D ratings, a reflection of a mature PFM system that performs well on most areas, but that still needs to close some gaps in order to reach international standards. This conclusion is elaborated in the following specific sections.
19. PFM out-turns. The methodologies used in Colombia for projecting and monitoring budgeted revenues and expenditures, and the coordinated application of these methodologies, have increased the ability of the central government to maintain aggregate fiscal discipline as planned in the budget. The initial expenditure budget is also a predictable instrument for strategic allocation of public resources, with some room still to reduce the level of investment expenditure deviations.
20 An important feature of the budget information system is the recording of accrued expenditures; however, the lack of identification of payment arrears per se affects the quality of fiscal and budget documentation. Based on existing systems, relatively minor adjustments could be made to compile and reconcile subsidiary records of accounts payable with age profile classifications.

Main challenges and opportunities

  • Periodic generation and monitoring of reliable and complete data on the stock of payment arrears through the integrated financial management system.

21. Comprehensiveness and transparency. Fiscal reporting in Colombia has a large coverage, with minimal unreported central government operations. Nevertheless, from an efficiency and transparency point of view, special consideration should be paid to the monitoring -or restriction, when deemed necessary- of the many funds (earmarked revenues, special funds, funds managed by financial agents, etc.) whose execution follows especial procedures.

22. The budget documentation put forward for legislative and public consideration is comprehensive and meets most international good practices, albeit, its presentation could be improved through more detailed comparators between the budget and the ongoing and preceding years. Efforts have been made to bridge the existing “traditional” budget and execution information with international economic and functional classifications. The latter, however, is only used at an aggregate level during the formulation stage, representing an important departure from international practice.
23. Important elements of fiscal and budget information are put in the public domain on a timely basis. Increasing, but not yet complete, data on contract awards are also published. Conversely, the public ability to drill down, e.g. to resources available to primary service units, or customize reports for specific purposes is currently very limited. Publication of revenue transparency measures, such as tax expenditures and evasion measurements should also be encouraged
24. The fiscal responsibility framework and reporting systems provide for regular risk monitoring across vertical and horizontal levels of the public sector, with minor sub-national gaps. These are strong foundations to improve aggregate reporting, particularly of consolidated budget execution and sectoral classification of expenditures at the sub-national level.
Main challenges and opportunities

  • Formulation and execution of the budget on the basis of a functional and sub-functional classification consistent with international standards.

  • Consolidation of sub-national budget execution reports with sectoral categorization.

  • Periodic publication of: (i) full statistics on contract award methods; (ii) use of funds at the frontline service provider level in the education and health sectors; and (iii) tax expenditures and evasion estimates.

25. Budget planning and approval. From the executive’s perspective, the budget planning process in Colombia resembles international good practice through a number of technical instruments that integrate medium-term fiscal and sectoral policies, and reconcile them in the annual budget formulation process. Still, many investment decisions have weak links to their recurrent cost implications, reflecting a system that has traditionally separated investment and operational budgeting. Moreover, there is no clear connection between the public procurement planning and budgeting exercises. The ongoing efforts to overhaul the public investment and procurement systems should address these issues.

26. The budget formulation process itself follows an established procedural framework in an orderly and timely manner. As more emphasis is put on medium-term frameworks, the process could be enhanced by allowing earlier Cabinet involvement in the setting of aggregate allocations.

27. As for legislative participation, there is a set of sound procedures that in principle allow extensive scrutiny of the budget. In practice, however, the capacity for in-depth analyses is limited. Moreover, as is often the case in Latin American countries, the executive has large powers to modify the budget during its implementation, with congressional involvement required only in a few cases. The executive can also guarantee expenditures against future budgets.
Main challenges and opportunities

  • Consistent incorporation of recurrent cost implications in the selection of investments and the related medium term estimates.

  • Earlier approval of aggregate budget ceilings by the Cabinet.

  • In-depth legislative review of fiscal policies and medium term fiscal frameworks.

  • Setting of stricter limits on extent and nature of budget amendments by the executive.

