Bolivia

Bolivia - Institutional Reform Project (Vol.1), 1999/05/20, 19325, Project Appraisal Document

At the end of the program period the public administration of Bolivia would be significantly improved. In contrast to today, most civil servants in the central government, including the nine regional departments, would be hired and promoted on merit and paid by the government based on coherent market related salary schemes rather than significantly underpaid or financed on an ad hoc basis by external donors. A more defined and secure career path based on evaluated performance would sharply reduce staff turnover and promote sustained quality improvements, professionalism, and esprit de corps. Public employment will have fallen in the Central Government from around 13,000 to 9,400 and it would be seen more as a legitimate career option for educated Bolivians rather than a non-productive job with little prestige and less pay for the least qualified, or a source of patronage for political parties. Honesty and transparency in the collection and use of public resources and provision of public services would be more the norm than the exception. Financial management would have been deconcentrated to line agencies through the parallel integrated financial management project, with accountability enhanced through modern information systems and adherence to uniform regulations and procedures. The budget process would have become a more reliable and powerful tool for medium term strategic planning. Ministries and agencies would have more coherent legal mandates, primary responsibility for managing their human and financial resources, streamlined organizational structures, smaller staff with a significant shift in skills balances, and be subject to publicized performance criteria. Their service delivery would be measured and their budgets adjusted according to the results achieved. While the reform agenda would not be complete, major and demonstrable gains would have been achieved and citizens and leaders alike will view the public sector more as a national resource capable of enhancing the general welfare rather than a source of corruption, private gain, or an impediment to development.

Bolivia - Regulatory Reform and Privatization Technical Assistance Project (Vol.1), 1998/05/14, PID6412, Project Information Document

Privatization Component: This project component focuses on support for (i) the divestiture of state-owned enterprises, including national hydrocarbons company (YPFB) enterprises, the water company of Cochabamba, the national smelting company (VINTO), and national railway (ENFE) assets; and (ii) the improvement in the delivery of local public services (water, electricity, telephone) by cooperatives through adequate enforcement of service standards and, where necessary, changes to the cooperative legal structure. Technical assistance will comprise financial, legal, and technical analysts to assist in enterprise and asset privatization, assistance to the establishment, promulgation, and enforcement of performance targets in concession contracts and licenses, and environmental audits where applicable.

Bolivia - Regulatory Reform and Privatization Technical Assistance Project (Vol.1), 1998/06/05, 17933, Project Appraisal Document

Pensions: On November 29, 1996 the Bolivian Government adopted a pension reform law (Law 1732) that fundamentally modified the country's pension system. The reform immediately closed the defined-benefit, publicly-managed pension system and replaced it with a defined-contribution, privately-managed system with individual capitalized accounts.

Previous governments have transferred key state-owned companies to private ownership and management. Through privatization and capitalization programs, the long distance telephone company, parts of the hydrocarbons and electricity companies, some airports, the national airline, the national railways, and the La Paz/ El Alto Water and Sewerage Company were transferred to the private sector. In addition, around 50 medium-sized enterprises were sold for a total value of around US$100 million.

Nonetheless, many state-owned companies remain to be sold (see Attachment 1 to Annex 2). Accordingly, the Government has selected the most economically-important enterprises to be included in its initial privatization program. These include: the hydrocarbon-sector assets owned by the national hydrocarbons company (YPFB); the national smelting company (Empresa Metrolurgica de Vinto (EMV)); a major cement company; two electric distribution companies; and the remaining state-owned rail assets (ENFE). In addition, about 55 smaller companies, of which 40 are under the control of the armed forces, are slated to be sold. The Government will prepare a prioritized list of all these enterprises according to the economic significance of the enterprise, i.e., their revenues, asset values, and profitability. Then, it will devise bi-annual action plans for the sale of these remaining enterprises, sequencing the privatization according to their economic importance and difficulty of sale.

