Colombia - Cucuta Water Supply and Sewerage Project

Document of The World Bank FOR OMCAuL USE ONLY Repot Ne- P-3869-CO REPORT AND RECOMMENDATION , OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EOUIVALENT TO US$18.5 MILLION TO EMPRESAS MUNICIPALES DE CUCUTA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A CUCUTA WATER SUPPLY AND SEWERAGE PROJECT AuguLt 17, 1984 Thi documeat b a resdrictd dibde md may be aed by seepients Inly I Itbc peufamace of their efdli dories. Ift ceame may o oherwie be dlsedd wihest Worm Bk amrimes. CURRENCY EQUIVALENrS Currency Unit - Peso Colombiano (Col$) Average Calendar 1982 Average Calendar 1983 US$1 - Col$64.102 US$1 - Col$78.857 Col$1 - US$O.0156 Col$1 - US$0.0127 Exchange Rate Effective August 12, 1984 US$1.00 - Col$103.4 Col$1.00 - US$0.0097 Weights and Measures Metric System FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY GLOSSARY OF ABBREVIATIONS EAAB Empresa de Acueducto y Alcantarillado de Bogota (Bogota Water Supply and Sewerage Company) ENC Empresas Municipales de Cucuta (Cucuta Municipal Utility Company) FFDU Fondo Financiero de Desarrollo Urbano (Urban Development Fund) IDB Interamerican Development Bank INWS Instituto Nacional de Salud (National Institute of Health) INSFOPAL Instituto Nacional de Pomento Municipal (National Institute of Municipal Development) USAID United States Agency for International Development 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. - I - COLOMBIA CUCUTA WATER SUPPLY AND SEWERAGE PROJECT LOAN AND PROJECT SUMMARY Borrower: Empresas Municipales de Cucuta (E(C) Guarantor: Republic of Colombia Amount: US$18.5 million equivalent, including capitalized front-end fee of US$46,135 and interest during construction on the loan until the date of the first principal repayment. , Terms: 17 years, Including 4 years grace, at the standard variable interest rate. Project The proposed project would consist of (a) construction of Description: water transmission, storage and distribution facilities, and development of a new source of water supply for Cucuta; (b) expansion of severage system, and construction of a waste water treatment facility to reduce river pollution; (c) storm drainage improvements; and (d) provision to ENC of extensive technical assistance for a program of institu- tional improvement. Risks: Since the works are relatively simple and consultants would be assisting EMC, no significant delays are expected in the execution of the project. While EMC should not find it difficult to generate funds required for the project, its readiness, or ability, to raise water rates does present a risk. Estimated Cost: Local Foreign Total US$ million--- Water Supply Equipment and Materials 2.97 7.34 10.31 Civil Works 5.58 1.81 7.39 Sewerage Equipment and Materials 0.78 0.52 1.30 Civil Works 2.14 0.72 2.86 Storm Drainage 1.05 0.35 1.40 Institutional Improvement 0.45 0.31 0.76 Consultants' Services 1.26 0.16 1.42 Base Cost 1/ 2/ 14.23 11.21 25.44 1/ In June 1984 prices. 2/ ENC is exempt from taxation on directly imported goods; local purchases are subject to a value added tax which has been included in the local cost component. - 11 - Local Foreign Total US$ million Physical Contingencies 1.55 1.03 2.58 Price Contingencies3/ 1.76 3.02 4.78 Total Project Cost 17.5 15.26 32.80 Interest during Construction - IBRD loan - 3.19 3.19 - Other 1.86 - 1.86 Front-end Fee - 0.05 0.05 Total Financing Required 19.40 16.50 37.90 Financing Plan: Local Foreign Total Z -US$ million- EMC 8.3 - 8.3 22 Government 6.9 - 6.9 18 Local Loan 4.2 - 4.2 11 IBRD - 18.5 18.5 49 Total Financing 19.4 18.5 37.9 100 Disbursement:4 Bank Fiscal Year 1985 1986 1987 1988 1989 1990 1991 1992 - u s ss milliun Annual 1.6 2.8. 3.9 5.0 3.4 1.0 0.5 0.3 Cumulative 1.6 4.4 8.3 13.3 16.7 17.7 18.2 18.5 Rate of Return: 12%5/ Appraisal Report: Report No. 4985-CO, dated August 14, 1984. 31 Based on Bank projections, as of November 1983, of price inflation and peso depreciation (para. 53). 41 Includes up to US$500,000 in retroactive financing. 5/ Based on 92% of project costs and tariffs required to meet the covenanted rates of return on annually revalued fixed assets. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$18.5 MILLION TO EMPRESAS HUNICIPALES DE CUCUTA FOR A CUCUTAL WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed loan to Empresas Municipales de Cucuta with the guarantee of the Republic of Colombia for the equivalent of US$18.5 million, including a capitalized front-end fee of US$46,135 and interest during construction until the date of the first principal repayment, to help finance a Cucuta water supply and sewerage project. The loan would have a term of 17 years, including 4 years of grace, with interest at the Bank's standard variable rate. PART I - THE ECONOMY1/ 2. An economic mission visited Colombia in July 1982 and its report (4444-CO) was distributed to the Executive Directors in August 1983. This mission was followed by a small updating mission which visited the country in February 1986. Also, a mission to review the external sector and agriculture visited Colombia during April/Hay 1983, and its report (4981-CO) was distri- buted to the Executive Directors in April 1984. This section reflects both missions' major findings. Country data sheets are presented in Annex I. Background 3. The Colombian economy has become more resilient to external shocks as a result of the structural changes that have occurred over the past thirty years. Rapid economic growth has resulted in a substantial structural trans- formation of the country from a predominantly rural and self-contained eco- nomy to a more diversified urban, industrial, services and open economy. Colombia has reached a point where population pressure on land no longer increases much, if at all. Public sector investment and output now play a greater role, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, non-coffee exports, * particularly exports of manufactured goods, expanded rapidly and the range of products sold abroad widened considerably. The growing urban-industrial- services oriented economic activity and a rapid expansion of surplus labor in rural areas attracted by higher wages and better services in the cities has given rise to rapid rural-urban migration. This phenomenon, together with the increased participation of women in the labor force, has been instru- mental in reducing poverty and improving income distribution over time. Financial and capital markets have evolved pari-passu with the growing needs of the economy, and Colombia has become an active participant in interna- tional capital markets. 1/ This section is an updated version of Part I of the report for the Small Scale Industry IV Project (No. 2464-CO, July 10, 1984). - 2 - 4. Real GDP per capita rose by about 2.2% on average during the 1950-83 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, which after having remained Ia 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. Creater economic and educational opportunities for women, rapid rural-urban migration, rising per capita income and increased effec- tiveness of family planning programs contributed to the decline in fertil- ity. Colombia's population is presently growing at an annual rate of 2.0%. As a result of the high proportion of women now entering childbearing years, this rate of population growth is likely to continue until the early 1990s. 5. The combination of rising per capita income and expanded public services has brought about a significant improvement in the welfare of the poorest, in absolute and relative terms. As a result of increased sanitation control, improved diets and better health care, the crude death rate fell by over 50% and life expectancy rose from 48 years in the early 1950s to 64 years currently. The child mortality rate declined from 11 per thousand in the early 1960s to 4 per thousand in the late 1970s. Infant mortality fell to 54 per thousand in the late 1970s, from about 124 per thousand in the early 1950s. School enrollment ratios have increased substantially at all grade levels since the 1960s and, by the late 1970s, 80% of urban children aged 7 to 14 were enrolled in school. The poorest income groups have experi- enced the greatest increases in electricity and water services in recent years and have benefitted 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 super- imposed on a broad, traditional and economically poor base. Development has been concentrated in relatively few areas of the country, public services are still not available to many of the rural and urban populations and unemploy- ment and underemployment are relatively high. The coverage of health care and water supply requires further improvement, and ad.equate housing is not available to a substantial portion of the population. Rapid migration to the large and medium-sized cities has created urban development problems, with attendant social difficulties. Moreover, in spite of the steady increase in per capita income over the past 30 years, substantial efforts are still required to improve and extend the benefits of development to the poorest income groups. 