Colombia - Second Atlantico Development Project

RESTRICTED' E w s ' d&uiM U U -Report No. P-11O1 FILE-COPY This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization.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. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE SECOND ATLANTICO DEVELOPMENT PROJECT June 13, 1972  CURRENCY EQUIVALENTS 1/ US$1 - Pesos ( Col$ ) 21.78 1 Peso - US$0.04591 1.. million Pesos - US$45,9l0 1/ Estimated end-May, 1972  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PREuIDENT TO TME EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE SECOND ATLANTICO DEVELOPMENT PROJECT 1. I submit the following report and reconmendation on a proposed loan to the Republiz of Colombia for use by the Colombian InstituCe for Agrarian Reform (INChOa) for the equivalent of US$5 million for an agri- cultural development project. The loan would have a term of 25 years, including 6 years of grace, with an interest rate of 7-1/4 pement per annum. PART I - THE EC3NOMY 2. The Bank's most recent economic report (Economic Position and Prospects of Colombia, R-72-21) was distributed to the Executive Directors on January- 24, 1972. The next Bank mission to assess the Colombian economic situation is scheduled for September-October of this year. My Report and Recommendation (P-1076) dated May 31, 1972, which was distributed in connec- tion with a proposed development program and export expansion loan, gave recent information on the Colombian economy and its prospects, and a conclusion concerning Colombia's creditworthiness for additional external borrowing. (For the relevant sections of that report, see Annex II, pages 2-7 attached. Page 8 of the annex includes a table showing the main sources of external financing for Colombia for the period 1963-71). PART II - BANK GROUP OPERATIONS IN COLOMBIA 3. The proposed loan, which would be the fiftieth made to Colombia, would bring the total amount of Bank loans to that country--including the Development Program and Export Expansion loan--to US$932.9 millipn (net of cancellations). Of the foregoing amount, US$719.9 million is now held by the Bank. IDA has made one credit of US$1965 million for highways in Colombia. Historically, the majority of Bank loans to Colombia have been in the electric power and transportation sectors, although begin- ning in 1966 an increasing share of the loans has been for agriculture, industry and telecommunications, and more recently, for education and water supply. Disbursements have been completed on twenty-five loans and the one IDA credit. Of the twenty-three with undisbursed balances, progress on the majority is satisfactory. IFG has made investment and underwriting commit- ments in 18 enterprises in Colombia, totalling US$19.7 million of which IFC  -2- now holds US$10.4 million. Annex I-contains a summary statement of Bank loans, the IDA credit, and IFn investments as of April 30, 1972, and notes on the execution of ongoing projects with particular reference to those which are encountering problems in execution and giving rise to delays in disbursements. 4. Fbr FY 1973, we are proceeding with an active lending program for Colombia. The staff has recently appraised a medium-size cities water supply and sewerage project, a sixth railway project, a fifth development finance companies project, and the Guatape II hydroelectric project. I hope to be able to recommend loans for most, if not all, of these projects during the next six months. In addition, loans are under preparation fo'r' presentation in the latter part of FY 1973 for a third education project and a second Caqueta land colonization project. 5. Over the past few years, Bank lending in Colombia has become increasingly diversified. In earlier years, the Bank focussed primarily on power and transport. As Bank activities in Colombia expanded and as the Bank assumed increasing responsibilities as head of the Consultative Group for Colombia, it has moved increasingly into industry, agriculture and the social, sectors. In formulating conditions for lending and in selecting fields'of activity, we have been motivated by the'following principal considerations: (a) to provide capital for high-priority sectors where other sources of external finance have been'difficult to mobilize; (b) to assist the Colombians in obtaining capital from other sources on adequate term's;'(c) to contribute to important institution-building objectives, including the development of an improved fiscal system and institutions capable of increasing public savings; (d) to give support to governmental programs and projects designed to remove the balance of payments"'constraint on accelerated economic development; an*d (e) to associate the Bank'increasingly with the efforts of the Colombian Govern- ment to distribute the benefits of economic progress more widely. 6. In accordance with these considerations, we expect over the next few years to make a substantial contribution to the expansion of agriculture and industry, with perhaps as much as 60 percent of our total lending in those two sectors.' We would hope that through our lending in agriculture we shall be able to assist',in tackling the problems of the lower income groups in the rural sector. A major objective in both fields will be to-continue tb help remove the balance of payments constraint on development. We.'shall be continuing with additional-projects in education and water supply where we have important institution-building objectives, as well as providing direct support to Government efforts to provide widening opportunities for the development of human capacities, and for broadening the geographical-distribution of the benefits of economic growth. While our future lending for transport and power will be significant, we would hope progressively2to encourage other members of the Consultative Group to assume a growing role in these fields.  -3- 7. The Colombian Government has recently prepared guidelines for a revision of its development program, to give increased emphasis to urban development, to balanced regional growth, and to stimulate a pattern of demand which will maximize' employment opportunities. The planning authorities in Colombia hope that a program can be formulated that will better serve the needs of the lower income groups. One of the principal elements of this program is to stimulate urban housing. We shall maintain close contact with the Colombian authorities to adjust our own lending program to the changes which emerge from the current re-evaluation. PART III - THE AGRICUTURE SECTOR 8. An exceptional regional diversity in soils and climates makes it possible for Colombia to produce a wide range of agricultural commodities for home consumption and export. In recent years government policy has been successful in making use.of the country's potential to diversify agricultural output and reduce the excessive dependence on coffee. In 1965 coffee accounted for 63 percent of exports, while in 1971 the propor- tion had fallen to about 53 percent. More than half of Colombia's non- traditional exports are now accounted for by agricultural products, and its agricultural trade balance (other than coffee), which averaged a negative US$25 million per annum from 1960 to 1965, became a positive US$65 million in 1970. The drive to increase non-traditional exports could not have succeeded without a strong overall rate of growth in the agricultural sector which averaged 4.8 percent in real terms during the period 1965-70, as compared with a rate of 2.7 percent for the previous 5-year period. (For Latin America, as a whole, agricultural growth for the 1965-70 period averaged about 2 percent p.a.) Growth declined to 2.4 percent in 1971 because of heavy rains and flood damage, but prelimi- nary information for 1972 indicates that the sector has resumed its previous rate of growth. 