Colombia - Second Guatape Hydroelectric Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use FE L E ts C P Y Report No. P-1160 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS PUBLICAS DE MEDELLIN WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE GUATAPE II HYDROELECTRIC PROJECT December 21, 1972 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENT Currency Unit - Colombian Peso (Col$) US$1.00 - Col$22.65 Col$1.00 - Us$0.04415 Col$1,000,000 - US$44.,150 Colombia's Fiscal Year - January 1 to December 31 1/ As at the end of November, 1972  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMEN4DATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESAS PUBLICAS DE MEDELLIN FOR THE GUATAPE la HYDROELECTRIC PROJECT 1. I submit the following report and recommendation on a proposed loan to the Enpresas Pudblicas de Medellin (EPM) with the guarantee of the Republic of Colombia for the equivalent of uS$56 million to help finance the Guatape II hydroelectric project. The loan would have a term of 25 years, including five years of grace, with an interest of 7-1/4 percent per annum. PART I - THE ECONOMY 2. The Bank's latest economic report on Colombia (Economic Position and Prospects of Colombia, R-72-21) was distributed to the Executive Directors on January 14, 1972. Last October/November an economic mission visited Colombia; its report is in preparation and is scheduled for distribution in April 1973. The following paragraphs in this part of the Report and Recommendation take into account the mission's preliminary findings. A draft report entitled the Development of Colombian Agriculture is also being prepared by a recent Bank mission and will be available in early 1973. Agriculture 3. The Colombian economy continues to depend heavily on agriculture, despite the fact that the sectorts relative importance in terms of GDP share has declined steadily from 36 percent in 1950 to 26 percent in 1970. Roughly two-fifth of Colombia's 23 million inhabitants (mid-1972 estimate) reside in villages and towns of 1,500 or fewer inhabitants, and 40-45 percent of the labor force is engaged in agricultural pursuits. In 1971 half a dozen agricultural comnmodities--bananas, coffee, cotton, livestock and meat, sugar and tobacco-- accounted for over three-fourths of Colombia's foreign exchange earnings. Between 1950 and 1970 agriculture grew in real terms by an average of 3.4 per- cent per annum, versus 4l.o percent for total GDP. Output growth declined to an estimated 2.2 percent in 1971 as a result of disastrous rains and flooding in the countryside, but 1972 promises to be an outstanding year. The Bank's draft report on Colombian agriculture indicates a 5.5 percent target rate of growth as feasible for the next 10-12 years, given certain policy improvements. Although such a rate might seem high by historical standards it is only one percentage point above that achieved during the 1965-70 period.  -2- Industry 4. Manufacturing industry accounts for about one-fifth of Colombia's gross domestic product, and has consistently outpaced other sectors in its rate of growth. Between 1950 and 1970 in- dustry expanded by an average of 6.3 percent per year, versus 4.9 percent for total GDP. Output grew by an estimated 8 percent in 1971, and early indications point to at least as much growth in 1972. Most manufacturing value-added arises from the production of non- durable consumer goods; and intermediate products, consumer durables and capital goods add les,s than 15 percent of the total. The domes- tic market as it now stands is not sufficient to allow for economies of scale in the production process for many items, a fact that is increasingly recognized by the industrial community. Many industries are able to produce goods at prices which are competitive in inter- national markets, and there is a growing interest in export sales, as evidenced by Colombia's success in steadily reducing its dependence on coffee exports. Employment 5. One of Colombia's most challenging development goals is to generate jobs for its unemployed and underemployed citizens. The na- tional labor force is expanding by an estimated 3.5 percent per year, one of the highest such rates in the world, and at least 5 million job oppor- tunities will be needed for the existing unemployed and new entrants to the labor market between now and 1985. Most visible unemployment is found in the urban areas, where immigrants from the countryside have had to settle in slums and shanty-towns because of the lack of jobs and adequate housing. The International Labor Office (ILO) and the Bank have calculated that real GDP growth on the order of 7-8 percent per annum would be neces- sary, together with a variety of specific policy measures, to reduce unem- ployment to manageable levels by 1985-90. The Bank economic mission has calculated the domestic savings and foreign borrowing requirements associ- ated with such high growth rates, and has found them to be feasible so long as external resources continue to be available on favorable terms. Development Planning 6. In recognition of the severity of the unemployment problem, the 1971-74 Development Plan spells out a growth strategy addressed to the creation of new jobs in the urban sector. The diagnosis of Colombia's national planning agency is that it is aggregate demand that needs to be stimulated, and in particular demand for urban housing and items of mass popular consumption. The official planners have concluded that only in this way can Colombia develop a broad-based economy characterized by economies of scale and low unit costs of production.  -7. There are in fact four "istrategies" enunciated in the Plan: urban development, increased agricultural productivity, export promotion, and action to achieve a more equitable distribution of personal income. The National Planning Department, however, is concentrating on the urban development strategy. Reflecting frustration over the high rate of un- employment, the planners have focussed on residential construction as the key to a "massive structural shift" in the economy. One concrete measure to implement this aspect of the Plan has been the establishment of a new savings and loan system, with both deposits and loans subject to indexing to provide full monetary correction. The idea is to stimulate a substantial inflow of funds into the system in order to finance a dramatic increase in the pace of urban construction (primarily middle-class housing). 8. One of the assumpuions in the Plan -- the existence of a great deal of unutilized plant and equipmenc in Colombia's manufacturing sector -- is strongly challenged by organized industry groups. Moreover, there is concern in Colombia that the proposed ho6using financing program of the planning agency, if carried out on a large scale, will over-stimulate aggregate demand, thereby creating inflationary pressures that could prove difficult to dampen. The new Plan strategy, which is being actively debated in public and private circles in Colombia, will-be discussad in detail in the Bank's forthcoming economic report. The Outlook 9. The near-term outlook for the Colombian economy at the moment is somewhat mixed. Output growth is strong, and a 7 percent real rate of in- crease in 1972 is quite possible. Coffee prices are high and shipments are moving well. Non-coffee exports are booming, and will approach the value of coffee shipments in 1972. Merchandise export earnings in 1972 should surpass US$800 million, some US$150 million above 1971 receipts, and net inter- national reserves of the Bank of the Republic reached nearly US$275 million (a historical high) at the end of September 1972. On the negative side is an accelerated rate of price inflaticn, with consumer prices likely to rise by 1L-15 percent, on the average, during 1972. Ihis is far above the 9-10 per- cent average increase for the 1967-72 period as a whole. Should this rate of inflation continue for long, Colombia will undoubtedly encounter a number of serious problems. Trade difficulties could arise, particularly if depre- ciation of the exchange rate falls behind domestic price increases. Indica- tions are that the peso will have been depreciated 9 percent vis-a-vis the U.S. dollar in 1972, slightly less than during 1971 despite a much higher rise in prices. Thus the index of real peso depreciation (rate index divided by price index) will fall back to only 2-3 percentage points above the level of early 1967 when the flexible rate policy was introduced. However, since prices in the United States and other trading countries have risen by some 20 percent during the same interval, the pace of devaluation has been fast  - 4 - enough to secure a substantial competitive gain for Colombia. Looking ahead to 1975 and beyond, two faotors cloud the balance of payments picture. First, it is not unrealistic to visualize a cyclical upturn in world coffee supply in response to current high prices, which would force prices downward. Second, it seems inevitable that by 1975 or 1976 Colombia will begin importing crude petroleum on a substantial scale. Domestic requirements for diesel fuel, motor gasoline, and other products are rising far more rapidly than new oil reserves are being discovered in the country. Thus, it is now as inportant as ever for Colombia to maintain the agricultural and industrial export drive to the fullest extent compatible with minimum domestic supply requirements. Sources of External Finance 10. The main sources of external financing for Colombia in the 1963-71 period are shown in Annex I. In the past, IBRD, IDB and AID have provided about four-fifths of total external financing to Colombia. The IDB has assisted projects in low-cost housing, university education, agrarian reform, ports, electric power, water supply, transportation, and industry. AID has shifted the emphasis of its lending in recent years from program to sector loans, particularly for