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CURRENCY EQUIVALENT(as of November 1994)

Exchange rate used in this study:

US$ I = 840 Pesos

FISCAL .EAR OF GOVERNMENT OF COLOMBIA

January 1 - December 31

ENERGY CONVERSION FACTORS

1 TOE 7.3 bbl1 MTOE = 12.4 TWh (heat content equivalent)I kcal = 3.968 BtuI CF of gas = 1000 BtuI kWh 860 kcalI m3 gas = 9000 kcal

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FOR OFFICIAL USE ONLY

ACRONYMS

ACIEM Colombian Association of Electrical and Mechanical EngineersANDI Asociaci6n Nacional de IndustrialesBOO Build, Own, OperateCARBOCOL Carbones de ColombiaSCI Colombian Association of EngineersCNE National Energy Commission (Comisi6n Nacional de Energia)COLGAS Compaflia Colombiana de GasCONPES Consejo Nacional de Politica Econ6mica y SocialCORELCA Corporaci6n Electrica de la Costa AtlanticaCVC Corporaci6n Aut6noma del Valle del CaucaDANE Departamento Administrativo Nacional de EstadisticaDNP National Planning Department (Departamento Nacional de

Planeaci6n)DSM Demand-side ManagementECOPETROL Empresa Colombiana de Petr6leosEBB Empresa de Energia de BogotiEEC European Economic CommunityEMCALI Empresas Municipales de CaliEPM Empresas P6blicas de MedellinESMAP Energy Sector Management Assistance ProgramFEN Financiera Energetica NacionalINEA Instituto Nacional de Energias AlternasIBRI International Bank for Reconstruction and DevelopmentICEL Instiuto Colombiano de Electrificaci6nICONTEC Instituto Colombiano de Normas TecnicasIDB Interamerican Development BankIPC International Finance Corporation (World Bank Group)ISA Interconexi6n Electrica S.A.JNT Junta Nacional de Tarifas de Servicios PiblicosMHCP Ministry of Fmance and Public CreditMIS Management Information SystenMME Ministry of Mines and EnergyOED Operations Evaluation Department, World BankOLADE Latin American Energy OrganizationPCR Project Completion ReportPROMIGAS Promotora de la Incorporaci6n de Gasoductos de la Costa AtlanticaSIC Superintendencia de Industria y ComercioSIE Energy Information SystemTA Technical AssistanceTERPEL Terminales de Distribuci6n de Derivados de Petr6leo Ltda.UNDP United Nations Developmert ProgramUSAID US Agency for International Development

This doumet has a resticted disibution and may b w d by rcpen oy in the pea*rna ohiofwcL duisIts nts may not otwiw be dilosed withot Wod Bn a ithohutWli

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ABBREVIATIONS

$ Colombian Pesosbbl BarrelBpd Barrels per dayBTU British Thernal Unitcat CalorieCF Cubic footCFd Cubic feet per dayCIF Cost, Insurance and FreightCNG Compressed natural gasDSM Demand side managementgal US gallonGDP Gross domestic productGWh Gigawatt-hour (109 Wh)IRR Internal rate of returnkCF Thousand cubic feetkW KilowattJ JouleLPG Liquid petroleum gasI LiterMBTU Million BTUMCF Million cubic feetMUS$ Million US$MW Megawatt (106 W)NPV Net present valueTJ TeraJoule (1012 J)TOE Ton of oil equivalept.TCF Tera cubic feet (IO-)

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COLOMBIA

ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT

Loan and Project Summary

Borrower. Republc of Colombia

Implementing Agency: National Planning Department (Departamento Nacional dePlaneacion, DNP)

Beneficiaries: Ministry of Finance, Ministry of Mnes and Energy, Energy and GasRegulatory Commission, Intercone)i6n Eletrica SA (ISA)

Pove. Not applicable.

Amount: US$11 million equivalent.

Terms: Repayment in 17 years, including four years of grace, at the standardvariable interest rate.

Commitment Fee: 0.75 on undisbursed loan balances, beginning 60 days after signing,less any waiver.

Financing Plan: See Schedule A

Net Present Value: Not applicable

Staff AppraisalReport: Not applicable

Estimated Project Costs (US$ 000):

Components Local Foreign Total

Regulation, Pricing, Energy PoQicy 550 4,500 5,050Power Sector Assistance 260 2,500 2,760Gas Sector Assistance 50 150 220Environment 140 1,300 1,440Energy Demand Management 100 750 850

Subtotal 1,100 9,200 10,300

Physical Contingencies 60 400 460Price Contingencies 170 1,000 1,170Project Coordinating Fee 70 400 470

Total 1,400 11,000 12,400

Proposed Financing Plan (US$ million)

IBRD 11.0Government 1.4

Estimated Disbursements (Bank FY)

1995 1996 1997 1998 1999

1.0 2.4 3.0 2.6 2.0

Cumulative 1.0 3.4 6.4 9.0 11.0

Economic Rate of Return: Not Applicable

Poverty Category: Not Applicable

Environmental Classification: B

Staff Appraisal Report: Not Applicable

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THIE IBRD TO THE EXECUTIVE D)IRECTORS

ON A PROPOSED LOAN TO COLOMBIAFOR AN ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT

I submit to your approval the following memorandum and recommendation on a proposedloan to Colombia for the equivalent of US$ tI million to help finance a project for Energy SectorTechnical Assistance. The loan would be at the Bank's standard variable interest rate, with amaturity of 17 years, including 4 years of grace.

