Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-3750-CO

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$170 MILLION

TO

FINANCIERA ELECTRICA NACIONAL

WITH THE GUARANTEE OF

THE REPUBLIC OF COLOMBIA

FOR A

POWER DEVELOPMENT FINANCE PROJECT

March 8, 1984

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

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CURRENCY EQUIVALENTS

Currency Unit = Peso - Col$

Average Calendar 1983 Exchange Rate Effective Feb. 29, 1984

US$1 = Col$78.861 US$1 = Col$92.53Col$1 = US$ 0.0127 Col$1 = US$0.01081

WEIGHTS AND MEASURES

1 ton (t; metric; 1,000 kg) = 1.100 short tons (sh. tons)1 kilowatt-hour (kWh) = 1,000 watt hours. megawatt (MW) = 1,000 kilowatts (103 kW = 106 W)1 gigawatt (GW) = 1,000 MW (103 kW = 106 kW)1 gigawatt-hour (GWh) = 1,000,000 kWh (106 W)paid quarterly in advance = p.q.a,.

GLOSSARY OF ABBREVIATIONS

BR = Banco de la Republica (Central Bank)CARBOCOL = Carbones de ColombiaCEV = Electricity CertificatesCHEC = Central Hidroelectrica de Caldas LimitadaCHIDRAL = Central Hidroelectrica del Rio Anchicaya LimitadaCONPES = National Economic and Social Policy CouncilCORELCA = Corporacion Electrica de la Costa AtlanticaCVC Corpor-acion Autonoma Regional del Valle del Rio CaucaDNP = National Planning DepartmentECOPETROL = Empresa Colombiana de PetroleosEEEB = Empresa de Energia Electrica de BogotajEMCALI = Empresas Municipales de CaliENE = National Energy StudyEPM Empresas Publicas de MedellinFEN = Financiera Electrica Nacional (National Electricity

Deve:Lopment Bank)FRG = Federal Republic of GermanyGDP = Gross I)omestic ProductICEL = Instituto Colombiano de Energia Electrica]:DB = Inter-lmerican Development BankISA = Interconexion Electrica S.A.JNT = National Tariff BoardOAS = Organization of American StatesOED = Operations and Evaluation Department (IBRD)UNDP = United Nations Development Programme

FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLY

COLOMBIA

POWE:R DEVELOPMENT FINANCE PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Financiera Electrica Nacional (FEN)

Guarantor: Republic of Colombia

Amount: US$170 million equjivalent (including front-end fee)

Terms: Repayment in seventeen years, including four years of grace, atthe standard variable interest rate and other charges. Accord-ing to a fixed amortization schedule based on the expectedaggregate of the amortization schedules of the individual sub-loans to be made.

Project The project aims at assisting Colombia during 1984-85 to main-Objectives taim the construction rhythm of ongoing electricity developmentand projects, which will supply the electric energy needed to facil-Description: itate growth of industrial and commercial activities, as well as

help supply electricity to a larger segment of the country'spopulation, only 54% of which now have access to it. The parti-cipation of the international capital market, which had dimi-nished sharply from past years, has been enlisted in this.1 /The proposed project also seeks to support the development ofFEN, the recently-established financial arm of the power sector,created to tap domestic and external capital markets on itsbehalf. Support is provided under the project to assist FEN inits role of strengthening power sector financial management.The proposed project consists of subprojects representing atwo-year time-slice of priority ongoing electricity developmentinvestments, several of which are already partly financed withBank loans. Criteria and procedures for subproject selectionhave been agreed with FEN. Based upon these criteria, a groupof subprojects has been selected on a preliminary basis, withfinal selection and sub-loan amounts to be based upon detailedproposals in each case. Subprojects will consist of a portionof the civil works, goods and services associated with theinvestments, including interest during construction on existingBank loans where justified, and the proposed subloans to be madeby FEN to the utilities would finance foreign exchange costs not

1/ Approval of the Board of Executive Directors of the negotiated terms andconditions of proposed US$30 million Bank participation in the US$200million B-loans is to be sought on the basis of President's Memorandadistributed separately.

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

- ii -

covered from other sources. Procurement under the proposed Bankloan, as well as the Bank's share of the cofinancing loans,would be under international competitive bidding in line withBank guidelines. The project would be implemented over a 2-yearperiod, beginning in the second quarter of 1984.