6. In large part, the achievements of the past 30 years were the results of government efforts to stimulate the productive sectors, provide the required economic and social instrastructure 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 transportation net- works were developed and the transformation to a semi-industrial economic structure began in earnest. By the mid-1960s, the prospects for further import substitution were substantially diminished, and the country was con- fronted with great economic uncertainty, arising from the fact that economic activity and the balance of payments were heavily influenced by developments in the world coffee market. In order to ease this constraint, during 1967 the authorities adopted an outward-looking development strategy, expanding and diversifying exports and, among the export markets, increasingly tapping - 3 - the Andean Group countries. Export promotion policies, including frequent small exchange rate devaluations, export tax rebates and other export incen- tives were introduced and the authorities began lowering tariffs somewhat 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 and employment. 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 the Central Government's overall fiscal deficit. Recent Economic Developments 7. In late 1974, the Government introduced a wide range of measures designed to correct the structural and policy weaknesses prevailing 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 stimulated aggregate demand; inflation accelerated. Economic growth also accelerated, and unemployment fell substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 1Z of GDP during the 1976-78 period and, by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to about 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreign exchange boom 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 econo- mic and social infrastructure. The rate of currency devaluation was slowed, and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with adverse effects on export expansion and diversification. Also, the Government was.compelled to maintain high reserve requirements and expand controls over credit thereby reducing, in real terms, the financing available to the private sector via the official capital market. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 and were partially successful in restraining aggregate demand growth, but relatively high inflation persisted. In response to the effects of increasing restraint 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 incen- tives 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 compa- nies--and on lending therefrom-were freed from controls. To offset the inflationary effects of these measures, the authorities further liberalized import payments and adopted the policy, supported by the emission of new short-term certificates, of not expanding the subsidized selective credit -4- operations of the Central Bank in excess of the resources captured from private savings for this purpose. The authorities also increased the sur- veillance and control of the illegal export trade. The effects of the above measures were not immediately noticeable. Real GDP growth declined to 4% in 1980, unemployment started to creep up, and inflationary pressures continued. 10. In 1981 the economic situation took a turn for the worse and the problems have continued through 1983. Real GDP growth which had decelerated to 2.5% in 1981 fell to 1.4% in 1982 and to about 1% in 1983. Agricultural output was hard-hit both in 1982 and 1983 as the production of cotton, oil seeds and other agricultural commodities dropped as a result of low international prices, reduced fertilizer use and adverse weather. Industrial activity deteriorated on account of depressed aggregate demand, and unutilized capacity continued to increase, particularly in manufacturing. After experiencing a surplus for six years, a deficit emerged in the resource balance in 1981 of about US$1.5 billion, which continued at roughly this level through 1983. These deficits resulted mainly from a drop in exports by about 9% annually in real terms: major reasons were the slowdown in world demand, a major devaluation and the introduction of Import restrictions in Venezuela a major trading partner-in 1983, and the reduction in Colombia's coffee export quota in the International Coffee Agreement significantly below the 1981 coffee export level. Net foreign exchange reserves ieclined by about US$1,800 million in 1983 and Colombia's net international reserves were equivalent to about 6.7 months of imports of goods and non-factor service at year end. To a significant extent, the fall in foreign exchange reserves was caused by the difficulties in tapping capital markets which resulted from the external debt problems of other countries. Inflation slowed down in 1983 to a 20% average for the year, down from 28% in 1981 and 25% in 1982. 11. Since 1983 the Government has been introducing a series of measures designed to stimulate aggregate demand and to initiate the adjustment process required to expand and diversify non-coffee exports, stimulate domestic production, and resume economic growth. The rate of peso devaluation is being accelerated with a view to regaining the 1975 real exchange rate during 1985; the housing construction industry is being provided with incentives to mobilize an increasing amount of resources; and open market operations are being discontinued to increase liquidity in the economy. Temporary Import restrictions are being introduced to arrest the falling foreign exchange reserves; these are to be lifted once the real exchange rate achieves its equilibrium level and exports respond fully to this incentive. The stabilization measures introduced in 1977 have been gradually dismantled, followed by government legislation, measures and regulations designed to reduce the fiscal deficit and ease distortions and restrictions in the financial system. While these measures have been in the right direction, there is need for significant additional efforts, as recognized by the authorities. In particular, the country continues to be affected by the tight international capital market in 1984, which together with a somewhat slower export growth than expected by the Government, have produced further declines ±n foreign exchange reserves. The continuing pressure on the external sector has brought to the Government's attention the need for further and timely actions to reverse the current trends. Such a policy package would need to include vigorous export promotion, stepped-up external resource mobilization, promotion of foreign investment, and fiscal and monetary measures for adjustment. -5- Development Strategy 12. The Government's strategy for accomplishing its development objectives is set forth in the 1983-86 National Development Plan. This strategy emphasizes growth with equity with the purpose of expanding the benefits of development to Colombia's population. This is to be achieved through increasing participation of all social and regional groups in the process of economic growth. The strategy also places high priority on the resumption of growth while maintaining price stability. The strategy strengthens the previous emphasis on export promotion as a means of supplementing domestic demand and assuring balance of payments stability, and on policy measures designed to increase economic efficiency and raise institutional capacity. It proposes a continuation of the large effort in public investment, giving high priority to energy, agriculture and industrial projects and to the provision of transport infrastructure. Economic decentralization, regional autonomy and the uniting of regional growth centers through improved transport, communication and financial links are directed towards creating an integrated national market. The development plan's strategy 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 contributing 