The World Bank

FOR OFFICIAL USE ONLY

Report No: 40270-CL

PROJECT APPRAISAL DOCUMENT

O N A

PROPOSED L O A N

IN THE AMOUNT OF US$24.8 MILL ION

TO

THE REPUBLIC OF CHILE

FOR THE

SECOND PUBLIC EXPENDITURE MANAGEMENT PROJECT

August 3,2007

Poverty Reduction and Economic Management Argentina, Chile, Paraguay, Uruguay Country Management Unit Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective January 28,2007)

Currency Unit = Chilean Peso (Ch$) Ch$l = US$O.O0184 US$1 = Ch$544.8

FISCAL YEAR January1 - December31

ABBREVIATIONS AND ACRONYMS (Spanish in parenthesis)

ACHM

BIP

BGI

CAS CFAA CGR

CLAD

CORFO

CONICYT

CPAR CPS DIPRES

ECLAC

F C M

GDP GFSM ICT IMF I T I L LAC MCS OECD PIU PROFIM

Chilean Association o f Municipalities (Asociacidn Chilena de Municipalidades) Public Investment Database (Banco Integrado de Proyectos) Integrated Balanced Management (Balance de Gestion Integral) Country Assistance Strategy Country Financial Accountability Assessment Office o f the Comptroller General (Contraloria General de la Republica) Latin American Center for Administration for Development (Centro Latinoamericano de Administracidn para el Desarrollo) Corporation for Production Development (Corporacidn de Foment0 de la Produccidn) National Commission for Scientific and Technological Research (Comisidn Nacional de Investigacidn CientFca y Tecnoldgica) Country Procurement Assessment Report Country Partnership Strategy Budget Directorate in the Ministry o f Finance (Direccidn de Presupuesto) Economic Commission on Latin America and the Caribbean (Comisibn Econdmica sobre Latinoame'rica y el Caribe) Common Municipal Fund (Fondo Comun Municipal) Gross Domestic Product Government Finance Statistics Manual Information and Communication Technology International Monetary Fund Information Technology Infrastructure Library Latin America and the Caribbean Management Control System Organization for Economic Co-operation and Development Project Implementation Unit Municipal Development Projects

11

FOR OFFICIAL USE ONLY

ROSC SIAP

SIAPER

SIGFE

S I L S I N I M

SOA SUBDERE

(Programa de Fortalecimiento Institucional Municipal) Report on the Observance o f Standards and Codes Budget Administration System (Sistema de Administracidn de Presupuesto) Human Resources Management System for the Civ i l Service (Sistema de Informacidn y Control del Personal de la Administracidn del Estado) Integrated Financial Management System (Sistema de Informacidn para la Gestidn Financiera del Estado) Specific Investment Loan National System o f Municipal Indicators (Sistema Nacional de Indicadores Municipales) Services Oriented Architect Sub-secretariat for Regional Development and Administration (Subsecretaria de Desarrollo Regional y Administracidn)

Vice President: Pamela Cox Country Director: Pedro Alba

Sector Director: Ernest0 M a y Sector Manager: Nicholas P. Manning

Sector Leader: James Parks Task Team Leader: Roberto Panzardi

I I

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

CHILE Second Public Expenditure Management Project

CONTENTS Page

A . STRATEGIC CONTEXT AND RATIONALE ............................................................................... 1 1 . 2 . 3 .

Country and sector issues ................................................................................................................ 1

Rationale for Bank Involvement ...................................................................................................... 8

Higher level objectives to which the project contributes ................................................................. 9

B . PROJECT DESCRIPTION ............................................................................................................. 10

1 . 2 . 3 . 4 . 5 .

Lending instrument ........................................................................................................................ 10

Project development objective and key indicators ......................................................................... 10

Project components ........................................................................................................................ 11

Lessons learned and reflected in the project design ....................................................................... 17

Alternatives considered and reasons for rejection ......................................................................... 19

C . IMPLEMENTATION .......................................................................................................................... 20 1 . 2.

3 . 4 . Sustainability 23

5 . 6 .

Partnership arrangements ............................................................................................................... 20

Institutional and implementation arrangements ............................................................................. 20

Monitoring and evaluation o f outcomes/results ............................................................................. 22

Critical r i sks and possible controversial aspects ............................................................................ 23

.................................................................................................................................

Loan conditions and covenants ...................................................................................................... 25

D . APPRAISAL SUMMARY .................................................................................................................. 26

1 . Economic and financial analysis .................................................................................................... 26

2 . Technical ........................................................................................................................................ 27

3 . Fiduciary ............................ ........................................................................................................... 27

4 . Social ............................................................................................................................................. 27

5 . Environment ................................................................................................................................... 27

6 . Safeguard policies .......................................................................................................................... 27

7 . Policy Exceptions and Readiness ................................................................................................... 28

Annex 1: Country and Sector o r Program Background .................................................................. 29

Annex 2:

Annex 3:

Major Related Projects Financed by the Bank and/or other Agencies .......................... 36

Results Framework and Monitoring .................................................................................. 39

iv

Annex 4:

Annex 5:

Annex 6:

Annex 7:

Annex 8:

Annex 9:

Annex 10:

Annex 11 :

Annex 12:

Annex 13:

Annex 14:

Annex 15:

Detailed Project Description ............................................................................................... 51

Project Costs ........................................................................................................................ 63

Implementation Arrangements .......................................................................................... 65

Financial Management and Disbursement Arrangements .............................................. 68

Procurement Arrangements ............................................................................................... 73

Economic and Financial Analysis ...................................................................................... 83

Safeguard Policy Issues ....................................................................................................... 84

Project Processing ................................................................................................................ 85

Documents in the Project Fi le ............................................................................................. 86

Statement of Loans and Credits ......................................................................................... 88

Country at a Glance ............................................................................................................ 89

Map - IBRD33386 ................................................................................................................ 91

V

CHILE

Source Borrower INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

SECOND PUBLIC EXPENDITURE MANAGEMENT

Local Foreign Total 21.8 0.00 21.8 0.00 24.8 24.8

PROJECT APPRAISAL DOCUMENT

L A T I N AMERICA AND CARIBBEAN

LCSPS

Total:

Date: August 3, 2007 Country Director: Pedro Alba Sector Director: Emesto May Sector Manager: Nicholas P.Manning

Team Leader: Roberto 0. Panzardi Sectors: Central government administration (70%); Information technology (30%) Themes: Public expenditure, financial management and procurement (P);Debt management and fiscal sustainability (P);Decentralization (S) Environmental screening category: Not Required

Project ID: P103441

Lending Instrument: Technical Assistance Loan

21.8 24.8 46.6

Project Financing Data [XI Loan [ ]Credit [ ] Grant [ ]Guarantee [ ]Other:

Borrower: REPUBLIC OF CHILE

Responsible Agency: Ministry o f Finance Calle Teatinos 120 Piso 12 Santiago, Chile Tel: (56) 2 473-25 17 mpv@dipres. c l

Estimated disbursements (Bank FY/US$m) I 2008 I 2009 I 2010 I 2011 I 2012 I 0 0 0 0

Project implementation period: October 1,2007 E1 Expected effectiveness date: September 28,2007 ExDected closing: date: December 31.2012

[]Yes [ X I N o

[ ]Yes [XINO

Does the project depart from the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? I s approval for any policy exception sought from the Board?

[ ]Yes [ IN0 [ ]Yes [ IN0 []Yes [ X ] N o

rv,v,, , hT,

Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation?

LAJ I C 3 J I Y U Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3

The overall development objective would be to increase the efficiency o f operations regarding financial management, budget formulation, and budget execution, and the transparency o f public expenditure management at the central and municipal level through the implementation o f an updated, fbnctionally enhanced and expanded financial administration system (SIGFE).

The Project Performance Indicators are:

Improve Efficiency of the Public Financial Management Administration: Time required for aggregating the financial data o f the central government i s to be reduced from 30 to 8 days. Increase EfJiciency of Operations regarding Budget Formulation and Execution: Time required to update SIGFE (execution) with the data generated by the SIAP system (formulation and administration) i s to be reduced from one week to one day. Improve Efficiency of Budget Execution: Processing capacity o f the SIGFE transaction module i s to be increased from 95,000 to 200,000 financial transactions per day, with a response time o f 8 seconds per transaction measured at the portal. Improve Efficiency of Financial Management Operations and Improve Effectiveness of Fiscal Control: Time for processing transactions within the Central Government Entities so that the information i s available in SIGFE i s to be reduced from 20 days to less than 3 days. Increase Transparency of Municipal Financial Information: Financial information and expenditures on at least 100 municipalities i s to be made available in the Municipal Financial Information System, which can aggregate the financial information o f a l l (presently 345) municipalities. Increase EfJiciency of Fiscal Monitoring of Municipal Finances: Information on aggregate municipal finances i s to be made available at the central level within 30 days instead o f presently up to 180 days. Increase Effectiveness of Budget Cycle Indicators: All monitoring indicators wil l be aligned

with the financial indicators and integrated in the budget formulation and execution. The new methodology wil l be adopted by al l Ministries covered by the M C S and wil l be integrated in the budget by 201 1.

0

Project description: Re$ PAD B.3, Technical Annex 4

Component 1 - Upgrading and Extending the Financial Information System to the Central Government Entities (US$31.1 million of which US$l7.1 million would be financed by the Bank loan):

This component would provide technical assistance, training, design and development o f software and equipment as wel l a procurement o f software licenses to upgrade SIGFE and install it in Central Government Entities. In particular, i t would support the further development and consolidation o f SIGFE by: (i) upgrading and optimizing the I C T and technical design o f SIGFE modules; (ii) improving i t s functionality, interoperability and reporting; and, (iii) implementing data standards issued by Normative Entities in al l agencies using the homologated systems.

Component 2: Improvement of Budget Procedures and Mechanisms o f the Management Control System (US$4.7 million of which US$2.8 million would be financed by the Bank loan):

This component would focus on enhancing the quality o f public expenditures by strengthening the Management Control System (MCS) and integrating them into the Budget Cycle. Specifically, this component would focus on developing and implementing: (i) a new conceptual model for the Budget Cycle, linking the budget classification and the MCS; (ii) a M C S information system; and (iii) a new version o f the budget formulation system used by DIPRES (SIAP). Innovative methods o f budget formulation would be developed for selected pol icy modules and the capacity o f DIPRES to undertake results-based monitoring and evaluation would be strengthened. This component consists o f two sub-components.

Component 3 - Strengthening Financial Administration at the Municipal Level (US$7.5 million of which US$4.5 million would be financed by the Bank loan):

This component would focus on: (i) improving the availability o f information on municipal budgets and on financial transfers; (ii) strengthening financial administration at the municipal level; (iii) Strengthening the capacity o f selected Municipalities to operate financial administration subsystems and the Municipal Financial Information System; and (iv) improving the effective use o f central government transfers to municipalities, for example within the Municipal Fund (Fond0 Comzin Municipal). The Office o f the Comptroller General in partnership with the Sub-secretariat for Regional Development within the Ministry o f the [nterior (Subsecretaria de Desarrollo Regional y Administracidn - SUBDERE) would implement this component. Finance would be provided for technical assistance, supplies and training within two sub-components.

Component 4 - Project Management (US$3.4 million of which US$0.4 million would be Gnanced bv the Bank loan):

This component would cover operating expenses, with the Borrower contributing US$3 .O mil l ion o f counterpart funds, related to the fol lowing activities: (i) Provision o f technical assistance to Central Government Entities as part o f the implementation o f SIFGE or SIGFE-compatible financial administration systems; (ii) Strengthening the Government’s capacity to monitor and supervise the overall implementation o f the Project. Which safeguard policies are triggered, if any? Re$ PAD D.6, Technical Annex 10 This project triggers none o f the Bank’s safeguard policies. Significant, non-standard conditions, if any: None

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Country Issues

1. For almost three decades, Chile has been firmly committed to economic liberalization and free trade. Chile has had, by far, the most robust economic performance in Lat in America and it figures prominently among the list o f winners from globalization. Chile has averaged an annual per capita growth rate o f 4.1 percent over the fifteen years since the return to democracy in 1990. Due to the financial crises o f the late 1990s, growth between 1998 and 2003 decreased to an average o f only 1.3 percent per year. However Chile has recovered strongly over the past four years, with growth accelerating from 2-3 percent in 2002 to above 6 percent in each o f 2004 and 2005. Real growth fe l l to 4 percent in 2006. This deceleration i s attributable to the concerted anti-cyclical policy efforts o f the Government, the non-copper trade effects o f an appreciating peso, higher o i l prices and the natural slowing associated with an economy exhausting the “easy- wins” from earlier reforms. Several temporary factors, such as the copper strike in mid 2006, also contributed to slower growth during the year and the possibility o f similar labor actions cannot be discounted in the fbture. Chile’s economic success reflects past economic reforms, strong public institutions and the maintenance o f a solid macro-economic pol icy framework supported by high investment and savings rates, a strong financial sector with an autonomous central bank, stable fiscal management, and prudent monetary policy. Chile’s longstanding commitment to trade liberalization i s confirmed by recently signed free-trade agreements, such as those with the U.S. and China, together with numerous other trade deals signed with other nations and economic blocks.

2. Robust economic growth has helped reduce poverty and improve living conditions for the poor. Since 1990, poverty has been cut by more than half, from 40 percent to 13.7 percent in 2006. Likewise, social indicators such as enrollment in primary education, youth literacy, infant mortality and l i fe expectancy, also improved substantially as the result o f targeted social programs and strong economic growth, reaching levels close to those o f industrialized countries. However, despite advances in poverty reduction, Chile s t i l l faces serious challenges in the fight against poverty and income inequality. The poor st i l l account for approximately 2.2 mi l l ion o f the population and they remain highly vulnerable to adverse income shocks. Levels o f indigent poverty have fallen in recent years from 4.7 percent in 2003 to 3.2 percent in 2006. Income inequality i s also considerable, as shown by a gini-coefficient o f 0.54. The poorest tenth percentile o f the population accounts for just 1.2 percent o f overall consumption, compared to 47 percent for the wealthiest one. Moreover, economic growth has exacerbated regional differences. The copper-endowed northern region and the central valley are more prosperous than the rest o f the country and there are strong differences between living conditions in rural and urban areas.

3. The challenge now facing Chile i s to continue sustaining high levels o f Gross Domestic Product (GDP) growth and employment, while, at the same time, ensuring that a l l segments o f the population partake in the benefits o f economic prosperity. All four center-left administrations that have governed Chile since 1990, including the present administration o f Michel le Bachelet, have been firmly committed to seeking more balanced development without hampering economic growth. In this regard, the Bachelet administration campaigned on, and i s n o w

1

implementing, policies focused on the goal o f ‘Growth with Equity o f Opportunity’. The private sector continues to be seen as the primary driver o f employment and production, with the public sector facilitating and creating opportunities for private participation by maintaining a stable macro-economic framework as well as trade openness. At the same time, the new administration has pledged to improve a broad range o f social services including public health, education, social protection for the elderly, and an expansion o f opportunities for women to participate in economic and social progress.

4. Public sector modernization continues to be a top priority in Chile’s development agenda. President Bachelet recently announced her Transparency and Probity Agenda, aimed at further enhancing the probity, transparency, efficiency and modernization o f Chile’s public sector. With state modernization as one the central pillars, the transparency agenda will focus on enhancing management oversight to ensure not only accountability - that is, an appropriate use o f public funds - but also high standards o f public services. In addition, financial management would be increasingly decentralized. A system o f incentives and sanctions i s to be introduced so that municipalities can have more autonomy in financial management, based on a system o f r isk classification. Likewise, steps wil l be taken to improve the timely and accurate reporting o f municipal financial information

5. Enhancing municipal financial management i s o f particular importance given their prominent role in the provision o f services under the strategy o f decentralization. Over the past two decades, municipalities have become increasingly autonomous, while assuming responsibility for a wide range o f services and the management o f increased financial resources. N o t only are they responsible for traditional urban services - such as the paving o f urban and rural feeder roads, solid waste collection and disposal, public transportation, drainage, street lighting, parks and recreation, and public cemeteries - but they have also been delegated the responsibility for primary health care and basic (primary and secondary) education, as wel l as for administering a number o f poverty-relief programs. Municipal public education accounts for 57 and 49 percent o f the country’s enrollment in basic and intermediate education respectively. Municipal education i s even more important for the poor, providing education for 68 percent o f the poorest quintile. Likewise, 80 percent o f the overall population receives health care in municipal health centers. To match the newly assigned responsibilities, a larger mass o f funds is now being transferred to municipalities. The Common Municipal Fund (FCM), Chile’s largest source o f municipal finance has increased by a multiple o f 3.8 in real terms since i t s inception in 1982 and by a multiple o f 2.6 since 1990. Including both municipal budgets as wel l as transfers from the central government for municipal health, education and infrastructure, total municipal spending accounts for 14.2 percent o f the country’s total public expenditures. As the country moves ahead to even greater decentralization, increased autonomy and responsibilities must be accompanied by enhanced performance and accountability.

Sector Issues

6. Public sector modernization to increase efficiency in public sector management, reduce wasteful public spending, and enhance the targeting o f public services and social programs continues to be a central priori ty for Chile. Moreover, i t is widely recognized that Chile’s strong public institutions have been a key factor in the country’s economic success. A wide range o f governance indicators show that Chile ranks highest in Latin America and better than some

2

countries o f the Organization for Economic Co-operation and Development (OECD). Specifically, Chile stands out as a highly competitive country, ranking 23 out o f 117 countries in the 2005 Wor ld Economic Forum’s Global Competitiveness Report, far ahead o f the rest o f Lat in America. Similarly, Chile gets the top Lat in American ranking in the World Bank’s Doing Business in 2007. I t ranks 28th out o f 175 countries in terms o f ‘ease o f doing business,’ better than Spain and France. Out o f 163 countries assessed by the corruption perception index o f Transparency International in 2006, Chile was ranked 20 out o f out o f 158 countries, together with Belgium and the United States. The soundness o f Chile’s institutions and the rule o f law have been vital in instilling foreign investor confidence, thereby ensuring a steady f low o f foreign direct investment as wel l as access to international financial markets.

Previous Situation (Pre-SIGFE) Financial management systems were overly decentralized and inadequately integrated.

7. The modernization o f public expenditure management has been one o f the central pillars o f state reform in Chile. Although Chile’s budget procedures have been effective in yielding the fiscal surpluses critical to macroeconomic stability, by the f i rs t ha l f o f the 1990’s they were identified as an obstacle to the efficient allocation o f public resources. As opposed to more modem budget systems, Chile’s budget was characterized by a narrow focus o n controlling expenditures rather than on promoting the efficient and effective use o f resources, assessing the results o f spending, and hl ly accounting for the economic costs incurred. As a result o f a hierarchical structure with the Ministry o f Finance at the apex, l ine entities lacked financial and management sk i l ls and played only a minor role in planning and executing their operations. In addition, a lack o f adequate and t imely information together with insufficient capacity for planning and evaluation undermined service delivery. Finally, the legislature and the public saw the budget process in terms o f haggling about incremental annual changes in resource allocations rather than an opportunity for more informed debate o n strategic goals and trade-offs.

Current Situation (Post-SIGFE) SIGFE i s n o w operational in 349 out o f the 39 1 entities within the central government (equivalent to 90 percent coverage within the central government).

3

Previous Situation @re-SIGFE)

Financial management systems were unable to provide real time data and adequate information for performance monitoring.

The formulation and supervision o f macroeconomic policy and public investment suffered from organizational overlaps, gaps in information, and insufficient coordination especially between economic and social sector ministries and on inter-temporal decisions.

There was no modem human resource management information system linked to financial management.

There was no modern procurement system linked to financial management.

The financial and human resources units in public entities were weak.

The government lacked a broadly disseminated and robust system to evaluate budget execution.

Current Situation (Post-SIGFE) There are approximately 7,000 active users o f the system, who, on a typical day, use it to make more than 80,000 transactions. A t the sector level, information on budget execution i s available on the Internet in real time. Aggregated information on budget execution across the board i s made available to Congress and to the public with a lag o f only 30 days. Aggregated information from SIGFE i s being used increasingly to support not only reporting requirements but also decision making by various government entities, including the Ministry o f Finance, sector ministries and other government entities. The process o f implementing SIGFE has encouraged coordination between key government entities, particularly DPRES and CGR. For example, the CGR performed an overall evaluation o f SIGFE to identify problems encountered by users and to provide suggestions on how to resolve them. The development o f a Human Resources Information and Management System for the Civi l Service (Sistema de Informacidn y Administracidn de Personal-SIAPER) also received Bank support under the Public Expenditure Management Project. Although there have been some delays, i t i s anticipated that the system will be implemented in 20 institutions on a pilot basis by the end o f 2007. When completed, SIAPER will be fully integrated with SIGFE. SIGFE has been effectively linked to the newly implemented electronic system o f public procurement (ChileCompra) and to the data bank o f public sector investment projects. The implementation o f SIGFE has gone hand-in- hand with extensive technical support for entities within the central government. In addition to providing information and communication technology (ICT) equipment, SIGFE has been supported by an extensive training program, reaching over 9,000 public managers and government officials. The Evaluation Division o f DIPRES has developed B system o f program evaluation with qualitative and quantitative program indicators based on information from SIGFE. Program evaluations are now operational in 180 public sector institutions.

4

9. The more recent Reports on the Observance of Standards and Codes (ROSC) o f the International Monetary Fund provides an assessment o f fiscal transparency in Chile (International Monetary Fund - IMF 2003, 2005). I t reveals high level o f fiscal transparency in Chile, and documents the rapid progress made in recent years to close remaining gaps. In particular, the reports point to the Government’s success in constructing and disseminating a very clear view o f i t s objectives and targets, both at the macro level and for individual budget programs. According to the IMF report, the budget clearly articulates government priorities and there are well-developed tools for evaluating budget performance. In addition, Chile has completed the f i rs t stage o f adapting i t s fiscal statistics to the IMF’s Government Finance Statistics Manual (GFSM). The authorities also reformed the budgetary classification and introduced a new functional classification o f expenditures in l ine with the GFSM. In addition, the report points to the importance o f SIGFE in facilitating public financial management, addressing data gaps (e.g., o n arrears), as wel l as a reconciling fiscal and monetary accounts (IMF 2003, 2005).