28. Revenue controls. Tax administration in Colombia is undergoing a substantial modernization process, including the operation of information systems that allow massive data processing and reduce transaction costs for the taxpayer, thus facilitating compliance and assessment. Taxpayers have access to comprehensive tax information and to seemingly fair, albeit not fully independent, appeals systems. These advancements, however, are inevitably constrained by the extremely complex legal framework. Initiatives to bring simplicity and consolidation into the system should therefore be considered again.

29. Overall good performance is seen in the registration, declaration, and tax audit functions. Moreover, there is a clear trajectory towards consolidation of critical tools, such as the single tax registry, the taxpayer individual accounts, and the risk-based audit programs supported by advanced data mining and cross-checking methodologies. In terms of collection efforts, the operational agreements with the banking sector provide for an orderly inflow of tax revenue, although the collection floating period is significantly larger than the regional average. On the other hand, enforced collection of tax arrears is deficient, calling for specific actions to step up efforts to reduce the stock to more manageable levels.
30. Of significant relevance is the taking of strong measures to safeguard overall integrity and accuracy of revenue data, by integrating or reconciling the different accounting systems used by the tax administrator, ensuring consistency between the information from its accounting and statistical records, and guaranteeing timely recording of transactions.
Main challenges and opportunities

  • Overall simplification of the major taxes’ legal framework.

  • Significant increase of the average tax arrears collection ratio and reduction of the stock.

  • Complete and prompt reconciliation of tax assessments, collections and arrears, including accounting records and statistics.

  • Reduction of the period from tax collection to deposit in treasury accounts.

31. Cash and debt controls. The interconnected systems used in Colombia to project and monitor cash flows on a timely basis, and to provide executing entities with reasonable certainty on the availability of funding, follow international good practice. These tools, together with the transparent and selective use of budget restrictions during the year, contribute to an orderly budget execution.

32. Good management and control of the government’s cash position is exercised, on the basis of a treasury single account that captures most central government revenues. Still, a number of funds operate out of the common payment system, risking the generation of idle funds and additional transaction costs. In the context of SIIF’s development, future measures could be introduced to grant the treasury with further control of public sector bank account balances and their consolidation.
33. The quality of debt records and controls is considered high. Nonetheless, the regular public debt reports could be improved by introducing management-type information with more frequency and by reconciliating balances between different sources for data integrity purposes.
34. Expenditure controls. The comprehensive design of the internal control system, with a standard guiding model, is worth highlighting. Since the model was only recently implemented, its intended results are yet to be fully realized. It will be critical to continue monitoring effectiveness of the model and the internal control risk ratings.
35. Budget execution procedures, as automated by the integrated financial information system for the central government, adequately control commitment of expenditures and largely mitigate the risk of unauthorized or undocumented outflows. Still, the budget execution via transfers to trust funds and financial agents is a practice that, although not widespread, should be monitored and regulated closer.
36. Central government payroll controls also seem largely effective, but this assumption should be confirmed continuously through payroll-specific audits, targeting and documenting full coverage on a rolling three-year basis. The ongoing development of a human resource management system will be a good opportunity to strengthen further the linkages between individual records, personnel database and payroll.
37. The separate Public Procurement volume presents a comprehensive detailed assessment of that function. As far as this report is concerned, an overhaul of the complaints mechanism, increased use of open competition, more complete documentation of procedures, and better statistics are needed to enhance internal controls.
38. Significant progress has been made through the full operation of internal audit units across the central government. Based on this advancement, the government should now consider making recognized professional standards mandatory, and monitoring their effective application through quality control reviews and performance indicators. In that context, a common statistical system to monitor aggregate implementation of internal improvement plans could also be developed.
Main challenges and opportunities

  • Formal implementation of a system of annual payroll-specific audits, aiming at full coverage on a rolling three-year basis.

  • Development and implementation of mandatory internal audit professional standards.

  • Development and implementation of systems to track timeliness and effectiveness of actions on internal audit findings.

  • Stricter budget execution controls on transfers to trust funds and financial agents.