Background

I. Colombia has abundant energy resources: proven oil reserves are currently on the order of3.2 billion barrels, equivalent to a Reserves/Production (RIP) ratio of around 20 years; proven (8.3rillion cubic feet ) and probable gas reserves amount to around 8.8 trillion cubic feet, equivalent toa R/P ratio of about 70 years; coal reserves are estimated to be on the order of 2.2 billion tones(R/P in excess of 100 years); the hydroelectric potential is around 90 gigaWatt (GW), of which lessthan 10% (about 8 GW) has been installed. Despite the abundance of energy, the sector facesserious problems: the electricity subsector was in dire financial straits until recently, exacerbated bya dramatic supply crisis in 1992-93 which curtailed supply by up to 25%; the coal subsector has hada prolonged shortage of funds withn the principal state-owned enterprise; finally, despite thevolume of reserves, natural gas has been supplied to a minimal proportion of potential users.

2. Since taling office in 1990, the Gaviria government has launched major economic reforms,characterized by opening trade through reduced tariff barriers, exposing economic agents tocompetition and fostering private sector participation in areas where the public sector traditionallyprevailed. Some areas where this policy is being applied are the ports, the railways, state-ownedbanking, state-controlled industial enterprises and social security. The Samper Government (1994-1998) policies have emphasized socially oriented priorities, but it has continued the Gaviria-erastrucural reforms. The energy sector is another area where the Government is currently promotingthese policies; an initial target for reform, due to the prominence of its problems, is the powersubsector, to be followed by the hydrocarbons industry starting with natural gas.

3. Energy will soon occupy an even more prominent position within the economy: Colombiawill fice an oil boom from newly discovered oil fields that could put the economy on a fastergrowth path; by the end of the centunty, Colombia can become a competitive upper-middle-incomeeconomy with a fist-growing service sector, a more selective but also more efficient and outward-oriented manufactwing sector, and a strong export base, if the oil windfill is effectively managedand its competitive edge is consolidated.

4. The Energy Sector. Until 1990 there was, in practice, no single insttution responsible foroverall energy policy, and although the Ministry of Mines and Energy (MNE) nominally exercisedthis function, it was overwhelmed by sector enterprises with vastly greater resources. As a

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consequence, oil policy was largely deternuned within ECOPETROL, the state oit corporation;power sector policy was determined through a complex interaction of five major generatingcompanies and ISA, an interconnection and generation enterprise (created in the late 60s with Banksupport); natural gas policy feil within the realm of ECOPETROL and its development was, at leastuntil the late 80s, a secondary consideration; since the late 70s coal policy has been entrusted toCARPBOCOGL a sate agency currently being resctured. Electricity pricing was the responsibilityof a Tariff Board which determined both bulk and retail tariffs, whereas prices for oil products werepromulgated by MME. Coal is the only product which has been exempt from state-dictated prices.

5. The energy sector has acquired an increasingly high profile within f'e country's economy.The discovery and commercial development of the Cusiana oil field with proven reserves of 2,000million barrels will undoubtedly have a major impact on the Colombian economy and energy sector.It wilt ensure steady growth of oil revenues and will provide a gas source in the center of thecountry to maintain, after year 2000, the development of the gas market when supplies, heretoforeconcentrated on the Atlantic coast, will start to decline.

6. The power subsector has experienced major problems during the last decade. In the 80s itbecane the source of considerable financial difficulties due to overbuilding of generating facilitieswhich led to significant macroeconomic dislocations. Paradoxically, it also faced a supply crisis dueto an unprecedented drought in the early 90s, which aggravated sectoral problems caused byinadequate planning, low efficiency, and poor maintenance These crises provided the impetus forembarldng on radical institutional reforms.

7. Despite the large volume of reserves, the natural gas industry is at an early developmentstage, and its availability has been limited to gas and oil-producing regions. Major cities such asCali and Medellin lack supplies in the absence of a national pipeline network. Power sectorproblems prompted the Government to focus on natural gas development and LPG distribution aseconomic substitutes for electricity. During the last two years, two major factors have convergedto provide new impetus to the development of the natural gas industry and to raise its profile in theGovernment's agenda: on one hand, massive power rationing highlighted the vulnerabilty of theelectricity sector to hydrological contingencies which the use of natural gas could mitigate both bysubstitting electricity at the final-use stage and by fueling low cost, efficient, turbines; on the other,very large volumes of associated gas were discovered which practically doubled the country'sreserves. In order to develop the natural gas industry's potential, ECOPETROL undertook theorganization of a trunk gas pipeline system which will reach the major urban markets by late 1995.

8. A number of the problems that the sector faces have institutional origins. In the 60s and70s the state increasingy became the major owner in energy enterprises, with a consequentslackening of efficiency incentives and the virtual disappearance of accountability. The symptomsof serious problems in the energy sector became alarming in the nid-80s with the power sector'sfinancial crisis; it then became evident that energy policy should be given a cohesive nature in orderto address the issues of excessive investment in electricity generation and the underdevelopment ofthe gas subsector. In 1990 an OED study', developed during a two year period with the

OEBD, Colombi-Tlhe Power Sector and the World Bank. 1970-1987. Repot No. 8893 (June 28, 1990).

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participation of Colombian experts, identfied many of the weaknesses of the power subsector andrecommended its restructuring through the introduction of adequate regulation and private sectorparticipation. Since 1991 the Bank has supported the reshaping of the powver sector in order tointroduce market forces by promoting competition and private sector participation.

