## _cr03237 ## Source details **Canonical URL:** [_cr03237](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03237.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03237.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03237.pdf.json) --- ### Introduction and scope - Assessment of Chile’s fiscal transparency relative to the IMF’s Code of Good Practices on Fiscal Transparency; comprised description of practice and IMF staff commentary. - Discussions held in Santiago during January 8-23, 2003; ROSC finalized during the Article IV consultation, June 2-13, 2003. - Staff team: Ms. Cheasty (head), Ms. Albino, Messrs. Donaghue and Phillips; Mr. Le Fort joined for final days. ### Definition of government, institutional coverage, and administration - General government defined largely as in the 2001 GFS Manual. - Chile: unitary state with three independent powers; administrative divisions: 13 regions, 51 provinces, and 341 municipalities. - Budgetary central government includes centralized institutions (ministries), constitutional state bodies (congress, judiciary, comptroller general, electoral tribunal), and decentralized agencies; universities and research institutes part of central government but have own budgets. Municipalities, public enterprises, the central bank, and Banco Estado comprise the rest of the public sector. - DIPRES presents general government statistics in its public finance statistics yearbook; these are compatible with GFS except they exclude universities and research institutes. - The Comptroller General (CGR) reports on budgetary central government (“the public sector”) and reports on public universities, municipalities, and public enterprises under CORFO. ### Roles, powers, and budgetary authorities - Executive authority: constitution grants the executive clear authority to conduct fiscal policy and allocate resources; President alone may take fiscal initiatives (Article 62). - Congress may approve or reject executive fiscal initiatives; cannot raise or lower revenue estimates in the draft budget and may only reduce draft expenditures (subject to restrictions). - If congress does not approve the Annual Budget Law within 60 days after submission, the draft automatically comes into force. - LAFE (permanent law) establishes unified budgeting, requires gross inclusion of incomes (LAFE, article 4), and allows the executive to specify budget execution rules annually (LAFE, article 14). - Municipalities: defined roles and revenues; Common Fund offsets financing gaps; municipalities may not share national tax revenue nor contract debt except when authorized by law (no municipal borrowing law in last 12 years). ### Coordination of on-/off-budget resources and earmarking - Expenditure financed by grants or external loans recorded in the budget; grants and external loans to public institutions must be approved by the Ministry of Finance. - Credits to central government entities subject to a global debt limit set in the annual budget law; loans maturing beyond the presidential term require approval by an absolute majority of senators and deputies. - Constitutional prohibition of tax earmarking (Article 19) with main exceptions: - Reserved Copper Law (Law 13,196 of 1976): assigns 10 percent of the state copper company’s sales to military equipment purchases; off-budget purchases subject to Ministry of Finance approval. In 2002, revenues transferred via the Reserved Copper Law were around 0.3 percent of GDP, or 1½ percent of budgeted expenditures. - Oil price stabilization fund operates outside the budget but declined to negligible operation after a 2000 reform law. - Copper stabilization fund and infrastructure fund fully integrated into the budget. - Local/regional activity taxation may be earmarked to municipalities and regional governments. ### Specialized agencies: Central Bank and Banco Estado - Central Bank: - Independent and autonomous in monetary policy (Law 18840 of 1989); constitutionally prohibited from providing credit or guarantees to government or public enterprises and cannot transact with the nonfinancial private sector (Article 27). - Rules for transfer of central bank profits to government defined; no formal procedure to compensate central bank losses though it may request new capital from the government. - Legacy commercial bank bail-out in the early 1980s left an enduring quasi-fiscal deficit; central bank’s cash deficit exceeds the accrual deficit by around 0.4 percent of GDP, and central government’s cash deficit is correspondingly understated because the central government is allowed to capitalize part of its interest obligations to the central bank. - Banco Estado: - Government-owned first-tier retail bank (law 2079 of 1978) with a market share of around 12 percent. - Performs quasi-fiscal activities; no information available on their cost. - Not covered by LAFE nor included in the Budget Law; board appointed by the President; some decisions require Ministry of Finance approval. - Administers the Treasury’s unified fiscal account (CUF) without paying interest on use of Treasury balances. - Social-role consequences: an ‘efficiency gap’ (administrative expenses/margin on operations) of about 65 percent compared with an average of 50 percent for Chilean banks; Banco Estado is developing a program aimed at reducing the efficiency gap by around 5 percentage points. ### Nonfinancial public enterprises and oversight - Important in strategic sectors (notably mining and oil); activities and relations with government defined by the Law of State Enterprises. - Creation/expansion of public enterprises requires qualified majority of congress. - Most public enterprises (from 2002) under the System of Public Enterprises (SEP) with exceptions (Codelco, Banco Estado, national television, defense enterprises). - Annual budgets approved via Ministry of Finance decree (Law 1350 of 1976); CGR and DIPRES report and consolidate execution. - Borrowing requires Ministry of Finance authorization via decree; borrowing requiring government guarantee must be approved by law. - Recent practice: government transfers in Budget Law covering quasi-fiscal deficits of certain enterprises (ENAMI, ENACAR, Santiago Metro, State Railway Company). ### Budget documentation, reporting, and public availability - Annual budget covers ‘budgetary central government’ (autonomous agencies included) but not universities, research institutions, and Reserved Copper Law resources. - Draft Budget Law accompanied by the Report on the State of the Public Finances and the Report on the Public Finances by the Budget Director. - DIPRES publishes monthly, quarterly, biannual, and annual reports on budget execution, audited annual balances and quarterly financial statements of public companies, monthly list of contingency fund decrees, Comprehensive Management Assessments (BGI), state external debt reports, and evaluations of programs agreed by congress. - Exceptions: resources under the Reserved Copper Law and gastos reservados are not fully itemized; gastos reservados reported globally and amount to less than 0.1 percent of total spending. A law approved by congress in January 2003 obliges limits and accountability for reserved expenditures. - Time series and projections: budget documentation shows four previous years and projections for three years following the budget; Public Finance Statistics yearbook includes consolidated figures for the previous nine years. - Since 2000, documents accompanying the budget include a financial projection of fiscal macro aggregates for three years following the budget. ### Contingent liabilities, tax expenditures, and quasi-fiscal activity - Government not legally required to explicitly present contingent liabilities, tax expenditures, or quasi-fiscal activities in annual budget documentation but has progressed in analyzing and presenting information: - 2001: congress provided a note identifying main contingent liabilities (minimum pension guarantee, guarantees on infrastructure concessions, state guarantee on bank deposits). - First study of tax expenditures completed by the SII. - Enhanced Public Sector Financial Report attached to the budget beginning in 2003 intended to regularly include estimates of tax expenditures and main contingent liabilities. - Quasi-fiscal activity: central government budget since mid-1990s began to include transfers to cover quasi-fiscal activities (ENAMI, ENACAR); since 2002 partly covers Santiago Metro and State Railway Company financing needs. Oil price stabilization quasi-fiscal activity largely curtailed by 2000 reform. ### Debt, assets, consolidation, and debt statistics - Ministry of Finance compiles and reports public debt and financial assets for the central government and nearly all of the public sector. - Quarterly reporting of central government (gross) debt follows SDDS requirements; twice-annual reporting of broader report (since 2002) includes central bank and nonfinancial public enterprise debt and liquid financial assets. - Consolidation: consolidated fiscal position for municipalities and central government published regularly; municipal consolidated budget balance included in DIPRES’s annual fiscal statistics. - Box 3 improvements since 2001: - Quarterly central government debt data released with one quarter’s lag starting September 2001; October 2002 comprehensive report expanded scope to include central bank and nonfinancial public enterprise debt and supplementary information (including pension “recognition bonds”). - Remaining gaps: report on military debt not yet included; recommended additional breakdowns by maturity, indexing, currency