9. Despite recent favorable growth performance, the sector is confronted with serious structural problems. Average per capita income in rural areas is only half the level of urban incomes, and income distribu- tion is very skewed with the poorest 50 percent of the rural population receiving only 16.5 percent of total rural incomes. The distribution of income is related to the concentration of land ownership: the 1960 census showed that the largest ten percent of farms accounted for 81 percent of all farm land. The quality of the land varies greatly, and while some of the large holdings are good arable land, many are not. Government actions since the establishment of INCORA in 1961 have been aimed at lessening the concentration, through the claiming for public domain of unused land, through irrigation and subsequent redistribution in some districts, and through resettlement projects. There has been little outright redistribution of good land. 10. Agriculture employs some 41 percent of the Colombian labor force, and while open unemployment has been estimated at no more than 2 percent, underemployment and seasonal unemployment together may raise the overall average for the sector to as high as 30 percent.  11. The Colombian authorities have became increasingly aware that the situation can be improved only by a resolute policy of' agricultural development coupled with accelerated agrarian reform. In the past, reform policy followed the moderate lines envisaged by the framers of the 1961 Agrarian Reform Law, and was designed with a view to improving the lot of the small farmer without sacrificing production. Primary emphasis was placed upon the developmental aspect of agricultural policy rather than upon land redistribution. As the agency responsible for land tenure issues, INCORA has claimed for the public domain some 3.5 million hectares of privately-owned land that had gone unused for a period of ten years or more. At the same time, INCORA had granted by the end of 1971 some 120,000 titles for 3.6 million hectares of effectively occupied and cultivated public lands. These lands were mainly in new frontier regions such as the Llanos and the Caqueta, where the Bank is assisting with a land settlement project (Loan 739-CO). In contrast to this, only 270,000 hectares of farmland had been purchased from private landowners for INCORA's own projects, and about half of this had been redistributed to some 8,000 land reform beneficiaries by the end of 1971. Since amendment of the Agrarian Reform Law in 1968, sharecroppers and tenant farmers have been able to claim title to the land they farm, and nearly 80,000 of them have applied to INCORA. Of these, some 45,000 have had the legitimacy of their claims recognized by INCORA and are thus eligible to receive supervised credit. 12. Recently, a new phase of land reform policies has been initiated by the agrarian reform bill now before the Colombian Congress. This bill has three main purposes: first, to improve substantially compensation for expropriation of well cultivated land, and thus dispel insecurity among landowners ready to embark upon substantial agricultural investment programs; second, to make it much easier for INCORA to purchase land which is inade- quately worked; and third, to establish a National Village Welfare Fund which would operate Rural Centers, systematically providing the dispersed rural population with such social services as health, education and technical assistance. It is envisaged that in addition to INCORA, a number of government agencies--the Ministries of Health and Education; the. government marketing agency for agricultural produce (IDEMA); the agricultural research and extension agency (ICA); and the agency for technical and adult education (SENA)--will coordinate their activities through these Rural Centers. A proposed third Bank loan for education, scheduled for presentation in FY 1973, would include a component for these centers. 13. Coffee diversification remains a key element of Colombian agri- cultural policy. For many years the Federation of Coffee Growers has operated a diversification program aimed at restraining increases in the areas planted with coffee and encouraging coffee growers to expand produc- tion of other agricultural commodities. A recent evaluation of this program at the farm level by the Inter-American Development Bank showed that beneficiaries of the program had cut back the dominance of coffee, which  previously constituted 78 percent of their total production, to 60 percent in 1970. Since coffee is typically a product of very small farms, the future of coffee diversification is closely bound up with the Government's general policy concerning farms too small to yield an adequate family income ("minifundia"). The new agrarian reform legisla- tion indicates that the Government's intention is to make greater use of cooperative farming as an instrument for consolidating the minifundia and rationalizing their production. 14. To assemble a major portion of small holdings into productive family farm units, or to make it feasible for large numbers of farmers to move to new areas, would require massive inputs of credit and technical assistance. To help meet this problem, the Government has adjusted its agricultural credit policies more and more with the small farmer in mind. For example, an analysis of the lending strategy of the Caja Agraria, by far Colombia's largest lending institution in the sector, shows that in recent years it is progressively lending more to small farmers, and a new regulation of the Monetary Board permits it to lend to bona fide farmers who are unable to produce land title as collateral. 15. In addition to credit facilities and technical assistance, marketing of agricultural products would have to be substantially improved in order to promote the welfare of small farmers. In this connection, the Government's proposed restructuring of IDEMA will shift its activities from retailing to wholesaling, and this should enable it to fulfill more effectively its function of stabilizing the market for agricultural produce. 16. Another important element in the Government's agricultural development policy has been its program of resettlement projects, of which there are now 12 in operation. These projects seek to increase total farmland available by bringing previously uncultivated lands into production. Complementary to colonization are the irrigation projects, which now number 15 and which usually include land reclamation and flood control as subsidiary objectives. The Atlantico project before you is typical in this respect. Also there are some 20 projects of land division and redistribution which aim at transforming tenant farmers or share- croppers into independent landowners by giving them titles to land worked and credit facilities to launch them into independent production. 17. The IDB, through recent loans for the Agricultural Research and Extension Agency (ICA), and AID, through its agricultural sector loans, have provided financing for improvements in research and extension services and can be expected to continue to do so. To help meet the credit needs of small farmers, AID has devoted a substantial portion of the resources of recent agricultural sector loans to supervised credit for beneficiaries of the agrarian reform program.  -6- 18. Given the scope of the problems, and as technical assistance capacity develops further, there should be much need for future Bank lending in the agricultural sector. Future loans would, of course, try to contribute further to the expansion of research, extension, and to training of agricultural technicians. Bank lending would also be guided by several of the key elements of the overall lending strategy for Colombia discussed in Part II, above: we would seek to include lending for small farmers while continuing to aim at increasing yields and outputs; to contribute to a further reduction in Colombia's dependence on coffee; and to help strengthen the Colombian institutions that implement Bank-financed projects. We have moved increasingly into the agricultural sector in the recent past, and we expect to make a substantial contribution to further expansion over the next few years, with perhaps as much as one- third of our'total lending to be made in the agricultural sector. 19. The Bank recently sent a mission to examine the special problems of agricultural development and the Government's policies in this field in order to update our knowledge of the sector and to provide a solid basis for increased Bank lending for agriculture. The mission has been in close contact with the Planning Department of the Ministry of Agriculture and with the Agency for International Development (AID) which are jointly undertaking a study to analyze development alternatives for the sector. The full report of the Bank'mission is expected in August. 20. The Atlantico project fits well into the overall policy objectives of the Colombian Government and the lending strategy of the Bank. It is also in harmony with the policy of the Colombian Government to finish those irriga- tion and land reclamation projects that have already been started before beginning any new ones of major scale. This will enable full benefits to be gained from the infrastructure investments that have already been made, and will allow them to become fully productive at an early date. PART IV - THE PROJECT 21. The proposed project would be the second stage of the First Atlantico Project presently being financed by a Bank loan signed in 1967 (Loan 502-CO). This stage was prepared by INCORA with the assistance of a consulting firm,'TAHAL (Israel). Two distinct and separate types of agricultural development were contemplated in the First Atlantico Project. One concerned development of 3,900 hectares for irrigated farming; the other aimed at improving 6,000 hectares for dry farming by providing drainage and protection from floods. Implementation of the irrigation phase is behind schedule by about two years, mainly because the specific lands to be provided with irrigation had to be redefined; technical difficulties were encountered in construction of the irrigation and drainage pumping plants,. The total area to be irrigated has been reduced to 3,000 hectares. Work on protection of the dry farm area was delayed pending the completion of plans for the proposed Second Atlantico Development Project. Construction of these works  -7- commenced in September 1971 and should be completed late in 1972. Additional flood protection and drainage works required in this area would be constructed under the Second Atlantico Project. 22. Although effective flood control is not yet fully available, progress has been made in the dry farming component of the First Atlantico Project. About 3,000 hectares are now under production, of which over 80 percent is double cropped. Soybeans, peanuts and tomatoes are now being grown in addition to the traditional crops of sorghum, sesame and cotton. In 1971 about Col$16 million worth of cash crops were marketed through the project's cooperative, as compared to only Col$3 million four years ago. As of May 31, 1972, US$4.1 million, or 46 percent, of Loan 502-CO had been disbursed. 23. The proposed Second Atlantico Project was appraised in October 1970, and negotiations were substantially completed in April 1971. The head of the Colombian delegation was Dr. Antonio Barberena, at that time General Manager of INCORA. However, a considerable delay in government approval of the loan documents--pending a review of the project by the Government within priorities among ongoing irrigation and settlement projects--made it necessary for a Bank mission to update the appraisal in the field in February 1972. 24. The purpose of the Second Atlantico Development Project is to supplement the flood protection and drainage works being constructed for further development of the 6,000 ha of the dry farming area being improved in the First Atlantico Project. In addition, the new project would extend the area being improved by 11,000 ha, thus bringing to 17,000 ha the total dry farming area under the combined first and second stages of,the Atlantic project. 25. The principal components of the proposed project are: (a) construc- tion of a drainage system; (b) construction of about 77 km of secondary and tertiary roads;. (c) land preparation; (d) construction of storage depots; (e) enlargement of operating headquarters; (f) acquisition by INCORA of about 17,000 ha and distribution of about 14,400 ha of this land to about 1,800 small farmers. In addition, the project would provide for the importation of equipment, the extension of TAHAL's contract for consulting services, training of INCORA's staff, evaluation of irrigation trials on the pilot farm, and the development of dairy farms through long-term credits. 26. A loan summary sheet is attached as Annex III to this report and an appraisal report (PA-84b) is being circulated separately to the Executive Directors. 27. Project execution should start by the end of 1972 and be completed by mid-1977. The proposed project would be carried out by Instituto Colombiano de la Reforma Agraria (INCORA), the government agency with primary responsibility for the implementation of the agrarian reform. Since its creation in 1961,  INCORA's total expenditure has amounted to the equivalent oTf US$300 million, of which about 35 percent has constituted investment in physical infra- structure, and a further 25 percent has been devoted to providing credit to beneficiaries under the agrarian reform program. 28. INCORA has received substantial external financial assistance. In addition to the US$9 million loan for the First Atlantico Project, the Bank has made a loan of US$17 million for agricultural credit (Loan 624-co) and a US$8.1 million loan for the Caqueta Colonization project (Loan 739-CO). The Inter-American Development Bank (IDB) has lent a total of US$20.5 million for irrigation projects, and AID has lent US$18 million for INCORA's super- vised credit programs, apart from the counterpart funds from AID program and agricultural sector loans allocated for INCORA investment activities in amounts averaging US$13 million p.a. equivalent over the past six years. 29. INCORA already owns approximately 5,600 ha of the Atlantico project area and would obtain about 11,000 hectares from private landowners by either private sale or expropriation with compensation in accordance with the Agrarian Reform Law. The suitable acquired lands would be sub- divided into lots of at least 8 ha and distributed to small farmers or farm workers from the surrounding areas. (Private landowners are legally entitled to retain a portion of their holdings, up to a maximwn of 100 ha. Those who retain land would have to follow the cropping patte-rns prescribed by INCORA for the project.) 30. Two crops a year would be grown on about 12,400 ha with planting adjusted to take advantage of the two rainy periods. Spring crops would include sorghum, maize, and soybeans; the main fall crops would- be sesame, soybeans,. cotton,, maize and tomatoes. As the project develops, other crops and fruits and vegetables could eventually substitute for the above-mentioned crops, if market prospects permit. The remaining 4,600 ha would be developed for dairy farming. The foregoing figures include an estimated 2,500 hectares of privately-held farms that would also benefit from the project. 