9. Government Policy. The Government has a well-defined policy for electricity within asector-wide perspective and clear objectives for the gas sector set out in the National Gas Plan. Adefinite policy for the oil sector has yet to be structured; nevertheless, it is a Governent objectiveto reduce its presence in the oil industry and it has already sold its petroleum distributioncompanies. An overall energy policy has not yet been formulated in detai but the Governmentrecognizes its need and has requested support for this purpose.

10 Government policy for the power subsector consists of: (a) introducing competition bycreatig a wholesale market for electricity und an open-access transmisson network managed by anindependent grid operator company; (b) disengag itself from direct participation in electnictyproduction and distribution through divestment of power plants and udtiles and undertaldng thedevelopment of new generating stations with private sector participation; (c) introducing reguationas a means to both attract the private sector and to prevent monopolistic behavior where marketmechanisms are ineffective; and (d) introducing pricing reforms to reflect costs amd to narrow thefocus of subsidies in order to target the needies sectors of the population.

11. In the gas subsector the Government aims at developing this relatively neglected resourceand, in the process, correcting the uneconomic use of electricity for heating. The Government'spolicy in this respect consists of: (a) promoting the increased share of gas-fired electricitygeneration in order to reduce the reliance on hydro-electric generation and increase systemreliability; (b) attracting the private sector to build an infrastructure of gas pipelines and distributionnetworks and developing new markets for gas; (c) stimulating exploration and development of newgas reserves to supply expected increases in demand; (d) creating an efficient gas trading andtransportation system with private sector participation; and (e) fostering a market similar to thatbeing developed for power.

12. The Government has taken the first sters towards implementing these policies: theincorporation of private capital in power generation and gas transmission has been initiated; theindependent grid operator company is being organized; an Energy Regulatory Commission has beencreated, together with a much-needed Energy Policy Unit to address overall sector issues.

13. The Regulatory Commission is continuing to promote the pricing adjustment policieswhich have been implemented in the last few years. Electicity tariffs have been continuouslyrevised in order to reach economic cost levels and eliminate price distortions within consumersectors; the following table summarizes average tariff levels as a percentage of economic costsduring 1991-1993 as well as the target levels for 1994-1997:

YEAR 1991 1992 1993 1994 1995 1996 1997Percent of Economic Cost 72.7 70.9 83.0 87.0 92.7 97.7 100

The tariff adjustment program is being implemented on schedule and the targets for 1994 havealready been met.

14. On average natural gas prices cover economic costs. Natural gas costs are on the order of$1 per miUion Btu (Mbtu) at the wellhead; wholesale and retal costs vary considerably according tolocation; for example, they are on the order of $1.8/Mbtu for wholesale deliveries and $3.8/Mbtufor retail delivery in Bogota compared to values which are expected to be 2o7% higher in Cali oncethe pipelines are put in place. Prices are set by MME and exhibit wide ranges of variation fom onemarket to another which reflect the fragmented nature of the industry. With the development ofnew trunk pipelines and the interconnection of producing fields, bulk prices should become moreuniform and a pricing policy will have to be developed to address the issues which will arise .l thecontext of an integrated gas industry structure.

15. Environmental policy, embracing socioecononic and sociocultural problems, is now beingactively taken into account in power sector planning and a Ministty of the Environment wasrecently created. A further step in this direction consists of consolidating energy-related regulationsand developing sector-specific guidelines.

16. Due to these reforms, the implementation of energy policy in Colombia is at a criticalpoint: major responsibilities have been vested in new institutions such as the Energy RegulatoryCommission and the Ener Polcy Unit, and the open-access power grid and gas sector andpipeline operating companies have yet to be organized. There is an urgent need for strengtheningthe new agencies in order to enable them to discharge their functions efficiently.

17. Country Assistance Strategy. Colombia's prospects and the Bank's Country AssistanceStrat (CAS) were discussed by the Board on December 16, 1993. The proposed project is fulyconsistent with the CAS. The country assistance program seeks to help the Government consolidateand increase its structural refonns, to support private-sector-led growth, to improve the delivery ofbasic services, to address the degradation of the natural resource base, and to strengtheninstitutional capacities. The strategy recognizes that the country's extenal position will becomesubstantially stronger and the Bank's efforts wil consequently focus on the quality of new lending,with a volume of resource transfers which takes into account the Government's priority ofmanaging significant foreign exchange inflows. Policy reform, insttutional development andimproved implementation will be stressed. The Bank will maintain a sound lending program withemphasis on technical assistance to help the Govemment in the process of decentralization andmodernization of the State. The proposed Technical Assistance responds directly to this strategy byfocusing on the institutional aspects of the energy sector and the implementation of reforms.

i8. The 1994 World Development Report explores ways for developing countries to imnprovethe provision and quality of infrastructure services, including electricity and piped gas. The reportidentifies the basic cause of poor past performance as inadequate institutional incentives forimproving the provision of infrastructure, which has been the case in the Colombian power and gassectors. The report recommends addressing the problem through commercial management,competition and user involvement.

