the w6rld bak...the w6rld bak for om cil use only lte. p. -3841-report and re3coiew4i(tio5 of 7e...

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The W6rld Bak FOR OM CIL USE ONLY lte. P. -3841- REPORT AND RE3COIEw4I(TIO5 OF 7E PRESIr CF IMRiAT1GNAL BANK F(R RECONSTffCUECI AND 1 VELOPM[II TO 7E EKEUrTIVE DIRTORS ON A PROPOSED LOA IN ANR AMN BQUIVALENT TD US$164.5 ION TO EyMPRESA PUBLICAS DE )DELLI WMi IRE GUMANYEE OF F~ lEE IRE REPBLIC OF CMI RID GRIU MUlI1UR}OSE PRDJ:T June 1, 19B4 i Sdument ha a rUe flmm and may be usd by ipeip-aw y* In Se pe(ie o Itir efficd d.ks In cint ma mm lburwhe be dlsdm e_ owm _k isW Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Page 1: The W6rld Bak...The W6rld Bak FOR OM CIL USE ONLY lte. P. -3841-REPORT AND RE3COIEw4I(TIO5 OF 7E PRESIr CF IMRiAT1GNAL BANK F(R RECONSTffCUECI AND 1 VELOPM[II TO 7E EKEUrTIVE DIRTORS

The W6rld Bak

FOR OM CIL USE ONLY

lte. P. -3841-

REPORT AND RE3COIEw4I(TIO5

OF 7E

PRESIr CF

IMRiAT1GNAL BANK F(R RECONSTffCUECI AND 1 VELOPM[II

TO 7E

EKEUrTIVE DIRTORS

ON A

PROPOSED LOA

IN ANR AMN BQUIVALENT TD US$164.5 ION

TO

EyMPRESA PUBLICAS DE )DELLI

WMi IRE GUMANYEE OF

F~ lEE IRE REPBLIC OF CMI

RID GRIU MUlI1UR}OSE PRDJ:T

June 1, 19B4

i Sdument ha a rUe flmm and may be usd by ipeip-aw y* In Se pe(ie oItir efficd d.ks In cint ma mm lburwhe be dlsdm e_ owm _k isW

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Page 2: The W6rld Bak...The W6rld Bak FOR OM CIL USE ONLY lte. P. -3841-REPORT AND RE3COIEw4I(TIO5 OF 7E PRESIr CF IMRiAT1GNAL BANK F(R RECONSTffCUECI AND 1 VELOPM[II TO 7E EKEUrTIVE DIRTORS

CUIMcr EQUIVA ETS

rency Unit Colombian Peso (Col$)COI$ - 100 Centavos (eti)C*1$79.50 (L983 average) US$lCol$l,000 = S$12.58 C1983 average)Co}l$,000,000 OOoI$) US$12,578 (1983 average)

UEI(ES AID ME&SURES

1 ueter (a) 3.281 feet (ft)I square kilometer (km2) 0-386 squae ulle (oi2 )1 cubic ueter (p3) 35.315 cubic feet (ft3)

2642 galons (gal)= 6.290 barrels (bbl)

I kilogrm (kg) - 2.206 poudo (1b)I ton (t; metric; 1,000 g) 1,100 sbort ts (sh.t.)

kilowatt (kI) - 1,000 Watts 110 3 I) I !egaatt (W) 1,000 W (lOs kg - 0 6 W)1 Gigawatt (GW) - 1,000 NW (106 kg l- W)I kilowatt-hmur (kgh) - 1,000 Wat-ours (103 wh)

- 830.3 kilocalories (kcal)1 Gigawatt-hour (Gin) - 1,000,000 kh (106 kWh)

aWSS&RY 0? A3UEVIAINS

BR 8anco de la RepublicaCOVES National Secoomic and Social Policy CouncilDNP - National Plannfrg DepartmentERA3 Empresa de Acueducto y Al rillo de BogotaEUPO - Empresas de Obras SanitarisEP Empresas PubUlcas de NedellinFEM Financiera Electrica NacionalFFDK Fondo Financiero de Desarrollo UrbanoFOM^DE Foudo Nacional de Desarrollo1iXS Water Supply Divislon of the Ministry of HealthISA Interconexion Electrica S.&.JNT - National Tariff BoardU5S -'Water Supply and Sewerage Department of EPN

FISCaL YEAR

January 1 to December 31

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FOR OFFICIAL USE ONLY

COLOB4

RIO GRAIE MUJLTIPURPOSE PROJECT

Loan and Project Summary

Borrower: Empresas Publicas de Nedelln (EPM)

Guarantor: Republic of Colombia

Amount US$164.5 million equivalent, includirg front-end fee.

* Terms: Repayment in 17 years, including 4 years of grace, withinterest at the Ba* 's standard variable rate.

ProjectDescriptiom This multipurpose water supply and hydroelectric project

vould support Colombia's efforts to provide the economic andsocial Infrastructure needed to facilitate growth and enhancewell-being. The project includes construction of facilitiesneeded by 1990 to provide safe and reliable water supply toabout 61,000 households currently without water or poorlyserved, about 10,000 commercial establishments, and 8,700manufacturing and industrial concerns in the Department ofAntioqula. The power component of the project would helpensure availability of electricity needed in the Department,witch is a productive center of major importance toColombia's economy. Moreover, in line with Colombia'sefforts to diminish reliance on non-renewable hydrocarbons,the project would enable reducing costly thermal generationIn the national interconnected svstem. Project workscomprise hydro-facilities on the R'o Grande including anearth-fill dam, tunnels, a 300 RV underground power station,a 22 MW surface power station serving as a pressure reducingfacility, a balancing taik and a steeL condult to feed rawwater to a potable water treatment plant to be constructedunder a second phase of this development. The project alsoincludes the extension of a computerized data processingn-twork, and staff training.

Risks: The main risks are those inherent in major eivil works indifficult terrain, including tunneling at great depth. Thedegree of riak is, however, acceptable because geologicalconditions in the area have been thoroughly studied, otherlarge civil works have been successfully carried out in thevicinity, EPM's staff and consultants have wide experience inthis type of work and, finally, adequate contingencies havebeen provided for. There is also a risk that the localcurrency share of the investment may not be available in atimely manner. However, the agreed financial targets andrelated program of tariff increases would minimize thisrisk. Further, it is conservatively assumed that plannedcofinancing of US$65.5 mlllion would not materialize, with aview to ensuring that the project would be fully financedeven under adverse conditions.

Thsdcmn _o thanWs teddistn-bution and waybe usedby nxipiensnly im theperformnuce|of ti offical duties. Its contents may not otherwie be dcklsd wrihout World Bank authonrzation

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Estimated Cost:Local Foreig Total-U USS million

Dam and reservoir 38.8 24.4 63.2Power stations, transMission 42.4 77.9 120.3water tank and supply conduit 27.4 35.9 53.3Training, data network 0.5 1.4 1.9Engineering and administration 26.4 8.8 35.2

Base cost 1/ 135.5 148.4 273.9Contingencies: Physical 18.0 19.2 37.2

Price 5.2 35.7 40.9Front-end fee 0.4 0.4

Total project cost 158.7 203.7 362.0Interest during construction 6.5 49.2 55.7

Total investment cost 165.2 252.9 418.1

Project Financing Plan:Local Foreign Total-Uzzz-uSS million

IB2D: Contracts - 164.1 164.1: Front end fee - 0.4 0.4

Subtotal IBiD - 164.5 164.5Cofinancing B-Loan 65.5 65.52/Suppliers 22.9 22.9FONADE, Government loans 13.6 - 13.6EPM 151.6 - 151.6

165.2 252.9 418.1

Estimated Disbursements:

Bank FY 85 86 87 88 89 90 91(US$ millions)

Annual 21.0 11.7 34.6 35.4 30.4 20.6 10.8Cumulative 21.0 32.7 67.3 102.7 133.1 153.7 164.5

Rate of Return: About 18% on the combined power and water investment programof EPH, using actual and projected revenues as a proxy forbenefits.

Appraisal Report: Report No. 5018b-CO dated June 1, 1984.

1/ At December 1982 prices, adjusted to April 30, 1984. Does not includetaxes and import duties, from which EPM is largely exempted in relationto the project.

2/ Cofinaucing of approximately US$65.5 million will be sought in 1985.However, given capital market uncertainties, the financial projectionsassume that EPM would need to finance from operations most of theUS$65.5 million shown.

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INTERTTIONAL BA!K FOR RECONSTRUCTION AND DELPME5T

REPGRT AND RECOMMENDTIOtf OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED L(.N TOE?PREESAS PUBLIC4S DE MDELLIN

VITEU THE GUARANTEE OF THE REPUBLIC OF O)LOMBIA POR THERIO GRANDE MULTIPURPOSE PROJECf

1. 1 submt the following report and recmendation on a proposed loanto Enpresas Publicas de Nedellin, with the guarantee of the Republic ofColombia, for the equivalent of US$164.5 million to help finance the RioGrande Multipurpose Project. The loan would have a term of 17 years,including 4 yeaMr oF grace, with interest at the Bank's standard variablerate.

PART I - TE ECONO=5YII

An economic mission visited Colombia in July 1982 and its report(4444-co) was distributed to the Executive Directors in August 1983. Thismission was folloved by a small updating mission which visited the country inFebruary 1984. A.so, a mission to review the external sector andagriculture visited Colombia during April/Nay 1983, and its report (4981-C)was distributed to the Executive Directors in April 1984. This sectionreflects both missions' major findings. Country data sheets are presented inAnnex I.

Background

3. The Colombian economy has become more resilient to external shocksas a result of the structural changes that have occurred over the past thirtyyears. Rapid economic growth has resulted in a substantial structural trans-formation of the country from a predominantly rural and self-contained eco-nomy to a more diversified urban, industrial, services and open economy.Colombia has reached a point where population pressure on laid no longerincreases much, if at all. Public sector investment and output now play agreater role, primarily as a result of increased activity on the part ofdecentralized agencies ant public enterprises. Also, non-coffee exports,particularly exports of manufactured goods, expanded rapidly and the range of

v products sold abroad widened considerably. The growing urban-industrial-services oriented economic activity and a rapid expansion of surplus labor inrural areas attracted by higher wages and better services in the cities hasgiven rise to rapid rural-urban migration. This phenomenon, together withthe increased participation of women in the labor force, has been instru-mental in reducing poverty and improving income distribution over time.Financial and capital markets have evolved pari-passu with the growing needsof the economy, and Colombia has become an active participant in interna-tional capital markets.

