Colombia - Playas Hydropower Project

Document of The World Bank FILE COpy FOR OFFICIAL USE ONLY Report No. P-2953-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS PUBLICAS DE MEDELLIN WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE PLAYAS HYDRO POWER PROJECT February 10, 1981 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Average Calendar 1979 Average Calendar 1980 (Estimated) Currency Unit - Peso - Col$ US$1 = Col$47.274 US$1 - Col$42.587 Col$1 - US$0.02115 Col$1 = US$0.02348 WEIGHTS AND MEASURES 1 meter (m) 2 3.281 feet (ft) 2 1 square kilometsr (km ) 0.386 square mile (mi3) 1 cubic meter (m ) = 35.315 cubic feet (ft ) it =264.2 gallons (gal) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t. metric;1,000 kg) = 1.100 short toni (sh. togs) 1 kilowatt (kW) - 1,000 Watts (10 kW = 10 W) 1 kilowatt-hour (kWh) m 830.3 kilocaiories (kgal) 1 Megawatt (MW) = 1,000 kW (106 kW - 109 W) I Gigawatt (GW) = 1,000 MW (10 kW - 10 W) 6 1 Gigawatt-hour (GWh) = 1,000,000 kWh (10 kWh) 1 kilovolt (kV) - 1,000 Volts (V) GLOSSARY OF ABBREVIATIONS CORELCA = Corporacion Electrica de la Costa Atlantica CVC - Corporacion Autonoma Regional del Valle del Rio Cauca DNP 3 Departmento Nacional de Planeacion EEEB - Empresa de Energia Electrica de Bogota EPM = Empresas Publicas de Medellin ICEL = Instituto Colombiano de Energia Electrica IDB Inter-American Development Bank ISA - Interconexion Electrica, S.A. JNT = Junta Nacional de Tarifas de Servicios Publicos PIN = Plan de Integracion Nacional FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY COLOMBIA PLAYAS HYDRO POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: Empresas Publicas de Medellin (EPM) Guarantor: Republic of Colombia Amount: US$85 million equivalent Terms: Repayment in seventeen years, including four years of grace at 9.6% interest per annum. Prolect Description: The project would assist Empresas Publicas de Medellin (EPM) in providing required electricity service to facilitate continued industrial and commercial growth in Medellin and its environs. It would also enable EPM to increase further the supply of hydroelectricity to rural areas in Antioquia, in substitution for unreliable and expensive power generation from small local diesel plants. In line with Government efforts to reduce the use of non-renewable energy resources, the project would provide additional power and capacity to the national system, thereby making hydro-based energy available in the North Atlantic region which now depends entirely upon thermal generation. The project consists of: (a) 65-meter sarthfill dam with a volume of about 1.9 million m , including a spillway with a 2,800 m3/sec discharge capacity, tunnels and underground penstock; (b) a 200 MW underground power station with three Francis turbines and three generators of 67 MW each; (c) a sub- station and 1 km of 230-kV transmission line to link with the San Carlos-Guatape line; and (d) studies to:- (i) assist in determining actions necessary to ensure adequate environ- mental protection of the Playas reservoir; (ii) provide a least-cost plan for power rationing in the event of need; and (iii) determine the feasibility of EPM's acquiring the Electrificadoras of Antioquia and Choco, and to assess the works needed to bring their systems up to adequate standards. Tariff measures provided for under the project would continue to support the Government's objective of sound sector financing. Furthermore, the abovementioned study of the Electrificadoras would complement recent Government initiatives to strengthen sector organization and efficiency. The project is subject to the risks associated with civil works in difficult terrain. How- ever, all appropriate safeguards have been provided for and the project is expected to be carried out as scheduled. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization,  - ii - Estimated Cost: I/ Local Foreign Total (US$ million equivalent) Civil Works Infrastructure 14.0 5.0 19.0 River diversion 13.4 14.8 28.2 Dam and spillway 15.3 20.1 35.4 Underground works 31.7 37.7 69.4 Subtotal 74.4 77.6 152.0 Equipment Turbines and generators 1.4 10.6 12.0 Hydro mechanical equipment 0.2 8.6 8.8 Electrical equipment 0.6 6.5 7.1 Subtotal 2.2 25.7 27.9 Engineering, Administration and Studies 15.2 6.1 21.3 Total Base Cost 2/ (91.8) (109.4) (201.2) Contingencies Physical 11.0 17.0 28.0 Price 31.8 50.4 82.2 Total Prolect Cost (134.6) (176.8) (311.4) Interest During Construction - - 35.0 35.0 Total Investment Cost 134.6 211.8 346.4 1/ Applicable ta,,es are included, but the amount is negligible. 2/ December 1979 prices. Note: During the period 1980-88, EPM's Power Department will carry out other operational investments with an estimated cost of US$1,466 million equivalent (excluding interest during construction amounting to US$84 million). Tt will also require an increase in working capital estimated at US$96 million equivalent and will invest approximately US$485 millior equivalent in Interconexion Electrica, S.A. (ISA), in which it is a shareholder.  - iii - Project Financing Plan: Local Foreign Total (US$ million equivalent) IDB 4.0 81.0 85.0 Internal Cash Generation 130.6 - 130.6 Proposed IBRD Loan - 85.0 85.0 Suppliers' Credits/Other External Borrowings - 45.8 45.8 134.6 211.8 346.4 Financing Plan for EPM's 1980-88 Investment Program: 1/ (US$ million equivalent) Internal Cash Generation 1,067.1 Existing Loans 37.7 Existing Loans for Guadalupe IV (1868-CO) 164.5 Proposed IBRD and IDB Loan for Playas 170.0 Suppliers' Credits/Other External Borrowings 110.7 Total 1,550.0 1/ Including capital contributions to ISA. Estimated Disbursements: FY82 FY83 FY84 FY85 FY86 FY87 ---------(US$ Million equivalent)----------- Annual 8.1 19.0 20.8 20.6 13.0 3.5 Cumulative 8.1 27.1 47.9 68.5 81.5 85.0 Rate of Return: 15.5% Appraisal Report: Report No. 3240b-CO, dated February 9, 1981.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 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 PLAYAS HYDRO POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Empresas Publicas de Medellin, with the guarantee of the Republic of Colombia, for the equivalent of US$85 million to help finance the Playas Hydro Power Project. The loan would have a term of 17 years, including four years of grace, with interest at 9.6% per annum. PART I - THE ECONOMY 2. An Economic Report on Colombia (2535-CO) was distributed to the Executive Directors in June 1979. An updating report is being prepared and will be distributed soon. This section on the economy reflects the major findings of the forthcoming report. Country data sheets are presented in Annex I. Background 3. The Colombian economy made considerable progress over the past quarter century. From a largely rural and agricultural base in the 1950s, it evolved to a more integrated urban-industrial and services orientation. The productive structure of the economy was broadened appreciably and output in both the agricultural and industrial sectors became more diversified. Public sector investment and output came to play a greater role in the economy, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, greater reliance on foreign trade allowed the external sector of the economy to grow, with non-coffee exports, particularly exports of manufactured goods, expanding rapidly and the range of products sold abroad widening considerably. The growing urban-industrial coloration of economic activity and a rapid expansion of surplus labor in rural areas gave rise to rapid rural-urban migration as rural labor sought to take advantage of higher productivity and better paying jobs in the major metropolitan areas. Financial and capital markets evolved pari-passu with the growing financial needs of the industrial and services sectors of the economy, and Colombia has become an active participant in international capital markets. The economy has grown more resilient to external shocks as a result of the structural changes that have occurred. 4. Real GDP per capita rose by 2.4% p.a. on average during the 1950-79 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, combined with more rapid GDP growth. Population growth, which had remained in the 3.0% to 3.5% range during the 1950s and early 1960s, declined dramatically after 1965 as a consequence of a sharp fall in the fertility rate. Greater economic  - 2 - and educational opportunities for women, rapid rural/urban migration, rising per capita income and increased effectiveness of family planning programs contributed to the decline in fertility. Colombia's population is currently growing at an annual rate of 2.1%. As a result of the high proportion of women now entering childbearing years, this rate of population growth is expected to continue until the early 1990s. 5. The combination of rising per capita income and expanded public services over the past quarter century brought about a substantial improvement in the welfare of the poorest income groups in Colombia. As a result of improved diets and better health care, the crude death rate fell by about 50% and life expectancy rose from 50 years to 62 years. The child mortality rate declined from 17 per thousand in the early 1960s to 9 per thousand in the mid 1970s. Infant mortality, one of the best indicators of welfare, fell to 98 per thousand in the mid-1970s, from about 124 per thousand in the early 1950s. School enrollment ratios have increased substantially at all grade levels since 1960, and by the late 1970s, 91% of urban children aged 7 to 14 were enrolled in school. The poorest income groups, including those in rural areas, have experienced the greatest increases in electricity and water services in recent years and have benefited more than the average of the population from services of the national health system. In spite of this progress, Colombia remains largely underdeveloped, with a relatively small modern sector superimposed on a broad, traditional and economically poor base. Development has been concentrated in relatively few areas of the country, public services are not available to a large proportion of the rural and urban populations, unemployment and underemployment are relatively high, and income and wealth distributions are skewed. The coverage of health care is still deficient and adequate housing is not available to a substantial proportion of the population. Rapid migration to the three major metropolitan areas has created urban development problems, with attendant social difficulties. 