31. Supporting agricultural services, including technical assistance, would be provided to project farmers through several government agencies under INCORA supervision and coordination. The following agencies will be involved in this task: ICA (Colombian Agriculture and Livestock Institute); SENA (National Training Service); CECORA (Central Cooperative for Agrarian Reform); CAC (Caribbean Agriculture and Livestock Cooperative); and IDEMA (Agricultural Marketing Institute). Also, the services of the consultant firm, mentioned in paragraph 25 above, would be employed during the implemen- tation of the project. 32. The total cost of, the proposed project, not including interest during construction, is estimated at US$9.7 million. Local costs are estimated at about US$6.3 million and foreign costs at US$3.4 million.  -9- The US$5 million Bank loan would finance the estimated foreign costs, about US$0.7 million of local costs and US$0.9 million for interest on the loan during construction. The balance of the local costs, equivalent to US$5.6 million, would be provided by the Government from its own resources. 33. The proposed amount of local cost financing is fully justified since Colombia has a well-conceived development program, but, in spite of its efforts to mobilize domestic resources for its support, still requires external assistance in excess of the foreign exchange component of develop- ment projects suitable for external lending. 34. The proposed loan would help finance the cost of civil works, imported equipment (vehicles, farm machinery, and operation and maintenance equipment), consulting services, and training of INCORA personnel. Inter- national campetitive bidding procedures would be followed in letting contracts for civil works and for equipment purchases. All civil works contracts, however, are expected to go to Colombian firms as an adequate number of qualified local contractors is available and the contracts cannot be combined into packages large enough to be attractive to foreign firms. Because of the type of equipment involved, it is expected that virtually all equipment contracts would be awarded to foreign firms, even though at the request of the Government, local manufacturers would participate in the international competitive bidding under a 15 percent margin of preference. To the extent that any equipment contracts are won by Colombian manufacturers, the ex-factory cost of the equipment, net of local taxes, would be eligible for Bank financing. J 35. The estimated settlement cost per farm for the Second Atlantico Development Project would be about the equivalent of US$).,300. These figures compare with the estimated costs of US$12,000 equivalent per family on irrigated land under the first stage project financed through Loan 502-CO. 36. Farmers participating in the project would pay at least operating and maintenance costs. They should also be able to make a significant contribution toward the recovery of investment, the latter contribution to be determined by a recently completed INCORA study of farmers' repayment capacity. The 8-ha size unit should enable each farmer's family to have a minimum annual net income of Col$20,000, or about the equivalent of US$900. 37. Bank Loan funds would be passed on by the Government to INCORA on the same terms as the Bank Loan, i.e., for a term of 25 years with a six- year grace period at 7-1/4 percent interest. The Government would assume the exchange risk. Within INCORA, the project would be administered under the general supervision of its headquarters in Bogota. Day-to-day project activi- ties would be handled by INCORA's field headquarters in the project area under the direction of a project manager, and the project office would be expanded to meet the needs of the project.  - 10 - 38. The output of the project area will be marketed with the assistance of 3 institutions: CECORA, CAC, and IDEKA. Sorghum and maize will be sold to manufacturers of feed concentrates such as Purina, while sesame, cottonseed, soybean, and about half of the peanuts would be purchased by oil processors in the coastal cities. The other half of the peanut crop is expected to meet confectionary standards for export to Europe. Cotton would be marketed through IDEMA, while tomatoes of canning quality would be absorbed by the California Cannery in Barranquilla and Truco Cannery in Cali. The fresh vegetable market in the coastal cities would also take a sizeable portion of the crop. Milk would go mainly to Barranquilla through CAC. 39. The principal benefits to be derived from the project by the Colombian economy would be in the form of: (a) increased production of crops and milk; and (b) increased employment and income in the Department of Atlantico. The net incremental value of production from the project would be about US$2.5 million annually. About 1,800 farm families would benefit directly from the program; another 650 heads of families would find permanent employment as farm laborers. Also a great number of families would benefit from the increase in employment opportunities through the induced impact of the project on services and industry in the project area and in the coastal cities. 4o. The average life of project facilities has been estimated to be 40 years. The project is estimated to yield an economic rate of return of about 23 percent. If project costs were to increase by 20 percent the rate of return would decline to about 19 percent. PART V - LEGAL INSTRUMENTS AND AUTHORITY 41. The draft Loan Agreement between the Bank and the Republic of Colombia, the draft Project Administration agreement between the Republic of Colombia and INCORA, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the EKecutive Directors separately. 42. The Project Administration Agreement covers, inter alia, the provision of funds to INCORA, including proceeds of the proposed loan. The draft Agreements contain covenants normally included in agreements for land reclamation projects. Attention is drawn to the following pro- visions: (i) Section 3.02(f) of the Loan Agreement provides that the Borrower shall cause INCORA to consult with the Bank before making any appointment to the position of Project Manager. (ii) Section 4.03 of the Loan Agreement provides that the Borrower shall cause INCORA to make suitable provision, acceptable to the Bank, for the recovery of all operating and maintenance costs of the project and as much as practicable of investment costs of the project taking into account the need to ensure that the farmers will have the necessary incentive to maximize production.  (iii) Section 4.04 of the Loan Agreement provides that the Borrower shall take all necessary action, including the provision of adequate funds, to insure that INCORA provides or arranges to meet the seasonal credit requirements of project farmers and the long-term credit requirements of dairy farmers for the establishment of their farms. (iv) Section 8.01 of the Loan Agreement establishes as a condition to effectiveness of the Loan Agreement the execution and delivery of the Project Administration Agreement. 43. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 44. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 13, 1972   ANNEX I Page 1 THE STATUS OF BANK GROUP OPERATIONS IN COLOMBIA. A. STATEMENT OF BANK LOANS AND IDA CREDITS (As at April 30, 1972) US$ million Loan Amount (less cancellations) Number Year BorTower Parpose Bank IDA Undisbursed Fully disbursed loans and credits 356.5 19.5 369 1964 Emnpresas Publicas de Medellin Power 39.0 1.4 451 1966 Banco de la Republilca Industry 25.0 o.6 499 1967 EBnpresa Nacional de Communica- Telecomunicaciones tions 16.0 1.5 502 1967 Instituto Colambiano de la Refonna Agraria Irrigation 9.0 5.0 534 1968 Banco de la Republica Industry 12.5 1.2 536 1968 Enpresa de Acueducto y Al- Water cantarillado de Bogota Supply 14.0 2.5 537 1968 B>npresa de Energia Electrica de Bogota Power 18.0 3.5 550 1968 Colombia Roads 17.2 3.5 551 1968 Ferrocarriles Nacionales Railways 12.4 1.3 552 1968 Colombia Educatim 7.6 2.6 575 1968 Interconexion Electrica S. A. Power 18.0 8.5 624t 1969 Colombia Agriculture 17.0 14.7 625 1969 Banco de la Republica Industry 25.0 3.9 651 1969 Colombia Agriculture 18.3 17.6 679 1970 Colombia Education 6.5 5.7 68o 1970 Colombia Roads 32.0 20.6 681 1970 Interconexion Electrica S. A. Power 52.3 39.1 682 1970 EBpresas Municipales de Water Cali Supply 18.5 16.8 738 1971 Ekripresas Municipales de Water Palmira Supply 2.0 1.9 739 1971 Colombia Agriculture 8.1 8.0 740 1971 Eapresa Nacional de Communica- Telecomunicaciones tions 15.0 15.0 741 1971 Enpresa de Acuedlacto y Al- Water canta.rillado de Bogota Supply 88.0 83.8 742 1971 Banco de la Republica Industry 40.0 34.0 Total 867.9 19.5 of which has been repaid 147.2 0.1 Total now outstanding 720.7 19.4 Amount sold 18.3 of which has been repaid I7 0.8 Total now held by Bank and IDA 719.9 19.4 Total undisbursed 292.7 292.7 ==5=3, Tt3ug.  ANNEX I Page 2 B. STATEMENT OF IFC INVESTMENTS (as at April 30, 1972) Amount in US$ million Year Obligor Type of Business Loan Equity Total 1959 Laminas del Caribe, S. A. Fiber-board 0.50 - 0.50 1960-1965 Industrias Alimenticias Noel, S. A. Food products 1.98 0.08 2.06 1961 Envases Colombianos, S.A. Metal cans 0.70 - 0.70 1961-1968 I4orfeo-Productos para el Hogar, S. A. Home furniture o.08 0.09 0.17 1961 Electromanufacturas, S.A. Electrical equipment 0.50, 0.50 1962 Corporacion Financiera Development Colombiana Firancing _ 2.02 2.02 1962-1963 Corporacion Financiera Development Nacional Financing - 2.O4 2.Oh 1963-1967- Campania Colombiana de 1968-1969 Tejidos, S. A. Textiles 1.86 0.27 2.13 1964-1970 Corporacion Financiera de Development Caldas Financing - 0.81 0.81 1964-1968 Forjas de Colombia, S. A. Steel forging - 1.27 1.27 1966 Al-macenes Generales de Deposito Santa Fe, S. A. Warehousing 1.00 - 1.00 1966 Industria Ganadera Colom- biana, S. A. Livestock 1.00 0.58 1.5S 1967-1970 ENKA. de Colombia, S. A. Textiles 1.00 1.65 2.65 1969 Compaia de Desarrollo de Hoteles y Turismo, Ltda. Hoturismo Tourism - 0.01 0.01 1969 Corporacion Financiera del Development Norte Financing - 0.43 0.4.3 1969 Corporacion Financiera del Development Valle Financing _- 0.43 0.43 1970 Promotora de Hoteles de Turismo Medellin, S. A. Tourism 0.23 0.11 0.31. 1970 Pro-Hoteles, S. A. Tourism o.80 0.22 1.02 Total gross conuitments 9.65 10.01 19.66 less cancellations, terminations, repayments and sales 7.75 1.50 9.25 Total commitments now held by IFC 1.90 8.51 1.O1 Total undisbursed - 0.25 0.25  ANNEX I Page 3 C. PROJECTS IN EXECUTION There are now 24 effective loans under disbursement and these are proceeding without significant delays in disbursements except for the following: US$39 million (Electric Power) loan of February, 1964 (Ln. 369) In September 1967, the Executive Directors approved amendments to the Loan Agreement to permit the financing of additional generating units out of project savings. Subsequent delays in the delivery of equipment made necessary a postponement of the Closing Date to October 31, 1972, and it is expected that the loan will be fully disbursed by that date. US$9 million (Irrigation) loan of June, 1967 (Ln. 502) This project has suffered from unexpected difficultiss in selecting suitable irrigable soils. Construction is now two years behind schedule and disbursements will probably not be completed before the end of 1973. US$18 million (Electric Power) loan of December, 1968 (Ln. 575) In June 1971, the Executive Directors approved a change in the project description for this loan for a power interconnection project to allow the use of savings for the construction of an additional transmission line (R 71-130). The original project has been completed and disbursements for the project addition are proceeding at the forecast rate. US$17 million (Agricultural Credit) loan of June, 1969 (Ln. 624) This loan finances a 4-year supervised credit program of INCORA to improve productivity on about 2,500 medium-size irrigated and rainfed farms. The project has been affected by many problems, one of which is that INCCRA now prefers to concentrate its resources on fanmers who have already benefitted from the agrarian refomi program4 thus excluding arsas presently undergoing such programs. As only US$2.2 million of the US$17 million loan has been disbursed through April 30, 1972, the Government is in the process of preparing proposala for restructuring the project. US$18.3 million (Livestock Development) loan of December, 1969 (Ln. 651) This loan has been affected by policy and administrative problems, among which are the unsatisfactory investment climate arising from the lack of clarity in application of the Agrarian Reform Law, and the failure on the part of the Government to provide sufficient short-term financing for working capital and purchase of feeder steers. The latter problem has left some participating ranchers unable to service debts and has contributed to the  ANNEX I Page L slowdown in the demand for Bank funds. The Government feels that proposed amendments to the Agrarian Reform Law, which have passed the Senate and are awaiting House concurrence, should go a long way toward resolving investment uncertainties in the agricultural sector. The Government also has recently increased substantially the availability of short-term funds for the Bank-financed project. The loan is being. kept under close review, however, so that an appropriate course can be embarked on if the rate of progress does not improve substantially in the next few months. US$18.5 million (Cali Water Supply and Sewerage) loan of June, 1970 (Ln.682) Of this loan for a water supply and sewerage project in Cali, US$1.7 million was disbursed as of April 30, 1972. The project lost about one year=-due to a change in the Cali Municipal Govern- ment that occurred after the loan was signed. It has since progressed slowly mainly because of administrative difficulties arising from the change in the Cali Municipal Government, which resulted in a reduction in the borrower's independence, the resignation of qualified staff and a reluctance on the pait of the Government to provide counterpart contributions. As a result of a further change in the Municipal Government after recent elections, a new management will be installed this autumn which it is hoped will improve the borrower's administration, and the Bank is discussing with the Government a schedule for payment of its counterpart contributions. The project is being kept under close supervision with a view to determining appropriate Bank action if improvements fail to materialize during the course of this year., US$6.5 million (Education) loan of June, 1970 (Ln. 679) Disbursements under this loan (June 1970, US$6.5 million) for an education project started slowly because of a change in the administration of the executing agency that occurred after the loan was-signed. Recent progress has been satisfactory; construction has started on eight of nine schools included in the project, and disbursements are expected to be completed by the present Closing Date.  