Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 19401

IMPLEMENTATION COMPLETION REPORT

BOLIVIA

REGULATORY REFORM AND CAPITALIZATION

TECHNICAL ASSISTANCE PROJECT

(CREDIT 2647-BO)

June 25, 1999

Finance, Private Sector and Infrastructure Sector Management UnitCountry Management Unit for Bolivia, Paraguay and PeruLatin America and the Caribbean Region

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

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CURRENCY AND EXCHANGE RATE

(As of December 30, 1998)

Currency Unit Boliviano (Bs)US$ 1.00 Bs. 5.62

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

CPAC Capitalization Program Adjustment CreditELFEC Empresa de Luzy Fuerza Electrica de Cochabamba (Cochabamba

Electricity Distribution Company)ENDE Empresa Nacional de Electricidad (National Power Company)ENFE Empresa Nacional de Ferrocarriles (National Railway Company)ENTEL Empresa Nacional de Telecomunicaciones (National

Telecommunications Company)GDP Gross Domestic ProductICR Implementation Completion ReportIDA International Development AssociationIDB Inter-American Development BankIMF International Monetary FundLAB Lloyd Aereo Boliviano (National Airline)MIF Multilateral Investment Fund (of the Inter-American Development

Bank)PPF Project Preparation FacilityRRPTAC Regulatory Reform and Privatization Technical Assistance CreditRRSAC Regulatory Reform Sector Adjustment CreditSAM SociedadAnonima Mixta (Mixed ownership company)SOE State-Owned EnterpriseSDR Special Drawing RightsSIRESE Sistema de Regulacion Sectorial (System for Sectoral Regulation)TA Technical AssistanceTAB Transportes Aereos Bolivianos (Military-operated airline)TAM Transportes Aereos Militares (Military-operated freight carrier)YPFB Yacimientos Petroliferos Fiscales Bolivianos (National Hydrocarbons

Company)

Vice President : Shahid Javed BurkiDirector : Isabel GuerreroTask Manager . Susan GoldmarkStaff Member . Shobha Sahgal

FOR OFFICIAL USE ONLYTABLE OF CONTENTS

Page No.

PREFACE ................................................

EVALUATION SUMMARY ................................................ .

PART I. PROJECT IMPLEMENTATION ASSESSMENT ........................................... 1

A. Background ............................................... 1 B. Project Objectives and Design ................................................ 1

C. Achievement of Objectives ................................................ 3

D. Major Factors Affecting Implementation ............................................... 7

E. Project Sustainability ................................................ 8

F. IDA Performance ............................................... 9

G. Borrower Performance ............................................... 10

H. Assessment of Outcome ............................................... 11

I. Future Operation ............................................... 12

J. Key Lessons Learned ............................................... 13

PART II: STATISTICAL ANNEXES

Table 1: Summary of Assessments ............................................... 15

Table 2: Related IDA Credits ............................................... 15

Table 3: Project Timetable ............................................... 17

Table 4: Credit Disbursements: Cumulative Estimated And Actual ................................ :.17

Table 5: Key Indicators for Project Implementation ............................................... 18

Table 6: Key Indicators for Project Operation ............................................... 19

Table 7: Studies Included in Project ............................................... 20

Table 8A: Project Costs ............................................... 20

Table 8B: Project Financing ............................................... 21

Table 9: Economic Costs and Benefits ............................................... 21

Table 10: Status of Legal Covenants ............................................... 21

Table 1 1: Compliance with Operational Manual Statements ............................................... 22

Table 12: Bank Resources: Staff Inputs ............................................... 22

Table 13: Bank Resources: Missions ............................................... 23

APPENDICES

A. AIDE MEMOIRE ............................................... 25

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

B. BORROWER'S CONTRIBUTION AND COMMENTS TO THE ICR ............... 28

C. PROJECT IMPLEMENTATION STATISTICS

Table 1: Use of Project Funds ....................................................... 33

Table 2: Capitalization Transactions ........................................................ 33

Table 3: Privatization Transactions 1995-1998 ....................................................... 34

Table 4: SIRESE Evaluation 1997 ........................................................ 34

Table 5: Tenure of SIRESE Superintendents ....................................................... 35

Table 6: SIRESE Budgets 1997-1999 ........................................................ 35

Table 7: SIRESE Employees 1997-1999 ....................................................... 36

Table 8: SIRESE Personnel Costs 1997-1999 ....................................................... 36

Table 9: SIRESE Appeals Cases 1997-1998 ....................................................... 36

MAP

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IMPLEMENTATION COMPLETION REPORT

BOLIVIA

REGULATORY REFORM AND CAPITALIZATIONTECHNICAL ASSISTANCE PROJECT

CREDIT 2647-BO

PREFACE

This is the Implementation Completion Report (ICR) for the Regulatory Reform andCapitalization Technical Assistance Project in Bolivia, for which Credit 2647-BO in theamount of SDR 10.5 million (US$15.4 million equivalent) was approved on July 26, 1994 andmade effective on January 4, 1995.

The Credit was closed on December 15,1998, five-and-a-half months later thanplanned. It was fully disbursed, the last disbursement taking place on April 30, 1998.Cofinancing for the project was provided by the Multilateral Investment Fund (MIF) of theInter-American Development Bank's Technical Cooperation Facility and by the Governmentof France.

The ICR was prepared by Lisette Price (Consultant) and Susan Goldmark (TaskManager and Sector Leader, LCSFP) and reviewed by Luis Guasch (Lead Specialist, LCSFP),Hermann von Gersdorff (Task Manager of the Bolivian Financial Markets and PensionReform Technical Assistance Credit, LCSFP) and Maria Victoria Lister (Quality AssuranceOfficer, LCSFP). The Borrower provided comments on the draft, which have beenincorporated into the final document. The Borrower's own evaluation of the project'sexecution is included as Appendix B of the ICR.

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BOLIVIAREGULATORY REFORM AND CAPITALIZATION

TECHNICAL ASSISTANCE PROJECT

(CREDIT 2647-BO)

EVALUATION SUMMARY

1. Background. Although Bolivia embarked on a program of adjustment as early as1985, key sectors of the country's economy-electricity, telecommunications, transport,hydrocarbons and mining-remained dominated by state-owned enterprises (SOEs) for sometime longer. By 1993, these sectors were generally suffering from weak management and lowproductivity, with negative consequences for the economy as a whole. That year, an incomingadministration devised a novel form of divestiture, called "capitalization", for SOEs in thesesectors, with the aim of improving investment, productivity and growth in Bolivia. Undercapitalization, investors would be offered 50 percent of an SOE's shares and managementcontrol, in return for increasing the company's equity. Ownership of the remaining shareswould be transferred to the Bolivian people, with a small portion sold to employees. In March1994, a Capitalization Law was approved, and a Ministry was formed soon after.

2. Project Objectives. To support the reforms, IDA organized a broad program ofassistance, including an adjustment operation and several technical assistance credits, ofwhich this was the first and largest. The credit for SDR 10.5 million (US$15.4 millionequivalent) was approved in July 1994 and made effective in January 1995. Its objectiveswere: (i) to assist in the planning, design and execution of the Government's capitalizationprogram in the electricity, telecommunications, transport, hydrocarbons and mining sectors;and (ii) to assist in the design, establishment and initial operation of a regulatory frameworkfor these sectors.

3. Assessment of Outcome. The project's outcome is rated satisfactory overall. Thebulk of the credit went towards supporting the capitalization transactions, and the results inthis area are rated highly satisfactory. Project funds were used mainly to finance consultants,who helped to translate the idea of capitalization into a workable model that was successfullyimplemented. They helped to prepare new sectoral laws, restructure the six public enterprisesinto eleven units to be capitalized, establish their book values and assess economic values,promote the companies to potential investors, design procedures for investor selection, anddefine investment and other contractual obligations. The project also financed a publicinformation campaign aimed at potential investors, workers and the Bolivian public ingeneral.

4. Of the six large SOEs, two were capitalized in their entirety-the long-distancetelecommunications company and the national airline (ENTEL and LAB). In the nationalpower company (ENDE), three generation companies were capitalized, and an electricitydistribution company and the transmission system were privatized. The nationalhydrocarbons company's (YPFB) exploration and production business, its existing pipelinesand the Bolivian portion of the prospective Bolivia-Brazil natural gas pipeline were

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capitalized. The national railway (ENFE) was capitalized as two railway companies. Theproject also supported privatization of Bolivia's three main airports. In general, there wasgood investor interest in the transactions, with most attracting several offers, including fromsome leading international firms. Only the national smelter (Vinto) failed to attract a bid.The winning capitalization bids totaled US$1.7 billion, almost a quarter of Bolivia's GDP.The transfers were executed quite rapidly-within two years of project effectiveness-and withsufficient transparency that investors went on record to describe it as the most transparentprivatization process in which they had been involved. The public information campaignproved very successful with potential investors and with workers, but the portion aimed at thegeneral public should have placed greater emphasis on the benefits of reform.

5. Not only were the transfers executed successfully, quite rapidly and with transparency,but Bolivia also established the conditions necessary for long-term benefits to flow from thedivestitures. New laws were approved in electricity, telecommunications, hydrocarbons andmining, which in general provide a sound basis for competition and so efficiency and growth.Enforcement of these rules now falls to the regulatory system, SIRESE, which the regulatoryreform component of the project helped to establish. The outcome of this component is ratedsatisfactory, because it substantially achieved its objective of helping to establish an effective,independent regulatory system, but some problems did arise during implementation. First,there were slight delays in establishing the agencies. Later, the main problem was thetemporary deterioration in relations between the regulators and some members of the newgovernment, following a change of government in August 1997. Nevertheless, the regulators'independence was maintained during a difficult transition period, and overall, theachievements of the component are considerable. A modern regulatory framework is in placein Bolivia, including some of the strongest legal guarantees of regulatory independence in theregion. The SIRESE agencies on the whole are well-funded and staffed and are operatingsatisfactorily. They have adopted some of the best practices of international regulation, suchas the use of public procedures for decision-making, attention to consumer concerns, andspeedy resolution of appeals from their decisions. Still, institution-building takes time, andthis project's achievements constitute just the first steps towards the successful developmentof regulatory capacity in Bolivia.

6. The reform program was completed quite recently, and it is still too soon to judge itsfull effect on productivity and growth. But, because Bolivia accompanied its divestitures withlegal and regulatory improvements, the prospects for efficient private sector activity are good.Already the reforms have significantly increased levels of private investment in Bolivia; in1997 private investment reached an estimated 1 1.5 percent of GDP, almost double the 5.9percent attained in 1994, the last full year before capitalization. This investment has brought arapid expansion of coverage in reformed sectors-companies appear to be reaching and, insome cases, exceeding their investment obligations. In electricity, for example, installedcapacity grew by 40 percent by 1998, while in hydrocarbons, investments planned for the nexteight years triple historical levels of investment in the sector. The telephone penetration raterose from 3.6 percent in 1994 to 6.47 percent by end-1997 and about 770 isolated villagesreceived lifeline services. Unlike privatization, capitalization provided no fiscal windfall tothe Government. But by making all adult Bolivians shareholders in the capitalizedcompanies, it will permit them to benefit directly from companies' profitability. Both the

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benefits of this share ownership and the governance of the companies would be enhanced bylisting of the shares on a stock exchange.