I/ This section is an updated version of Part I of the report for the PowerDevelopment Finance Project (No. P-3750-CM, March 8, 1984).

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4. Real GDP per capita rose by about 2.2% on average during the1950-83 period, with each succeeding decade registering greater gains in percapita income. This was the result of lower population growth, which afterhaving remained In the 3.OZ to 3.5: range during the l950s and early 1960s,declined dramatically after 1965 as a consequence of a sharp fall in thefertility rate. Greater economic and educational opportunities for women,rapid rural-urban migration, rising per capita income and increased effec-tiveness of family planning programs contributed to the decline in fertil-ity. Colombia's population i: presently growing at an ann-al rate of 2 .OZ.As a result of the high proportion of women now entering ch ldbearing years,this rate of population growth is likely to cortinme until the early 1990s.

5. The combination of rising per capita income and expanded publicservices has brought about a significant improvement in the welfare of thepoorest, in absolute and relative terms. As a result of increased sanitationcontrol, improved diets and better health care, the crude death rate fell byabout 50Z and life expectancy rose from 48 years in the early 1950s to 63years currently. The child mortality rate declined from 11 per thousand Luthe early 1960s to 3.5 per thousand in the late 1970s. Infant xDrtality fellto 55 per thousand in the late 1970s, from about 124 per thousand in theearly 1950s. School enrollment ratios have increased substantially at allgrade levels since the 1960s and, by the late 1970s, 79% of urban childrenaged 7 to 14 were enrolled in school. The poorest income groups have experi-enced the greatest increases in electricity and water services in recentyears and have benefitted more than the average of the population fromservices of the national health system. In spite of this progress, Colombiarem-ins largely underdeveloped, with a relatively small mDdern sector super-imposed on a broad, traditional and economically poor base. Development hasbeen concentrated in relatively few areas of the country, public services arestill not available to many of the rural and urban populations and unemploy-ment and underemployment are relatively high. The coverage of health careand water supply requires further improvement, and adequate housing is notavailable to a substantial portion of the population. Rapid migration to thelarge and medium-sized cities has created urban development problems, withattendant social difficulties. Moreover, in spite of the steady increase inper capita income over the past 30 years, substantial efforts are stillrequired to improve and extend the benefits of development to the poorestincome groups.

6. In large part, the achievements of the past 30 years were theresults on government efforts to stimulate the productive sectors, providethe required economic and social instrastructure and establish an effectiveinstitutional base in the economy. In the 1950s and early 1960s, developmentpolicy favored import substitution supported by high tariff protection andthe provision of economic infrastructure by the public sector. It was duringthis period that the country's major communication and transportation net-works were developed and the transformation to a semi-industrial economicstructure began in earnest. By the mid-1960s, the prospects for furtherimport substitution were substantially diminished, and the country was con-fronted with great economic uncertainty, arising from the fact that economicactivity and the balance of payments were heavily influenced by developmentsin the world coffee market. In order to ease this constraint, during 1967the authorities adopted an outward-looking development strategy, expandingand diversifying exports and, among the export markets, increasingly tapping

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the Andean Group countries. Export promotion policies, including frequentsmall exchange rate devaluations, export tax rebates amd other export incen-tives were introduced and the aathorities began lowering tariffs somewhat andfreeing capital markets from controls as means of raising efficiency andincreasing the competitiveness of Colombian goods in external markets. Thesemeasares were highly successful in relieving the foreign exchange constraintand stimulating growth and employment. However, by the mid-1970s the economywas once again experiencing difficulties casned primarily by the worldrecession and by excessive Central Bank financing of the Central Government'soverall fiscal deficit.

Recent Economic Developments

7. In late 1974, the Government introduced a wide range of measuresdesigned ro correct the structural and policy veaknesses prevailing in theeconomy at that time. Before these reforms were fully effective, the economywas subjected to strong inflationary pressures arising from a sharp increasein world coffee prices. The increased receipts from coffee exports, togettherwith some official surrender of foreign exchange from illegal exports, causeda turnabout in the balance of payments. Incomes rose rapidly and stimulatedaggregate demand; inflation accelerated- Economic growth also accelerated,and unemployment fell substantially, both in rural and urban areas. Largelyas a consequence of increased coffee tax revenues, the public financesgenerated overall surpluses averaging about 12 of GDP during the 1976-78period and, by the end of 1979, net official international reserves had risento about US$4.1 billion, equivalent to about 12 months imports of goods andnon-factor services.

8. While beneficial in many respects, the foreign exchange boom had asomewhat negative impact on the evolution of the Colombian economy, largelyas a consequence of the need for measures to stabilize the economy. Publicinvestment was curbed, thereby delaying some badly needed additions to econo-mic and 3ocial infrastructure. The rate of currency devaluation was slowed,and the conversion of export receipts into pesos was delayed to moderate thegrowth of domestic demand, with adverse effects on export expansion anddiversification. Also, the Government was compelled to maintain high reserverequirements and expand controls over credit thereby reducing, in real terms,the financing available to the private sector via the official capitalmarket.

9. The stabilization measures were virtually unchanged from early 1977through 1979 and were partially successful in restraining aggregate demandgrowth, but relatively high inflation persisted. In response to the effectsof increasing restraint on aggregate demand and the troublesome financialmarket distortions caused by inflation and the extended period of monetaryrestraint, the authorities began in late 1979 to adjust the stabilizationprogram. The rate of peso devaluation was advanced to increase export incen-tives and reduce borrowing abroad, and in early 1980, credit restraints wererelaxed by lowering reserve requirements. At the same time, interest rateson time deposits captured by commercial banks and development finance compa-nies--and on lending therefrom--were freed from controls. To offset theinflationary effects of these measures, the authorities further liberalizedimport payments and adopted the policy, supported by the emission of newshort-term certificates, of not expanding the subsidized selective credit

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operations of the Central Bank in excess of the resources captured fromprivate savings for this purpose. The authorities also increased the sur-veillance and control of the illegal export trade. The effects of the abovemeasures were not immediately noticeable. Real GDP growth declined to 4% in1980, unemployment started to creep up, and inflationary pressures continued.

10. In 1981 the economic situation took a turn for the worse and theproblems have continued through 1983. Real GDP growth which had deceleratedto 2.5% in 1981 fell to 1.4Z in 1982 and to about 1% in 1983. Agriculturaloutput was hard-hit both in 1982 and 1983 as the production of cotton, oilseeds and other agricultural commodities dropped as a result of lowinternational prices, reduced fertilizer use and adverse weather. Industrialactivity deteriorated on account of depressed aggregate demand, andunutilized capacity continued to increase, particularly in manufacturing.After experiencing a surplus for six years, a deficit emerged in the resourcebalance in 1981 of about US$1.5 billion, which continued at roughly thislevel through 1983. These deficits resulted mainly from a drop in exports byabout 9% annually in re-l terms: major reasons were the slowdown in worlddemand, a major devaluation and the introduuction of import restrictions inVenezuela-a major trading partner-in 1981, and the reduction in Colombia'scoffee export quota in the International Coffee Agreement significantly belowthe 1981 coffee export level. Net foreign exchange reserves declined byabout USS,800 million in 1983 and Colombia's net international reserves wereequivalent to about 6.7 months of imports of goods and non-factor service atyear end. To a significant extent, the fall in foreign exchange reserves wascaused by the difficulties in tapping capital markets which resulted from theexternal debt problems of other countries. Inflation slowed down in 1983 toa 20% average for the year, down from 28% in 1981 and 25% in 1982.

11. Since 1983 the Government has been introducing a series of measuresdesigned to stimulate aggregate demand and to initiate the adjustment processrequired to expand and diversify non-coffee exports, stimulate domesticproduction, and resume economic growth. The rate of peso devaluation isbeing accelerated with a view to regaining the 1975 real exchange rate during1984; the housing construction industry is being provided with incentives tomobilize an increasing amount of resources; and open market operations arebeing discontinued to increase liquidity in the economy. Temporary importrestrictions are being introduced to arrest the falling foreign exchangereserves; these are to be lifted once the real exchange rate achieves itsequilibrium level and exports respond fully to this incentive. Thestabilization measures introduced in 1977 have been gradually dismantled,followed by government legislation, measures and regulations designed toreduce the fiscal deficit and ease distortions and restrictions in thefinancial system. While these measures have been in the right direction,there is need for significant additional efforts, as recognized by theauthorities. In particular, the country continues to be affected by thetight international capital market in 1984, which together with a somewhatslower export growth than expected by the Government, have produced furthecdeclines in foreign exchange reserves. The continuing pressure on theexternal sector has brought to the Government's attention the need forfurther and timely actions to reverse the current trends. Such a policypackage would need to include export promotion, external resource mobill--zation, promotion of foreign investment, fiscal and monetary measures.

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Development Strategy

12. The Government's strategy for accomplishing its developmentobjectives is set forth in the 1983-86 National Development Plan. Thisstrategy emphasizes growth with equity with the purpose of expanding thebenefits of -ievelopment to Colombia's population. This is to be achievedthrough increasing participation of all social and regional groups in theprocess of economic growth. The strategy also places high priority on the

* resumption of gro-wth while maintaining price stability. The strategystrengthens rhe previous emphasis on export promotion as a means ofsupplementing domestic demand and assuring balance of payments stability, andon policy measures designed to increase economic efficiency and raiseinstitutional capacity. It proposes a contimation of the large effort inpublic invesrment, giving high priority to energy, agriculture and industrialprojects and to the provision of transport infrastructure. Economicdecentralizarion, regional autonomy and the uniting of regional growthcenters through improved transport, communication and financial links aredirected towards creating an integrated national market. The developmentplan's strategy also places emphasis on the promotion of both small-scale andcommercial agriculture as a means of diversifying and increasing exports,assuring adequate domestic food supplies, holding down inflation aidcontributing to the Government's nutrition and welfare goals. Industrialpolicy objectives are to provide an environment of certainty, along withadequate credit and infrastructure, so that entrepreneurs are encouraged toInvest and expand output. Because of its benefits in opening foreignmarkets, creating employment and bringing in new technology, private foreigninvestment is to be encouraged. The financial sector is also to bestrengthened. The Gove rnnt's approach to helping the poor takes on a neworientation in the development plan's strategy. Its efforts are focused uponimproving efficiency in the use of resources, broadening coverage of servicesand strengthening the social service institutions. Programs in the housing,health, and education sectors are to be better focused and integrated, andselected low income and disadvantaged grouwps, such as workers in the informalsector, children and unemployed youth, are singled out for specialattention. Combined with a significant expansion in construction oflow-income housing and the extension of the Integrated Rural Development(DRI) program, the new directions given to social programs are expected toraise significantly the welfare of low income groups in Colombia.