Most public services (elecit icity distribution, local telecommunications, and water and sanitation) at the local level are provided by approximately 450 public service cooperatives. Most of these cooperatives have poor performance records, lack investment capital to expand service coverage and improve quality of services, and are not under effective supervision. The government plans to extend service standards to all service providers, including through concession contracts and licenses. Where public service cooperatives do not comply with standards, the Government plans to require their corporate transformation in a manner that would allow them to meet quality and coverage targets, assure concession contracts and preserve share holder value. Again, the cooperatives will be ranked onto a list according to economic significance, from which the Government will prepare bi-annual action plans for their reform

Provision of financial advisory services, legal and technical assistance, and promotion activities for the privatization of remaining state-owned companies, including the national hydrocarbons company (YPFB), the national smelting company (EMV), a major cement company, two electricity distribution companies, and remaining state-owned rail (ENFE) assets and a selected number of smaller state-owned enterprises.

Although most of the major infrastructure owned by the Bolivian government was transferred to the private sector as part of the privatization and capitalization programs, there is still a substantial list of state-owned enterprises that remain to be transferred. In particular, some parts of the hydrocarbons company (YPFB) remain to be sold, as well as some residual assets of the old state-run electricity and rail companies (ENDE and ENFE) as well as around 55 smaller companies, including about forty owned by the armed forces (see Annex 2, Attachment 1). The government is committed to privatize these assets as part of its program and will use funds from the loan to finance this program. Privatization will both provide revenues to government and improve the quality and efficiency with which these services are provided.

This subcomponent will finance the preparation for sale of the main remaining state-owned companies, notably hydrocarbon-sector assets owned by the national hydrocarbons company (YPFB), the national smelting company (EMV), a major cement company, two electric distribution companies; and the remaining state-owned rail assets (ENFE). The Government will prepare a prioritized list of all the smaller enterprises to be privatized according to their economic significance, i.e., their revenues, asset values, and profitability. It will then devise bi-annual action plans for the sale of these remaining enterprises, sequencing the privatization, taking into consideration their economic importance and difficulty of sale.

Decision Point Document (HIPC: August 1997)

Bolivia has also implemented a comprehensive program of structural reforms (Table 3). These included the lifting of price and interest rate controls; a comprehensive tax reform; public enterprise restructuring; liberalization of the exchange and trade system, including the adoption of a low and uniform external tariff; the closure of all state-owned banks; the elimination of the quasi-fiscal deficit and recapitalization of the central bank; the passage of mining and hydrocarbons and investment laws that permitted joint ventures in these sectors; the capitalization of five of six major public enterprises;6 the privatization of almost all small public enterprises; popular participation and administrative decentralization; education reform; the establishment of central bank independence; the strengthening of financial system supervision; and the 1996 pension reform that privatized the pension system in mid-1997.

It is not surprising that over a decade was required to implement such comprehensive reforms, largely because of the need to sequence reforms properly and to build an internal consensus for the reforms. With regard to public enterprise restructuring, for example, public enterprises were first put on a firm financial footing in the late 1980s mainly through price increases and employment cutbacks. Subsequently, laws were changed early this decade to create a climate that was conducive to private investment in those sectors where public enterprises operated, allow the formation of joint ventures between public and private enterprises, and to authorize the sale of public assets. Finally, privatization began in 1992 followed by the capitalization process of 1995-97. In the financial sector, interest rate and credit controls were lifted first, followed by a learning period for banks in allocating credit according to market signals. The government first attempted to reorganize the state banks, but subsequently closed the banks after their problems persisted. There have been two rounds of dealing with financial difficulties in some private banks, as banking supervision strengthened and the sector learned to operate effectively in a freer regulatory environment.

Under the third annual ESAF-supported program, Bolivia is expected to maintain strong macroeconomic policies and to complete the structural reforms that currently are under way, especially the capitalization of public enterprises and the strengthening of financial supervision and public sector management. In addition, the scope of structural reforms will be broadened to include the development of a local capital market and improve labor market efficiency. The government that took office on August 6 supported with only very minor modifications the economic program for the third-year annual ESAF arrangement, that was negotiated with the previous government.