education, urban development, and agriculture. Thanks to the relatively large assistance from official development agencies, Colombia's debt structure is favorable; suppliers' and financial credits account for only one-tenth of the total medium and long-term debt. This has been an important factor in holding down the debt servicing burden despite the large capital inflow. Creditworthiness 11. In Colombia it appears feasible to aim at maintaining a 7 percent real annual growth rate. This would necessitate a continuation of a strong expansion of non-coffee exports, however, and a steady inflow of long-term development capital from abroad. Some of this capital will have to be provided to finance local costs, because in spite of Colombia's efforts to mobilize domestic resources in support of its development program, external assistance in excess of the foreign exchange component of development projects will continue to be required. Colombia's public debt service ratio is low, relative to many other developing countries (13.5 percent in 1971). Public long-term external debt repayable in foreign currency amounts to US$2,018 million at the end of 1971, or US$1,354 million excluding undisbursed commit- ments. Colombia is, therefore, judged creditworthy for substantial amounts of foreign loans.  -5- PART II - BANK GROUP OPERATIONS IN COLOMBIA 12. The proposed loan, which would be the fifty-second made to Colombia, would bring the total amount of Bank loans to that country to US$997.6 million (net of cancellations). Of the foregoing amount, US$761.8 million is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia in 1961. 13. Disbursements have been completed on twenty-six loans and the one IDA credit. Of the twenty-four effective loans with undisbursed balances, progress on the majority is satisfactory. IFC has made invest- ment and underwriting commitments in 18 enterprises in Colombia, total- ling about US$20 million of which IFC now holds US$9.94 million. Annex II contains a summary statement of Bank loans, the IDA credit, the IFC investments as of November 30, and notes on the execution of ongoing projects. 14. Bank disbursements as a percentage of total disbursements by official lenders to Colombia are expected to peak at about 40 percent in 1973-74 and then decline. The Bank's share of total debt service is also projected to peak at about 40 percent in 1974-75, and the Bank share of total debt disbursed and outstanding should stay at about 33 percent during the next several years. 15. For this fiscal year, two further loans to Colombia are planned. One would be for a third education project and the other for a development finance companies project. As regards FY 1974, project preparation is going forward on two agricultural projects, one industrial and possibly a sixth railway project. It is still too early, however, to determine which of these projects will advance sufficiently to be ready for presen- tation to the Executive Directors in that year. 16. Over the past few years, Bank lending in Colombia has become increasingly diversified as Bank activities expanded and as the Bank assumed greater responsibilities as head of the Consultative Group for Colombia. Increasingly, projects involving Bank loans in agriculture, industry, and the social sectors were developed. While the Bank's efforts continue to be directed toward production-oriented operations in support of economic growth and related export expansion objectives, we are now seek- ing, in cooperation with Colombia, to develop projects in such a way as to combine increasing output with maximum benefits in terms of employment and improving the income of the poor, particularly in rural areas. Such further shift in emphasis of Bank lending, however, requires a new approach in many instances and hence, project preparation and appraisal are likely tc be more time-consuming than in the past. Also, at least in the initial stage, such projects are likely to be of much smaller size than the tradi- tional large infrastructure projects.  - 6 - 17. Keeping the foregoing considerations in mind, we expect over the next several years to do the major part of Bank lending in Colombia in the agricultural and industrial sectors. In evaluating the suitability of projec-ts in these two sectors for Bank lending, four main objectives would be pursued: efficient growth of output; poten- tial contribution to foreign exchange earnings or savings; creation of employment; and improvements for the lower income groups. he other major focus of our activities would be in such social sectors as education and water supply. In the project areas which have been the traditional sectors of Bank lending - i.e. electric power, transportation and tele- communications -- we would continue to be active if important institution- building objectives can bie achieved. In formulating conditions for lending, the Bank would a:Lso continue to cooperate with the Government in its efforts to improve its fiscal system and in developing institutions capable of increasing public savings. As the Government's development activities progress, we shall maintain close contact with the Colombian authorities to adjust our own lending program to any major changes in the Government's priorities. 