39. Accounting and reporting. The government accounting function in Colombia is well institutionalized and shows relevant advances, such as the comprehensive set of accrual-based government accounting standards, the ample coverage of entities and types of information, and the timely availability of in-year and annual budget execution reports and financial statements. Still, some controls, such as the effective follow-up of non-Treasury managed bank reconciliations, standing advances and similar accounts, could be improved.

40. The major concern in this area lies, though, on the reliability of certain components of budget reports and financial statements. Special attention should be paid to the overall timeliness and accuracy of revenue reporting, as well as to the several balance sheet issues that have led to a decreasing, but still significant, number of audit qualifications. Other relatively minor problems, such as some instances of noncompliance with timely reporting from individual entities, and the repeated reporting of expenditures under inter-agency agreements, should also be addressed. All this with the objective of safeguarding a comprehensive and effective oversight of the use of funds, and accordingly reducing the opportunity for operational efficiency breaches and fiscal risks.
41. Building upon the successful experience of financial data collection from health sector frontline service providers, a similar effort could be pursued in the education sector; and, while not directly addressed by this report, there is certainly a need to attend to the important efficiency and transparency obstacles associated with the flow of funds from the central government, passing through departments and municipalities, to hospitals and schools.
Main challenges and opportunities

  • Addressing of various issues that affect integrity of accounting and budget data, such as revenue accounting, some instances of noncompliance with timely reporting, recording of transfers between budget entities, and other issues that have led to audit qualifications.

  • Periodic generation and monitoring of reconciliation and clearance of balance sheet standing advances and similar accounts.

  • Periodic data collection and reliable reporting on resources received by service delivery units in the education sector.

42. External audit and scrutiny. Based on legislation that provides it with adequate independence and room to exercise its external audit function, the supreme audit office has made important progress through the development of generally sound government auditing standards and procedures. Worth mentioning are the internal control risk assessments, the integral approach to audits, the large coverage of audited entities, the comprehensive reporting, and the consequent improvement plans.

43. Some areas could still be further enhanced, especially if the auditor were not charged with some instances of reporting (compilation of budget and treasury, finances, and debt data) that are unusual of supreme audit institutions. A formal opinion on budget execution reports, similar to that on financial statements, is a first necessity; the timeliness of individual audit releases, through more upfront audit work, should also be enhanced to provide a stronger basis to the consolidated report; and the delayed implementation of improvement plans should be analyzed specifically, to determine whether the problems lie in execution or in improper identification of root causes and corrective actions.
44. On the legislative front, the comprehensive analysis of budgetary, financial, audit and other data is impressive. However, its effects are minimized by limited follow-up.
Main challenges and opportunities

  • Issuance by the supreme audit institution of an audit opinion on budget execution.

  • Analysis of audit observation recurrence problems. Revision of the proper identification of causes and effective corrective actions.

  • Stronger follow-up to the legislative resolutions on the annual budget and treasury accounts.

45. Fiscal reporting arrangements. There are various instances of duplicate, and sometimes inconsistent, reporting of fiscal position, public debt, financial assets, and budget execution. Granting that some data may need to be compiled differently for different users and purposes, the lack of reconciliations among reports can generate confusion and raise questions about data integrity. In line with international good practice, the supreme audit institution could concentrate on the independent audit and evaluation of fiscal reports, rather than on its compilation. As for the executive, opportunities to streamline and consolidate reporting among finance, planning, and accounting offices could be addressed. While this course of action would take some time due to legal, even constitutional considerations, in a shorter timeframe transparency would be served by firm reconciliation procedures that clearly explain how dissimilar use of sources of information and compilation procedures result in different final figures.

Main challenges and opportunities

  • Periodic reconciliation of fiscal data generated by different sources.

  • Simplification and clearer division of fiscal reporting responsibilities.

46. Prospects for reform. Colombia has shown a very good track record in the successful operationalization of a number of international good PFM practices. While mindful of the complex legal framework and division of responsibilities, there is sufficient capacity and institutional consolidation to address the few areas of opportunity identified in this report, most of which are consistent with the country’s reform trajectory. The performance measurement indicators documented in this report could be used by the government as the baseline for a monitoring and evaluation system to assess impact of PFM reforms over time.

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