A key objective of the macroeconomic program over the next five years will be the adaptation of fiscal policy to absorb the upfront costs of the 1996 pension reform, which replaced the previous public defined-benefit system with a privately managed defined-contribution system(Annex). The old system comprised a government-run pay-as-you-go (PAYG) basic pension, together with complementary pension funds which were operated by employers, financed by employees, and regulated by the government. While the basic pension system had been running only moderate deficits, its generous retirement benefits, short contribution period, and rapidly declining ratio of workers to retirees would have increased costs very significantly over the long term. Moreover, the old basic pension system covered only a fifth of the formal workforce and suffered from considerable evasion. By 1996 most of the complementary pension funds were insolvent on an actuarial basis. This situation raised the difficult question of whether fiscal measures would be taken to close the pending financing gap or whether the problem of the system would lead to a higher fiscal deficit.

The 1996 reform privatized the pension system, mandated a broader coverage of the workforce, and changed the structure of contributions and benefits. Under the new system, in May 1997 all contributors to the PAYG system stopped making social security contributions and began to pay into individual retirement accounts managed by one of two pension-fund administrators. Over the next two years, all workers in the formal workforce will be required to join the new system. At the same time the system was privatized, the retirement age for future retirees was increased from 50 years for women and 55 years for men to 65 years for both men and women. The government will continue to pay the basic pension of current retirees and will reimburse future retirees for the contributions they had made to the old system. In addition, the government agreed to take over the complementary
pension funds in late 1996 and has begun to pay the complementary pensions of current
retirees.

The authorities estimate that the 1996 reform will save the government an estimated US$1.1 billion (12 percent of GDP) in net present value terms, reflecting the increase in the retirement age and the fact that under the old system contributions to the system would not have matched the pension outlays for current workers. However, the transition to a single private system creates additional net cash outlays for the government of about 2 percent of GDP a year in the near term, because of the loss of social security contributions (about 1 percent of GDP a year) and the payment of the complementary pensions (about 1 percent of GDP a year).

Bolivia: Main Structural Reforms, 1985-97
Public Enterprises -- Reorganization 1986/90 The state petroleum (YPFB) and mining (COMIBOL) companies were decentralized. Unproductive mines were closed, the Bolivian Development Corporation was dissolved and its 23 enterprises transferred to the regional development corporations. Employment in these enterprises was sharply reduced.
Sale of assets - April 1992 - Congress approved a Privatization Law allowing the sale of most public enterprises.
1993/96 - Process started with the sale/liquidation of 50 enterprises owned by the regional development corporations.
Capitalization - March 1994 - Framework law approved. The private sector investor commits to double the net worth of the company in exchange for 50 percent of the shares.
1995-96 - The electricity, railways, telecommunications, national airline, and petroleum companies were capitalized. Investment commitments of US$1.7 billion were obtained.
Price system - August 1985 - All prices freed, except for the services and products provided by public enterprises. Wage contracts freely negotiable in the private sector.
Pension reform - Dec. 1996 - Law provides for replacement of the pay-as-you-go system, by privately managed individual capitalized accounts, and the creation of noncontributory pension with the 50 percent of the shares of capitalized enterprises.

Bolivia: Reforms Supported by World Bank Adjustment Credits
Structural Adjustment Credit (Cr. 2298-BO; 1991);
· Public Enterprise Reform
- Improve efficiency in public enterprises
- Increase private sector investments
- Implement budgetary/fiscal discipline in public enterprises
- Design and implement the privatization program for
enterprises controlled by the Regional Development Corporations
Capitalization Program Adjustment Credit (Cr. 2761-BO; 1995)
- Privitization of additional public enterprises
- Pension system reform, including the establishment of a regulatory agency

Bolivia: Proposed Benchmarks and Performance Criteria for the Implementation of
Selected Structural Policy Measures-Third Annual Arrangement Under the ESAF
Sell transmission company of the national electricity company ENDE June 1997 (Implemented in July)
Privatize the national smelting company Vinto December 1997
Develop plan to privatize or otherwise improve efficiency of two refineries and distribution operations of the residual national oil company YPFB December 1997
Sell two electricity companies
Sell two remaining companies that had belonged to the regional development corporations
Transfer management of remaining public customs warehouse to private sector March 1998
Complete construction of two private customs posts June 1998