10. Notwithstanding these advances, Chilean authorities are fully committed to further enhancing public expenditure management to help achieve s t i l l greater transparency, more efficient resource management, and more effective financial planning. International experience has shown that these objectives require continuous modernization in order to consolidate and deepen institutional reforms. Public-sector modernization should be regarded as a process o f progressive advances in basic management capabilities rather than as a one-time intervention. In that respect, there s t i l l remain challenges to be addressed as Chile continues to improve its public expenditure management.

11. Further consolidation of SIGFE i s needed: SIGFE faces a number o f technical challenges to process large numbers o f financial transactions more quickly and to extend i t s coverage to al l public entities. There i s a need to update the current technology o f SIGFE, to ensure i t s scalability and adaptability as wel l as its interoperability with other systems. There i s also a need to automate the core modules o f SIGFE, including the transaction module that records payments and receipts, the aggregation module that consolidates financial information, and the configuration module that enables the initial loading and subsequent changes o f the national budget, the chart o f accounts and other institutional or sector classifications. In addition, SIGFE has to be able to operate with other institutional or market-developed systems to comply with the Circular Conjunta CGR and DIPRES No. 646/45880 that requires that standardized institutional operational systems be certified. Furthermore, since DIPRES manages the Budget Administration System (SIAP), which is used for budget formulation and administration, the S I A P and the SIGFE systems need to be linked automatically to eliminate manual errors. It is equally important is to ensure that SIGFE i s institutionally sustainable and that the SIGFE team be mainstreamed into the governmental structure. Once SIGFE is fully adopted by al l l ine entities, the Ministry o f Finance will be able to further decentralize decisions for the allocation o f resources and wil l receive financial information to monitor and control the use o f public resources. Aggregated financial information will not only allow Congress and the public at large to be better informed about the status o f budget execution, i t wil l also help the budget decision making process by improved reporting, transparency and trust between government entities, including the Ministry o f Finance, Comptroller General Off ice and Congress.

5

12. Treasury functions can be improved: One particular area o f concern i s treasury operations, which are highly decentralized. Monthly cash allotments are transferred to ministries and entities and deposited in non-interest bearing accounts. Funds are deposited in more than 600 entities and approximately 7,000 accounts. A preliminary evaluation indicates that: (i) the Treasury has l imited capacity and there i s l i t t le interconnection between Treasury systems and SIGFE, (ii) most monthly and annual tax declarations o f individuals are handled manually (approximately 80 percent o f 1,000,000 tax declarations are processed manually); (iii) the accounting and budget norms are antiquated; (iv) the procedures and systems in place produce poor records and unreliable information on revenues and expenditures; (v) there are significant delays o f up to 20 days in the preparation o f monthly revenue reports; (vi) information regarding the administration o f financial assets (activos y pasivos Jinancieros), including debt instruments i s poor; (vii) inconsistencies between reports prepared by the Internal Revenue Services and the Treasury are reconciled manually so that monthly revenue reports are unreliable. Most o f these issues could be fixed with appropriate cash management devices such as a single electronic account and updated systems. They could be introduced at minimum cost without compromising financial decentralization.

13. The further integration of Management, Control and Evaluation System (MCS) into the Budget Cycle. As part o f a successful program o f public sector modernization, Chile has established a highly regarded system aimed at enhancing effectiveness and efficiency in the management and control o f public expenditures. The system encompasses management and control as wel l as ex-post monitoring and evaluation. Chile i s practically the only country in the region, which has succeeded in developing a M C S that f i l ly encompasses budget formulation, approval, execution, and monitoring and evaluation, along with mechanisms to provide feedback throughout the budget cycle. Furthermore, the methodologies and systems provide timely and reliable information, which, in turn, enable resources to be allocated o n the basis o f pol icy priorities. Some o f the tools are: (i) Strategic Definitions; (ii) the Evaluation Program o f Government Projects (PERG); (iii) Comprehensive Management Reports; (iv) the Government Competitive Fund; and, (v) Indicators and Performance Goals included in the budget to enhance the quality o f discussion about government programs among l ine entities, the Ministry o f Finance and Congress. These advances prepared the ground for the Structural Surplus Rule (Regla de Superavit EstructuraZ). The challenge ahead i s to integrate the systems developed by DPRES, so that budget classifications and the M C S classifications are effectively linked. That will enable the use o f financial and capital cost information to enhance monitoring and evaluation, to move forward an agenda to introduce an accrual accounting system and a better- integrated budget cycle.

14. SIGFE still does not cover all Central Government Entities (CGE): The expansion o f SIGFE since i t s inception in 2002 has been remarkable. Currently, SIGFE’s transaction module, which records budget and accounting data, commitments, and cash transactions, is now operational in 349 out o f the 391 entities within the CGE (equivalent to 90 percent coverage within the central government). This includes the totality o f the health sector with 192 public hospitals. Overall, there are close to 7,000 registered users in 1,3 13 financial management units (Unidades de Administracidn Financiera - U D A F s ) . They handle budget, accounting, and cash management operations using the standardized norms, procedures, and information software defined by SIGFE. However, there are st i l l 38 entities within the central government that do not

6

yet operate under SIGFE. Some o f these entities, such as the Treasury, do not have their own systems. Others, such as Public Minister and the Ministry o f Public Works, have their own financial management system and their financial records need to be standardized to allow them to be integrated within SIGFE. That is a challenging task.

15. The goal o f the Government project i s to implement SIGFE in al l Government entities, including Police, Armed Forces and Municipalities. This Government project wil l be financed through: (i) allocations made in the Chilean budget, and (ii) the Second Public Expenditure Management Project (SIGFE 11) - the proposed Bank operation - including Bank and counterpart fbnding. The Bank project does not finance activities within the Armed Forces or the Police.

16. Municipalities differ greatly in the quality of their financial administration: The weak financial administration o f many municipalities poses a serious challenge. They are being given greater responsible for the provision o f services and, consequently, they administer a larger share o f public expenditures. In general, management systems for controlling budgets and expenditures are inadequate. According to the results f i o m a 2005 survey o f the information and communication technology (ICT) infrastructure, roughly 25 percent o f the municipalities lack a treasury module, 17 percent do not have public accounting, and 68 percent do not have a budgetary planning and control system. O f those that have such systems, approximately 40 percent are not interconnected with the tax administration. Weaknesses in financial administration at the municipal level reflect not only a lack o f modern management tools, but also processes and practices that are not transparent and result in the inefficient allocation o f public resources. Municipal resources are allocated by elected officials and are based largely on perceptions and non-technical criteria. A lack o f understanding often leads to a ‘gauging’ o f fbture revenues, artificially inflating the budget and often generating deficits - usually covert ones. Technical capacity i s also weak, as there is very l i t t le training at the municipal level. On average, less than 2 percent o f municipal budget staff a year i s given training and i t i s usually in areas others than financial management.

17. Lack of timely financial information at the municipal level: Currently, there i s a lack o f aggregate financial data at the municipal level. Although municipalities report financial information to the CGR periodically as mandated by law, the logistics are cumbersome and inefficient, both for the CGR and for the municipalities themselves. Approximately one-third o f the municipalities provide their information using electronic formats Vorrnulario plano). The other two-thirds rely o n hard copies, which are later entered manually into the CGR database. Due to the complex logistics, there are substantial delays in processing the information and making i t available. For example, the 2005 Financial Administration Report (Informe de Gestidn Financiera del Estado) that i s published every March o f the fol lowing year by the CGR showed that only 48 percent o f municipalities had reported financial data corresponding to December 2005. In addition, a l l the available information relates to actual revenues and expenditures. That does not allow the central government to determine whether municipal budgets and their revenue forecasts are reasonable. Financial information collected through the National System o f Municipal Indicators (Sistema Nacional de Indicadores Municipales - SINIM) is also backward looking on an annual basis. The lack o f timely municipal financial information hinders the ability o f the central government to effectively take the pulse o f municipal finances and to detect early the prospective fiscal problems o f individual municipalities. In addition, there are loopholes in

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the information system that caused municipal revenues to be under-reported, particularly those revenues that are to be shared with other municipalities through the FCM. It is estimated that approximately US$20 mi l l ion o f municipal revenues go unreported each year.

18. The state of municipal finances: The analysis o f aggregate municipal accounts for the period 2000-2005 reveals that, for Chile as a whole, municipal finances are strong. In general, this analysis o f municipal finances shows no deficits, a robust growth o f own-source revenues, as wel l as sound spending patterns for the municipal sector, with approximately equal spending on investment and o n personnel. However, upon closer examination, a more complex picture begins to emerge. Although municipal fiscal performance seems robust in the aggregate, there were a considerable number o f municipalities with a current-revenue deficit in 2005. Whi le only 10 percent o f municipalities have a budget deficit, 90 percent o f them experience cash f low problems in the course o f the fiscal year. Municipalities are not permitted to borrow, according to the IMF’s Fiscal ROSC, but there seem to be cases o f ad hoc financing through arrears. Specifically, there are substantial levels o f municipal floating debt - estimated at US$ l50 mi l l ion - much o f i t with private providers o f urban services, such as street cleaning and street lighting. Likewise, there are substantial arrears in contributions to health insurance and pensions for municipal teachers, estimated to amount to more than US$50 mil l ion. When needing cash, municipalities frequently sell some o f their assets, such as buildings or equipment, and then ‘lease’ them back, regardless o f the economic rationale. The Bachelet administration has recently announced i t s intention to give municipalities more financial autonomy, including more flexibility in contracting debt. To that effect, a municipal credit rating system i s being considered.

2. Rationale for Bank Involvement

19. The Bank i s wel l placed to support Chile as it continues to consolidate i t s financial administration system within the central administration and expand it to the municipal level. The following factors justify the Bank’s continued involvement:

(i) The Bank has already established a very effective working relationship with the Chilean authorities within the context o f the ongoing Public Expenditure Management Project. The Government has indicated i t s satisfaction with the broad international experience that the Bank has been able to bring to this cooperative endeavor.

i) As indicated above, the implementation o f SIFGE has already yielded significant benefits, including enhanced fiscal transparency, robust institution strengthening, improved inter-agency coordination, and enhanced financial planning. The further consolidation and expansion o f SIGFE wil l continue to strengthen Chile’s public expenditure management, thus ensuring increased efficiency and transparency in the allocation and use o f public resources. Moreover, by strengthening financial management at the municipal level, the Project will help improve the effective utilization o f municipal resources while promoting greater accountability.

(iii) With extensive experience in the Chile’s municipal sector, the Bank i s well positioned to help the Government extend its public expenditure modernization agenda to municipalities. The Bank has played an active role supporting Chile’s decentralization

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efforts since the reestablishment o f democratic rule. The Chile: Sub-National Government Finance study (Report No. 10583; October 13, 1992) outlined a sector strategy to support improvements in sub-national government finances. Subsequently, the First and Second Municipal Development Projects (Programa de Fortalecimiento Institucional Municipal; PROFIM-I and 11; Loans No. 3668-CH and 4429-CL) supported the Government’s policies for gradual decentralization and for strengthening and modernizing municipal governments. Particularly relevant to this project was the Bank’s experience in supporting the development o f a National System o f Municipal Indicators (SINIM), which received Bank financing under the two municipal operations.

One o f the Bank’s assets i s i t s ability work across entities within the central administration and at various levels o f government - i.e., central government and municipalities - which will help foster the coordination needed for the successfbl implementation o f the next phase o f financial management modernization.

The Project is f i l ly consistent with the Bank’s overall strategy o f assistance to Chile. Specifically, the Project directly supports a strategic objective o f the Country Partnership Strategy Report No. 38691-CL, April 24, 2007), which aims at accelerating sustainable growth by, inter alia, strengthening public sector management. Likewise, the Project’s objectives are in l ine with the findings o f the latest Development Pol icy Review (Report No. 33501-CL; June 2006), which concluded that the utilization o f revenues and transfers could be improved by giving more discretion to municipalities along with greater accountability, as well as by strengthening institutional capabilities at the local level in preparation for further decentralization. The Project i s also consistent with the findings o f a study undertaken by the Bank o n a fee-for-service basis, which evaluated the effectiveness o f the Government’s own system o f program evaluation (Report No. 34589- CL, December 30, 2005). In addition, Project wil l generate synergies with other components o f the Bank’s analytic work, including a Country Procurement Assessment Report (CPAR) and fol low up o n the Country Financial Accountability Assessment (CFAA, Report No. 32630-CL June 27,2005)

3. Higher level objectives to which the project contributes

20. The project would improve public expenditure management by furnishing Congress and the Executive with more effective tools for budget formulation and budget execution. Better public expenditure management would, in turn, ensure increased efficiency and transparency in the allocation and use o f public resources. Congress, the Executive and the public at large would have access to financial information that i s more accurate, timelier and more complete, thereby supporting the Transparency and Probity Agenda o f the Bachelet administration as well as the objectives o f the World Bank Country Partnership Strategy (CPS) for 2007-2010. The expansion and strengthening o f SIGFE is one o f the Government’s key initiatives incorporated in the 2007 Budget law.

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B. PROJECT DESCRIPTION

1. Lending instrument

21. (SIL) to support technical assistance during FY 2008-2012.

2. Project development objective and key indicators

22. The overall development objective would be to increase the efficiency o f operations regarding financial management, budget formulation, and budget execution, and the transparency o f public expenditure management at the central and municipal level through the implementation o f an updated, hnct ional ly enhanced and expanded financial administration system (SIGFE).

The Government o f Chile has requested a US$24.8 mi l l ion Specific Investment Loan

The indicators for the aforementioned PDO outcomes would be as follows:

Improve EfJiciency of the Public Financial Management Administration: Time required for aggregating the financial data o f the central government i s to be reduced from 30 to 8 days. Increase Efficiency of Operations regarding Budget Formulation and Execution: Time required to update SIGFE (execution) with the data generated by the SIAP system (formulation and administration) i s to be reduced from one week to one day. Improve Efficiency of Budget Execution: Processing capacity o f the SIGFE transaction module is to be increased from 95,000 to 200,000 financial transactions per day, with a response time o f 8 seconds per transaction measured at the portal. Improve Efficiency of Financial Management Operations and Improve Effectiveness of Fiscal Control: Time for processing transactions within the Central Government Entities so that the information i s available in SIGFE is to be reduced f rom 20 days to less than 3 days. Increase Transparency of Municipal Financial Information: Financial information and expenditures o n at least 100 municipalities i s to be made available in the Municipal Financial Information System, which can aggregate the financial information o f a l l (presently 345) municipalities. Increase EfJiciency of Fiscal Monitoring of Municipal Finances: Information on aggregate municipal finances i s to be made available at the central level within 30 days instead o f presently up to 180 days. Increase Effectiveness of Budget Cycle Indicators: All monitoring indicators wil l be aligned with the financial indicators and integrated in the budget formulation and execution. The new methodology will be adopted by al l Ministries covered by the M C S and wil l be integrated in the budget by 201 1.

The PDO would be achieved through upgrading and expanding the financial administration system (SIGFE) and by developing and implementing a new municipal financial information system. The new SIGFE system for Central Government Entities would adopted by al l CGE. I t would be compatible with other systems used by government entities and levels o f government not adopting the upgraded SIGFE system for significant technical reasons. On the municipal level the project would strengthen the financial administration capacity and on

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the central level a new municipal financial information system would be developed and implemented that would be capable o f aggregating information from al l municipalities.

Intermediate outcome indicators would be as follows:

Improve Efficiency of Public Financial Management: SIGFE would be upgraded by enhancing functionality and increased usability as wel l as the upgrading i t s technological platform, which wil l reduce processing time. Improve Efficiency of Budget Execution: SIGFE would be upgraded and technically enhance the link with SIAP. Linking both systems will ensure the consistency o f budget data, and wil l improve the updating o f the systems in case o f changes if necessary. Improve EfJiciency of Financial Management Operations and Improve Effectiveness of Fiscal Control: The upgraded and expanded system wil l allow users to monitor and execute transactions through a single operation in real time. At present, transactions must fol low a number o f steps including: verify the budget approval, confirm funds allocation, validate account balances, assign invoice numbers and execute financial transactions individually. Increase Transparency of Municipal Financial Information: The new municipal financial information system wil l allow the Government to have complete information about the municipal finances through an aggregation system. At present, municipalities have different accounting systems o f varying quality. This slows down reporting o f the municipal financial data to the central government. Increase Efficiency of Municipal Financial Information: The new municipal financial information system will ensure interoperability with SIGFE. Increase effectiveness of Budget Cycle Indicators: The upgraded and expanded system wil l incorporate monitoring and evaluation indicators from the MCS, which are aligned with budget data, and budget indicators. During budget formulation, the DIPRES and Congress will have al l necessary projects and programs data available allowing for an analysis o f the services o f the entities taking into consideration financial information and performance. At present, M C S information i s not fully consistent with financial indicators for projects and programs. Increase Transparency of public expenditure: The upgrading o f SIGFE and interoperability o f SIGFE with M C S wil l improve the quality o f budget information and improve the quality o f information disseminated.

3. Project components

26. The operation would consist o f four components: Component 1 - Upgrading and Expansion o f SIGFE; Component 2 - Improvement o f Budget Procedures and Mechanisms o f the Management Control System; Component 3 - Strengthening Financial Administration at the Municipal Level; and Component 4 - Project Management. Table 2 shows the financing for each component:

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Component

Component 1

Total World Bank Financing Local Financing

31.1 17.1 I 55.0% 14.0 45.0% (US$ Mil l ion) (US$ Mil l ion) % (US$ Mi l l ion) %

Component 2 Component 3 Comoonent 4

27. Component 1 - Upgrading and Extending the Financial Information System to the Central Government Entities (US$31.1 million of which US$l7. I million would be financed by the Bank loan): This component would provide technical assistance, training, design and development o f software and equipment as wel l a procurement o f software licenses to upgrade SIGFE and install it in Central Government Entities. In particular, i t would support the further development and consolidation o f SIGFE by: (i) upgrading and optimizing the I C T and technical design o f SIGFE modules; (ii) improving i t s finctionality, interoperability and reporting; and, (iii) implementing data standards issued by Normative Entities in al l entities using the homologated systems. There would be three sub-components as follows:

4.7 2.8 60.0% 1.9 40.0% 7.5 4.5 60.0% 3 .O 40.0% 3.4 0.4 11.8% 3.0 88.2%

28. Sub-Component 1.1: Upgrading and Expanding SIGFE Functions (US$22.3 million of which US$13.4 million would be financed by the Bank loan): This sub-component would provide assistance to transform SIGFE into a modern integrated web-based system by: (i) eliminating redundant and outdated operations, increasing processing capacity and better integrating the transaction, aggregation and configuration modules; (ii) updating the software to improve budget programming and budget execution as well as accounting and treasury hnctions; (iii) strengthening the interoperability o f SIGFE with other systems; (iv) optimizing the reporting capacity o f SIGFE for the benefit o f internal and external users, including public sector entities, Congress, and Normative Entities; and (v) mainstreaming the organization and the functions o f SIGFE within DPRES and establishing financial management units within Central Government Entities.

Sub-Total 46.6 24.8 Fee 0 0 Total 46.6 24.8

29. The activities to be financed within this sub-component include:

53.1% 21.8 46.9% 0% 0 0%

53.1% 21.8 46.9%

Updating o f software to improve and optimize SIGFE hnctions, especially with respect to budget programming, budget execution, and accounting and treasury f i c t i o n s . Upgrading software and hardware to overcome operational problems, increase processing capacity, facilitate the integration o f a l l modules, and increase automatic l i n k s between different budget, commitment and accounting classifications. Strengthening the capacity o f SIGFE to prepare reports for internal and external users, such as other public entities, Congress, and the Normative Entities. Improving SIGFE to allow interconnectivity with other systems such as ChileCompra (Chile’s e-procurement system), MIDEPLAN’s public investment database (Banco Integrado de Proyectos - BP) and other systems aimed at improving the decision-making process, including fixed asset and cash management.

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Strengthening the capacity o f financial units within Central Government Entities and diagnostic o f the improvement needs o f key processes within the financial administration and o f the normative framework related to the access and processing o f data. Supporting the integration o f SIGFE as an operational unit within D P R E S on the basis o f best international practice. Implementation o f a system for aggregation and consolidation o f financial information o f the general government with financial and accounting information provided by the Central Government Entities and municipalities.

0

30. Sub-Component 1.2 - Extending S IGFE to Central Government Entities (US$4.7 million of which US$2.8 million would be financed by the Bank loan): This sub-component would finance the expansion o f the transaction module o f SIGFE or, alternatively, the certification o f agency-developed or market-developed systems to fully integrate financial information o f a l l Central Government Entities into the existing system. Central Government Entities are al l entities at the central government level. The Project will not finance activities within the Armed Forces or the Police. Although the transaction module o f SIGFE has been adopted by 90 percent o f a l l CGE, the remaining 10 percent represent a large share o f the budget. These entities include: the National Treasury, the Ministry o f Public Works, the Legislature and the Judiciary. This sub-component would support the integration o f existing independent systems into SIGFE though assimilation or certification (homologation). Further this component would finance the integration o f SIGFE into the National Pension Administration (Instituto Nacional de Previsidn).

3 1. The activities to be financed within this sub-component include: Definit ion o f reporting standards consistent with the norms issued by the Normative Entities for the Central Government Entities, which have financial information systems other than SIGFE. Analysis and evaluation o f the results o f the implementation process o f market products used in Central Government Entities, e.g., the Corporation for Production Development (Corporacidn de Foment0 de la Produccidn - CORFO). Implementation o f one such market products on a pi lot basis in one institution such as the Ministry o f Public Works or the Tax Revenue Services. Diagnostic o f the improvement needs o f the financial management processes in Central Government Entities so that they may be integrated into SIGFE. Installation o f SIGFE or alternative systems in the Borrower’s Pension Administration Agency (Instituto de Normalizacidn Previsional) or its successors. Provision o f hardware for the implementation o f SIAPER in Central Government Entities.