6. In large part, the achievements of the past twenty-five years were the result of Government efforts to stimulate the productive sectors, provide the required economic and social infrastructure and establish an effective institutional base in the economy. In the 1950s and early 1960s development policy favored import substitution supported by high tariff protection and the provision of economic infrastructure by the public sector. It was during this period that the country's major communication and trans- portation networks were completed and the transformation to semi-industrial economic structure began in earnest. By the mid-1960s the prospects for further import substitution were substantially diminished and the country was in the midst of a period of great economic uncertainty, with economic activity and the balance of payments heavily influenced by developments in the world coffee market. In 1967 the authorities adopted an outward- looking development strategy. Export promotion policies, including periodic exchange rate devaluations and export tax rebates, were introduced and the  - 3 - authorities began lowering tariffs and freeing capital markets from controls as means of raising efficiency and increasing the competitiveness of Colombian goods in external markets. These measures were highly successful in relieving the foreign exchange constraint and stimulating growth. However, by the mid-1970s the economy was once again experiencing difficulties caused primarily by the world recession and by excessive Central Bank financing of domestic budget deficits. Recent Economic Developments 7. In late 1974, the Government introduced a wide range of fiscal and monetary policies designed to correct the structural and policy weaknesses pre- vailing in the economy at that time. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures arising from a sharp increase in world coffee prices. The increased receipts from coffee exports, together with some official surrender of foreign exchange from illegal exports, caused a turnabout in the balance of payments. Incomes rose rapidly and stimu- lated aggregated demand; inflation accelerated. Economic growth also accele- rated and unemployment fell substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated surpluses averaging about 5.8% of GDP during the 1976-79 period, and by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to nearly 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreign exchange boom has had a somewhat negative impact on the evolution of the Colombian economy, largely as a consequence of the need for measures to stabilize the economy. Public investment was curbed, thereby delaying some badly needed additions to economic and social infrastructure. The rate of currency devaluation was lowered and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with some adverse effects on export expansion and diversification. Also, the Government was compelled to maintain high reserve requirements and expand controls over credit (including interest rate ceilings, directed credit, portfolio requirements, etc.), thereby reducing the financing available to the private sector via the official capital market. These controls encouraged the development of a flourishing extrabank market in which credit was available albeit at high interest rates and for short maturities. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 and were moderately successful in restraining aggregate demand growth; thus relatively high inflation persisted. In 1979, consumer prices rose by nearly 30%. Nevertheless, real GDP growth remained strong, rising by about 5% for the year, led by a good performance in services, manu- facturing and agriculture. However, construction and mining activities declined. In response to the increasing stabilizing effects on aggregate demand and the troublesome financial market distortions caused by inflation and the extended period of monetary restraint, the authorities began in late 1979 to adjust the stabilization program. The rate of peso devaluation was advanced to increase export incentives and reduce borrowing abroad, and in early 1980, credit restraints were relaxed by lowering reserve requirements. At the same time, interest rates on time deposits captured by commercial banks and development finance companies - and on the lending therefrom - were  - 4 - freed from controls. To offset the inflationary effects of these measures the authorities further liberalized import payments and adopted the policy, supported by a new issue of short-term certificates, of not expanding the subsidized selective credit operations of the Central Bank in excess of the resources captured from private savings for their financing. The authorities also increased the surveillance and control of the illegal export trade. 10. The effects of the above measures were not immediately noticeable. Industrial sector growth slowed during the first half of 1980 and construction activity, which had fallen sharply in 1979, continued to slacken. Agricul- tural output was affected by drought, high incidence of disease and rising fertilizer costs. Consequently, real GDP growth is likely to decline to 3-4% in 1980. With world coffee prices at relatively high levels for most of the year, Colombia's balance of payments in 1980 is estimated to have regis- tered an over-all surplus in the US$700 million range. This would maintain net official reserves at about 11 months imports of goods and non-factor services. Colombia's consolidated public finances are estimated to have recorded a large surplus in 1980 for the fourth consecutive year, again mainly because of increased earnings on foreign exchange holdings and large receipts from the coffee tax. Inflation continued to be a problem in 1980, however, despite the slowdown in economic activity, with consumer prices increasing by about 26% for the year. The major challenge facing the Colombian authorities over the next few years will be to bring about a reduction in the inflation rate, while at the same time raising investment to the level required for private sector expansion. Development Strategy 11. Achievement in this decade of the Government's objectives of increased productivity and maximum economic growth, improved distribution of income and greater welfare for all Colombians will require a major effort to remove from the economy the constraints of inadequate economic and social infrastructure and insufficient demand. Infrastructure needs are most pressing in the energy and transportation sectors. 12. The Government's strategy for accomplishing its development objec- tives are set forth in the recently promulgated Plan de Integracion Nacional (PIN). This strategy continues the previous emphasis on export promotion as a means of supplementing domestic demand and assuring balance of payments stability, and on policy measures, including further import liberalization, designed to increase economic efficiency and raise institutional capacity. It proposes a large increase in public investment, giving high priority to energy projects and to the provision of transport infrastructure. Economic decentralization, regional automomy and the uniting of regional growth centers through improved transport, communication and financial links are directed towards creating an integrated national market, a strategic goal of the PIN. The Plan also places emphasis on the promotion of both small scale and commercial agriculture as a means of diversifying and increasing exports, assuring adequate domestic food supplies, holding down inflation and contribut- ing to the Government's nutrition and welfare goals. Industrial policy  objectives are to provide an environment of certainty, along with adequate credit and infrastructure, so that entrepreneurs are encouraged to invest and expand output. Because of its benefits in opening foreign markets, creating employment and bringing in new technology, private foreign investment is to be encouraged. The Government's approach to helping the poor takes on a new orientation in the PIN. Programs in the health and education sectors are to be better focussed and integrated, and selected low income and economically disadvantaged groups, such as workers in the informal sector, children and unemployed youth, are singled out for special attention. Combined with extensions of the Integrated Rural Development (DRI) and National Nutrition (PAN) projects, the new directions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 13. While the PIN provides a good analysis of the development issues facing the country and sets forth the general guidelines for policies and programs to resolve these issues, there are two important aspects of bringing off the development strategy that are expected to receive increasing attention from the authorities in coming months. The first involves a required deepening of the sector analyses in order to improve coordination in planning and executing sector strategies, and the second has to do with matters related to financing the PIN. Given the large investment required to carry out the PIN strategy, inadequate planning and coordination among sectors or insufficient domestic resource mobilization would be likely to result in substantial resource mis- allocation and to delay execution of the strategy. It is essential that this be avoided. The two most important sectors where additional work is urgently required are energy and transportation. 14. Colombia became a net oil importer in 1976 and by 1985 petroleum imports are expected to absorb nearly 25% of total export proceeds. In the absence of rapid energy development, energy shortages will become a major constraint on Colombia's growth later in this decade. Resolution of the energy problem depends on the country's success in developing its abundant domestic energy resources. The strategy for doing this will require energy pricing policies that rationalize consumption with energy resource avail- abilities, a least cost program of investments in energy and policy measures to assure the program's rapid execution. Although planning and policymaking have improved substantially in many energy sector institutions in recent years, overall planning and coordination in the sector are still weak. A study initiated in 1980 by the National Planning Department is expected to provide the basis for improvements in sector-wide planning and policy-making (para- graph 27), and recent pricing decisions have gone a considerable way towards providing the correct signals for regulating consumption and encouraging production. The prices paid to producers (primarily foreign companies) for "incremental" and "new" crude have been raised to levels which should provide adequate production incentives, and the retail prices of petroleum products, while still below international levels, have been increased substantially in excess of world oil price rises. The Government has committed itself to raise energy prices to equivalent international levels as rapidly as politically and economically possible, and a least cost energy investment program is being prepared. Between October 1978 and October 1980, the price of regular gasoline was raised by 125%, from US$0.40 to US$0.90 per gallon.  -6- 15. Colombia's high transportation costs and inadequate service could become a constraint on economic growth, particularly on mining development. The State Railway is in poor condition and the road network needs rehabili- tation and upgrading. The authorities have begun to take steps to improve the country's infrastructure and PIN assigns an important share of future investments to the sector. There is, however, a need for more efficient planning to ensure that only least cost investments are carried out and that a sound policy framework for the sector is established to deal effectively with the problems of intermodal coordination and energy conservation in line with the Government's energy objectives (paragraph 27). Investment and Its Financing 16. A substantial increase and redirection of public sector investment will be required in the next several years to carry out the development strategy outlined in the PIN. Over the 1980-85 period, such investment is expected to increase by about 12% p.a. in real terms. The energy, transpor- tation and industrial (including mining) sectors are expected to account for the bulk (60%) of this investment; however, sizeable real increases in invest- ment are also expected in the nutrition and health, small scale agriculture and industry, water and sewerage, and education sectors. Overall, public fixed investment is projected to average 9.2% of GDP during the 1980-85 period, and is expected to total Col$1,716 billion (US$22,260 million). Private investment will have to increase also during this period to provide the goods and services required by the expanding economy. 17. This increase in investment will demand a major resource mobilization effort on the part of Colombia's public sector. The buoyancy of the tax system (excluding coffee tax revenues and receipts from earnings on foreign exchange holdings), which has declined in recent years, will have to be increased through new taxes and better tax administration and the charges levied for public services will have to be raised substantially in real terms. Since this effort is expected to coincide with increased private sector demand for investment resources, the importance of measures to expand domestic savings cannot be over-stressed. The recent capital market liberalization should encourage savings. A significant increase in voluntary private savings is not likely, however, as long as inflation remains high. Consequently, stabilization remains a sine qua non for the country's future growth and development. Growth and Balance of Payments Prospects 18. Given the country's strong resource base and sound economic manage- ment, Colombia's growth prospects for this decade are good and significant advances in economic welfare are anticipated. The urgent need to relieve the pressure on aggregate demand arising from the recent growth of foreign exchange earnings and the necessity to increase rapidly imports to develop the country's resource potential and restore higher economic growth requires a turnaround in the balance of payments from a current account surplus of US$596 million  (2.2% of GDP) registered in 1979 to a current account deficit projected to average US$1,150 million, over the 1980-85 period, equivalent to 2.8% of GDP. By the end of this period, net official international reserves would have fallen to a level above three months of imports of goods and services (a level which is adequate for Colombia) without prejudice to the country's credit- worthiness. This should be sufficient to support an average growth of real GDP of 5.5% during this period. Beyond 1985, the current account deficit should improve as a result of increasing export proceeds (particularly coal) and a levelling-off of imports. The current account deficit would fall to 2% of GDP in 1987 and to 1% by 1990. It is expected, therefore, that the economy will be able to achieve real GDP growth averaging about 5.5% per annum during the 1980-85 period. To reach this level of growth, gross domestic investment will have to expand to about 24% of GDP, up from 18% in the early 1970s and 21% in recent years, and to avoid too large an increase in foreign indebted- ness, gross national savings would need to average about 21% of GDP. This is about the same level of savings achieved in 1978-79, when the terms-of-trade gains from the coffee boom raised the savings coefficient, but above the level achieved in the early 1970s. 19. Gross external capital requirements (net of reserve drawdown) are projected to total US$10.0 billion in current prices for the 1980-85 period, for an annual average requirement of US$1,670 million. About 31% of this amount will be required annually for debt amortization and the rest to cover current account deficits. Multilateral and bilateral agencies are expected to provide 40% of these requirements, 48% is expected to come from foreign suppliers and financial institutions and the balance should come from private foreign investment. At the end of 1979, Colombia's public and publicly guaranteed external debt disbursed and outstanding amounted to US$3.4 billion, equivalent to 12% of GDP. The Bank/IDA share of this external debt was 25%. Reflecting the recently increased lending by the Bank and the decline by bilateral sources, this share is expected to increase to about 30% in 1983, before falling to about 25% in 1987. The debt service ratio at end of 1979 was 12% and is expected to climb to 17% by 1985, peak at about 18% in the early 1990s and then decline gradually. The World Bank's share in public debt service is expected to rise to about 24% in 1985 from about 13% in 1979. With continued sound economic and financial management, Colombia is expected to maintain its creditworthiness through and beyond the 1980-1990 period. PART II: BANK GROUP OPERATIONS IN COLOMBIA 20. The proposed loan, the 89th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$2,790.9 million (net of cancella- tions). Of this amount the Bank held, as of September 30, 1980, US$2,200.9 million; IDA made one credit of US$19.5 million for highways in 1961. Dis- bursements have been completed on 52 loans and the IDA credit. During 1972-77  - 8 - disbursements averaged US$86 million equivalent per year, then declined slightly to US$82 million in 1978 but increased sharply to US$138 million in 1979 and to US$203 million in 1980. The improved performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures which should allow relaxation of fiscal restraint and the recent Bank lending for infrastructure projects, all point to higher levels of disbursements in the future. IFC has made investments and underwriting commitments of US$53.9 million in 24 enterprises and, as of September 30, 1980, it held US$15.1 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of September 30, 1980. The Annex also contains summaries on the execution of the 36 ongoing projects. 21. In response to the priority objectives established by successive Governments (self-sustained economic growth, increased employment and improved income distribution), since 1966, Bank lending to Colombia has become increas- ingly diversified and has been concentrated on production-oriented programs and activities which emphasized social as well as economic benefits. All three loans for education have been made during this period, and so have twelve of the fourteen loans for industry, eleven of the thirteen agricultural loans, one loan for a nutrition project, two loans for urban development projects and all nine loans for water supply and sewerage. During the same period, sixteen loans were made in the power and transport sectors, while before 1966, twenty-two out of a total of twenty-five loans were made to these sectors. 22. Bank lending to Colombia in FY80 consisted of two loans for power generation and distribution projects, and one each for a nickel project, telecommunications, and credit to small-scale industry and to development finance companies for medium- and large-scale industry, totalling US$518.0 million equivalent. In addition to the loan proposed in this report, the FY81 program includes loans for further hydro power development, railways, rural and feeder roads, village electrification, irrigation rehabilitation and erosion control, and secondary oil recovery. Work is also under way on projects for further petroleum development and mining, land settlement, rural development, ports, highways, oil refining, electric power, agro-industries, fertilizers, water supply and sewerage, urban development and environmental improvement, for possible consideration by the Executive Directors during the next two years. 23. The proposed Bank lending conforms closely with the Government's development strategy as outlined in the PIN (paragraphs 12 through 15). To help Colombia develop domestic sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank intends to assist the development of coal mines which hold potential in helping Colombia meet part of its energy requirements and in diversifying exports. In support of the Government's objective to increase the supply and the recovery of domestic petroleum, the Bank proposes to finance further petroleum projects and, for the first time, become involved in projects which promote the efficient processing of hydrocarbons. Bank financing in the energy sector would also assist in strengthening major institutions and in mobilizing external  - 9 - finance as some of the projects would require co-financing. Other future loans would finance agriculture and industry to support the Government in its efforts to raise overall productivity, income and employment, and to increase and diversify exports. Closely related to these objectives would be the proposed Bank lending for transport infrastructure. In this context, the Bank is assisting the Government in preparing a highway paving and rehabilita- tion program in support of the increasing interregional flow of goods and services. Other loans under preparation for ports and railroads are aimed at helping Colombia handle larger volumes of non-traditional exports and the imported inputs on which the modern sector of its economy relies for expansion. Finally, several loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. Lending for urban development and slum improvement, rural electrification, rural development, land settlement, water supply and sewerage, irrigation and environmental improvement projects is principally designed to improve the standard of living of the poor. 24. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB, and bilateral sources provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approximately 50% for the 1976-79 period and it is expected that during the period 1980-85 will decline further to about 40% of external capital requirements. Like the Bank, IDB has given increased emphasis to social projects and has financed projects in low cost housing, urban and rural development, agrarian reform, university education, water supply, rural electrification and land erosion control. In the future, it proposes to assist Colombia to develop sources of domestic energy and to expand the activity of the productive sectors to help generate increased employment. USAID has supported programs in education, urban development and small farm development, but is phasing out its aid program in Colombia. The Governments of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for social and regional integration projects. PART III - THE ENERGY SECTOR AND POWER REQUIREMENTS Energy Resources and Requirements 25. Colombia is endowed with substantial primary energy resources (hydropower, natural gas, petroleum and coal). Low cost hydropower, with a potential estimated at 93 GW, has been developed on a limited basis to date (4 GW). Coal resources are believed to be considerable, with reserves ranging from 10-40 billion metric tons of both thermal and coking coal, but explora- tion has been insufficient. The coal deposits identified are reported to be of very good quality, characterized by high caloric and low sulfur content. A relatively recent discovery of natural gas in the Guajira Peninsula, amounting to 3.5 trillion cubic feet, has brought proven reserves to a level well above 4 trillion cubic feet. However, known reserves of crude oil have been falling for several years and are estimated to last less than 12 years at present extraction rates. Of the country's 13 sedimentary basins, few have been systematically  - 10 - explored; thus, there is potential for new oil discoveries. In an attempt to find additional crude oil reserves, the state-owned oil company, ECOPETROL, in part with Bank financing, will investigate several basins and undertake detailed explorations of promising areas. It is also carrying out explorations and development in association with foreign oil companies. 26. Since 1965, output of primary energy has lagged behind overall economic growth, mainly because of declining crude oil output. By 1978, production of crude (267 trillion Btu) had fallen to 65% of 1965 output. While during 1965-78 total energy output increased by 12%, from 578 trillion Btu to 650 trillion Btu annually, energy consumption increased by 132%, rising from 271 trillion Btu to 628 trillion Btu. (Exports and losses account for the difference between production and consumption figures.) By 1979, hydro- carbon imports exceeded exports by US$425 million equivalent. Projections of Colombia's energy balance indicate an expanding deficit that could become so large in the 1980s as to become a constraint on economic growth (paragraph 14). Energy Development Objectives and Strategy 27. As stated, the Government's objective is to overcome the energy deficit by developing domestic energy sources and by promoting rational use of them. To this end, it has adopted several measures. First, it has recast its hydrocarbon pricing and regulation policy to stimulate output of petro- leum. Foreign oil companies, in response to these measures, have initiated new explorations based on joint venture contracts. Second, the Government has been moving domestic consumer prices for hydrocarbons toward inter- national levels, and has adopted a policy calling for charging consumers the full cost of electric power, in order to promote efficient energy use and self-generate an important share of the financing required for invest- ment (paragraphs 17 and 32). Third, CARBOCOL, a Government agency estab- lished to develop the country's coal resources, has concluded contracts with various foreign companies to explore and develop several coal fields, particu- larly El Cerrejon (measured reserves in excess of I billion tons), in the Guajira region. Fourth, considerable substitution of gas for petroleum products in industry and thermal power generation is being carried out on the Atlantic Coast. Fifth, a program for rapid expansion of power generation and transmission facilities to meet forecast demand over the 1980-88 period is being carried out (paragraphs 33 and 34). Lastly, the Government has concluded a contract with the French Minatome Group to explore the country's uranium potential. Although these measures have already yielded positive results, the Government recognizes that its planning and policy efforts have been insuffi- ciently coordinated among the various energy subsectors (paragraph 14). To remedy this, the Government has begun the already-mentioned study to evaluate the country's options in developing domestic energy resources - mainly hydro- power, coal, oil and natural gas (paragraph 14). This study will also focus on policy measures that can maximize the benefits to be derived from recommended investments, based on least-cost solutions. The Bank is working closely with the Government in this endeavor and would continue to do so during implementa- tion of the proposed project. In the interim, the project would assist the Government in increasing output of low-cost hydroelectric energy.  - 11 - The Power Market, Service Levels and Institutional Framework 28. Electric power is the fastest-growing form of energy use in Colombia. Its share of total energy consumption has risen from 6.5% in 1970 to 8.9% in 1978. Colombia's installed capacity at the end of 1978 was about 3,900 MW, including captive plant (about 235 MW); hydro stations account for 69% of total power generated. Since 1972, production of electricity has been growing at an annual rate of 9.9%, i.e., one and a half times as fast as the growth rate of GDP. Power sales have also been rising rapidly (9.3% per annum since 1972). Annual per capita electricity generation in 1979 was about 730 kWh, which is below the average for Latin America. Households (40% of the total), industry (31%) and commerce (12%) are the major electricity users. 29. About 63% of Colombia's 26.7 million population has electric power, compared to 26% in 1950 and 45% in 1970. The urban population, comprising about 68% of the population, has greater access to electricity. 1/ In 1976, for example, 90% of households in large cities (population of 50,000 or more) had electrical service while in rural towns (population between 500-2,500) the corresponding figure was 36%; in other rural areas, 16%. With the assistance of external lenders, the Government is carrying out programs to increase the supply of electricity to rural areas; the proposed village electrification project under preparation would expand such efforts in the North Atlantic Region. 30. The Ministry of Mines and Energy is charged with formulating national policy for power generation, transmission and distribution. In defining investment priorities, it shares responsibility with the National Planning Department (DNP). The Government cannot enforce its policies directly on the municipally controlled power companies, but Interconexion Electrica, S.A. (ISA), a generating and transmission company, of which the shareholders are the largest municipal power companies and the Government-owned national power companies, 2/ provides a mechanism for reaching agreement on major issues affecting the sector. ISA defines the generation and transmission expansion program for the interconnected system; after approval by DNP, this becomes the national power expansion program. Public utility tariffs are regulated by the Junta Nacional de Tarifas de Servicios Publicos (JNT) in DNP. JNT, which was established in the late sixties with Bank support, has the power to approve requests from the power companies for tariff increases. Power Development and Its Financing 31. Colombia's power sector has developed rapidly. Between 1950-1978 installed generating capacity increased by 3,700 MW or about sixteenfold, electricity service has been provided to one-third more of the population 1/ Residents of cities with 2,500 or more inhabitants. 2/ Empresas Publicas de Medellin (EPM), Empresa de Energia Electrica de Bogota (EEEB), Corporacion Electrica de la Costa Atlantica (CORELCA), Corporacion Autonoma Regional del Valle del Rio Cauca (CVC), and Instituto Colombiano de Energia Electrica (ICEL).  - 12 - (paragraph 29) and the task of interconnecting the country's regional systems to form an integrated national network is nearing completion (paragraph 41). A substantial part of this expansion was financed with internal cash generation (in the case of the large municipal companies, about 40% of total capital outlays) and with contributions from the National Treasury, chiefly to ICEL, CVC and CORELCA. The Bank and IDB were the main sources of foreign financing for the power sector, although in recent years suppliers' credits and external commercial banks have increased their participation. 32. During 1971-74, power rate adjustments lagged behind cost increases and the companies' finances deteriorated, with the result that construction of needed works was delayed and the operating efficiency of the companies suffered. However, investment outlays have picked up sharply since 1977, when the Government and the major power companies initiated a program of tariff increases with the aim of generating an adequate portion of investment funds for planned expansion (paragraph 27). They propose to continue adjusting tariffs as necessary to generate sufficient resources for investment. To complement this effort, and in view of the high priority attached to the heavy program of planned investments (paragraph 34), the Government has under- taken to establish a permanent power development financing facility, and has made interim arrangements for such financing until the facility begins operations. Finally, to promote rational energy use, the power companies and the Government, under the San Carlos I Hydro Power Project (1582-CO), are studying the internal structure of rates with a view toward bringing them more in line with the cost of supply to each consumer category. The study is taking into account the Government's social welfare policies with respect to rates to be charged to low income consumers, which include cross-subsidies between the high and low income electricity users (paragraph 59). Power Requirements and Proposed Investments 33. To catch up with rising power requirements, in view of the under- investment in new facilities during the first half of the 1970s and to sub- stitute some electricity for more costly forms of energy, effective generating capacity is planned to be increased by 175%, to about 10,500 MW, by 1988. Of this total, about 3,700 MW are under construction. The proposed project would provide about 3% of these requirements through development of renewable hydropower. 