Bolivia: Major Elements of 1996 Pension Reform
Old System
Basic Pension
· Contribution of 8.5 percent of wage shared by worker, employer and government.
· Pension of at least 30 percent of base wage (average inflation-adjusted wage during last two working years).
· Benefits guaranteed by government. A pay-as-you-go system.
Complementary Pension
· 26 funds organized by industry, union, and profession.
· Contribution of 6.3 percent (on average) of wage fully paid by employee.
· Pension of at least 40 percent of base wage.
· Prior to November 1996, not guaranteed by government.
Other pensions
· For private banks, state universities, police and army.
Shortcomings of Old System
· Covered only 22 percent of formal sector workers.
· Full retirement at 50 years of age for women, 55 years for men.
· Depleted reserves, unfunded liabilities, and overdue contributions.

New System
Personal Contributory Pension
· Worker contributes 10 percent of wage into individual account.
· Pension funded only from individual account.
· Retirement before 65 possible only if individual account sufficient to cover annual pension of at least 70 percent of base wage (average U.S. dollar-denominated wage during last five working years).
Noncontributory Minimum Pension
· For all citizens at least 65 years old.
· Payment in form of annuity in an amount determined by dividends on shares of capitalized enterprises.
· In 1997 minimum pension total cost at US$[70] million (0.9 percent of GDP).
Private Management of Both Pension Plans
· Two pension fund managers selected in February 1997.
Transition Rules
· Government pays basic and complementary pensions of retirees under existing system and will pay past contributions to current participants when they retire.
· Workers eligible for retirement under existing system may choose to continue to pay contributions to government, which would pay their pension.
· All other workers participating in existing system transferred to the new system when new funds began operation, in May 1997.
· All workers not participating in old system must join the new system within 24 months.

Completion Point Document (HIPC: September 1998)

The authorities' program for 1998 aimed to support an increase in economic growth from about 4 percent in 1997 to 4.5-5 percent in 1998, with a further reduction in poverty.4 The program also sought to limit the inflationary effects of an increase in indirect taxes and reduce inflation slightly to 6.5 percent during 1998 (Table 1). After rising by over US$100 million in 1997, net international reserves were to remain constant in 1998, while gross international reserves would be kept broadly stable in relation to imports and the short-term liabilities of the central bank. Key structural reforms included bringing the refineries of the state petroleum company (YPFB) to the point of sale, privatizing the state smelting company (Vinto), improving governance through judicial and customs reform, continued strengthening of financial sector supervision, and beginning a social dialogue on labor market reform (Box 1). To maintain macroeconomic stability and help offset a large part of the fiscal

Status of Structural Reforms
Divesture of public enterprises
· Capitalization of 5 major enterprises 1995-96
· More than 50 small enterprises sold or liquidated 1993-ongoing
· Refineries and smelting company Pending
Public administration
Pension reform 1997
Civil service reform Pending
Improving the legal and regulatory framework
Deregulating labor market Pending

The 1996 pension reform (which took effect in May 1997) established a funded system of private individual retirement accounts, raised the retirement age and mandated a broader coverage of the formal workforce. Under the new system, the government lost social security tax revenue (1 percent of GDP), paid pensions to newly retired workers eligible to receive benefits under the old system (1 percent of GDP) and took over responsibility to pay private "complementary pensions" (1 percent of GDP), which had been unfunded.

Structural Reform Agenda, 1998-2000

The government plans to privatize all remaining public enterprises, including those owned by the armed forces. The most important action is to privatize YPFB's refineries by June 1999. The other parts of YPFB still in the public sector are being privatized (the drilling service unit was sold by June 1998 and the remaining natural gas network, jet fuel stations, and bottling plants will be sold by March 1999). The government will also bring the state smelting company (Vinto) to the point of sale by October 1998. The government also plans to sell several smaller public enterprises over the next six months.

In May 1998 the government started a national dialogue with key business, labor, and political groups to seek a consensus for reforming the labor law, which is antiquated, overly complex and discourages employment in the formal sector. By end-1998, the government will develop a proposed draft law that will serve as a basis for discussion among the key business, labor and political groups.