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 financial sector is also to be strengthened. The Government's approach to helping the poor takes on a new orientation in the development plan's strategy. Its efforts are focused upon improving efficiency in the use of resources, broadening coverage of services and strengthening the social service institutions. Programs in the housing, health, and education sectors are to be better focused and integrated, and selected low income and disadvantaged groups, such as workers in the informal sector, children and unemployed youth, are singled out for special attention. Combined with a significant expansion in construction of low-income housing and the extension of the Integrated Rural Development (DRI) program, the new directions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 13. After many years of being a net petroleum exporter, Colombia became a net oil importer in the mid 1970s and, in recent years, 10-15% of merchandise imports have been accounted for by petroleum. In the absence of rapid energy development, energy shortages could become a major constraint on growth later in this decade. Resolution of the energy problem depends on the country's success in developing its abundant domestic energy resources- hydroelectricity, coal and natural gas--and also upon increasing petroleum exploration and development. The strategy for doing this will require energy pricing policies that balance consumption with energy resource availabili- ties, a least cost program of investments, sufficient domestic and external financing for these investments, strengthened sector institutions, improved program execution capability and rapid carrying out of investments. Although planning and policy making have improved substantially in many energy sector institutions in recent years, further improvements in overall sector planning and coordination are needed. A recently completed National Energy study - 6 - carried out by the Government is providing the basis for seeking such improvements. Additionally, recent oil 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 provide adequate production incentives, and the retail prices of petroleum products have been increased substantially in recent years, reflecting, on the whole, international levels. 14. Colombia's agricultural growth performance has slowed down markedly in recent years. Both demand and supply constraints have been responsible for this. To increase output, utilization of additional acreage for cultiva- tion is projected to involve greater investment than in the past, implying the increasing need to pursue options of yield improvements. In addition to productivity gains, additional land could and should be brought under irriga- tion and/or drainage for more intensive cultivation. Watershed management and forestry development should also become integral parts of a long-term strategy for growth and for conserving the natural resources. The generation and delivery of technological innovations should receive priority in the array of long-term measures. Research and extension institutions are in need of rehabilitation and strengthening. Marketing constraints also need to be relaxed if higher production is to be sustained. Sufficient credit availabi- lity for production and marketing is also essential. Recently the Government initiated a major policy redirection to address these issues and the develop- ment plan assigns a key role to future investments in the sector. 15. Colombia's high transportation costs and inadequate services could become a constraint on economic growth and exports, affecting particularly the development of the country's vast coal reserves and its agriculture. The State Railway is in poor condition and the road network needs maintenance and rehabilitation. The authorities have taken steps to improve the country's infrastructure and the development plan assigns an important share of future investments to the sector. An important part of this effort is the ongoing Rural Roads, Railway Rehabilitation, and Highway Sector Projects. Investment and its Financing 16. An increase of public sector investment will be required in the next several years to carry out the development strategy outlined in the development plan. Over the 1984-86 period, such investment is expected to increase by about 5% p.a. in real terms. The energy and transportation sectors are expected to account for the bulk (about half) of this investment; however, real increases in investment are also expected in the small- and medium-scale agriculture, housing, nutrition and health, industry (including mining), water and sewerage, and education sectors. Overall, public fixed investment is projected to average 9% of GDP during the 1984-86 period, and is expected to total Col$1,312 billion. 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 mobiliza- tion effort on the part of Colombia's public sector. In particular, the size of the overall Central Government deficit will have to be reduced signifi- cantly. 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 - 7 - administration; the growth of expenditures will have to be checked; resources will have to be used more efficiently; and the charges levied for public services will have to be raised substantially in real terms. A package of measures o tackle some of these issues was approved by Congress in 1983, including measures related to broadening the base and increasing the average rate of the sales tax, increasing other indirect taxes, reducing the earmarking of revenues, reducing tax evasion, and strengthening tax adminis- tration which are expected to have an effect in 1984. Additional actions on the expenditure side are expected to follow. Since this effort is likely 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, sound economic management and increased capital inflows during 1984-86, Colombia's growth prospects for this decade are reasonably good and significant advances in economic welfare are anticipated. However, because of the decline in coffee prices and the weakening in exports caused by the recession in some of traditional Colombian markets, in addition to the need to increase imports to develop the country's resource potential and restore higher economic growth, the current account deficit of the balance of payments is projected to average US$1.5 billion per year during 1984-86, equivalent to about 4% of GDP. Almost half of the deficit is projected to be financed by reducing foreign exchange reserves and by direct foreign investment. By the end of this period, net official international reserves would have fallen to a level of about three months of imports of goods and non-factor services (a level which is adequate for Colombia) without prejudice to the country's creditworthiness. This should be sufficient to support an average growth of real GDP of 3% during this period. Beyond 1986, the current account deficit should improve as a result of increasing export proceeds (particularly coal) and a leveling-off of imports resulting from increased domestic production of petroleum. The current account deficit would gradually fall to about 12 of GDP by 1990. To achieve real GDP growth of about 3% per annum during 1984-86, gross fixed investment will have to be maintained at 20% of GDP, and to avoid too large an increase in foreign indebtedness, gross national savings would need to average about 19% of GDP. 19. Gross external capital requirements are projected to total about US$5,655 million in current prices for the 1984-86 period, for an annual average requirement of about US$1,885 million. Net foreign investment is expected to account for US$750 million during 1984-86. This should provide about 13% of the gross external financing required. Of the remaining 87% (US$4,905 million) about US$2,500 million, has been either committed or is expected to be secured from multilateral and bilateral sources, while the difference, US$2,405 million, will need to be borrowed abroad from financial markets and suppliers' credit sources. At the end of 1982, Colombia's public and publicly guaranteed external debt disbursed and outstanding amounted to US$6.2 billion, equivalent to 16% of GDP. The Bank/IDA share of this external debt was 22%. Reflecting the recently increased Colombian borrowing from commercial sources, this share is expected to remain at about 20% during 1983-86. -8- The public debt service ratio at the end of 1982 was 18% and is expected to climb to 25% by 1986, peak at about 27% in 1988 and then decline gradually to 