18. In the past, one of the most important aspects of the Bank's operations in Colombia has been the financial assistance given to the power sector through 17 loans to seven public utilities totalling US$288.1 million. Bank involvement with the electric power sector began with the first economic mission which visited the country in 1949. In lending for the sector in Colombia, the Bank gave priority to building up electric power capacity in major urban centers in line with the Government's strategy, and to meeting -the urgent demand backlog, as well as providing support for Colombia's growing industry. An important objective was to establish financial self-sufficiency of power companies and to help create an interconnected network in the central region of the country -- which is the basis for a national interconnected power network in the future. As part of its lending, the Bank has also financed a number of studies with the aim of identifying projects to satisfy the rapidly increasing power needs of Colombia. 19. Through the proposed loan for the Guatape II hydroelectric project, the Bank would continue its association with Colombian efforts at the sound development of the electric power sector. As discussed in greater detail in Parts III and IV below, the proposed loan breaks new ground in a number of aspects: on the project level, it includes expansion of electricity distribution to low income areas; and for the first time in a Colombian power project, ecological issues have been thoroughly taken into consideration. For the sector as a whole, the operation  - 7 - involves a coumtry-wide power development plan to be carried out by the Colombian Government; among other things, this plan would address itself to further institutional improvements and take into account several suggestions on power investment, tariff policy, and rural electrification, which emerged in part from Bank staff evalua- tion of the sector. PART III - POWER SECTOR IN COLGMBIA 20. Colombia's power resources are large. Abundant rainfall in the three Andean mountain ranges gives the country an excellent hydro- electric potential; an estimated 60,000 MW are available at known sites. Of these, about 30,000 MW are located in the high Andean regions. The largely unexploited plain of the Llanos, which covers more than half the country in the southeast, is also estimated to have a potential of 30,000 MW. 21. Total installed capacity in the public sector was nearly 2,100 N4W in 1970, of which about 1 ,465 MW was of hydroelectric origin, con- centrated exclusively in the Andean region. This latter figure represents only 5 percent of the total hydroelectric potential of that region; thus, the overall power potential of the country has hardly been tapped. About 90 percent of the exploited hydroelectric potential is concentrated within the Bogota-Medellin-Cali industrial triangle, which also includes the Manizales power system (see attached map). About 65 percent of the popu- lation of Colombia lives in these areas. 22. Colombia also has an important thermal potential. Coal reserves, the large scale exploitation of which is under study, are estimated at 18 billion tons. In the northern zone of the country along the Atlantic Ocean about 22 percent of the total population relies almost exclusively on thermal generation. In the future, when this region is connected with the central system, it is expected that thermal power will give way to hydro-electric power on the basis of cost advantage. 23. The power sector of Colombia has developed rapidly during the last two decades. Investment in power, after increasing unevenly from 1950 to 1963, has remained fairly constant since then at some $60 million per year. Total installed generating capacity,including captive plants, increased almost ninefold, from 270 MW in 1950 to 2,330 in 1970, or an average annual growth  rate of about 11.4 percent. Installed capacity per capita for the country as a whole, however, is only 103 watts, less than in most Latin American countries. Only about 45 percent or the population enjoys uninterrupted electricity supply; about 30 percent has no supply at all, and the remaining 25 percent is supplied part time. 2h. Electricity in Colomrbia is generally supplied through public corporations owned either by the central, departmental or municipal governments. Captive industrial plants, both public and private, account for about 10 percert of installed capacity. 