Second Decision Point Document (HIPC: January 2000)

Bolivia has been implementing a comprehensive structural reform program, although with some delays. The main components of this program included privatization, consolidation of the financial system, improving the road network, and making fiscal decentralization more effective. During 1997-99, major steps were taken toward completing the privatization program, with the sale of the refineries of the petroleum company YPFB and the state smelting company Vinto. In the financial sector, the authorities introduced new capital requirements for financial intermediaries (raising the minimum capital-to-risk-weighted assets ratio to 10 percent) and replaced most of the banks' reserve requirement with a liquid asset ratio. In 1999 the first stage of regulations aimed at tripling provisioning requirements over a five-year period was implemented. With regard to the national road network, a fund, supported by tolls on cars and trucks, was established to finance most of the maintenance work on the major highways. Finally, with respect to fiscal decentralization, ceilings have been established on the debt and debt-service ratios of local and regional governments.

Progress has also been made to improve transparency and reduce corruption. With assistance from the Fund and the Word Bank, the authorities designed a plan in 1998 for a comprehensive reform of customs. In June 1999 a new customs law was approved and in July 1999 a new president was appointed for a five-year period. In 1999 a new statute of the civil servant was approved by congress, establishing a recruitment and promotion system based on merit in the civil service. Progress is also being made in the reform of the judicial system.

Letter of Intent and Memorandum of Economic Policies, August 14, 1998

Our economic program for 1998 (which is supported by the third annual program under the current ESAF arrangement) is in line with this medium-term strategy. Economic policies seek to boost real output growth to 4½ to 5 percent by stimulating higher domestic investment and savings, limit inflation to 6½ percent, and hold net international reserves constant. The external current account deficit was projected to remain somewhat below 8 percent of GDP. The combined public sector deficit was to rise from 3.3 percent of GDP in 1997 to 4.1 percent of GDP, reflecting mainly the increase in the cost of structural reforms (especially the pension reform) from 3 percent of GDP in 1997 to about 5 percent of GDP in 1998 (Table 1). Key structural reforms included the privatization of the state smelting company (Vinto), and other public enterprises and bringing the refineries of YPFB to the point of sale; improved governance through judicial and customs reform; continued strengthening of financial sector supervision; efforts to develop domestic capital markets further; approval of the insurance law; and the beginning of a dialogue on labor market reform.

The medium-term strategy pursued since 1985 has yielded significant gains on the inflation and external fronts, but economic growth in recent years and the decline in poverty have been slower than expected. The government believes that this growth performance results from gaps in the implementation of certain key reforms, most notably the lack of a national road network, limited progress in education and health reform, and continued difficulties with the judicial system and customs administration and delays that occurred in the privatization of key public enterprises. Also, the strategy needs to incorporate a comprehensive reform of the labor market, which is governed by antiquated and often contradictory laws and regulations. Against this background, in November 1997 the government launched a national action plan for the period 1998-2002 to reorient the focus of the medium-term strategy by placing renewed emphasis on key reforms, so that all Bolivians can enjoy a higher standard of living.

A vigorous and well-targeted structural reform program will also help us boost growth and reduce poverty. We attach very high priority to strengthening education and health reform and the rural development program, with the support of the Inter-American Development Bank (IDB) and the World Bank. Other key structural reforms will include making fiscal decentralization as effective as possible, privatizing all remaining public enterprises, improving road construction and maintenance, carrying out another round of comprehensive financial sector reforms (including the establishment of deposit insurance), deepening of domestic capital markets, and reforming labor market legislation. It will also be essential to weed out corruption through ongoing judicial reform, a complete restructuring of customs, and steps to improve the transparency of government operations.

Nonpension current spending will remain stable in relation to GDP, reflecting in part about 0.4 percent of GDP in costs for disaster relief (El Niño and an earthquake in May 1998 that destroyed two small cities). Current spending on reforms in health, education and other sectors will amount to 0.6 percent of GDP, while the general government wage bill (including merit pay for some teachers) will hold steady in relation to GDP. The government will maintain very tight control over other current expenditures to ensure that the deficit target is reached.