composition, and inclusion of state university debt if present; include debt service projections. ### Budget process, medium-term framework, and structural balance - Since 2001 central government budget prepared and presented in a medium-term framework with two main elements: a target for the structural balance and a medium-term financial projection. - Government commitment: maintain each year a constant 1 percent of GDP surplus in the structural balance (policy commitment of the administration; not legislated). - Structural balance estimate updated and published twice a year; expert panel convened each August to provide basis for the budget proposal finalized in September; medium-term financial projections published each October presenting four years of projections for expenditure and revenue (both before and after cyclical adjustment). - Panels provide forecasts for key revenue drivers (medium-term copper price and rate of growth of potential output); in 2002 panels convened in August, one month ahead of the budget presentation, and results were placed on the DIPRES website. - The structural balance target is the main fiscal indicator since 2001; balance ajustado published quarterly. ### Execution, accounting, procurement, and controls - Accounting: CGR sets public sector accounting rules and prepares accrual-basis government accounts; DIPRES records at the payment stage (cash basis), enabling quicker reporting but no systematic centralized recording of commitments or arrears. - SIGFE (integrated financial management system) began development in 2001 and is to be fully operational by end-2005. - Procurement: almost all state procurement subject to tender; LBGAE sets transparency and competitiveness principles; 2003 procurement law generalizes procedures (including defense and municipalities), requires web publication of procurement records, and establishes an independent tribunal for supplier appeals. - Internal control: internal audit units exist in agencies (87 percent of central government’s public services have internal audit units); independence mechanisms for internal audit officials not yet established. - Civil service reform (2003): new salary structure, new career ladder, new National Civil Service Directorate; political appointments to line jobs reduced from around 3,500 to 400. ### Revenue administration and taxpayer services - Revenue agencies (SII, Customs, Treasury) governed by framework laws; permanent commission chaired by head of SII coordinates activities. - Electronic services: 70 percent of income tax returns via the internet; 15 percent of VAT returns via the internet (representing nearly 60 percent of VAT payments); Customs developing full internet tracking and a ‘single window’ project. - Taxpayer rights: appeals first to a tribunal within SII or Customs, then to general courts; reform to make first-round tribunals independent and create chambers with independent tax expertise within the Court of Appeals expected by end-2004. - Tax evasion estimated 24 percent in 2001 (before Law on Fighting Tax Evasion, June 2001); collection results for 2001 and 2002 show further declines under the new law. ### Transparency achievements (selected findings) - Government disseminates clear objectives and targets at macro and program levels. - Structural balance rule enhances confidence about medium-term macro-fiscal responses. - Budget transmits priorities via objectives, quasi-program presentation, indicators, and evaluations. - Reporting to congress increased in frequency, timeliness, and breadth; performance evaluations regularly reported. - Independent consultants and panels used for projections and evaluations; public debate is active. - Debt reporting expanded; substantive public studies of contingent obligations produced. - Law of January 21, 2003 authorizes fuller reporting on Reserved Copper Law details. ### Overarching reform challenges - Institutionalize recent transparency advances into permanent legal frameworks instead of relying on time-bound initiatives or protocols. - Make the structural balance rule more enduring (consider legal basis) while weighing policy implications. - Improve transparency of military extra-budgetary activity: disclose extra-budgetary military transactions and debt; subject military spending to general budget discipline; incorporate military deficit and debt into budget and fiscal statistics. - Align accounting bases across institutions (central bank, CGR, DIPRES) to clarify flows and quasi-fiscal positions. ### Specific reform recommendations (selected and preserved phrasing) - Clarity of roles and responsibilities: - Fiscal statistics should clearly show transactions of copper and oil stabilization funds if maintained. - Clarify coverage and effectiveness of municipal budget constraint; eliminate minor coverage differences in sources of general government statistics. - Align central bank and government accounting bases; consider recapitalizing the central bank to encourage transfers of profits back to government rather than showing uncompensated losses. - Make relations with Banco Estado explicit: remuneration for use of balances in the unified fiscal account and offsetting costs of providing fiscal services and social support agenda. - Continue to provide detailed information on public enterprises; shift to accrual accounting and develop a general government balance sheet incorporating enterprise equity values. - Reform tax tribunals: make first-round tribunals independent and create expert tax chambers in the courts. - Procurement: introduction of Chilecompras and the new law aligning procurement rules across agencies will clarify rules (including for small purchases), eliminate differences of treatment across agencies, and make contracts more transparent. - Public availability of information: - Incorporate defense transactions and debt under the Reserved Copper Law into the budget and fiscal statistics. - Regularly update studies of contingent liabilities and account transparently for flows associated with concessions in fiscal statistics. - Establish a regular updating schedule for estimates of tax expenditures and contingent liabilities. - Open budget preparation and reporting: - Consider converting the structural balance target into a legally-based fiscal rule. - Provide more detail about potential output methodology and longer-term spending goals to enhance public understanding. - Increase disaggregation of expenditure in medium-term projections to show impact of future obligations (investment, concessions, pensions). - Include more systematic discussion of fiscal risks (sensitivity analysis or alternative scenarios) in budget documentation. - Adopt unified presentation of fiscal accounts to dispel questions about whether fiscal targets accurately show fiscal stance. - Data and systems: - Provide a consolidated national currency budget in the Budget Law in addition to separate dollar and peso budgets; increase disaggregation of economic classification. - Improve functional classification of expenditure and make it available with budget documentation rather than only ex post. - Introduce SIGFE as soon as possible; SIGFE being piloted by the Ministry of Finance. - Address lack of timely and systematic accounting and reporting of expenditure arrears under the cash-based budget system; as a short-term measure, consider issuing periodic reports on arrears in problem areas (notably health and public works). - Assurances of integrity: - Undertake regular macro-level reconciliation exercises of fiscal and monetary data. - Rapid full implementation of the new (2001) GFS standard to facilitate reconciliation and provide an integrated view of all government flows and stocks. ### Key statistics, dates, and procedural milestones (preserved) - Discussions in Santiago: January 8-23, 2003; ROSC finalized June 2-13, 2003. - Administrative divisions: 13 regions, 51 provinces, and 341 municipalities. - Reserved Copper Law (Law 13,196 of 1976) assigns 10 percent of Codelco’s sales to military equipment purchases. - In 2002, revenues transferred via the Reserved Copper Law were around 0.3 percent of GDP, or 1½ percent of budgeted expenditures. - Gastos reservados amount to less than 0.1 percent of total spending. - Banco Estado market share: around 12 percent; efficiency gap about 65 percent vs 50 percent average for Chilean banks; targeted reduction by around 5 percentage points. - Banco Estado profit surcharge: 40 percent (a dividend tranche). - Structural-balance policy: constant 1 percent of GDP surplus target (administration commitment since 2000). - Panels for medium-term forecasts convened in August (2002 panels convened in August, one month ahead of the budget presentation). - Structural balance estimate updated and published twice a year; medium-term financial projections published each October with four years of projections. - SDDS flexibility usage: as of July 2003 IMF website showed these options still being used. - Law authorizing publication of Reserved Copper Law details: January 21, 2003. - Central bank cash–accrual difference: around 0.4 percent of GDP (legacy deficit from 1980s commercial bank rescue operations). - SIGFE target full operation: by end-2005. - Debt reporting improvements: quarterly central government debt released with one quarter’s lag starting September 2001; October 2002 comprehensive public sector debt report issued. ### Box summaries — selected transparency issues - Box 1 — Military Activity: - Reserved Copper Law transfers 10 percent of Codelco’s gross revenues in equal parts to the three branches of the armed forces for equipment; Ministry of Finance