24% in 1990. The World Bank's share in public debt service is expected to remain below 25% during 1983-86. With continued sound economic and financial management, Colombia is expected to maintain its creditworthiness through and beyond the 1984-90 period. PART II - BANK GROUP OPERATIONS IN COLOMBIA 20. The proposed loan, the 108th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$4,121.9 million (net of can- cellations). Of this amount the Bank held, as of March 31, 1984 US$2,981.3 million; IDA made one credit of US$19.5 million for highways in 1961. Dis- bursements have been completed on 66 loans and the IDA credit. Before 1979, disbursements averaged US$86 million equivalent per year, but had increased to US$250 million per year by 1982 and US$294.5 million in 1983. While lower than those recorded in Latin America for similar projects, concentrated efforts to overcome probleai in project execution have resulted in signific- ant increases in the disbursement record in 1983 and 1984. Improving per- formance of social sector institutions, gradual containment of inflationary pressures and the effects of the recently introduced fiscal reforms, which should improve counterpart funding, and increased Bank lending for infra- structure projects, all point to a higher level of disbursements in the future. IFC has made investments and underwriting comiitments of US$119.9 million in 29 enterprises and, as of March 31, 1984, it held USS48.0 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of March 31, 1984. 21. Since the initial loan was made in 1949, Bank lending to Colombia has become quite diversified. Although through the mid-1960s, 88% of the loans made were for power or transport, since then the Bank has broadened its participation in lending for agriculture and indu-try, and initiated lending for irrigations and watershed management, education, water supply, telecommu- nications, urban development and nutrition. By the late 1970s, 53% of the loans made to Colombia were for projects other than transport and power. Of the loans made since 1978, 39% were for power and transport, 16% each for agriculture and industrial projects, 7% for urban development, 5% each for projects in water supply, telecommunications and irrigation, and 7% for education, nutrition and multipurpose projects. The diversification was a desirable aim as it helped provide close contact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's role can only be a marginal one and, thus, to enable lending to be focussed upon sectors in which the Bank's presence can have a meaningful impact. 22. Bank lending to Colombia in FY84 consisted of loans for power sec- tor financing, coal exploration, earthquake reconstruction, agricultural diversification and multipurpose water supply and electricity, totalling US$464.1 million. In addition, the Bank parricipated in two B-loans for a total of 14% of the loans, or US$28.75 million. In response to Colombia's having undertaken a gradual acjustment process to expand and diversify non- coffee exports and resume growth, the thrust of Bank support has shifted towards strengthening the Government's programs, enhancing the effectiveness of resource use, and emphasizing quick-yielding investments. Loans recently approved by the Board and a number of operations at an advanced stage of -9- prearation reflect this overall direction. Regarding infrastructural investments, the FY85 program stress rehabilitation, modernization and a more intensive use of facilities already in place, such as is the case of the proposed project, as well as electricity distribution, reinforcing the efforts under the recently approved power development finance project which was entirely geared toward completion of ongoing projects. Similarly, increased emphasis has been placed on directly productive operations, such as the already-approved agricultural diversification and small-scale industry projects, and the development banking project which is expected to be considered by the Board in the near future. Beyond FY85, work is also underway on projects for further petroleum development, electric power, development finance, agricultural extension and marketing, fertilizers, and irrigation for possible consideration by the Executive Directors during the next two years. 23. The proposed Bank lending is consistent with the Government's development strategy. 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, and help develop renewable sources of energy through lending for hydropower and arranging associated co-financing. Closely related to these objectives would be Bank lending for infrastructure that would facilitate the increasing inter- regional flow of goods and services. Finally, several loans are being pre- pared in support of the Government's efforts to help the poorer segments of the Colombian population. Proposed lending for further rural development, agricultural credit, water supply and sewerage, and irrigation projects are 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, 1DB and bilateral sources provided about 75% of total external financing to Colombia in the 1961-72 period, their share had decreased since then to some 49% for the 1975-82 period and is expected to decline further to about 40% of external capital requirements during the eighties. Like the Bank, IDB has given increased emphasis to energy-related projects in addition to those for low-cost housing, urban and rural develop- ment, agrarian reform, university education, water supply, rural electrifica- tion and land erosion control which are aimed at improving living standards of the lower income population. In the future, it proposes to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased employment. USAID has supported programs in education, rural development and small farm development, but is phasing out its program in Colombia. The Government of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for basic needs and regional integration projects. PART III - THE WATER SUPPLY AND SEWERAGE SECTOR Service Levels 25. In 1983, about two-thirds of Colombia's estimated population of 27.5 million lived in urban agglomerations2/ and one-third in the small 21 2,500 or more inhabitants. - 10 - communities or rural areas. About 602 of total population had access to public water supply and about 50% was connected to a sewerage system. Piped water was available to 80% and sewerage services to 65% of the urban inhabit- ants. These proportions were much lower for the rural population; about 22% had water connections and less than 20% sewerage connections. 26. Nation-wide water and sewerage service levels place Colombia among the better served countries in Latin America; several countries with similar income levels rank far below. However, the quality of service is uneven. Many water supply and sewerage systems are in need of repairs or have become obsolete. In large and medium-size cities, safe water is generally available on a continuous basis, but service tends to be irregular in some neighbor- hoods. In small communities and rural areas, the quality of water is often unsatisfactory. In practically all urban agglomerations and rural areas, waste water is discharged untreated, often causing severe pollution in rivers and streams. Sector Institutions 27. The Ministry of Health is in charge of the sector and formulates sector policy in coordination with the National Planning Department. Two decentralized entities, the National Institute for Urban Development (INSFOPAL) and the National Institute of Health (INAS) are responsible for central planning and financing of sector investment in urban agglomerations and rural areas, respectively, and act as technical and financial intermedia- ries. In 28 principal cities, where about 48% of the country's population is concentrated, autonomous municipal utility companies are in charge of water supply and sewerage, and - in many instances - solid waste collection and disposal, public markets and slaughterhouses. As a rule, these companies have a General Manager, appointed by the Mayor, and a Board whose members are appointed by the City Council. In the smaller cities and towns, sanitation works companies are in charge of construction, maintenance and operation of water supply and sewerage systems. The activities of these sanitation works companies are coordinated and supervised by municipal or departmental author- ities, and by INSFOPAL; in fact, some of them were operating subsidiaries of INSFOPAL before 1975, when INSFOPAL was reorganized and relinquished the operation of sanitation facilities. Sanitation works companies are managed by executives selected jointly by INSFOPAL and the local authorities, and their Boards consist of representatives of INSFOPAL, the departments and municipalities, and the users of the services. In many small towns, local administrations provide water and sewerage services directly. In rural areas, water and sanitation facilities are built by departmental offices of INAS in coordination with the beneficiary communities. 