13. After many years of being a net petroleum exporter, Colombiabecame a net oil importer in the mid 1970s and, in recent years, 10-15% ofmerchandise imports have been accounted for by petroleum. In the absence ofrapid energy development, energy shortages could become a major constraint ongrowth later in this decade. Resolution of the energy problem depends on thecountry's success in developing its abundant domestic energy resources--hydroelectricity, coal and natural gas-and also upon I'ncreasing petroleumexploration and development. The strategy for doing this will require energypricing policies that balance consumption with energy resource availabili-ties, a least cost program of investments, sufficient domestic and externalfinancing for these investments, strengthened sector institutions, improvedprogram execution capabilitv and rapid carrying out of investments. Althoughplanning and policy making have improved substantially in many energy sectorinstitutions in recent years, further improvements in overall sector planningand coordination are needed. A recently completed National Energy study

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carried out by the Government is providing the basis for seekirg suchimprovements. Additionally, recent oil pricing decisions have gone aconsiderable way towards providing the correct signals for regulatingconsumption and encouraging production. The prices paid to producers(primarily foreign companies) for -incremental and 'new- crude provideadequate production incentives, and the retail prices of petroleum productshave been increased substantially in recent yeara, reflecting, on the whole,international levels.

14. Colombia's agricultural growth performance has slowed down markedlyin recent years. Both demand and supply constraints have been responsiblefor this. To increase output, utilization of additional acreage for cultiva-tion is projected to involve greater investment than in the past, implying S

the increasing need to pursue options of yield improvements. In addition toproductivity gains, additional land could and should be brought under irriga-

tion and/or drainage for more intensive cultivation. Watershed managementand forestry development should also become integral parts of a long-termstrategy for growth and for conserving the natural resources. The generationand delivery of technological innovations should receive priority in thearray of long-term measures. Research and extension institutions are in needof rehabilitation and strengthening. Marketing constraints also need to berelaxed if higher production is to be sustained. Sufficient credit availabi-lity for production and marketing is also essential. Recently the Governmentinitiated a major policy redirection to address these issues and the develop-ment plan assigns a key role to future investments in the sector.

15. Colombia's high transportation costs and inadequate services couldbecome a constraint on economic growth and exports, affecting particularlythe development of the country's vast coal reserves and its agriculture. TheState Railway is in poor condition and the road network needs maintenance andrehabilitation. The authorities have taken steps to improve the country'sinfrastructure and the development plan assigns an important share of futureinvestments to the sector. An important part of this effort is the ongoingRural Roads, Railway Rehabilitation, and Highway Sector Projects.

Investment and its Financing

16. A large increase of public sector investment will be required inthe next several years to carry out the development strategy outlined in thedevelopment plan. Over the 1984-86 period, such investment is expected toincrease by about 5% p.a. in real terms. The energy and transportationsectors are expected to account for the bulk (about half) of this investment;however, real increases in investment are also expected in the sma11- andmedium-scale agriculture, housing, nutrition and health, industry (includingmining), water and sewerage, and education sectors. Overall, public fixedinvestment is projected to average 9Z of GDP during the 1984-86 period, andis expected to total ColSl,312 billion. Private investment will have toincrease also during this period to provide the goods and services requiredby the expanding economy.

17. This increase in investment will demand a major resource mobiliza-tion effort on the part of Colombia's public sector. In particular, the sizeof the overall Central Government deficit will have to be reduced signifi-cantly. The buoyancy of the tax system (excluding coffee tax revenues andreceipts from earnings on foreign exchange holdings), which has declined inrecent years, will have to be increased through new taxes and better tax

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administration; the growth of expenditures will have to be checked; resourceswill have to be used more efficiently; and the charges levied for publicservices will have to be raised substantially in real terms. A package ofmeasures to tackle some of these issues was approved by Congress in 1983,including measures related to broadening the base and increasing the averagerate of the sales tax, increasing other indirect taxes, reducIng theearmarking of revenues, reducing tax evasion, and strengthening taxadministration which are expected to have an effect in 1984. Additionalactions on the expenditure side are expected to follow. Since this effort islikely to coincide with increased private sector demand for investmentresources, the importance of measures to expand domestic savings cannot be

* over-stressed. The recent capital market liberalization should encouragesavings. A significant increase in voluntary private savings is not likely,however, as long as inflation remains high. Consequently, stabilizationremains a sine qua non for the country's future growth and development.

Growth and Balance of Payments Prospects

18. Given the country's strong resource base and sound economic manage-ment, Coloubia's growth prospects for this decade are reasonably good andsignificant advances in economic welfare are anticipated. However, becauseof the decline in coffee prices and the weakening in exports caused by therecession in some of traditional Colombian markets, in addition to the needto increase imports to develop the country's resource potential and restorehigher economic growth, the current account deficit of the balance of pay-ments is projected to average US$1.7 billion per year during 1984-86, equiva-lent to 4% of GDP. Almost half of the deficit is projected to be financed byreducing foreign exchange reserves and by direct foreign investment. By theend of this period, net official international reserves would have fallen toa level of about three months of imports of goods and non-factor se-vices (alevel Which is adequate for Colombia) without prejudice to the country'screditworthiness. This should be sufficient to support an average growth ofreal GDP of 4% during this period. Beyond 1986, the current account deficitshould improve as a result of increasing export proceeds (particularly coal)and a leveling-off of Imports resulting from increased domestic production ofpetroleum. The current account deficit would gradually fall to about 1% ofGDP by 1990. To achieve real GDP growth of about 4% per annum during1984-86, gross fixed investment will have to be maintained at 20% of GDP, andto avoid too large an increase in foreign indebtedness, gross nationalsavings would need to average about 192 of GDP.

19. Gross external capital requirements are projected to total US$6.1- billion in current prices for the 1984-86 period, for an annual average

requirement of about US$2.0 billion. Net foreign investment is expected toaccount for US$0.9 billion during 1984-86. This should provide about 15% ofthe gross external financing required. Of the remaining 85Z (US$5.2 billion)about US$2.5 billion, has been either committed or is expected to be securedfrom multilateral and bilateral sources, while the difference, US$2.7billion, will need to be borrowed abroad from financial markets and supp-liers' credit sources. At the end of 1982, Colombia's public and publiclyguaranteed external debt disbursed and outstanding amounted to US$6.2billion, equivalent to 16% of GDP. The BanklIDk share of this external debtwas 22%. Reflecting the recently increased Colombian borrowing from commer-cial sources, this share is expected to remain at about 201 during 1983-86.

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The public debt service ratio at the end of 1982 was 18% and is expected toclimb to 25% by 1986, peak at about 27Z in 1988 and then decline gradually to24Z in 1990. The World Bank's share in public debt service is expected toremain below 25X during 1983-86. With continued sound economic and financialmanagement, Colombia is expected to maintain its creditworthiness through andbeyond the 1984-90 period.

PART !I - BANK GROUP OPERATIONS IN COLOMBIA

20. The pruposed loan, the 103rd to be made to Colombia, would bring s-he total amount of Bank loans to Colombia to US$3,983.3 million (net ofcancellations). Of this amount the Bank held, as of March 31, 1984 US$2,981.3 million; IDA made one credit of US$19.5 million for highways in1961. Disbursements have been completed on 66 loans and the IDA credit.Before 1979, disbursements averaged US$86 million equivalent per year, buthad increased to to US$250 million per year by 1982, and US$294.5 million in1983, reflecting the higher level of commitments in the late 1970s. Whiledisbursements in Colombia have been slower than those recorded in the LatinAmerican Region for similar projects, concentrated efforts to overcomeproblems to initiate project execution have resulted in a 272 increase indisbursements during FY83 compared to the previous year and in the currentyear disbursements have continued at the higher level. The graduallyimproving performance of social sector institutions in the execution ofBank-financed projects, the gradual containment of inflationary pressu'res andthe effects of the recently-introduced fiscal reforms, which should improvecounterpart funding, and the increased Bank lending for infrastructureprojects, all point to a higher level of disbursements in the future. IFChas made investments and underwriting commitments of US$119.9 million in 29enterprises and as of March 31, 1984, it held US$48.0 million. Annex IIcontains a summary statement of Bank loans, the IDA credit and IFC invest-ments as of March 31, 1984.

21. During the past 17 years, Bank lending to Colombia has become quitediversified. While before 1966, 22 loans out of a total of 25 loans made toColombia were for power and transport projects, since then, from a total of79 loans only 24 have been made to these sectors. In addition, all fourloans for education, 13 of the 15 loans for industry, 15 of the 17 agricultu-ral loans, one loan for nutrition, two loans for urban development, all nineloans for water supply and sewerage and one each for coal exploration, weremade after 1966. The diversification was indeed a desirable aim as it helpedprovide close contact with a broader range of Colombia's developmentproblems. The experience gained has served to identify areas in which theBank's role can ouly be a marginal one and, thus, to enable lending to befocused upon sectors in which the Bank's presence can have a meaningfulimpact.

22. Bank lending to Colombia in FY83 consisted of loans for rural edu-cation and agricultural research totalling US$78.4 million equivalent. Inaddition to the loan presented in this report, the current program includes

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already approved loans for coal exploration, power seector financlng. andearthquake reconstruction. To assist Colombia in the face of adverse economicconditions, efforts have been stepped up to associate the Bank vith directlyproductive projects. Thus, loans are being considered for smal-scaleIndustry, agrieltural diversification and infdustrial credit, and areexpected to be presented to the Exective Directors in the coaming months.Work is also uaJerway on projects for export development, petroleum,electricity distribution, development finance, agricultural extension andmarketing, roads. water supply and sewerage, and Irrigation, for possibleconsideration by the Executive Directors during the next two years.