34. Investments in generation and transmission through 1990 are expected to amount to about US$16 billion in current prices, of which some 60% would be foreign exchange. Thus, in accordance with national policy of financing only foreign costs with external borrowings, external financing on the order of US$870 million equivalent on average per annum, in nominal terms, would be required. A substantial share of such borrowings is expected to come from foreign capital markets, which have recently been providing increased financing to the power sector, including to Bank-financed projects. Future distribution investments are estimated to amount to at least 25% of total investments. 35. To provide for future sector expansion, ISA and its shareholders, under San Carlos I, have completed a Master Plan for generation and transmission facilities covering the period 1980-1990 in detail, and 1991-2000 in more  - 13 - general terms. This plan is being supplemented by a Master Plan for distri- bution covering the same period. This combined effort should encourage not only improved investment planning but also greater attention to system design, operation and maintenance in light of modern techniques, with a view toward enhancing the quality and reliability of service to consumers. Overall, the consolidated Master Plan is expected to provide a valuable framework for long-range decisions on sector expansion, including rural electrification, financing and pricing. Recent Sector Developments 36. In recognition of the power sector's important role in Colombia's development process, in the mid-1970s the Government and the main power companies established a framework, the Sochagota Agreement, for orderly and efficient sector expansion. To enable equitable sharing among the regions of the financial burden of the large investments contemplated, to foster least- cost development of high priority generating plants, and to assure that adequate supply from these plants would reach all regions, the Agreement envisaged that ISA would be responsible for planning, building and owning all plants of national interest. Since then, ISA has functioned on this basis. However, in 1979, the shareholders of ISA expressed reservations about the concentration almost 70% of planned expansion in generating facilities through 1988 in the national company and the associated loss of parity among themselves in relative generating capacity. Another worrisome aspect has been the fact that ISA's construction capacity is nearly fully committed over the next few years with works in progress (1,925 MW of hydro plant, 232 MW in thermal plant, numerous 230-kV lines and a 500-kV line). To take due account of these reservations while, at the same time, ensuring that the objectives set forth above would be achieved, the Government and ISA's Board have confirmed that: (a) ISA would achieve and maintain direct ownership of at least 33% of total sector capacity (it currently owns 28%), as well as all trunk transmission lines. This would be sufficient to assure ISA a predominant role in guiding sector development and operation, while avoiding problems attendant upon over- concentration of sector responsibilities in ISA, (b) the regions would continue to share, through investments in ISA, in the cost and benefits of relatively low-cost hydro-electric resources, which are geographically concentrated in only a few regions, and (c) ISA, as the future national dispatch agency (facilities are being constructed) will operate the interconnected system at minimum cost. 37. Another matter under discussion between the Government and the Bank has been the rapid growth in overdue payments to ISA, both for electricity purchases and capital contributions, by the largely rural-based ICEL (a holding company for some 13 local power companies, Tielectrificadorasti). ICEL depends upon national budgetary resources to meet its capital contribu- tions to ISA; these contributions have been recently brought up-to-date by the Government. There are, however, still substantial arrears for the electri- ficadoras' energy purchases from ISA, and the Government is determined to erase them by strengthening electrificadoras' finances. In line with this, the electrificadoras themselves have initiated higher monthly tariff increases (as high as 3.3%) to improve their ability to pay. For its part, the Govern- ment has decided that a 15% surcharge would be added to their tariffs (as in the CORELCA system on the North Coast). Further, from national budgetary  - 14 - appropriations to public entities, the Government proposes to deduct amounts owed to the electrificadoras by such entities and pay this debt directly. At the same time, the Government has authorized re-financing of the electrificadoras' financial debt in order to free resources with which to pay ISA. With a view toward a long term solution, the Government realizes that the electrificadoras would need to be grouped into larger market companies to become financially viable and operationally efficient. In line with this, some ISA shareholders have begun to buy, or are contemplating buying ownership of electrificadoras in geographic proximity to them. For example, EEEB has ratified a proposal to obtain, as a first step, a 25% share of the Electrificadoras of Cundinamarca and Meta, and EPM's Board is considering acquisition of the Electrificadoras of Antioquia and Choco. In support of the development, the project includes assistance to EPM in assessing the proposed move (paragraph 47). The Bank envisages continued support of this sectoral reorganization, and future lending will include appropriate programs with this aim. It should be recognized, however, that such restructuring will necessarily be achieved gradually over a period of several years. Finally, Bank lending for power will also address the subject of watershed manage- ment, since siltation and erosion are beginning to have adverse effects on reservoirs' levels. In this regard, a start would be made under the proposed project in the form of watershed management studies for the Guatape River (paragraph 47). The Power Market of Medellin and of the Surrounding Area 38. Medellin is the capital and principal center of Antioquia, the most heavily populated state in Colombia. Medellin and its immediate suburbs, situated in the Aburra Valley of the Central Mountain range, account for about one-half of the state's estimated 3.5 million people. Colombia's industriali- zation began in Medellin which for many years was the leading industrial and commercial center in the country. Though it has been overtaken by the rapidly growing Bogota, it is still the major industrial site for production of a large range of commodities, including textiles, garments and leather goods, and accounts for about 23% of the country's industrial employment and 19% of its output. Surrounding Medellin is also a rich agricultural area farmed by notably efficient small owner-operators (many of whom are being provided with assistance under a loan for Integrated Rural Development, 1352-CO) producing flowers, beans, vegetables and a variety of other food crops. Colombia's major coffee producing region is also nearby. 39. The area within about a 35 km radius of Medellin includes a large number of towns ranging in population from about 10,000 to over 100,000 inhabitants. These towns have been growing rapidly since the physical growth potential of Medellin is approaching its limits. Two major developments are expected to influence greatly the spatial development of the entire southern region of the state. Construction of a new Medellin airport at Rio Negro, in the valley adjacent to the Aburra Valley, is currently underway with the assistance of a Bank loan (1624-CO). An industrial and free trade zone is also planned for construction close to the airport. Together, these develop- ments are expected to result in a rapid growth of industry, population, housing and services. Another urban complex is also planned north of Medellin adjacent to Bello, a town with over 100,000 population, which may nearly  - 15 - double the population of that area by 1990. The demand for public services, including electricity, can be expected to grow rapidly in areas farther away from Medellin. 