25. The public service is supplied almost wholly by the following four entities: (a) Instituto Colombiano de Energia Electrica (ICEL), a central government company, which, through 15 departmental and 13 minor subsidiaries, supplies electric energy to most of the areas in the northern, central, and western regions of the country not served by the large generating companies mentioned below. (b) Empresa de Energia Electrica de Bogota (EEEB), a municipal utility for electrical service only, which supplies energy to Bogota and the populous Cundinamarca Department directly, and by bulk supply to distributing agencies and subsidiaries of ICEL in rural regions in its service area. (c) Empresas Publicas de NLedellin (EPM), a municipal utility provid- ing electricity, water and sewerage, and telecommunication services, which supplies electric energy directly to Vedellin and the Department of Antioquia, and by bulk supply to the Electrificadora de Antioquia, a rural distributing subsidiary of ICEL. (d) Corporacion Autonoma Regional del Va1le del Cauca (CVC), which supplies energy to the Valle Department, mainly by bulk supply to Empresas Municipales de Cali (EMCALI) and to other rural distributing agencies, subsidiaries of ICEL, and CVC. 26. The considerable expanse of the country and its rugged mountain chains have isolated the various regional centers, which have traditionally developed separately their regional institutions and economic resources as well as their own power systems. One of the results has been the fragmentation of electric service. In the case of the ICEL system its affiliated entities are mnall and the areas they service are generally uneconomic. The individual systems are not sufficiently connected with other areas and as a result are not able to provide satisfactory service. The entities affiliated with ICEL often suffer financial and technical difficulties.  - 9 - 27. An important step towards the rationalization of the power sector was the establishment, in 1967, of Interconexion Electrica, S.A. (ISA). ISA, a corporation owned in four equal parts by EEEB, EPM, CVC/Chidral and ICEL was formed to interconnect tho sponsors, electric systems and to plan, construct, own, and operate new power generating plants in the interconnected system, covering to date the central zone of the country. The Bank was instrumental in the estab- lishment of ISA and has granted it two loans for an interconnection project (US$18.0 million) and a loan, in cooperation with the IDB, for the Chivor hydroelectric project (US$52.3 million). The interconnected system represents about 80 percent of the country's power consumption. 28. For the northern coast area, not yet interconnected with the ISA system, an important development was the establishment, in 1967, of the Corporacion Electrica de la Costa Atlantica (CORELCA). CORELCA operates in seven departments previously served by ICEL's subsidiaries. It plans, constructs, and operates new power generating plants and transmission lines in that area. 29. The Bank has been Colombia's main source of foreign financing for the power sector; through its loans it has made available about 73 percent of the total external financing in the sector between 1950 and 1970. As shown in Annex II, through the end of 1972 the Bank hal extended 17 loans to seven Colombian utilities, totalling US$288.1 million, of which 14, totalling US$199.8 million, have been fully disbursed. Existing generating capacity financed by the Bank amounts to 1 ,000 MW, or about 50 pei7cent of total public sector capacity. 30. Over the last five years the Inter-American Development Bank (IDB) has also assumed an important role in the financing of the sector. The IDB has lent US$118.9 million for the following projects: Alto Anchicaya (US$60 million), Chivor I (US$33.9) and for a transmission and distribution project executed through ICEL (US$25 million). The IDB and Bank both financed the Chivor I project. 31. While Bank and IDB support of ISA has helped provide considerable rationalization in the planning process for a major part of the sector, overall coordination of sector planning is still limited. 1 jor problems remaining in the sector call for: (a) further consolidation of ICEL's subsidiaries along regional lines similar to CORELCA; (b) improved distri- bution in the urban slum areas. EEEB and EPM4 are now giving high priority to this problem; (c) improved quality of service in many small towns served by ICEL's subsidiaries; a program for 127 small towns has been started with the help of a US$25 million loan from the IDB; (d) rural electrification to serve about six million people living in areas without supply; in this connection basic studies sponsored by ICEL to ascertain priorities are now under way; and (e) a nationwide review of tariff levels and structure.  - 10 - 32. After discussions with the Bank in connection with the proposed loan, the Colombian Goverrment has begun to prepare a power development plan that will address the aforementioned problems and will include institutional changes necessary to increase the planning and operational efficiency of the sector on a national scale. The plan will propose a long-term generation and transmission program aimed at the integration of regional systems and will also serve as a guide for investments in urban and rural service systems. Further, in view of the rapidly mounting power demand and other claims on transferable savings of the economy, the plan will propose new mechanisms for raising local funds in Colombia for the sector, as well as foreign financing. The power plan will be coordinated with Colombia's overall development plan and it is expected to be concluded early in 1974. The Colombian authorities have expressed their wish to consult with the Bank during the preparation of the plan and also during its implementation. 33. At present, Colombia's approach to external lenders for financing of power is made ditficult by a lack of coordination among the numerous companies operating in the sector and the absence of any institution with a sector-wide strategy for external financing. The resulting fragmentation of demand for, and procurerent of, imported equipment is clearly an obstacle to the orderly development of the sector. The implementation of the institutional changes to be proposed by the power development plan would help rationalize the financing of the sector and promote greater involvement by the countries participating in the Consulta- tive Group for Colombia. PART IV - THE PROJECT 34. Guatape II is the second stage of a hydroelectric project identi- fied in 1960. Ihe Bank helped finance the first stage -- through the Nare Project (Loan 369-CO) -- which included a small diversion dam and the first four generating units (280 MW). The Tare project has now been completed. and is in operation. The feasibility studies for the proposed project were prepared by Colombian and foreign consultants and concluded in 1971. Appraisal of the project was carried out in March 1972 and loan negotiations were held in October 1972. The Borrower's delegation was led by Mr. Josue Ortiz, Manager of EPM, and the Government's delegation by Mr. Rafael Marino, from the Planning Office. A loan and project summary is attachedl as Annex III to this report and ar appraisal report (PU-104a) is being circu- lated separately to the Executive Directors. Description and rurpose of the 1roject 35. The Guatape II Project consists of (a) construction of the 280 MW second stage of the Guatape hydroelectric power station, raising total capacity to 560 MW. This involves heightening the Santa Rita dam and  duplicating most of the civil and electromechanical features of the first stage. The higher dam will permit better control of the Nare river and facilitate future hydroelectric projects; (b) a 230 kV power transmission line from Guatape to EPM's load centers and associ- ated sub-stations; (c) expansion of the distribution system in EPM's service area; and (d) training of EPM's personnel in distribution techniques. The proJect also includes the resettlement cf the community of El Penol, which will be flooded by the expanded reservoir for the project. 36. The primary purpose of the project would be to help meet the growing demand for electricity by industry, commerce, and households already included within Colonbia's central region interconnected system. The need for the 280 MW increased generating capacity is based on the requirements of the entire system, although the project will primarily serve the Medellin area. A forecast of system demand prepared by ISA and the National Planning Office assumes an annual growth of demand of 8.7 percent in the EPM system, and 9.5 percent for ISA's interconnected system. 37. The distribution system expansion will improve the service to areas where present facilities are overloaded and will provide for connecting new consumers in or near Ibdellin who do not have access to electricity. Mbst of these new consumers are located in low income areas. The distribution facilities proposed under the project require additional specialized training of EPM's personnel. This will be accomplished through a progran which contemplates overseas training in distribution, planning, desigrn, operation and maintenance techniques. Project Costs and Financial Plan 38. The total project cost, excluding interest during construction, is estimated at the equivalent of US$9&.2 million, including local costs of US$49.1 million and foreign costs of US$49.1 million. Total financing required including interest on the Bank loan during construction would be US$109.9 million. Ihe proposed Bank loan of US$56 million, would finance the following items:  - 12 - US$ I-llion Equivalent (i) 62% of the main civiL works contracts - dam and power station 27.5 (ii) Foreign costs of electro-mechanical equip- ment, excluding turbines and generators (iii) Foreign costs of transmission line and sub- station materials and equipment 3.2 (iv) Foreign costs of distribution equipmert and training 6.6 (v) 50% of the cost of engineering 2.3 Sub-total (L6i of total cost) 5 .1 Plus interest on the Bank loan during construction period 10.