28. While the water supply and sewerage sector in Colombia might have reached a higher stage of development than in some other Latin American countries, the record of INSFOPAL, INAS and most of the companies supplying the services has fallen short of expectations. Performance of these sector entities is largely determined by local conditions and the attitudes of the local authorities. Thus, INSFOPAL and INAS found it difficult to provide the leadership required to ensure within the sector adequate standards of opera- tion, maintenance and financial management. Moreover, they never acquired the necessary proficiency in investment programming and supervision of proj- ect execution by local operating entities. Frequent changes in management, shortage of competent and experienced staff, and the deficient administrative and operational procedures have further limited the effectiveness of the two - 11 - institutions. At the local level, most of the operating companies are handi- capped by unduly large and poorly trained work force, large quantities of unaccounted-for water, reluctance - or inability - to charge proper water rates and inadequate accounting, billing and collection procedures. Sector Policies and Finances 29. Government policy aims at expanding water and sewerage services, and improving their quality. For 1990, it has set for urban agglomerations service level targets of 90% for water and 80! for sewerage. For rural areas, service levels are to be raised from about 222 co 40X for water supply and from less than 20% to 35% for sewerage. This would mean reaching an additional 5.5 million people in the urban areas and an additional 2.0 million in the rural areas by the end of 1990. In line with the Government's goal of -development with equity", most of the new beneficiaries would be low-income families, consuming relatively little water and paying minimum rates. 30. The Government recognizes that these service level targets are very ambitious. In the 'seventies, annual sector investment averaged about US$160 million equivalent at 1983 prices. The peak of almost USS200 million was reached in the middle of the decade, but thereafter investment fell to about USS120 million annually. About 92% of the investment benefitted the urban agglomerations and only 8% the rural areas. About 60Z of the capital expend- iture was financed by budget appropriations and domestic credit; about 20% by external lenders, primarily the Bank and the IDB; and the balance largely fro internal cash generation of the local operating companies. 31. The Government is well aware of the financial implications of its policy aims for the sector, which would call for capital expenditure of the order of USS1.7 billion (at 1983 prices) over the next six years. Conse- quently, to attain higher levels of self-financing, through internal cash generation by the local companies providing water and sewerage services, has now become a foremost objective of Government policy for the sector. The Government also endeavors to ensure a steady flow of funds for sector invest- ment, recognizing that its sporadic contributions in the past have hampered planning for expansion and delayed execution of projects. Bank Role in the Sector 32. Between 1968 and 1979, the Bank made nine loans, totalling USS233.4 million, for water supply and sewerage in Colombia. In addition, water and sewerage components were included in the first urban project and the nutri- tion project of 1978, and in two rural development projects financed by the Bank. Six of the loans, US$166.3 million in the aggregate, were made to the autonomous municipal utility companies in Bogota, Cali and Palmira, and three, for a total of US$67.1 million, to INSFOPAL for relending to local companies in support of 36 projects in medium-size and small cities and towns. By far the largest borrower has been Empresa de Acueducto y Alcantarillado de Bogota (EAAB), to which the Bank has lent US$132 million in three separate operations; a fourth loan is being discussed. To date, per- formance audit reports were issued for the first Bogota project of 1968 and the first Cali project of 1970, and a project completion report for the - 12 - Palmira project of 1971.3/ These reports were critical of the optimistic projections of demand for water, which had been disproved by a declining trend in urban growth in the 'seventies and by a concomitant fall in water use per household, as low-income inhabitants came to represent a rising pro- portion of the beneficiary population. They pointed out to delays in project execution which, in an inflationary environment, resulted in cost overruns for most of the projects. Furthermore, the reports emphasized the general- ized failure to raise water rates to compensate for cost increases. 33. The Bank's experience with the Bogota projects and with EAAB has been relatively good. The first two projects, though completed after sub- stantial delays, have achieved their basic objectives. The third project is being carried out satisfactorily and should be completed by mid-1985. In the case of the other projects and borrowers, the Bank has encountered difficul- ties in accomplishing its institutional objectives. In particular, INSFOPAL in spite of three loans has not developed into the strong and efficient regulatory, technical support and financial assistance institution through which the Bank planned to support projects in medium-size cities and towns. The financial performance of many mnicipal utilities (Cali, subborrowers of INSFOPAL projects) was inadequate, largely because of the combined effect of insufficient tariff levels and excessive operating costs. The financial viability of many companies was impaired particularly in 1981 and 1982 when the Government rejected applications for water rate adjustments. Only in 1983, did the Government move to correct the situation by authorizing large rate increases; however, these increases were reduced or delayed in some instances because of political opposition. Another obstacle for more efficient project Implementation was the Government's inability to make available budget appropriations for investment through INSFOPAL and INAS in a timely fashion. 34. Faced with the failure of INSFOPAL, the Bank has changed its sector strategy for Colombia. Multi-city lending is no longer considered feasible until INSFOPAL can improve its performance dramatically, or alternative intermediary arrangements are established. Consideration is being given at this time to direct lending on a selective basis to the larger municipal utility companies, which have demonstrated the will to improve their standards of performance and to accept outside advice, even though this is regarded as an inferior solution likely to constrain efforts to raise service levels throughout Colombia. Empresas Hinicipales de Cucuta would be the first of these companies. PART IV - CUCUTA WATER AND SEWERAGE SERVICES The City 35. Located in the northeast on the border with Venezuela, Oicuta is Colombia's eighth largest city and a departmental capital. Founded by the Spanish 250 years ago, it has grown from a town of 40,000 in 1940 to an urban agglomeration of 350,000 in 1983. In the last three decades, three munici- palities adjacent to Cucuta have also experienced rapid growth and the possi- bility is being explored of consolidating the pub"ic services throughout the Cucuta metropolitan area. Because of its location and due to the creation of 3/ SecM7R-260 of March 3, 1978, SecM79-632 of August 29, 1979 and SecM83-714 of July 11, 1983. - 15 - is the most urgent investment. It would permit EMC fully to utilize the available average daily peak production capacity of 1.4 cubic meters per second from the existing water source, the Pamplonita River which flows into the Zulia River and would suffice to meet projected demand until 1989. Thereafter, tapping the Zulia River would be the least-cost alternative for meeting Cucuta's longer-term water demand, the dependable yield of the Pamplonita River being too small to produce more water. The Zulia River scheme involves tapping cooling water tailings of an existing power plant operated by Instituto Colombiano de Electricidad, and the construction of a water treatment plant, a combined gravity-pumping water transport system, and two storage tanks from which water would be fed into Cucuta's existing trans- mission and distribution network. For the first stage of the Zulia River scheme to come on line in 1989, procurement has to be initiated in 1985. Once in full production, it will add a production capacity of about 1m3/sec which, with complementary investments in water transmission, storage and dis- tribution, would meet Cucuta's demand through the next 20 years. 