23. The proposed Bank lending is consistent with the Government's deve-lopment strategy- To help Colombia develop renewable sources of energy, asizeabie part of the proposed lending would be for hydropower. The Bank in-tends to assist in the development of coal nines Which hold potential to helpColombia meet part of its energy requirements and in diversifying exports.Bank financing in the energy sector would also assist in strengtbening majorinstitutions and iu mobilizing external finance, as wost of the projectswould require substantial cofinancin-g Otber future loans would financeagriculture and industry to support the Government in its efforts to raiseoverall productivity, income and employment, and to increase and diversifyexports. Closely related to these objectives would be Bank lending for in-frastructure that would facilitate the increasing inter-regional flow ofgoods and services. Finally, several loans are being prepared in support ofthe Government's efforts to help the lowest 50% of the Colombian population.Proposed lendiig for further rural electrification, rural development,agricultural credit, public health, and irrigation projects are principallydesigned to improve the standard of living of the poor.

24. The operations of external lenders in Colombia are sbown in Ansex}. While IBRD, IDB and bilateral sources provided about 75% of total exter-nal financing to Colonbia in the 1961-72 period, their share had decreasedsince then to some 60Z for the 1975-82 period and is expected to decltne fur-ther to about 30Z of external capital requirem2nts during the eighties. Likethe Bank, IDB has given increased emphasis to projects with a poverty orient-ation and has financed projects in low-cost housing, urban and rural develop-ment, agrarian reform, university education, water supply, rural electrifica-tion and land erosion control. la the future, it is proposed to assistColombia in developing sources of domestic energy and in expanding productivesector activities to help generate increased employment. USAID bas supportedprograms in education, rural development and small farm development, but isphasing out its program in Colombia. The Governments of Canada, the FederalRepublic of Germany and the Netherlands have also provided concessionalfinancing for basic needs and regional integration projects.

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PART :El - THE W&TER SUPPLY AND P-llER SECfO2S

A. Water SUnplV and Sewerage

Service Levels

25. iationwide water and sewerage service levels place Colombia amongthe better served countries in Latin America, although there Is st1ilsubstantial room for Improvements. In large and meiirum-size cities, safewater is generally available on a contlnuous beais, although service tends tobe irregular in some neighborhoods. In mll commin¢ties and rural areas,however, the quality of water Is often unsatisfactory. Moreover, inpractically all comimmities, waste water is discharged untreated, caMUsigsevere pollution in rivers and streams. The overall quality of service isuneven, and many water supply and sewerage systems are in need of repairs orhave become oDsolete.

26. in 1983, about two-thirds of Colombia's estimated population of27.5 millfon Lived in urban comnmrnities2/ and one-third in snall comaunitiesor rural areas. About 60% of the total population had access to public watersupply and about 40Z was connected to a sewerage system. Piped water Qsavailable to 80% and sewerage services to 65Z of urban inhabitants. Of therural population, about 19? had water service and about 1Z seweragecoonnections.

Sector Policies and Finances

27. Government policy for expanding water and sewerage services andimproving their quality is aimed at urban comminity service level targets of90% for water and 80% for sewerage, by 1990, compared with present coverage,as cited above. For rural areas, coverage is to be inereased in the meperiod from about 22% to 40? for water supply and from less than 20% to 35%for sewerage. This would mean reaching an additional 5.5 million people inthe urban areas and an additional two mllion in the rural areas. Most ofthe new beneficiaries would be low-income families, consuming relativelylittle water and paying minimum rates.

28. In line with these objectives, the Government anticipates capitalexpenditure-! in the sector averaging about USS300 million per anuai Cat 1983prices) over the next six years. In comparison, during the seventies, annmalsector investment averaged about US$160 million equivalent at 1983 prices, ofwhich about half was financed by budget appropriations and domestlc credit,30Z by external lenders (primarily the Bank and IDS) and 20% from internalcash generation. A cornerstone of the current investment strategy is theattainment of higher levels of self-financing by the local companies. TheGovernment has also undertaken to ensure a steady flov of complementarybudgetary funds for sector investment to overcome past constraints on thetimely carrying out of projects.

21 2,500 or more inhabitants.

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Sector Institutions

29_ The ministry of Eealth oversees the sector and fornmlates sectorpolcy in coordintion with the National Plannng Deparment (DlNP). Twodecentralized entities, the National Institte for Manicipal Development(INMP&L) and the National Institute of Health (INUS) are responsible fo,central pLannming and financing of sector investment in urban comwanities andrural areas, respectively, and for performing as technical aid financialintersediaries. In 28 principal cities, ihere about 48% of the country'spopulation in concntrated, atonomons municipal utility companies aze incharge of water supply and sewerage. In the smaller cities and towns,sanitation works companies are responsible for construction, maintenance andoperation of water supply and sewerage systems. In many small towns, localadministrations provide water and sewerage services directly. In ruralareas, water aid sanitation facilities are built by departmental offices ofI1,S in coordination with the beneficiary coumunities.

30. Despite the aforementioned relatively superior service levels,INSFOPL and M?&S have not so far succeaded in providing the leadership, andthe technical ard financial assistance, required to ensure adequate standardsof operation, maintenance and financial management withia the sector.Frequent changes in management, shortage of competent and experienced staff,and deficient administrative and operational procedures have hampered theeffectiveness of the two institutions. The large municipal water supplyutilities, particularly those serving Medellin and Bogota, have been the mostsuccessful at keeping pace with their rapidly-growing population's need forsafe and reliable water supply and sewerage services. Many of the smallerutilities, bowever, are handicapped by weak financial and operationalmangem ent, low water rates and anduly large and poorly trained work forces.

B. Power

nergy Resources, Policies ard Institutions

31. Colombia is rich in energy resources, particalarly hydroelectricityand coal. Its known reserves of oil and natural gas are modest by interna-tional standards, yet significant at the national level- In terms of knownreserves, about 55Z of Colombia's primary energy potential lies in bydro-electricity, 40% in coal and only 5% in oil and natural gas. In contrast,consumption of commercial energy relies primarily upon oil products (50%) andless on natural gas (20%), coal (20Z) and hydroelectricity (10%). Colombia'shydroelectric potential, at about 100 G(, is amongst the largest in theworld. Although the country has made strides in developing this potential,only some 4% has been developed to date. However, plants now under construc-tion will virtually double capacity by 1988. Since the plentiful hydro-reserves can be developed at relatively low cost, they represent an option ofhigh priority as indicated by the Investments in hydro plants foreseen by thenational least-cost Power Investment Program, 1987-96. Bowever, the optilumix of generation sources needs to be determined to take advantage ofprojected increased supply of coal and existing availability of a natural gassurplus. This matter is currently being studied.

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32_ Colombia traditionally enjoyed a positive trade balaneo in energybecause of its relatively rich ener&y endowment and vxdest .oMsumption (atabout one ton of coal equivalent per annum, per capita ener consmption isbelow average for middle-income developing countries). In 1976, the countrybecame a net importer of energy, aid by 1981 oil imports reached almostUS$400 million, mainly because of a 7% annual fall In oil output betwen 1970and 1979. The Government moved in the late 1970s to redress the negativeenergy trade balance by changing relative prices to encourage consumers tomove aay from oil, and providing incentives to producers; and by publicsector ivestments, particularly In hydroelectricity and coal. As a result,the previoas trend has been reversed since 1980, with production inereae inpetroleum, aggregate energy consumption growth lower than GDP, and withpetroleum's share of total primary energy consumption falling, and hydro-electricity, coal and natural gas, increasing.

33. Over the past five years, Colombia has been successful in wobiltz-ing external financing for energy development, through direct foreign invest-ment (in oil and gas first and lately In coad) and external loans to theenergy agencies, including power companie£. owever, current conditions inthe international capital market are making private financing lore difficultto obtain- Local finacing reqxuire.ants are covered by Internally generatedresources and Government contributions, with the incipient local capitalmarket providing only a marginal share of financing. To Increase Internalresource mobilization in 1980 the Government created the National Coal Fundthat receives revenme from a tam on coal production ana finances coal explo-ration (80%) and small and medium-scale coal mining operations (20%). In1982, a power development bank - FEN, the borrower under the recentlyapproved Power Development Finance Project (2401-CO) - was established tomobilize domestic as well as foreign resources for the power sector (para.36).

34. Interconexion Electrica, S.A. (ISA) was created in 1968 as anindependent, national generation and interconnection company, of which theshareholders now include all the largest municipal pover utilities aid theGovernment-owned power companies. 3 ! In addition to plant construction, ISAhas integrated the regional power systems. At the same time, the Governmenthas taken measures to improve the sector's prospects for efficient growth; itestablished the National Tariff Board (JNT) in DNP to approve requests fromthe power companies for tariff changes and rate increases, aid it hasfostered the consolidation of numerous small utilities, particularly in theNorth Atlantic Region. The nluistry of Nines and Energy is charged withformlating national policy for the generation, transmission and distributionof electricity.

Recent Developments

35. During the past three years the power sector has suffered financialproblems caused mainly by lover than expected revenues resulting from tariffadjmstuent delays, slow demand growth, rationing, and higher than expectedlocal cost shares of investments as well as insufficient availability of

31 Empresas Publicas de Iedellin (EPK), Empresa de Energia Electrica deBogota (EEN), Corporation Electrica de la Costa Atlantica (CORELCA),Corporacion Autonoma Regional del Valle del Rio Cauca (CVC), and InstitutoColombiano de Energia Electrica (ICEL).

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financing. Local borrowings needed by the sector have outpaced the domesticbanking system's lending capability. Moreover, Government-related lendingearmarked for the sector was held back and external borrowings was amthorizedonly on a highly selective basis because of the higher prioridty accorded toshort-term economic management of inflation.