19. The Bank's role regarding the electric power sector was formulated in detail in a 1993Policy Paper2 which provides guiding pr; iples for Bank support of power sector restructuringprograms. The recommendations consist of: (a) transparent regulation requiring countries toseparate their govenunent's role as operator and owner of utilities from its policy formulation role,through independent regulatory bodies; (b) importation of services which the Bank would assist infinancing for improving efficiency; (c) commercialization and corporatization whereby the Bankwill aggressively support power sector strategies designed to reorganize the operation of utilities ascommercial concerns; (d) commitment lendcng focused on countries clearly engaged in improvingsector performance in line with the preceding principles; and (e) encouraging private sectorinvestment. Excepting the importation of services, which does not apply to Colombia -a countrywith a proven record of managerial capability-, the Govermment is proving its commitment toinsatitional reform by directing its efforts towards implementing all of the proposedrecommendations.

20. The Bank has supported the Government in the process of power sector institutionalreform since 1991. The Bank has helped to shape and to define a new vision for the energy sectorby: (a) supporting analyses of the sector's problems and identifying the issues; (b) exploring theoptions for addressing them; (c) fostering constructive debate concerning past conceptual andsystemic deficiencies attnbutable to inadequate institutions; (d) designing a reform program startingwith the power subsector; and (e) by supporting the implementation of this program. As anessental component of institutional reform in the energy sector, the TA project will also focus onthe gas subsector where the development of a natural gas industry wili complement power policy bylowering electricity generation costs and substituting end-use electricity consumption, therebyfostering a rational pattem of energy use consistent with Colombia!s resources. The Bank'sinvolvement at an early stage seeks to ensure an effective development of the natural gas subsectorand to avoid problems which affected the power subsector in the past.

21. in regard to environmental and energy demand management issues the project will aim atproviding the energy sector with a head start in developing regulations and incorporating them intoits expansion strategy, thereby supporting other institutions, such as the Ministry of theEnvironment, with viable guidelines to enable sector development whilst simultaneously respectingenvironmental constraints.

22. Project Objectives. The proposed TA projeci provides a direct application of the countryassistance strategy by preserving the momentum gained over the immediate past regardinginstitutional reform by passing from the study and design stages to the more resource-intensivephase of recommended actions. The objectives of the project are: (a) to implement regulatoryreforms by strengthening the newly created entities in charge of regulation and energy policyfomulation and implementation for the power and gas sub-sectors in order to help them buildexperience and thereby increase their chances of performing efficiently; (b) to implement strategiesspecifically designed for the energy sector, respecting environmental concerns and constraints andattracting private investment in the sector; and (c) to develop a demand-side management strategyand assist in its implementation.

2 World Bard's Role in the Electdc Power Sector, The World Bank, 1993

23. Objectives specific to the power sub-sector are to achieve the divestment of state-ownedassets or enterprises, to attract new private investments for system expansion, and to execute theinstiutional reforms required for putting in place a fiUy competitive market at the generation level.Objectives specific to the gas sub-sectors are to assist in developing the industry's structure andregulations for building up a gas market, and to assist in seting up the required organizations. Theenviromnental care objecive is to develop a consistent set of environmental guidelines for energysector development. Demand-side management objectives are to develop standards and guidelinesfor efficient energy use and to disseminate them among consumers and industries.

24. In the regulatory and policy making areas, the project will seek to implement regulatoryreforms by strengthening the recently created regulation and energy policy orgapizations in order tohelp them build up experience, thereby increasing thei chances of performing efficiently.Objectives specific to the electricity sector are to achieve the divestment of state-owned assets andenterprises, to attract new private sector investment for system expansion and to continue theinstitutional reforms required for putting in place a competitive market at the generation level.Objectives specific to the gas sector are to assist in developing the industry's structure andregulations for building up a gas market and to assist in setting up the required organizations. Theenvironmental care objective is to develop a consistent set of environmental guideEnes for energysector development. Demand side management objectives are to develop standards and guidelinesfor efficient energy use and to disseminate them among consumers and industry.

25. PIroject Desription. According to the project objectives, the proposed TechnicalAssistance has been broken down into the following components (refer to Amex 4 for details):

(a) Overall Regulation, rding and Energy Poicy: assistance to the EnergyRegulatory Commission and to the Energy Policy Unit for developing a compeiveindustry, disseminating information regarding utiiities' performance, protectinguses, pncing services efficiently, controlling and focusing the allocation of subsidiesto the poor, and structuring energy strategies, taking into account enviromnental andsocioeconomic constraints;

(b) Specific Power Sector Assistance: hiring of engineering and investment banlingassistance and privtizaon exports to help mobilze private capital (both domesticand foreign) for new power generation and distribution projects, divestnent ofexsting public-sector controlled power plants, corporatization and privatization ofutilities, and creation of the new grid company (ISA-Transmission) to facilitatecompetition between electricity generators;

(c) Specific Gas Sector Assistance: assistance in developing a new industry structureand regulations for the natural gas market incorporating private sector participationand competition; assistance to the Govenmment in attracing private companies tothe sector;

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(d) Environment: assistance in executing sectoral environmental assessments togetherwith project environmental assessments, formulating energy sector enviromnentalregulations and guidelines, and promoting user awareness and participation in thedefinition of energy sector projects;

(e) Energy Demand Management and Safety Enhancement: development of ademand side management strategy for efficient energy use; assistance in devisingmechanisms for disseminating information to help users in making fuel andequipment choices.