Estimated Costs:

Investments in Progress of ISA, EEEB, EPM and CVC 2/3/

(US$ million)

Local Foreign Total

l. Civil works, goods and services 704.0 694.0 1,398.02. Interest during construction - 204.0 204.0

Total 704.0 898.0 1,602.0

Financing Plan:

Local Foreign Total

1. Existing external financing - 528.0 528.02. A-Loan - 170.0 170.03. B-Loans - 200.0 200.04. Other external loans 25.0 - 25.05. Internal cash generation 466.0 - 466.06. Local currency FEN loans 170.0 - 170.07. Other 43.0 - 43.0

Total 704.0 898.0 1,602.0

2/ Estimates do not include two rural-based utilities whose eligibility toparticipate in the project is contingent upon their meeting certainconditions, including the preparation of viable financing plans.

3/ Investments by one utility in construction projects of another utilityare not included nor are permanent working capital increases. Inclusionof these items, which are being financed by internal sources, would bringaggregate investment requirements to US$2,049 million.

Estimated Disbursements:

CY: 1984 1985 1985 Cumulative

100.0 70.0 170.0

Rate of Return: Projects which are prospective candidates for Bank

financing have higher estimated internal rates of returnthan when originally appraised by the Bank. For all

hydroelectric facilities included under the project,

representing about 80% of project cost, the average cost

per installed kW is estimated at a low US$700. Sub-transmission and distribution facilities would representthe least--cost means of bringing electricity to the

final consumer.

Risks: There is a risk that the local currency share of invest-

ments may not be available in a timely manner. However,

the expected internal cash generation of the four majorutilities and the measures already taken by theColombian authorities to mobilize domestic savings, as

well as future actions that have been agreed shouldenable project financing to materialize as scheduled.

There is another risk, which is attendant upon FEN's

ability to fulfill its role as a development bankinginstitut-ion. However, the establishment of sound lend-ing and operating criteria, the support provided under

the project for the entity's monitoring and advisoryrole and the broad-based composition of its Credit

Committee are considered adequate to minimize this risk.

Staff AppraisalReport: Report No. 4771-Co, March 8, 1984.

f O I

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN TO

FINANCIERA ELECTRICA NACIONALFOR A

POWER DEVELOPMENT FINANCE PROJECT

1. I submit the following report and recommendation on a proposed loan

to the Financiera Electrica National (FEN), with the guarantee of theRepublic of Colombia, for the equivalent of US$170 million for a power deve-lopment finance project. The loan would have a term of 17 years, includingfour years of grace, and would bear a front-end fee of US$423,940.

PART I - THE ECONOMY

2. An economic mission visited Colombia in July 1982 and its report(4444-CO) was distributed to the Executive Directors in August 1983. Thismission was followed by a small updating mission which visited the country inFebruary 1984. This section reflects both missiont s major findings. Countrydata sheets are presented in Annex 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 land 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 and public enterprises. Also, non-coffee exports,particularly exports of manufactured goods, expanded rapidly and the range ofproducts 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.

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 3.0% to 3.5% range during the 1950s and early 1960s,declined dramatically after 1965 as a consequence of a sharp fall in thefertility rate. Greater economic and educational opportunities for women,

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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 is presently growing at an annual rate of 2.0%.As a result of the high proportion of women now entering childbearing years,this rate of population growth is likely to continue 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 50% and life expectancy rose from 48 years in the early 1950s to 63years currently. The child mortality rate declined from 11 per thousand inthe early 1960s to 3.5 per thousand in the late 1970s. Infant mortality 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 196Qs 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, Colombiaremains largely underdeveloped, with a relatively small modern 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 of 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 substilution supported by high tariff protection andthe provision of economic inf-rastructure 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 conrfronted 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 tappingthe Andean Group countries. Export promotion policies, including frequentsmall exchange rate devaluations, export tax rebates and other export incen-tives were introduced and the authorities began lowering tariffs somewhat andfreeing capital markets from controls as means of raising efficiency andincreasing the competitiveness of Colombian goods in external markets. Thesemeasures were highly successful in relieving the foreign exchange constraint

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and stimulating growth and employment. However, by the mid-1970s the economywas once again experiencing difficulties caused 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 to ccrrect the structural and policy weaknesses 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, togetherwith 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 1% 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 social 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 depreciation was advanced to increase exportincentives and reduce borrowing abroad, and in early 1980, credit restraintswere relaxed by lowering reserve requirements. At the same time, interestrates on time deposits captured by commercial banks and development financecompanies--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 creditoperations 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.