36. As a result, dhen the current national administration took officeIn August 1982 the sector's financing deficit for the year was estimated toamount to USS430 mdllion; at the same time, the previously-favorable lendingclimate for Colombia in the international capital market became affected bydevelopments in other Latin American countries and began to deteriorate. In

* the Fali of 1982, the authorities moved quickly to review the sectorfinancing plan and to authorize badly-needed rate increases; by the end of1983 electricity rates had been raised by 44% over the becember 1980 level inexcess of the consumer price index. In addition, the authorities scaled downsharply the National Power Expansion Program in the light of slower demandgrovth and insufficient financing availabilities. The Govermsent has alsotaken other actions to mobilize needed external and local resources to ensurethat high priority electricity projects under construction would be completedas currently scheduled. The Bank assisted in this effort by collaboratingclosely with the authorities to put FEN on an operational footing and byproviding financing for these on-going projects through a US$170 million Bankloan and by supporting a US$200 mdilion cofinancing B-loan package.

C. The Water and Power Market of Medellin and Its Environs

37. Medellin is the capital and principal center of Antioquia, the mostheavily populated department in Colombia. Situated in the Central Mountainrange, Kedellin and its immediate suburbs account for about one-half of thedepartment's estimated 3.5 million people. Colombia's industrializationbegan in MeJellin which for many years was the leading industrial andcommercial center in the country. Though it has been overtaken by thterapidly groving Bogota, it is still the major industrial center for produc-tion of a large range of commodities, including textiles, garments andleather goods, and accounts for about 232 of the country's industrial employ-ment and 19% of its output. Surrounding Medellin is also a r,ch agriculturalarea farmed by notably efficient small owner-operators producing flowers,beans, vegetables and a variety of other food crops. Colombia's major coffeeproducing region is also nearby.

38. The area within about a 35 km radius of Medellin includes a largenumber of towns ranging in population from about 10,000 to over 100,000inhabitants. These towns have been growing rapidly since the pUyslcal growthpotential of Nedellin is approaching its limits beeause of topographicalconstraints. Two major developments are expected to influence greatly thespatial development of the entire southern region of the department.Construction of a new Medellin airport at Rio Negro, in an adjacent valley,is currently underway with the assistance of a 'Rak loan. An industrial andfree trade zone is also planned for construction close to the airport.Together, these developments are expected to result in substantial long-termgrowth of industry, population, housing and services. Another urban complexis also planned north of Medellin adjacent to a town with over 100,000 popu-lation, which may nearly double by 1990. The demand for public services,

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including water, sewage and electricity, can also be expected to grow rapidlyin areas further outside Medellin.

39. At present, Nedellin obtains its water supply from a number ofsources, of which the rivers Negro and the Buey each contribute nearly balfof the total. Various small rivers and streams within the urban area arebeing taken out of service because of high levels of contamination andencroaching urbanization. By 1990, the Rio Grande river vill account forabout 40Z of the total water supply in the EPM system. WPM supplies water to861 of urban inhabitants and sewage services to 68Z. Forecasts of futurecoverage indicate that by 1990, both water supply and sewerage will reach90%, and total water customers are expected to increase from 240,000 in 1983to 340,000 in 1990. Consumers comprise households (711), commercialestablishments (12Z), industry (9Z), amd others including government (8Z).During the last three years, residentiaL and commercial consumption increasedslightly faster than the total, while industrial and government consumptiondeclined, the former related to the country's slower economic growth rate.

40. EPM has been doing a remarkable job of realigning its market areawell beyond municipal boundaries in line with the pattern of urban develop-ment in the Aburra valley, and its water and sewerage policy reflects sensi-tivity to social welfare considerations. By 1985, EPM will provide serviceto three additional neighboring municipalities and continue to improve cover-age gradually throughout the project period. The contractual arrangementsbetween EPM and Envigado, Sabaneta and La Estrella would be completed byMarch 15, 1985 (Section 3.08 of draft Loan Agreement). In line with theobjective to improve service in the Department, UPM would also absorb some ofthe areas now served by the weaker Acuantioquia and outlying municipalities,which is to be financed entirely by EPM. In 1983, EPM provided water supplyto over 46,000 poor households consisting typically of 5 or more persons andtotal family income of less than US$320 per month. To accommodate nelyserved areas, which usually are populated by low-income residents, andlow-income households in its current service area, EPM provides a fiwancialassistance program for them. Under this program, EPM finances distributionlines and house connections for water, sewage and electricity, including asubsidy for poorer subscribers. For water and sewage, the maximum repaymentperiod is 120 months at a mlni=um interest of 0.5% monthly.

41. EPM supplies electricity to the city of 1edellin, to 25 of theDepartmental towns and, through bulk sales to the Electrificadora deAntioquia, to 77 small municipalities, thus covering about 86% of the 118municipalities in Antioquia. In line with its efforts to upgrade the qualityof basic services in the Department, EPM has recently reached agreement withthe Electrificadora whereby EPX undertakes the technical, financial, adminis-trative and economic management of the weaker utility, in which EPM owns10.41 of the shares. It is expected that EPH wil gradually extend itstransmission facilities in the Electrificadora's service area. In 1983, EPMserved directly 345,000 customers, plus a further estimated 145,000 usersthrough sales to the Electrificadora, with sales reaching a total of 4,200GWh. Households (401), industrial (241), commercial (81) and block sales(201) are EPM's major customers. Reflecting the growth of industrial,commercial and agricultural activity, EPH's sales through end-1983 have been

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increasing rapidly at an annual average rate of 7Z since 1975 and 6.2Z since1979- EPM's sales are expected to continue growing during the period 1984-90(about 7.4% on average per annum). 5ross per capita consumption in EPK'ssupply area in 1983 was on the order of 1,200 kWh, probably the highest inthe country. To serve the expanding market and improve the coverage andquality of services In rural areas, EPM will undertake substantialinvestments in new facilities, both directly and through participation inISA.

42. EPM's expansion program (1984-91) includes the Guadalupe IV andPlayas Projects for which Bank loans were approved in 1980 and 1981. Theseprojects are well underway and are proceeding satisfactorily. Together withISA and its other partners, EPM will also participate in least cost operationof the national electricity network and in preparation for this is construc-ting a regional load dispatch plant and is contributing to the national loadcontrol study. The aforementioned generation projects as well as theproposed one, will enable EP! to continue to meet power demand in itsexisting service area, provide electricity to consumers currently without itor inadequately served by local utilities, and to provide part of the energyand capacity needed to meet the requirements of the interconnected system,including substitution of hydrobased electricitv for more costly thermalgeneration in the North Atlantic Region.

D. Bank Participation in the Water and Power Sectors

Water

43. With more than US$250 million committed in loan funds for watersupply and sanitation projects since 1968, or about 7% of total Bank lendingover this period to Colombia, the Bank has been the main source of externalfunds for sector investments. In the past, the Bank used a three-prongedapproach to provide funds to the sector. Financing for large urban centerswas provided through loans directly to the municipal companies (e.g. Bogota,Cali). By far the largest borrower has been Empresa de Acueducto yAlcantarillado de Bogota to which the Bank has lent US$132 million in threeseparate operations; a fourth project is being prepared. The Bank's projectsin medium-site cities were financed using INSFOPAL as an intermediary.INSFOPAL has also been the channel used to execute water supply components ofurban development projects financed by the Bank. Int rural areas, the Bankparticipated in the financing of water supply schemes executed as part ofIntegrated Rural Development Projects and Nutrition Improvement Projects.Bank assistance has covered all but one of the major cities, nearly all ofthe medium-sized urban areas, and rural areas in 14 departments. Ferformanceunder the loans to the Bogota water supply company has been generallysatisfactory and the loans have led to significant improvements in servicelevels and institutional strengthening. However, the Project PerformanceAudit Report for Loan 536-CO (Bogota Water Supply Project) 4 ! noted theimportance of carefully evaluating the growth of demand aid per capitaconsumption, and the negative impact of cost overruns because of inflation.Project Performance Audit Reports have also been issued for two smaller loansmade by the Bank to the manicipal enterprises in Cali (US$18.5 million) an!Palmira (US$2 million) 5 /. While most of the basic objectives of both

4/ SecH 78-260.

5/ SecH 79-632 and SecM 83-714.

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projects were achieved, substantial cost overruns were experienced because ofconstruction delays in an inflationary environment. Financial performancewas unsatisfactory in both cases. The foregoing was taken into account inthe preparation of the proposed project.

44. The Bank has made three loans to INSFOPAL for the expansion ofwater supply and sewerage services in medium and sma l-size cities. On thewhole, Bank involvement under these loans has helped improve water supply andsewerage services although it has not been particularly successful in meetinginstitution-building objectives for INSFOPAL. la terms of meeting suchobjectives, the Bank has been somewhat more successful with the Bogota loansand to some extent Cali, although US$5.8 million of the Second E(CALI loan ofUS$13.8 mlllion was cancelled mainly because of non-compliance with financialcovenants. Faced with the failure of INSFOPAL to become a strong regulatory,technical support and financial assistance institution, the Bank has adoptedan alternative approach. This second-best strategy focuses lending selec-tively upon municipal entities with sufficient financial and operationalcapability to ensure efficient construction and utilization of new facili- (ties. The Cucuta Water Supply and Sewerage Project now being processed(US$18.5 million), as well as the proposed project reflect this approach.

45. EPY's water division is generally efficient and well-managed.Further strengthening would be pursued under the project through technicalassistance and training of water division staff. EPM has already demonstra-ted responsiveness to Bank advice, as evidenced by actions taken regardingproject design, the phasing of implementation, tariffs and other financialmeasures. The proposed loan represents the first Rank assistance to EPM forwater supply. 1DB has financed four water supply projects and is expected tofinance a fifth that would be complementary to the proposed project. Tnearly 1980, the Baxk also made a loan to EP( for part of its telecommunica-tlons expansion and Improvement program.

Power

46. Since 1950, the Bank has made 28 loans to Colombia's power sector,totalling US$1,544 million, or 39? of total Bank lending to Colombia. Pastloans have assisted the expansion of generating capacity, and transmissionand distribution facilities in the systems serving Medellin, Bogota, Cali,Cartagena, Bucaramanga and Manizales, including expansion of electricitydistribution to low income areas. Loans since 1978 would complete the taskof interconnecting the country's regional power systems and add a total of3,253 MW of capacity to the national interconnected system, as well as extendurban, village and rural distribution networks. The most recent loan in thepower sector was the Power Development Finance Project in 1984 to helpfinance 1984-85 sector investments. In addition to coordinating a technicalassistance project to strengthen system planning, the Bank is the executingagency for another UNDP-financed project which would enhance the sector'sconstruction management capability for large hydroelectric facilities.Further, in connecti-n with Bank lending, marginal cost tariff studies havebeen carried out for the major markets by ISk's shareholders. The adoptionof the results of the studies into the various tariff structures is underdiscussion with the Government. Taken together, the above-mentioned projectsreflect the Bank's participation in overall power development in Colombia,from the planning stage through financing and construction of generation andtransmission facilities, to delivery of service to the final consumer.