26. Specific outcome/unplementation indicators linked to each of the major project objectivesare as follows (refer to Annex 4 for milestones and timetable):

(a) The consolidation of a competent team of experts within the Energy RegulatoryConnission who will produce regulations for use of the transmission system, rule onregulated prices and conduct a first comprehensive regulatory review of a poweruility before the end of the project;

(b) Development and publication of a comprehensive energy strategy;

(c) The sale of assets or shares in 3 power utilities and the awarding of contracts for notless than 400 MW of new generating capacity; the creation and satisfactoryoperation of the new transmission company;

(d) The development of a plan for a new gas industry structure and the creation of thenew company (or companies) involved in the plan;

(e) The publication of an energy sector environmental policy, and the publication of theappropriate legislation and guidelines together with an upgrading of staff skills forenvironmental management and planning; and

(f) The publication of a demand-side management strategy together with a plan forimplementing recommendations and disseminating information to users.

27. The planned outputs of the project are summarized in the action plan in Annex 4.Monitoring of project progress will involve both control of technical assistance output throughprogress reports and review meetings with consultants, and tracking of implementation actions bythe Government. The recipients of technical assistance will be the institutions involved in sectoralreforms, namely the Mnistty of Finance, the Ministy of Mines and Energy through its EnergyPolicy Unit and its Institute of Alternative Energies, ISA, and the Energy Regulatory Commission.This list may be extended to other institutions, such as the Superintendency of Public Services,insofar as energy matters are concerned.

28. Rationale for Bank Involvement. The Bank's active involvement in assisting policyformulation and implementation began in 1991 with the discussion of the 1990 OED report which

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was widely debated in a semina organized by the Colombian authorities in 1991. This seminar wasfollowed by a number of similar events sponsored by the Bank which provided a forum for theparticipants to discuss sector issues, and particularly the politically sensitive questions regardingsectoral structure, the role of Government in the sector, as well as the array of possible solutions.

29. The Bank has supported power sector reforms over the last three years through a phasedapproach: a first phase, sponsored with ESMAP funds, defined the issues, identified the origins ofmany of the problems and the options for institutional reform. The first phase (between March andJuly 1991) ended with a seniinar and a workshop where the Government, backed by sectorauthorities, firmly endorsed the power sector restructuring program. There followed a secondphase (between August and December, 1991), supported by Japanese Grant Facility funds, where anumber of task forces staffed with representatives from the sector, together with considerableconsulting support, drafted an Electricity Law which was approved by Congress, and enacted inJuly 12, 1994. A third, much more resource-intensive phase, was initiated by the end of 1992: itspurpose consists of producing the detailed power sector regulations based on the Government'spolicy and the findings of Phase 2. The consultants hired for the development of phases 2 and 3have been financed by the Bank through the Public Sector Reform Loan.

30. The Bank's participation in institutional reform has now matured into a project withtangible results, such as the creation of the Energy Regulatory Conunission and a firm commitmentto seting up a workable competitive market for electricity generation. Effictive action has alsomaterialized in the area of private sector participation which has been promoted through: (a) theinstailation of 95 MW (Mamonal) of private generation in an industrial complex in Cartagena; (b) a150 MW BOO contract awarded through international competitive bidding (ICB) to Seviliana deElectricidad, a Spanish utility (both of these projects are already in operation); (c) a 880 MW BOOcontract (ICB) in Barranquilla awarded to a consortium led by ABB and urrently being negotiated;(d) the award of a 150 MW ICB project awarded to ENRON (Termovalle); and (e) invitation topre-qualification for a 300 MW BOO thermal plant on the Atlantic Coast (La Loma). Thegeneration capacity of these plants totals 1575 MW, which represents 16% of the total installedcapacity in Colombia. These developments are to be followed shortly by the organization of theopen access network operated by an independent transmission company. These achievementsshould be seen as the consequence of the effort that went into devising the sector's reforms. TheTA project will support the restructuring program which will require greater funds given theincreasing complexity of the tasks which lie ahead.

31. The Technical Assistance project seeks to facilitate and speed up the transition frompublicly-owned sector organizations in power and gas to competitive enterprises with privateparticipation. The introduction of private sector participation will include divestiture of selectedassets and private participation in new investment. The project will respond to the need for gettingnew institutions and the regulatory system to perform adequately; it thereby addresses the policyrecounendations formulated in the OED study. The start-up and leaning processes involved insetting up the new entities can be exceedingly lengthy and prone to error. The TA project isdesigned to hasten the process whilst avoiding potentially costly significant mistakes. In order toensure a successful transfer of knowledge, the project will inevitably have to span a significant

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period of time (estimated to be around 4 to 5 years); otherwise, given the volatility of institutionalmemory, the resources are likely to be lost.

32. Complementing the TA project, an investment project (Power Market Development) isbeing prepared to develop the infrastructure required for the creation of a competitive bulk marketfor electricity sales. In the context of a comprehensive strategy statement expected to be providedby the Government to implement the power sector reform proposals described above, this follow-on project will: (a) strengthen and expand the national load dispatch center and the financialsettlement center, to ensure the smooth functioning of the mechanisms for energy interchange andthe corresponding cash flows; (b) strengthen and expand the interconnected transmission system,removing existing bottlenecks, aimed at increasing the competition for sales of electricity, andfacilitating entry to the market; and (c) train those ISA-TRANSMISSION 3personnel responsiblefor load dispatch and settlement.

33. The Bank's involvement in the development of strategies and advice on consultantselection, supervision and evaluation will provide valuable benefits by ensuring that objectives arebeing achieved and by keeping the process on track through periodical project audits. In order tosustain this process, the Bank can bring to bear its knowledge gained through previous sectorstudies, and its experience with sector reforms (both successful and unsuccessful), includingprivatization in Argentina, Chile, Peru, Bolivia, Pakistan, Jamaica and the Philippines.