32. Sub-Component 1.3 - Strengthening the Public Treasury (US$1.5 million of which US0.9 million would be financed by the Bank loan): This sub-component would focus on modernizing the Treasury and the treasury functions to improve the recording o f accounting and budget transactions.

33. e

Activities to be financed include: Revision and updating o f the conceptual module, including norms and procedures, to update accounting and budget records o f the Public Treasury.

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0

0

Revision o f norms and procedures used in the recording and administration o f financial assets and liabilities. Design and implementation o f improvements to the Public Treasury accounting and budget records system Review o f the interconnection between such improved accounting and budget systems with other information and management subsystems o f the Public Treasury, consistent with the norms and procedures approved by the Normative Entities.

34. Component 2: Improvement of Budget Procedures and Mechanisms of the Management Control System (US$4.7 million of which US$2.8 million would be financed by the Bank loan):

This component would focus on supporting efforts to enhance the quality o f public expenditures by strengthening the Management Control System (MCS) and integrating i t into the Budget Cycle. Specifically, this component would focus on developing and implementing: (i) a new conceptual model for the Budget Cycle, linking the budget classification with the information categories o f the MCS; (ii) a M C S information system; and (iii) a new version o f the budget formulation system (SIAP) used by DIPRES. Innovative methods o f budget formulation would be developed for selected pol icy modules and the capacity o f DIPRES to undertake results-based monitoring and evaluation would be strengthened. This component consists o f two sub- components : Figure 1: Budget Cycle

35. Sub-Component 2.1 - Improvement of Budget Procedures (US$3.1 million of which US$1.9 million would be financed by the Bank loan): This subcomponent would support the development o f new budget processes and techniques to enhance the overall quality o f budget design. Whi le Chile’s budget systems are wel l developed, there i s additional room for further improvement, particularly in terms o f linking resource allocations to measurable results. The incentives for client entities to participate in SIGFE would be enhanced by demonstrating how performance-based management can help them improve their own effectiveness and efficiency.

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36. The activities to be financed include: Developing a conceptual model for integrating information f rom the Borrower’s MCS into the Borrower’s budget formulation process, including linking the budget classification with the information categories o f the MCS.

0 Developing new budget techniques such as budget formulation by pol icy areas and performance-based-budgeting.

0 Developing and implementation o f an improved version o f the budget formulation system (SIAP) in DIPRES interconnected with SIGFE and the MCS.

0 Studies to improve the borrower’s budget process, including public treasury functions and cash management. Strengthening DIPRES’ capacity to generate information to be provided to Congress.

37. Sub-component 2.2 - Strengthening the Management Control System (US$l. 6 million of which US$l million would be financed by the Bank loan): The objectives o f this sub- component are: (i) applying the conceptual model to integrate the budgetary process with the Management Control System; (ii) using information from the M C S as an input for decision making during the budget cycle; and (iii) developing a management and control information system that integrates the various M C S tools and that interacts with the financial administration systems (SIGFE and SIAP). Implementation o f this subcomponent will be the responsibility o f the Management Control Division (Divisidn de Control de Gestidn) o f DIPRES.

38. A strengthened MCS, better integrated with the decision-making processes o f the budgetary cycle, would contribute to increase the quality o f public expenditures in terms o f their effectiveness and their efficiency. In addition, the linkage between the M C S information system and the financial administration system would result in an integrated system.

39.

0

The activities to be financed within this sub-component include: Strengthening the existing information technology instruments used by the M C S and integrating them better. Developing and implementing an M C S information system that interoperates with SIGFE and SIAP, as defined in the conceptual model described under sub-component 2.1. Strengthening the institutional capacities o f the M C S so that it may operate along the l ines envisaged by the conceptual module described under sub-component 2.1. Developing a new methodology to quantify a ‘coverage indicator’ o f the MCS. This new indicator wil l measure the relative weight o f public sector programs included under the M C S as a percentage o f the public sector programs in the overall budget. Improve processes to enable decision makers in government entities and in Congress to make more efficient use o f information generated by the MCS. Reporting formats would be adapted to the specific needs o f users.

40. (US$7.5 million of which US$4.5 million would be financed by the Bank loan):

Component 3 - Strengthening Financial Administration at the Municipal Level

This component would focus on: (i) improving the availability o f information on municipal budgets and on financial transfers; (ii) strengthening financial administration at the municipal

15

level; and (iii) improving the effective use o f central government transfers to municipalities, for example within the Municipal Fund (Fond0 Comun Municipal). The Off ice o f the Comptroller General in partnership with the Sub-secretariat for Regional Development within the Ministry o f the Interior (Subsecretaria de Desarrollo Regional y Administracidn - SUBDERE) would implement this component. Finance would be provided for technical assistance, supplies and training within two sub-components, as follows:

41. Sub-Component 3.1 - Development of a Municipal Financial Information System (US$2.5 million of which US$1.5 million would be financed by the Bank loan): This sub- component would support the development o f a Municipal Financial Information System that includes al l Chilean municipalities. The system would be capable to aggregate financial information f rom all, presently 345, municipalities, according to the normative framework - e.g., budget classifications and accounting framework (Plan de Cuentas) - defined by the responsible Normative Entities (organismos rectores). It would record financial information corresponding to areas o f municipal responsibility - e.g., municipal management, health, education, and cemeteries.

42. The activities to be financed within this sub-component include: Develop and implement a Municipal Financial Information System, which wil l be linked to the Municipal Financial Administration Sub-Systems, and i s capable to aggregate and integrate financial information from the sub-systems o f a l l municipalities. This system would be both flexible and dynamic and, thus, able to respond to the changing needs o f the users. The conceptual model wil l be based on the aggregation module o f SIGFE I. Develop an interface linking the Municipal Financial Information Sub-systems to the new Municipal Financial Information System within SUBDERE. Def ine norms to standardize the financial information o f individual municipalities according to requirements specified by the Normative Entities to meet the needs o f internal and external users; and streamline the reporting required from municipalities by CGE. Strengthening the Government’s capacity, in particular DIPRES and SUBDERE, for analyzing and monitoring o f the financial situation o f municipalities. Disseminate information about the Municipal Financial Information System to municipalities and the Chilean Association o f Municipalities (Asociacidn Chilena de Municipalidades ACHM). Training users in the use o f the system.

43. Sub-Component 3.2 - Installation of a Sub-System of Municipal Financial Administration (US$5 million of which US$3 million would be financed by the Bank loan): This sub-component would strengthen financial administration at the municipal leve l by developing a simplified sub-system o f financial management in municipalities that lack adequate systems, and by upgrading others to ensure that they meet the homologation standards defined under the Municipal Information System. This component would cover about one hundred municipalities. The financial administration sub-system would cover budget, accounting and treasury functions. I t would be consistent with the normative framework established by Normative Entities. I t would incorporate the budget classifications jo int ly determined by CGR, DIPRES and SUDBERE, and the accounting processes (Plan de Cuentas) established by the CGR. This subsystem would comply with the homologation standards defined under the Municipal

16

Financial Information System. Special emphasis would be placed on training municipal authorities and officials not only in the operation o f the financial administration sub-system but also in the use o f information. Implementation at the municipal level would build on the lessons learned during the introduction o f Chile’s electronic procurement system (ChileCompra) at the municipal level.

Lessons Learned Leadership, clear strategic direction, and commitment are critical for success.

Coordination i s critical.

Training and technical support during the

44. The activities to be financed within this sub-component include: Diagnosis o f the information technology and communication capacity at the municipal level, based on a survey o f the technological infrastructure currently available in the Municipalities, including internet access and broad-band connection. Diagnosis o f the financial administration systems available in the market, their capabilities and the cost o f installation and operation o f such systems. Strengthening the capacity o f selected Municipalities to operate financial administration subsystems and the Municipal Financial Information System. Strengthening o f financial administration o f selected Municipalities, including, inter alia, the provision o f equipment and the introduction o f a system o f financial administration in those municipalities that currently lack one, including data assembly, testing, and equipment, data migration and implementation o f the Technology Upgrading Plans, as applicable. Provision o f training programs for municipal authorities and staff, focusing on the operation o f the new financial administration sub-system and the use o f information f rom it.

0

0

0

Project Design Inter-agency coordination i s critical to the success o f the Project and DIPRES will assume a leadership role during project implementation, as it did during the f i r s t stage o f SIGFE’s development. The CGE need to coordinate both their message and their actions in order to avoid codusion and in order to maximize their effectiveness. The responsibilities and prerogatives o f other key actors-Le., SUBDERE and CGR-will be clearly defined. A critical mass o f officials at the managerial and operational level

45. financed by the Bank loan):

Component 4 - Project Management (US$3.4 million of which US$0.4 million would be

This component would cover operating expenses, with the Borrower contributing US$3 .O mil l ion o f counterpart funds, related to the fol lowing activities: 0 Provision o f technical assistance to Central Government Entities as part o f the

0 Strengthening the Government’s capacity to monitor and supervise the overall implementation o f SIFGE or SIGFE-compatible financial administration systems.

implementation o f the Project.

4. Lessons learned and reflected in the project design

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Lessons Learned implementation o f SIGFE and beyond are critical.

I t i s critical to provide timely and sufficient support to users during implementation.

Need to establish an inclusive and integrated framework for systems development and replication.

A mature information system i s best conceived as a system with multiple actors, including those who provide input data and those who use it.

Need to include municipalities early on in the design process.

Need to limit the scope o f the project.

Need to identify a ‘champion o f reform’ in each government agency project leadership and political coordination. There should be close, continuous dialogue with counterparts at the national and sub- national levels.

Need for political commitment to modernization.

The technical soundness o f municipal counterpart has to be ensured, particularly in small- and medium-sized municipalities where weak technical capacity has been a bottleneck.

Local information systems should be Conceived as a dynamic process. They should allow for periodic revisions, and also set in place processes and mechanisms to

Project Design has to be trained in the use o f the new tools. Implementation has to be flexible enough to accommodate unanticipated needs in terms o f time and resources. As in the previous operation, there wil l be progress reports and training programs from basic computer use to specific sk i l l s such as accounting or treasury. A help desk will continue to operate to solve urgent p rob lem on the spot and thereby facilitate project implementation. An e-government framework for policy, interoperability, integration and replication w i l l be sought as part o f the consolidation o f SIGFE and the development o f the Municipal Financial Information System Early in the design process, an inventory o f the needs o f users-e.g. entities within the central administration, Congress, regional and municipal governments, non-government associations, and academia-will be made and used to design the new version o f SIGFE and the Municipal Financial Information System. After a failed f i r s t attempt as a result o f resistance from municipalities, the SINIM was successfully implemented largely due to the participatory process that was adopted subsequently. Individual municipalities as well as the A C H M w i l l be invited to participate in the design o f the Municipal Financial Information System. The A C H M has already indicated its support for the development o f such an information system. As opposed to the Municipal Development Projects, which tackled financial management as one component o f a more complex municipal agenda, this project w i l l focus exclusively on financial management, working joint ly wi th al l critical stakeholders at the central level-including, not only SUBDERE but also DIPRES and CGR. Each participating government agency and municipality will be expected to designate a counterpart responsible and accountable for the project. Chile’s municipalities are extremely heterogeneous and r e w i r e - individual (rather than wholesale) implementation arrangements. SUBDERE’s strong ties to municipalities-both individual municipalities and the ACHM-wil l facilitate the dialogue. Thus, the SUBDERE w i l l be responsible for the implementation o f Component 3, There i s strong political support f rom the highest authorities for the expansion o f SIGFE at the central level and the development o f a Municipal Financial Information System. A demand-based approach w i l l be adopted for municipal strengthening to ensure the participation o f those with a w i l l to participate. Component 3, which focuses on municipal financial management, w i l l have a strong focus on training in basic I C T ski l ls as well as financial administration and budget processes with an emphasis on newly adopted budget classifications and accounting procedures. Municipalities w i l l also be provided with basic working tools- such as computers and communication technology-as needed. A steering committee with representatives from the major stakeholders-DIPRES, CGR, SUBDERE and representatives from the municipalities-will be established to oversee the Municipal Financial Information System. Annual and five-year evaluations

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Lessons Learned foster change and innovation.

Making local information systems accessible to the general public enables citizens to effectively monitor the performance o f local governments and, in turn, increases the credibility o f the overall system.

5. Alternatives considered and reasons for rejection

Project Design w i l l be conducted to ensure that the f i anc ia l information as well as the processes o f collection, aggregation, and distribution corresponds to the needs o f users. Information about the Municipal Financial Information System wi l l be made available to the public.

47. Develop a new SIGFE in house vs. purchasing a commercial product. The project team has evaluated the pros and cons o f commercial products that could replace SIGFE. I t was decided that the new version o f SIGFE will operate with open standards based on J2EE specification, with minimal proprietary elements, at the database engine level. In addition, to ensure scalability and adaptability, a modular application development strategy i s envisaged on the basis o f a services oriented architecture (SOA). This approach allows for the incremental development o f applications; the integration o f the system into a Web environment, and interoperability with different SIGFE modules and with the applications o f other entities (e.g. Chile-Compra). The fol lowing tasks wil l be outsourced: (i) the detailed IT design and construction o f the application; (ii) the process o f conformity testing; and (iii) the evaluation o f the application’s user friendliness. The SIGFE team proposal wil l hire local and international f i rms, based on international and national competitive bidding. The objective wi l l be to have the SIGFE application developed during 2008 and to begin implementation in 2009. DIPRES i s considering contracting an external data center and using the current DIPRES data center as a backup.

48. Identijkation of the Municipal Financial Information System: Considerable thought was given as to whether to integrate the Municipal Financial Information System into SIGFE or, alternatively, to give i t an independent structure. Although the two systems would be interconnected, i t was decided that it was strategically preferable to maintain a separate municipal system, mainly to avoid resistance from municipal governments. Specifically, SIGFE i s perceived by municipal governments as an information system designed and operated mainly by the Ministry o f Finance (Hacienda) to serve i t s own purposes. Traditionally, municipalities have been very protective o f their financial autonomy, particularly in their relationship with Hacienda. Conversely, municipalities accept the role o f the CGR in auditing municipal accounts, as well as their need to report to both CGR and SUBDERE, as mandated by the Municipal Organic Law. Moreover, they have developed a positive working relationship with SUBDERE in the development o f SINIM, a comprehensive system o f municipal information that i s collected on an annual basis. Thus, developing a real-time municipal financial information system with i t s own structure would seem l ike a natural progression o f SINIM, while extending SIGFE to the municipal level might be perceived as a threat to municipal autonomy. In addition, the majority o f municipalities already have an adequate financial management system. These systems can be adjusted to accommodate the new CGR norms and then they can be l inked through a module to the SIGFE system. Replacing the existing systems would be unnecessarily costly.

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49. Structure of the Municipal Financial Information System: As opposed to developing a self-standing municipal financial information system (similar to ChileCompra) that operates independently within the municipalities, the Government, with the endorsement o f the Bank team, opted for a Municipal Financial Information System as a platform that inputs data from the municipalities’ own management systems. Such an approach avoids placing an undue burden on municipalities in terms o f additional data entry. It also reduces time lags in data availability because no additional data entry i s required; it minimizes errors in data entry; and it reduces resistance from the municipal bureaucracy.

50. Demand-Driven vs. Supply-Driven Approach to Strengthen Municipal Financial Management: With regard to the strengthening o f financial management at the municipal level, the Government and the Bank have opted to offer technical support on a demand-driven basis rather than adopting a supply-driven approach. Specifically, municipalities that are interested in strengthening their financial management could either adopt the financial administration sub- system to be developed under the Project, or elect for technical assistance to standardize their own financial administration sub-systems. It i s expected that most municipalities would voluntarily request technical assistance because they will be required to adopt the new budget classifications and accounting processes in 2008, a great challenge for many municipalities. Even for those municipalities that have the technological and institutional capacity to easily adopt the new system can save resources by choosing to participate in the Project. Whether municipalities choose to participate or not, they wil l be obligated to report their financial information to Municipal Financial Information and Management System on l ine to comply with the requirements o f the CGR.

C. IMPLEMENTATION

1. Partnership arrangements

5 1. It i s not envisaged that other multilateral or bilateral agencies will participate in financing the proposed project. However, during the first operation, there was technical collaboration in sector analysis and knowledge sharing and, under the proposed loan, collaboration would be encouraged with international agencies including the OECD , the Economic Commission for Lat in America and the Caribbean (ECLAC), the Lat in American Center for Administration for Development (Centro Latinoamericano de Administracidn para el Desarrollo - CLAD) and others.

2. Institutional and implementation arrangements

52. It i s the long-term goal o f the Bank to integrate the project implementation o f Bank financed operations into the regular units o f the counterpart entities in the client countries once the country’s procurement, financial management and accounting systems are sufficiently developed. The 2005 C F A A rated Chile high in al l relevant areas: financial management, fiscal discipline, transparency and operational efficiency. In addition financial management operations are governed by clear ru les and strict adherence to the rules. There i s a dedicated and qualified staff and management, which respect ethical and efficient behavior, and there i s a matching o f responsibility with accountability. These indicators imply that a move towards a full integration o f the project implementation into the regular units i s feasible.

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53. To ensure continuity with the previous project, and due to the in house development o f SIGFE, which requires specialized skil ls, the Project implementation would broadly follow the existing arrangements that were introduced with Public Expenditure Management Project I. DIPRES would be the overall responsible agency for the entire project and responsible for the execution o f Component 1 and 2 related to the implementation o f the SIGFE system on the central government level. SUBDERE wi l l be the executing agency o f Component 3 related to integrating the financial information from the municipal level to SIGFE.

54. The Project w i l l be implemented through the existing Project Implementation Unit (PIU). The PIU, established in DIPRES under SIGFE I and to be maintained as established, w i l l continue to be responsible for technical support, monitoring and evaluation, and financial management (which encompasses accounting and financial reporting, budgeting, internal control, treasury operations and external audit). The PIU w i l l coordinate with SUBDERE and oversee the implementation o f Component 3. The PIU w i l l be financed by the project during a transitional period o f one year to encourage i t s integration within the public sector. The National Project Director would be the Minister o f Finance and the National Coordinator responsible for project implementation would be the Budget Director. The PIU would comprise a chief financial officer, a procurement expert, and experienced professionals to assist with financial management and with the implementation and monitoring the major project components. SUBDERE wi l l have a select group o f procurement, financial and accounting specialists to implement the activities in participating municipalities. An independent evaluation w i l l be undertaken to ascertain whether the proposed new activities call for changes or adjustments in the current PIU structure. Considering Chile’s excellent track record in dismantling PIUs at the end o f the project cycle and integrating their functions into the regular administration, the Government has decided with Bank support to maintain the PIU for a limited time. The PIU i s scheduled to be dissolved in the second year o f the project, and be assimilated by DIPRES.

55. The project would place strong emphasis on coordination with other institutions, particularly l ine entities, ministries, municipalities and the Chilean Association o f Municipalities. The following table shows the structure o f institutional frameworks and the anticipated component coordination structure.

Figure 2: Coordination of Components :oordination of Components SUBDERE

Treasury DIPRE

Comptrollers Off ice

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56. The PIU will report to the Budget Director, the National Project Coordinator, and the Sub-secretariat for Regional Development in the Ministry o f Interior. The existing agreement between DIPRES and CGR, governing the responsibilities o f DIPRES as the implementing agency for SIGFE and establishing the Coordination Unit (dated October 3, 2005) i s still valid. This relationship was recently strengthened through the 2007 Budget Law, explicitly giving DIPRES the authority to implement SIGFE. DIPRES wi l l continue using implementation agreements with Central Government Entities, which define the responsibilities o f the entities in receiving the new system. These Model Entity Agreements have been reviewed by the Bank and found satisfactory.

57. SUBDERE wi l l s i g n collaboration agreements with participating municipalities to establish the municipality’s responsibilities and define a technology upgrading plan. The Bank has reviewed the draft Municipal Agreement and found i t satisfactory. SUBDERE wi l l share all relevant monitoring information with DIPRES and the Bank. DIPRES wi l l monitor the implementation progress according to the results indicators.

58. The DIPRES wi l l identify the technical assistance, training, and supplies to be provided under the project and they wi l l commit the entities to agreed performance indicators and concrete results. The respective entities and municipalities are the front-end data provider o f SIGFE and as such need to be fully capable o f using the system to ensure accurate data for the end-users (DIPRES, and to some extend SUBDERE).

59. As SUBDERE i s responsible for coordinating and overseeing activities in the participating municipalities, i t w i l l be also reporting to and seeking procurement no-objections from the DIPRES through the PIU. In addition to the financial documentation SUBDERE wi l l provide adequate reporting documentation to the PIU to monitor the progress o f Component 3, according to the indicators agreed on in Annex 3. DIPRES and SUBDERE will agree on a monitoring schedule, and SUBDERE wi l l identify a contact within SUBDERE for the purposes o f implementing the component’s activities and facilitating Bank’s supervision o f this component o f the project.

60. With regard to the mainstreaming and institutionalization o f the SIGFE team within DIPRES, a first step has already been taken by designating the head o f the ICT unit o f DIPRES as the person in charge o f ICTs for the SIGFE project. Given the strategic importance o f ICT for DIPRES, a number o f options were considered to ensure that the technology and the strategic priorities o f the institution are well aligned.

3. Monitoring and evaluation of outcomes/results

61. Monitoring and evaluation the implementation o f the components would be the responsibility o f the Project Implementation Unit. An annual comprehensive evaluation o f progress w i l l be undertaken using key performance indicators. A mid-term review o f the project w i l l also be carried out after two years. The PIU w i l l be responsible for the collection and compilation o f information required to track the monitoring plan as described in the results framework (ref. Annex 3). The final set o f indicators and their expected time track over the five years o f the project were determined at appraisal. The PIU has already drafted a plan o f activities for the entire f ive years o f the project. The work plan for the first year o f the Project

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was agreed during the final preparatory mission and preliminary work plans for the subsequent four years wil l be reviewed as the project progresses. Annual project reviews wil l be carried out no later than December 31st o f each year, beginning in 2008. A mid-term review wil l be conducted no later than June 30, 2010 to assess progress on agreed targets and to identify additional support as needed. Semi-annual progress reports wil l be presented to the Bank no later than 45 days after each calendar semester, starting December 3 1,2008.