7. Implementation Experience. The implementation of such sweeping reforms is aconsiderable achievement in a country with an under-developed private sector and weakinstitutional capacity. It was made possible by complete local ownership of the reformprogram, increased by the presence of local experts in the working groups handling thereforms in each sector. Capitalization was a Bolivian idea, and there was full commitment toits implementation both at technical and political levels of government. As a result,transactions proceeded rapidly, with four of the six SOEs capitalized within eighteen monthsof project approval. The SIRESE reforms lagged the divestitures, partly because of a focus onthe high-profile transactions and partly because of Bolivia's limited human resources. Thedelay in establishing SIRESE caused a few problems to the main technical assistance packagefinanced by the project. The initial scope of work had to be adjusted to take account of theviews of Superintendents appointed some months later. Delays also arose in the procurementof the spectrumn frequency-monitoring equipment for the TelecommunicationsSuperintendency. These eventually made necessary a five-and-a-half month extension of theclosing date, even though the credit was otherwise almost entirely disbursed a year before theoriginal closing date.

8. The early rapid pace of capitalization produced cashflow problems in the Ministry ofCapitalization, since sectoral TA credits that were to finance part of the program were not yetapproved or effective. This project therefore financed some expenditures that were meant forthe sectoral operations. Despite this, financing gaps continued to appear as the reformprogram expanded. The IDA country team was able to locate some additional funds, but theMinistry of Capitalization still had to negotiate bridge loans to cover its needs. The search forfunds took time and attention, both the Ministry's and IDA's, away from the main issue--thereform program. The problem might not have arisen if the sectoral loans had been approvedand effective sooner. Alternatively, it could have been avoided altogether, by organizing thetechnical assistance for capitalization transactions, regardless of sector, into a singleoperation.

9. IDA Performance. Overall, IDA performance is rated satisfactory. Identification washighly satisfactory; IDA immediately acknowledged the priority given to capitalization andrecognized the need for technical assistance. Staff worked hard to provide timely financing ofthese needs, with Board approval of the project coming just three months after an appropriateimplementing agency was established. Project appraisal was sound; the decision to includeunallocated funds proved crucial as financing gaps emerged in the program. Supervision wassatisfactory. IDA staff spent considerable time and effort processing the numerous contractsgenerated by the project. During the early years of project implementation, prior review wasrequired of all contracts in order to address concerns about the contracting capacity of theMinistry of Capitalization, a new implementing agency. In practice, prior review by IDA ofevery single contract was not the efficient way to handle this issue. When the SIRESEcomponent ran into trouble with the new administration, IDA played an important role in

v

safeguarding these reforms, discussing with the new Government the importance toinvestment and growth of strong, credible regulatory authorities.

10. Borrower Performance. This was satisfactory overall. Full Governmentcommitment made possible quite rapid implementation of a complex and demanding reformprogram. As planned, once its key tasks had been completed, the Ministry of Capitalizationclosed in July 1997. It is noteworthy that Bolivia tackled time-consuming legal andregulatory reform, as well as divestiture. The timing of the SIRESE reforms could have beenbetter. The tensions that arose between the new administration and SIRESE undermined thelatter's credibility, but the Government did subsequently declare its commitment to regulatoryindependence and during the past 18 months has taken actions to substantiate this declaration.

11. Project Sustainability. The project's achievements are likely to be sustainable. Thecapitalization components provided assistance that was by nature short-term. Theyaccomplished their objective-to transfer ownership of key SOEs to the private sector underconditions that promote efficiency and competition-and these achievements are not likely tobe reversed. The main political parties are committed to private management of productiveactivity. More privatizations are in fact planned, including of remaining portions ofenterprises that were capitalized. Parallel to privatization, the broader program ofstrengthening the legal and regulatory framework for private investment is continuing. Thiswill help to ensure that long-term benefits flow from the privatizations. IDA is supporting theongoing reforms with a new adjustment operation approved in November 1998 and with theRegulatory Reform and Privatization Technical Assistance Credit, (RRPTAC), approved inJune 1998.

12. With regard to SIRESE, the benefits of the assistance provided in this first project nowappear likely to be sustained, although SIRESE will need continued support for its long-termdevelopment. The project helped to ensure that the new agencies made a good start. IDA wasable to offer them important support during a change of government, inevitably a difficultperiod. These were the first successful steps in what will necessarily be a long process ofinstitution-building. Efforts to improve the system are continuing, and include fine-tuning ofregulations, and a proposal to create a committee to improve coordination between theexecutive branch and SIRESE. The regulators are to adopt a "Code of Conduct" and staffingbenchmarks based on international best practice, guidelines which will promoteaccountability. In its future operation, SIRESE will benefit from some of the strongest legalsafeguards of independence enjoyed by regulators anywhere. Also, continuing IDA assistanceaims to clarify and resolve pending issues between the regulatory agencies and the executive.IDA is also providing support for judicial reform in Bolivia, which, if successful, willcontribute greatly to the long-term prospects for SIRESE and private sector development ingeneral.

13. KEY LESSONS LEARNED

* Where there is full commitment, both at technical and political levels of Government,major reform is possible.

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* Divestiture needs strong leadership and access to the highest levels of government fordecisions to be taken quickly.

* Privatizations should be preceded by establishment of a legal and regulatoryframework designed to promote competition and efficiency.

* Divestitures, especially of large SOEs, are high-profile events and governments tendunderstandably to focus on transactions to the detriment of accompanying legal andregulatory reforms. IDA can play a key role by emphasizing these latter aspectsthrough advice, guidance on best practice and initial financing of regulatory agencies.

* Providing technical assistance to a reform program through a free-standing credit(separate from an adjustment operation) allows maximum flexibility.

Short-term technical assistance for divestiture is better provided through a singleoperation rather than several sector-specific credits.

* Since the priorities for privatization may shift during project implementation, technicalassistance operations supporting such efforts should allow for some flexibility.

IDA's procedures of prior review, including its information systems, are not designedto handle TA projects involving numerous contracts. They are onerous and do notserve as efficient abuse-prevention mechanisms. Higher prior review thresholdscombined with effective ex-post review mechanisms would be more efficient.

* §)Divestiture transactions are best managed by a strong core of local professionals withadvice from high-calibre international firns and consultants. This ensures thattransactions are well handled while encouraging local ownership and accountability.

Public information campaigns should be used to disseminate information on thebenefits of divestiture programs as well as to collect information from keystakeholders to help design the program.

Institution-building takes time, and is best supported by a program--rather thanproject-approach.

* A rigorous, comprehensive evaluation of the impact of such regulatory reform anddivestiture programs should be conducted several years after their implementation.This analysis should focus particularly on how these reforms have affected the poor.

BOLIVIA

REGULATORY REFORM AND CAPITALIZATIONTECHNICAL ASSISTANCE PROJECT

(CREDIT 2647-BO)

PART I. PROJECT IMPLEMENTATION ASSESSMENT

A. BACKGROUND

1. Although Bolivia embarked on a program of adjustment as early as 1985, key sectorsof the country's economy-electricity, telecommunications, transport, hydrocarbons andmining-were still dominated by state-owned enterprises (SOEs) eight years later. Thesestrategic sectors were generally suffering from weak management and low productivity, withnegative consequences for the economy as a whole. In an attempt to raise productivity in theSOEs, performance contracts had been introduced in 1990, but they proved difficult to designand administer and were discontinued after two years. In 1993, with the aim of improvinginvestment, productivity and growth in Bolivia, an incoming administration devised a novelform of divestiture called "capitalization" for the six largest SOEs. A Capitalization Law wasapproved in March 1994 and a Ministry of Capitalization formed soon after.

2. Under capitalization, investors would be offered 50 percent of the shares of anenterprise and management control, in return for increasing the company's equity. Ownershipof the remaining shares would be transferred to the Bolivian people, with a small portion soldto employees. Like privatization, capitalization would be a complex undertaking: enterpriseswould have to be restructured, new laws introduced and regulatory agencies established, inorder to create the conditions for efficient private sector activity. Yet unlike privatization,capitalization would bring no fiscal windfall to finance the costs of these reforms. TheGovernment of Bolivia therefore sought IDA funding for its reform program.

3. Representing a second stage of adjustment that IDA had long been promoting, theprogram clearly merited support. Accordingly, IDA assistance was to include an adjustmentoperation, the Capitalization Program Adjustment Credit (CPAC), as well as several technicalassistance credits, of which this was the first and largest. In addition, several existing projectswere restructured to provide support for reform activities. A Project Preparation Facility(PPF) for this project was approved as early as August 1993. When the CapitalizationMinistry was created in April 1994 and designated implementing agency, the project wasappraised, approved in July 1994 and made effective in January 1995.

B. PROJECT OBJECTIVES AND DESIGN

4. Objectives. The project's objectives were: (i) to assist in the planning, design andexecution of the Government's capitalization program in the electricity, telecommunications,transport, hydrocarbons and mining sectors; and (ii) to assist in the design, establishment andinitial operation of a regulatory framework for these sectors.

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5. Design. To achieve these objectives, the project included four components: (i) aMinistry of Capitalization component, comprising technical assistance for legal reform andcapitalization in all sectors, including support for a public information campaign; (ii) atelecommunications component to assist sectoral reform, capitalization and establishment of atelecommunications regulator; (iii) a similar aviation component, covering the national airline(LAB), two small military airlines (TAM and TAB) and airports; (iv) a regulatory reformcomponent to provide assistance for establishment of the new regulatory system (SIRESE)f,including financing of training programs.

6. Evaluation of Objectives and Design. The project objectives represented importantintermediate goals in IDA's assistance strategy for Bolivia, which viewed increased privateinvestment as the key to greater productivity and growth. Divestiture was central to thestrategy, and it was important that it be well executed. The project's objectives were also verymuch in keeping with the Government's own priorities, capitalization being the key economicprogram of the administration. The objectives correctly encompassed regulatory reform aswell as capitalization, recognizing the need to create a legal and regulatory framework thatwould encourage privatized companies to increase competition and efficiency. The regulatoryobjective was formulated realistically as offering support to the early stages of regulation.

7. Although divided into four components, the assistance to be provided under theproject was basically of two types: (i) short-term technical assistance to capitalization,covering the usual transaction-related matters such as asset valuation, enterprise restructuringand the design of sale procedures, as well as an information campaign; and (ii) longer-termassistance for institutional development of regulatory authorities. The project's apparentemphasis on the telecommunications and aviation sectors is incidental, stemming from thedesign of the entire IDA program of technical assistance in support of capitalization andregulatory reform. This was to be a large TA program (US$39.4 million),2 its size almostequaling that of the adjustment credit. It was also complex, involving support to almost adozen regulatory agencies as well as several line ministries. To manage this complexity, thepackage was split along sectoral lines and staggered. Since specific TA projects were plannedfor hydrocarbons, electricity and finance, and there were existing operations in mining andrailways, this project was to finance activities in the two remaining sectors, as well as providecross-sectoral assistance to the Ministry of Capitalization. In practice, for reasons discussedbelow, project funds were also used for sector-specific activities in electricity andhydrocarbons. This project was not involved in the pension reform and share distributionaspects of the reform program. Thus, these components are not discussed in this report.