44. EMC plans to provide sewerage services to 802 of Cucuta's popula- tion by 1988 and to maintain them at that level thereafter. This would require the construction of about 16,400 house connections to service about 100,000 people. About 402 of these connections would be in urban areas with already existing sewerage infrastructure. Urban developers would build secondary collector networks in unsewered areas and make about 10% of the new connections. EMC would thus be responsible for the construction of trunk sever and secondary collector networks, sufficient to service about 8,200 house connections. Consultants have drawn up for EMC a masterplan for expanding Cucuta's sewerage system through 2005. The recommended least-cost solution would divide the municipal area into three sewer districts with separate interceptor and treatment facilities. aste water from the Pamplonita district, covering most of Cucuta, would be transported through the existing but expanded system of interceptors to a stabilization lagoon for treatment and subsequent discharge into the Pamplonita River. The treat- ment would result in a marked improvement in the quality of water in the Pamplonita River and safeguard the quality of water in the Zulia River. 45. EMC was among the beneficiaries of the second loan made by the Bank to INSFOPAL in 1975 and of the loan made to the Republic of Colombia in 1978 for the first urban development project. The loan proceeds allocated to it amounted, respectively, to US$1.58 million and US$3.0 million. In both instances, the execution of the subprojects suffered from delays; the finan- cial targets, laid down in the Subsidiary Agreements with INSFOPAL, were not met fully, one of the reasons being that the Government refused to authorize EMC to raise water rates in 1980, 1981 and 1982. EMC Financial Performance 46. Traditionally, the water and sewerage service has been EMC's strongest revenue earner, with its revenues being used to subsidize the other services. Between 1978 and 1982, ENC generated sufficient revenues to cover operating costs, working capital needs and debt service for all its services on a consolidated basis. During that period, expenses quadrupled under the impact of inflation and service expansion, while the growth of operating revenues fell behind, owing to very low tariffs which did not change between - 16 - 1980 and 1982 (with the exception of slaughtering fees). In this situation, investment outlays of the water and sewerage service were small and were financed mainly by loans and Government grants. 47. The financial position of EMC improved substantially in 1983. After a complete modernization, slaughterhouse tariffs were increased seven- fold in 1982. Water and sewerage rates went up by 90% in April 1983 and through the remainder of 1983 have been subject to monthly increases of 1.5%. As a result, with the exception of solid waste collection and dis- posal, each EMC service generated a cash surplus in 1983. Nonetheless, water and sewerage rates remain low and raising them over a period of time would not inflict undue hardship on the customers. The average combined water and sewerage tariff was equal to US$0.14 per cubic meter of water in 1983 and the monthly bill per connection averaged US$5 equivalent; these figures were about 50% below Bogota and Cali levels. EMC customers are divided into several categories, and the tariffs are progressive. The lowest residential category benefits from a fixed charge of 46 pesos for a monthly water allow- ance of 20 cubic meters. The monthly water charge of 46 pesos represents not more than 0.5Z of the family income at the estimated relative poverty level of about 130,000 pesos per annum, making the cost of service easily afford- able. In line with other cities in Colombia, high income Cucuta customers pay water rates about five times higher than those being collected from low- income customers. EMC derives about 201 of its water and sewerage operating revenues from connection charges. The present average combined charge for a water/sewerage connection is roughly equivalent to US$350 and is being levied over a period of 12 to 40 months, depending on the customer's ability to pay. 48. To enhance its capacity to generate internal resources for invest- ment and to make each of its services financially self-supporting, EEC has, effective July 1984 increased tariff levels for water and sewerage and market services. Increases in tariffs for the solid waste service are expected to be authorized by the National Tariff Board and implemented by EMC before the end of this year. This would enable EMC in 1984 to make a 10% contribution to investment from internal cash generation. It should further ensure a 1.0% rate of return for the year on revalued fixed assets of the water and sewer- age service, compared with negative rates of 5.3% in 1982 and 0.52 in 1983. 49. Some of the existing debt of EMC is secured by lien on its assets and revenues. Evever, none of these liens have been created on the assets or revenues of the water and sewerage service. Their total is quite small, if compared with EHC prospective overall revenues. PART V - THE PROJECT 50. The proposed project (IBRD Maps 18145 and 18146) was identified in the fall of 1981 by a Bank mission which visited Cucuta at the invitation of Empresas Municipales de Cucuta (EMC). The mission recommended that consult- ants be retained to bring up to date the existing masterplans for expanding the water and sewerage system, in order to help prepare a project with the assistance of the Bank. On the occasion of Cucuta's 250th anniversary in June 1983, the President of Colombia declared his support for the project and offered a Government grant as a contribution to its cost, on the grounds that - 17 - the project would improve living and working conditions in a city going through a difficult period-owing mainly to the across-the-border effects of the economic problems affecting Venezuela--and would make Cucuta better able to diversify its economic pursuits by attracting some industrial enterprises (para. 35). The project was appraised in December 1983 and the negotiation of the proposed loan took place in Washington in May 1984 with a delegation headed by Pedro Sayago Rojas (General Manager of EMC), and consisting of a special representative of the President of the Republic and the head of EMC's Project Coordination Office. Project Objectives and Description 51. The objectives of the project are: to improve water and sewerage service and extend it by 1988 to 95% and 802, respectively, of Cucuta's inhabitants; to provide an adequate source of safe water for the next 20 years; to reduce the volume of unaccounted-for water through leak detection and repairs, better network maintenance, and installation of about 50,000 water meters; to check river pollution; to put an end to flooding of the city's center; and to transform EMC into a modern, well-managed, efficiently operated, competently administered and financially sound public utility. The project would consist of: the expansion of water transmission and distribu- tion capacity; the construction of a new water production facility on the Zulia River with the capacity of one cubic meter per second; the expansion of the capacity of the sewerage system, including the construction of a waste water stabilization lagoon for treatment of sewage before discharge into the Pamplonita River; construction of storm drainage collectors and the lining of a section of Canal Bogota; an institutional improvement program, involving provision to ENC of consultants, training and equipment; preparation of a study on the feasibility of consolidating water and sewerage services throughout the Cucuta metropolitan area; and provision of consultants for project administration and construction supervision. The project is to be carried out in seven years. Status