authorizes spending but CGR does not receive transaction details. - January 21, 2003 law authorizes authorities to publish details on Reserved Law resources; available data suggest the military balance is small and stable enough not to change overall fiscal policy conclusions. - Armed forces may borrow to finance equipment purchases; their debt is not reported (not included in new Statistics on Public Debt). - Expenditure reserves (gastos reservados) are very small, around 0.1 percent of the armed forces’ total budget allocation; January 21, 2003 law intended to limit and require reporting. - Armed forces exempt from some general regulations (procurement internal procedures, equipment purchases not subject to technical evaluation); 2003 procurement law begins to address shortcomings. - Box 2 — Central Bank legacy quasi-fiscal activity: - Central Bank records a quasi-fiscal deficit from past operations (commercial bank rescue operations in the 1980s; sterilized interventions prior to 1999) though such activities have long ceased. - Differences arise from government cash reporting vs central bank accrual reporting; transition to accrual reporting of interest payments as part of GFS implementation will help resolve differences. - Central bank prohibited from providing credit/guarantees to government; rules for transfer of profits to government defined, no rule requiring government to recapitalize the bank should losses emerge. - Box 3 — Public Debt Statistics: - 2001 ROSC: Chile met SDDS (with flexibility options on timeliness/periodicity). - Improvements: Ministry of Finance began releasing quarterly central government debt data with one quarter’s lag (starting September 2001); October 2002 report broadened scope to include central bank and nonfinancial public enterprise debt and supplementary information (including pension “recognition bonds”). - Remaining gaps: need to report military debt; recommended breakdowns by maturity, separate identification of exchange-rate/inflation-indexed debt, inclusion of state university debt if present, verification of currency/residence coverage, and inclusion of debt service projections. *Source: IMF staff assessment and descriptive material contained in “1. Chile’s Public Sector.”* ### 1. Chile’s Public Sector................................................................................................ ### 1. Chile’s Public Sector ### Introduction - The report assesses fiscal transparency in Chile relative to the IMF’s Code of Good Practices on Fiscal Transparency. - The assessment has two parts: a description of practice (based on discussions with authorities and questionnaire responses) and an IMF staff commentary. - Discussions on fiscal transparency were held in Santiago during January 8-23, 2003, and the ROSC was finalized during the Article IV consultation, June 2-13, 2003. - The staff team comprised Ms. Cheasty (head), Ms. Albino, Messrs. Donaghue and Phillips; Mr. Le Fort joined for the final days. ### Definition of government, boundaries, and institutional coverage - The general government is defined largely as in the 2001 GFS Manual. - Chile is a unitary state with three independent powers: executive, legislative, and judiciary. - Administrative divisions: 13 regions, 51 provinces, and 341 municipalities. - Public entities are categorized under framework laws (Title II of the Framework Law on the General Bases of the State Administration; Framework Law on the Financial Administration of the State). - Budgetary central government includes centralized institutions (ministries), constitutional state bodies (congress, judiciary, comptroller general, electoral tribunal), and decentralized agencies; universities and research institutes are part of central government but have their own budgets. Municipalities, public enterprises, the central bank, and Banco Estado comprise the rest of the public sector. - DIPRES presents general government statistics in its public finance statistics yearbook; these are compatible with GFS except they exclude universities and research institutes. - The Comptroller General (CGR) reports on budgetary central government (referred to as “the public sector”) and also reports on public universities, municipalities, and public enterprises under CORFO. ### Functions of different levels of government and intergovernmental fiscal relations - Municipalities’ roles and revenues defined by Framework Law on Municipalities and Law on Municipal Resources. - Municipalities’ Common Fund offsets municipal financing gaps; formula and permitted distribution clearly defined by framework law. - Municipal shared responsibilities with central government include education, primary health care, and public cemeteries; financed by transfers broadly determined by number of service users. - Municipalities cannot share national tax revenue; may contract debt only if authorized by law. In the last 12 years, no law authorizing borrowing has been issued for any municipality. - Municipalities can run deficits in principle only by drawing down deposits; some reports exist of arrears and ad-hoc financing. - Under Article 10 of the 2003 Budget Law, municipalities in good standing with the Common Fund and up to date with pension contributions may be authorized by the Ministry of Finance to take on financial contracts beyond the fiscal year. ### Functions of different branches of the state and budgetary powers - The constitution grants clear authority to the executive to conduct fiscal policy, allocate resources, and administer state finances; the President alone may take fiscal initiatives (Article 62 of the constitution). - Congress may only approve or reject the executive’s fiscal initiatives; it is prohibited from raising or lowering revenue estimates in the draft budget and may only reduce draft expenditures (subject to restrictions for expenditures allocated by permanent law). - If congress does not approve the Annual Budget Law within 60 days after submission by the President, the draft automatically comes into force. - The executive has the legal right to specify rules of budget execution each year (LAFE, article 14). The budget commission was made permanent by a 2003 law to improve congress’s technical capacity to analyze the budget. ### Coordination of resources within and outside the budget - LAFE establishes the principle of unified budgeting and requires all incomes to be included in institutions’ budgets on a gross basis (LAFE, article 4). - Expenditure financed by grants or external loans is subject to the same rules as other outlays and is fully recorded in the budget; grants and external loans to public institutions must be approved by the Ministry of Finance. - Credits to central government entities are subject to a global debt limit set in the annual budget law; loans maturing beyond the current presidential term must be approved by an absolute majority of senators and deputies. - Earmarking of taxes is prohibited by the constitution (Article 19), with main exceptions: - Reserved Copper Law (Law 13,196 of 1976) assigns 10 percent of the state copper company’s sales to military equipment purchases (off-budget purchases but subject to Ministry of Finance approval). From 2002 DIPRES began reporting the amount of the transfer from Codelco to the armed forces (though not associated off-budget expenditure). - The oil price stabilization fund operates outside the budget but declined to negligible operation after a 2000 reform law. - The copper stabilization fund and the infrastructure fund are fully integrated into the budget. - Taxation of local and regional activities may be earmarked to municipalities and regional governments. - In 2002, revenues transferred via the Reserved Copper Law were around 0.3 percent of GDP, or 1½ percent of budgeted expenditures. ### Specialized public agencies — Central Bank - The Central Bank is independent by law, autonomous in monetary policy management, and has its own capital (Constitutional Framework Law of the Central Bank of Chile, Law 18840 of 1989). - It can act as fiscal agent of the government but constitutionally is prohibited from providing credit or guarantees to the government or public enterprises and cannot transact with the nonfinancial private sector (Article 27 of Law 18840 of 1989). - Rules for transfer of central bank profits to the government are clearly defined; there is no formal procedure for compensating central bank losses but it may request new capital from the government. - A legacy commercial bank bail-out in the early 1980s left the central bank with an enduring deficit (Box 2). The central bank’s cash deficit exceeds the accrual deficit by around 0.4 percent of GDP, and the central government’s cash deficit is correspondingly understated because the central government is allowed to capitalize part of its interest obligations to the central bank. ### Specialized public agencies — Banco Estado - Banco Estado is a government-owned first-tier retail bank (legal basis: law 2079 of 1978) with a market share of around 12 percent. - Banco Estado performs quasi-fiscal activities; no information is available on their cost. - Banco Estado is not covered by LAFE nor included in the Budget Law. Its board is appointed by the President; some decisions (profit distribution and salaries) require Ministry of Finance approval. - Banco Estado is subject to supervision by the Superintendency of Banks and is independently audited. It cannot lend to government or public enterprises but can engage in leasing operations involving government. - Banco Estado administers the Treasury’s unified fiscal account (CUF) without paying