Second, to foster an expansion of microcredit and to deepen the local capital market, younger eligible Bolivians (those between 21 years or older but less than 50 at December 31, 1995) will receive an individual account (Cuenta de Acciones Populares) which they may use as a collateral to obtain credit, sell in the financial market or convert into an annuity when they reach 65 years of age. This program will be financed by the remaining 70 percent of the shares held by the FCC which will be transferred to a mutual fund called the Popular Share Fund (CAP). Shares in the Solidarity Fund and the CAP may be donated to a Social Action Fund (FAS) to be administered by the Catholic Church and other nonprofit organizations for the purpose of financing social work projects such as homeless shelters or to a treasury account designated for road construction. Both the Solidarity Fund and the CAP will be managed by the pension fund administrators.

Benchmarks and Performance Criteria for the Implementation of Selected Structural Measures:
--Offer the national smelting company Vinto for sale - October 1998
--Publish bid for privitization of refineries of YPFB - February 1999
--Complete privitization of the natural gas network, jet fueld stations, and natural gas bottling plants - March 1999
--Privitize refineries of YPFB - June 1999

Policy Framework Paper 1998-2001, August 25, 1998

The government intends to privatize all remaining public enterprises, including the enterprises of the armed forces (which will be joint ventures with majority private ownership). The government has already started to privatize the residual of YPFB, as the conversion of the drilling services unit to a joint venture was completed in June 1998. The workforce of YPFB was reduced by 1,350 persons between September 1997 and June 1998. The government will publish a request for bids to privatize the refineries by February 1999 and intend to privatize the refineries by June 1999. The publication of the request for bids by February 1999 will be a structural performance criterion under the program. Privatization of YPFB's natural gas network, jet fuel stations, and natural gas bottling plants will be completed by March 1999, and gasoline stations will be sold as existing long-term leases expire. A plan of action to reduce excess employment in other residual elements of YPFB (including headquarters) will be formulated by June 1999. In addition, the state smelting company (Vinto) will be offered for sale by October 1998 and the workforce of Vinto will be reduced by 890 persons in 1998. The government plans to sell the development finance company of Santa Cruz (FINDESA) by October 1998; a sugar mill (Bermejo) and a water company (SEMAPA) by December 1998; and two electricity distribution companies (Servicios Eléctricos de Potosí and Servicios Eléctricos Tarija) by June 1999.

The government is sponsoring a dialogue among representatives of the private sector, labor, and government that is intended to lead to a comprehensive revision of Bolivia's labor laws and regulations, which are antiquated, complex and often contradictory. The government has secured the technical assistance of the International Labor Organization (ILO) and the United Nations Development Program (UNDP), and established an office in the ministry of labor to coordinate the process of developing new labor legislation. Two tripartite meetings were held in the first half of 1998. By December 1998, the government will prepare a proposed draft law that will serve as a basis for further discussion among the main groups in society. A new draft law will be submitted to congress by end-1999.

Policy Matrix 1998-2001
Link teacher's remuneration to performance. 1999
Offer the national smelting company Vinto for sale. October 1998
Sell development finance development company, FINDESA. October 1998
Privatize sugar mill (Bermejo) and SEMAPA. December 1998
Privatize electricity distribution companies of Tarija and Potosí. June 1999
Publish bid for joint venture for the refineries of YPFB. February 1999
Complete privatization of the natural gas network, jet fuel station, and natural gas bottling plants. March 1999
Expedite liquidation of assets from former complementary pension funds. September 1999

Letter of Intent and Memorandum of Economic Policies, April 8, 1999

Total nonpension spending is projected to fall by 0.5 percent of GDP, reflecting a similar decline in current spending in relation to GDP. The government has adopted a very prudent wage policy to help limit inflationary pressures. The general government's wage bill is expected to decline in relation to GDP, based on the recent agreement to grant an average wage increase of 4 percent (ranging from 6 percent for those earning below Bs 600 per month to no increase for those earning above Bs 3,000 per month and some additional increases for teachers). Interest payments will also fall owing to relief under the HIPC Initiative. Other current spending on reforms in health, education and other sectors will rise in relation to GDP, financed in part with resources coming from lower interest payments resulting from debt relief under the HIPC Initiative. This spending also includes the backpayment of all overdue tax rebates to exporters.