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47. Previous Bank lending to Colombia's power sector has been foundgenerally successful in several OED reports. For instance, the most recentreport, -Power Interconnection (575-CO) and Chivor Hydroelectric Projects(681-CD)- (Report No. 2720, October 29, 1979), c-mmented upon the Bank's par-ticipation in Colombia's effort to evolve a stro%er and more efficient powersector organization. Through the creation of ISA in conjunction with theseprojects, and the steps taken to overcome financial and institutional diffi-culties, real progress was made tovard more coordinated sector development.Despite implementation delays and increased costs, both projects weresuccessfully implemented. Also, the report entitled 'Bank Operations inColombia, an Evaluationu (Report No. M-18) of Yay 25, 1972, concluded that

U Bank financing was successful in assisting the power companies to develophydroelectric plants at lover unit cost than they otherwise would have beenable to do. In turn, this permitted greater urban coverage as well ascheaper and more reliable electricity supply to industry. The reportcommended Bank efforts in the establishment of JNT and the central inter-connected system, which facilitated further power sector development. Amongother things, the report recommended that in the future the Bank payincreased attention to the companies' financial planning, tariff structures,distribution programs and energy losses. These points have been addressedunder the aforementioned recent loans.

PART IV - THE PROJECT

Background and Objectives

48. The project was prepared by EPM with the assistance of consultants,and was appraised by a Bank mission which visited Colombia in October 1983.Negotiations were held in Washington during the week of May 21, 1984, with aColombian delegation led by Dr. Jorge Serpa, Director of Public Credit of theM-nistry of Finance. A Staff Appraisal Report is being distributedseparately to the Executive Directors.

49. The mnan project objective is to support Colombia's efforts todevelop the economic and social infrastructure needed to facilitate growthand well-being. This aim would be furthered under the water supply componentof the proposed project by construction of the infrastructure needed toprovide, by 1990, safe and reliable water supply to approximately 61,000households currently without water or poorly served, over 10,000 commercialestablishments, and 8,700 manufacturing and industrial concerns in theDepartment of Antioquia. Under the project, EPM will also take overinadequate services in three neighboring municipalities, upgrading andexpanding them. The power component of the project would help ensureavailability of the electricity needed by the same year in the Departmentand, in line with Colombia's efforts to diminish reliance on non-renewablehydrocarbons, would help the country to reduce costly thermal generation inthe national interconnected system. Also supported under the project areenvironmental management and reforestation, data base management and stafftraining.

Project Description

50. The water component of this multipurpose project constitutes thefirst phase of EPM's 1984-90 development program for potable water. This

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first phase consists of construction of the raw water facilities. The secondphase, expected to be financed by IDB, would include construction of a watertreatment plant and the related distribution networks and sewerage expansionwhich vill be carried out by EPH in accordance with a timetable agreed withthe Bank (Section 3.07 of the draft Loan Agreement and Section 2.01 of draftGuarantee Agreement). EPH's 1982-91 power expansion program, consistingmainly of hydro-based generation, transmission and distribution facilities,is designed to provide 9,0no GWh of electricity, of which the Rio Grandefacilities represent about 21Z. The 300 MN Rio Grande hydro station at anincremental cost of about US$600 per installed kW, vill be represents by farthe lowest cost plant in the future national system. The project alsoincludes consulting services, training and computer facilities as detailedbelow. The main characteristics of the project are as follows:

The Tasajera hydro pover plant, which will be constructed onthe Rio Grande River about 28 km northeast of the center ofMedellin, with a 110 million z useful capacity reservoir. Averageannmul generation would be about 1600 GWh. Project works includean earthen dam on the Rio Grande River and an open spillway, intaketower (combined with raw water intake), pressure tunnel with twoshafts, surge tanks, steel penstock in the tunnel, undergroundpower house (with 3 units of 100 MW each), and tailrace tunnel;

The Niquai water and power facilities consisting of an intakeshared with the power intake, a tunnel, surge tanks, steel-linedpenstock, surface power station with an initial capacity of 22.5MW, a subsurface tank, and a steel pressure supply line leading tothe future water treatment plant. Initial average annumalgeneration would be about 105 CWh, increasing subsequently to 156GRh, depending upon the requirements for raw water.

Transmission facilities consisting of one surface substation atTasajera; a 220 kV transmission line of about 13 km betweenTasajera and Barbosa; another surface substation at Niquia; and a44 kV transmission line of about 5 km between Niquia and Bello.

Consulting services comprising a Board of Consultants for generalassistance and technical advice, and consultants for design andconstruction supervision;

Training comprising a program to enhance the operational capabili-ties of EPM's staff in the areas of power, water, administrationand finance. By December 31, 1989, EPM would have carried out atraining program acceptable to the Bank (Section 3.01(b)(i) of thedraft Loan Agreement); and

Data processing network consisting of the second phase (the firstwas financed under Loan 1868-CO - Guadalupe IV) of EPM's computerdata processing network covering power, water and telephonedivisions, including 24 micro computers that will interface withEPM's existing main frame computer. A third phase, includingadditional software aui training, would be completed later on thebasis of experience during the first two phases.

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Cost and Financing

51. Total financing requirements, including interest during construc-tion (US$55.7 million) are estimated at US$418.1 million, of which US$7,2.9million (60%) corresponds to the foreign exchange component. Project costsare based on end-1982 estimates prepared by INTEGRAL (Consultants, Colombia),and, adjusted to end-April 1984; they include physical contingenciesamounting to approximately 13%. Price contingencies, equivalent to about1 2.7% of base costs plus physical contingencies, are based on estimates oflocal inflation, exchange rate adjustments and foreign inflation. Localcosts would be covered by EPM (US$151.6 million) and FOMADE (US$13.6

t milLion). Foreign costs would be financed by commercial banks under aproposed B-loan arrangement (US$65.5 million), suppliers' credits (US$22.9million), and the Bank loan (US$164.5 million). Action on the B-loan wouldbe deferred until 1985 because the expenditure involved will not occur beforethen. However, given uncertain capital market conditions, EPM's financialprojections assume that it will provide most of the funds in question and thecorresponding tariff commitments will be adjusted if the cofinancing loanmaterializes (paras. 59 and 62).

The Borrower, EPM

52. EPM is an autonomous company owned by the Municipality ofMedellin. Established in 1955, it is responsible for providing Medellin andnearby areas with electricity, water, sewerage, and telephone services. Theutility is governed by a seven-member Board of Directors and a GeneralM-anager appointed by the Board. The General Manager is responsible for day-to-day operations and is assisted by five Managers, heading, respectively,the power, water and sewerage, telephones, administration and financedepartments. A secretary-general in charge of legal matters and officerecords reports directly to the General Manager. The organization isadministered separately for each of the three services, which functionfinancially Independently of each other. The Board of Directors is headed bythe Mayor of Medellin who selects the remaining members at large.

53. EPM has benefitted from stable and capable leadership at topmanagement levels. Overall management and staff are well-qualified andcompetent. Average length of employment is about 20 years and pay scales areattractive on the whole. EPM has a good training program for existing andnew staff and recently has constructed a new training center. To enable theentity to reduce reliance on consultants for detailed design, procurement andconstruction supervision, the Guadalupe TV Project (1868-CO) providedfinancing for highly specialized training of EPM's professional staff, andthis training program would continue wlth financing under the proposedproject (para. 50).

54. EPX had 4,418 employees as of October 1983, of which 2,113 pertainto power and 1,256 work directly in the Power Department. Staff productionratios are reasonable, at 2.3 GWh and 160 customers per employee in 1983.These figures compare favorably with those of other electric utilitiesserving similar markets. The number of employees pertaining to EPM's WaterSupply and Sewerage staff (WSS) in August 1982 was 930, plus a pro-rata shareof common services amounting to 341. This is equivalent to 167 employees per1,000 connections, a relatively efficient ratio.

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55. EPM's accounting and internal audit systems are satisfactory.Independent external auditors, satisfactory to the Bank, would continue tocarry out annual audits under the proposed loan (Section 5.02 of the draftLoan Agreement). EPM maintains adequate insurance coverage of its powerassets, and would do so in the future (Section 4.03 of the draft Loan Agree-ment).

Finances

56. A consolidated review of all three departments (power, WSS andtelephones) shows a satisfactory flow of funds through the uroject period.Annual debt service coverage (net of investments in ISA, in the case ofpower) for each department would be at least 1.5 during 1980-1989 (Section5.06 of the draft Loan Agreement). Agreements reached confirnm local arrange-ments which proscribe financial interaction between the divisions, except oncommercial terms and conditions (Section 5.11 of the draft Loan Agreement).EPN's power and WSS departments would not undertake investments exceeding IUof respective revalued fixed assets in operation of the respective departmentunless the investment is currently included in the investment programs, orunless a proposed new investment would be economically viable and adequatefinancing would be available (Section 5.10 of draft Loan Agreement).Further, EP!( would not undertake investments unrelated to the operations ofits three departments (Sections 5.09 and 5.10(b)) of draft Loan Agreement).EPM retains all its profits although, since 1955, each department has beenrequired to pay an anmal tax to the Municipality of Medellin based upongross revenues: Power, 4.425x; Telephones, 3.420Z; Water Supply, l.993Z; andSewerage, 2.4372. Because of its integrated collection system (all servicesare billed in a single invoice) and service interruption policy, receivablesare less than 2-months of billings, which is an exceptional record in LatinAmerica.