interest on the use of Treasury balances; since inflation has dropped, the value of the right to use CUF balances has declined. The Ministry of Finance may (since 1979) exempt public agencies from having to keep their finances in the CUF. - Banco Estado pursues social goals from its profits (maintaining branches in small communities, mortgage loans, loans backed by unemployment insurance, micro-industry servicing, insurance to low-income sectors). These social activities have resulted in an ‘efficiency gap’ (administrative expenses/margin on operations) of about 65 percent compared with an average of 50 percent for Chilean banks. - Banco Estado is developing a program aimed at reducing the efficiency gap by around 5 percentage points, the closest it deems compatible with fulfilling its social functions. - Like nonfinancial public enterprises, Banco Estado pays a surcharge on its profit tax of 40 percent (a dividend tranche). ### Nonfinancial public enterprises - Nonfinancial public enterprises are important in strategic sectors, notably mining and oil. - Activities and relations with government are defined and restricted by the Law of State Enterprises. Creation of new public enterprises or expansion of their activity requires a qualified majority of congress. - Public enterprises are joint stock companies or state enterprises established by law; all prepare financial statements compiled and audited in line with the Law of Joint Stock Companies. - From 2002, most public enterprises have come under the supervision of the System of Public Enterprises (SEP), with exceptions (Codelco, Banco Estado, national television, and defense enterprises). - By law, their annual budgets are approved via a decree of the Ministry of Finance (Law 1350 of 1976), and their presentation and execution reports must follow the central government budget classification. The CGR and DIPRES report on and consolidate execution of these budgets. - Borrowing by public enterprises requires authorization of the Ministry of Finance via decree; borrowing requiring a government guarantee must be approved by law. - Some enterprises carry out social functions and may not cover operational costs with revenues; the government has recently been meeting financing needs by transfers from the Budget Law (examples: ENAMI, ENACAR, the Santiago Mass Transport System, and the National Railway). - Authorities state the policy is to reflect all quasi-fiscal activities of public enterprises in the budget so that fiscal activity is adequately covered. ### Privatizations, concessions, and post-privatization shareholdings - Privatizations in the last decade have been carried out transparently via public open tender; the state transferred majority share capital in a number of enterprises but still retains important equity (typically about 35 percent) in some firms. - The largest recent privatization or concession was of six water enterprises; the state retained significant equity in many cases. - The state has transferred concession rights in state ports. - Government equity holdings in partially privatized companies are declared in CORFO’s financial statements. Majority state-owned companies are regulated by the Law of Joint Stock Companies, requiring annual public financial reports. - The Budget Law obliges the Executive to issue semiannual financial reports to congress for these firms. - CORFO is regulated by a framework law and supervised by DIPRES but is subject to fewer accounting requirements than public enterprises. *Source: IMF staff assessment and descriptive material contained in “1. Chile’s Public Sector.”* ### 17. The nonfinancial private sector is regulated mainly via sector-specific laws ### 17. The nonfinancial private sector is regulated mainly via sector-specific laws ### Regulation of the nonfinancial private sector - Regulatory regime: - Mainly sector-specific laws defining the regulatory process. - A general antitrust law oriented toward safeguarding competition and free markets. - Specific regulation in sectors of natural monopoly (for instance, electricity, gas and water, and telecommunications). - Administrative review and consultation: - Decisions of regulatory and supervisory agencies are subject to the constitutional principle that citizens have the right to seek review of administrative acts. - Only recently revised laws incorporate ex ante consultation provisions. - Laws establish detailed appeal and review procedures for environmental issues and tariff-setting in natural monopolies. - Environmental impact studies must be published and discussed in the affected communities. - Tariff fixing is done on the basis of microeconomic analyses of cost and demand, and subject to arbitration of differences between regulator and regulatees. ### Financial system regulatory framework - Supervisory authority: - Banking system supervised and controlled by the Superintendency of Banks and Financial Institutions (SBIF). - SBIF is an independent public institution that authorizes creation of new banks and has wide powers to interpret and enforce regulations. - SBIF approves any change in statutes or capital increase proposed by banks. - Reporting and disclosure requirements for banks: - Banks must submit monthly financial reports to the SBIF. - Banks must publish quarterly financial reports in the national media. - Banks must have their financial statements audited annually by independent auditors and get two risk classifications (ratings). - Banks must report to the SBIF any person or entity who controls 5 percent or more of bank property directly or indirectly. - Anyone who wishes to acquire 10 percent or more of bank property must first get SBIF authorization. - Banco Estado is included under SBIF supervision. ### Legal and administrative framework for the budget - Main permanent law: - The LAFE applies to all central government institutions except the resources governed by the Reserved Copper Law. - LAFE regulates budgetary processes, accounting, management of funds, financial control, and public credit. - LAFE concentrates responsibilities for formulation and execution of the budget in the Ministry of Finance and DIPRES; assigns financial control and accounting functions to the CGR; and assigns management of public cash and credit to the Treasury. - LAFE requires all fiscal revenues to be included in the budget, deposited in the unified fiscal account held by Banco Estado, and allocated in line with budget priorities. - LAFE allows some outlays to exceed the budget allocation, financing overruns with reallocations or higher revenues. - Permanence and annual laws: - An important part of the legal framework is not permanent but set by annual laws. - Some provisions regulating modifications to the budget (such as the size and use of the Executive’s contingency fund) are part of each Annual Budget Law. - A significant 2003 amendment to the LAFE has importantly reduced the number of such provisions. - Congress has accompanied its approval of the budget with agreements with the Executive (protocols) specifying reports to be presented to congress; these protocols are public commitments without the force of law. ### Legal framework for tax and customs administration - Governance: - Revenue agencies (Internal Revenue (SII), Customs, and the Treasury) are each governed by a framework law. - A permanent commission chaired by the head of the SII coordinates their activities. - Tax law features and electronic services: - Tax laws are relatively simple; the President has the sole right to initiate them. - Self-assessment is the norm (Constitution, article 62). - SII and Customs have web-sites explaining tax dispute procedures. - 70 percent of income tax returns are made via the internet. - 15 percent of VAT returns are made via the internet (representing nearly 60 percent of VAT payments). - Customs agents can complete clearance procedures via the internet. - Customs is developing a project for full internet tracking of imports through to clearance, and a ‘single window’ project is under discussion. - Taxpayer rights and appeals: - Taxpayers have clear legal rights and arbitration procedures described in the Tax Code. - First level of appeal is to a tribunal within the SII or Customs; this decision may then be appealed in the general courts. - Because first-round tax appeals are internal to the tax services, authorities have proposed making first-round tribunals independent of the tax agencies and creating chambers with independent tax expertise within the Court of Appeals; these are expected to be in place by end-2004. ### Code of conduct for public officials - Ethical framework: - Public officials are subject to a code of conduct, principally the Administrative Statute and the Law of Administrative Probity. - The Administrative Statute establishes principles of probity, confidentiality in legally restricted affairs, and prompt reporting of knowledge of irregularities. - The Administrative Probity law requires blameless official conduct and subordination of individual interest to the common good. - The President, Ministers, Subsecretaries, intendants, and governors must submit a declaration of interests within 30 days after taking office; this declaration must cover their professional and economic activities. - Personnel rules for regulatory/enforcement agencies: - Agencies with regulatory or enforcement powers have personnel rules that set stricter limitations and a superior pay regime compared with other state workers. - In the CGR, civil servants have traditionally been ‘personas de confianza,’ meaning they can be fired at the discretion of the Comptroller. ### Public