The state petroleum company (YPFB): Bids to purchase the refineries are to be requested in April 1999. The refineries are expected to be privatized by August 1999, and we understand that this action will be a prior action for the next annual ESAF arrangement. The privatization of YPFB's natural gas network, jet fuel stations and natural gas bottling plants will also be completed by August 1999.

The state smelting company (Vinto): We will attempt to privatize this enterprise by May 1999; if this effort does not succeed, we will liquidate Vinto by September 1999.2 Either the privatization or liquidation of Vinto will be another prior action for the next annual ESAF arrangement.

Benchmarks and Performance Criteria for the Implementation of
Selected Structural Policy Measures
Offer the national smelting company Vinto for sale. Oct. 1998 A new auction is expected in May 1999.
Complete privatization of the natural gas network, jet fuel stations, and natural gas bottling plants. Mar. 1999 August 1999

Complete privatization of the natural gas network, jet fuel stations, and natural gas bottling plants. Mar. 1999 August 1999.
-- Prepare a plan of action to reduce excess employment in the residual YPFB (including headquarters). June 1999
Privatize refineries of YPFB. June 1999 August 1999.

Letter of Intent, December 20, 1999

Key structural reforms are being implemented under the 1999 program. A new Customs Law, which replaces the old law dating back to 1929, was approved by Congress in July. This new law emphasizes accountability and enforcement through the establishment of a Customs Board, the appointment of an independent president of customs for a five-year period, and the replacement of politically-related personnel with highly qualified staff. Following the appointment of the new president in August, the customs department has been reorganized around five regional directions, the units for the repression of contraband have become operational since late October, and politically-related staff are being replaced. In the area of privatization, the public shareholdings in the cement company FANCESA were sold in September, the sale of the refineries of the state petroleum company YPFB was completed in November, and that of the state smelting company Vinto is expected to be completed in early January 2000. Financial sector regulations have continued to be strengthened, with improved risk assessment requirements in effect since the beginning of 1999 for classification of new loans and the implementation in September 1999 of the first stage of the December 1998 regulation aimed at tripling provisioning requirements over a five-year period.

Tax administration is being strengthened. The regulations for implementation of the law on the civil servant status approved in October 1999, aiming at promoting professionalism and continuity in the civil service, will be issued by end-March 2000. The draft tax procedures code, which aims at strengthening the enforcement power of the tax and customs administration, will be introduced to congress no later than end-March 2000; this measure will be a structural performance criterion under the program. In the internal revenue service, during the first half of 2000 all employees will have to pass a competency examination as a precondition to becoming permanent staff. A new tax administration law, aimed at restructuring the internal revenue service into an autonomous agency with its own resources, will be submitted to congress during the first half of 2000. The draft law will also aim at removing political influence in the selection of staff and establishing a career system for professionalized staff recruited on the basis of merit.

The Government of Bolivia intends to complete its privatization program by the end of 2000. Following the privatization in 1999 of the refineries of the state petroleum company YPFB and the sale of its service stations to the company's employees, the government will privatize its remaining assets, including the oil storage facilities, the natural gas distribution networks, the airport jet fuel stations, and the natural gas bottling plants during the first half of 2000. The government also intends to offer for sale in 2000 the electricity distribution company of Tarija (SETAR), the electricity generation and distribution company of Potosi (SEPSA), and the electricity generation company of Trinidad. During 2000, the government plans to offer in concession to the private sector the operation of the postal service company ECOBOL.