The MOP refers to a regulatory commission (CONARE); the proposed design and name were later changed.

2 This sum includes funds provided by this Credit, the Hydrocarbons Sector Reform and Capitalization TACredit, the Financial Markets and Pension Reform TA Credit and the Power Sector Reform TA Credit. It doesnot take account of funds provided by pre-existing credits (Export Corridors, Mining Sector Rehabilitation andPrivate Enterprise Development) or by the Judicial Reform Credit.

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C. ACHIEVEMENT OF OBJECTIVES

8. Capitalization Components. The capitalization components, which absorbed some64 percent of project funds (in SDRs),3 substantially achieved their objective; they helped totranslate the idea of capitalization into a workable model that was successfully implemented.The funds financed mainly consultants' fees, including those of investment banks (retainers),transaction lawyers, regulatory lawyers, auditors and local technical specialists who made upthe working groups in each sector. The consultants helped the Government to prepare newsectoral laws and regulations, restructure the six public enterprises into eleven units to becapitalized, establish book values and assess economic values, promote the companies topotential investors, design procedures for investor selection, and define investment and othercontractual obligations.

9. They provided advice on a complex range of issues, some unique to the capitalizationapproach, for example: whether to require investors to deposit the full capitalization amountup-front; how to keep the capitalization funds safe until they could be invested in Bolivia;why and how the public's shares should be placed in trust until fund managers could assumecontrol of them. The assistance provided helped to make the transactions a success: ENTELand LAB were transferred in their entirety to private management, as were major portions ofENDE, ENFE and YPFB. The smelter failed to attract a bid, but most enterprises attractedmultiple offers, many from leading international firms. All winning bids but one were abovebook value, an important achievement for the Government, that wished to demonstrate thatgood value had been obtained for public assets. Together, the winning bids totaledUS$1.7 billion, almost two-and-a-half times book value, and about a quarter of the country'sGDP.4

10. The challenging program of reform was implemented in a remarkably short period -between March 1994 and December 1996. Although the Government's initial timetable waseven more ambitious, in practice it would have been difficult to accelerate the pace of reformmuch further, for both technical and political reasons. Overall, a good balance was struckbetween maintaining the momentum of reform and taking the time needed to prepare properlyfor divestiture. The transparency of the process was good, with investors going on record todescribe it as the most transparent privatization process in which they had been involved.IDA was able to play a useful role in this, for example in emphasizing the importance ofbasing final selection of investors on economic bids. The use of IDA procedures forcontracting consultants also contributed to the transparency of the overall program.

11. With respect to the two sectors specifically covered by this credit, the ENTELcapitalization was one of the program's success stories, in terms of the winning bid's size.The high bid of US$610 million does in part reflect the decision not to eliminate themonopoly in long-distance telephony until 2001, but the operator is nevertheless required tomeet expansion and quality-of-service targets. In aviation, although Bolivia did succeed incapitalizing the national airline, LAB, which it had previously tried but failed to privatize, theoperator is now in financial straits, despite having satisfied financial criteria during the

See Table 1 of Appendix C for the final breakdown by component of project funds .4 See Table 2 of Appendix C for details of the capitalization transactions.

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selection process. This disappointing result is basically the consequence of low interest in thetransaction. Several firms participated in the early stages of bidding, but in the end only oneoffer was received. This winning bid, equivalent to US$49 million, essentially involved theaddition of three airplanes to the LAB fleet.

12. Privatization. The project also supported some privatizations, including a concessioncovering the three main airports, which handle 85% of the country's air transport.Cofinancing provided by the Government of France funded a study of alternatives for theairports' privatization. IDA then financed advisors for the transaction itself. In November1996, a 25-year master concession was awarded to a private consortium, making Bolivia thefirst country in Latin America to privatize its airports. Consultants financed by the projectalso advised on the sale of shares in ELFEC, a regional electricity distribution company.They reviewed an initial proposal to sell shares through a stock exchange, and recommendedan alternative approach, which improved the transparency of the sale and brought in a winningbid of US$50.3 million. The planned privatization of TAM and TAB did not take place; aftereliminating the implicit subsidies they had been receiving, the Government decided that theirprivatization was of lower priority.

13. Public Information Campaign. Part of the project's support to capitalization wasfinancing for a public information campaign, both foreign and domestic. The internationalcampaign worked well, achieving the objective of promoting capitalization and Bolivia topotential investors. It funded publication of bidding notices, and also helped to finance aseries of seminars for potential investors, which proved both popular and useful. Theseminars gave investors a better understanding of capitalization, a new approach toprivatization. They also provided the Government with useful feedback on the feasibility ofits reform proposals.

14. The domestic campaign had two main parts, one focusing on employees of publicenterprises. They were given the chance before capitalization to buy a share in their SOE atbook value. With this share they acquired an option to purchase more shares (up to the valueof their accumulated "social benefits"), still at book value, following capitalization. Theinformation campaign brought workers into seminars where the benefits of share ownershipand of the option were explained. These were a success; in most enterprises, more than 90%of employees took up the option. LAB and ENFE at 60% were the exceptions, with thereluctance of the latter's workers vindicated by the relatively low bids subsequently received.Overall, some 11,500 workers, over three-quarters of those eligible, bought shares.

15. The other part of the domestic campaign was aimed at the general public. Although itwas highly visible, involving television, radio, and print media, and including publication of acapitalization newsletter, it focused more on describing how capitalization worked and less onexplaining why it was necessary and benefited Bolivians. It appeared to have only a smallimpact on public opinion, as resistance to the reforms grew as capitalization proceeded. Itnow seems clear that the emphasis on technical issues was inappropriate. For the mass of theBolivian population, as opposed to the political elite, the question was why privatizationshould happen, not how. The campaign, with its focus on technical aspects, did not engagethe majority of Bolivians, for whom concepts such as share ownership were nebulous. But

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the failings of the campaign have only become apparent with hindsight. At the time, theproject was financing experts in public relations and communications, and they weremounting what looked like a well-organized campaign. By contrast, IDA staff had littleexperience to draw on in this field. Overall, the lesson learned is that information campaignsdo have an important part to play in a reform effort, but IDA should encourage a focus on thebenefits of reform.

16. Regulatory Reform Components (SIRESE). The objective of the regulatory reformcomponents was substantially achieved, using some 29 percent of project funds. About halfthis amount financed consultants whose tasks included: helping to prepare the SIRESE lawand regulations; advising the Government on the structure and functions of SIRESE;producing operational and administrative manuals for use by SIRESE ; and providing trainingto the new regulators. The other half of the funds was spent on purchasing specializedequipment for the Telecommunications Superintendent, needed to help regulate the sector.The project was designed to help with the early stages of establishing an effective,independent regulatory system, and in this it was basically successful. The SIRESE agencieshave encountered some difficulties, as discussed below, but on the whole are off to a goodstart. Still, they remain recent creations, and IDA support for their institutional developmentneeds to continue.

17. The first step towards establishing the SIRESE system was taken in 1994 withpreparation of the framework law. Consultants financed by the project helped with this work,and the law that was approved in October 1994 encourages regulatory independence withsome of the strongest legal safeguards in the world. These include fixed terms of office,removal for incapacity or misconduct only, independent funding through levies on regulatedcompanies, and an appeals structure which excludes recourse to political authorities. The IDAteam contributed to discussions on the law, making available information on regulatorymodels and best practice.

18. One aim of IDA assistance was to promote a coordinated approach to regulation acrossthe various sectors. In the Bolivian context, it also seemed sensible to encourage sharing ofscarce resources, such as regulatory economists and lawyers. Both coordination and resource-sharing could have been facilitated by the creation of a multi-sectoral agency, such as acommission. But the idea of a commission was finally rejected as diluting personalaccountability. So under the Bolivian model of a "system" of regulation, individualSuperintendents are in charge of each sector-electricity, telecommunications, transport,water, and hydrocarbons-but are overseen by a General Superintendent, who can encourageresource-sharing and coordination. He authorizes budgets and administrative structures andreviews the efficiency and effectiveness of sectoral regulators. Since he also hears appealsfrom their decisions, there is a potential conflict between his responsibilities. He should notbe involved in sectoral regulators' affairs if he is to maintain impartiality in appeals, but inorder to oversee the agencies effectively, he must have some knowledge of their work.

19. The project helped to address this potential difficulty. First, under the SIRESEregulations which project consultants helped to prepare, ad hoc intervention by the GeneralSuperintendent in the work of regulators is specifically prohibited. Instead, his reviews are

6

annual and ex-post. The project also financed a study that suggested other practical ways inwhich to reduce conflicts between the oversight and appeals functions. For example, allsuperintendents are to be evaluated on the same criteria, which should be defined in advanceand focus on broad areas of performance. The first review, covering 1997, puts these ideasinto practice. It provides enough detail to justify its conclusions and suggest areas forimprovement. Yet it does not overstep the mark and encroach on Superintendents' autonomy.The report paints a clear picture of SIRESE's first year, and will serve as an importantbaseline against which to judge future performance.5 Its regular publication could also havethe happy effect of promoting competition arnong the SIRESE agencies as they vie for betterratings. The monitoring is to be further improved, based on suggestions set out in a"fiscalization" manual prepared by consultants. This identifies useful performance indicators,which the General Superintendent is now finalizing for use from 1999 onwards.

20. The report makes clear the extent of the challenge faced by regulators in the first year,as delays in the appointment of Superintendents meant that they had to tend immediately tosubstantive as well as organizational tasks. Now, however, the SIRESE agencies have beenoperating for between two and three years, and on the whole are working well.6 They aregenerally well-staffed with qualified professionals, and have made a good start on tacklingregulatory tasks. They are making use of modem regulatory procedures, for example, holdingpublic hearings on tariff adjustment requests from regulated firms. The telecommunicationsagency has shown itself able to analyze and detect anti-competitive behavior, and has imposedlarge fines on the long-distance company for price discrimination against certain users. TheElectricity Superintendent has led the way on consumer protection, organizing a campaign toadvise consumers of their rights and establishing effective procedures for handling consumercomplaints. Investors in regulated firms are having their appeals resolved by the GeneralSuperintendent in a timely fashion, within the mandatory periods established by law.

21. In general therefore, SIRESE is off to a good start, although a few weaknesses in thesystem have become apparent. Some regulations need fine-tuning, in particular in electricityand hydrocarbons, while in transport a new law is required, in order to clarify the division ofresponsibilities between the Superintendent and the civil aviation authority. Similarly, aBasic Sanitation Law is needed to provide the Water Superintendent with a modem legal basisfor his functioning. A draft law has recently been submitted to Congress, and regulations arewell-advanced. It has also become clear that there is a need for greater coordination betweenthe regulators, policymakers and interested stakeholders. To this end, the GeneralSuperin.endent is discussing with the Government the possibility of creating a committee,similar although not identical to that operating in the financial sector. It would serve as aforum for discussion of proposed norms and more generally as a channel for communicationbetween SIRESE and the executive, private sector and other interested parties.