- 4 -

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 1.4% in 1982 and to about 1% in 1983. Agriculturalout:put was hard-hit both in 1982 and 1983 as the production of coffee, cottonand oil seeds dropped as a result of low international prices, reduced fer-tilizer use and adverse weather. Industrial activity deteriorated on accountof depressed aggregate demand, and unutilized capacity continued to increase,particularly in manufacturing. After experiencing a surplus for six years, adeficit emerged in the resource balance in 1981 of about US$1.5 billion,which continued at roughly this level through 1983. These deficits resultedmainly from a drop in exports by about 9% annually in real terms: majorreasons were the slowdown in world demand, a major devaluation and the intro-duction of import restrictions in Venezuela--a major trading partner--in1983, and the reduction in Colombia's coffee export quota in the Inter-national Coffee Agreement significantly below the 1981 coffee export level.Net foreign exchange reserves declined by about US$1,800 million in 1983 andColombia's net international reserves were equivalent to about 6.7 months ofimports of goods and non-factor service at year end. To a significantextent, the fall in foreign exchange reserves was caused by the difficultiesin tapping capital markets which resulted from the external debt problems ofother countries. Inflation slowed down in 1983 to a 20% average for theyear, down from 28% in 1981 and 25% in 1982.

11. In 1983 the Government introduced a series of measures designed tostimulate aggregate demand and to initiate the adjustment process required toexpand and diversify non-coffee exports, stimulate domestic production, andresume economic growth. The rate of peso devaluation has been acceleratedwithl a view to regaining the 1975 real exchange rate over the 1983-84 period;the housing construction industry has been provided with incentives tomob;ilize an increasing amount of resources; and open market operations havebeen discontinued to increase liquidity in the economy. Temporary importrestrictions have been 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. The stabili-zation measures introduced in 1977 have been gradually dismantled, followedby government legislation, measures and regulations designed to reduce thefiscal deficit and ease distortions and restricitions in the financialsystem. The effects of the above measures are beginning to be felt in 1984.However, the country continues to be affected by the tight internationalcapital market in 1984, which together with a somewhat slower export growththan expected by the Government, have produced further declines in foreignexchange reserves. The Goverrnment will thus have to intensify its externalresource mobilization and export promotion efforts during 1984 to strengthenrapidly Colombia's external sector.

Development Strategy

12. The Government's strategy for accomplishing its development object-ives is set forth in the 1983-86 National Development Plan. This strategyemphasizes growth with equity with the purpose of expanding the benefits ofdeve;Lopment to Colombia's population. This is to be achieved throughincreasing participation of all social and regional groups in the process ofeconomic growth. The strategy also places high priority on the resumption of

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growth while maintaining price stability. The strategy strengthens the pre-

vious emphasis on export promotion as a means of supplementing domesticdemand and assuring balance of payments stability, and on policy measures

designed to increase economic efficiency and raise institutional capacity.It proposes a continuation of the large effort in public investment, givinghigh priority to energy, agriculture and industrial projects and to the pro-

vision of transport infrastructure. Economic decentralization, regionalautonomy and the uniting of regional growth centers through improved trans-port, communication and financial links are directed towards creating an

integrated national market. The development plan's strategy also placesemphasis on the promotion of both small-scale and commercial agriculture as ameans of diversifying and increasing exports, assuring adequate domestic food

supplies, holding down inflation and contributing to the Government's nutri-tion and welfare goals. Industrial policy objectives are to provide an envi-ronment of certainty, along with adequate credit an(' infrastructure, so that

entrepreneurs are encouraged to invest and expand output. Because of itsbenefits in opening foreign markets, creating employment and bringing in new

technology, private foreign investment is to be encouraged. The financialsector is also to be strengthened. The Government's approach to helping thepoor takes on a new orientation in the development plan's strategy. Itsefforts are focused upon improving efficiency in the use of resources, broad-ening coverage of services and strengthening the social service institu-tions. Programs in the housing, health, and education sectors are to be

better focused and integrated, and selected low income and disadvantagedgroups, such as workers in the informal sector, children and unemployedyouth, are singled out for special attention. Combined with a significantexpansion in construction of low-income housing and the extension of theIntegrated Rural Development program, the new directions given to socialprograms are expected to raise significantly the welfare of low income groupsin Colombia.