The Government of Bolivia believes that current labor regulations are excessively complex and intricate, and it intends to introduce in congress in 2000 a draft law aimed at modernizing them. Some flexibility was introduced in working hours in all sectors of the economy in May 1999, and a law aimed at protecting the rights of children and preventing child labor exploitation was approved by congress in September 1999. The new labor law, prepared in consultation with all economic and social agents, will be introduced in congress in October 2000, for approval by year-end. It will aim at modernizing the labor market and at bringing Bolivian labor regulations in line with the norms of the International Labor Organization, particularly with respect to equality of treatment among genders and labor safety. The government also intends to introduce in congress a law aimed at promoting employment generation, with special emphasis on microenterprises, which account for two-thirds of employment in Bolivia.

Structural Benchmarks and Performance Criteria, 1999-2000
Prior Action Offer the state smelting company Vinto for sale. December 1999
Prior Action Complete the bidding process for the privatization of the refineries of YPFB. November 1999
Benchmark Complete privatization of the residual assets of YPFB, including the natural gas network, jet fuel stations, and natural gas bottling plants. June 2000
Benchmark Complete the privatization process fully, including the dairy product company Milka, the electricity companies SEPSA, SETAR, and the electricity generation of Trinidad. December 2000

Poverty Reduction Strategy Paper, March 31, 2001

Participants indicated the need to harmonize and simplify labor legislation, maintaining worker protection, providing clear standards for working conditions, designed to generate employment and legal security for the parties involved. To that end, it was suggested that labor legislation should be modernized and that laws should be adapted for micro and small-scale enterprises (MSE's).

Market liberalization began with government deregulation of domestic prices to enhance the transparency of operations carried out by economic agents involved on the goods and services market. On the labor market side, flexibility was enhanced by deregulating hiring and by consolidating special bonuses into the basic wage. In this way, prices regained their capacity to send adequate signals to economic agents.

Recently, based on the needs created by the process of Popular Participation and Administrative Decentralization, the basic regulations for the administrative systems provided in the SAFCO Law were formalized. In addition, progress was made in modernizing public administration through: (i) approval of the Civil Service Regulations [Estatuto del Funcionario Público], which will allow the implementation of a merit-based administrative career and development of gradual institutionalization processes at all levels of public administration; (ii) development of the Integrated Management and Administrative Modernization System (SIGMA), which seeks to modernize and automate financial and nonfinancial administration in all public agencies; and (iii) creation of the System for Monitoring and Evaluating Performance-Based Government Management (SISER), which will make it possible to evaluate the results of activities undertaken in the Annual Operating Programming Exercises of the Ministries, Prefectures, and other public agencies.

Structural reforms must go further, particularly in the legal system and labor market so that obstacles created by bureaucracy in the judicial system and rigidities in the labor market can be reduced.

Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, May 25, 2001

Although there were some delays in the structural adjustment program, progress has been achieved in several areas. The customs reform advanced with the issuance of regulations in August 2000 for implementation of the 1999 Customs Law that establishes an autonomous customs agency with an independent board of directors and professional staff. Some 50 percent of the professional and technical staff have been selected through a competitive selection process thus far. The selection process for the remaining 50 percent is under way and is expected to be completed by mid-2001. In December 2000, congress passed a law for the reform of the internal revenue service (SI), which allows for the restructuring of this institution along the same lines as the customs reform. Advances were also made with the privatization program. The sales of the state smelting company (Vinto) and dairy (Milka) were completed in early 2000. Further, the sale of the refineries, the storage facilities, and jet fuel stations of the state-owned oil company (YPFB) were sold by December 2000.

To control the costs of the pension reform, which has put much pressure on the overall fiscal balance since its inception in 1997, we will close admission to the old system for new retirees by the end of 2001.

The Government of Bolivia intends to complete its privatization program by the end of 2001. Following the privatization in 2000 of most of YPFB's assets, the remaining gas networks and the LPG bottling plants will be sold during the fourth quarter of 2001. The government also intends to offer for sale in 2001 the electricity distribution company of Tarija (SETAR), the electricity generation and distribution company of Potosi (SEPSA), and the electricity generation company of Trinidad (COSERELEC).

With a view to achieving consensus on a modernization of labor legislation, pilot programs to demonstrate the benefits that a modern labor law would permit are being implemented (for example, hourly work that is agreed upon by private firms and university students).