34. Lessons from previous Bank Involvement. The Bank has lent more than US$ 2 billionin 31 operations to support the Colombian energy sector, mainly by financing investments in powergeneration and transmission. The 1990 OED review found that the projects generally met theirphysical objectives, and helped develop technical capabilities in the beneficiary agencies, but failedto establish a sustainable institutional and financial framework for the sector.

35. The last tranche of the 1987 Power Sector Adjustment Loan w>, canceled due to theinstitutional pitfills encountered during its execution. The corresponding PCR, confirms OED'sfindings (refer to Annex 1 - Lessons from the Bank Experience in the Power Sector): (a) a complexand cumbersome institutional sttucture with pervasive political and regional pressures that blockmanagement efficiency incentives; (b) poor financial performance in individual utilities and thesector at large; (c) low and distorted electricity tariffs; and (d) a sectoral investment program thatoverly stressed generation at the expense of distribution, and suffered from large time and costoverruns. The TA will support restructuring programs for the power and the gas sectors aimed ataddressing all of the primary institutional causes of these problems and will draw on the experiencegained in similar projects (e.g. Pakistan, Jamaica).

36. Key lessons which have been learned from other Bank TA loans include the need to: (a)limit the scope and size of the technical assistance loan to keep it focused and manageable; (b)ensure consistency and coordination between the legal/regulatory reform and the corporaterestructuring/privatization process; (c) ensure the continuity of the reform program, during andafter the execution of the technical assistance operation; and (d) have well-defined loan

3 A new company, to be cseated from existing assets of ISA, dedicated to power transmission, economic load dispatchand financial seltlement among participants of the national power pool.

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administration and financing arrangements in place up-front. The proposed TA has been designedwith these principles in mind.

37. Costs and Financing. The total cost ofthe project is estimated to be about US$ 12.4million, with a foreign currency element of about 89%/. The amount of the Bank loan, would beUS$ 11 million (Schedule A).

38. Implementation. The project will be managed at two levels: a Coordinating Group willbe in charge of overall orientation, and an Executing Unit will be in charge of projectadministration. The Coordinating Group will be made up of representatives from the NationalPlanning Department, the Mnistry of Mines and Energy, the Mnisay of Finance and, the EnergyRegulatory Commission. A project coordinator will be in charge of the executing unit and will beassisted by consultants hired to do specific tasks as required (Annex 4 presents the ProjectImplementation plan). All reports and recommendations of the consultants engaged to assist in theexecution of the project witl be submitted to the Bank. The Executing Unit will have primaryresponsibility for preparing terms of reference and short lists, and selecting consultants, subject toBank approval. Bank staff will hold a project launch workshop in Colombia short after loan signingin order to review planned startup actions. Inputs required to supervise the project are estimatedto total about 12 staff-weeks per year during the first two years and 10 staff-weeks per yearsubsequently. A midterm review of the project to detemiine the need for adjustments will be heldbefore October 31, 1997, or whenever 50% of the loan has been committed, whichever is earlier.Annex 2 summarizes the Operational Guidelines for loan administration and consultant hiring,contracting and supervision. Draft TOR's for consulting assistance to prepare/implement theproject components are available in the project files.

39. The Government and the Bank agreed to use UNDP to administer the contracts andpayments under a management arrangement satisfactory to the Bank (Annex 3). Its managementfee of US$ 0.4 million will be financed from the proceeds of the loan. UNDP will disburse directlyto consultants and will maitWain supporting documentation on file for review by Bank supervisionmissions.

40. Project Sustainability. By supporting the implementation of institutional reforms whichpromote private sector participation, economic pricing, environmental protection, and efficientenergy uses, the project will help the Govermnent establish conditions for a sustainable operationand development of the energy sector.

41. Environmental Aspects. The Project has no adverse environmental effects. It has beendesigned to introduce environmental considerations and guidelines into energy sector developmentsand will include Sector Environmental Assessments and Project Environmental Assessments.Because of the special attention given to these issues it belongs to Environmental Category B.

42. Poverty Category. Not applicable to this project.

43. Program Objective Category. The Project belongs to the category of Public SectorManagement and Private Sector Development.

44. Procurement. The loan witl finance consulting services, computers and ancillaryequipment, and training. Methods for procurement and disbursement are shown in Schedule B.Procurement of goods to be financed with proceeds from the loan would follow procedures inaccordance with Bank Guidelines for procurement. The contracting of consulting firms for servicestotaling about US$ 9.9 million to caffy out sectoral, institutional and management studies under thevarious components of the project, and of individual consultants for the strengthening of MME andthe operations of the Project Coordinating Unit, would be in accordance with Bank Guidelines forthe use of consultants and use the Bank standard contract form. Prior Bank review or approval ofbudgets, short lists, selection procedures, letters of invitation, proposals, evaluation reports andcontracts under the Bank's Consultant Guidelines shall not apply to contracts estimated to cost lessthan US$ 100,000 equivalent each, in an aggregate not expected to exceed US$ 500,000.However, this exception to prior Bank review shall not apply to: (a) the terms of reference for suchcontracts; (b) single-source selection of consulting firms; (c) assignments of a critical nature, asreasonably determined by the Bank; or (d) amendments of contracts for the employment ofconsulting firms raising the contract value to US$ 100,000 equivalent or above. Procurement ofcomputing equipment and software, and necessary communications and ancillary equipment for theimnplementation of the energy regulation information system, and strengthening of the electricitydispatching center, and the general strengthening of MME units, for an estimated amount of aboutUS$ 0.5 million, would be procured through International Competitive Bidding (ICB) using mainlya 2-step bidding procedure, with standard Bank bidding documents, in packages of not less thanUS$ 100,000 each. An estimated US$ 0.6 milion of the loan proceeds would be used for thereimbursement of training expenses such as tuition fees and travel expenses for courses andseminars in accordance with a plan to be previously approved by the Bank, and for fees ofindividual consultants acceptable to the Bank. The administrative expenses of UNDP, which wouldbe hired as procurement agent under a Management Service Agreement with DNP to expediteproject implementation, would be paid with proceeds from the loan directly to UNDP. Prior reviewof documentation and procurement decisions will be required for all procurement including theproposed UNDP management service agreement.