13. Colombia became a net oil importer in 1976, and by 1984 petroleumimports are projected to absorb about 14% of merchandise exports. In theabsence of rapid energy development, energy shortages could become a majorconstraint on growth later in this decade. Resolution of the energy problemdepends on the country's success in developing its abundant domestic energy

resources--hydroelectricity, coal and natural gas--and also upon increasingpetroleum exploration and development. The strategy for doing this willrequire energy pricing policies that balance consumption with energy resource

availabilities, a least cost program of investments, sufficient domestic andexternal financing for these investments, strengthened sector institutions,improved program execution capability and rapid carrying out of investments.

Although planning and policy making have improved substantially in manyenergy sector institutions in recent years, further improvements in overallsector planning and coordination are needed. A recently completed National

Energy study carried out by the Government is providing the basis for seekingsuch improvements. Additionally, recent oil pricing decisions have gone aconsiderable way towards providing the correct signals for regulating con-

sumption and encouraging production. The prices paid to producers (primarilyforeign companies) for "incremental" and "new" crude provide adequate produc-tion incentives, and the retail prices of petroleum products have been

increased substantially in recent years, reflecting, on the whole, inter-national levels.

14. Colombia's agricultural growth performance has slowed down rarkedlyir, 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, implyingthie 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 couldbeczome 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'sin;Erastructure 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 small- andmedium-scale agriculture, houasing, nutrition and health, industry (includingmining), water and sewerage, and education sectors. Overall, public fixedinvestment is projected to average 9% of GDP diuring the 1984-86 period, andis expected to total Col$1,312 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. The buoyancy of the taxsystem (excluding coffee tax revenues and receipts from earnings on foreignexchange holdings), which has declined in recent years, will have to beincreased through new taxes and better tax administration; resources willhave to be used more efficiently; and the charges levied for public serviceswill have to be raised substantially in real terms. A package of measures totackle some of these issues were approved by Congress in 1983, includingmeasures related to broadenirg the base and increasing the average rate ofthe sales tax, increasing othler indirect taxes, reducing the earmarking ofrevenues, reducing tax evasion, and strengthening tax administration whichare expected to have an effect in 1984. Since this effort is likely to coinrcide with increased private sector demand for investment resources, the

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importance of measures to expand domestic savings cannot be over-stressed.The recent capital market liberalization should encourage savings. A signi-ficant increase in voluntary private savings is not likely, however, as longas inflation remains high. Consequently, stabilization remains a sine quanon 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, Colombia'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 cotntry'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 norr-factor services (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 19% of GDP.

19. Gross external capital requirements are projected to total US$6.1billion in current prices for the 1984-86 period, for an annual averagerequirement 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 85% (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 Bank/IDA share of this external debtwas 22%. Reflecting the recently increased Colombian borrowing from commer-cial sources, this share is expected to remain at about 20% during 1983-86.The public debt service ratio at the end of 1982 was 18% and is expected toclimb to 25% by 1986, peak at about 27% in 1988 and then decline gradually to24% in 1990. The World Bank's share in public debt service is expected toremain below 25% during 1983-86. With continued sound economic and financialmanagement, Colombia is expected to maintain its creditworthiness through andbeyond the 1984-90 period.

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PART II - BANK GROUP OPERATIONS IN COLOMBIA

20. The proposed loan, the 102nd to be made to Colombia, would bringthe total amount of Bank loans to Colombia to US$3,818.9 million (net of can-cellations). Of this amount the Bank held, as of September 30, 1983US$2,831.8 million; IDA made one credit of US$19.5 million for highways in1961. Disbursements have been completed on 66 loans and the IDA credit.During 1972-77 disbursements averaged US$86 million equivalent per year, thendeclined slightly to US$82 million in 1978 but increased to US$215 million in1980 and US$250 million per year in 1981 and 1982, reflecting the higherlevel of commitments in the late 1970s. While disbursements in Colombia havebeen slower than those recorded in the Latin American Region for similar pro-jects, concentrated efforts to overcome problems to initiate project execu-tion have resulted in a 27% increase in disbursements during FY83 compared tothe previous year and in the current year disbursements have continued at thehigher level. The gradually improving performance of social sector institu-tions in the execution of Bank-financed projects, the gradual containment ofinflationary pressures and the effects of the recently-introduced fiscal re-forms, which should improve counterpart funding, and the increased Bank lend-ing for infrastructure projects, all point to ai higher level of disbursementsin the future. IFC has made investments and utderwriting commitments ofUS$119.8 million in 29 enterprises and, as of September 30, 1983, it heldUS$48.8 million. Annex II contains a summary statement of Bank loans, theIDA credit and IFC investments as of September 30, 1983.