Risks

4. Sustainability

~ ~~~ ~~ ~~ ~

Risk Rating with Mitigation Risk Mitigation Measures

62. The current administration believes that further measures are necessary to help sustain economic growth, increase the responsiveness o f the public sector and strengthen i t s ability to deliver higher quality services at lower cost. The Government’s commitment and i t s ownership o f the proposed operation are amply proven by i t s commitment to the f i rs t Project. The Government has given i t s full collaboration in developing the project with participation from the highest authorities, managers and staff. There can be no guarantee that reforms are irreversible but support for state modernization has been clearly expressed by the highest Chilean authorities.

63. Financial Sustainability. The project i s expected to generate economic and fiscal savings as a result o f better informed budget decisions, and more efficient financial monitoring and control. This will reduce fiscal vulnerability, improve financial management and public procurement, and improve the evaluation o f prospective public investments. A more qualified c iv i l service wil l improve service delivery and effectiveness, and civic groups wil l be able to scrutinize public performance more closely.

5. Critical risks and possible controversial aspects

Table 4: R i s k s and Risk Mitigation

Poor coordination :esulting in flawed implementation and :eluctance o f individual entities to support the system.

The project i s being implemented at a number o f different levels o f Government. The primary focus o f the project i s to strengthen and enhance the existing system. This accounts for 68 percent o f Bank financing and about 66 percent o f the total project cost. The system i s well established within the Government. Hence, a further enhancement cannot be considered r i s k y because the SIGFE development team i s well experienced in project design, development and implementation. Resistance from other public sector entities i s reduced by allowing them to adapt and improve their existing systems in cases where the adoption o f a fully SIGFE based system would be too disruptive. This limits the risk o f poor coordination between DIPRES and other branches o f government. On the other hand there i s a risk o f poor coordination between DIPRES and SUBDERE. The overall impact on project risk can be considered moderate as it only applies to Component 3, which represents 16 percent

M

23

Risk Mitigation Measures I Risks

Reduced Financial Management and Procurement capacity Following the ibsorption o f the PIU .nto DPRES if that were to result in a loss i f knowledge and key staff.

o f the overall project cost.

The present PIU has been evaluated by the Bank’s Financial Management and Procurement teams, and i s found to have sufficient capacity to carry out its responsibilities and implement the project according to Bank guidelines. However due to the pending mainstreaming o f SIGFE and the PIU into DPRES, it i s expected that a number o f Bank financed s ta f f might quit, leaving gaps in the knowledge on Bank procedures. To mitigate this risk, the Bank and the government have agreed to provide adequate training. Furthermore, the Bank has accepted most o f the national procurement methods (ChileCompra etc) as meeting Bank requirements. Thus this risk i s rated as negligible.

To component results

Risk Rating with Mitigation

N

Component 1 - Upgrading and Extending the Financial Information System to the Central Government Entities

4ccounting norms, standards and irocedures could be :hanged and the :xisting system may be eevised if a new 3overnment Agency were to be established md put in charge

The executive branch recently presented a bill to Congress that would modify the functions o f the CGR. Amongst the most important changes would be to transfer the accounting functions o f the Government from the CGR to a new and independent executive agency. I t i s unlikely that a complete overhaul o f the system would result. Chile’s accounting system was recently reviewed by the IMF and other international institutions and found compatible with international standards. Even if the agency were to decide to review the overall system, it would have a limited impact on SIGFE and on project implementation. The core o f SIFGE i s the information system, and the norms defined by the Controller General or i t s successor i s a relatively small part o f the overall system. Further more these norms and standards are continuously reviewed, and SIGFE i s capable o f accommodating the changes if needed. Finally an overhaul o f the system would take time to implement, and the present standards will continue in place until new ones could be implemented. Thus the risk i s considered negligible.

N

7omponent 2 - Improvement of Budget Procedures and Mechanisms of the Management Control System

Iivergence between wdget classifications md norms and those ised by the vlanagement Control md the Monitoring and ?valuation Information

A results-based budgeting system can work effectively only if the classifications and norms o f the Budget System are the same as those used by the Management Control and Monitoring and Evaluation Information systems. In order to ensure compatibility prior to the design and upgrading o f SIAP, a conceptual model for unifying the MCS categories and S I A P will be developed. In a second step this conceptual

M

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Risks

system.

Component 3 - Strengthening Financial Administration at the Municipal Level

Risk Rating with Mitigation Risk Mitigation Measures

model will be used to design the new information system. Since the M C S unit has only l imi ted experience with budget classifications and norms, it will require additional efforts o f coordination and thus the risk i s considered as moderate.

Resistance f rom Llunicipalities to ubmit the required .nformation in time.

I i f f icul t ies in mplementing nunicipal financial idministration sub- systems in the ipproximately 100 nunicipalities that lave an especially weak technical and nstitutional capacity.

3verall Risk Rating:

Current legislation requires municipalities to report financial information to the CGR and SUBDERE o n a regular basis. Also by law, the CGR has the authority to specify the accounting framework (Plan de Cuentas) to be adopted. As part o f i t s Probity and Transparency Agenda, the Government i s committed to improve the timely and accurate reporting o f municipal financial information to the CGR and the SUBDERE. T o that end it wil l enforce incentives and sanctions. The A C H M has expressed i t s support for the development o f the information system. Nevertheless, municipalities may s t i l l be reluctant to cooperate, especially those who will not receive a new system. SUBDERE has sufficient b d s to upgrade the municipal financial system in the 200 municipalities, which need assistance. Nevertheless, SUBDERE has to provide strong leadership and coordination to fully succeed. Thus the risk i s seen as moderate.

T o mitigate this risk, the project will finance a full evaluation o f the existing situation in each o f the participating municipalities, including the cost and time-frame for introducing a new system. The implementation will b e gradual. The private sector will p lay a central ro le in developing and implementing the municipal financial administration sub-systems, malung use o f the robust products already present in the market. Under the Bank- financed PROFIM operations, SUBDERE developed substantial hands-on experience in the conceptualization, development, and deployment o f similar municipal finance sub-systems. To secure a competitive framework for the implementation o f Sub-component 3.2, SUBDERE will ensure that a minimum o f three f i r m s will participate in the procurement processes. Overall, there i s a moderate r i s k that this component might not be implemented o n schedule.

M

M

M

<isk Rating: H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or L o w Risk)

6. Loan conditions and covenants

64. There are no effectiveness conditions.

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Loan covenants:

65. The annual audited financial statements wil l be furnished to the Bank not later than six months after the end o f each year. The borrower wil l submit semiannual Interim Unaudited Financial Reports as part o f the Project Reports.

66. Prior to disbursement corresponding to or activities in CGE o f Sub-component 1.2, DIPRES will s i g n an entity agreement with the respective participating entity, in accordance with the terms o f the Model Entity Agreement.

67. Prior to disbursement o f Component 3, SUBDERE will enter into an agreement with the respective municipality in accordance with the terms o f the Model Municipal Agreement. The Agreement wil l define the responsibilities o f SUBDERE and the Municipalities and performance indicators to be met by the respective municipality.

D. A P P M S A L SUMMARY

1. Economic and financial analysis

68. Chile has earned an excellent reputation for macroeconomic performance and pu

the

dic sector management within the Latin American the Caribbean (LAC) region. It recoveredbetter and more quickly than most other L A C countries f rom the economic difficulties that were provoked by the East Asia crisis o f 1998. That recovery was due, in large part, to a steady and purposeful program o f structural reform that had been put in place since the 1970s and that had resulted in a strong institutional framework, sound fiscal fundamentals, prudent monetary policies, far-reaching integration into the global economy and a solid and deep financial sector. Chile has doubled i t s income since 1990 and has significantly reduced the proportional gap between i t s per capita income and that o f high-income OECD economies. As a result o f sound macroeconomic management and a l o w level o f public debt, Chile enjoys a high level o f confidence in the international financial markets as evidenced by sovereign spreads that match those o f advanced economies.

69. Chile has adopted the ambitious goal o f converging with OECD economies in terms o f per capita incomes within a span o f twenty years. At the same time, the administration o f President Michelle Bachelet who assumed office in 2005 has pledged to improve a broad range o f social services including public health, education and security o f income for the elderly, and an expansion o f opportunities for women to participate in economic and social progress. If Chile i s to succeed in this ambitious agenda it wil l need to continue with sound macroeconomic management and with further reforms to enhance the efficiency o f the economy in general and the public sector in particular.

70. Fiscal discipline has been at the center o f sound macroeconomic management in Chile. In 2002, the Government sought to enhance transparency and oversight o f budget formulation and execution by introducing an integrated financial management system (SIGFE). That initiative received Bank support with a loan for a Public Expenditure Management Project. The proposed second Public Expenditure Management Project would follow-up on that initiative by making improvements to the system and extending i t s coverage.

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2. Technical

71. Technical aspects o f the Project relate to introducing the latest information and communication technologies along with technical assistance in the areas o f economic and financial management and public administration. The Government has demonstrated the experience and ability to manage and maintain technologies o f this kind. As a resul t o f previous Bank assistance and other donor support in this field, the Ministry o f Finance staff i s well-trained staff in these areas. The staff wil l receive regular training to update capabilities and to operate with new technologies.

3. Fiduciary

72. The Procurement and Financial Management arrangements for loan implementation are satisfactory and meet Bank fiduciary requirements. The Procurement and Financial Management risk for the operation i s Low.

73. Financial Management and Procurement requirements were reviewed before appraisal to evaluate existing arrangements and the ability o f the Project Implementation Unit to provide the Bank with accurate, reliable, and timely information regarding resources and expenditures (see annexes 7 and 8).

4. Social

74. This Project does not trigger any o f the Bank’s social safeguard policies. In addition, the project i s expected to have a positive social impact by generating greater efficiency, effectiveness, and accountability in the utilization o f public resources, both at the central level and also among municipalities. Specifically, fiscal savings from enhanced public sector management can be redirected to finance social expenditures and targeted social programs. Thereby, it wil l contribute to the development objectives o f balanced economic growth with equity.

5. Environment

75. project i s rated as Category “C.”

This Project does not trigger any o f the Bank’s environmental safeguard policies. The

6. Safeguard policies

76. This Project does not trigger any o f the Bank’s safeguard policies.

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Table 5: Safeguard Policies affected by the Project

Safeguard Policies Triggered b y the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) [I [XI

Natural Habitats (OPBP 4.04) [I [XI

Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI

Involuntary Resettlement (OPBP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI

Forests (OPBP 4.36) [I [XI

Safety o f Dams (OPBP 4.37) [I [XI

Projects in Disputed Areas (OPBP/GP 7.60)* [I [XI

Projects on International Waterways (OPBP/GP 7.50) [I [XI

[I

[I

7. Policy Exceptions and Readiness

77. comply with all applicable Bank policies.

The proposed Project would not require any exceptions from Bank policies and would

' By supporting theproposedproject, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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Annex 1: Country and Sector or Program Background

Chile: Second Public Expenditure Management

A. COUNTRY AND ECONOMIC BACKGROUND

Chile economic performance in the past two decades has been exceptional within the L A C region and the World. Chile introduced a series o f market based institutional and structural reforms in the 1990’s, which, in combination with appropriate monetary and fiscal policies, led to sustained growth. Trade liberalization and increasing commodity prices in the mineral sector provided additional external economic stimulation. However, both sources o f growth are vulnerable due to limited economic diversification. Chile has acknowledged this vulnerability and i s addressing i t though various policies and programs to strengthen regional and sector diversification.

Chile has averaged an annual per capita growth o f 4.1 percent over the fifteen years since the return to democracy in 1990. Due to the financial crises o f the late 199Os, growth between 1998 and 2003 decreased to an average o f only 1.3 percent per year. However Chile has recovered strongly over the past four years, with growth accelerating f rom 2-3 percent in 2002 to above 6 percent in each o f 2004 and 2005. GDP per capita more than doubled f rom 1990 to the 2005 level o f US$11,301 in constant PPP terms. This growth has been clearly linked to commodity prices, which increased on average by more than 6percent in the past few years. These export revenues enabled the government to expand the money supply significantly allowing greater domestic borrowing without the risk o f inflation. There was a strong increase in domestic investment while consumption grew moderately.

However, the impact o f economic growth upon Poverty and Income Distribution i s more complex to assess. Even though absolute poverty has dropped significantly within ten years f rom 30 percent in 1993 to only 18.8 percent in 2003 so that Chile the second lowest in the L A C Region, relative poverty i s on the rise. Chile i s r ich in natural resources (minerals and fishing) and the exploitation o f those resources i s wel l managed. Technologically the industries have been at the cutting edge and copper and other mining revenues are supporting the general budget. However, Chile always had an extreme income inequality. Since the 1950’s the gini-coefficient stayed at a very high level and only fluctuated marginally. During 1974-1987 it increased, and the trend reversed i t s e l f in the 1990s. Since 1990 the gini-coefficient only slightly changed to 0.54, which i s similar to South Afr ica and that i s o f concern to the Government.

Chile i s aware o f i t s vulnerability to Global Economic developments. A slow down in China’s growth or a crisis in India would have a significant impact on Chile’s economy due to the likely drop in demand for copper, molybdenum and other metals. This caution i s reflected in the medium term budget estimates. Part o f the long-term economic strategy o f the government to reduce the impact o f external shocks i s to balance the long-term budget with strict anti-cyclical spending.

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B. MACROECONOMIC PERFORMANCE AND PUBLIC SECTOR MANAGEMENT.

Chile has earned an excellent reputation because o f i t s macroeconomic performance. I t recovered better and more quickly than most other L A C countries from the economic difficulties that were provoked by the East Asia crisis o f 1998. That recovery was due, in large part, to a steady and purposeful program o f structural reform that had been put in place since the 1970s and that had resulted in a strong institutional framework, sound fiscal fundamentals, prudent monetary policies, far-reaching integration into the global economy and a solid and deep financial sector. Chile has doubled i t s income since 1990 and has significantly reduced the proportional gap between i t s per capita income and that o f high-income OECD economies. Furthermore, the Government’s debt i s very l o w compared to most OECD and developing countries. Fiscal surpluses have been used to reduce public debt and the central government has become a net creditor, with net claims equivalent to 6 percent o f GDP at end-September 2006. As a result o f the sound macroeconomic management, Chile enjoys a high level o f confidence in the international financial markets as evidenced by sovereign spreads that match those o f advanced economies.

Good Governance

Strong macroeconomic fundamentals and outward looking trade policies have been accompanied by reforms in governance that have progressively increased efficiency and transparency, and have given Chile a well-deserved reputation for “clean” and effective government. Out o f 159 countries assessed by Transparency International in 2005, Chile was ranked 21 (between Ireland and Japan) with a score o f 7.3 out o f a clean score o f 10. Indicators o f governance are shown below.

Figure 3: Governance Indicators

Control o f Corruption (2005)

ARGENTINA

BRAZIL

FRANCE

SINGAPORE

0 20 40 60 80 100

Government Effectiveness (2005)

SPAN-l SINGAPORE -cE-

0 20 40 60 80 1001

Source: Worldwide Governance Indicators: 1996-2005

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OECD convergence

Chile has adopted the ambitious goal o f converging with OECD economies in terms o f per capita incomes within a span o f twenty years. At the same time, the administration o f President Michelle Bachelet who assumed office in March 2006 has pledged to improve a broad range o f social services including public health, education, and income security o f the elderly, and an expansion o f opportunities for women to participate in economic and social progress. If Chile is to succeed in this ambitious agenda it wil l need to continue with sound macroeconomic management and with further reforms to enhance the efficiency o f the economy in general and the public sector in particular.

Fiscal discipline

Fiscal discipline has been at the center o f sound macroeconomic management in Chile. In 2002, the Government sought to enhance transparency and the oversight o f budget formulation and execution by introducing an integrated financial management system (SIGFE). That initiative received Bank support with a loan in the amount o f US$23.23 mi l l ion for a Public Expenditure Management Project. The proposed second Public Expenditure Management Project would follow-up on that initiative by making improvements to the system and extending i t s coverage.

A World Bank Country Partnership Strategy (CPS) for Chile was presented to the Board in early 2002. At that time, the economy was s t i l l recovering from the sharp reduction in growth precipitated by the global financial crises o f the late 1990s. The 2002 Country Assistance Strategy (CAS) was successful in strengthening the Bank’s working relationship with the Government as it pursued proactive, counter-cyclical investments in health, education and social protection.

The CPS for 2007-20 10 supports Chile’s ambitious development agenda and forward-looking goals o f convergence with the OECD in terms o f income levels and living standards. Skillful economic management, high commodity prices, propitious global economic conditions, effective public institutions, and stable and consensual governance have enabled Chile to reestablish strong growth and restore progress in key social sectors.

C. THE GOVERNMENT’S DEVELOPMENT PROGRAM

Michelle Bachelet, Chile’s f i rs t elected female head o f state, campaigned on, and i s now implementing, a coherent development program centered on the goal o f “Growth with Equity o f Opportunity”. The Government’s program reflects a growing consensus within Chile that the gains to be won from earlier reforms have already been secured, and that a commensurate advance in the years to come wil l require a new set o f pol icy commitments. Continued sound economic management remains central to the program, as i s Chile’s commitment to trade openness. Additional emphases include becoming more competitive, by bringing more people in to the work force, particularly women, and making them more productive, through a national commitment to education and a quantum leap in innovation. The new Government also knows that closing the gap with advanced economies wil l require a new social compact. Despite enormous progress, poverty in Chile remains high, and inequality and social stratification deep.

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In this context, the Government i s working to broaden the reach and strengthen the effectiveness o f the social protection system. President Bachelet i s the f i rs t Concertacidn president to enjoy a majority in both houses o f Congress, though with only a slim lead in both chambers she w i l l s t i l l have to work with the opposition. Within the diverse composition o f Concertacidn itself, which includes parties from the Christian Democrats to the Socialists, President Bachelet has established an effective coalition. By late 2006, President Bachelet maintained a solid popularity rating o f around 60 percent.

Box 1: Chile - Digital Agenda

Chile - Digital Apenda and E-Povernment

Chile has actively promoted ICT, both from a sector perspective (Le. development o f the telecommunications and IT services sector) as well as to enhance production across the board. E- government i s one particular area where Chile has excelled and become a model for other countries in the L A C Region, having managed to evolve smoothly from a purely informational stage focused on government Web presence and citizen access, to a more transactional stage, focused on creating value and having an impact on the Government’s overall economic and social development objectives. The current administration wishes to build on the successes o f the past with a determined focus on an enduring impact. In that context the government has established a Ministerial Committee for Digital Development, comprised o f the Ministers o f Economy, Finance, Transport and Telecommunications, and Presidency Secretariat. This Committee has recently drafted a methodology (about to be published) for the design o f a new Digital Development Agenda. I t comprises o f a set o f individual and very specific ICT-related strategies, rather than one single monolithic all-encompassing e-strategy. The components o f this Digital Agenda are the following, among others that may be added to it:

A new Digital Agenda 2.0, focusing on e-government applications with high impact and integrating the wide range o f applications already developed. The new Digital Agenda will also include measures aimed at improving the environment for businesses (notably SMEs), security, transparency, education and digital democracy. A technology policy pillar, centered around creating a modem enabling environment for digital development, through legal and regulatory reforms and other measures relating to privacy, security, payment systems, etc. An IT sector promotion pillar, focused on identifying measures to nurture and expand the already competitive and booming IT services sector, both as a way to leverage private investment in e-government and to increase Chile’s participation in the global B P O l industry. A connectivity pillar, under the leadership o f Subtel. I t i s implicitly included in the Agenda through the recent definition o f a new three-year program for the ‘<Fond0 de Desarrollo de las Telecomunicaciones” (FDT), Chile’s acclaimed telecommunications universal service fund.

In the area o f E-government, the new administration wishes to build on the successes o f the past, notably in e-procurement (Chile Compras), tax administration, the Customs and Municipal Information System (SINIM), to name only a few, and to address a number o f key challenges that have emerged in the course o f this experience:

0 Interoperability standards: an interoperability pilot project has been conducted with five institutions. Based on the results o f this pilot project, more ambitious strategies and standards will need to be developed. Improving the accessibility and usability o f e-government applications. Developing standardized and uniform payment systems for all government websites.

0

0

32

C.l. DECENTRALIZATION AND REGIONAL DEVELOPMENT

Part o f the Government’s Plan to address social and economic imbalance i s to enhance regional development through a decentralized administrative system in which decision-making and the responsibility for public services i s moved closer to the consumer. This i s critical if Chile i s to achieve greater social and economic equality among the country’s 14 different regions. The focus wil l be on strengthening the capacity o f each region so that can determine i t s own development path based on i t s comparative advantage and with less dependence on support from the capital.

In November 2006 Chile advanced the decentralization agenda by splitting the northernmost Region - Region I - into two Regions with Iquique and Arica as their capitals. Both Regions are part o f the “Extreme Zones”, which must contend with exceptional geographic, topographic and hydrological difficulties. The Bank assisted the Government in developing strategies to create a sustainable and self-sufficient economy in both Regions through a Fee for Services Technical Assistance Study.

Another key challenge for Chile i s regional development, particularly reducing the sharp economic and social disparities between regions. In this context, the Government has asked the Bank to prepare a study on the regional development strategy for the Tarapacci Region (Region I). This would be a follow-up the Extreme Zones study (2006). The Government wants to support i t s broader decentralization agenda through a continued focus on strengthening the public administration, and asked the Bank for assistance through a follow-up to the SIGFE project to expand the work done on budgeting and public expenditure management to sub- national governments.

The Government has announced a number o f initiatives to foster regional development, improve municipal and rural services and also improve the effectiveness and efficiency o f government programs.

Improved Municipal Financial Management

The new administration has addressed this issue through the enactment o f the Law No. 18.696 - Orgcinica Constitucional de Municipalidades (D.F.L. No. 1, 2006, Ministry o f Interior) and Law No. 19.602 - Amended by L a w No. 18.695, Orgcinica Constitucional de Municipalidades en Materia de Gesti6n Municipal. These laws define the relationship between SUBDERE and the municipalities, the reporting and technological needs o f the municipalities and the right o f access and the authority o f SUBDERE over municipal financial reporting and financial management.