40. EPMsupplies electricity to the city of Medellin, to 25 of the above-mentioned towns and, through sales to the Electrificadora de Antioquia, to 73 small municipalities, thus covering about 85% of the 116 municipalities in Antioquia. In 1979, EPM served directly 280,000 customers, plus a further 100,000 users through sales to the Electrificadora, who in that same year consumed a total of 3,250 GWh. Households (44%), industrial (29%), commercial (7%) and bulk sales (15%) are EPM's major customers. Reflecting the growth of industrial, commercial and agricultural activity, the company's sales have been growing rapidly at an annual rate of 9.3% since 1968 and 7.7% since 1975. For the reasons cited above, it is expected that EPM's sales will continue to grow during the period 1979-88 (about 8.7% per annum). To serve the expanding market and improve the coverage and quality of services in rural areas, EPM will undertake substantial investments in new facilities, both directly and through participation in ISA. The expansion program (1980-88) includes the Guadalupe IV project (Loan 1868-CO), approved last year. The Guadalupe project would enable EPM to increase its generating capacity, subtransmission and dis- tribution system, and to participate, together with ISA and its other partners, in least-cost operation of the national electricity network. While continuing to assist EPM in improving its services, under the proposed project the Bank would encourage EPM to broaden the scope of its responsibilities by acquiring neighboring electrificadoras, consistent with the objective of improving the efficiency and financial viability of the sector as a whole (paragraph 37). The proposed project would also enable EPM to strengthen further its generating capacity and to provide part of the energy and capacity needed to meet the requirements of the interconnected system, including substitution of hydro- based electricity for thermal generation in the North Atlantic Region. Bank Participation in the Power Sector 41. Since 1950, the Bank has supported Colombia's power sector with loans totalling US$894 million which have assisted the expansion of generating capacity, and transmission and distribution facilities in the systems serving Bogota, Medellin, Cali, Cartagena, Bucaramanga and Manizales, including expan- sion of electricity distribution to low income areas (874-CO, 1973; 1807-CO, 1980; and 1868-CO, 1980). The Bogota Power Distribution Project (1807-CO; US$87 million) is the first Bank loan to Colombia to support exclusively distribution expansion and, in addition to other beneficiaries, would directly benefit about 340,000 lower income consumers. In addition, the Bank has supported rural electrification under 246-CO (1960) and 313-CO (1962) and under the ongoing Integrated Rural Development Project (1352-CO, 1977). The most recent loans included the 500-kV Interconnection Line (1583-CO, 1978), the San Carlos I and II Hydropower Projects (Loans 1582-CO, 1978; 1725-CO, 1979) and Guadalupe IV Hydro Power (1868-CO, 1980) which would, respectively, complete the task of interconnecting the country's regional power systems begun under 575-CO (1968), and add 1,240 MW and 213 MW of capacity to the national interconnected system. EEEB's Mesitas Hydropower Project (1628-CO, 1979) would meet about 95% of projected incremental demand in the Bogota system during 1982-84. Taken together, the abovementioned projects reflect  - 16 - the Bank's participation in overall power development in Colombia, from the planning stage through financing and construction of generation and transmission facilities, to delivery of service to the final consumer. It is envisaged that the proposed project would be followed this year by a project in support of village electrification in northern Colombia and a further project for hydro power development to assist Colombia in developing renewable domestic sources of energy. 42. Past Bank lending to Colombia's power sector has been found gen- erally successful in several OED reports. For instance, the most recent report, "Power Interconnection (Loan 575-CO) and Chivor Hydroelectric Projects (Loan 681-CO)" (Report No. 2720, October 29, 1979), commented upon the Bank's participation in Colombia's successful effort to evolve a stronger and more efficient power sector organization. Through the creation of ISA in conjunc- tion with these projects, and the steps taken to overcome financial and institutional difficulties, real progress was made toward more coordinated sector development. Despite implementation delays and increased costs, both projects were successfully implemented. Also, the report entitled "Bank Operations in Colombia, an Evaluation" (Report No. Z-18) of May 25, 1972, concluded that Bank financing was successful in assisting the power companies to develop hydroelectric plants at lower unit cost than they otherwise would have been able to do. In turn, this permitted greater urban coverage as well as cheaper and more reliable electricity supply to industry. The report commended Bank efforts in the establishment of JNT and the central intercon- nected system, which facilitated further power sector development. Among other things, the report recommended that in the future the Bank pay increased attention to the companies' financial planning, tariff structures, distribu- tion programs and energy losses. These points have been addressed under the aforementioned recent loans, which have been the first Bank operations since late 1972 (paragraph 32). Complementary measures are also provided for under the proposed project. 43. EPM has received six Bank loans, totalling US$260 million, for power development and a recently-approved loan of US$44 million for telecom- munications. The previous power loans have assisted with expansion of generation, transmission and distribution capacity. An OED report, "Third Medellin Power Project - Loan 369-CO" (Report No. 450, May 24, 1974) concluded that the project had been very well executed despite considerable geological difficulties. PART IV - THE PROJECT Background and Objectives 44. The project, prepared by EPM, with the assistance of consultants, comprises part of its 1980-88 power investment program, and covers planned 1981-86 generation expansion. It was appraised by a joint Bank/IDB mission which visited Colombia in September/ October 1980. Shortly before negotiations, scheduled to begin on January 21, 1981, draft Loan and Guarantee Agreements  - 17 - were sent to EPM and the Government for study. The Bank was subsequently informed by the Colombian authorities that there were no issues requiring negotiations. 45. Project objectives are: (a) to provide for the incremental power needs of Medellin and its environs; (b) to expand further the supply of hydroelectricity in rural areas of Antioquia, in place of unreliable and expensive power generation from small local diesel plants; (c) to provide part of the power and capacity required by the national system, thereby making hydro-based energy available in the now totally thermal-dependent North Atlantic Region; (d) to support recent Government and power sector initiatives to strengthen sector organization and efficiency; (e) to help ensure that, in the event of need, EPM would be prepared to deal with power rationing on a least-cost basis; and (f) to assist EPM in improving watershed management. In addition, the project would continue support of the Government's objective of sound sector financing through the maintenance of adequate tariff levels. Project Description 46. Playas Hydro Plant. The Playas hydro plant will form part of the integrated hydroelectric development of the Nare and Guatape Rivers, which in- cludes the Guatape, San Carlos and Jaguas plants. The 200 MW generating plant, to be constructed 16 km upstream from the San Carlos station, will use the waters of the Guatape River augmented by the flow diverted from the Nare River for the Guatape and Jaguas plants. It would operate under a gross head of 190 m and generate an average of 1,450 GWh per annum. Project works comprise construction of: (a) Dam and Spillway - A 653m high earth and rockfill dam with a volum5 of about 1.9 m with a concrete spillway with a 2,800 m /sec discharge capacity, a diversion tunnel and dam and a reservoir with a storage capacity of about 3 85 Mm (b) Underground Works - A 200 MW underground power station with three 67 MW Francis turbines coupled to 60 Hz generators, power and pressure tunnels, surge tanks, caverns, tailrace tunnel and discharge channel. (c) Substation - A substation, located 1 km from the Guatape- San Carlos line now under construction, and control building adjacent to the entrance of the access tunnel and 230 kV transmission line which would connect the power station to the substation. (d) Infrastructure - 40 km of roads to replace roads to be inundated, 4 km of access roads, a bridge over the Guatape River and a two-lane access tunnel to the underground power station.  - 18 - 47. Consulting Services. Consulting services for the execution of the project would comprise: (a) Board of Consultants - A Board of Consultants for general assistance and supervision of all works. (b) Engineering Services - Engineering services for the final design and preparation of bid documents, engineering and supervision of the works. (c) Studies - (i) Definition of measures to assist EPM in protecting the Playas reservoir against siltation and pollution caused by the increasing population and industrialization along the Guatape River; (ii) an assessment of the cost to consumers and to the economy in EPM's service area of possible electricity rationing and the preparation of a least-cost power curtailment program; and (iii) a feasibility study to assist EPM in assessing a proposal that it would acquire the Electrificadoras of Antioquia and Choco, including a determination of the works necessary to bring their electricity systems up to adequate standards. Taking account of the study's conclusions, if the proposed acquisition would be justified and feasible, then EPM would do so, in line with an action plan that would be agreed with the Bank. Costs and Financing 48. Total project cost, excluding interest during construction (which amounts to US$35 million equivalent), is estimated at US$311.4 million equivalent, of which US$176.8 million equivalent, or 57%, correspond to the foreign exchange component. During project execution (1981-1986), EPM plans to carry out other investments at a cost of US$829 million equivalent, including interest during construction and investments in ISA, and will need an increase in working capital of US$68 million equivalent. Project costs are based upon estimates prepared by EPM and include physical contingencies amounting to approximately 14% and price contingencies equivalent to about 41% of base costs (Loan and Project Summary). The cost of consultant services for design and engineering supervision includes 9,700 man-months at an average of US$1,200 per man-month and 20 man-months for the electrificadoras' study at an average cost of US$5,000 per man-month. (These averages include overheads and personnel at various levels of expertise.) All such services would be provided by consultants whose qualifications, experience, and terms and conditions of employment would be satisfactory to EPM and the Bank (Section 3.02 of the draft Loan Agreement). 49. The proposed loan of US$85 million equivalent represents 27% of the project cost, or 48% of the foreign exchange cost. An IDB loan of US$85 million equivalent would cover 38%, or US$67 million, of the foreign cost, US$4 million of local cost and US$14 million of interest during construction. The remaining foreign cost would be financed by commercial borrowings and suppliers' credits (14% or US$24.8 million). US$130.6 million of local cost would be provided from EPM's own resources. Exclusive of the portion provided by IDB, other interest during construction (US$21 million equivalent) would be financed by commercial borrowings. Thus, of the total foreign element, including interest during construction, the proposed Bank loan would represent 40%, IDB 38%, and external commercial sources (banks and suppliers) 22%.  - 19 - The Borrower, EPM 50. EPM is an autonomous company owned by the Municipality of Medellin. It was established in 1955 and is responsible for providing Medellin and nearby areas with electricity, water, sewerage, and telephone services. 51. EPM is administered by a seven-member Board of Directors and a General Manager appointed by the Board. The General Manager is responsible for day-to-day operations and is assisted by four Assistant Managers heading, respectively, the administrative, financial and commercial, technical and operational branches of the organization. Additionally, a secretary general in charge of legal matters and office records and a planning director report directly to the General Manager. Below the level of the managers, each of whom is responsible for all three services, the organization is administered separately for each service. The corresponding three branches of EPM function financially independently of each other. The Board of Directors is headed by the Mayor of Medellin who selects the remaining members at large. 52. EPM's management and staff are, in general, well-qualified and competent. Average length of employment is 10 years, as turnover is low. Pay scales are attractive on the whole. EPM has a satisfactory training program for existing and new operational staff; in 1979, 950 participants each obtained about 60 hours of instruction. To enable the entity to reduce reliance on consultants for detailed design, procurement and construction supervision, the recently approved Guadalupe IV Project (1868-CO) provided financing for highly specialized training of EPM's professional staff. 53. EPM had 4,120 employees as of May 1980 of which 1,950 are directly concerned with the Power Department. The latter includes a technical staff of 79, and 901 operations personnel, as well as 60 construction staff. The history of the company's staff growth over the past ten years, in relation to number of customers served and energy sold, shows a steadily improving trend: 167 customers and 2.9 GWh per employee in 1979, compared with 138 customers and 1.4 GWh per employee in 1970. These figures compare favorably with those of other electric utilities serving similar markets. 54. EPM's accounting and internal audit systems are satisfactory. Independent external auditors, satisfactory to the Bank, would continue to carry out annual audits under the proposed loan (Section 5.02 of the draft Loan Agreement). Billing and collection procedures are sound; on average during 1973-79, accounts receivable as a percentage of annual sales have not exceeded 19.2%. EPM has secured adequate insurance coverage of its power assets, and would maintain such coverage in future (Section 4.03 of the draft Loan Agreement). Finances 55. EPM has in general maintained a satisfactory financial position throughout its 21-year relationship with the Bank. The measures it has taken under the San Carlos projects, including full revaluation of assets for monitor- ing financial performance, have strengthened EPM's financial structure. At  - 20 - the end of 1979, EPM's debt to equity ratio was 32/68, calculated on the basis of revalued assets, and the coverage ratio of debt service plus investments in ISA was 1.6. The company's cash flow and working capital have been adequate in recent years, with the current ratio rising from 1.5 in 1976 to 3.3 in 1979. EPM's 1980-88 investment program amounts to US$1,550 million equivalent, of which US$346.4 million pertain to the proposed project and US$485 million (about one-third of planned investments) comprise capital investments in ISA. In line with Government policy to finance the local cost of investments from domestic sources and reflecting the limited availability of financing in the domestic capital market, EPM would generate internally about 70% of the total funds required during this period. The proposed loan represents 5% of the investment program's requirements. Approximately 26% of EPM's own-invest- ments would be financed from other external sources. The favorable structure of EPM's debt and its program of tariff increases (paragraph 56) place it in a good position to obtain the additional financing it will need over and above that provided by the Bank. For example, EPM has recently signed a loan with the Bank of America for US$32 million for transmission and substation system expansion (with a term of 10 years including 5 years of grace; interest, LIBOR plus 5/8% for the first 2 years, 3/4% thereafter; management charges 1/2% flat, commitment 1/4%, Government guarantee not required). Prior to effectiveness of the proposed loan, EPM would make satisfactory arrangements for the remain- ing foreign exchange needed for the project and for the balance of financing required to carry out scheduled investments during 1981 and 1982 (Section 8.01 of the draft Loan Agreement). 56. The projected cash generation in EPM's financing plan is based upon the company's planned tariff increases. The plan assumes continuance through 1984 of the recently reinstated 2.2% monthly tariff increase (Section 5.08 of the draft Loan Agreement), plus three further increases each esti- mated at 12% in June 1981, 1982, and 1983 in order to generate adequate cash. 57. Based on the above, projected net operating income would produce minimum annual rates of return on fully revalued assets ranging from 7% in 1981 to 10% in 1982, 14% in 1983 and 1984, and 12% in 1985 and annually thereafter, and EPM has confirmed that it would meet these targets (Section 5.07(b) of the draft Loan Agreement). (During 1978 and 1979, EPM exceeded the annual targets of 9% agreed under the San Carlos loans.) These returns are consistent with the aforementioned internal cash generation (paragraph 55). 58. EPM's debt service coverage ratio during 1980-86, the implementation period of the proposed project, would range from 1.8 in 1980 to 2.3 in 1984 as a result of the substantial revenue increase and the grace period of foreign borrowings. Through 1986, the ratio is expected to fall no lower than a satis- factory 1.9. EPM has confirmed that, unless the Bank should otherwise agree, it would not incur debt in any fiscal year which would reduce the coverage of its maximum future debt service by internal cash generation below 1.5 times (Section 5.06 of the draft Loan Agreement). It is expected that the company's debt/equity ratio will improve slightly from the current proportion of approxi- mately 32/68 during the next two years, reaching 24/76 by the end of 1986.  - 21 - Lastly, to ensure adherence to the financing plan as well as to the national least-cost power expansion program, until project completion, EPM has agreed not to undertake without prior concurrence of the Bank, aggregate investments in any year in excess of 1% of the value of its net fixed assets in service other than for: (a) the proposed project; (b) generation expansion included in the national expansion program (with the exception that plants of 100 MW or less could be undertaken under the 1% limitation referred to above), provided that adequate financing would be available; (c) its obligations to ISA; and (d) other invest- ments in its agreed 1980-86 program (Section 5.10 of the draft Loan Agreement). In addition, EPM would not incur, without Bank concurrence, investments unre- lated to the operations of its three services (Section 5.09 of the draft Loan Agreement). 59. Tariff Structure and Rates. EPM's average rate has been rising in real terms and is scheduled to continue doing so over the next three years. However, its charges to industrial and commercial consumers are higher than to households, even though the cost of servicing the latter is estimated to be at least equal to the cost of the former. Since 1973, the difference between residential and other rates has widened by the allocation of a smaller portion of overall rate increases to the residential category. A study on cost of service to final consumers and pricing implications, being carried out under San Carlos I, is expected to detail the precise dimensions of the problem. In view of the importance to the energy sector, and to the Colombian economy as a whole, of promoting efficient energy pricing, EPM has agreed under Guadalupe IV to take account of the study's recommendations and establish a related program in agreement with the Bank. The revised tariffs would be consistent with the Government's social welfare policies with respect to the lowest-income consumers. Should the study be delayed, EPM has agreed (also under Guadalupe IV) to implement an interim program to correct the most obvious rate differentials. Procurement, Implementation and Disbursements 60. All the items to be financed by the proposed loan (except consult- ing services) would be procured by international competitive bidding (ICB) under Bank guidelines. Colombian manufacturers would receive a margin of preference of 15% or the applicable import duties, whichever is the lower, for purposes of bid evaluation. The cost estimate assumes that local manufacturers would be able to supply some items required for the project, the cost of which is estimated not to exceed US$2 million equivalent. Project works would begin in August 1981 and be completed by February 1986. To take account of the different procurement arrangements of the Bank and IDB, the proposed financing of each institution would be associated with separate bid documents, with the Bank covering the foreign cost of contracts for the river diversion, electro- mechanical equipment and some consultant services, and IDB, underground works contract and remaining consultants. 61. Disbursements would be made against: (a) 56% of total expenditures for civil works; (b) 100% of foreign expenditures for directly imported equipment and 100% of the ex-factory cost of locally-manufactured materials and equipment; (c) 100% of foreign expenditures for foreign consultants and  - 22 - 50% of total expenditures for local consultants. In the interest of continuity, retroactive financing not to exceed US$500,000 has been included in the proposed loan to finance the cost of consulting services as of January 1, 1981. The loan is expected to be fully disbursed by June 30, 1987. Benefits and Risks 62. The project would have a considerable impact upon the State of Antioquia, and particularly upon the municipality of Medellin and surround- ing areas. Through provision of needed electricity services to industrial and commercial establishments, the project would facilitate continued growth of economic activity in the area and support the Government's objective of stimulating development of townships in Medellin's sphere of influence. Moreover, the standard of living of the substantial number of lower income people who would be connected for the first time to electricity service would be enhanced. The increased bulk sales to other areas of Antioquia would provide support to the Government's aim of substituting hydro-based energy for costly power currently supplied from local diesel plants, as well as to the aim of increasing the rural population's access to basic services. It has been found in the Medellin area that provision of reliable electricity supply to small-scale economic activity improves efficiency and productivity. 