45. Disbunements. The Planning Department will request disbursements and submit theserequests through the Executing Unit to UNDP for processing. UNDP will disburse paymentsdirectly to consultants. Expenditures for individual contracts of goods or services, for which priorreview by the Bank is not required will be disbursed against Statements of Expenditures (SOEs)certified by the Banco de la Republica of Colombia. Detailed supporting documentation forexpenditures will be kept by UNDP and submitted by the borrower to the Bank. The applicationfor withdrawal submitted by the Borrower to UNDP will be in amounts of about US$ 500,000.UNDP will submit full documentation for all contracts requiring Bank's prior review. Conditions ofdisbursement for training will be that the corresponding expenditures have been included in a plansatisfactory to the Bank, submitted by the Executing Unit. The responsibility of the Executing Unit.Disbursements, representing mainly expenditures under short term technical assistance, will be madeover a five-year period, which is close to the 4-year average disbursement profile for technicalassistance projects in the Latin America and Caribbean Region. Since the implementation of energysector reforms has already started, retroactive fmancing not to exceed US$ I million (i.e., 10% of

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the loan amount) would be applied to finance eligible expenditures made after July 31, 1994. Theclosing date of the proposed Loan would be December 31, 1999.

46. Accounts and Audit. UNDP will maintain separate accounts for receipt of project fundsand payments for all project activities. Accounts and statements of expenditures of the project andofthe Executing Unit, would be audited each year by auditors acceptable to the Bank in accordancewith the Bank's Auditing Guidelines. The audited reports would be submitted to the Bank not laterthan four months after the close of the fiscal year.

47. Actions Agreed. During negotiations, agreement was reached on: (a) a projectimplementation plan, including timetable, presented in Schedule 5 to the loan agreement; (b) thatthe Borrower will furnish to the Bank (i) not later than August in each year, a forecast for thesources uses and funds during the next calendar year, and (ii) 30 days after the end of each calendarsemester, a report on the results of the Project and on the meeting of the targets set in theimplementation program; and (c) that at the time of submitting to the Bank each report to besubmitted pursuant to the provisions of paragraph (b) (ii) above, review jointly with the Bank thetime-table for the Implementation Program, and revise such time-table if so agreed with the Bank

48. Conditions of effectiveness will be (i) the signature of a project administration agreemnent,satisfactory to the Bank, between UNDP and the Government, and (fi) the coordinating group andthe executing unit shall have been established in form and subsistence satisfactory to the Bank.

49. Benefits. The proposed loan would assist the Government in the implementation oflegaVregulatory reforms for the energy sector and the strengthening of associated publicinstitutions, which would improve efficiency and attract private investors to the energy sector.Economic pricing of electricity and gas would eliminate a financial burden to the Government byallowing these sectors to fund their own investment needs, and would reduce energy waste andpollution. Sector efficiency would be further enhanced through increased private participation, andscaling-down of government intervention which would be focused on market regulation.Environmental monitoring and management of energy-related operations would be much improved.

50. Risks. The project poses no significant technical risks and enough momentum seems tohave been developed to carry the power and gas sector reform implementation over, which issupported by the Central Govenmient administration that took power in September, 1994. Themajor risks relating to the implementation of the sector reforms include: (a) insufficient institutionalcapabilities in government to develop and enforce the regulations needed for the successfulimplementation of the new energy sector structures; (b) a political reluctance to authorize tariffadjustments, and the opposition to reform of interested groups such as the unions, the managementof existing utilities, and some local govenmients; and (c) the possibility of a slow response from theprivate sector. These risks will be mitigated substantially through: (a) training (funded by the loan)and in-house technical assistance during the first years of operation of the new Energy RegulatoryCommission; and (b) advice regarding the prudent use of Government guarantees to privateinvestors together with mechanisms designed to prevent unjustified and excessive use of suchguarantees and pre-established rules for phasing them out.

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51. Recommendation. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank, and recommend that the Executive Directors approve it.