availability of fiscal information — budget documentation and reporting - Coverage of budget documents: - Annual budget covers all ‘budgetary central government,’ including autonomous agencies such as Congress, the Comptroller General of the Republic, and the Public Prosecutor, but not universities, research institutions, and the resources under the Reserved Copper Law. - The Draft Budget Law of the Public Sector is accompanied by the Report on the State of the Public Finances presented by the Minister of Finance, and the Report on the Public Finances presented by the Budget Director. - Publication and frequency: - DIPRES sends to congress and publishes on its website monthly, quarterly, biannual, and annual reports on budget execution, and audited annual balances and quarterly financial statements of public companies. - DIPRES also publishes a monthly list of decrees on transfers from the contingency fund, Comprehensive Management Assessments (BGI), reports on the state’s external debt, and evaluations of programs agreed by congress. - Exceptions and limited items: - Budget documents provide comprehensive information on all items except resources under the Reserved Copper Law and gastos reservados. - Gastos reservados are reported globally but not itemized; they amount to less than 0.1 percent of total spending. - A law approved by congress in January 2003 establishes the obligation to limit the amount of reserved expenditures, restrain ability to supplement them, limit purposes and institutions that can use them, and make them accountable to the CGR. - Time series and projections: - Budget documentation shows information for the main fiscal aggregates for four years previous to the budget and projections for three years following the budget. - Draft Budget Law includes final execution figures for the four previous years for Ministries and programs, with as much disaggregation as in the budget. - The CGR’s annual statements include a comparison with the relevant budget. - The Public Finance Statistics yearbook includes consolidated figures for central government, general government, and the nonfinancial public sector for the previous nine years. - Since 2000, documents accompanying the budget have included a financial projection of the fiscal macro aggregates of budgetary central government for three years following the budget. ### Contingent liabilities, tax expenditures, and quasi-fiscal activity - Disclosure practices and improvements: - Annual budget documentation is not required to explicitly address contingent liabilities, tax expenditures, or quasi-fiscal activities but the government has progressed in analyzing and presenting information in each area. - In 2001, congress was provided with a note identifying and giving basic quantitative information on contingent liabilities (including the minimum pension guarantee, guarantees on infrastructural concessions, and the state guarantee on bank deposits). - A first study of tax expenditures was recently completed by the SII. - The enhanced Public Sector Financial Report to be attached to the budget beginning in 2003 is intended to regularly include estimates of tax expenditures and the main contingent liabilities. - Quasi-fiscal activities: - Since the mid-1990s, the central government budget began to include transfers to pay for quasi-fiscal activities of two small public enterprises (ENAMI and ENACAR). - Since 2002, the budget has partially covered financing needs of the Santiago Metro and the State Railway Company, which their tariff revenue cannot fully cover. - The oil price stabilization scheme prior to 2000 represented a quasi-fiscal activity; a 2000 law reformed the scheme, making regulated oil price setting transparent and greatly limiting the scale of future quasi-fiscal activity. - The impact of the oil price stabilization has been incorporated into the government’s fiscal policy target measure, and authorities plan to modify budget submissions and official statistics to reflect it. ### Debt, assets, and consolidation - Public debt and assets reporting: - Statistics on public debt and financial assets are compiled and reported by the Ministry of Finance for the central government and nearly all of the public sector. - Quarterly reporting of central government (gross) debt follows SDDS requirements and includes various classifications of the debt stock; it does not include any debt associated with off-budget military expenditure. - Since 2002, twice-annual reporting of a broader report began, which also includes statistics on central bank and nonfinancial public enterprise debt, and data on liquid financial assets (including reserves). - Consolidation: - Consolidated fiscal position for municipalities and the central government is published regularly. - Municipalities are subject to the same standards of fiscal accounting as the central government. - Municipal budgets are approved independently and subsequent to the Annual Budget Law; their information is provided ex post. - CGR prepares quarterly consolidated statements on municipal budgets, finances, and assets based on monthly reports from municipalities. - Municipal consolidated budget balance is included in DIPRES’s annual fiscal statistics. ### Timeliness and release calendar - Delivery dates and schedule: - Delivery dates are set in the annual Budget Law for specified fiscal information that the Executive should present to congress. - The detailed release calendar is published (Figure 2) and includes monthly, quarterly, biannual, and annual schedules with approximate publication dates (for example, monthly central government budget execution published forty-five days after the end of the month; quarterly budget report forty-five days after the end of the quarter; state-owned companies’ financial report sixty days after the end of the quarter; public finance statistics annually in March; public finance report annually in September; public debt report biannually March and September). - Reports and contents (selected examples from the calendar): - Central government’s budget execution: Central government’s income and expenses, by subtitle; outturn (balance). Monthly — Forty-five days after the end of the month — Budget Directorate, Ministry of Finance. - Central government’s budget report: Central government’s income and expenses, by subtitle; outturn (balance); balance ajustado; income from taxes; financing items; central government’s gross debt. Quarterly — Forty-five days after the end of the quarter — Budget Directorate, Ministry of Finance. - State-owned companies’ financial report: Financial statement both by company and consolidated; status of results, both by company and consolidated. Quarterly — Sixty days after the end of the quarter — Budget Directorate, Ministry of Finance/State-Enterprise System. - Public finance statistics: Detailed execution and consolidated figures for central government, municipalities, general government, and state-owned companies. Annually — March — Budget Directorate, Ministry of Finance. - Public finance report: Central government’s financial statement; contingent liabilities; tax expenditures; others, to be determined. Annually — September — Ministry of Finance. - Public debt report: Central government’s gross and net debt; Central Bank’s gross and net debt; explanatory notes and complementary information. Biannually — March, September — Ministry of Finance with collaboration from the Central Bank. ### Open budget preparation, execution, and reporting — objectives, rules, and projections - Fiscal objectives and medium-term framework: - Main fiscal policy objectives are presented each year in the President’s speech on May 21 and in the Minister of Finance’s budget presentation and report to congress. - Beginning with the 2001 budget, the central government budget has been prepared and presented in a medium-term framework with two main elements: a target for the structural balance and a medium-term financial projection. - The government that took office in early 2000 committed to maintaining each year a constant 1 percent of GDP surplus in the structural balance. - The approach is designed to avoid sustained debt accumulation while allowing the overall balance to fluctuate temporarily. - Scope and applicability: - The structural balance framework does not apply to the general government (argument: legal prohibition against municipalities contracting debt has kept local government cash balance very close to zero). - For the public enterprise sector, sustainability is considered company by company, including when the Minister of Finance approves each company’s annual budget. - Fiscal rule status and transparency: - The structural balance rule is not based in legislation but is a policy commitment of the administration. - The rationale, nature, and technical design of this quasi-rule are laid out in a policy paper published by the Budget Directorate in 2001; the estimation methodology has been published. - The government delegated to independent expert panels the determination of critical inputs to the estimation: medium-term forecasts of real copper prices, the labor force, capital accumulation, and total factor productivity. - Statements identifying the members and documenting the panels’ results have been published. - Medium-term projections and public assessment: - Annual budget is prepared and presented on the basis of medium-term projections for potential output and copper export prices, and internally consistent assumptions for a broader set of variables, using a model kept by the Ministry of Finance. - Assumptions for a core group of relevant macro