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 of75 loans only 21 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 for coal exploration, were madeafter 1966. The diversification was indeed a desirable aim as it helped pror-vide close contact with a broader range of Colombia's development problems.The experience gained has served to identify areas in which the Bank's rolecan only be a marginal one and, thus, to enable lending to be focused uponsectors in which the Bank's presence can have a meaningful impact.

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 includesalready approved loans for coal exploration and earthquake reconstruction,and loans for agricultural diversification, small scale industry, developmentfinance and multipurpose water and power development. Work is also underwayon projects for water supply and sewerage, electric power, agriculturalextension and marketing, fertilizers, irrigation and teacher training forpossible consideration 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, asizeable part of the proposed lending would be for hydropower. The Bank ir-tends to assist in the development of coal mines 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 strengthening major

institutions and in mobilizing external finance, as most of the projectswould require substantial cofinancing. Other 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 inrfrastructure 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 lending for rural electrification, further rural development, agri-cultural credit, water supply and sewerage, and irrigation projects are prin-cipally designed to improve the standard of living of the poor.

24. The operations of external lenders in Colombia are shown in AnnexV I. While IBRD, IDB and bilateral sources provided about 75% of total exter-

nal financing to Colombia in the 1961-72 period, thei share had decreasedsince then to some 60% for the 1975-82 period and is expected to decline fur-ther to about 30% of external capital requirements 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. In the future, it proposed to assist Colombiain developing sources of domestic energy and in expanding productive sectoractivities to help generate increased employment. USAID has supported prog-rams 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.

PART III:, THE POWER SECTOR

Energy Resources and Policies

25. Colombia is rich in energy resources, particularly hydroelectricityand coal. Its reserves of oil and natural gas are modest by internationalstandards, yet significant at the national level. In terms of known re-serves, about 55% of Colombia's primary energy potential lies in hydroelec-tricity, 40% in coal and only 5% in oil and natural gas. In contrast, con-sumption of commercial energy relies primarily upon oil products (50%) andless on natural gas (20%), coal (22%) and hydroelectricity (8%).

26. Colombia traditionally enjoyed a positive trade balance in energybecause of its relatively rich energy endowment and modest consumption (atabout one ton of coal equivalent per annum, per capita energy consumption isbelow average for middle-income developing countries). In 1976 the countrybecame a net importer of energy, and by 1981 oil imports reached almostUS$400 million, mainly because of a 7% annual fall in oil output between 1970and 1979. The Government moved in the late-1970s to redress the negativeenergy trade balance through: (i) pricing measures to increase the cost ofenergy to consumers, changing relative prices to encourage consumers to moveaway from oil, and providing incentives to producers; and (ii) direct publicsector investments, particularly hydroelectricity and coal. As a result, theprevious trend has been reversed since 1980, with production increases inpetroleum, aggregate energy consuamption growth lower than GDP, and

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petroleum's share of total primary energy consumption falling, and hydroelec-tricity, coal and natural gas increasing.

27. Known oil reserves at the end of 1981 totalled about 700 millionbarrels, or only about 10 years consumption at present rates of utilization.Policies pursued during the 1960s and the early 197Cs contributed to a dete-riorating oil situation. Prices to consumers and producers were kept artifi-cially low, thus promoting consumption and dampening incentives for develop-ment of new reserves through exploration. In recent years the Governmentmoved forcefully to remedy this by bringing internal consumer prices closerto international levels (internal prices were increased by more than three-fold in real terms between 1974 and 1980, and, since the latter year, havefluctuated around 80%-90% of international prices) and by enabling producersto benefit from a large part of the price increases. As a result, explora-tion has increased from 11 wells per year in 1975 to 61 in 1981, with knownreserves expanding by about 10% in 1981, after several years of steady dec-line. Also, crude oil production has been increasing at over 5% per annumsince 1980 to some 80% of domestic consumption at present. Average growth inconsumption has not surpassed 0.5% per annum during the last five years, andself-sufficiency in oil may be within reach during the mid-198 i.