of Project Preparation 52. Project preparation is well advanced. About 90% of all designs and bidding doctunents have already been completed. With the exception of the designs for the waste water stabilization lagoons, for which consultants are currently carrying out treatability tests on a pilot facility, all designs and bidding documents are expected to be completed by the end of July 1984. Draft terms of reference for the project administration and supervision of construction consultancy have been discussed during negotiations. After incorporating the Bank's comments EMC expects to invite proposals from four local engineering firms with qualifications satisfactory to the Bank by mid- June 1984 and engage the consultants by September 1984. Draft terms of reference for the various technical assitance consultancies are being pre- pared by ENC and are expected to lead to the beginning of work in March 1985. Cost and Financing 53. The cost of the project, excluding interest during construction and the front end fee, is estimated at US$32.8 million equivalent. The base cost, in June 1984 prices, is US$25.4 million. No allowance is included for duties and taxes for imported goods since EMC is exempt from such charges. - 18 - Local goods are subject to a tax on the value added by local manufacturers which on average amounts to about 4% of the purchase price. This tax is included in the local cost component. Physical contingencies were calculated by the Bank at about 10%. Price contingencies, equivalent to about 17% of base costs plus physical contingencies, were calculated assuming that local inflation varies from 20% in 1984 to 18% in 1991 and foreign inflation from 9.5% in 1984 to 6% in 1991. The foreign exchange component mounts to US$15.26 million or 46.5% of the project cost. 54. Total financing required amounts to US$37.9 million equivalent, including interest during construction. This is justified by the cash flow needs of EMC, determined by the large size of the project in relation to existing capital assets. The local component is US$19.4 million equivalent and the foreign exchange component US$18.5 million. The financing plan pro- vides for an EMC contribution of US$8.3 million equivalent, a Government con- tribution of 800 million pesos (equivalent to US$6.9 million), a long-term loan from local financial institutions of 600 million pesos (equivalent to US$4.2 million) and a loan of US$18.5 million by the Bank. The Bank would finance the foreign exchange component of the project cost, interest on its loan during construction until the date of the first principal repayment to the Bank, and the front-end fee of US$46,135. The long-term loan from local financial institutions is expected to be provided by PFDU which has already, through a letter of intent, expressed its preparedness to make the required funds available. To ensure the financing plan for the-project, assurances have been received from (i) EMC that it would enter into arrangements with local financial institutions in order to obtain additional financial resources in the amount of ColS600,000,000 not later than December 31, 1985, and the Government, that it would take all necessary actions to enable the Borrower to secure these additional funds; and (ii) the Government that it would provide to the Borrower in a timely manner, an amount of not less than Col$800 million in the form of budgetary contributions (Sections 2.02 and 2.03 of the draft Guarantee Agreement and Section 3.07 of the draft Loan Agreement). Execution of the Project 55. The Project Coordination Office of EMC would carry out the pro- ject. This Office is competently staffed and directly subordinated to the General Manager (para. 37). The draft Loan Agreement provides that EMC would maintain the Project Coordination Office under the supervision of qualified and experienced management assisted by competent staff in adequate numbers (Section 3.10). A personal representative of the President of the Republic would closely follow the progress of the project. The Project Coordination Office would be assisted by consulting engineers employed on terms and con- ditions acceptable to the Bank; their employment would be a condition of the effectiveness of the proposed loan (Sections 3.02 and 7.01 of the draft Loan Agreement). Most of the investment under the project would be completed by the end of 1989. Of high priority are the expansion of water transmission and distribution capacity, which would enable EMC to make full use of its water production capacity, and institutional improvement. Since initial pay- ments on some contracts for these parts of the project may have to be made before the signing of the proposed loan, retroactive financing of not more than US$500,000 equivalent has been recommended for goods an! services pro- cured after December 31, 1983 and in accordance with Bank guidelines. - 1q - 56. The areas where sewerage networks would be built have not yet been Aefinitely determined. Before March 31, 1985, EMC would furnish to the Bank a program for their construction based on population density and its willing- ness and ability to pay for the service (Section 3.08 of the draft Loan Agreement). Not later than June 30, 1985, EMC would present to the Bank the final design for a stabilization lagoon, where waste water would be treated before discharge into the Pamplonita River; and not later than December 31, 1986, EMC would purchase the land required for the construction of the lagoon (Sections 3.05 and 3.06 of the draft Loan Agreement). 57. To bring about the necessary institutional Improvement, extensive technical assistance would be provided to EMC in the following fields, supplemented by training of personnel and the acquisition of data processing equipment: (1) organization, management and administration; (ii) maintenance and operation of all EMC services; and (iii) control of water losses, includ- ing leak detection and repairs. Local consultants would provide the assist- ance, drawing on foreign expertise in specialized areas. The main objective would be to improve existing procedures and practices, and make them more efficient thus enhancing staff productivity. On-the-job training, supple- mented by outside training to meet special needs, would be the main vehicle for technology transfer. The scope of the technical assistance program and a timetable for its implementation were discussed and agreed upon during negotiations. The progress of the institutional improvement program would be closely monitored by way of reports and Bank staff visits. Procurement, Disbursement and Auditing 58. Procurement arrangements for the project (Annex III) would be such that contracts awarded through international competitive bidding would account for more than 80% of the project cost. Most of the equipment con- tracts are expected to be won by foreign manufacturers. Contracts for water pipes and accessories are likely to be awarded to local producers, although large diameter pipe may be supplied from abroad. Qualifying domestic suppliers would be given a preference in bid evaluation of 15% of the c.I.f. bid price or the applicable import duty, whichever is lower (Schedule 4 to the draft Loan Agreement). Civil works contracts would most probably go to local contractors, but because of Cucuta's location, participation by foreign contractors is also envisaged. Technical assistance contracts would be let in accordance with Bank guidelines for use of consultants and are expected to be won by local consulting firms, which rely on foreign consultants for specialized assignments. To attract competition from abroad, contracts would be grouped into large packages for both equipment supply and civil works. An exception would be the construction of water and sewerage networks, and service connections, which are more conveniently bid in smaller packages. 