These laws were drafted with the expansion o f SIGFE in mind. They authorize SUBDERE to develop a municipal version o f SIGFE that wil l be applied to municipalities, hospitals and schools. That wil l allow SUBDERE to monitor the floating debt o f municipalities, the underreporting o f motor vehicle registrations, and the under payment o f social security contributions, al l o f which have a significant cost. The municipal version o f SIGFE wil l allow the government to react quickly to avert the threat o f a financial crisis in municipalities. I t wil l

33

also enable resources to be reallocated if expenditures are not covered by investment plans or if they are otherwise lacking proper authorization.

Public Expenditure Management Agenda

The Government has adopted a broad public expenditure management agenda. The SIGFE system i s one o f several tools being developed by DIPRES towards Results Based Budgeting and, more broadly Performance Management within the public administration. In this regard, SIGFE i s supplemented, inter alia, by the following programs:

1. Public Expenditure Evaluation Program, which feeds in information o n program performance for budget decisions. This program further advances budget programming, provides valuable information for enhancing or terminating programs and otherwise l i n k s budget allocations with result-indicators and corresponding institutional commitments by ministries and services. Management Enhancement Program, which includes a financial management area geared to ensuring al l ministries and services have properly installed SIGFE and meet S IGFE requirements.

2.

The administration also has indicated i t s intention to create a new Monitoring and Evaluation Agency. The consolidation and expansion o f SIGFE and the introduction o f M C S instruments into al l government entities -central and local- i s a core objective for the administration as expressed in the 2007 budget law. The overall Government program i s to implement SIGFE in al l CGE including the Armed forces and the Police, through a number o f activities. One o f those activities i s the Bank financed project.

The Bank financed project does not support activities within the Armed Forces and Police. The strategy for upgrading SIGFE includes:

Harmonization and application o f government norms, laws and decrees including data security. Adoption o f a common software platform (Java) to ensure interconnectivity with commercial products - transformation to a web-based system. Upgrading SIGFE to the ITIL reference model (Information Technology Infrastructure Library) to enhance production and service. Enabling SIGFE to be further upgraded by developing the C M M I (Capability Maturi ty Model Integration) reference model. Adoption o f the SOA (Services Oriented Architect) paradigm to allow the further development o f SIGFE and i t s integration with other internal and external systems. Adoption o f open-source computer science standards to ensure the technological neutrality o f SIGFE. Outsourcing highly specialized services to better enable SIGFE to finance and provide standard technical and process support to users.

The preparations for the institutionalization o f SIGFE are wel l advanced. A budget for the operation o f SIGFE has been approved - independent o f the Bank-supported project. The government has also approved financing for the ongoing administration o f SIGFE and i s planning to integrate SIGFE into DIPRES. I t wil l give other entities such as SUBDERE and the

34

Controlaria General permanent access to SIGFE within the new institutional arrangements. The number o f users w i l l be greatly expanded once SIGFE i s operational in municipalities. Congress, Universities and the public at large will be able to follow online the budget operations o f individual entities and have access to aggregated financial information.

The MCS instruments, shown below, need to be made automatic to facilitate the budget process, in particular those aspects o f the process relating to evaluation, formulation and execution.

ent Control and

35

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

Chile: Second Public Expenditure Management

Related Bank Financed Projects

Sector Issue Latest Supervision

Project (PSR) Ratings

Bank-Financed Public sector modernization by improving the effectiveness, efficiency, and transparency o f the Chilean public administration through the establishment o f a modem and integrated financial management and resource allocation system

~ ~~

Support for the implementation, monitoring, evaluation and continuous planning o f the urban transport reform program, and strengthening the capacity and improving the procedures to mitigate potential adverse impacts o f transport infkastructure works

Support for increasing the effectiveness o f public finding for tertiary education by enhancing coherence, responsiveness, equity and quality in the system, through stronger accountability for performance.

Support for increasing the effective and productive use o f sustainable infrastructure services by poor rural communities in selected territories

Support for implementing the 2000-20 10 Urban Transport Plan for Santiago (TRANSANTIAGO), a comprehensive multi-sector plan, which i s consistent with the overall objectives o f the GEF operational program on sustainable transport.

Support for the provision o f lifelong education and training opportunities for young adults and adults.

Public Expenditure Management Project (IBRD US$23.23M)

Santiago Urban Transport Technical Assistance Project (IBRD US$4.8M)

Tertiary Education Finance for Results First Phase APL (IBRD US$25.13M)

Infrastructure for Territorial Development (IBRD US$50.26M)

Sustainable Transport and Air Quality for Santiago (GEF) (IBRD US$6.98 M)

Life-long Learning and Training Project (IBRD US$75.75M)

S

MS

S

U

S

S

S

S

S

MU

S

S

36

Sector Issue Latest Supervision

Project (PSR) Ratings

Support for reducing the consumption o f ozone depleting substances (ODS) through a combination o f means including public awareness raising, financial subsidies, creation o f an ozone team and specific training, assisting Chile in phasing-out the use o f substances that deplete the ozone layer, developing the regulatory framework for an ODS phase-out and conserving the institutional capacity gained by CONAMA in the execution o f Chile's Montreal Protocol program.

Reduction o f Ozone Project (Montreal Protocol) (GEF Grant US$6.46M)

S S

37

Related IDB Financed Proiects Other development agencies (Inter-American Development Bank)

Approved Projects

Support for an external certification system and quality o f management incentives for regional and municipal governments. That wil l include institutional strengthening initiatives to obtain and maintain the certification o f the sub national governments. I t will also include investments by the regional and municipal governments in cultural identity as well as investments and technical assistance to support regional and municipal governments in the formulation and execution o f integrated territorial development programs.

Strengthening the instrument o f the Public Management System known as "Program for strengthening o f public management - PMG"

Support for the improvement o f human resources administration, the consolidation o f the judiciary statistical system, and the organizational reengineering o f the Administrative Corporation o f the Judiciary (CAPJ), including i t s administrative decentralization.

Support for improving the operation o f the Chilean Parliament by developing the Library o f Congress o f Chile and promoting a closer relationship between Congress and the Chilean people.

Support for deepening the modernization and professionalization o f public human resource management in Chile, by strengthening the institutional capacity o f the National Civ i l Service Department (DNSC).

Support Sub-natione Governance in Chile L1018 (IDB Loan US$SOM)

ZCLIP) CH-

External Certification o f I S 0 NonnsPublic Management CH-T 10 1 1 (IDB Technical Cooperation $2M)

Inst . Streng. Judicial Branch Adm. Corporation CH-L 10 12 (IDB Loan US$3.7M)

Strengthening Support Program for Parliamentary Functions CH-L1011 (IDB Loan US$3.9M)

Strengthening the National Civ i l Service Department CH- L1008 (IDB Loan US$3M)

38

Annex 3: Results Framework and Monitoring

Chile: Second Public Expenditure Management

Results Framework

PDO

The overall development objective would be to increase efficiency o f operations regarding financial management. budget formulation, and budget execution, and the transparency o f public expenditure management at the central and municipal level through the implementation o f an upgraded, functional enhanced and expanded financial administration system (SIGFE).

Project Outcome Indicators

Improve Efficiency o f the Public Financial Management Admini stration : Time required for aggregating the financial data o f the central government i s to be reduced from 30 to 8 days. Increase Efficiency o f Operations regarding Budget Formulation and Execution: Time required to update SIGFE (execution) with the data generated by the SIAP system (formulation and administration) i s to be reduced from one week to one day. Improve Efficiency o f Budget Execution: Processing capacity o f the SIGFE transaction module i s to be increased from 95,000 to 200,000 financial transactions per day, with a response time o f 8 seconds per transaction measured at the portal. Improve Efficiency o f Financial Management Operations and Improve Effectiveness o f Fiscal Control: Time for processing transactions within the Central Government Entities so that the information i s available in SIGFE i s to be reduced from 20 days to less than 3 days.

B Increase Transparency o f Municipal Financial Information: Financial information and expenditures on at least 100 municipalities

Use of Project Outcome Information

Improve Efficiency o f Public Financial Management: SIGFE would be upgraded by enhancing functionality and increased usability as well as the upgrading i t s technological platform into a single web based system, which will reduce processing time. Improve Efficiency o f Budget Execution: SIGFE would be upgraded and technically enhance the link with SIAF'. Linking both systems will ensure the consistency o f budget data, and will improve the updating o f the systems in case o f changes if necessary. Budget formulation data i s presently entered semi- automatically in the budget execution systems. In many cases the cash balances cannot be updated in due time resulting in errors in budget execution. In addition there are delays if budget-planning data i s changed during the course o f the year. Improve Efficiency o f Financial Management Operations and Improve Effectiveness o f Fiscal Control: The upgraded and expanded system will allow users to monitor and execute transactions through a single operation in real time. At present, transactions must follow a number o f steps including: Verify the budget approval, confirm funds allocation, validate account balances, assign invoice

39

i s to be made available in the Municipal Financial Information System, which can aggregate the financial information o f all (presently 345) municipalities. Increase Efficiency o f Fiscal Monitoring o f Municipal Finances: Information on aggregate municipal finances i s to be made available at the central level within 30 days instead o f presently up to 180 days.

Budget Cycle Indicators: All monitoring indicators will be aligned with the financial indicators and integrated in the budget formulation and execution. The new methodology will be adopted by al l Ministr ies covered by the MCS and will be integrated in the budget by 2011.

Increase Effectiveness o f

numbers and execute financial transactions individually.

D Increase Transparency o f Municipal Financial Information: The new municipal financial information system will the Government to have complete information about the municipal finances through an aggregation system At present, municipalities have different accounting systems o f varying quality. This slows down reporting o f the municipal financial data to the central government. Increased Efficiency o f Municipal Financial Information: The new municipal financial information system will ensure interoperability with SIGFE. In addition the municipal financial norms are being aligned with the relevant central government norms.

Budget Cycle Indicators: The upgraded and expanded system will incorporate monitoring and evaluation indicators from the Management Control System, which are aligned with budget data, and budget indicators. During budget formulation, the DIPRES and Congress will have al l necessary projects and programs data available allowing for an analysis o f the services o f the entities taking into consideration financial information and performance. At present, Management Control System information i s not fully consistent with financial indicators for projects and programs. Increase Transparency o f public expenditure: The upgrading o f SIGFE and interoperability o f

m Increase effectiveness o f

40

Intermediate Outcomes

Component 1 : Upgrading and Extending the Financial Information System to the Central Government Entities

Upgraded and expanded SIGFE functions

Strengthened interoperability between SIGFE and other transversal systems

100 percent o f the Central Government expenditures are consistent with SIGFE financial information requirements.

Intermediate Outcome Indicators

Time required to aggregate financial data for the central government reduced f rom 30 to 8 days.

Increased processing capacity o f transaction module f rom 95,000 to 200,000 financial transactions per day with a response time within 8 seconds at port.

SIGFE’s configuration processes to have been automated.

Batch interfaces between SIGFE and ChileCompras, BIP o f MIDEPLAN and other selected systems have been replaced by full interoperability.

Upgraded SIGFE used by the 90 3ercent o f the CGE that xesently use SIGFE. The -emaining 10 percent o f CGE :hat operate their own systems ‘including Ministry o f Public Works, the Legislature and the ludiciary) should generate Snancial information that i s :onsistent with SIGFE financial nformation requirements.

SIGFE with M C S will improve the quality o f budget information and improve the quality o f information disseminated.

Use of Intermediate Outcome Monitoring

Periodic reports, mid term evaluation, learning/dissemination

YR2-5: Determine if the access o f decision makers to financial information has improved in terms o f reduced time.

YR3-5: Determine if SIGFE users receive a more effective service in terms o f reduced processing time.

YR2-5: Determine if SIGFE users receive a more effective service in terms o f simplified configuration procedures as a result o f increased automation.

YR3-5: Determine if users o f SIGFE, ChileCompra and BIP receive a more effective service in terms o f eliminating duplicated entries, enhancing the quality o f information, and timeliness.

YR2-5: Determine if the financial information generated by entities that operate their own systems (homologated entities) i s timely, reliable and relevant for decision making and public resource management.

YR2-5: Determine if the input o f financial information o f SIGFE entities i s t imely and in accordance with the specified SIGFE requirements.

41

Intermediate Outcomes

The aggregation o f financial information for Chile’s public sector (Central Government and Municipalities) has been improved

Treasury accounting and budget registration and financial assets registration are automated

SIGFE institutionalized within DIPRES

Component 2: Improvement of Budget Procedures and Mechanisms of the Manapement Control Svstem

Improved Budget Procedures

Improved budget administration

Intermediate Outcome Indicators

Aggregation and consolidation o f financial and accounting information from Central Government and Municipalities available within 30 days from monthly closing.

100 percent automatic interoperability with SIGFE.

Establishment o f a new administrative structure and processes to institutionalize SIGFE within DIPRES.

New conceptual model implemented for integrating MCS information into budget formulation.

SIAP implemented in DIPRES,

Use of Intermediate Outcome Monitoring

YR2-5: Identify needs in terms o f training and technical support for SIGFE users within the Central Government.

YR 2-5: Identify potential inconsistencies in levels o f desegregation between financial information generated by the Central Government and Municipalities.

YR 3-5: Identify systemic delays in information inputs by CGE and Municipalities.

YR 3 -5 : Generate financial information at the regional and sector levels for enhanced policy analysis and decision making.

YR 2-5: Determine if recorded information i s timely, reliable and relevant for decision making.

YR1-5 : Determine if SIGFE i s well managed and operates in an eff icient manner, providing effective services to SIGFE users.

Periodic reports, mid-term evaluation, learning/dissemination.

YR1: Review o f the MCS categories that are to be linked to the budget process. YR2-5 : Implementation o f the new conceptual model and information linkages.

YR1: assessment o f needs.

42

Intermediate Outcomes

through upgraded SIAP in D P R E S

Strengthened Management Control System.

Component 3: Strengthening Financial Administration at the Municipal Level

Improved aggregation o f financial information at the municipal level

Strengthened financial

Intermediate Outcome Indicators

including interoperability with SIGFE.

100 percent o f management and control tools are interlinked through an information system.

100 percent o f the interfaces identified by conceptual model and designed to make the M C S information system interoperate with SIGFE and SIAP, have been implemented.

The indicator o f coverage of M C S i s quantified and 100 percent automated.

Aligning M C S indicators with financial indicators

Integration o f the new monitoring indicators in the Budget

Increased Transparency o f Fiscal Monitor ing o f Municipal Finances: Financial information and expenditures on at least 100 municipalities i s available inNational Information System o f Municipal Financial Administration, which i s a capable to aggregate the financial information o f a l l 345 municipalities.

Information o n aggregated municipal budget expenditures has been reduced from as much as 180 to less than 30 days.

Capacity Building in at least 100

Use of Intermediate Outcome Monitoring

YR2: design o f SIAP. YR3-5: implementation.

YR1: strengthening M C S modules YR2: design the new M C S YR3-5: implementation YR1: assess monitoring gaps YR2: design new mechanisms YR3-5: implementation

M C S indicators aligned by 2009

In the 2009 Budget: 18 to 20 new indicators are integrated In the 2012 Budget: a l l new indicators are integrated

Periodic reports, mid term evaluation, learning/dissemination

During YR 1 : Determine i f basic institutional capacities are in place; ver i fy that DPRES, CGR and SUBDERE are effectively coordinating efforts; identify resistance from stakeholders at the municipal levels.

During YR 2: Determine if implementation strategy needs to be changed.

YR 3-5: Identify systemic delays in information inputs fi-om municipalities.

YR 1-4: Identify resistance or

43

Intermediate Outcomes

administration at the municipal level

Component 4: Project Management, Monitoring and Evaluation

Intermediate Outcome Indicators

municipalities on new Financial Management Systems.

Use of Intermediate Outcome Monitoring

Effective coordination o f entities implementing SIGFE in the Central and the Municipal Government Entities

weak technical capacity among municipalities that might hamper the adoption o f electronic financial administration sub-systems.