63. A return on investment was calculated by relating the combined costs (capital and incremental operating/maintenance costs) of EPM's 1979-88 development program to estimated incremental revenues at levels that would prevail over the period (as a proxy for benefits). On this basis, the return on investment would be about 15.5%, i.e., well above the estimated opportunity cost of capital in Colombia. The incremental revenues, however, which are based on tariffs rather than on the--unmeasurable--consumers' willingness to pay, underestimate the benefits to subscribers, particularly in commerce and industry. The measurable benefits also exclude the social benefits accruing from enabling some 50,000 new household connections in the Medellin area alone from 1986 to 1990. 64. The project is subject to risks normally associated with large civil works in difficult terrain. However, the site is one of the most closely studied in Colombia because of other large hydro works in the area (paragraph 46) and all precautions considered necessary have been provided for; therefore, the project is expected to be carried out as scheduled. There is also a risk that the return on investment may be less than expected if capital costs would be significantly higher than provided for, or if quantified benefits would be substantially lower than anticipated because of slower growth of revenues. In view of experience with recent hydro station contracts in the vicinity, as well as EPM's history of adequate income genera- tion, a return lower than 15.5% appears unlikely.  - 23 - Ecology 65. EPM has carried out previous projects with due regard to environ- mental protection and safety considerations. Under the proposed project, the works will be carried out in a like manner. Moreover, the study provided for under the project (paragraph 47) is expected to provide a basis for improving existing environmental conditions in the area of the Guatape River. PART V: LEGAL INSTRUMENTS AND AUTHORITY 66. The draft Loan Agreement between the Bank and EPM, the draft Guarantee Agreement between the Republic of Colombia and the Bank and the report of the Committee provided for the Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 67. Special conditions of the loan are listed in Section III of Annex III. An additional condition of effectiveness would be that EPM has made satisfactory arrangements to secure the remaining foreign exchange needed for the project, as well as the balance of financing required for its scheduled 1981-82 invest- ments (paragraph 55). 68. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 69. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments February 10, 1981.  ANNEX I Page 1 of 5 COLOMBIA - SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE GROUPS (WEIGHTED AVER/ACES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 1138.9 AGRICULTURAL 230. 6 MOST RECENT MIDDLE INCOME MIDDLE IUCOME 1960 /b 1970 lb ESTIMATE Lb LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US$) 250.0 400.0 1010.0 1562.9 2749.5 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 491.0 606.0 700.0 1055.9 1641.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 15.8 21.3 25.6 URBAN POPULATION (PERCENT OF TOTAL) 48.2 59.8 68.3 63.4 53.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 39.0 STATIONARY POPULATION (MILLIONS) 57.0 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENSITY PER SQ. EM. 14.0 19.0 22.0 28.1 77.2 PER SQ. EM. AGRICULTURAL LAND 71.0 93.0 111.0 81. 7 129. 3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 47.0 46.8 40.7 41.4 30.6 15-64 YRS. 50.0 50.5 56.3 54.7 61. 1 65 YRS. AND ABOVE 3.0 2.7 3.0 3.9 8.2 POPULATION GROWTH RATE (PERCENT) TOTAL 3.1 3.0 2.3 2.7 1.6 URBAN 6.0/c 5.2 3.9 4.1 3.3 CRUDE BIRTH RATE (PER THOUSAND) 46.0 37.0 31. 0 34.8 22.9 CRUDE DEATH RATE (PER THOUSAND) 14.0 10.0 8.0 8.9 8.9 GROSS REPRODUCTION RATE 3.2 3.2 1.8 2.5 1. 5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115.4 142.0 USERS (PERCENT OF MARRIED WOMEN) .. .. 35.9 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 100.0 99.0 120.0 106.9 113.1 PER CAPITA SUPPLY OP CALORIES (PERCENT OF REQUIREMENTS) 97.0 88.0 102.0 107.4 125.3 PROTEINS (GRAMS PER DAY) 54.0 48.0 52.0 65.6 91.0 OF WHICH ANIMAL AND PULSE 28.0 24.0 26.0 33.7 39.6 CHILD (AGES 1-4) MORTALITY RATE 17.0 13.0 9.0 8.4 4. 3 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 53.0 58.5 62.0 63.1 67.9 INFANT MORTALITY RATE (PER THOUSAND) .. 98. O/d * 66.5 55.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 63.0 64.0 65.9 URBAN .. .. 73. 0 80.4 RURAL .. .. 46.0 44.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 47.0 48.0 62.3 URBAN * 75.0 73.0 79.4 RURAL *- 8.0 13.0 29.6 POPULATION PER PHYSICIAN 2400.0 2170.0 1970.0 1649.2 1030.1 POPULATION PER NURSING PERSON 3740.0 2040.0 1250.0 1227.5 929.4 POPULATION PER HOSPITAL BED TOTAL 363.0 449.0 620.0 480.3 289. 7 URBAN .. .. RURAL .. .. ADMISSIONS PER HOSPITAL BED .. 23.0 25.0 .. 17.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 5.7/d URBAN *- 5. 5/ad RURAL .. 5.9/ad AVERAGE NUMIBER OF PERSONS PER ROOM TOTAL .. 1. 8/d . URBAN .. 1. 6/d .. RURAL *- 2. 4/d .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 47.0/e 58.1/d .. URBAN 83. 07o 87.57d .. RURAL 8. O|e 13. 2i/ ..  - 25 - ANNEX I Page 2 of 5 COLOMBIA - SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE GROUPS (WEIGHTED AAVERA9ES - NDST RECENT ESTIMATE) - MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRDIARY: TOTAL 77.0 103.0 103.0 99.7 105.9 MALE 77.0 101.0 100.0 101.0 109.3 FEMALE 77.0 105.0 105.0 99.4 103.0 SECONDARY: TOTAL 12.0 24.0 39.0 34.4 64.0 HALE 13.0 24.0 39.0 33.5 71.1 FEMALE 11.0 24.0 40.0 34.7 56.9 VOCATIONAL ENROL. (% OF SECONDARY) 31.0/f 21.0 17.0 38.2 28.8 PUPIL-TEACHER RATIO PRIMARY 38.0 38.0 30.0 30.5 29.4 SECONDARY 11.0 17.0 19.0 14.5 26.1 ADULT LITERACY RATE (PERCENT) 63.0 73.0 81.0 76.3 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 7.0 11.0 18.4 43.0 84.6 RADIO RECEIVERS PER THOUSAND POPULATION 124.0 100.0 107.0 245.3 192.2 TV RECEIVERS PER THOUSAND POPULATION 9.0 37.0 64.0 84. 2 118.5 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 56.0 .. 69.0 63.3 93.0 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 4.1 .. 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 4726.5 6353.3 8174.0 FEMALE (PERCENT) 18.9 24.6 25.0 22.2 30.4 AGRICULTURE (PERCENT) 51.4 37.9 30.0 37.1 37.0 INDUSTRY (PERCENT) 19.2 21.0 23.0 23.5 29.3 PARTICIPATION RATE (PERCENT) TOTAL 30.6 29.7 29.7 31.5 40.9 MALE 49.8 44.9 44.7 48.9 55.9 FEMALE 11.6 14.6 14.6 14.0 26.2 ECONOMIC DEPENDENCY RATIO 1.6 1.7 1.4 1.4 1.0 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 41.2/e.g 31.97g HIGHEST 20 PERCENT OF HOUSEHOLDS 67. 7/e.g 60. _I/ LOWEST 20 PERCENT OF HOUSEHOLDS 2. lej 3. 5/R LOWEST 40 PERCENT OF HOUSEHOLDS 6. 81e_ 10. 1/ POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (U5$ PER CAPITA) URBAN .. .. 214.0 RURAL .. .. 197.0 190.8 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 267.0 474.0 RURAL *- * 122.0 332.5 385.8 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOMtE LEVEL (PERCENT) URBAN .. .. 34.0 RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c 1951-64; /d 1973; /e 1964; /f Including teacher training at the third level; /g Economically active population. Most recent estirate of GNP per capita is for 1979- October, 1980  ANNEX I - 26-Page 3of 5 jElPIOLTOOS If SOCtA. INPOCOTOPS Ntno.: Adch-Aa h 0'. .to -r droen tr-m ..o.t.n geoceoLly lodged the -ot ecthorfooftee ann -IiSobir. it hould .ine be noted that they nap eet be inter- -atieealiy com,parabl hl cac...- of, theIao of o taried d.l.ttetten end ..o..aPtnee-d by dififere- t 'ettt collecting the aLto. The data are, mena- ebine,oefl o eoele cdteatI agotId. Ledei . treedo. and ohartotrfon -entaie naoe diffetanonL anencct in.. The refere... fce t-peo (1) o ...e' ...t . I.oc ofithe aeto ..act enY d (2f a -coery geemp oft1 aenohae 9high t-a"t-ge Intone than the on...ery greep ofte blmo oer:(aetfo aclSritOlSnntr'gn;eee"Kiddle Ionte flece Aft i- and fliddlt Stat an ch-nen hnotat - taof g leant halfIof oh, ccotOIn. Ag-op hoc date let that telttr float the oeoetgn of .oonnote- nean the edboaceon dep-rdn on the a-al.ihi fty0 at net bod cotter at a tIme aceog chegce coto oc -tintenothgr-ups LAR AREA (cho..nao,d oqkn) neca .e.ne Phyntoon - Vopaiattn acceded by,nette ca ptttttelng pby- jTan Ttotl cfti etcoptCg la_d area ad inland wtern.uiotana. qulif itd teem ra dical school at ..nn..nifty meal. Ieiaioo - ttf.ote- of anclot rmeuedtnyrtiya IIran ly Ptlati-n-aoc ottnaPanm-Ppolinia diotded bY oteb pr of ..entlina for tepe. p-socrt., ma-Anted oveo-- ga-des en te lit yfailne; 197 data. sale and -tmalsgedot teea. panna oa, ;and assitan oss oalaosd hbysn totso tched an to-ld Bank Atlas. (1977-PB bee b): 1960, available in poblie end private gratena1 and apteislteed haspyta and re- 1 7 d 1979d.c. ~~~~~~~~~~~~~~habilltatian neetara, esylnale ena eatablishments p.snm....tly staffed by at leas.t ont phYslin is,Etahlihtaa.ta peaniding pnintipally n..stediel iNERit COB0iBLATION PF i A COPA - Aeclcncpte f_m cileeg nl oa.crs arm tnot tncladed. Ruanl hespitala, bhans, inelads health end madtal and liganitet, petrelmea, osteomi gas n d.hydra-, noIsar an ethenma elan- onsantpritnl n ad by e-pytne (bt by a nedital assis.tant, t ioitoy Sri kllearaa ef ...I eqailca.. ran sepite; 1990, 1970, and 19798macse, iodtife, ate.) shith effam on-petiant .aenadatian and prenide d-L.. ~~~~~~~~~~~~~~~~~~limited range at medical fectlitlee. roe s.tesitinal porpoa. urban baspi- tas inninde Ott prnitipel gaaalad spanfi.lead haepital, and naal.. PDPSfIATIOn AND Olihi. STAIbBTiC haspitala~~~~ ..oat on runel ha ptnital and ntdinal and satannity n.n.te. ToalPmcieao Kd-at tIl A.o atfa Jely 1; 1960, 1970, and 1978 dlsesecItete s atlcaataadisasteniehns data. -Ri. reamot.... P" f. hospitals divided by the caber aP beds.. diffeantdalttIesetIabat acea mayaffe ctempamablity of data HOUSING among neo..trlem; 1960