ANNEX !I Page I COUNTRY DATA COUNTRY: COLOMBIA AREA: 1,139,000 km2 POPULATION: 22.3 million (1971 mid-year estimate) DENSITY& 19.6 per km2 Rate at Gr-tc: 3.21 (tram 1965 ta 1970) ibid 81.6 per km2 of arabia land POPULATION CHARACTERISTICS: HEALTH: Crude Birth Rate (per 1,000) 47 (1964) Crude Death Rate (per 1,000) 15 (1964) Populstion per physician 2200 (1966) Infant Mortality (per 1,000 live births) 78 (1967) Pepulation per hospital bed 400 (1966) INCOME DIST'RIBUTION: DISTRIBUTION OP LAND OWNERSHIP:1/ 7. of national income, lowest quintile 2.21 7. of Used owned by top 10% owners 81.1 bighest quintile 68.06 7. at land owned by smallest 10% ownero 0.1 ACCESS TO POTABLE WATER:(% ot Population) ACCESS TO ELECTRUCITY: (7. of population) Urban 67 Urban 70 Rural 25 Rural 7 NUTRITION: GNIP PER CAPUTA: $325 (1970) EDUCATION, Calorie intake as 7. at requirements 89 (1963) Adult literacy rate 75% (1968) Per capita protein intake (granmes) 49 (1963) Primary school enrolment 947. (1968) CROSS NATIONAL PRODUCT (1970): ANNUAL RATE OP GROWTH (7.. constant prices): (value in US$ mln.) % 1960-65 1965-70 1970 GNP at market prices 6865 100.0 4.1 5.1 6.3 Croon Investment 1521 22.2 3.0 5.8 15.2 Grona National Savingo 1212 17.7 1.3 3.9 -3.5 Curret Account Balance -283 -4.1 EXports of looads, NPS 1001 14.6 1.7 4.8 0.9 Imports of loads, NPP 1116 16.3 5.0 5.5 17.1 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1970: Value Added Labor Force Value Added Per Worker (US$ Million) 7. millions 7. (US $) 7. of national average Agriculture 1885 29.1 2.349 40.7 802 71 Iadustry 1703 26.2 1.138 19.7 1499 133 Services 2900 44.7 2.279 39.5 1272 113 Total/Average 6488- 100.0 5. 76 4 100.0 1126 1.00 PUBLIC FINANCE IN 1970: All Govern"ments 2/ NationaL. Government (-Iese in US$ millions) 7A at GDP Aver-age (amount) 7. af GOP 7. at GSP Average (amount) % at GDP last three years ls he er Current Receiptu attre er 646 9.2 8.7 Current Expenditures (inel. transfers) 428 6.1 5.5 Current Surplus/Deficit -)563 8.0 218 3.1 3.2 Capital Expenditures 825 11.7 294 4.2 4.0 External Assistance (net) 135 2.2 79 1.1 1.1 PRICES AND CREDIT: cod at year: Wholesale Price Index Bask Credit to Public Sector!/ Bank Credit to private Sector!' index (1963=100) t change (Col$ million) 7. change (Col$ million) 7. change 1968 169.5 6.3 1969 lBO.8 6.7 5,791 0.1 17,886 23.6 1970 194.6 7.6 5,834 0.7 22,305 24.7 1971 213.6 9.8 5,809 -0.4 26,946 20.8 Feb. 1971 203.7.. Feb. 1972 227.2 11.5 BALANCE OF PAYMENTS: MEIRCHANDISE EXPORTS (Average of 1968. 1969. 1970) 2 (Millions US $) (US$ million) Z 1968 1969 1970 Coffee 390.4 61.9 Exports of loads, NFPS 788 870 1000 Petroleum 49.6 7.9 Imports of Goads, NFS 866 939 1149 Cotton 33.5 5.3 Resource Gap (deficit =- -78 -69 -149 Textiles 16.7 2.6 Bananas 16.0 2.5 Interest Payments a(net)A/ Catmle and Beet 13.8 2.5 Workers' Remittances 2/ 31 38 36 Sugar 15.7 2.5 Other Pactor Payments (net) -113 -144 -180 All other Co-modities 92.7 14.7 Net Transfers -B2 -106 -144 Total 630.4 100.0 Balance on Current Account -160 -175 -293 EXTERNAL DEBT ON DECEMBER 31. 1970: Direct Foreign Inveutment 48 50 39 Mediun and Lang-tern Loans (net) 137 131 161 Medium and Long-term Credits, Public. 1072.4 Disbursements (210) (197) (234) Nan-Gcaranteed Private MLT. 157.2 Amoartization (73) (66) (73) Official Grants na ma na Total Outstanding and Disbursed. 1229.7 Other Capital (net) - - 21 6 lncreaue in Official Reserves 69 55 36 DEBT SERVICE RATIO (1970): 11.4 % All other itens -7 -19 IBRD/IDA LENDING, DECEMBER 31. 1971 ($ mln.) IBRD IDA Grass Reserveus2 218 207 208 Outstmiding sod Disbursed 391 20 Net Reserves 35 97 152 Undisubrsed 321 Outetmiding inci. Undisbursed 712 20 Rate at Exchbange: US$ 1.01 - Col$ 21.70 Date: May 19, 1972 Col$ 1.00 - US$ 0.0461 Departmen.t: South America Department .1/ 1960 census. Figures refer to farm units irrespective at ownership. g/Includes National Government, National Decentraliced Entities, Departments and Municipalities (including Municipal Enterprises). Figures are intended as useful appraoximations rather than precise values, asd are subject to revisian as improve data become available. 3/ Merchandise export registrations. 4/ Included in other factor payments (net). 5/ Total set unrequited transerec. 6/IMP Special Drawing Rights. 7/Central Bask reuerves. 8/Central Bank and Commercial Bask credit (net balances at year end) to the National Government, Departments, Municipalitieu and Official Entities. 2/Central Bunk and Conmercial lank credit (met balancesat year end) to development agencies and to the private sector.  ANNEX II Page 2 EXTRACT FROM THE PRESIDENTtS REPORT AND RECOMMENDATIONS ON A PROPOSED LQAN TO THE REPUBLIC OF COLOMBIA FOR A DEVELOPMENT PROGRAM AND EXPORT EXPANSION PROJECT "8. When the present Government took office in August 1970, Colombia's economy was in a period of steadily accelerating growth. Coffee prices, while declining from late 1969 and early 1970 highs, were still well above the prices prevailing throughout the previous decade. The rate of increase of gross domestic product and both public and private investment had been rising strongly since 1967. Industrial growth was moving ahead of historical averages, agriculture was keeping ahead of population growth, the rise in prices was be- ing held down to a manageable 7 percent annual rate, and Government planners were predicting a 7 percent real GDP growth in 1970 (actual growth was 6.7 percent, the third highest since 1950). "9. Although encouraged by these improvements in the overall economic situation, Government planners were convinced that the existence of deep- seated rural poverty and a high rate of urban unemployment made it necessary to accelerate development. Depressed rural incomes reflecting low producti- vity and the extremely small size of the vast majority of fams, coupled with inadequate water supply, health care, education and the generally inferior public services compared to urban areas, had led to a massive migration into the cities and towns thus increasing urban unemployment. Between the early 1950's and mid-1960's, the largest cities grew at 7 percent a year, more than double the rate of natural increase. The rate at which Colombia's labor force was growing made the employment problem especially difficult. A 1970 ILO report estimated that for the next 10 to 15 years the labor force would grow at 3.5 percent per year, one of the highest rates in the world. The report estimated that open unemployment had reached as much as 10 percent in Bogota and somewhat higher in the cities outside the capital, and that dis- guised unemployment and underemployed amounted to another 15 percent of the urban work force. More recent estimates indicate that open unemployment in Bogota had declined slightly to about 9.8 percent in 1969 and 8.2 percent in 1970, and it is likely that unemployment in other urban centers also de- clined. (A noteworthy feature of these more recent developments is that 1969 and 1970 were years of accelerating output growth and rising invest- ment.) During the last two decades employment rose by 2.2 percent per year. This was associated with an output growth rate which averaged about 5 percent per year. At an average productivity growth rate of 3.2 percent per year (ILO estimate), output would have to increase by 6.7 percent per annum to absorb new entrants into the labor force, and at an even higher rate if unemployment were to be reduced. "10. The new Government, therefore, drew up a development plan designed to achieve or surpass 7 percent GDP growth in 1970-73. The plan stressed particularly the need to associate higher growth rates with the creation of increased employment opportunities. It called for a continuation of the Agrarian Reform Program and an increased effort to provide agrarian reform beneficiaries with supporting services. One aspect of the latter