22. Probably the most serious problems faced by SIRESE in its first years came with thechange of government in August 1997. This occasioned some public questioning of thesystem by prominent members of the governing coalition. Three of six Superintendents

5 Table 4 of Appendix C summarizes the review's fndings, showing ratings given to each agency.6 See Tables 4 to 8 of Appendix C for data on SIRESE's operation.

7

resigned during this period, to be replaced by interim appointees whose uncertain statusdetracted from the system's credibility. IDA played an important role during this time,discussing with high-level officials the importance of keeping SIRESE independent andcredible. The Government has now publicly reaffirmed its commitment to the principle ofindependent regulation. It translated its commitment into action by appointing permanentSuperintendents for Telecommunications, Electricity and Transport. But several importantissues still remain to be resolved. The budget approved for 1998 reduced the SIRESEagencies' funding, even though they are not financed by the Treasury but by fees on regulatedcompanies. This year, the submitted budget was approved, but with some limitations on itsuse. The Government has also intervened in the question of SIRESE salaries, trying to pegthem to public sector salaries, despite the SIRESE law and regulations, which provide thatthey be set by reference to levels prevailing in regulated firms. IDA has supported theestablishment of a joint Govermment-SIRESE commission to address this issue, and iscontinuing its support to the SIRESE system through new credits, the Regulatory ReformSector Adjustment Credit (RRSAC) and Regulatory Reform and Privatization TechnicalAssistance Credit (RRPTAC).

D. MAJOR FACTORS AFFECTING IMPLEMENTATION

23. Ownership of the Reform. A major program of divestiture and regulatory reformwas successfully implemented in Bolivia because there was complete local ownership of thereform program. Capitalization was a Bolivian idea, and there was full commitment to itsimplementation at the highest political levels of government. This commitment did not wavereven when politically sensitive transactions, such as the capitalization of YPFB, came underattack. Local ownership of the reforms was increased by the use of local experts to form thecore of the working groups handling the reforms in each sector. That Bolivia, one of theregion's poorest countries, was able to assemble the skills needed to manage this complexreform program is an impressive achievement.

24. Rapid Pace of Reform. Backed by this full commitment, the capitalization programproceeded quite rapidly, with four of the six large enterprises capitalized within eighteenmonths of this project's approval. Since preparatory work for the transactions began sometime beforehand, the Ministry of Capitalization began to run into cashflow problems early on,when sectoral TA credits that were to finance some of this work were not yet approved oreffective. This project therefore financed certain expenditures that originally were to befunded by the sectoral credits, such as most of the costs associated with the electricitygeneration capitalizations and part of the retainer to the hydrocarbons investment bank. As aresult, the credit was almost 60% disbursed within a year of becoming effective. Despite this,financing gaps continued to appear as the Government's reform program expanded, taking in,for example, water sector privatizations. The IDA country team was able to provide someadditional funds from a Japanese grant and from an existing Private Enterprise DevelopmentProject (Cr.2134-BO), but even so the Ministry of Capitalization had to negotiate bridge loansto cover its needs. The search for funds took time and attention, both the Ministry's andIDA's, away from the main issue, the reform program. This problem might not have arisen ifthe sectoral loans had been approved and effective sooner. Alternatively, it could have been

8

avoided altogether, by organizing the technical assistance for capitalization transactions,regardless of sector, into a single operation.

25. Delays in Establishing SIRESE. Ideally, Superintendents would have beenappointed before transactions took place in their sectors. This would have allowed them timeto establish their offices before having to deal with substantive issues of regulation, and couldhave helped also to boost investors' confidence and the levels of their bids. In the endhowever, in no sector was a Superintendent in place before capitalization bids were received,and the main SIRESE regulations were not approved until February 1997, some eighteenmonths after the first transaction. Partly this was the result of the Government's focus on thetransactions, understandable given their high-profile nature. Partly it was the result ofBolivia's limited human resources. Many of the persons with the experience andqualifications to staff the regulatory agencies were, not surprisingly, acting as localconsultants on the legal reforms and transactions. This made parallel establishment ofSIRESE difficult. The delays caused a few problems with the main technical assistancecontract to SIRESE, which was negotiated and signed before some of the Superintendentswere in place. The services to be provided under the contract had to be adjusted later to takeaccount of their views and requirements.

26. Procurement Delays. By June 1997, a year before the original closing date, the creditwas 86% disbursed. Almost all remaining funds were for the purchase of the Superintendencyof Telecommunications' frequency-monitoring equipment. Although procurement of thisequipment began in 1996, delays in the process and in the installation of the equipment madenecessary a five-and-a-half month extension of the closing date. The delays came about partlybecause the purchase could not be completed before the Ministry of Capitalization closed, andresponsibility for the component was then transferred to SIRESE, which was obliged to re-start the process. Turnover in the sectoral Superintendency also contributed to the delay.

E. PROJECT SUSTAINABILITY

27. The project's achievements are likely to be sustainable. The capitalizationcomponents provided assistance that was by nature short-term. They accomplished theirobjective - to transfer ownership of key SOEs to the private sector under conditions thatpromote efficiency and competition - and these achievements are not likely to be reversed.The main political parties in Bolivia are committed to private management of productiveactivity. More privatizations are in fact planned, including of remaining portions ofenterprises that were capitalized. Parallel to privatization, the broader program ofstrengthening the legal and regulatory framework for private investment is continuing. Thiswill help to ensure that long-term benefits flow from the privatizations. IDA is supporting theongoing reforms with a new adjustment operation, the RRSAC, approved in November 1998and a TA credit, the RRPTAC, approved in June 1998.

28. The new regulatory system, SIRESE, will also be very important for the long-termsuccess of the divestiture process. With help from this project, SIRESE is off to a good start,and its achievements are considered sustainable. The laws and regulations needed for thesystem's proper functioning are now in place or being prepared. The SIRESE agencies have

9

been operating on average for over three years now, and they are on the whole well organized,funded and staffed. They have survived a change of government, inevitably a difficult period.The present Superintendents have held their positions for an average of 19 months, a measureof the recent stability of the system, which contrasts with the turbulence of the 1996-97period.

29. Although the basic elements of an effective regulatory system are now present, furtherimprovements to SIRESE are also planned. Coordination between the executive branch andSuperintendents will be formalized and enhanced with the creation of the planned consultativecommittee. SIRESE, together with other regulators in Bolivia, is to adopt a "Code ofConduct" and staffing benchmarks based on international best practice, guidelines which willpromote accountability. These measures were suggested by policymakers and regulators inBolivia and enjoy their support. IDA is also giving its backing to these particularimprovements by including them in the conditionality of the new adjustment loan, while theTA credit will finance preparation of the final laws and regulations needed by SIRESE. Stepsare also being taken to improve public understanding of the new regulatory system. A focus-group survey commissioned by the General Superintendent in June 1998 found that the publicwas still quite uninformed about the workings of SIRESE. The survey indicated, perhapsunderstandably, that policymakers, regulated firms and consumers all had differentexpectations of the system. These results have led SIRESE to attempt to increase the flow ofinformation to the public, most recently through publication of a detailed report that explainsthe origins of the system, places it in an international context, and reviews its first full year ofoperation. IDA will support public education efforts through the TA credit, which includesfinancing of a public infornation campaign on regulatory reform and privatization.

30. In its short life, SIRESE has already had to endure some difficult periods, but theregulators are slowly beginning to consolidate their operations, build up credibility andstrengthen their public image. The process of institution-building is necessarily a gradual one,and IDA has recognized this by programming continuing support for SIRESE. In its futureoperation, SIRESE will also be able to avail itself of some of the strongest legal safeguards ofindependence enjoyed by regulators anywhere. This and continuing IDA assistance shouldsustain the agencies through occasionally tense relations with the Government, unavoidable ina country with no tradition of independent regulation. IDA is also providing support for civilservice and judicial reform in Bolivia, which, if successful, will contribute greatly to the long-term prospects for SIRESE and private sector development in general.

F. IDA PERFORMANCE

31. Overall, IDA performance was satisfactory. Identification was highly satisfactory;IDA staff immediately acknowledged the priority given to capitalization and recognized theneed for technical assistance. The project provided timely financing of these needs. A PPFfor the reform program was arranged in August 1993. This project was identified inDecember 1993, negotiated in mid-May and approved by the Board in July 1994. IDA staffworked hard to accelerate its preparation, with Board approval coming just three months afteran appropriate implementing agency, the Ministry of Capitalization, was established. The one

10

weakness in project preparation is not specific to this project but concerns the design of theprogram of technical assistance in support of capitalization and regulatory reform. Thedecision to split the package of assistance along sectoral lines appears to have been supply-driven, due mainly to the IDA team's sectoral organization, which was mirrored amonggovernment counterparts. This division and subsequent delays in processing the later projectscontributed to the cashflow problems in the Ministry of Capitalization. Perhaps a betterdivision would have been between the short-term TA support for capitalization (regardless ofsector) and longer-term institution-building efforts for regulatory authorities. Such anarrangement might also have been more efficient administratively, reducing the need formultiple implementing agencies in each project.

32. Project appraisal was sound, with IDA staff recognizing that this project, a kind ofcatch-all, was very tightly budgeted, leaving little room to cover any unanticipated expenses.The project therefore included some unallocated funds to cover unanticipated costs. All theunallocated funds were in fact needed by the Ministry of Capitalization. IDA staff alsoproperly appreciated the importance of familiarity with IDA procurement and disbursementprocedures for management of this project, and arranged special training for project staff. Thecontact this provided with IDA specialists proved useful during implementation.

33. Supervision of the project was satisfactory, although IDA staff were forced to spendconsiderable time and effort just processing the numerous contracts generated by the project -about 165, of which most required several amendments. Almost all of these were approved inthe first two years of implementation when prior review was required of all consultingcontracts. On average, therefore, a no-objection would have been issued at least every threeworking days. The prior review requirement was meant to address concerns about thecontracting capacity of the Ministry of Capitalization, a new implementing agency. Inpractice, prior review by IDA of every single contract was not the efficient way to handle thisissue. IDA staff did make various changes to alleviate this administrative burden and respondto the early rapid pace of disbursement (raising the prior review level and increasing theauthorized allocation to the special account). The IDA team also demonstrated flexibility andresourcefulness in finding funds to cover financing gaps that emerged. When the SIRESEcomponent ran into trouble with the new administration, IDA played an important role insafeguarding these reforms, discussing with the new Government the importance toinvestment and growth of strong, credible regulatory authorities.