57. Water. The recent financial performance of EPM's water supply andsewerage operation has been satisfactory, with operational cash generationbaving almost tripled during 1980-83. Internally generated funds, net ofchanges in working capital, financed about 50Z of capital expenditures (ex-cluding donated works) during the period. Borrowings, mainly from IDB,financed the remaining 50Z. Additional works were donated by urban deve-lopers or beneficiary municipalities. Debt service coverage during the sameperiod was satisfactory in spite of a substantial increase in borrowings.The 1983 financial performance was not as strong as in previous years; never-theless, its 1983 net income was US$7.5 million equivalent (under currentdepreciation procedures 6/), while internal cash generation net of changes inworking capital, financed about 37% of WSS' investments of US$32.5 million

6/ Based on unrevalued fixed assets. A net loss of US$200,000 equivalentwould be reported if depreciation on revalued fixed assets were applied.

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(excluding donated works). About 63X of this program was financed byborrovings. Finally, urban developers and municipalities added about US$5million equivalent worth of new assets for EPM's water and sewerage opera-tions.

58. EPM's 1984-91 WSS investment prograw amounts to about US$457million equivalent in current prices. Ir ircludes on-going projects; the RioGrande investment; interest during construction; regular expansion works,

* pollution control of the Medellin river; donated works; and working capitalrequirements. Internally generated funds would finance about 52% of theproposed investment program. Borrowings including the proposed Bank loan areexpected to finance about 36.5% of this program. Urban developers andbeneficiary municipalities would finance the remaining 11.5Z.

59. The projected cash generation in the financing plan is based on thecompany's planned tariff increases, which would result in progressive chargesconsidered well within consumers' capacity to pay, including low incomehouseholds. EPM would continue to increase its water rates by at least 1.8Zmonthly through end-1988, supplemented by a lump 15% increase in 1985. Theagreed rates of return, based upon EPX's projected tariff program, would risefrom 1.1% on fully revalued assets in 1984 to 6% by 1988 (Sections 5.07 and5.08 of draft Loan Agreement and Section 3.02 of draft Guarantee Agreement).In view of the high satisfactory self-financing ratio together with socialimpact of safe and reliable sound potable water supply, these figures areacceptable. The debt service coverage ratio would range from 3.0 in 1984 to1.9 in 1989, well above the minimum acceptable level of 1.5 (see para. 56).

60. Power. Throughout Its 24-year relationship with the Bank, EPM'sPower Division has maintained a satisfactory financial position, except forthe years 1974-75. The measures taken under recent agreements with the Bank,including annual revaluation of assets, have considerably strengthened EPM'sfinancial structure. Since 1976, its internal cash generation has comple-mented adequately its financing requirements, fluctuating from 23% of itsinvestment needs in 1978, to 67% in 1979, and 30% in 1983, including substan-tial contributions to ISA. This may be attributed in large part to the highdensity of its market and low-cost facilities, given the area's geographicadvantages for hydro generation. The balance of the company's investmentfunds has been obtained through borrowings, generally at reasonable cost; nosubsidized Government funding has ever been required. At the end of 1983,EPN's debt/equity ratio was 31/69, calculated on the basis of revaluedassets, and the debt service coverage ratio (including investments in ISA)was 1.6. The company's cash and working capital have been adequate; thecurrent ratio reached 4.2 in 1980 and was 2.1 in 1983. On average, accountsreceivable have not exceeded the equivalent of 55 days of yearly sales since1979.

61. EPM's 1984-1991 power investment program, including constructionand studies for future projects and investments in ISA, interest duringconstruction, and requirements for working capital, amounts to US$1,245

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million equivalent. The proposed Rio Grande project is the largest singlecomponent of EPM's construction program, representing 18.4% of the total.Investments in ISA account for another 20.6%. The remaining 61% consists ofother generation plants, transission and distribution. EPN's net internalcash generation would finance 63% of total investment requirements through19917/, and the remaining 37% would be covered by loans, with a small por-tion derived from donated works. The proposed loans for the power componentof Rio Grande total US$154.9 million of which US$114.3 million would comefrom the Bank with the balance planned to be covered by: (a) suppliers' cre-dits, US$23 million; (b) commercial banks, US$6.7 million for the 15X down-payment required by suppliers, and US$8.9 million in already-disbursed loanproceeds; and (c) FONADE, US$2.0 million. Nost of the borrowings requiredfor projects under construction, aggregating US$402 million have already beenobtained.

62. The projected cash generation in EPH's financing plan is based uponthe company's planned tariff increases. The plan assumes continuance through1988 of the recently reinstated 2.2% monthly tariff Increase plus a furtherincrease of 10% in October 1985. In addition, montnly increases of 1.8%would continue after 1988. Based on the foregoing, EPN's projected net opera-ting income from power operations would produce minlmum annual rates of re-turn on fully revalued assets ranging from 7% in 1984 to 12% in 1986 and 10%thereafter (Sections 5.07 and 5.08 of the draft Loan Agreement and Section3.02 of the draft Guarantee Agreement). The power division's debt servicecoverage ratio during 1984-89 would range from 1.9 in 1984 to 1.8 in 1989which is considered satisfactory. It is expected that the power division'sdebt/equity ratio would not exceed 41159, except marginally in 1985 and 1986.

Procurement, Implementation and Disbursement

63. All the items to be financed by the proposed loan (other than con-sulting services) would be procured by international competitive bidding(ICB) under Bank guidelines. Colombian manufacturers would receive a marginof preference of 15Z or the applicable import duties, whichever is the lower,for purposes of bid evaluation. The cost estimates assume that local manu-facturers would be able to supply some items required for the project, thecost of which is estimated not to exceed US$3 million equivalent.

64. Disbursements would be made against: (a) 58% of expenditures forcivil works; (b) 100% of foreign expenditures for directly imported equipmentand 91Z of locally-procured equipment and materials; (c) 100% of foreign ex-penditures for foreign consultants, and 50% of total expenditures for localconsultants; and (d) 100% of foreign expenditures for training and relatedequipment and 100% of foreign expenditures for directly imported equipmentand materials for the data processing network. Because the water componentwould be completed by 1988, and the execution of civil works requires strictseasonal planning, EPM has contracted the main civil works in advance and, inagreement with the Bank, has retained the design engineers for project super-vision. Bid documents for the contracted works have been reviewed and foundacceptable by tne Bank. Retroactive financing for the above-mentioned pur-poses, for an amount not exceeding US$13 million, has been included in theloan.

7/ Internal cash generation may be slightly reduced if the situation ofinternational capital markets allows EPM to make greater use of foreigncommercial bank credit over this period.

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65. Loan proceeds would be disbursed into a dollar-denominatedspecial account in Banco de la Republica, to be establshed by EPl( solely forthe purposes of the project. The Bank would make an nitial deposit into thefund of US$8 Million. Isbr s from the special accont would be madefor eligible expenditures under the Loan. Special account flen ofthe dollar equivalent amount of disbursemts from that account vould be madeupon receipt of withdrawal applications from EP. For civil vwocs, theseapplications would be under a certified starement of expenditures. Afterdisbursement from the loan account of a total of US$140 million, the Bankwould begin to recuperate the initial deposit. In addition to the externalauditing of EP( (para. 55) the revolving fund account will be auditedannually by independent auditors acceptable to the Bank (Section 5.02(b) ofthe draft Loan Agreement). The Closing Date of the Loan vould be December31, 1991.

66. EPK has created a separate project unit for Rio Grande. The peaklevel manning of the unit will be 27 professional and 75 other staff. Theunit will be gradually manned in 1984 comnsurately with the start andbuild-up of the -aif civil works. In accordance with the usual practice forconstruction of hydro projects financed by the Bank, an independent Board ofExperts, comprising three consultants would be appointed to meet at leasttwice annually (or as required) to study the execution of the project, theresults of any pertinent reports, surveys or monitoring action.

Environ_ental Aspects

67. Any environmental impact would originate principally in thereservoir, the intake and tailrace faclities, the surface power station andraw water tank, the conduit to the treatment plant and the substation andtransmission lines. The area to be affected, which was largely owned byabsentee landlords, is about 5,700 ha. of which 1,100 ha. pertains to thereservoir. EPM has a comprehensive long-term program for creating recreationfacilities within a new forest area to be developed that would cover vast ofthe 5,700 ha. This would reduce soil erosion and siltation of the reservoiras well as encroachment by settlers. Most of the silt iu the river ispresently caused by numerous small uines operating on the embankment of theriver, and this vould be Uliminated by the forestation program. About 100persons were affected and, except for a few still on land to be acquired,have iined. About 90% of the land needed has been acquired to date. EPHwill have completed land acquisition by December 31, 1936 (Section 3.05 ofthe draft Loan Agreement).

Benefits and Risks

68. This dual purpose project would have a considerable impact on thedepartment of Antioquia. Water supply vill be increased substantially tomeet increased demand in Nedellin and other nearby municipalities aid EPMvill provide water and sewerage services to three additional municipalitieswhich are populated mainly by low-income residents. In all, 87,000 new waterconnections are anticipated by 1990 as a result of the new supply. Addi-tiorna pover would be provided to meet the growing needs of Antioquia, adenergy would also be made available to the interconnected system whichsupplies hydra-energy to the North Atlantic coast to decrease costly therml

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generation. in general, the project wotld enable EPi! to integrate theprovision of basic public serwlces to urban aid rural consumers, as thebenefits of FEP's efficient organization and high quaty of services becomeavailable at reasonable cost to adjoining comities which hitherto havebeen dependent on weaker suppliers of these services.

69. A return on investment vas calculated by relatig the combindcosts (capital and operatlnglmainteoance costs) of EPW"s 1983-90development program for water and power to estimated i--nem -- t-l revences atlevels that would prevail over the period (as a proxy for benefits). On thbsbasis, the return on investment would be 18Z, well above the estimated oppor-tnidty cost of capital in Colombia- The inetal revenues, owever,considerably understate the true economic benefits sice they exclude socialand health benefits.

70. The project is subject to risks norally associated with largecivil works In difficult terrain. The works will be constrcted wstly undergeological conditions simllar to other large hydro projects In the area thathave been or are being carried out successfully. Also, EP£ staff aid ittsconsultants have wide experIence In this type of work. Therefore, theproject is expected to be carried cut as scheduled. There is also a risk-that the return on investment may be less than expected if capital costswould be siificy her thn povded for, or if quantified benefitswould be substantially lower than anticipated because c slower growt ofrevrenues. Even in a worst-case scenario, however, the projects rate ofreturn is expected to remain welU abo e the opportunity cost of capital-i.e., above 1lZ.