Project implementation and coordination as well as the monitoring and evaluation o f the implementation process.

~~~

Periodic reports, mid term evaluation, learning/dissemination

FY 1-5: ongoing dialogue among entities and initiatives for knowledge sharing. FY 1-5 : Identification and mitigation o f possible constraints and delays to project implementation.

44

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Annex 4: Detailed Project Description

CHILE: Second Public Expenditure Management

Sector issues

This operation would consolidate and expand o n the progress made under the First Public Expenditure Review Project (SIGFE I, Loan No. PO69259-CL), which closed June 30, 2007. With support from SIGFE I, Chile’s Government has been modernizing the country’s financial administration for 4 years. One o f the triggers that set the reform process in motion was the Government’s increasing awareness o f the need for a major overhaul o f existing public finance procedures together with the introduction o f modem information systems. In that context, the Government requested Bank support in the development o f an integrated Financial Administration System (Sistema de Informacidn Financiera para la Gestidn Financiera del Estado - SIGFE), aimed at improving the quality and timeliness o f financial information so as to enhance transparency in the management o f public resources.

The proposed operation would enable the Government to fbrther develop SIGFE and extend its reach to al l Central Government Entities. In addition, support would be provided to improve budget and management control to enhance the overall transparency and efficiency in the management o f public resources. Finally, the proposed operation would support Government efforts to strengthen financial management in Chile’s 345 municipalities by enhancing their capacity to manage their own resources as wel l as the central government’s ability to monitor municipal finances through the development o f a Municipal Financial Information System. Together, these two systems (Le., SIGFE and SIGFMU) would cover 100 percent o f public expenditures. As a result, aggregate financial information for the central government would be available o n a daily basis compared with a lag o f one month at present. Aggregate financial information for municipalities would be available with a lag o f less than one month compared with 4- 16 months at present.

Project Description

The operation would consist o f four components: Component 1 - Upgrading and Expansion o f SIGFE; Component 2 - Improvement o f Budget Procedures and Mechanisms o f the Management Control System; Component 3 - Strengthening Financial Administration at the Municipal Level; and Component 4 - Project Management. The fol lowing table provides the detailed costs and financing for each component.

51

Table 6: Detailed Project Cost and Financing

Cost and Financing Table

Component 1 - Upgrading and Extending the Financial Information System to the Central Government Entities

Project Costs Project Financing I I I

Local External Total

11,519,296 19,533,759 31,053,05 ~ 17,086,278 13,966,778 31,053,056

Sub-component 1.2 - Extending SIGFE to Central Government Entities

and Expanding SIGFE Functions Sub-component I. 1 - Upgrading

1,861,138 2,791,707 4,652,846 2,791,707 1,861,138 4,652,846

Component 2 - Improvement of Budget Procedures and Mechanisms of the Management Control System

Sub-component 1.3 - Strengthening the Public Treasury 1 596,2061 894,309 1,490,5 151 894,309/ 596,206 1,490,5 15

1,889,012 2,833,519 4,722,531 2,833,519 1,889,012 4,722,531

Sub-component 2.2- Strengthening the Management Control System

Sub-component 2. I Improvement of Budget Procedures 1 1,234,9381 1,852,404 3,087,3461 1,852,404 1,234,9381 3,087,346

654,074 981,111 1,635,185 98 1,111 654,074 1,635,185

Component 3 - Strengthening Financial Administration at the Municipal Level 745,185 6,717,778 7,462,963

Sub-component 3. I- Development of a Municipal Financial Information System 671,111 1,806,667 2,477,778 1,486,667

52

991,111 2,477,778

Sub-component 3.2 - Installation of a Sub-System of Municipal Financial Administration 74,074 4,911,111 4,985,185 2,991,111 1,994,074 4,985,185

Component 4 - Project Administration

Total

3,017,778 360,000 3,377,778 360,000 3,017,778 3,377,778

17,171,272 29,445,056 46,616,327 24,757,574 21,858,753 46,616,327

Component 1 - Upgrading and Extending the Financial Information System to the Central Government Entities (US$31.1 million of which US$I 7.1 million would be financed by the Bank loan): This component would provide technical assistance, training, equipment and the design and development o f software for an upgraded SIGFE system, which would be extended to al l Central Government Entities, as well as associated software licenses. In particular, i t would support the further development and consolidation o f SIGFE by: (i) upgrading the I C T and technical design o f SIGFE modules; (ii) improving and optimizing its functionality, interoperability and reporting; and, (iii) enforcing standards issued by Normative Entities in al l entities using homologated systems. There would be three sub-components as follows:

Sub-component 1.1: Upgrading and Expanding S I G F E Functions (US$24.9 million of which US$13.4 million would be financed by the Bank loan): This sub-component would provide assistance to transform SIGFE into a modem integrated web-based system by: (i) eliminating redundant and outdated operations, increasing processing capacity and better integrating the transaction, aggregation and configuration modules; (ii) updating the software to improve budget execution, accounting and treasury functions; (iii) strengthening the interoperability o f SIGFE with other systems; (iv) optimizing the reporting capacity o f SIGFE for the benefit o f internal and external users such as other public sector entities, Congress, and Normative Entities; and (v) mainstreaming the organization and functions o f SIGFE within DIPRES and within the financial management units o f Central Government Entities.

The activities to be financed within this sub-component include: Updating o f software to improve and optimize SIGFE functions, especially with respect to budget programming, budget execution, and accounting and treasury functions. Upgrading software and hardware to overcome operational problems, increase processing capacity, facilitate the integration o f a l l modules, and increase automatic l inks between different budget, commitment and accounting classifications. Strengthening the capacity o f SIGFE to prepare reports for internal and external users, such as other public entities, Congress, and the Normative Entities. Improving SIGFE to allow interconnectivity with other systems such as ChileCompra (Chile’s e-procurement system), MIDEPLAN’s public investment database (Banco Integrado de Proyectos - BIP) and other systems aimed at improving the decision-making process, including fixed asset and cash management. Strengthening the capacity o f financial units within Central Government Entities and diagnostic o f the improvement needs o f key processes within the financial administration and o f the normative framework related to the access and processing o f data. Supporting the integration o f SIGFE as an operational unit within DIPRES on the basis o f best international practice. Implementation o f a system for aggregation and consolidation o f financial information o f the general government with financial and accounting information provided by the Central Government Entities and municipalities.

Sub-Component 1.2 - Extending SIGFE to Central Government Entities (US$4.7 million of which US$2.8 million would be financed by the Bank loan): This sub-component would finance the expansion o f the transaction module o f SIGFE or, alternatively, the certification o f agency- developed or market-developed products to assemble financial information from a l l Central

53

Government Entities. Although the transactional module o f SIGFE has been adopted by 90 percent o f a l l CGE, the remaining 10 percent represent a large share o f the budget. These entities include: the National Treasury, the Ministry o f Public Works, the Legislature and the Judiciary. This sub-component would support the integration o f existing system into SIGFE though assimilation or certification (homologation). Further this component would finance the integration o f SIGFE into the National Pension Administration (Instituto Definit ion o f reporting standards consistent with the norms issued by the Normative Entities for the Central Government Entities, which have financial information systems other than SIGFE: 0 Definit ion o f reporting standards consistent with the norms issued by the Normative Entities

for the Central Government Entities, which have financial information systems other than S IGFE .

0 Analysis and evaluation o f the results o f the implementation process o f market products used in Central Government Entities, e.g., the Corporation for Production Development (Corporacidn de Foment0 de la Produccidn - CORFO). Implementation o f one such market products on a pi lot basis in one institution such as the Ministry o f Public Works or the Tax Revenue Services. Diagnostic o f the improvement needs o f the financial management processes in Central Government Entities so that they may be integrated into SIGFE. Instalation o f SIGFE or alternative systems in the Borrower’s Pension Administration Agency (Instituto de Normalizacidn Previsional) or its successors. Provision o f hardware for the implementation o f SIAPER in the Central Government Entities.

0

0

0

Sub-Component 1.3 - Strengthening the Public Treasury (US$1.5 million of which US$0.9 million would be financed by the Bank loan): This sub-component would focus o n the modernization the Treasury and the treasury functions to improve the recording o f accounting and budget transactions. Today, the Treasury operates with a Single Fiscal Account (Cuenta Fiscal UniJicada) and it transfers funds to subsidiary accounts in 600 entities. I t has been estimated that public entities have around 7000 accounts in all. Hence the day-to-day financial operations o f the public sector are unnecessarily complex and difficult for the Treasury to monitor.

Activities to be financed include: 0 Revision and updating o f the conceptual module, including norms and procedures, to update

accounting and budget records o f the Public Treasury. 0 Revision o f norms and procedures used in the recording and administration o f financial

assets and liabilities. 0 Design and implementation o f improvements to the Public Treasury accounting and budget

records system 0 Review o f the interconnection between such improved accounting and budget systems with

other information and management subsystems o f the Public Treasury, consistent with the norms and procedures approved by the Normative Entities.

Component 2: Improvement of Budget Procedures and Mechanisms of the Management Control System (US$4.7 million of which US$2.8 million would be financed by the Bank loan):

54

This component would focus on supporting efforts to enhance the quality o f public expenditures by strengthening the M C S and integrating it into the Budget Cycle. Specifically, this component would focus o n developing and implementing: (i) a new conceptual model for the Budget Cycle, linking the budget classification with information categories o f the MCS; (ii) a M C S information system; and (iii) a new version o f the budget formulation system (SIAP) used by DIPRES. Innovative methods o f budget formulation would be developed for selected pol icy modules and the capacity o f DIPRES to undertake results-based monitoring and evaluation would be strengthened. This component consists o f two sub-components

Sub-component 2.1 - Improvement of Budget Procedures (US$3.I million of which US$1.9 million would be financed by the Bank loan): This subcomponent would support the development o f new budget processes and techniques to enhance the overall quality o f budget design. Whi le Chile’s budget systems are well-developed, there i s s t i l l room for fbrther improvement, particularly in terms o f linking the allocation o f resources with measurable results. The incentives for client entities to participate in SIGFE would be enhanced by demonstrating how performance-based management can help them improve their own effectiveness and efficiency.

The activities to be financed include: 0 Developing a conceptual model for integrating information from the Borrower’s M C S into

the Borrower’s budget formulation process, including linking the budget classification with the information categories o f the MCS.

0 Developing new budget techniques such as budget formulation by pol icy areas and performance-based-budgeting.

0 Developing and implementation o f an improved version o f the budget formulation system (SIAP) in DIPRES interconnected with SIGFE and the MCS.

0 Studies to improve the borrower’s budget process, including public treasury functions and cash management.

0 Strengthening DIPRES’ capacity to generate information to be provided to Congress.

The upgraded M C S wil l be included in the budget cycle as follows:

55

Figure 5: Budget Cycle

Table 7: Improvements and Expected Benefits from Updating and Extending SIGFE

SIGFE Module

SIGFE Transactions

Areas to be improved

1. Usability

2. Strengthening the programming o f budget execution.

3. Inter-connectivity

4. Optimizing SIGFE functions.

Benefits The multiple-entry o f data would be eliminated by increasing the automation o f operations. For example, “payments outstanding’’ would be automatically linked to the original budget entry. The programming o f budget execution would be redefined, by allocating funds on a provisional basis that would be automatically adjusted to accommodate “payments outstanding”. The exchange o f data between different modules and subsystems o f the Financial Information system would be facilitated, as would the interconnection with other public sector data systems (e.g. ChileCompras). The operational scope o f the present functions would be expanded and incorporated into the financial management system. For example, new features could include reconciliation o f budget data with banking data in multiple currencies, dissemination of data within and between institutions, fixed assets, electronic sirmatures. etc.

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SIGFE Module e

1 SIFGE Aggregation

Areas to be improved

1. Decentralizing the configuration o f SIGFE.

2. Adapting transaction data to suit the sector and functional responsibilities o f public sector entities.

3. Adapting the time frame for transaction data to the needs and convenience o f public sector entities.

4. Structuring the classification and characteristics o f transactions within the budget.

1. Developing functions for consolidation and reclassification.

2. Expanding the availability o f structured and semi-structured reports.

3. Establishing a publicly accessible website for budget execution

Benefits Each level within the hierarchy o f the financial administration would be able to configure the system according to i t s needs within the limits o f i t s authority. All entities and administrative units providing inputs to SIGFE would be able to record and submit data in a format suited to their operational requirements, albeit within a consistent overall budget and accounting framework. Each level within the hierarchy o f the financial administration would be able to establish parameters (dates and hours) to define i t s reporting period and SIGFE would have the ability to consolidate data within a common time frame. All entities and administrative units linked to SIGFE would be able to structure the components o f their budget and the accounting framework with a degree o f detail that reflects their individual needs. SIGFE would be better able to furnish reliable and timely information to support decision making throughout the Central Government.

The facilities for non-specialized users to generate reports would be enhanced.

A web site would be established showing the budget execution o f the Central Government, thereby increasing transparency and the availability o f information to supervisory organisms, civi l society, international organizations, and citizens in general.

Sub-component 2.2 - Strengthening the Management Control System (US$I. 6 million of which US$l.O million would be financed by the Bank loan): The objectives o f this sub- component are: i) to put in place a conceptual model for integrating the budget process into the Management Control System; ii) to encourage the use o f information from the M C S as an input for decision making during the budget cycle; and (iii) to develop and implement an management and control information system that incorporates M C S tools and that interoperates with the financial administration system. The implementation o f this subcomponent will be the responsibility o f the Management Control Div is ion (Division de Control de Gestidn) o f DIPRES.

A strengthened MCS, better integrated with the decision making process o f the budgetary cycle, would contribute to increase the quality o f public expenditures in terms o f their effectiveness and

57

their efficiency. A linkage between the M C S information system and the financial administration system would result in an integrated system.

The activities to be financed within this sub-component include:

0

0

0

Strengthening the existing information technology instruments used by the M C S and integrating them better. Developing and implementing an M C S information system that interoperates with SIGFE and S U P , as defined in the conceptual model described under sub-component 2.1. Strengthening the institutional capacities o f the M C S so that it may operate along the lines envisaged by the conceptual module described under sub-component 2.1. Developing a new methodology to quantify a ‘coverage indicator’ o f the MCS. This new indicator will measure the relative weight o f public sector programs included under the M C S as a percentage o f the public sector programs in the overall budget. Improve processes to enable decision makers in government entities and in Congress to make more efficient use o f information generated by the MCS. Reporting formats would be adapted to the specific needs o f users.

Component 3 - Strengthening Financial Administration at the Municipal Level (US$7.5 million of which US$4.5 million would be financed by the Bank loan):

This component would focus on: (i) improving the availability o f financial information on municipal budgets, including financial transfers from the central government, and on budget execution for al l 345 municipalities; (ii) strengthening the financial administration at the municipal level; and (iii) improving the effective use o f transfers made by the central government to municipalities, for example through the Common Municipal Fund. Implementation o f this component would be a collaborative effort between the Off ice o f the Comptroller General (CGR) and the Sub-secretariat for Regional Development in the Ministry o f Interior (Subsecretaria de Desarrollo Regional y Administracidn - SUBDERE). Financial management, procurement and contracting would be done by DIPRES. Finance would be provided for technical assistance, supplies and training within two sub-components, as follows:

Sub-Component 3.1 - Development of a Municipal Financial I n formation System (US$2.5 million of which US$1.5 million would be financed by the Bank loan): This sub-component would support the development and implementation o f a Municipal Financial Information System for al l municipalities. This system would be capable to aggregate and integrate financial information from all, presently 345, municipalities according to the normative framework - e.g., budget classifications and accounting framework (Plan de Cuentas) - defined by the corresponding Normative Entities (organismos rectores). It would encompass financial information corresponding to the administrative responsibilities assigned to municipalities - e.g., municipal management, health, education, and cemeteries.

The activities to be financed within this sub-component include: 0 Develop and implement a Municipal Financial Information System, which will be linked to

the Municipal Financial Administration Sub-Systems, and i s capable to aggregate and integrate financial information from the sub-systems o f a l l municipalities. This system would

58

be both flexible and dynamic and, thus, able to respond to the changing needs o f the users. The conceptual model wil l be based on the aggregation module o f SIGFE I. Develop an interface linking the Municipal Financial Information Sub-systems to the new Municipal Financial Information System within SUBDERE. Define norms to standardize the financial information o f individual municipalities according to requirements specified by the Normative Entities to meet the needs o f internal and external users; and streamline the reporting required from municipalities by CGE. Strengthening the Government’s capacity, in particular DIPRES and SUBDERE, for analyzing and monitoring o f the financial situation o f municipalities. Disseminate information about the Municipal Financial Information System to municipalities and the ACHM. Training users in the use o f the system.

Sub-Component 3.2 - Installation of a Sub-system of Municipal Financial Administration (US$5 million of which US$3 million would bejhanced by the Bank loan): This sub-component would strengthen financial administration at the municipal level by developing and implementing a simplified sub-system o f financial management in municipalities that currently lack satisfactory systems. The financial management o f other municipalities would be upgraded to ensure they meet the standardized norms defined under the Municipal Information System. The component would develop new systems for municipalities that do not have a system or upgrade municipal systems if they are substandard. This component would cover about one hundred municipalities. The financial administration sub-system would cover budget, accounting and treasury functions. I t would be consistent with the normative framework established by Normative Entities, such as the budget classifications jo int ly determined by CGR, DIPRES and SUDBERE, as wel l as with the accounting processes (Plan de Cuentas) established by the CGR. This subsystem would also comply with the standards defined under the Municipal Information System. Special emphasis would be placed on training municipal authorities and officials not only in the use o f the financial administration subsystem but also o n the use o f information to enhance decision making. Implementation at the municipal level would capitalize on the lessons learned during the deployment o f the Chile’s electronic procurement system (ChileCompra) at the municipal level.

The activities to be financed within this sub-component include: Diagnosis o f the information technology and communication capacity at the municipal level, based on a survey o f the technological infrastructure currently available in the Municipalities, including internet access and broad-band connection. Diagnosis o f the financial administration systems available in the market, their capabilities and the cost o f installation and operation o f such systems. Strengthening the capacity o f selected Municipalities to operate financial administration subsystems and the Municipal Financial Information System. Strengthening o f financial administration o f selected Municipalities, including, inter alia, the provision o f equipment and the introduction o f a system o f financial administration in those municipalities that currently lack one, including data assembly, testing, and equipment, data migration and implementation o f the Technology Upgrading Plans, as applicable. Provision o f training programs for municipal authorities and staff, focusing on the operation o f the new financial administration sub-system and the use o f information f rom it.

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Component 4 - Project Management (US$3.4 million of which US$0.4 million would be financed by the Bank loan):

This component would cover operating expenses, with the Borrower contributing US$3 .O mil l ion o f counterpart funds, related to the following activities: 0 Provision o f technical assistance to Central Government Entities as part o f the

0 Strengthening the Government’s capacity to monitor and supervise the overall implementation o f SIFGE or SIGFE-compatible financial administration systems.

implementation o f the Project.

Information & Communication Technology (ICT) Strategy

SIGFE I - ICT architecture and information systems: Under the first Public Expenditure Management Project, the Bank supported the introduction o f the Integrated Financial Management System (SIGFE), which comprises three major modules or sub-systems:

1) Transaction SIGFE: This module was developed in 2001 based on Microsoft technology. I t has a complex design that makes further expansion o f the module difficult.

2) Aggregation SIGFE: This module was developed more recently using a combination o f open platforms (Java, Linux) and Oracle Systems.

3) Configuration SIGFE: This module was developed in parallel to the Transaction SIGFE and on the same Microsoft platform. However, i t was never fully developed and i t can only handle the init ial loading o f information. Subsequent changes must be made semi- manually.

The transaction module o f SIGFE operates in a remote access mode with base servers that are located in the DIPRES building. I t i s used by 159 institutions and 189 hospitals throughout the country.

There are another 25 central government institutions, defined as standardized entities (homologadas), which do not use the transaction module o f SIGFE, but instead operate a variety o f financial management systems, among which the system C G U 6 (of the Chilean company Browse) i s the most prevalent. Twelve o f those systems are in operation today and DIPRES used the same system before converting to Transaction SIGFE. Other financial management systems in use in the Chilean central public administration are the SAFI-Millennium system o f the Armed Forces, the SIGAC o f the Public Works Ministry, both o f which have been installed in three entities, S A P , which has been adopted by two entities (CORFO and InnovaChile), and four other systems each o f which has been adopted by only one agency.

In 2001, a f i rst analysis was made o f these diverse applications with the objective o f identifying key functional requirements for SIGFE. This analysis has not been updated and there i s no assessment o f how best to incorporate these 25 institutions within the planned new Transaction SIGFE. Another six ‘special cases’ exist, among which are the 3 institutions o f the Legislative Branch, the INP, the CENABAST and the Public Treasury, none o f which use Transaction SIGFE. They simply forward their own accounts to DIPRES and CGR. This information i s

60

incorporated into the Aggregation SIGFE. Hence, DIPRES does not have information on the finances o f these institutions at the transaction level, but only at the aggregate level.