G. BORROWER PERFORMANCE

34. The performance of the borrower was satisfactory overall. Commitment to reformexisted at both the technical and highest political levels of government, and made possible therelatively rapid implementation of a complex and demanding reform program. Boliviatackled time-consuming legal and regulatory reforms, as well as divestiture, to provide a goodbasis for efficient private sector activity. As planned, once its key tasks had been completed,the Ministry of Capitalization closed in July 1997. Thus, it was not possible to get feedbackfrom the project's key implementing agency for this report. The timing of the SIRESEreforms could have been better. The Government's focus on the politically sensitive

11

transactions was understandable, but somewhat to the detriment of SIRESE. The tensions thatarose between SIRESE and the new administration undermined the regulators' credibility, butthe Government subsequently declared its commitment to regulatory independence and hasbegun to act on its declaration.

35. As regards capitalization, the performance of the Ministry was highly satisfactory. Itsucceeded in putting together good sectoral teams comprising a core of local professionalsbacked by international experts as needed. This combination encouraged local ownership ofthe reform and increased national accountability while ensuring that the Government had itsdisposal advice on international best practice. The project management unit also performedvery well. The project included a very large number of consulting contracts and processingthese placed heavy demands on the unit. They coped very well with the administrativeburden, and in general managed IDA's procurement, disbursement and accountingrequirements well.

H. ASSESSMENT OF OUTCOME

36. The project's outcome is rated satisfactory overall. The bulk of the credit wenttowards supporting capitalization and its associated legal reforms, and the results in this areaare rated highly satisfactory. Of the six largest public enterprises, two (ENTEL and LAB)were capitalized in their entirety. In the national power company (ENDE), three generationcompanies were capitalized, and the transmission system and an electricity distributioncompany were privatized. The national hydrocarbons company's (YPFB) exploration andproduction business, its existing pipelines and the Bolivian portion of the Bolivia-Brazilnatural gas pipeline were capitalized. The national railway (ENFE) was capitalized as twocompanies. The project also supported privatization of the three main airports. In general,there was good investor interest in the transactions, with most attracting several offers,including from some leading international firms. Only the national smelter (Vinto) failed toattract a bid. The winning capitalization bids totaled US$1.7 billion, almost a quarter ofBolivia's GDP.

37. Not only were the transfers executed successfully, quite rapidly and with transparency,but Bolivia also established the conditions necessary for long-term benefits to flow fromdivestiture. New laws were approved in electricity, telecommunications, hydrocarbons andmining. In general these provide a sound basis for competition and efficiency, although muchwill depend on the new regulatory system, SIRESE. The project outcome with regard toSIRESE is rated satisfactory. The objective of helping to establish an effective, independentregulatory system was substantially achieved, although problems did arise. Delays inappointments made SIRESE's initial year a challenging one. Later, the main problem wasthat of managing relations between the regulators and the executive. Still, regulatoryindependence was maintained during a difficult transition period, and overall the component'sachievements are considerable. A modern regulatory framework is in place in Bolivia,including some of the strongest legal guarantees of regulatory independence in the region.SIRESE agencies on the whole are well funded and staffed and are operating satisfactorily.They have adopted some of the best practices of international regulation, such as the use of

12

public procedures for decision-making, attention to consumer concerns, and speedy resolutionof appeals from their decisions. Nevertheless, institution-building takes time, and thisproject's achievements constitute just the first steps towards the successful development ofregulatory capacity in Bolivia.

38. The project's immediate goals were to assist transactions and help establish newagencies. But these were intermediate objectives, pursued as means to the more importantends of increased investment, efficiency and growth. It is still too soon to judge the reformprogram's effects on these longer-term goals. A proper study would be needed to try todistinguish between the impact of the reform and the impact of macroeconomic, industry orother factors. The Government would in fact like to see this kind of study attempted. Untilthen, the available evidence suggests that the reform is having the desired effects.' There wasan immediate and strong increase in private investment following capitalization. In 1997, itreached an estimated 11.5 percent of GDP, almost double the 5.9 percent attained in 1994, thelast full year before capitalization. This investment has brought a rapid expansion ofcoverage-- in infrastructure, companies appear to be reaching and, in some cases, exceedingtheir investment obligations. In electricity, installed capacity increased some 40 percent by1998. The telephone penetration rate rose from 3.6 percent in 1994 to 6.47 percent by end-1997 (wire and wireless). Lifeline telephone services were extended to over 770 isolatedvillages between 1996-98. Also, the number of cellular telephones increased from barely5,000 to about 200,000 between 1994-98. In hydrocarbons, investments planned over thenext eight years triple historical levels of investment in the sector (including past privateinvestment). The Bolivia-Brazil pipeline has been completed and will soon begin transportingnatural gas to Sao Paulo, generating important export eamings. With regard to productivity,there is some evidence that the impact has been positive, although this issue requires morecareful analysis. Sales and profits of the capitalized companies have generally increased,notably in the long-distance telephone company and the railways, while employment hasremained stable, except in the railways where further lay-offs have taken place. It alsoappears that the pace of economic growth is improving. The 1994-1997 average of 4.4percent GDP growth is an improvement over previous years, and official estimates are ofstable growth of 6 percent by 2002.

I. FUTURE OPERATION

39. Capitalization accomplished the transfer to private ownership of the five largest publicenterprises, and the parallel program of privatization involved the sale of some 50 small- andmedium-sized enterprises. The Government is now pursuing the privatization of remainingstate-owned assets, including the smelter, remaining portions of YPFB, ENFE and ENDE,water companies, and about 50 smaller enterprises of which 40 are operated by the military.Under the RRPTAC, the Government and IDA will agree every six months on the priority listof enterprises to be privatized and progress will be tracked by reference to these plans.

7 For a fuller discussion of the reform program and its outcome, see the Implementation Completion Report ofthe Capitalization Program Adjustment Credit.

13

40. This credit and the accompanying adjustment operation, the RRSAC, will also supportthe deepening of regulatory reform. Performance indicators for future operation were definedunder these credits, having been first discussed at the 1998 Consultative Group meeting.They will track the broad impact of the reforms, such as on levels of private investment in theeconomy. The detailed indicators which the General Superintendent is now agreeing withsectoral Superintendents will permit closer monitoring. This comprehensive list includesmeasures of administrative efficiency, regulatory effectiveness, attention to consumers, aswell as measures of performance of the regulated companies.8

J. KEY LESSONS LEARNED

* Where there is full commitment, both at technical and political levels of Government,major reform is possible. The Bolivian program demonstrates this principle well, havingbeen implemented in a challenging environment: a country with less developed economicinfrastructure and weak institutional capacity.

* Divestiture needs strong leadership and access to the highest levels of government fordecisions to be taken quickly.

* Privatizations should be preceded by establishment of a legal and regulatory frameworkdesigned to promote competition and efficiency.

* Divestitures, especially of large SOEs, are high-profile events and governments tendunderstandably to focus on transactions to the detriment of accompanying legal andregulatory reforns. IDA can play a key role by emphasizing these latter aspects throughadvice, guidance on best practice and initial financing of regulatory agencies.

* Providing technical assistance to a reform program through a free-standing credit (separatefrom an adjustment operation) allows maximum flexibility. As in this case, technicalassistance can support preparatory efforts, thus allowing commitment to be demonstratedand up-front conditionality on an adjustment operation to be satisfied.

* Short-term technical assistance for divestiture is better provided through a single operationrather than several sector-specific credits.

* Since the priorities for privatization may shift during project implementation, technicalassistance operations supporting such efforts should allow for some flexibility.

* IDA's procedures of prior review, including its information systems, are not designed tohandle TA projects involving numerous contracts. They are onerous and do not serve asefficient abuse-prevention mechanisms. Higher prior review thresholds combined witheffective ex-post review mechanisms would be more efficient.

s See Table 6 of Part II for details of indicators under discussion.

14

* Divestiture transactions are best managed by a strong core of local professionals withadvice from high-calibre international firms and consultants. This ensures thattransactions are well handled while encouraging local ownership and accountability.

* Public information campaigns should be used to disseminate information on the benefitsof divestiture programs, but they should not be expected to eliminate all opposition toreform.

* Institution-building takes time, and is best supported by a program- rather than project-approach. Thus the support provided by this project to SIRESE will be continued underrecently approved projects, and even further follow-up could be required.

* A rigorous, comprehensive evaluation of the impact of such regulatory reform anddivestiture programs should be conducted several years after their implementation. Thisanalysis should focus particularly on how these reforms have affected the poor.

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PART II: STATISTICAL ANNEXES

TABLE 1: SUMMARY OF ASSESSMENTS

A. Achievement of Objectives Substantial Partial Negligible Not Applicable

Macroeconomic policies xSector policies xFinancial objectives xInstitutional development xPhysical objectives xPoverty reduction xGender issues xOther social objectives xEnvironmental objectives xPublic sector management xPrivate sector development x

B. Project Sustainability Likely Unlikely Uncertainx

C. Bank Performance Highly Satisfactory Satisfactory Deficient

Identification x

Preparation assistance x

Appraisal xSupervision x

D. Borrower Performance Highly Satisfactory Satisfactory Not Applicable

Preparation xImplementation xCovenant compliance xOperation x

Highly HighlySatisfactory Satisfactory Unsatisfactory Unsatisfactory

E. Assessment of Outcome

x

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TABLE 2: RELATED IDA CREDITS

Credit Title Purpose Approved Status

Preceding operations

Export Corridors (2012-BO) Expand and rehabilitate rail and road network. FY89 Closed

Mining Sector Rehabilitation (2013-BO) Promote private investment in mining and FY89 Closedrestructure COMIBOL into holding company.

Private Enterprise Development (2134-BO) Strengthen the private industrial sector through FY90 Closedimproved access to credit and businessdevelopment services.

Structural Adjustment Credit (2298-BO) Help to restructure financial sector, public FY92 Closedenterprises and public investment.

Following operations

Judicial Reform (2705-BO) Modernize justice administration focusing on FY95 Underwaycivil and commercial branches in order toprovide efficient and predictable frameworkfor enforcement of private rights.

Capitalization Program Adjustment Credit Support establishment of legal and regulatory FY96 Closed(2761-BO) framework for private investment and help to

divest key public enterprises.

Hydrocarbons Sector Reform & Capitalization Support capitalization of YPFB and FY96 ClosedTechnical Assistance (2762-BO) establishment of regulatory framework.

Financial Markets & Pension Reform Support implementation of pension reform and FY96 ClosedTechnical Assistance (2789-BO) further strengthening of financial sector.

Power Sector Reform Technical Assistance Support privatization of transmission and FY96 Underway(2790-BO) establishment of regulatory framework.

Regulatory Reform & Privatization Technical Support independence of regulatory FY98 UnderwayAssistance (3108-BO) framework, stability of financial sector and

improve key infrastructure services.

Regulatory Reform Structural Adjustment Support independence of regulatory FY98 UnderwayCredit (3143-BO) framework, stability of financial sector and

improve key infrastructure services.