28. Measured natural gas reserves stood at about 4.2 trillion cubicfeet at the end of 1981, or almost 40 years consumption at present rates ofutilization. Most reserves, production and consumption are concentrated onthe northern coast, and total consumption growth averaged about 7% per annumover the last five years. Thermal power plants now account for about half oftotal gas use. Industry represents the bulk of the remainder with oil re-fineries also important consumers. There is significant excess supply in thenorthern region, and further important increases in consumption are tiedlargely to several gas-processing options currently being studied. The bestalternative appears to be an ammonia-urea plant (the Bank is the ExecutingAgency for a UNDP-financed feasibility study). As a consequence of the gassurplus on the northern coast, the Government has not yet defined a clearpricing policy for natural gas. Prices for new deliveries are negotiatedex-posi: with producers, which is a disincentive for exploration. Althoughconsumer prices are relatively low (less than US$2 per thousand cubic feet),the exltent to which they result in misallocation of resources is not clearbecause the viability of future gas-consuming projects remains to be estab-lished

29. Colombia's coal resources are substantial, with reserves estimatedat some 16 billion tons, of which only about 20% can be classified as mea-sured. At planned rates of use, reserves would last hundreds of years. Inview of the magnitude of reserves, Government policy encourages domestic conr-sumption in substitute for natural gas and fuel oil, and promotes coal ex-ports. Since 1979, the UNDP and the Bank have been working jointly with theState coal corporation, CARBOCOL, that together with an EXXON subsidiary hasundertaken a project to produce 15-mtpy from El Cerrejon North. The recent-ly-approved loan for a coal exploration project will assist in assessing theeconomic potential of several other promising areas.

30. Coal production grew at about 7% per annum on average over the1970s to reach a level of about 5 million tons in 1981. Production came from

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about 400 small and medium-scale mines, virtually all of which are norrmecha-nized. More than half of coal production and consumption is concentrated inthe highlands near Bogota. Sixty percent of all coal is consumed by indus-try, and most of the rest by the power sector. Colombian coal is bituminous,with high calorific value and low sulphur content, and some possesses cokingproperties. In 1982, domestic coal prices, which are set by market forces,typically ranged between US$25-35 per ton delivered to large consumers in theindustrial centers of Bogota, Medellin and Cali. This is well below inter-national prices, but high internal transport costs imposed by the long dis-tance to ports and difficult terrain for now all but rule out exports of coalfrom the interior of the country.

31. Colombia's hydroelectric potential, at about 100 GW, is amongst thelargest in the world. Although the country has made strides in developingthis potential, only some 4% has been developed to date (para. 34). How-ever, plants now under construction will virtually double capacity by 1988.Since the plentiful hydro-reserves can be developed at relatively low cost,they represent an option of high priority. However, the optimal mix of gene-ration sources needs to be determined to take advantage of projected inr-creased supply of coal and existing availability of a natural gas surplus.This matter is currently being studied.

Energy Investment and Financial Issues

32. In Colombia, electricity, petroleum and natural gas prices are setby the Government. In spite of positive Government actions in recent years,there is still a need to develop long-term pricing policies that reflect theopportunity cost of the various energy sources and provide, within theGovernment's broader objectives, appropriately balanced incentives for theirdevelopment. It is not clear whether current prices actually provide suchincentives. Towards this end, the Government has undertaken a major effortto improve sector knowledge through a National Energy Study (ENE), the firststage of which was carried out between 1979 and 1982 by the National PlanningDepartment (DNP) with the help of local consultants and technical assistancefrom UNDP and the Federal Republic of Germany (FRG). The report on ENE'sfirst stage is under Government review. This study provides significantinformation needed for energy planning, including preliminary evaluation ofdemand growth and investments that could best serve such growth. A secondstage of the ENE is now about to commence with several specializedstudies.1/ The effort has already elicited foreign technical assistance fromofficial sources. FRG will provide assistance on modeling and data gather-ing, France on industrial energy savings, Italy on rural electrification, andthe Organization of American States (OAS) on energy use in transportation.Several energy sector agencies and the Ministry of Public Works will providecounterpart staff and DNP will coordinate the external assistance. Finally,in support of Government efforts to sharpen its energy investment strategy,the Bank will carry out a study on selective issues through the energyassessment program financed by UNDP.

1/ Among others, studies on natural gas available for ammonia-urea fertili-zer production and the aforementioned coal exploration studies.