SIGFE 11 - Planned ICT Architecture and Information Systems: The SIGFE team i s proposing a new Transaction SIGFE version 2. I t predominantly uses open standards based on J2EE specifications, with minimal proprietary elements if needed, at the database engine level. In order to ensure scalability and adaptability, a modular application development strategy i s envisaged based on a services-oriented architecture (SOA). This approach allows for the incremental development o f applications, which facilitates i t s f i ture adaptation to changing requirements. In turn, this facilitates the integration o f the system into a Web environment. Interoperability i s built in to SIGFE modules, and they integrate we l l with other DIPRES applications, as well as with other entities’ applications (in particular ChiZeCompru and the Planning Ministry systems, such as Bunco Integrudo de Proyectos - BIPE). From the point o f v iew o f the user al l the modules and systems look l i ke and operate as one single application (see Diagram 1). Figure 6: SOA Architecture for the Integration of SIGFE’s and other Information Systems

The requirements analysis for the new Transactional SIGFE application employs a standard RUP methodology (originally developed by IBM), within the context o f overall standardized processes in l ine with the Capability Matur i ty Model Integration (CMMI). That will facilitate development because the specification o f requirements can be readily formalized.

The following tasks wil l be outsourced: 1) the detailed IT design and construction o f the application, 2) testing for conformity, and 3) the evaluation o f the application’s user friendliness. The SIGFE team proposal i s to recruit different companies for these three tasks, based on

61

international and national competitive bidding, with the objective o f having the application developed during 2008 and implementation begun in 2009. The technical platform may also be outsourced. The project team i s considering contracting an external datacenter and using the current DIPRES data center as a backup. Box 2: Strategic Principles for the Updating and Expansion of SIGFE

Strategic Principles for the Updating and Expansion of SIGFE

The incorporation o f technology into operational processes requires a broader perspective that looks beyond the deployment and operation o f a system. It must also provide for regular maintenance and upgrading. The pace o f technological innovation requires that systems be updated approximately every four years. The Government has undertaken a series o f technical studies to determine the strategic principles that should guide the upgrading o f SIGFE and expanding i t during the next cycle o f development. Seven principles have been identified, with a particular focus on the ITC strategy: The upgrading and further development o f SIGFE must be in accordance with the existing legal framework, including laws, decrees and regulations pertaining to electronic documents and communications, as well as their security. New software-developed either in-house or commercially-has to follow J2EE (Java Enterprise Edition) specifications. A reference model ITIL (Information Technology Infrastructure Library) will be adopted for enhanced user support. The reference model C M M I (Capability Maturity Model Integration) will be adopted to guide the development, expansion and updating o f all the systems developed under the SIGFE umbrella. A services-oriented architecture (SOA) will be adopted to facilitate the internal and external integration o f SIGFE. All technological developments will operate under open-standards that have been endorsed reputable international organizations with respect to technological neutrality. The SIGFE project will focus on the technical and technological aspects o f financial and accounting processes and it will outsource highly specialized ITC services.

Source: DIPRES (2006), Informe de las Finanzas Phblicas - Provecto de Lev de Presupuestos del Sector Publico para e l aiio 2007, October 2006

The Government, with the endorsement o f the Bank, i s also considering possible commercial _ _ - - - __ . - - ~. . . .. - -- - _ - - - products that could replace SIGFE in the long run. That would relieve DIPRES of the need to continue developing new versions o f SIGFE. To that end, a pi lot survey i s planned in one or two o f the entities currently using accredited applications with a view to adopting a ‘world-class,’ integrated financial management information system. The evaluation o f this pi lot survey wil l include an assessment o f the experience with the S A P system, currently in use at CORFO.

An important step towards mainstreaming the SIGFE team within DIPRES has been to appoint the head o f the I C T unit o f DIPRES as the person in charge o f ICTs for the SIGFE project. Given the strategic importance o f ICTs for DIPRES and the need to make sure that technology and the strategic priorities o f the institution are well aligned, a number o f options are being considered. One option would be to establish a CIO position. Many private companies have taken that route and i t i s also becoming common practice in the public sector o f developed countries.

62

Annex 5: Project Costs

CHILE: Second Public Expendi ture Management

Project Cost B y Component

1. Upgrading and Extending the Financial Information System to the Central Government Entities

1.1. Upgrading and Expansion o f SIGFE’s functionalities

1.2 Expansion o f SIGFE to Central Government Entities 1.3 Strengthening the Public Treasury

2. Improvement o f Budget Procedures and Mechanisms of the Management Control System

2.1 Improvement o f Budget procedures

2.2 Strengthening the Management Control System

3. Strengthening Financial Administration at the Municipal Level

System

Administration

4. Project Management

Unallocated Funds Front end fee

3.1 Development o f a Municipal Financial Information

3.2 Implementation o f a Sub-system o f Municipal Financial

Project Cost by Component (Local and Foreign)

11,519.3 9,061.0

1,861.1 596.2

1,889.0 1,234.9

654.1

745,2

671.1

74,l

3,017.8

070

19,533.8 31,053.1 15,847.7 24,909.7

2,791.7 4,652.8 894.3 1,.490.,5

2,833.5 4,722.5 1,852.4 3,087.3

981.1 1,635.2

6,717,s 7,463.0

1,806.7 2,477.8

4,911.1 4,985.2

360.0 3,377.8

090 090 0.0 030

bo ta l Project Costs

Local I Foreign I Total US% thousand

17.171.31 29.445.01 46.616.31

63

Project Cost Summary by Component - Bank Financing; (US

- 1. Upgrading and Extending the Financial

Information System to the Central Government Entities

functionalities

Entities

2. Improvement of Budget Procedures and Mechanisms of the Management Control System

1.1. Upgrading and Expansion o f SIGFE’s

1.2 Expansion o f SIGFE to Central Government

1.3 Strengthening the Public Treasury

2.1 Improvement o f Budget procedures 2.2 Strengthening the Management Control Systen

3. Strengthening Financial Administration at the Municipal Level

Information System

Financial Administration

4. Project Management

Unallocated Funds

Total Project Cost Front end fee

3.1 Development o f a Municipal Financial

3.2 Implementation o f a Sub-system o f Municipal

Total Financing Required

1 ComDonent I

[ndicative Cost N S $ million)

31.1

24.9

4.7

1.5

4.7 3.1 1.6

7.5

2.5

5 .O

3.4

46.6

46.6

million)

- Yo of Total -

66.7%

10.1%

16.1%

7.3%

100.0%

100.0%

Bank financing

million)

- cus$

17.1

13.4

2.8

0.9

2.8 1.8 1 .o

4.5

1.5

3 .O

0.4

24.8

24.8

- Yo of - Bank

tinancinq

69.0%

11.3%

18.1%

1.6%

100.0%

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Annex 6: Implementation Arrangements

Chile: Second Public Expenditure Management

The Loan Agreement i s expected to become effective in October 2007 and the Project wil l be implemented over a five year period, through December 2012.

Implementation

DIPRES would be the executing agency for this Project. I t would assume responsibility for the U$S 21.8 mi l l ion o f counterpart funds provided by the Ministry o f Finance. The overall Project responsibility l ies with the Project Implementation Unit (PIU) in DIPRES. A PIU was set up in DIPRES under the previous project and i t wil l continue to function under the proposed operation. The ability o f DIPRES to implement Bank projects, i s amply evidenced by the successful implementation o f SIGFE I. A s a result, i t has well-trained staff, substantial experience in the supervision o f consultants, and in al l aspects o f project management. Given the gradual rotation o f personnel, project staff wil l receive additional training in procurement.

The PIU would be headed by a Project Coordinator and would comprise a Deputy Project Coordinator, Component Coordinators and administrative staff including a financial management expert, a junior accountant, a procurement specialist and one assistant. I t will also include a Monitoring and Evaluation Specialist and a Change Management Specialist. I ts organization and functions i s to be detailed in a revised Operational Manual, satisfactory to the Bank. The Operational Manual includes the terms o f reference, finctions and responsibilities o f the PIU, the procurement procedures as defined in Annex 8, the monitoring indicators as defined in Annex 3, draft models for the Municipal Agreement and the Entity Agreement, as well as the disbursement arrangements described in Annex 7.

The PIU wil l coordinate the project activities with DIPRES, Comptroller General Office, National Treasury and SUBDERE. I t s main responsibilities would be: a) monitoring the execution and evaluation o f project activities, b) monitoring funding from al l sources, c) coordinating and keeping a registry o f procurement according Bank rules, d) monitoring compliance with legal arrangements, e) preparing biannual status reports and ensuring that they are delivered to the Bank in a t imely manner, f ) ensuring the preparation o f annual financial statements for external auditing. The P I U wil l also implement Components 1 and 2.

The National Project Director will be the Deputy Director for Budget in the Ministry o f Finance. H is main responsibilities would be (i) to manage the PIU and ensure project execution; and (ii) to approve the annual plan and the annual progress report. SUBDERE i s the central government agency appointed to manage regional and municipal development, strengthen municipal governments and oversee decentralization. I t i s the direct counterpart that manages the relations between municipalities and the central government level. Thus SUBDERE would be the counterpart agency for implementing the municipal component.

Inter-institutional Coordination under the leadership o f DIPRES has been agreed by DIPRES , CGR, SUBDERE, and Public Treasury, to provide strategic leadership for project implementation.

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Implementation o f Component 3 wil l be done by SUBDERE. I t i s the direct counterpart o f the municipalities and manages the relations between municipalities and the central government.. All the activities related to SUBDERE would be implemented under the supervision o f DIPRES. SUBDERE will provide procurement, financial and accounting services. Technical and fiduciary staff will be appointed to implement the component. The staff wil l include among others a financial management expert, an accountant and a procurement specialist.

Financial and Acco ................................................................................................................................................................................................................................................................�� *.. ....,*

L

To ensure appropriate reporting with respect to Bank supervision, SUBDERE would submit to DIPRES financial and implementation-monitoring data as appropriate. In addition SUBDERE wil l seek approval o n a no-objection basis from the D P R E S where applicable.

The project would place strong emphasis on coordination with other institutions, particularly l ine entities, ministries, municipalities and the Chilean Association o f Municipalities. The fol lowing table shows the institutional framework, and the anticipated structure o f the Project Implementation Unit.

A sequencing plan has been agreed upon that wil l help prioritize investments over the five year implementation period. The project wil l include retroactive financing and a large part o f the investments will take place in 2008 and 2009. The main focus wil l be on the measures to foster efficiency under the f i rst component and o n the measures to foster transparency under the third component. Those measures are designed to improve service-delivery and improve the detection o f fraud and error. Figure 7: SIGFE II- Project Administration and Implementation Structure

I Project Implementation 1

...A, ...... ~ ....... " ................. " ... I 1

\ ._______-__ i Coordination Component 1

No-Obiection ~

Coordination Component 2-1

1 I

1

I Coordination Component 3 1

Monitoring and evaluation

There wil l be a sharp focus o n establishing a sound monitoring and evaluation (M&E) system for the project. One o f the lessons o f SIGFE I is the need to have a solid result-oriented M&E to

66

provide reliable information on project implementation. Responsibility for M&E would be shared between DIPRES (Project Unit, I C T and M&E Departments), the CGR, SUBDERE and external stakeholders. Internal and external independent progress reviews wil l be complemented by participatory M&E carried out by stakeholders and local universities to engender a greater sense o f ownership. Monitoring instruments include reports with indicators o f process, progress, outcome, and results. A combination o f ex ante and ex post monitoring; impact evaluations and user surveys wil l be employed. Emphasis will be on continuous learning to ensure that M&E results are effectively used to enhance project performance. Use will be made o f the M&E framework developed by DIPRES to monitor and evaluate government programs financed by the central government budget, including baseline measurements and performance indicators developed by DIPRES and SIGFE. The M&E will be refined in the course o f project implementation, as a key part o f component 2. I t would provide an important instrument to monitor and evaluate the impact o f SIGFE. Annual reviews will be carried out before December 31 o f each year and mid-term review would be conducted no later than March 30, 2010. Semi- annual financial progress reports would be presented to the Bank in April and October o f each year.

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Annex 7: Financial Management and Disbursement Arrangements

CHILE: Second Public Expenditure Management

Summary and Conclusion

Arrangements for the Financial Management o f loan implementation satisfactorily meet Bank FM requirements. The FM risk for the operation i s low. The Project will be implemented following same arrangements as for the previous projects. The FM performance o f those projects was satisfactory in terms o f the capability o f project implementation units, internal controls and flows o f funds.

Country Background

As spelled out in the 2005 Country Financial Accountability Assessment (CFAA), Chile scores high with respect to financial management, fiscal discipline, transparency and operational efficiency. All financial management operations are governed by clear rules and strict adherence to the rules. There is a dedicated and qualified staff and management, which respect ethical and efficient behavior and there i s a matching o f responsibility with accountability.

Given this high financial management performance and strong institutional capacity, the country financial management r i s k o f Chile i s l ow and the execution o f Bank supported operations i s usually fully incorporated in the systems for budget formulation, budget execution, accounting and treasury. The Bank is currently working with IDB and the Government to use country systems for the purpose o f reporting to the Bank and to harmonize those reporting requirements with IDB.

Strengths

Project Implementation Unit (PIU) capacities are satisfactory for the financial management o f the project. The Project Unit has already successfully implemented a Bank funded Operation (Public Expenditure Management Project). I t i s staffed with qualified and experienced professionals, and i t s administrative and internal control procedures are satisfactory. Country systems are used for budgeting, accounting, and internal control.

Risk Assessment and Mitigation

Overall FM risk at entry is low. Overall FM risk consists o f Inherent Risk (country level and entity level) and Project Control Risk (Budgeting, Accounting, Internal Control, Flows o f funds, Financial Reporting, and Auditing). Considering the high quality o f FM used for the project, Inherent and Control Risk components are l o w and no specific mitigating measure i s required.

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Table 8: Risk Assessment and Mitigation Financial Management)

. Accounting - Project budgeting, accounting, and treasury operations fully integrated into country system . Internal Control

Risk

Low

L o w

Risk Rating

. Financial Reporting . Auditing - Excellent CGR Derformance and timelv audit comdiance

I Inherent Risk I I

Low

Low

. Country Level L o w

Projectl Entity Level L o w

Control Risk . Budgeting Low

. Funds Flow 1

I Overall Residual Risk rating I Low I

Implementation Arrangements

DIPRES wil l be the executing agency for this Project. A Project Implementation Unit (PIU) has been set up in DIPRES under the previous project, which will continue to retain overall responsibility for project financial management comprising: accounting and financial reporting, budgeting, internal control, treasury operations and external audit and for project procurement. I t wil l also assume responsibility for the local counterpart contribution to the Project that wil l be provided by the Ministry o f Finance. The PJU in DIPRES wil l also oversee and coordinate a small group o f staffs in SUBDERE, which wil l be primarily in charge o f financial accounting and procurement o f Component 3 o f the Project. SUBDERE has qualified and experienced staff in procurement and financial management that successfully implemented a previous Bank- financed project Second Municipal Development Pr. PO55480 - Loan # 4429, closed December 31, 2004. All the procurement and financial information o f Component 3 wil l be reported by SUBDERE to DIPRES on a monthly basis, and to ensure timely financial reporting to the Bank. DIPRES wil l consolidate the financial data and prepare the interim and annual financial statements and the Procurement Plan for the Project as a whole.

Budgeting, Accounting, and Financial Reporting

Country Integrated Financial Management System (SIGFE) will be used for project budgeting and accounting. Internal control will rely o n the controls embedded in DIPRES-Ministry o f Finance system and the other components o f Chilean public sector internal control framework.

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SIGFE will also be used for purposes o f project financial reporting to the Bank. Data wil l be extracted from the system for the preparation o f project financial reports and Statements o f Expenditure (SOEs). Project financial reports will be prepared by the PIU. Project financial reports wil l consist o f annual financial statements and semiannual Interim Unaudited Financial Reports (IUFRs) as part o f project progress reports. Annual financial statements will be on accrual basis; consistent with International Accounting Standards; and subject to annual audit. IUFRs will be reviewed in the course o f Bank supervision. Financial Statements and IUFRs wil l fol low the same format as in the previous project. They are acceptable to the Bank and are incorporated in the Operational Manual. IUFRs should include:

Sources and uses o f funds for each semester and cumulative (uses by category), and uses o f funds by component; Physical progress: Budget allocation and financial execution compared to physical progress and results achieved.

Disbursement Arrangements

Disbursement Methods that may be used under the Loan are (i) Reimbursement; and (ii) Direct Payment.

Supporting documentation for project eligible expenditures should be provided with each application for withdrawal as set out below:

Reimbursements: (a) Statements o f Expenditures (SOEs) for expenditures below the fol lowing thresholds: (i) payments for Goods against contracts valued at US$ 500,000 or less; (ii) payments for Consultant Services against contracts valued at US$lOO,OOO or less for individual consultants and payments for consulting firms against contracts valued at US$350,000 or less; (iii) payments for works against contracts valued at US$50,000 or less, and (iv) al l non consultant services, training and operating costs.

(b) Records (e.g.: copies o f receipts, supplier/consultants invoices, contracts) for a l l payments for eligible expenditures which contracts are above those thresholds specified in (a) above.

Direct Payments: records (e.g. : copies o f receipts, supplier/ contractors invoices).

The minimum value for applications for direct payments and reimbursements wil l be US$250,000.

All consolidated supporting documentation under SOE wil l be maintained by D P R E S - PIU for post-review and audit purposes for up to one year after the final withdrawal f rom the loan account. Loan proceeds will be disbursed against the expenditure categories given in the fol lowing table:

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Category Amount of the Loan (in USD million)

(1) Goods, non-consultant services, 20.3 works, consultants’ services, operating costs and training for Parts A, B and D

Percentage of expenditures to be

financed 100%

Retroactive financing.

- o f the Project

works, consultants’ services, operating costs and training for Part C o f the Project

Total Amount

(2) Goods, non-consultant services,

(3) Front-end Fee

The project will be eligible for retroactive reimbursement o f eligible expenditures incurred up to 12 months prior to the date o f the Loan Agreement. These expenditures should not exceed 20 percent o f the loan amount.

4.5 100%

0 24.8 100%

Internal Control

Chile Government internal controls consists o f (i) financial controls embedded in the financial management system and FM rules and practices established through the PFM legal framework; and (ii) internal audit. Government internal audit i s camed out by Units located in each Ministry and coordinated by the Council for General Government Internal Auditing (CAIGG). Chile Government internal control performance i s high, as reflected in the CFAA.

External Audit Arrangements

Project annual financial statements wil l be audited by an auditor acceptable to the Bank following auditing standards and specific terms o f reference acceptable to the Bank. Annual audit wil l cover al l funding and expenditures reported in the project financial statements. Audit reports wil l be due within six months fol lowing the end o f the reported year (Due date: June 30 following the end o f the reported period). The standard period to be covered i s the calendar year. All audit reports for the previous projects were received by the Bank in a timely manner, acceptable, and with unqualified opinions.

Supervision Plan

Project FM Supervision plan is presented in the below table and will be adjusted by the Bank according to the fiduciary performance and updated r isk

71

Table 10: Financial Management Supervision Plan

Timing

General Supervision. If Audit opinion i s clean, bi-annual.

Type

Visit

Mechanism

Integrating supervision missions once a year for the f i rst year o f the project and every two years thereafter.

Desk work

Audit Review

Semi-annual Over the IUFR

Once a Year Over the Audit Report submitted to the Bank

Objective

+ Review FM performance. + Review controls/staffing. + Update assigned risk.

+ Review IUFR information

+ consistency. Raise issues disclosed in IUFR, if any.

+ Review Audit Report. + Raise issues disclosed in the

Audit Report.

72

Annex 8: Procurement Arrangements

CHILE: Second Public Expenditure Management

General

Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004, revised October 2006; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. However, the proposed second phase o f the project would also finance four (4) contracts 1, which procurement was initiated under the previous Public Expenditure Management Project I, which was ruled by the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated January 1995 and revised in January and August 1996, September 1997 and January 1999 and by the "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers'' dated January 1997 and revised in September 1997 and January 1999. These contracts amount below US$1.5 mi l l ion in aggregate.

The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan for the f i rs t 18 months o f implementation also identifies those contracts procured under the previous phase o f the project that will be financed by the second phase. The Procurement Plan wil l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

1,

2.

3.

4.

Procurement implementation: al l the procurement under the project will be made centrally. The PIU located at DIPRES wil l be responsible for procurement for components 1, 2 and 4; while SUBDERE wil l be responsible for component 3.

Procurement of Works: Small refurbishing and power supply installations to accommodate IT equipment and Communication networks would be procured through Shopping in amounts not to exceed $250,000 equivalent per contract.

Procurement of Goods: Goods procured under this project would include IT, hardware, software. These goods wil l be procured using I C B procedures for contracts estimated to cost more than US$350,000; N C B procedures for contracts estimated to cost less than US$350,000; Shopping procedures for contracts estimated to cost less than US$lOO,OOO or Chilecompra 's convenio marc0 when the individual cost o f the items i s less than $350,000 as further detailed in the Procurement Plan and in the Table A below.

Procurement of services (other than consultant services): al l contracts for services not related to consultant services (logistics, organization o f seminars, workshops, travel, printing services) may be procured under the same methodologies and thresholds specified for goods.

Three (3) contracts for goods and one (1) contract for non-consultant services.

73

5.

6.

7.

8.

9.

Selection o f Consultants: consultant services wil l be contracted in the following areas: technical assistance for the development o f software applications and systems, studies, design o f information systems. All contracts wil l be procured using Bank’s Guidelines for the hiring o f consultants.

For firms, QCBS wil l be the preferred method; however, CQ, FB and LCS may be used as well. Single Source selection (SSS) procedures may be used, without prior a eement o f the Bank, for hiring consultant services estimated to cost less than US$lOO,OOO , or with prior approval by the Bank, when the services meet the requirements o f paragraphs 3.10 o f the Consultants’ Guidelines and the estimated cost is above such threshold, for assignments when only one firm is qualified or has experience o f exceptional worth. At the time o f appraisal three possible direct contracting were identified: (i) One contract for the Design o f SIGFE 11, (ii) one contract to develop the aggregation module o f SIGFE, and (iii) one contract to manage the aggregation module o f SIGFE; the final decision on the selection method to be followed will be made after consideration o f the justification o f the proposed sole sourcing to be provided by the borrower. Some o f the consultant contracts, Le., software development, system design, testing, security, quality assurance and others as detailed in the Procurement Plan may be hired under Indefinite Delivery Contracts, as defined in paragraph 4.5 o f the Consultant Guidelines (“umbrella” contracts). These contracts will be generally contracted through QCBS but the individual requirements will be serviced through purchase orders. Purchase orders above US$400,000 will require prior approval by the Bank. The short l i s t o f consultants in contracts estimated to cost less than $500,000 equivalent, per contract, may be comprised entirely o f national consultants, in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