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TABLE 3: PROJECT TIMETABLE

Steps in Project Cycle Date Planned | Actual Date

Identification/Preparation December 1993

Appraisal April 1994

Negotiations May 26-27, 1994

Board Presentation July 26, 1994

Signing July 28, 1994

Effectiveness October 26, 1994 January 4, 1995

Credit Closing June 30, 1998 December 15, 1998

TABLE 4: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL

(US$ millions)

FY95 FY96 FY97 FY98 FY99

Appraisal Estimate 5.0 9.0 13.0 14.7 -

Actual 4.1 10.8 12.5 13.7 15.4

Actual as % of Estimate 82% 120% 96% 93%

Date of Final Disbursement April 30, 1999

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TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION

EXPECTED PROJECT OUPUTS EXPECTED TIMING ACTUAL OUTPUT / TIMING

CAPITALIZATION MINISTRY

Laws and regulations in the Laws by first quarter All laws and regulations approved, except forelectricity, telecommunications, 1995. Regulations by railways law, which was later deemed nothydrocarbons, mining and railways end-1995. essential for reform. Expected timingsectors and regulations for the ambitious. Final law approved early 1997;aviation sector. final regulations approved 7/97, but fine-tuning

is ongoing.

Capitalization of six SOEs and By second quarter Capitalization of five SOEs and privatization ofprivatization of AASANA. 1997. AASANA accomplished by expected date. No

bids received on one SOE, the smelter.

National and international public For two years from Campaigns organized and launched on time.information campaigns. third quarter 1994. Local campaign had to continue into 1997 to

explain share distribution scheme which couldnot begin until pension reform accomplished;pension law approved 11/96.

SIRESE

Establishment of SIRESE agencies. General and sectoral Superintendents appointedafter slight delay. Some positions later vacantor filled by interim appointees for severalmonths. Pernanent Superintendent for watersector still to be appointed. Awaiting approvalby Congress of Basic Sanitation Law.

Technical assistance package for Fourth quarter 1994 to Start of main TA contract delayed until fourthSIRESE, including resident advisor second quarter 1995. quarter 1995 as SIRESE appointments alsoand development of policy and delayed. Included full-time advisor residentpersonnel manuals part-time and production of manuals.

Training of SIRESE staff. Fourth quarter 1994 to Start of training delayed for reasons above.second quarter 1996.

Contacts with regulatory agencies in Fourth quarter 1994 to Start delayed. Useful contacts made.other countries. second quarter 1996.

Installation of specialized Second quarter 1994 to Procurement delays. Installation completedtelecommunications equipment. fourth quarter 1996. end-1998.

lPreparation of restructuring Fourth quarter 1994 to On advice of sectoral experts, aviation reformproposal for TAM and TAB. fourth quarter 1995. required only that subsidies to TAM and TAB

be eliminated. Accomplished early 1995.Plans to fully privatize TAM and TAB givenlower priority.

Note: This project was prepared when performance indicators were not yet included as a matter of course inproject documentation. Schedule 1 of the MOP defined key monitorable project outputs as summarized above.

19

TABLE 6: KEY INDICATORS FOR PROJECT OPERATION

INSTITUTION INDICATORS

All SIRESE sectoral Annual budget (executed)/ PopulationSuperintendencies Annual budget (executed)/ Clients of regulated companies

Annual budget (executedy Employees

Executed budget / Planned budget

Actual regulatory fee / Maximum regulatory fee

Technical personnel / Management Personnel

Technical and management personnel / Support personnel

Resolutions appealed / Resolutions issued

Consumer complaints attended / Consumer complaints lodged

Electricity KWh billed / Employees of generation companies

KWh billed Employees of distribution companies

KWh billed Employees of regulated companies

KWh / Consumers

Growth in number of consumers

Growth in energy sales

Transmission losses

Distribution losses

Telecommunications Percentage of network digitalized

Localities with basic telephone service

Fixed-line penetration rate

Mobile telephone penetration rate

Waiting period for connection

Growth in number of telephone lines

Transport Average domestic tariff (US$) / flight hour

Average passenger train fare / kilometer

Average cargo train fare / kilometer

Growth in international air passenger traffic

Growth in domestic air cargo

Growth in international air cargo

Growth in train passenger traffic

Growth in train cargo

Growth in train cargo exports

Growth in cargo and mail handled by regulated airports

Growth in domestic passenger traffic at regulated airports

Growth in international passenger traffic at regulated airports

Occupation factor on trains

Occupation factor on airplanes

20

INSTITUTION INDICATORS

Water Average consumption

Employees of regulated companies / Thousand potable water connections

Water billed / Water produced

Sewerage connections / Water connections

Growth in number of consumers

Hydrocarbons Transport capacity used / Installed capacity

Growth in natural gas consumption

Growth in natural gas exports

Growth in refining

Govermment Private investment as % of GDP increases

Private investment in local service providers increases

Entry of firms in regulated sectors increases

Number of SOEs offered for sale/concession

Revenues from privatization

Note: The SIRESE indicators are still being agreed between the General Superintendent and SIRESE agencies.Other indicators are established in the CAS, RRSAC and RRPTAC, and are to be monitored thereunder.

TABLE 7: STUDIES INCLUDED IN PROJECT

N.A.

TABLE 8A: PROJECT COSTS

Appraisal Estimate (US$m) Actual (US$m)

Local Foreign Total Local Foreign Total

Ministry of Capitalization 2.21 5.35 7.56 2.11 12.31 14.42

Telecormmunications Sector 1.50 8.30 9.80 0.89 8.83 9.72

Aviation Sector 0.32 3.12 3.44 0.35 2.62 2.97

SIRESE 0.20 1.30 1.50 0.25 1.36 1.61

Refinancing of PPF - 1.00 1.00 - 0.99 0.99

TOTAL 4.23 19.07 23.30 3.60 26.11 29.71

Note: - "Telecommunications" includes both the capitalization and regulatory components for the sector.- See Table I of Part III for use of project funds, reported in SDRs.

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TABLE 8B: PROJECT FINANCING

Appraisal Estimate (US$m) Actual (US$m)

Local Foreign Total Local Foreign Total

Government of Bolivia 3.23 2.37 5.60 2.26 9.03 11.29

IDA 0.50 14.20 14.70 0.84 14.58 15.42

Government of France 0.70 0.70 0.70 0.70

Multilateral Investment Fund 0.50 1.80 2.30 0.50 1.80 2.30

TOTAL 4.23 19.07 23.30 3.60 26.11 29.71

Note: - "Government of Bolivia" includes success fees financed by winning bidders.- IDA financing differs from appraised amount because of exchange rate fluctuations.

TABLE 9: ECONOMIC COSTS AND BENEFITS

N.A.

TABLE 10: STATUS OF LEGAL COVENANTS

Section Covenant Status Original Revised Description of Commentstype f fulfillment fulfillment covenant

date date

CREDIT AGREEMENT

2.02 (b) 3 C Borrower to open and maintain Special Complied with.Account in Central Bank.

3.01 (a) 5 C Continuous Borrower to carry out project with due Complied with.diligence through MOC

3.02 5 C Continuous Procurement requirements Complied with.

4.01(a) I C Continuous Separate accounts and records to be Complied with.maintained.

4.01(b) _ C Annual Provide annual audit reports to IDA Complied with.

4.01(c) I C Continuous Maintain records of SOE expenditures Complied with.

Covenant types:

1. = Accounts/audits 5. = Management aspects of the project or executing3. = Flow and utilization of project funds agency4. = Counterpart funding 9. = Monitoring, review, and reporting

10. = Project implementation not covered by categories 1-9

Present Status:

C = covenant complied with CP = complied with partiallyCD = complied with after delay NC = not complied with

22

TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS

The project complied with Operational Manual Statements.

TABLE 12: BANK RESOURCES: STAFF INPUTS

Stage of Project Cycle ActualWeeks US$

Preparation to Appraisal _ 4.1

Appraisal-Board * 2.0

Negotiations through Board Approval 8.1 16.2

Supervision 75.7 227.4

Completion 5.5 6.0

TOTAL 89.3 255.7

* The time used was included in the Structural Adjustment Credit (Credit 2761-BO).

23

TABLE 13: BANK RESOURCES: MISSIONS

Performance Rating

Number Specialized Implemen- Develop-Stage of Month! of Days in Staff Skills tation ment Types of

Project Cycle Year Persons Field Represented Status Objectives Problems

Through Appraisal 12/93 8 14

Appraisal through 4/94 5 10 t oBoard Approval 5194 3 3

Supervision 10/94 6 12 Privatization HS HSRegulatoryAviationTelecom

3/95 4 7 Privatization HS HSRegulatory

9/95 3 7 Hydrocarbon HS HSPrivatizationTelecom

3/96 4 12 Privatization HS HSRegulatoryDisbursement

12/96 5 9 Privatization HS HSRegulatoryAviation

3/97 1 7 Regulatory S S

11/97 4 10 Privatization U SRegulatoryEconomist

6/9S 2 7 Privatization S SEconomist

Completion 12/98 3 7 PrivatizationTelecom

____ ____ PSD _ _ _ _

24

APPENDICES

25

APPENDIX A. AIDE MEMOIRERegulatory Reform and Capitalization Technical Assistance (Cr. 2647-BO)

Supervision Mission: December 8-10, 1998

1. A mission of the International Development Association comprised of SusanGoldmark (task manager), Eloy Vidal (telecommunications expert) and Alison Beck (taskteam member) visited La Paz to conduct the final supervision of the Regulatory Reform andCapitalization Technical Assistance Project. The mission met with Ministry of Financerepresentatives, including Minister Herbert Muller, Vice-Minister Alberto Valdes, MarianellaZeballos, the General Superintendent of SIRESE, Claude Besse and members of his staff, andSuperintendent of Telecommunications Guido Loayza and other staff members of thisSuperintendency. The mission's objective was to review project progress during the last sixmonths, and to finalize plans for the project's closing on December 15, 1998. Missionmembers wish to sincerely thank their Bolivian counterparts, as well as the staff of theResident Mission, for their time and assistance during our visit.

2. Project Objectives and Implementation: The credit's objectives were to assist theGovernment to: (i) establish an appropriate legal and regulatory framework to attract privateinvestment and spur growth in an efficient manner; and (ii) divest and capitalize key largepublic enterprises in the hydrocarbons, telecommunications, electricity, mining and transportsectors. Nearly all project funds were disbursed two years ago, and the remaining funds--forspectrum monitoring equipment--will be disbursed by April 15, 1999 at the latest. The credithas helped to establish the SIRESE system, and has assisted with the capitalization of publicenterprises in all targeted sectors, specifically ENTEL, LAB and key parts of ENDE, ENFEand YPFB. It also helped to fund the privatization of some key enterprises, including theCochabamba electricity distribution company and the three main airports. This missionfocused on gathering informnation in three areas: (i) purchase of telecommunications spectrummonitoring equipment and training of staff in its use; (ii) progress made in contracted studies;and (iii) overall functioning of the SIRESE system.