variables, but not details of estimation procedures, are provided in documents accompanying the budget submission, including on the web. - Congress and the public may assess the reasonableness of the budget proposal’s macro projections, for example, on the basis of independent projections released by the central bank in mid-September, and the survey of private forecasts conducted and published each month by the central bank. *Source: _cr03237 - 17. The nonfinancial private sector is regulated mainly via sector-specific laws* ### 41. The question of fiscal sustainability is revisited on an ongoing basis. The ### _cr03237 - 41. The question of fiscal sustainability is revisited on an ongoing basis. The ### Fiscal sustainability framework - Structural balance estimate is updated and published twice a year. - Expert panel convened each August to provide the basis for the budget proposal finalized in September. - Medium-term financial projections published each October. - Projections present four years of projections for expenditure and revenue (for the latter, both before and after cyclical adjustment); exercise does not show details of spending programs or financing projections. - Because the target is defined with respect to a balance including interest, deterioration in financing conditions that increases the interest bill would require the government to raise its primary surplus. - Reference: Balance Estructural del Gobierno Central, DIPRES, September 2001; comprehensive discussion in IMF, Chile, Selected Issues, 2001. ### Identification of new policies - Budget distinguishes existing commitments and new policies. - Since 2001, methodology differentiates inertial and “incremental” outlays. - Gap between inertial expenditure and total permitted by the structural balance target determines a pool (Fondo Común Concursable (FCC)) for competing proposals. - Proposals must include objectives, expected results, coverage, resource requirements, and evaluation indicators. ### Risks - General analysis of fiscal risks included in the Budget Director’s report to congress at budget submission; scope varies with uncertainties faced (example: late-2001 report considered an alternative macro scenario). - Policy of targeting the structural balance limits consideration of short-term fluctuations in output and copper export prices as risks; budget intended to be executed irrespective of such shocks. - Analyses of risks to specific expenditure commitments are not presented, though studies exist on main contingent liabilities, deficit of the military pension system, and costs of the penal reform. ### Policy analysis and budget classification - Budget data reported on a gross basis by rule. - Budget developed by administrative categories and reported broadly on a program basis. - Summary table showing an economic classification is presented but with little detail. - Information by functional classification only available ex post; Chile’s methodology is broadly based on institution-level statistics with adjustments rather than compiled by program; unclear whether classification fully follows COFOG. - Budget reporting does not include state universities nor extra-budgetary activities of the armed forces associated with the Reserved Copper Law. ### Program objectives and evaluation - Objectives outlined for all budget programs; specifications at ministry and program level linked to performance indicators and evaluation procedures. - Budgets include mission, main outputs, beneficiaries, objectives, performance indicators, and quantitative targets. - LAFE contains provisions for evaluating goals of budget programs. - From mid-1990s, management control system established bases for budgeting through results; coordinated by DIPRES and implemented via Management Improvement Programs (PMG). - Annual outturns (budget execution) and achievement of targets, indicators, and institutional commitments must be reported in Comprehensive Management Assessments (BGIs). - Programs receiving FCC resources must specify objectives, expected results, and quantitative targets. - During 2002, about 150 public service agencies submitted information on quantitative targets, based on more than 500 performance indicators. ### Fiscal indicators and published balances - Overall balance of the central government and the current account balance considered indicators of fiscal position. - Since 2001, main indicator and target of fiscal policy is the structural balance of the central government, published annually with estimated cyclical components. - The balance ajustado (overall balance after adjustments that enable calculation of the structural balance but without cyclical adjustments) is published quarterly. - Analytical tables show relation between budget estimates and the overall balance. - A consolidated nonfinancial public sector balance had been published annually but is being reconsidered. - Quarterly accrual data for public enterprises available on SVS website. - Authorities consider consolidation unnecessary given limited quasi-fiscal activities and transparency of transfers; conversion to cash basis risks biasing investment and financing decisions. - In 2003, authorities begin to present data aggregating companies’ individually prepared and externally audited financial reports and to establish procedures to publish accrual basis data in line with the 2001 GFS. - Note: after shift to a unified fiscal presentation (targeted for mid-2003), the overall balance will be aligned with the balance ajustado and only one number will be reported. ### Execution and monitoring — Accounting - Public sector accounting rules comprehensive and consistent with international standards; set by CGR. - Entities develop and maintain accounts within rules; CGR centralizes, aggregates accounting information, and prepares accrual-basis government accounts. - DIPRES keeps records only for the payment stage of expenditure, enabling quicker reports but meaning no systematic centralized recording of commitments or payments arrears despite accrual-based accounts. - Differences in methodology, coverage, and periodicity between DIPRES and CGR complicate cross-checking and reconciliation. - SIGFE, an integrated financial management system, began development in 2001 and is to be fully operational by end-2005. ### Procurement - Almost all state procurement subject to tender. - LBGAE establishes transparency and competitiveness principles; CGR sets monetary thresholds for open and public tender. - Mismanagement in procurement reportedly uncommon; current Ministry of Public Works presumed corruption case under judicial investigation is an exception. - Transparency International found procurement procedures transparent except for small purchases. - Prior to 2003 law, regulations were agency-specific and not fully defined for all areas (e.g., municipalities not covered); armed forces procurement was self-regulated and exempted from technical evaluations. - 2003 procurement law generalizes and homogenizes procedures (including defense and municipalities, though not professional services), ensures publication on the web with records of procurement decisions, and establishes an independent tribunal for supplier appeals. - Ministry of Finance created a register of state suppliers and an official website for public contracts. - Prior to the 2003 law, Transparency International found that, in terms of value, 82 percent of goods and services acquisitions were made through open and public tenders (for construction services, 99 percent). ### Terms of employment and civil service reform - Entry to civil service based on competition and merit except for political appointments (mainly at high administration levels). - Civil service careers cover most of central government but co-exist with special personnel regimes; promotions by competition or career ladder by law. - Series of laws passed in 2003 to formalize and expand civil service HR policy: new salary structure, new career development ladder, and new National Civil Service Directorate. - Number of political appointments to line jobs reduced from around 3,500 to 400 (including ministers, under-secretaries, and ambassadors). - Salary scales established by law; grade-based with performance incentives since 1994; different scales for civil servants, armed forces and police, municipal employees, teachers, and doctors. - Allowances for experience, location, and training; some officials allowed supplementary pay from teaching, consultancy, and honoraria previously; new law improved pay levels, enforced full-time work, and severely limited topping up salaries through honoraria or reserved spending. ### Internal control - Internal control system more or less voluntary within each agency, based on incentives, particularly under PMGs. - DIPRES exercises budgetary control; National Council for Internal Audit sets policies; CGR establishes internal control guidelines and performs legal control and evaluation. - Internal control performed by internal audit units within each agency; annual audit plans approved and monitored by the highest authority. - No mechanisms ensure independence of officials of internal audit units currently. - PMGs, voluntary, have strengthened internal audit and are connected to a merit pay system; internal audit is one component. - Currently, 87 percent of the central government’s public services have internal audit units. ### Revenue collection and tax administration - Tax and customs administrations legally protected from political influence: they report to Ministry of Finance, not congress; Director of the SII has exclusive right to interpret tax