F

Specialized advisory services would be provided by individual consultants selected by comparison o f qualifications o f at least three candidates and hired in accordance with the provisions o f paragraph 5.1 to 5.3 o f the Consultant Guidelines. Individual consultants may be selected through sole-source with prior approval o f the Bank in accordance with provisions o f paragraphs 5.4 o f the Consultants Guidelines.

Operating Costs: project operation costs will include specialized staff the Project coordinator, one Procurement Specialist, one junior Financial Specialist, one Human Resource Specialist, and one Administrative Assistant.

Procurement at municipal level: the project will support the efforts o f 345 municipalities to strengthen their financial management with the aim o f developing a Municipal Financial Information System. 100 o f these municipalities will receive a Sub-system o f Municipal Financial Administration as a basic financial package. The procurement o f the goods and

The hiring o f consultant f i i s with estimated cost less than US$lOO,OOO wil l b e generally be done using national procedures which include advertisement and processing through Chilecompra Portal: such procedures - that m a y include open competit ion are no t consistent with the shortlisting procedures as specified in the Bank’s guidelines but in Chile such procedures ensure transparency and quality services and therefore, the Bank wou ld a l low the direct contracting o f the firms thus selected.

74

services used in this component wil l be carried out by SUBDERE at the national level and deployed at the municipal level. Therefore, there i s no procurement at the municipal level.

Category

10. Operational Manual: The Operational Manual (OM) used in the first loan will be updated with the revised procurement arrangements under the second loan as detailed in this Annex. In particular, the Operational Manual wil l promote the use o f harmonized bidding documents for N C B other lending institutions to reduce the cost o f doing business with the multi-lateral development banks (MDBs), the use o f Chilecompra, the coordination with DIPRES, SUBDERE and CGR for project supervision.

Contract value (thresholds US$)

11. Thresholds for procurement methods and reviews: the thresholds for procurement methods and prior review wil l be defined in the procurement plan. The following thresholds will be taken into account in the design o f the procurement plan for selection o f methods and for the review by the Bank and to be set forth in the Operational Manual to define the procurement arrangements for the subprojects.

Procurement method

Table 11: Guidance for Thresholds for Procurement Methods and Prior Review in the

Contracts subject to prior review

Shopping or Convenio Marco

Minor works I1250,OOO

amount.

Goods and Non Consulting I > 350,000

Consultants’ services (f irms)

Services

> 200,000

5350,000

< 100,000 r 5 200,000

< 100,000

Consultants’ services (individuals)

> 100,000 or sole source

< 100,000

Shopping I The f i rs t two.

ICB I All above US$500,000 and f i rst two under each method regardless o f

N C B or Convenio

US$350,000 and f i rst two under each

amount. sss

See section V o f Guidelines

See section V o f Guidelines

All

N o

Note: QCBS = Quality- and Cost-Based Selection; LCS = Least-Cost Selection; FB = Fixed Budget; CQ = Selection Based on Consultants’ Qualifications; SSS Single Source Selection

75

Procurement Plan

12. The Procurement Plan o f the project for the f i rst 18 months o f the project implementation was discussed during Appraisal: the plan identifies about 65 items and services for procurement; most o f them are hiring o f consultant f i r m s and individual consultants. In the init ial plan there are four (4) ICBs and five (5) Consultant Services processes with international short list, as detailed in Section E.

13. The Procurement Plan wil l be available in the project’s web page: www.dipres.gov.cl and in the Bank’s external website. The Procurement Plan wil l be updated in agreement with the Project Team annually or as early as required to reflect the actual project implementation needs and improvements in institutional capacity.

Capacity Assessment and Frequency of Procurement Supervision

14. Both the PIU located at DIPRES and SUBDERE have successful experience in implementing Bank projects: DIPRES has implemented the Public Expenditure Management Project I while SUBDERE has implemented the Municipal Development Project. DIPRES staff has recently received training - sponsored by CONICYT (Comisidn Nacional de Investigacidn Cient i jka y Tecnoldgica) while SUBDERE staff was trained by the Bank during the implementation o f its previous project. Both entities are familiar with the procurement planning, the procurement o f goods and the hiring o f consultant firms and individuals. Consequently, the overall risk assessment o f the implementing unit i s low. I t will require post-review supervision only once a year. The Bank’s ex post review shall cover no less than 1 in 20 contracts signed.

Special Provisions in Chile

15. The fol lowing are the special provisions normally used in Chile to ensure compatibility o f the national laws with the Bank’s Guidelines: a.

b.

C.

d.

e.

The lowest evaluated bid shall be selected for contract award.

Exception made o f processes carried out fol lowing Shopping and Convenio Marco procedures, there shall be no prescribed minimum number o f bids or proposals to be submitted in order for a contract to be subsequently awarded.

Chilecompra portal may be used for advertisement and processing o f I C B and N C B procurement provided that the bidding documents are the standard bidding documents o f the Bank for I C B and the agreed national bidding documents.

Chilecompra convenio marc0 may be used as an alternative to N C B or shopping provided that the implementing agency compares at least three prices o f items or not consultant services that meet the specifications and award to the lowest compared price.

For consultant services for contracts estimated to cost above US$1OOyO0O, the invitation for expression o f interest for consultant services and the award shall be published in Chilecompra portal but the processing o f the hiring need not to be carried out through the

76

system. For consultant services for contracts estimated to cost below US$lOO,OOO, the Bank will accept as sole sourcing the winning proposal o f procedures hired through Chilecompra.

7

Details of the Procurement Arrangements Involving International Competition

8

1. Goods, Works, and Non Consulting Services

Ref. No.

1

2

3

4

(a) List o f contract packages to be procured following ICB and direct contracting:

Table 12: ICB Packages

Contract (Description)

Licensing SIGFE Aggregation Hardware Primary Site SIGFE Aggregation Equipment SUPER Hosting Services

' 1 I 2

Review byBank (Prior / Post)

Prior

Prior

Expected Bid-

Opening Date

March 2008

September 2007

3

Ref. No.

1

2

3

Estimated cost

Description o f Estimated Selection Review Expected Assignment cost Method b y Bank Proposals

(Prior / Submission Post) Date

Development 1,3 11,111 QCBS Prior September 2007 Consulting SIGFE I1 Maintenance 640,000 QCBS Prior September 2007 System Consulting SIGFE Aggregation Implementation 1,250,000 QCBS Prior June 2008 and Integration

1,400,000

500,000

1,400,000

1,2 10,000

4

Procurement Method

ICB

ICB

ICB

ICB

5

P-Q

No

No

N o

N o

6

Domestic Preference

(yedno)

No

No

N o

N o

2. Consulting Services

(a) List o f consulting assignments with short-list o f international firms.

Table 13: QCBS Packages

I March2008 Prior

I June 2009 Prior

1 I 2 I 3 I 4 I 5 I 6

77

1 2

Ref. No. Estimated cost

Description o f Assignment

555,556 4

5 1,000,000

Consulting o f INP and ISP Development Consulting TP Municipal Financial Development Svstem

4

Selection Method

QCBS

QCBS

5

Review by Bank (Prior I

Post)

Prior

Prior

6

Expected Proposals

Submission Date

March 2009

March 2008

78

Table A: Project Costs by Procurement Arrangements3

Total

Expenditure Category

12.2 3.1 (7.4) (1 *3)

1. Goods

2. Consultants & Training

3. SalariesiRecurrent Costs

(in U S mi l l ion equivalent)

Procurement Method

ICB

12.2 (7.4)

N CB

3.1 (1.3

Other

4.9 (1.8)

26.4 (14.3)

0.0 (0.0)

N.B.F

I I

Total Cost (including

contingencies)

20.2 (10.5)

26.4 (14.3)

0.0 (0.0)

31.3 46.6 (16.1) I I (24.8)

Note: N.B.F. = N o t Bank-financed (includes elements procured under parallel co- financing procedures, consultancies under trust funds, any reserved procurement, and any other miscellaneous items). The procurement arrangement for the items listed under "Other" and details o f the items listed as "N.B.F." need to be explained in footnotes to the table or in the text.

Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit

For details on presentation o f Procurement Methods refer to OD1 1.02, "Procurement Arrangements for Investment Operations." Details on Consultant Services can be shown more easily in the Table A1 format (additional to Table A, where applicable).

79

Table A1 : Consultant Selection Arrangements (optional)

Category

A. Firms

B. Individuals Total

(in US$million equivalent)

S)

(7.0) (0.0) (1.0) (8.0)

QCBS QBS SFB LCS CQ Other N.B.F. 11.7 0.0 1.6 13.3

13.1 13.1 (6.3) (6.3)

I 11.7 , I 14.7 I 0.0 I 26.4 I

Consultant Services

Expenditure

Selection Method Total Cost (including

contingencie

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection o f individual consultants (per Section V o f Consultants Guidelines), Commercial Practices, etc.

N.B.F. = No t Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan.

80

Table B: Thresholds for Procurement Methods and Prior Review4

Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review I

Estimated Total Value Subject to

Prior Review 1. us $ 2. us $

THOUSANDS MILLIONS

1. Goods > $350 ICB

$35&and 2 $100 N C B $100 Shopping

(International or

12.2 3.1

National) 2. Services Finns - > $200 QCBS 11.7

< $200 Least Cost Selection*

Individuals - > $100 0

USS27.0 Total value of contracts subject to prior review:

* This selection process will depend on the type o f consulting service in accordance with paragraph 3.6 o f the Consultant Guidelines

Thresholds generally differ by country and project. Consult OD 11.04 "Review o f Procurement Documentation" and contact the Regional Procurement Adviser for guidance.

81

Table C: Allocation of Loan Proceeds

Expenditure Category

(1) Goods, Non-Consultants Services and Works

(2) Consultants’ services And Training

(3) Incremental Recurrent Costs

(4) Refunding o f Project Preparation Advance

(5) Unallocated

Amount in US$

10,500,000

14,3 00,000

0

0

0

Financing Percentage

100% o f foreign expenditures and

local expenditures.

100%

Amounts due pursuant to Section 2.02(b) o f the Loan

Agreement

Total 24,800,000

82

Annex 9: Economic and Financial Analysis CHILE: Second Public Expenditure Management

A definition NPV = U S $ million; ERR = %; FRR = % i s not applicable

Comparable projects in other countries are costing an estimated one hundred percent more than SIGFE. Even accounting for expenditures under SIGFE I, the project cost as such i s significantly below international thresholds.

The project will improve financial and fiscal accountability in Chile through the provision o f comprehensive, reliable, timely and accurate data for better and informed decision making at al l levels o f government. Further the extension o f SIGFE i s a precondition for improved monitoring and evaluation and a major milestone in reaching a full framework for budget by results. The integration o f the municipalities and o f the monitoring and evaluation system will significantly improve financial management and oversight. The benefits o f the project testify to i t s economic and financial soundness. They include:

e . . . e

e . . e . . . e . .

improved and timely budgeting using international best practices; introduction o f a single (passive account); elimination o f redundant steps due to electronic filing and transactions; updating o f accounting norms across entities and maintaining current norms across entities in cases o f normative changes by DPRES; information with suitable dimensions and disaggregating at the lowest leve l o f financial responsibility (including health and education institutions); enabling physical/financial assets accounting; improved business processes, better accounting and system security, thus creating substantial savings through elimination o f rent-seeking intermediaries and faster detection o f fraudulent practices; reducing transaction time between procurement, purchasing and payment; eliminating unfunded expenditures due to outdated budget data. At the end o f the project, the timeliness and accuracy o f federal and municipal accounts will allow for comprehensive and on-time reconciled reports. The extension o f SIGFE i s the most cost effective solution due to the: the web-based application is expandable; the Java platform allows outsourcing o f programming and maintenance needs; no service or licensing fees apply; l imited infrastructure and hardware cost for the municipalities as the transactions are pooled at the server level; reduced training and migration cost as the system i s tailored to existing systems and standards.

83

Annex 10: Safeguard Policy Issues

CHILE: Second Public Expenditure Management

This project triggers none o f the Bank’s safeguard policies.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) Natural Habitats (OPBP 4.04) J Pest Management (OP 4.09) J Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) Involuntary Resettlement (OP/BP 4.12) J Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OPBP 4.36) J Safety of Dams (OPBP 4.37) Projects in Disputed Areas [OP/BP/GP 7.60) Projects on International Waterways COPBP/GP 7.50)

J

J

J

J J J

84

Annex 11: Project Processing

CHILE: Second Public Expenditure Management

PCN Review Appraisal Negotiations

Planned Actual February 24,2007 January 8,2007 July 11- 17,2007 July 11-13,2007 July 19-20.2007 JulV 18-20.2007

Board Presentation Effectiveness Date Mid-term Review Date Closing Date

K e y institutions responsible for preparation o f the project: SIGFE Comptroller General Office SUBDERE

August 20,2007 August 28,2007 October 2007 March 30,2010 December 20 12

Bank staff and consultants who worked o n the project included:

David Rosenblatt Keith Mackay H e m Forero

Team Members Roberto Panzardi Fernando Rojas Marta Molares-Halberg Wolfgang Koehling Alexandre Arrobbio Efraim Jimenez Andres Mac Gaul Xiomara A. More l Juan-Navas Sabater Alejandro Solanot Cecilia Zanetta Gerard0 Ui ia Nina-Christina Ohman Silvio Solarte Marcos Makon

Lead Economist and Sector Leader LCSPR Senior Evaluation Officer IEGKE Senior Information Officer ISGEG

Sandra X. Alborta

Title TTL, Sr. Public Sector Management Specialist Lead Public Sector Management Specialist Lead Counsel Economist Sr. Financial Management Specialist Sr. Procurement Specialist Sr. Procurement Specialist Senior Finance Officer Sr. I C T Specialist Financial Management Analyst Municipal Consultant Budget Consultant ET Consultant I C T Consultant Consultant Language Program Assistant

Unit LCSPS LCSPS LEGLA LCSPS L C S F M LCSPT LCSPT LOAFC CITPO LCSFM LCSPS LCSPS LCSPS LCSPS LCSPS LCSPS

Bank funds expended to-date o n project preparation: Bank resources: US$178,150 Estimated Approval and Supervision costs:

Estimated annual supervision cost: US$130,000

85

Annex 12: Documents in the Project Fi le CHILE: Second Public Expenditure Management

A. PROJECT IMPLEMENTATION PROJECT

Project Implementation Plan Operational Manual Project Procurement Plan

B. BANK ASSESSMENTS

Chile: Towards Results-Oriented Budgeting. Note en Breve, Roberto 0. Panzardi (November 2005). Country Procurement Assessment Report - Republic o f Chile, the World Bank (August 2004). Chile: Regional Development Study Concept Note Draft (November 2006). Implementation Completion Report - Municipal Development I1 Project, the World Bank (June 2005). Chile: Analisis del Programa de Evaluacion del Gasto Phblico, The World Bank (December 2005). Public Financial Management - Performance Measurement Framework, PEFA (June 2005). Country Financial Accountability Assessment - Republic o f Chile, the World Bank and the IDB (June 2005). Towards Equality o f Opportunity 2006-2010 - Chile, the World Bank (July 2006). Towards the Institutionalization o f Monitoring and Evaluation Systems in Latin American and the Caribbean, presented by the World Bank and the IDB (2006).

C. OTHERS

Results: Everybody’s Business - Budgeting for Results in Chile, presented by Jaime Crispi (January 2004). Sistema de Control de Gesti6n y Presupuestos por Resultados La Experiencia Chilena, Government o f Chile Division de Control de Gesti6n (September 2005). Informe de Finanzas Publicas - Proyecto de Ley de Presupuestos del Sector Publico para e l ail0 2007, Government o f Chile, presented by Albert0 Arenas de Mesa (October 2006). Informe de Finanzas Publicas - Proyecto de Ley de Presupuestos del Sector Phblico para e l ail0 2006, Government o f Chile, presented by Mario Marcel Cullell (September 2005). Cinco &os de Balance Estructural en Chile: Una Evaluacion, Mario Marcel Cullel, XVIII Seminario Regional de Politica Fiscal, CEPAL, Santiago de Chile (Enero 2006) Documentos de Avances del Proyecto SIGFE, Direccion de Presupuestos (2005 y 2006). Informe Encuesta Programs de Mejoramiento de Gestion (PMG). Compendio de Informes de Encuestas de Formulacion de PMG y Efectos (2001-2006). Division de Control de Gestion. Julio 2006. Balance: L a Base de la Nueva Regla de Politica Fiscal Chilena: Economia Chilena, Mario Marcel, Marcel0 Tokman, R. Valdes and P. Benavides (December 2001).

86

Law No. 19.8961 introduced modifications to the Financial Administration Law (Ley de Administracion Financiera del Estado D.L. No. 1.263/75) Law No. 18.696. Ley Organica Municipal. Law No. 19602. Amendment Ley Organica Municipal. Circular No 646 05 DIPRES-CGR. Protocol to develop and implementation o f a financial management information system. Protocols signed between CGR and DIPRES to develop and implement SIGFE (October 2005) Political Agreements attached to the Annual Budget signed between Congress and DIPRES (2004,2005,2006).

87

Annex 13: Statement of Loans and Credits CHILE: Second Public Expenditure Management

~ ~ ~~~

Difference between expected and actual

disbursements Original Amount in US$ Millions

Project ID F Y Purpose IBRD I D A SF GEF Cancel. Undisb. Ong. Frm. Rev’d

PO86689 2006 CL-Santiago Urban Transport T A L 4.80 0.00 0.00 0.00 0.00 4.29 3.09 0.00 PO88498 2006 C L -Tertiary Edu. Fin. for Results APL l 25.13 0.00 0.00 0.00 0.00 21.07 1.99 0.00 PO76807 2005 CL-Infrastructure for Territorial Dvlpmt 50.26 0.00 0.00 0.00 0.00 46.81 13.25 0.00 PO73985 2004 GEF C L Sus Trans & Air Quality Santiago 0.00 0.00 0.00 6.98 0.00 1.85 6.62 0.00

PO82037 2004 CL-Social Protection T A Loan 10.71 0.00 0.00 0.00 0.00 3.42 1.48 0.00

PO68271 2002 CL-Lifelong Learning and Training Proj 75.75 0.00 0.00 0.00 0.00 39.40 34.07 0.00 PO69259 2002 C L Pub Expenditure Management 23.23 0.00 0.00 0.00 0.00 2.32 25.55 0.00

Total: 189.88 0.00 0.00 6.98 0.00 119.16 86.05 0.00

CHILE STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U S Dollars

Committed Disbursed

IFC IFC

F Y Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

1991 Aconcagua 0.00 6.00 0.00 0.00 0.00 6.00 0.00 0.00

1993 Aconcagua 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00 1989 Escondida 0.00 7.48 0.00 0.00 0.00 7.48 0.00 0.00 1999 Escondida 0.00 0.00 14.00 0.00 0.00 0.00 10.25 0.00 1996 FEPASA 0.00 3.58 0.00 0.00 0.00 3.58 0.00 0.00 2005 Fac torline 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2005 La Higuera 35.00 0.00 10.00 115.00 0.00 0.00 0.00 0.00 2005 Lignum 0.00 6.50 0.00 0.00 0.00 0.17 0.00 0.00 1996 Proa Fund 0.00 2.86 0.00 0.00 0.00 2.86 0.00 0.00 2005 Proa I1 0.00 11.00 0.00 0.00 0.00 2.36 0.00 0.00 2000 San Antonio 0.00 3.70 0.00 0.00 0.00 3.70 0.00 0.00 2002 San Vicente 14.10 0.00 0.00 0.00 14.10 0.00 0.00 0.00 2004 Sonda 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00

TFSA 0.00 1.55 0.00 0.00 0.00 1.55 0.00 0.00 2003 U.Diego Portales 7.20 0.00 0.00 0.00 7.10 0.00 0.00 0.00

Total portfolio: 61.30 53.12 24.00 115.00 26.20 38.15 10.25 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

2004 Gas Atacama 0.08 0.00 0.05 0.13

Total pending commitment: 0.08 0.00 0.05 0.13

88

Annex 14: Country at a Glance

CHILE: Second Public Expenditure Management - POVERTY and SOCIAL

2005 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Averroe annual growth. 199945

Population (%) Labor force (%)

Most recent estimate (latest year avallable. 199946)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at biRh (years) Infant mortailty (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulation age 15+) Gross Primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985

GDP (US% blllions) 16.5

Gross capital formationlGDP Exports Of goods and ServiceslGDP Gross domestic SavingsJGDP Gross national savingslGDP

Current acwunt balancelGDP Interest paymentslGDP Total debWGDP Total debt servicelexports Present value of debWGDP Present value of debtfexports

17.2 26.1 19.6 7.8

9.9 123.6

1985-95 199545 (average annual growth) GDP 7.6 3.7 GDP per capita 5.9 2.4 Exports of goods and Services 10.7 6.7

Chlle

16.3 5.670 95.7

1.1 1 .o

19 88 76

1 95 96

104 106 101

a

1995

71.3

26.2 29.3 28.4 25.0

-1.9 1.7

30.9 24.3

2005

5.7 4.5 3.5

Latin Amerlca & Carlb.

55 1 4.006 2,210

1.4 2.2

77 72 27

7 91 90

I19 121 117

2005

119.0

22.4 41 .9 30.9 23.5

1.1 0.9

37.8

2 0 0 6 (e )

4.0 3.1 4.2

Upper- mlddle- Income

599 5,625 3,368

0.6 1.2

72 69 23 7

94 94

107 108 106

Zoos(-)

145.8

22.5 45.0 34.9 24.0

3.6 0.3

33.1

200549

5.2

D.v.lopment dlrmond'

Life expectancy

T Gross

prima- capita enroilmenl

I

Access to improved water source

- Chile - Uppar-middie-income group

Trade

Capital formation

Domestic savings

Indebtedness

Chile - - upper-mlddle-income group

STRUCTURE of the ECONOMY

(% of GDP) Agricu I tu re Industry

Services

Household flnai consumption expenditure General gov't flnal consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household flnai consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services Gross national product

Manufacturing

1985 1995

7.6 9.2 37.6 35.3 16.2 18.1 54.6 55.5

67.0 61.2 13.4 10.4 25.7 27.1

198545 1995-05

5.4 4.7 6.6 4.9 6.9 5.7 7.7 1.9

8.0 3.8 2.8 3.4

14.2 3.5 14.3 6.5 6.4 2.9

2005

4.1 40.0 14.8 55.9

58.2 10.9 33.1

2005

5.7 5.2 6.4 6.0

7.9 5.3

23.0 17.7 4.3

2006(e)

3.9 45.0 12.6 51.1

55.0 10.1 30.4

2 0 0 6 (e )

3.5 2.6 2.5 4.8

7.1 3.6 4.4 9.4

-3.3

1 Growth of capital and GDP (%)

W 01 02 03 01 05 OB 1 -GCF &GDP

i3:r;wth of exports and imports (%) I

1

Note: 2006 data are preliminary estimates. This table was produced from the Development Economics LDB database, Central Bank of Chile and Chile's Budget Office data.

89

Chile

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grantsj Current revenue Current budget balance Overall sumlus/deficit

TRADE

(US$ millionsj Total exports (fob)

Copper Fruits Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=1OOj Import price index (2000=100j Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ mi/lionsj Conversion rate (DEC, local/US$j

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

iBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows interest payments Net transfers

1985 1995

29.5 8.2 30.7 10.4

. . 21.7

.. 5.9

.. 3.1

1985 1995

3,804 16,024 1,789 6,487

515 1,172 1,168 6,608 3,229 15,900

284 576 545 1,420 642 4,187

72 137 61 82

118 167

1985 1995

.. 19,359

.. 18,299

.. 1,060

.. -2,712

.. 306

.. -1,346

.. 2,407

.. -1,061

. . 15,224 160.9 396.8

1985 1995

20,384 22,038 487 1,372

18 11

2,271 4,964 37 841

1 1

32 54 436 -1,810 684 2,262 144 2,957

0 -249

541 155 231 83 20 705

18 137 193 -759

211 -622

2005 2006(e)

3.7 2.6 7.9 11.7

24.4 25.4 7.9 10.8 4.7 7.9

2005 2006(e)

41,297 58,116 18,873 32,332 2,199 2,407

13,867 16,513 32,735 38,409

6,035 7,852 5,763 6,065

81 5

155 108 144

2005 2006(e)

48,828 66.247 38,684 45,003 10,144 21,245

-10,645 -19,392 1,791 3,356

1,291 5,210

425 -3,212 -1,716 -1,997

16,963 19,429 559.8 530.3

2005 2006(e)

45,014 48,239 289 346

4 3

7,620 10,906 222 22

1 1

55 56 207 6

-152 50 15 16

-167 34

Inflation (%) 14 T I

061 1 00 01 02 03 M 05

I -GDPdeflator h C P I I

Export and import levels (US$ mill.)

70.000 T I 60.000 50,000 40,000

30,000 20,000 10,000

O6 I 1 00 01 02 03 04 05

I &ports w Imports I

~ ~

Source LDB database, Central Bank of Chile, Budget Office Chile.

1 Current account balance to GDP (%)

:omposition of 2006 debt (US$ mill.)

A: 346 3

u F: 38.284

r n . IBRD E - Bilateral B ~ IDA D - Other multilateral F - Pnvate

~ C - I M F G - Short-tern

90

MAP SECTION

Atta

cam

a D

esert

An

de

s M

ou

nt a

i ns

An

de

s

Mo

un

t ai n

s

Nevado OjosNevado Ojosdel Saladodel Salado(6,880 m)(6,880 m)VallenarVallenar

OvalleOvalle

ChillánChillán

VictoriaVictoria

OsornoOsorno

PuertoPuertoQuelliónQuellión

Puerto AisénPuerto Aisén

ManatialesManatiales

PuertoPuertoYungayYungay

CalamaCalama

SANTIAGOSANTIAGO

XIIXII

XIXI

X

IXIX

XIVXIV

VIIIVIII

VIIVII

VIVIRMRM

V

IVIV

IIIIII

IIII

I

XVXV

Vallenar

Ovalle

Chillán

Victoria

Osorno

PuertoQuellión

Puerto Aisén

Manatiales

PuertoYungay

Calama

Tocopilla

Iquique

Antofagasta

Copiapo

La Serena

Valparaíso

Concepcíon

Temuco

Puerto Montt

Valvidia

Coihaique

PuntaArenas

Talca

Rancagua

Arica

SANTIAGO

XII

XI

X

IX

XIV

VIII

VII

VIRM

V

IV

III

II

I

XV

ARGENTINA

BOLIVIA

PARAGUAY

PERU

URU

GUAY

Cape Horn

Strait ofMagellan

PACIFIC OCEAN

ATLANTICOCEAN

To San Sebastián

To Río Gallegos

To Paso

Río Mayo

To Nahuel Huapí

To BardasBlancas

To Villa Nueva

To Rodeo

To Fiambalá

To Salta

To Uyuni

To Corque

To La PazTo

Tacna

To Tolar

Grande

To Las Lajas

Atta

cam

a D

esert

An

de

s M

ou

nt a

i ns

An

de

s

Mo

un

t ai n

s

Nevado Ojosdel Salado(6,880 m)

85°W 80°W 75°W 70°W 65°W 60°W

40°S

35°S

30°S

25°S

50°S

45°S

40°S

35°S

30°S

25°S

20°S

80°W 75°W 70°W 65°W 60°W 55°W 50°W

CHILE

TARAPACÁ

ANTOFAGASTA

ATACAMA

COQUIMBO

VALPARAÍSO

REGIÓN METROPOLITANADE SANTIAGO

LIBERTADOR GENERALBERNADO O’HIGGINS

MAULE

BIO BÍO

LA ARAUCANÍA

LOS LAGOS

AISÉN DEL GENERAL CARLOSIBÁÑEZ DEL CAMPO

MAGALLANES Y DE LAANTÁRTICA CHILENA

LOS RÌOS*

ARICA-PARINACOTA*

I.

II.

III.

IV.

V.

RM.

VI.

VII.

VIII.

IX.

X.

XI.

XII.

XIV.

XV.

REGIONS OF CHILE

* Regions approved by cabinet and parliament, will become effective on October, 2007.

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 200 400

0 200 400 Miles

600 Kilometers

IBRD 33386R

JUNE 2007

SELECTED CITIES AND TOWNS

REGION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

REGION BOUNDARIES

INTERNATIONAL BOUNDARIES

FALKLAND ISLANDS (ISLAS MALVINAS)A DISPUTE CONCERNING SOVEREIGNTY OVER THE

ISLANDS EXISTS BETWEEN ARGENTINA WHICH CLAIMSTHIS SOVEREIGNTY AND THE U.K. WHICH ADMINISTERS

THE ISLANDS.

CHILE