3. Radio Spectrum Management and Monitoring System. The Government requestedand IDA's country management unit agreed to extend the closing date of the project by 5.5months to December 15, 1998, to allow for the shipment, installation, and testing of thespectrum monitoring system, as well as training of staff in its use. The Superintendency ofTelecommunications finished the civil works in the monitoring sites, including the installationof the tower and the antennae. The mission inspected the monitoring stations and controlcenter in La Paz, and found that the buildings, towers and radiation systems were builtaccording to professional standards and received assurances that the sites in Cochabamba andSanta Cruz were built according to the same standards.

4. The system is scheduled to be fully installed and tested by late December- January 15,1999. The training of staff will start next week, and will last two weeks. An outstandingpayment of 20% is due to the supplier upon finai commissioning. Since satisfactory evidence

26

indicates that the installation will be completed soon after the project closing, the mission andthe Government confirmed that the project will not be extended. However, the Bank willdisburse this payment to the UNDP account (the procurement agent), to be paid to the supplieronly after satisfactory completion of the final acceptance tests.

5. Sector Studies. Consultants hired by the General Superintendency of SIRESEproduced the following studies, as planned, during the last six months: Manual deFiscalizaci6n, Analisis y Altemativas de la Fiscalizaci6n, Consejo Normativo, Borrador deLey de Procedimientos Administrativos, Informe Anual de 1997. The mission has receivedcopies of all these studies. The Informe Annual de 1998 is scheduled to be completed in June1999. Further work on the administrative procedures law is now continuing within theexecutive branch. The audit firm for the project has been contracted, and, it was agreed withthe General Superintendent of SIRESE that the audit report would be completed no later thantwo months after all disbursements have been made.

6. Functioning of SIRESE System. The mission noted that the overall situation ofSIRESE has improved substantially in the past six months. Specifically, the appointment ofqualified, permanent Superintendents for the Electricity and Transport sectors in July 1998serves as the basis for strengthening regulatory capacity in these sectors. The role of andfinancing for the Superintendency of Transport is being defined more clearly by a newGeneral Transport Law currently under preparation. A draft law of Basic Sanitation will alsoestablish the policy framework for this sector; after its passage, the Government intends toappoint a permanent Superintendent of Basic Services. Both are critical steps in trying toimprove services in this sector. The Telecommunications Superintendency also appears to bewell-staffed and assuming its regulatory functions; for example, it fined ENTEL US$2 millionfor overpaying on certain inputs. The Electricity Superintendency has developed a goodconsumer complaint system in major cities of the country which spurs improved service.While still in early stages of development and suffering some teething problems, after onlythree years of functioning, the system appears to be solidifying and has gained greateracceptance.

7. Sustainability of the System The basic objective of establishing an independentregulatory system has been achieved. However, critical issues remain to be resolved. Thesystem is to be further strengthened through two new projects financed by the Bank: (i) theRegulatory Reform and Privatization Technical Assistance Credit (RPTAC); and (ii) theRegulatory Reform Sector Adjustment Credit (RRSAC). The RPTAC will support theadjustment operation by financing technical assistance to deepen regulatory reforms in varioussectors. During the RRSAC negotiations in early November, the Government and thesuperintendencies agreed to forn a committee to resolve the previously identified issue ofremuneration levels of Superintendency staff. This group has not yet met and the issue stillremains unresolved. Additionally, during these same discussions, the Superintendents agreedto contract studies to define performance standards (including staffing targets) and "Codes ofConduct", as a form of self-regulation. The mission also participated in the Project Launchfor the RPTAC-including a seminar in which the participating superintendencies and

27

sectoral ministries further defined their action plans for deepening of the regulatory systemunder the new credit.

8. Implementation Completion Report The Ministry of Finance and the IDA missionagreed that drafts of both sections of the implementation completion report (IDA and theGovernment's) would be completed by mid-May to avoid a last minute rush. TheGovernment's section should be no longer than 10 pages long and will need to be translatedinto English. The ICR must be sent to IDA's Board no later than June 15, 1999.

Alberto Valdes SusantGgdmarkVice-Minister Sector eader/Task ManagerMinistry of Finance IDA(Confirmation via e-mail)

December 18, 1998

28

APPENDIX B. BORROWER'S CONTRIBUTION AND COMMENTS

REGULATORY REFORM ANDCAPITALIZATION TECHNICAL ASSISTANCE PROJECT

(CREDIT 2647-BO)

PROJECT BACKGROUND

The Regulatory Reform and Capitalization Technical Assistance Project was prepared andapproved in 1994 to support the previous administration's capitalization program. The programwas of Bolivian design, although its eventual emphasis on legal and regulatory reform wasstrongly encouraged by IDA, which focused much of its support on these reforms. This projectwas designed mainly to provide flexible cross-sectoral support to the Ministry of Capitalizationand to the regulatory system, SIRESE.

Preparation of the ICR began in June 1998. The Government, SIRESE and IDA have workedclosely on the evaluation of the regulatory components of the project. However, the closure ofthe other implementing agency, the Ministry of Capitalization, in July 1997 made it difficult toassess the implementation experience of the capitalization and privatization components.

ACHIEVEMENT OF PROJECT OBJECTIVES

CAPITALIZATION AND PRIVATIZATION

The project objectives were to assist in: (i) the planning, design and execution of theGovernment's capitalization program, with particular emphasis on the telecommunications andaviation sectors; and (ii) the design, establishment and initial operation of a regulatoryframework for these sectors. Two of the largest public firms, LAB, the Bolivian airline, andENTEL, the telecommunications company, were completely transferred to the private sector,while the other three enterprises were only partially transferred. The Government's currentprivatization program now includes plans for the transfer of many of the remaining assets ofENDE, ENFE, YPFB and the Vinto smelter as well as companies owned by the armed forces.

SITUATION OF THE CAPITALIZED COMPANIES

ENDE - This project provided technical assistance to help capitalize three generation companies:Guaracachi, Corani and Valle Hermoso. In addition, it financed advisors to help privatize theCochabamba electricity distribution company. Another IDA project assisted in the privatizationof the electricity transmission company. At present, some assets still owned by the stateelectricity company, Ende, are in the process of being sold. These include parts of smaller localdistribution companies.

29

ENFE was capitalized by Cruz Blanca, a Chilean company. A residual ENFE comprised ofsome of the assets (i.e. real estate) and liabilities of the old company still exists and is in theprocess of liquidation.

The state petroleum company YPFB was divided into three companies that were capitalized:Transredes S.A. which includes the Bolivian portion of the Bolivia-Brazil pipeline, other exportpipelines and the local pipeline network; and the exploration and production areas of Chaco andAndina. The gas pipeline to Brazil has been constructed and was inaugurated in February1999-natural gas exports are expected to have an important effect on Bolivia's economy.Investment in gas exploration and production has also increased greatly from an average ofUS$ 100 million in the years before 1997 to about US$800 per annum beginning in 1999.

At the moment, some services remain under the property of residual YPFB: i) refineries, ii)natural gas distribution networks, iii) storage plants; iv) service stations; and v) gas bottlingplants. These services will be totally privatized by the end of 1999 and YPFB will only serve asa counterpart of shared risk agreements in exploration and production contracts.

REGULATORY REFORM: DESIGN AND FUNCTIONING OF SIRESE

The project focused upon creating an adequate regulatory framework to accompany the changeof ownership of key companies from the State to the private sector. This involved the design andpromulgation of sector specific laws and regulations and the creation of SIRESE, the regulatorybody created to ensure compliance with this legal framework. The initial proposal was for amulti-sectoral regulatory commission, which would have encouraged pooling of resources thatwere not sector-specific, such as lawyers and economists.

The eventual model was a hybrid, with each sector regulated separately, but review andcoordination provided by a General Superintendent. At the design stage, there was also somediscussion as to whether the General Superintendent's functions would be better performed by acommission or by an individual. Finally, the previous Government decided that Bolivia'sexperience with commissions had not been very successful. Thus, it was believed that greateraccountability would be encouraged by giving responsibility to a single person. The opinion ofthe current administration is that a collegiate body could have been more appropriate. However,to maintain stability, the former system has not been changed.

Although SIRESE's functions are clear in the Law (coordination, fiscalization; administration ofresources), in practice, there may be conflicts among these functions. One potential conflict ofinterest was cited between the fiscalization and appeals functions of the GeneralSuperintendency. Consultants financed by the project (OXERA) recently completed a studywhose objective was the reduction of the potential conflict between these two functions.OXERA concluded that there was no conflict on this issue and that the appeals function wasincluded in the fiscalization function because the first comes before the second. However, in thecase of the financial sector regulation system, the functions of the superintendent of appeals hasbeen limited only to appeals to avoid potential conflicts. In any case, the issue is still there.

30

At the moment, SIRESE's legal framework is composed of the SIRESE Law, the Electricity,Telecommunications and Hydrocarbons Laws and their respective regulations. Prices and ratesfor the five regulated sectors have been set in accordance with these legal dispositions. Thisadministration has drafted a Basic Sanitation Law covering the water and sewage function whichhas been submitted to Congress for consideration in July 1999.

The SIRESE system is completed by five sector Superintendencies. Since they were set up,these five Superintendencies (Water, Electricity, Hydrocarbons, Telecommunications andTransport) have resolved 117 first-level appeals. The SIRESE General Superintendency, as thesystem's highest authority for administrative justice, has resolved 48 second-level appeals.

It is important to stress that attending to customer complaints is also part of the SIRESESuperintendencies' regulatory function. The Customer Services Office (ODECO) system was setup for this purpose. This functions at two levels, with offices located within the companiesproviding the service, which have so far dealt with 138,000 complaints, and offices in theSectoral Superintendencies, which have dealt with 1,230 complaints. These customer serviceoffices are currently most advanced in the electricity sector, which has established 56 suchoffices in the companies involved.

Furthermore, one of the SIRESE Sectoral Superintendencies fundamental activities is to awardlicences to operators. As part of this activity, 1,085 existing operators have been included in thenew regulatory framework and licences have been awarded to 622 new operators. TheGovernment has sought to ensure that the activities under SIRESE's jurisdiction are: i) efficientii) contribute to the development of the economy; and iii) providing the public access to essentialservices. These objectives intend to guarantee that the interests of the customers and companiesthat are being regulated enjoy the full protection of the law.

On the issue of SIRESE's independence and credibility, it has to be noted that the currentadministration always affirmed its commitment to the principle of independent regulation.Superintendents appointed by the previous administration--such as the Superintendent of Banks,the general Superintendent of SIRESE and the Hydrocarbons Superintendent have continuedwith support from this administration. After the resignation of three superintendents for personalreasons, the current Administration replaced them with technical specialists.

Even if these Superintendencies are independent, they remain under the tuition of theGovernment. SIRESE is under the tuition of the Ministry of Economic Development. Sincethese institutions are part of the Executive Branch, they have to follow the same rules as those ofthe rest of the Govermment: i) their budget has to be approved by the Congress and ii) salariescannot exceed the level designated by a general norm. And, while SIRESE's revenues stem fromregulated firms rather than the Treasury, all the resources of the institutions of the State have tobe inscribed in the General Budget of the Nation. As a consequence, any resources that are spentmay contribute to the fiscal deficit. Thus, the issues of the Superintendents' budgets and salaryscales are under review and a satisfactory solution is anticipated.