PART V: LEGLL I IUMENTS AAD AUTHORITY

71. The draft Loan Agreement between the Bank aid EPh, the draftGuarantee Agreement between the Republic oE Colombia and the Bank and thereport of the Committee provided for in Article III, Section 4(ii1) of theBank's Articles of Agreement are being distributed to the Executive Directorsseparately.

72. Special conditions of the loan are listed in Section III of AnnexIII.

73. 1 am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank.

PART TI: REC0HMEEITIOE

74. 1 recommend that the Executive Directors approve the proposed loan.

A.W. ClaasePresadent

AttachmentsWashington, D.C.June 1, 1984

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Annex IIPage 1 of 4

A. STATEMENT OF BANK LOANS AND IDA CREDITS IN COLOMBIA (as of March 31, 1984)

(US$million)Loan Amount (less Cancellation)Number Year Borrower Purpose Bank IDA Undisbursed

66 fully disbursed loans and one IDA credit 1,406.1 23.5 I/ -

1163 1975 Colombia Agriculture 21.0 4.61352 1977 Colombia Rural Dev. 52.0 5.31357 1977 Banco de la Republica Agricultural Cr. 64.0 1.11450 1977 Empresa Nacional de

Telecomunnicaciones Communications 58.3 25.51471 1977 Colombia Highways 90.0 7.31487 1978 Colombia Nutrition 25.0 8.11558 1978 Colombia Urban Develop-

ment 24.8 11.21582 1978 Interconexion Electrica, S.A. Power 126.0 20.11583 1978 Colombia Power 50.0 11.21593 1978 Zona Franca Industrial y Industrial

Comercial de Cartagena Export 15.0 4.51624 1979 Colombia Airports 61.0 1.91628 1979 Empresa de Energia Electrica

de Bogota Power 84.0 2.01694 1979 Colombia Urban Develop-

ment 13.5 10.11697 1979 Empresa de Acueducto y

Alcantarillado de Bogota Water Supply 27.9 3.81725 1979 Interconexion Electrica, S.A. Power 72.0 35.71726 1979 Instituto Nacional de Fomento

Municipal Water Supply 31.0 23.61737 1979 Instituto Colombiano de la

Reform Agraria Agriculture Cr. 20.0 12.7

1/ Includes exchange adjustment of US$4.0 million.

The status of the projects listed in Part A is described in a separate report on allBank/IDA financed projects in execution, which is updated twice yearly and circulatedto the Executive Directors on April 30 and October 31.

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Annex IIPage 2 of 4

A. STATEMENT OF BANK LOANS AND IDA RDITS (as of March 31. 1984)

Number Year Borrower Purpose Bank IDA- Undisbursed

1807 1980 Empresa de Energia Electricade Bogota Power 87.0 49.3

16?5 1980 Eupresas Publicas de Medellin Couzunications 44.0 11.31834 1980 Banco de la Republica Industrial Cr. 32.0 2.21857 1980 Banco de la Republica Industrial Cr. 150.0 85.91868 1980 Empresas Publicas de Nedellin Power 125.0 87.41953 1981 Eupresas Publicas de Nedellin Power 85.0 75.31966 1981 Colombia Rural Roads 33.0 18.21996 1981 Instituto Colombiano de

Hidrologia Irrigation 37.0 25.31999 1981 Corporacion Ele: i--ca -e -a

Costa Atlantica Power 36.0 26.02008 1981 Empresa de Energia Electrica

- de Bogota Power 359.0 294.32069 1981 Iastltuto Nacional de los

Recurscs NaturalesRenovables y del Medio WatershedAmbiente Management 9.0 7.8

2090 1982 -Ferrocarriles Nacionales deColombia Railways 77.0 77.0

2121 1982 Fondo Vial Nacional Hishways 152.3 139.42174 1982 Colombia Rural Develop-

meat 53.0 52.22192 1982 Fonda del Ninisterio de

Educacion Rural Education 15.0 13.32303 1983 Instituto Colombiano Agricultural

Agropecuarlo Research 63.4 62.7

234911 1983 Carbones de Colombia, S.A. CoalExploration 9.5 9.5

23791/ 1984 Colombia Earthquake Re-construction 40.0 40.0

23012/ 1984 Financiera Electrica Nacional Power Develop-ment Fiuance 170.0 170.0

TOTAL 3,818.8 23.5Of which has been repaid 837.5 4.1

Total now outstanding 2,981.3 19.4

Amount sold 51.0 -Of which has been repaid 51.0 -

Total now held by Bank and IDA 2,981.3 19.8

Total undisbursed 1,435.8

1/ Not yet effective.Z/ Not yet signed.

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Annex IIPage Tof 4

B. STATEMENT OF IFC I}VESTMENTS (as of March 31, 1984)

Fiscal Type of Amount in US$ MillionYear Obligor Business Loan Equity Total

1959 Laminas del Caribe, S.A. Fiber-board .50 .501960-1965 Industrias Alizenticias

Noel, S.A. Food products 1.98 .08 2.061961 Envases Colombianos, S.A. Metal cans .70 - .701961-1968 Morfeo-Productos para el

Hogar, S.A. Home furniture .08 .09 .171961 Electromanufacturas, S.A. Electrical equipment .50 - .501962 Corporacion Financiera Development

Colombiana financing - 2.02 2.021962-1963 Corporacion Financiera Development

Nacional financing - 2.04 2.041963-1967 Compania Colombiana de Textiles 1.98 .15 2.131968-1969 Tejidos, S.A.1964-1970 Corporacion Financiera de Development

Caldas financing - .81 .811964-1968 Forjas de Colombia, S.A. Steel forging - 1.27 1.271966 Almacenes Generales de Warehousing 1.00 - 1.00

Deposito Santa Fe, S.A.1966 Industria Ganadera Livestock 1.00 .58 1.58

Colombiana, S.A.1967-70-74 ENKA de Colombia, S.A. Textiles 5.00 2.61 7.611969 Compania de Desarrollo de Tourism - .01 .01

Hoteles y Turismo, Ltda.(HOTURISMO)

1969-1973 Corporacion Pinanciera del DevelopmentNorte financing - .45 .45

1969 Corporacion Pinanc-era del DevelopmentValle financing - .43 .43

1970 Promotora de Hoteles de Tourism .23 .11 .34 ,

Turismo Medellin, S.A.1970-1977 Pro-Hoteles, S.A. Tourism .80 .24 1.041973-1975 Corporacion Colombiana de Housing - .46 .46

Ahorro y Vivienda1974 Cementos Boyaca, S.A. Cement 1.50 - 1.501975 Cementos del Caribe, S.A. Cement 3.60 - 3.601976 Las Brisas Mining 6.00 - 6.001977 Promotora de la Interconexion

de los Gasoductos de laCosta Atlantica S.A. Utilities 13.00 2.00 15.00

1977 Compania Colombiana de Clinker, Cement andS.A. Construction

Material 0.97 1.76 2.73

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Annex IIPage 4 of 4

B. STATEMENT OF IFC INVESTMENTS (as of Narch 31, 1984) (Continued)

Fiscal Type of Asouut in US$ MillionYear Obligor Business Loan Equity Total

1981 Leasing Bolivar Leasing 9.00 .17 9.171981-1982 Petroleos Coloubianos Ltd. Chemicals and

Petrochemicals 12.15 3.86 16.011983 Frigorificos Colombianos, S.A. Food Processing 1.00 0.54 1.541984 Cementos Riocelaro S.A. Cement and

ConstructionMaterial 21.91 5.00 26.91

1984 Carbones del Caribe S.A. Mining 10.65 1.64 12.29

Total Gross Comitments 93.55 26.32 119.87Less cancellations, termina-

tions, repayments and sales 62.28 9.60 71.88

Total commitments mw held by IFC 31.27 16.72 47.99

Total undisbursed (including 33.56 7.06 40.62participants)

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Annex IIIPage 1 of 2

COLOMBIA

RIO GRANDE MULTIPURPOSE PROJECT

SUPPLEMENTARY PROJECT DATA S T

Section I: Timetable of Key Events

(a) Time taken to prepare project: 30 months

(b) Agency which prepared project: EPH/INTEGRAL

(c) First presentation to Bank: September 1982

(d) First mission to review project: November 1982

(e) Departure of Appraisal Xission: October 1983

(f) Completion of negotiations: May 29, 1984

(g) Planned date of effectiveness: September 1984

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

Assurances have been obtained that:

(a) by March 15, 1985, EPM will have completed contractual arrangementswith the municipalities of Envigado, Sabaneta and La Estrella forEPM's provision of water supply and sewerage services to them (para.40);

(b) EPM will carry out the Second Phase of the Water Development Programin accordance with a timetable agreed with the Bank (para. 50);

(c) except as the Bank shall otherwise agree, annual debt service cover-age for each of EPH's divisions would be not less than 1.5 (para.56);

(d) in line with current EPM procedures, funds generated by the power andWSS divisions will not be transferred to other divisions, unless allrecurrent and capital expenditures have been covered and then only asloans on commercial terms and conditions (para. 56);

Lkt

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Annex IIIPage 2 of 2

(e) without prior concurrence of the Bank, EPH will not make any capitalexpeniditures not directly related to the operations of any of itsdepartments (para.56);

(f) EPM would achieve a rate of return for its WSS division on fullyrevalued assets of not less than 1.1% in 1984, 2.5% in 1985, 3.5% in1986, 5.5% in 1987, 6.0% in 1988, and 5% in 1989 and thereafter(para. 59); and

(g) EPI would achieve a rate of return for its power division on fullyrevalued assets of 7% in 1984, 10% in 1985, 12% in 1986, and 10% in1987 and thereafter (para. 62)

Section IV: Amendments to Prior Agreements

Based upon updated estimates of the requirements of EPH's powerinvestment program, the annual rates of return on annually revalued powerassets in service have been adjusted froui 14% in 1984, and 12% in 1985 andthereafter, to 7% in 1984, 10% in 1985, 12Z in 1986, and 10% in 1987 andthereafter. On this basis, EPM would self-finance 62% of total powerInvestment requirements during 1984-91.

f~~~~~~~

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