laws by law. - Court rulings and administrative interpretations accessible to the public on SII website. - All revenue agencies subject to Law of Probity and laws governing civil servants’ behavior; framework laws forbid other remuneration. - Entry to tax services by public competition except at highest levels. - Requirement that imports must be made through customs agents not seen as restrictive; around 250 agents; professional affiliation by public competition. - Reporting on tax activities regular; customs issues monthly internal receipt reports (not published but widely distributed). - Both agencies required to provide congress any requested information. - Tax evasion estimated 24 percent in 2001 (before Law on Fighting Tax Evasion came into effect in June 2001); law aims to strengthen tax administration and fair treatment of taxpayers. - Collection results for 2001 and 2002 show further declines in evasion under the new law. ### Fiscal reporting and evaluations - Government delivers to congress quarterly reports on budget execution (at the “subtitle” level) and posts execution reports (in economic classification) on DIPRES website within 45 days. - Since 2001, DIPRES provides mid-year report to congressional committees evaluating financial conduct of central government over previous year and updating projections for current year. - DIPRES publishes public financial statistics yearbook in April or May covering central government (armed forces incompletely), municipalities, and nonfinancial public enterprises; accounts of Banco Estado not included but reported in externally audited annual report. - Audited final accounts compiled by CGR published in March or April with somewhat reduced coverage (e.g., excluding Codelco). - Types of evaluations presented to congress: - April (year after budget): report on Comprehensive Management Balances of public agencies with PMGs. - September: targets and compliance rate with management indicators of PMG entities presented as part of draft Budget Law. - Program and impact evaluations; comprehensive expenditure evaluations for a selected ministry. - Evaluations prepared over four to five months by panels of three private sector experts (competitively chosen); reports sent to congress in June before draft budget submission. - Impact evaluations carried out by universities or private consultants on first-hand information. - Comprehensive expenditure evaluation aims at evaluating whole set of procedures, programs and policies administered by a Ministry. ### Assurances of integrity — Data quality and reconciliation - Overall budget results have not differed significantly from original estimates; total expenditure execution in the last five years varied between 97 and 99.8 percent of approved expenditure. - Supplementary budgets have not been used since adoption of LAFE in 1975. - Annual budget data published by DIPRES are on a cash basis; final accounts (Informe sobre la Gestion Financiera del Estado) published by CGR are on an accrual basis; both include methodological commentaries. - DIPRES reconciles official fiscal statistics with data consolidated, published, and audited by CGR; in principle no statistical discrepancy needed given double-entry accounting. - Published below-the-line flows have not provided enough detail to reconcile with banking data and balance of payments; budget balance has not been reconciled with change in government debt or other financial instruments. - Planned introduction of new GFS and more detailed debt statistics since 2002 expected to facilitate reconciliation. - Independent external audit carried out by the Comptroller General of the Republic (CGR), an autonomous agency. - By constitution, Comptroller designated by President via a Senate majority agreement and may not be removed until age 75; CGR law specifies removal only by President upon judicial resolution. - CGR verifies legality of administration’s transactions, inspects income and investment of treasury and municipality resources, and develops auditing and internal control; CGR sets accounting standards. - CGR employees hired, promoted, and removed at sole discretion of the Comptroller; Comptroller determines his annual budget and wage scale of personnel with approval of the President. - CGR must present, by the 30th of April every year, to the President and congress a Report on the Financial Administration of the State for the previous year. *Source: _cr03237 - 41.* ### 63. The Budget Directorate makes its own fiscal forecasts and outside scrutiny is ### _cr03237 - 63. The Budget Directorate makes its own fiscal forecasts and outside scrutiny is ### IMF staff summary and context - The Budget Directorate prepares its own fiscal forecasts; outside scrutiny is described as "piecemeal but growing." - The main macro assumptions for the budget are made public "in line with the Transparency Code." - Panels provide forecasts for two key revenue drivers: the medium-term copper price and the rate of growth of potential output. In 2002 this was done in August, one month ahead of the budget presentation, and the results were put on the DIPRES website. - The national statistics institute does not publish fiscal statistics; the official Chilean fiscal statistics are those published by the Budget Directorate and are not subject to external verification. They are, however, based on the same information used by the CGR for audited final accounts (with slightly different coverage and nomenclature). - Chile meets the Special Data Dissemination Standards (SDDS) of the IMF. Chile has made use of the SDDS flexibility option for timeliness and periodicity of fiscal data; as of July 2003 the IMF’s website showed these options still being used. ### Major achievements in fiscal transparency (bulleted findings from paragraphs 65) - Government constructs and disseminates a clear view of objectives and targets at macro and program levels. - The structural balance rule provides confidence-enhancing information about future macro-fiscal responses into the medium term. - Budget transmits government priorities to sectors via objectives in ministry budget documents, quasi-program budget presentation, and a sophisticated array of indicators and evaluation procedures. - Government accountability to congress and the public has been strengthened: regular reporting increased in frequency, timeliness, and breadth; performance evaluations are multi-faceted and reported to congress. - Use of protocol agreements and establishment of a permanent congressional committee deepen congressional oversight. - Independent consultants and panels are increasingly used to provide projections and evaluations; the economic debate in the press is "rich and heated." - Government has clarified and delineated aspects of its economic role: central bank quasi-fiscal activities that generated deficits have stopped; Banco Estado must comply with prudential requirements; most public enterprise quasi-fiscal costs are covered by explicit budget transfers. - Government greatly expanded debt reporting and produced substantive publicly-available studies of contingent obligations. - Passage of a law permitting fuller reporting on extra-budgetary military spending is expected to reduce uncertainty about armed forces’ economic activity. ### Overarching reform challenges (paragraphs 66–69) - Institutionalize recent advances in transparency so they become permanent components of fiscal management rather than dependent on future governments’ goodwill. - Many transparency measures were implemented via specific initiatives (protocols, time-bound laws) rather than permanent legal provisions (examples: reports on tax expenditures and contingent liabilities, budget modification conditions, rules governing the contingency fund). - Most internal control appears motivated by voluntary incentives rather than permanent legal frameworks. - The structural balance target lacks a legal basis and is a policy commitment of the current government. - Authorities have indicated willingness to move some transparency measures to permanent legislation and have amended LAFE to cover key annual budget provisions (notably limits on the expenditure envelope and transfers). - Continued improvement of transparency of military activity is a second major challenge: - Effectively disclose extra-budgetary military activity, not only authorized expenditures but movements in debt. - Subject military spending to general budget discipline, including normal borrowing and reporting procedures, and eliminate earmarking or spending floors. - Incorporate military deficit and debt information into the budget and fiscal statistics. - The authorization to disclose details on Reserved Copper Law resources is an important step forward. ### Specific reform recommendations and areas for progress - Clarity of roles and responsibilities in the public sector: - Fiscal statistics should clearly show transactions of copper and oil stabilization funds if maintained. - Clarify coverage and effectiveness of the municipal budget constraint; eliminate minor coverage differences in sources of general government statistics. - Align central bank and government accounting bases to clarify flows and the central bank’s quasi-fiscal balance; consider recapitalizing the central bank to encourage transfers of profits back to government rather than showing uncompensated losses. - Make relations with Banco Estado explicit: remuneration for use of balances in the unified fiscal account and offsetting costs of providing fiscal services and social support agenda. - Continue to provide detailed information on public enterprises; planned