31

OBJECTIVE OF RESPECT TO THE MARKET RULES

Nowadays, some companies have strong lobbying powers. This situation has caused pressure tobe exerted on the Executive Power. In order to avoid this kind of problem, the SIRESE systemaims to establish stable rules of the game. This means that if a company decides to invest inBolivia, there will not be no reason to make special rules for it; furthermore, it will be subject tothe same market forces as the existing Bolivian companies.

PROBLEMS

The SIRESE system is still relatively new and continues to develop. However, the system wouldbe improved if there were better coordination with the Executive Branch. For example, it wouldbe useful for the Executive Branch to consult with SIRESE technical specialists as well as otherinterested stakeholders prior to drafting new norms. This problem has begun to be solved. Apreliminary proposal for a Supreme Decree on the Sectoral Regulation System StandardsAdvisory Council (CONOSI) is currently under discussion. This proposal aims to improve co-ordination mechanisms between the executive branch, the SIRESE Superintendencies and otherinterested stakeholders.

SUSTAINABILITY

The Regulatory Reform and Capitalization Technical Assistance Project was closed in end 1998.The reforms relating to divestitures and the establishment of a regulatory framework are expectedto be sustained. The sustainability of SIRESE has been ensured with the designation of newSuperintendencies and the continuation of the former General Superintendency and theSuperintendency of Hydrocarbons. New Superintendents were appointed in the areas ofTelecommunications, Transport. and Electricity. The Government is committed to appointing apermanent Superintendent of Basic Sanitation once the Basic Sanitation Law has been passed.

Currently, the regulatory reforms have helped to increase private sector activity in Bolivia and toencourage efficiency in these services. Consolidation of the reforms will continue with the newadjustment and technical assistance credits (such as 3108-BO). The preparation and approval ofimportant new laws to help consolidate these reforms, such as the Administrative ProceduresLaw and a new Transport Law are underway.

Furthermore, SIRESE had positive results during fiscal year 1997. In fact, the regulator's 1997annual report stated that the Superintendencies of Telecommunications, Electricity andTransports were efficient and effective in their respective tasks.

LESSONS LEARNED

PUBLIC INFORMATION CAMPAIGN

Privatization transactions are not just technically challenging, but also have important politicalrepercussions. A lesson for fiuture privatizations is that public perceptions of the transactionsneed to be better understood and addressed by public information campaigns. Less emphasisshould be given to technical aspects that are not well understood by the majority of the

32

population. The Government appreciates that important political and social issues surroundprivatizations and that efforts had to be made to improve communication, with less emphasisgiven to technical issues. The design of information campaigns should take account of thecharacteristics of the population, including literacy rates and access to different media.

IMPLEMENTATION

The reforms were undertaken during the whole previous government through the Minister ofCapitalization. Under the previous administration, the financial benefits of the capitalizationprogram were expected to be seen through the transfer of shares to privately-managed funds withannual distributions to those over age 65. However, the first distribution of proceeds carried outin mid 1997(US$250 per capita) was supposed to be a benefit to the aged. Indeed, the processresulted in more beneficiaries than expected due to some fraud and amounted to three years ofthe annual public investment program. Because of the long-term unsustainability of the Bonosolat the level which had been distributed during its first year and the fact that it only benefitedthose 65 and over, the new Government introduced the Property and Popular Credit Law whichallocates 70% of the capitalization funds to Popular Shares (Acciones Populares) in mutualfunds, ownership of which will be given to all Bolivians who were 21-49 in 1995. This will havethe additional benefit of fostering the development of domestic capital markets. The secondalternative benefit is the "BOLIVIDA", a lifetime pension for citizens who were over the age of50 on December 31th, 1995. Distributions are expected to begin after the new registration ofBolivian citizens and the public listing of shares.

FINAL CONSIDERATIONS OF THE PROJECT

The first objective of the Regulatory Reform and Capitalization Technical Assistance Project wasthe strengthening of the capacity of the Ministry of Capitalization to make the necessary reformsto privatize the public companies. However, much of the population did not understand the ideaof capitalization and many economists agreed that "privatization" was a much better option.Funds derived through privatization could have been used by the Treasury for social sectorprograms.

The Government believes that it would be useful to evaluate the impact of the capitalization,privatization and regulatory reforn program on the country's economy and particularly in termsof impact on service quality, quantity, location and prices with particular analysis on its impacton the poor. This evaluation should compare these benefits with the financial costs of theprogram, of which this project is a part.

33

APPENDIX C. PROJECT IMPLEMENTATION STATISTICS

TABLE 1: USE OF PROJECT FUNDS

Category COMPONENT ALLOCATION (SDRS) / PERCENTAGEPLANNED ACTUAL

CAPITALIZATION 5,440,000 52% 6,763,332 64%I-a, 2-a Ministry of Capitalization Strengthening 1,960,000 19% 3,499,042 33%

3 Public Information Campaign 700,000 7% 696,754 7%

1-c-i Telecommunications Capitalization 1,560,000 15% 1,255,472 12%

1-d Aviation Sector 1,220,000 12% 1,312,064 13%

REGULATORY REFORM 3,280,000 31% 3,055,946 29%1-b SIRESE Strengthening 510,000 5% 922,646 9%

4 SIRESE Training 430,000 4% 43,500 0.4%

1 -c-ii, 2-b Telecommunications Superintendency 2,340,000 22% 2,089,800 20%

5 REFUNDING OF PPF 710,000 7% 680,723 7%

6 UNALLOCATED 1,070,000 10% -

TOTAL 10,500,000 100% 10,500,000 100%

Notes: -Numbers in first column refer to disbursement categories as defined in the Credit Agreement.- The aviation component includes some expenditures on regulatory reform.- Percentages may not sum due to rounding.- Categories I a & 2a helped to finance sectoral reform and transactions in the power, hydrocarbons, miningand railways sectors.

TABLE 2: CAPITALIZATION TRANSACTIONS

ENT'ERPRISE BID NUMBER BOOK WINNING PRE-DATE OF BIDS VALUE BID MIUM

______ _ _ __ _(Sm) (Sm)Corani (ENDE Generation) 4 33.0 58.8 78%Guaracachi (ENDE Generation) June 1995 6 35.3 47.1 33%Valle Hermoso (ENDE Generation) 3 30.8 33.9 10%ENTEL (Telecommunications) September 1995 3 130.0 610.0 369%LAB (Airline) October 1995 1 24.0 47.5 98%

ENFE Red Andina (Railways) December 1995 1 29.0 13.3 -54%ENFE Red Oriental (Railways) 1 24.0 25.9 8%Andina (Exploration & Production) 3 130.0 264.8 104%Chaco (Exploration & Production) December 1996 2 155.8 306.7 97%Transportadora (Hydrocarbons Pipelines) 3 97.2 263.5 171%TOTAL 27 689.1 1,671.5 143%

34

TABLE 3: PRIVATIZATION TRANSACTIONS 1995-1998(In US$'000)

1995 1996 1997 1998

Number of Transactions 28 21 1 2

Revenues 66,142 31,338 12 9,889

TABLE 4: SIRESE EVALUATION 1997

SUPERINTENDENCYAREA I

Electricity Telecommunications Transport Hydrocarbons

A. EFFICIENCY Adequate Adequate Adequate Adequate

Institutional Development Adequate Adequate Adequate Good

Administrative Systems Inadequate Inadequate Inadequate InadequateStrategy Adequate Adequate Adequate AdequateResources Good Adequate Adequate Good

B. EFFECTIVENESS Adequate Adequate Adequate Adequate

Operators' Compliance Adequate Adequate Adequate AdequateAward of Concessions/Licenses Adequate Adequate Adequate Good

Prices & Tariffs Adequate Good Adequate AdequateProtection of Competition Adequate Adequate Inadequate AdequateSupervision & Monitoring Inadequate Adequate Good AdequateAppeals Adequate Inadequate Adequate Adequate

Attention to Consumers Good Inadequate Inadequate Inadequate

Note: These ratings are taken from the first annual "fiscalization" report issued by the General Superintendent. TheWater Superintendent is not covered by the report as operations were just beginning in July 1997.

35

TABLE 5: TENURE OF SIRESE SUPERINTENDENTS

(Months)

Superintendency_ Appointment Time since

Date Type Duration to date EstablishmentGeneral November 1995 Permanent 12 43

November 1996 Vacant 4March 1997 Permanent 27

Electricity June 1996 Permanent 19 36July 1997 Interim 3

October 1997 Interim* 10August 1998 Permanent 10

Telecommunications November 1995 Permanent 23 43October 1997 Interim* 2

December 1997 Permanent 18Transport March 1996 Permanent 21 39

November 1997 Vacant 8. August 1998 Permanent 10

Hydrocarbons April 1996 Interim 11 38March 1997 Permanent 27 l

Water June 1997 Interim 24 24

Average of all appointees 16 37Average of incumbent 19 l l

Note: Asterisked interim appointees were later confirmed as permanent Superintendents.

TABLE 6: SIRESE BUDGETS 1997-1999(Bolivianos)

Superintendency 1997 Growth 1998 Growth 1999 GrowthGeneral 11,492,883 - 14,900,236 30% 17,977,077 21%Electricity 17,360,662 - 20,255,321 17% 26,444,740 31%Telecommunications 16,449,119 - 41,024,525 149% 35,476,951 -14%Transport 4,048,360 - 5,665,616 40% 7,939,768 40%Hydrocarbons 23,097,544 - 22,417,078 -3% 22,074,068 -2%0Water - 6,984,040 9,411,703 35%

TOTAL 72,448,568 - 111,246,816 54% 119,324,307 7%

Note: These are planned not executed budgets.

36

TABLE 7: SIRESE EMPLOYEES 1997-1999

1997 1998 1999Superintendency

Planned Actual Planned Actual Planned Actual

General - 17 28 23 32Electricity - 27 38 29 52

Telecommunications - 32 55 52 72

Transport - 22 19 14 18 N/AHydrocarbons 28 58 51 58Water _ 6 14 18 22TOTAL 132 212 187 254

TABLE 8: SIRESE PERSONNEL COSTS 1997-1999(As percentage of planned budget)

Superintendency 1997 1998 1999

General 36% 33% 35%Electricity 35% 33% 34%Telecommunications 36% 23% 37%

Transport 69% 63% 48%Hydrocarbons 36% 41% 47%Water 39% 44%TOTAL 38% 33% 39%

Note: These are planned personnel costs as a percentage of planned budgets.

TABLE 9: SIRESE APPEALS CASES 1997-1998

Superintendency No. of Appeals Average No. of Days % w/in Statutory Period

1997 1998 1997 1998 1997 1998

Electricity 9 13 34 75 44% 69%Telecommunications 26 22 32 28 50% 77%Transport 2 3 11 32 100% 67%Hydrocarbons 3 7 22 29 100% 86%Water - 8 - 17 - 100%TOTAL / AVERAGE 40 53 25 36 74% 80%

Note: The statutory requirement is for first-instance appeals to be resolved within 30 working days.

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