effort was the initiation during 1971 of a program to increase the number of extension  ANNEX II Page 3 offices of the Colombian agricultural research and extension agency from the present 59 to 450 by 1975, a goal which is ambitious, but if achieved would enable the agency to reach 900,000 farm families, or 70 percent of the total of about 1.3 million families. Addressing itself to disparitiea be- tween urban and rural development, the Government also embarked in 1971 upon a plan which gave priority to adding classrooms to incomplete rural schools and the development of rural "concentrations" (designed to provide educa- tional, health, social and agricultural services in rural country towns and villages). Reflecting the directions indicated in the plan, the investment program gave increased emphasis to industry, education, housing and agricul- ture and relatively less emphasis to investments in power and transport. "11. The prospects for carrying out the development proposed in the new plan appeared favorable. A major reason for this was the apparent lessening of the foreign exchange constraint. This was derived from two sources. First, the continuing deficit of world coffee production relative to consumption, reflected in the dramatic reduction of stocks in the hands of producers, led to the expectation that the price of coffee, which still represented almost two-thirds of merchandise exports, would decline only gradually over a period of several years from the 58 cents average price for the first half of 1970. Second non-traditional exports (i.e., exports other than coffee and petroleum5, fueled by the Government's flexible ex- change rate policy and the minor export subsidy,l/ doubled between 1966 and 1970 and Government planners were predicting a continued strong growth of these exports, although at a somewhat slower rate. A further reason for optimism was the demonstrated increase in the capacity to undertake develop- ment projects. This was reflected in an increase in aggregate investment, in particular a sharp rise in public investment, and in a substantial increase in the flow of projects submitted for financing to international lending agencies. The proportion of fixed capital investment to GDP in 1967-69 was around 19 percent which is higher than the historical average, and the rate of project commitments from external lending agencies increased from an average of US$115 million per year from 1961-67 to an average of US$232 million during 1968-70. The main constraint, as it appeared then, was the availability of local finance for investment, particularly in the public sector. From 1950-58 public savings averaged 4-5 percent of GDP. In 1969-70, they reached nearly 7 percent of GDP, as a result of a sharp increase in public revenues (40 percent in real terms in 1966-69). Nevertheless, with the expanaion in public investment, it was apparent that the need for public savings would continue to expand; in particular the demand for local savings to support foreign-financed projects was increasing rapidly. "12. The Colombian economic situation and the Government's develop- ment policies and programs were analyzed in the Bank's comprehensive economic report, Economic Growth of Colombia: Problems and Prospects (WH-200a, November 1, 1970 -- hereinafter referred to as the 1970 Economic Report). 1/ Exporters are issued "Tax credit certificates" equal to 15 percent of the FOB value of non-traditional exports, which can be redeemed at face value for the payment of taxes after a specified holding period.  ANNEX II Page 4 The Consultative Group for Colombia, 'at its meeting in February 1971, con- sidered this report and concluded that the development program was feasible and merited the' support of the Group, provided that economic performance continued to improve in accordance with the Government's stated policies. Subsequent to the meeting the Government took the principal actions con- sidered necessary to support the development program. Sales taxes were raised in April 1971, stamp taxes were increased on a long list of items and, in June, the "petroleum dollar" exchange rate applicable to crude petroleum transactions was raised from Col$9 to Col$20, eliminating a costly subsidy paid to consumers of fuels by the Government. It resulted in a 45 percent increase in the retail price of motor gasoline, and will produce substantial new fuel tax proceeds. "13. Unfortunately, during 1971, there was a sharp,, unexpected drop in coffee prices and unusually heavy and prolonged rainfall, which broke the momentum of growth and disrupted development. GDP growth slackened to an estimated 5.5 percent in 1971, while prices, spurred by reduced supplies of foodstuffs, rose by 10-12 percent (see paragraphs 14 and 15 below). The authorities cut the import budget, stepped up efforts to promote non-traditional exports, and imposed strict monetary measures to dampen demand. At the same time, however, the Government felt that extraordinary assistance was necessary, and requested the Bank to coasider, as an extraordinary measure, a program loan designed to restore the' development program to the levels approved by the Consultative Group. "l14. The Government had prepared the quantitative targets for its 1970-73 development plan associated with GDP growth of 7 percent on the assumption of an average New York coffee price of 56 cents per pound for 1971. The coffee price had reached 60 cents in 1969 and held firm for several months in 1970, averaging just under 58 cents per pound during the first semester. As indicated above, it was projected that prices would gradually weaken beginning in 1971 and reach a level of about 50 cents after several years. Nevertheless, and for reasons outside the control of the Colombians, prices dropped sharply from 57 cents per pound in June 1970 to less than 52 cents in December. Shipments from Colombia also fell off rapid- ly through the end of 1970. In 1971, the coffee price unexpectedly con- tinued to fall, reached a low point of 48 cents, and averaged 49 cents per pound for the year. Thus, Colombia was faced with the situation in which coffee prices declined in one year to the level that had been expected only after at least three or four years. The extent of the problem is emphasized by the fact that for each one cent per pound drop in the average coffee price. Colombia's foreign exchange receipts decline by US$8.4 million. In recent months the New York coffee prices have recovered to 52-53 cents, but the dollar cost of Colombia's imports has also risen and the foreign exchange constraint has continued. "15. The coffee problem was compounded by the heavy rains which fell almost continuously from late 1970 until mid-1971. In the Cauca Valley, for example, which is probably the most important agricultural area of the country, the Cauca River established a new monthly flow record in November 1970 and reached average flow levels during January - April 1971 which were  ANNEX II Page 5 the highest since 1950. The unusually severe weather flooded large areas, interrupted transportation and communications, delayed farm planting and exerted strong upward pressure on domestic food prices. The Colombian Government was required to make unexpected public expenditures for road and bridge repair, emergency medical and food assistance, and relief. No pre- cise data are yet available on the effects of flood and rain damage on agri- cultural production in 1971, but current estimates are that there was little or no real growth in agricultural production in that year and that weather damage was one of the principal causes. "16. Another disappointment in late 1970 and the first half of 1971 was the slowdown in the growth