Lewis T. PrestonPresident

Attachments

Washington. D.C.November 17, 1994

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SCHIEDULE A

PROJECT COSTS AND FINANCING(US $000)

COSTS

LOCAL FOREIGN TOTAL

1. REGULATION, PRICING, ENERGY S50 4,500 S,050POLICY

Regtlatoiy Commission Assistance 300 3,000 3,30tEnergy Policy Unit 250 1,500 1,750

2. POWER SECTOR ASSISTANCE 260 2500 2760

Gen. and Dist. Divestment 70 1,000 1,070Private Sector Investment in future Plants 60 850 910Grid Operator 130 650 780

3. GAS SECTOR ASSISTANCE SO IS0 200

Organizing Gas Industy Enterprises 50 150 200

4. ENVIRONMENT 140 1,300 1,440

Sectoral Environment Assessment 40 400 440Project Environment Assessment 100 900 1,000

S. ENERGY DEMAND MANAGEMENT 100 750 350

Demand-Side management strategr. 100 750 850promotion of safe and efficient gas use

TOTA BASE COST 1,100 9,200 10,300

Physical Contingencies 60 400 460Price Contingencies 170 1,000 1,170Project Coordination Unit 70 400 470

TOTAL PROJECT COSTS 1,400 11,000 12,400

FINANCING

Borrower 1,400 - 1,400

IBRD Loan - 11,000 11,000

TOTAL FINANCING 1,400 11,000 12,400

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SCHEDULEBI

Allocated costs, US$ 000'sA. PROCUREMENT METHIOO ICB LCB Other NBFd VTOTAL

Consulting Services L/ 9,500 1,000 10,50019,5001 19,5001

Computing, Communications andAncillazy Equipment bl 500 50 550

[5001 [500]

Training Expenses c/ 600 200 80016001 [6001

Consulting Services for the ProjectCoordination Unit a/ 400 1S0 550

14001 [4001UNDP administrative feesTOTAL S00 0 10,500 1,400 12,400

1500 110,5001 [110001

a/ Contactng of Consulting firms and individual consultants in accordance with Bank guidelines.kl Two step International Competitive Biddingc Expenditures acceptable to the Bank to be reimbursed.d/ Non-Bank Financed: contracting under Borrower's procurement procedures.

Note: Figures in parentheses are the respective amounts financed by the Bank Loan.

B DISBURSEMENTAmount of the Percentage of Expenditures to be

Loan Allocated financed with Proceeds from loanCategory US$ 000's

Consulting Services 9,900 100% for expendituresEquipment and Maerials 500 100% for expendituresReimbursement Expenses for TrainingProgram 600 100%/0 for expendituresUNDP Administration FeesTOTAL 11,000

Estimated Disbursements (Bank FY)

1995 199 1997 1991 1999Anmual 1 2.4 3 2.6 2Cumulative 1 3.4 6.4 9 11

Economic Rate of Return: Not applicablePoverty Category: Not applicableEnviromnent Classification: B

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SCHEDULE C

COLOMBIA

ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT

Timetable of Key Processing Events

(a) Time taken to prepare: 18 months

(b) Prepared by: Ministry of Mines and Energy,Department of National Planning, andISA, with Bank assistance

(c) First identificationtpreparation nission: May 1993

(d) Appraisa mission departure: November 1993

(e) Negotiations: November 1994

(f) Planned date of effectiveness: Febnruy 1995

(g) List of relevant PCRs and PARs: Colombia - The Power Sector and theWorld Bank - OED Report No. 8893of June 28, 1990.

Power Sector Development FinanceProject (Loan 2401-CO) - ProjectCompletion Report No. 12116 ofJune 30, 1993.

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SCEDULE D

A. STATEMENT OF BANK LOANS & IDA CREDITS IN COLOMBIA(as of September 30. 1994

Amount (lessLn/Cr Fiscal cancellations) Undis-Number Year Borrower Purpose Bank IDA bursed

118 Loans and one IDA Credit fully disbursed 5,300.57 23.48

2449 1984 EPM Rio Grande Multipurp. 156.80 3.082470 1985 EMC Cucuta Water/Sew 18.50 4.392667 1986 HIMAT Irrigation I 114.00 42.482909 1988 Fondo Vial CajaAgraria 15.00 7.712961 1988 CajaAgraia WS &WasteSector 150.00 59.803010 1988 BCH Ed Sector 100.00 48.033025 1989 Colombia 5th Sm Med Entp 80.00 3.783113 1990 B. de la Rep. Sm-Scale IrTig 50.00 36.783157 1990 Colombia Rural Rds Sector II 55.00 11.203201 1990 Fondo Vial Comm Child Care & Nu. 24.00 10.683250 1991 Colombia Rural Dev Invest 75.00 34.713278(S) 1991 Colombia Public Sector Reform 304.00 1.053321 1991 Colombia Indust Restruct 200.00 141.443336 1991 Coloanbia Munic Devt 60.00 24.093449 1992 Colombia IFI-Restrc.&Divst. 100.00 75.903453 1992 Colombia Third National Roads 266.00 165.663575 1993 Colombia Agricultural Credit 250.00 250.003608 1993 Colombia Export Development 50.00 50.003615 1993 Colombia Municipal Health Serv. 50.00 49.553669 1994 Colombia Public Fin. Mgmt. 30.00 28.953683 1994 Colombia Secondary Eduic. 90.00 90.003692 1994 Colombia Natural Resource Mgmt. 39.00 39.00

2,277.30 1,178.28

TOTAL 7,577.87 23.48Of which repaid 4.222.82 11.47

Total held by Bank & IDA 3,355.05 12.01

Amount sold 50.99Of which repaid 50.99

Total undisbursed 1.178.28

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B. STATEMENT OF IFC INVESTMENTS (as of SeDtember 30, 1994

Loan Equity Total(in Millions of US$)

Total Gross Commitments 429.43 57.10 486.53Less cancellations, teminations, exchange adjustments,repayments, writcoffs, and sales 329.73 39.87 369.60Total Comniitments now held by IFC 99.70 17.22 116.92Total Undisbursed IFC 10.00 1.20 11.20