shift to accrual accounting and development of a general government balance sheet that incorporates enterprise equity values will improve transparency. Supervision and reporting requirements of CORFO should be examined. - Reform of tax tribunals in congress (making first-round tribunals independent and creating expert tax chambers in the courts) is appropriate to address independence questions. - Recent laws clarifying government remuneration and limiting political appointments, and the general civil service reform law, should improve transparency as implemented. - Procurement: introduction of Chilecompras and the new law aligning procurement rules across agencies will clarify rules (including for small purchases), eliminate differences of treatment across agencies, and make contracts more transparent. - Public availability of information: - Incorporate information on defense transactions and debt under the Reserved Copper Law into the budget and fiscal statistics. - Regularly update studies of contingent liabilities and account transparently for flows associated with concessions in fiscal statistics. - Establish a regular updating schedule for estimates of tax expenditures and contingent liabilities. - Open budget preparation, execution, and reporting — macro objectives and framework: - Consider converting the structural balance target into a legally-based fiscal rule, while weighing other policy considerations. - Provide more detail about potential output methodology and longer-term spending goals to enhance public understanding of the structural balance target. - Increase disaggregation of expenditure in medium-term projections to show impact of future obligations (investment, concessions, pensions). - Include more systematic discussion of fiscal risks (sensitivity analysis or alternative scenarios) in budget documentation. - The copper stabilization fund co-exists uneasily with the structural balance rule; if proposed fiscal accounting changes proceed, the copper fund could become redundant. - Adopt unified presentation of fiscal accounts to dispel questions about whether fiscal targets accurately show the fiscal stance. - Data for budget preparation and execution: - Provide a consolidated national currency budget in the Budget Law in addition to separate dollar and peso budgets; increase disaggregation of the economic classification of budget numbers. - Improve functional classification of expenditure and make it available with budget documentation rather than only ex post; ensure compilation from program-level data. - Introduce SIGFE (integrated financial management system) as soon as possible; it is being tested on a pilot basis by the Ministry of Finance. - Address lack of timely and systematic accounting and reporting of expenditure arrears under the cash-based budget system. CGR has commitments data allowing arrears tracking (and these are small). Implementation of the new GFS will provide a comprehensive accounting framework; SIGFE should permit timely reporting. As a short-term measure, consider issuing periodic reports on arrears in problem areas (notably health and public works). - Assurances of integrity: - Reconciliation of fiscal with monetary data is done by individual institutions but not systematically at the macro level; a regular macro-level reconciliation exercise is recommended. - Rapid full implementation of the new (2001) GFS standard is welcome to facilitate reconciliation and provide an integrated view of all government flows and stocks. ### Key statistics and dates preserved from the source - Panels convened for forecasts: in 2002, done in August, one month ahead of the budget presentation. - SDDS flexibility usage: as of July 2003, IMF website showed options still being used. - Law authorizing publication of Reserved Copper Law details: passed on January 21, 2003. - Military expenditure reserve size: around 0.1 percent of the armed forces’ total budget allocation. - Central bank accounting and GFS references: move to full implementation of the new (2001) GFS; floating exchange rate regime adopted in 1999; central bank commercial bank rescue operations occurred in the 1980s. ### Box summaries (transparency issues highlighted) - Box 1 — Military Activity—Transparency Issues: - Reserved Copper Law: 10 percent of Codelco’s gross revenues from copper transferred in equal parts to the three branches of the armed forces for equipment purchase; law sets a floor on revenues transferred and can be topped up by government in case of very low copper prices. Ministry of Finance authorizes spending financed by these resources though CGR does not receive transaction details. January 21, 2003 law authorizes authorities to publish details on Reserved Law resources; available data suggest the military balance is small and stable enough not to change overall fiscal policy conclusions. - Armed forces may borrow to finance equipment purchases; their debt is not reported (not included in new Statistics on Public Debt), creating uncertainty about total debt stock and debt service. Ministry of Finance aims to limit military borrowing to amounts compatible with future earnings expected from the Reserved Copper Law. - Expenditure reserves (gastos reservados) are included in the budget and reported to the Ministry of Finance and the CGR without details of use; they are "very small, around 0.1 percent" of the armed forces’ total budget allocation. The January 21, 2003 law is intended to limit these and require reporting details. - Armed forces exempt from various general regulations (procurement internal procedures, equipment purchases not subject to technical evaluation, exemptions for defense industry enterprises). The 2003 procurement law will begin to address these shortcomings. - Several legal provisions complicate budget management: constitutional floor on defense spending and legal floors on some components; armed forces not required to provide same disaggregation of spending items nor to record/clear proceeds from sale of fixed assets. - Box 2 — The Legacy of Past Quasi-Fiscal Activity in the Central Bank: - Central Bank records a quasi-fiscal deficit from past operations (commercial bank rescue operations in the 1980s; sterilized interventions prior to 1999) though such activities have long ceased. - Differences in reporting arise from government accounts on a cash basis vs. central bank on an accrual basis; transition to government reporting interest payments on an accrual basis as part of the move to the new GFS will help resolve differences. - The central bank is constitutionally prohibited from providing credit or guarantees to the government or public enterprises; its transactions with the government are limited to acting as a fiscal agent on market-related terms. Rules for transfer of central bank profits to government are defined, but there is no rule requiring government to compensate or recapitalize the bank should losses emerge; the bank is authorized to request new capital from the government. *IMF STAFF COMMENTARY (excerpt).* ### Box 3. Chile’s Public Debt Statistics ### Box 3. Chile’s Public Debt Statistics ### Assessment and historical background - The quality of Chile’s public debt data was previously assessed by the IMF in mid-2001, for the Data Module of the ROSC. At that time it was found that Chile’s fiscal data met the Special Data Dissemination Standards, though with flexibility options exercised on timeliness and periodicity.60 - The Ministry of Finance compiled quarterly central government debt data with a one-month lag but did not disseminate them. - Annual central government debt data were compiled and disseminated with a ten-month lag, although the data were available earlier.61 - The coverage of Chile’s debt statistics was effectively general government—except for the omission of military debt—since municipalities have not been permitted to contract debt. ### Improvements since 2001 - The Ministry of Finance began to release quarterly data on central government debt with one quarter’s lag, starting in September 2001. These data include classifications by currency, maturity, creditors, and instruments. - The Ministry issued a comprehensive report on public sector debt in October 2002, with broader scope, more detail, international comparisons, and methodological commentary. In particular, the new report: - includes central bank debt and nonfinancial public enterprise debt, - shows net and gross debt of the central government consolidated with the central bank, - includes supplementary information on the amount of pension “recognition bonds,” despite pension liabilities not being classified as debt in the GFS and not reported by most countries. - Taking all of Chile’s sources of debt statistics into consideration, Chile now more than fully complies with the best-practice criteria in the Fiscal Transparency Manual (paragraph 79), with some remaining exceptions. ### Remaining gaps and recommended reforms - The outstanding reform agenda includes the need to report on military debt. - For the new report covering the broader public sector, it would be advisable to: - break down debt by maturity; - separately identify debt indexed to the exchange rate or inflation (and comment on its revaluation); - if the state universities have debt, include this; - verify whether information provided by residence and by currency composition is comprehensive (for instance, data are shown only in dollars and pesos); - include debt service projections (interest as well as amortization) in the reports. *Box 3. Chile’s Public Debt Statistics.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03237.pdf_