of non-traditional exports, i.e., everything other than coffee and crude petroleum. These exports rose little if at all during 1970. During the first semester of 1971 export registrations rose 7 percent above the comparable period in 1970. The unexpectedly poor per- formance may be attributed to two factors. First, an increase in domestic demand associated with a high rate of economic growth diverted production from the export market to the domestic market. Secondly, after three con- secutive years of rapidly expanding exports, there remained considerably less excess capacity in the industries concerned than before. There is evidence that these problems had had their maximum effect on minor export growth by mid-1971. Non-traditional exports picked up significantly during the latter half of 1971 and, for the year as a whole, they increased by 15 percent over the level achieved in 1970. "20. The effects of the changed circumstances of 1971 were analyzed in the 1972 economic report (Economic Position and Prospects of Colombia, WH-211a, January 14, 1972) which concluded that balance of payments and fis- cal constraints had again become the main obstacles to the maintenance of a high level of growth in output and employment. The report concluded, how- ever, that Colombia should be able gradually to reach and sustain a 7 percent growth rate by the mid-1970's if (a) non-traditional exports grew at a rate of 15 percent per annum (b) adequate new tax measures were adopted to yield Col$1,000 million per annum, beginning in 1973, in order to ensure a satis- factory rate of growth in public investment and (c) Colombia continued to borrow sufficient amounts externally on favorable terms. "21. Since the end of 1971, there has been considerable progress in these areas. With respect to non-traditional exports, it appears that export re- gistrations during the first three months of 1972 grew by at least 15 per- cent over the comparable period in 1971, and the Govenment in late 1971 and early 1972 adopted a number of measures, in addition to continuing its flex- ible exchange rate policy,!/ which should give further inpetus to minor ex- port growth: the required holding period for tax credit certificates was reduced from 9 months to 6 months for some exports and 3 months for others. 1/ The exchange rate with respect to the US dollar has been depreciating pari passu with domestic price increases, thus assuring an effective devaluation vis-a-vis the world's major currencies.  ANNEX II Page 6 The National Monetary Board issued a resolution authorizing the export pro- motion agency (PROEXPO) to borrow up to US$30 million equivalent from the Banco de la Republica for the financing of private sector exports and for financing imports required by export enterprises. The main purpose of this new measure is to provide a substitute for foreign sources of export financ- ing, but it should also provide a twofold stimulus to exports. First, many firms with established lines of external credit will probably choose to maintain their traditional financial arrangements, and to this extent the new measure would increase the total resources available for export financing. Secondly, as exporting firms will no longer be obliged to seek financing from foreign financial intermediaries, the new measure should help increase the export potential of newer and smaller firms who do not have access to exter- nal sources of finance. The same Monetary Board resolution increased by approximately US$7 million equivalent the local currency funds available to PROEXPO for. financing trade fairs, export publicity and certain other in- vestments of exporting firms. "22. The investment climate in Colombia is currently favorable, as evi- denced in part by the rapidity with which industrial investors have taken up sub-loans under the most recent Bank loan (742-CO) to the privately-owned development finance companies (see paragraph 37 below). It is likely that recent political developments will continue to be favorable to investment. As for the agriculture, there have been widespread reports during the past year that the lack of clarity in application of the Agrarian Reform Law has caused investment uncertainty. However, proposed amendments to the Agrarian Reform Law which have passed the Senate and are awaiting concurrence of the Chamber of Deputies should help improve the investment climate in agriculture. "23. In the fiscal area, the Colombia Government has already reformed the customs tariff and additional revenue measures are expected to yield about Col$ 700 million beginning in 1973, and several other measures, designed to yield at least an additional Col$ 300 million, are at various stages of processing. The Consultative Group, in its February 1972 meeting gave its support to US$350 million in new external commitments for projects in Colombia for 1972, agreed that it was essential for the preservation of Colombia's creditworthiness to receive external financing on terms which would avoid deterioration of its debt structure, and agreed further that substantial non- project assistance was necessary to enable the Government to achieve its growth and investment objectives. Creditworthiness Prospects "7. If the Colombian Government is to meet its growth and employment objectives, the net transfer of external financial resources flowing from the Consultative Group will have to continue at high levels during the next five years. Bank disbursements expressed as a percentage of total public disbursements to Colombia should peak at 40 percent in 1973-7L and then  ANNEX II Page 7 decline. The Bank's share of total debt service is also projected to peak at about 40 percent in 1974-75 before turning down, and the Bank group share of total debt disbursed and outstanding should stay at about 33 percent dur- ing the next several years, assuming that Bank lending over the next few years averages about US$120 million per annum. Thanks to the relatively large supply of assistance from development agencies, and careful borrowing policy, 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. Colombia is one of the countries whose debt ser- vice ratio has fallen in recent years. The ratio was 15 percent in 1965-66 and 13 percent in 1971. Under the impact of projected growth in gross bor- rowing, the ratio would be back to 15 percent by 1975. The debt servicing burden in the more distant future will be influenced by the terms of borrow- ing: a decline in assistance by AID and other bilateral long-term develop- ment agencies would result in a peak debt service ratio of 25 percent in 1982. If commitments from bilateral development lenders increase gari passu with total capital requirements, the need for private credits would be reduced and the debt service ratio would stabilize at 21 percent in 1982. These pro- jections assume a relatively low price of coffee. Should export earnings from coffee improve notably, external borrowing requirements would be reduced and debt service would accordingly be lower. It is nevertheless likely that the burden will increase from the present level, but this should be manage- able as long as domestic savings and non-traditional exports (discussed in Part II and III below) continue to rise at a satisfactory rate, and terms of borrowing do not deteriorate seriously. In the light of past perfonmance and present prospects, therefore, I believe that Colombia is creditworthy for the borrowing presently contemplated."  ANNEX II Page 8 SOURCES OF EXERNAL FINANCING OF COLOMBIAI ROJECTS FOR 1963-1971 (Amounts in Millions of US Dollars) 1963-1969 1970 1971 Average Annual Amount8 % Amount (j Amount @ U.S. AID 61 30 72 23 82 21 U.S. EX3XAK 14 7 12 4 3 1 IBRD 5