59. Disbursement would be: (a) against 100% of foreign expenditure for direct imports; 60% of local expenditure for imported equipment and materials procured locally and 60% of ex-factory cost of locally manufactured goods; 30% of total expenditure for civil works; 100% of foreign expenditure for foreign consultants and training; and 30% of local expenditure for local con- sultants and training; and (b) in respect of amounts due for interest and other charges on the Bank's loan until the date of the first principal repay- ment to the Rank (Schedule 1 to the draft Loan Agreement). For local con- tracts of less than US$30,000 equivalent each, the Bank would disburse against statements of expenditure certified by E4C. - 20 - 60. In order to expedite project execution and to reduce the interval during which EMC would finance with its own resources the Bank's share of locally procured goods and services, a Special Account would be opened at Banco de Is Republica and an initial deposit of up to US$1.0 million would be made into it through one or more withdrawals from the Loan Account [Section 2.02(c) and Schedule 5 of the draft Loan Agreement]. EMC would be entitled to make withdrawals from the Special Account upon presentation to Banco de la Republica of duly authorized copies of withdrawal applications supported by proper documentation. At the same time, EMC would forward the original with- drawal applications to the Bank, which would replenish the Special Account. The Special Account would be audited annually by independent auditors accept- able to the Bank [Section 5.03 of the draft Loan Agreement). 61. ENC would at all times keep adequate project accounts. EMC's financial statements separate for each service and consolidated and the Special Account and the certified statements of expenditures would be audited annually by independent auditors satisfactory to the Bank. The auditor's report would be sent to the Bank no later than five months after the close of each Fiscal Year (December 31). EMC Financial Prospects 62. During the period of the execution of the proposed project, EKC would implement a number of measures to rehabilitate its financial condition and raise its capacity for internal cash generation. As a result, EKC should be in a position to make a contribution of 22% to the cost of the project from its own resources. 63. Through gradual increases in water and sewerage rates by 60% in real terms between 1985 and 1990, EMC should earn on its annually revalued fixed assets of the water and sewerage service an annual return of 3.5Z in 1985, 5% in 1986, 5.5% in 1987 and 1988, 6% in 1989 and 7% in 1990; there- after, the rate of return would remain at the level of 7% (Section 5.09 of the draft Loan Agreement). From its operations other than water supply and sewerage, 124C would generate revenues equivalent on a consolidated basis to not less than its total operating expenses, the amount by which debt service exceeds provision for depreciation, its working capital requirements, and its other assets and liability requirements (Section 5.10 of the draft Loan Agreement). 64. To bolster its financial position further, EKC would not--without the Bank's agreement-incur any debt, if this would reduce the debt service coverage below 1.5 during any twelve-month period (Section 5.05 of the draft Loan Agreement). Moreover, unless the Bank has concurred, EMC would not in any given year commit itself to, or incur, a capital expenditure of more than US$1.0 million equivalent in addition to the proposed project (Section 5.06 of the draft Loan Agreement). 65. While adequate water rates and other tariffs for EMC services would be the key to financial rehabilitation, technical assistance provided under the proposed project would assume an Important role in raising productivity and bringing about cost-savings throughout EMC. Among the specific targets would be an effective control of water losses, reduction in the number of employees per one thousand water connections (para. 37), and the reduction in - 21 - collection arrears from an amount corresponding at oresent to sales proceeds of about three months to an amount equivalent to two and a half months' sales in 1985 and thereafter (Section 5.11 of the draft Loan Agreement). Benefits and Risks 66. About 240,000 people would benefit from the water supply component of the project; of them, 130,000 would be connected to the water distribution network and 110,000 would no longer be subject to water rationing. About 100,00 more people would be connected to the sewerage system upon the comple- tion of the project than there are at present. The Zulia River water produc- tion facility would supply potable water to an additional 200,000 people between 1991 and 2008. The treatment of sewage would reduce water pollution in the Pamplonita and Zulia Rivers, thus benefitting the riparian population in Colombia and Venezuela. About 60% of the people benefitting from the project would be the urban poor living on an annual income of less than US$220 equivalent per person. The cost of service would be affordable to the urban poor. Assuming that family income increases in time with inflation, a family living below the relative poverty level would have to spend 0.8% of its income for water and 1.1% for water and sewerage combined based on pro- jected 1990 tariff levels. Connection fees (about Col$18,000 for water and about Col$12,000 for a sewerage connection) would equally be affordable, since they could be paid in up to 40 monthly installments. 67. Using estimated revenues as a proxy for economic benefits (based on tariffs required to meet the covenanted rates of return on revalued fixed assets--para. 63), economic rates of return were calculated for the water supply component, the sewerage component, and for these project components combined. Shadow pricing was applied for the unskilled labor Darts of con- struction and operating costs. The results show rates of return of, respec- tively, 10%, 19% and 12%. Considering that financial revenues do not fully reflect the economic and social benefits of investment in water supply and sewerage, these rates of return are satisfactory. No rates of return were estimated for the storm drainage component of the project and for institu- tional improvement, because their costs cannot be reliably allocated to any specific group of beneficiaries. These costs are relatively small, amounting in the aggregate to 8% of the cost of the project. 68. No significant delays are expected in the execution of the pro- ject. The works are relatively simple and engineering consultants would be assisting EMC in project administration and construction supervision. The project has been assigned high priority by central, local and municipal authorities, and the involvement of a personal representative of the President of the Republic would certainly speed up physical progress (para. 55). Conservative population and consumption forecasts were used in prepa- ring the revenue estimates. Water rates projected for 1990 would still be low, compared with those charged in other cities (para. 47), and should be well within the customers' capacity to pay. Thus, the potential for raising rates above the projected levels would be there in case of unexpected cost increases. Nevertheless, the Bank's experience shows that the attitude of the Government and the local authorities regarding implementation of timely and adequate increases in public utility rates does present a risk. - 22 - PART VI - LEGAL INSTRUMENTS AND AUTHORITY 69. The draft Loan Agreement between the Bank and Empresas Municipales de Cucuta, the draft Guarantee Agreement between the Republic of Colombia and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 70. Special conditions of the proposed loan are listed in Section III of Annex IV. 71. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 72. 1 recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments Washington, D.C. August 17, 1984 - 23 - Annex 1 TA -LE 34 Page 1 of 5 COLOaIA - SOCIAL INDICATOS DATA SET COLOIIA &EPEENCE CmPS (a1mTED äA iAS) s. mpT (MOST aECE~ ESTINATE> & RaCE. KIDDLC iNCmE NIDDLE IB I96ft 1ma ESTALT.- LAT. AfhICA £ CaR EnPe AIDA (T«m~S eq. M) TOTAL 1136.9 1138.9 1138.9 ACRICULTURAL 350.5 350.5 320.5 CuP MR CAPITA (0$) 270.0 440.0 1460.0 2106.6 2345.3 usl. nm.~TI0E Pra CAPr (KILOMS OF OIL EQUIVALENT) 355.0 49.0 690.0 995.5 1122.8 POUPLATION A-D VITAL STATIC PDPULATION.MID-TAR (THOUSANDS) 15754.0 212b6.0 26965.0 URBAN POPULATION (2 OF TOTAL) 48.2 59.8 64.9 66.5 46.8 POPULATION PROJECTIONS POPULATION IN YEAH 2000 (MILL) 37.5 STATIONART POPUILATION (MILL) 61.7 POPULATION ?KIENTUM 1.8 POPULATION DENSITT PER Sq. KI. 13.8 18.7 23.2 35.7 82.9 PER SQ. KI. AEI. LAND 45.0 60.7 82.4 92.4 158.9 POPULATION ACE STRUCTURE (2) 0-14 YRS 46.8 46.2 36.2 39.9 31.6 15-64 YRS 50.3 51.1 60.3 56.0 61.1 65 AND AlOVE 2.9 2.8 3.4 4.5 7.1 POPULATION GalTH RATE (Z) TOTAL 3.1 3.0 2.0 2.4 1.6 UUBAN 5.7 5.2 2.7 3.6 3.7 cD~E BIRTH RATE (PER THOUS) 47.2 33.8 28.9 31.3 23.4 CRIDE DEATH KATE (R TUIS) 17.4 9.7 7.4 8.1 8.8 C05 REPODUCT9ON RATE 3.3 2.3 1.8 2.0 1.6 FAMILY PLAING ACCEPTURS. ANNUAL (THOUS) .. 115.4 192.8 U~Es (X uF nammIED UNIKu> .. .. 49.0 40.3 vN AD guiT INDEX OF Pm0D PROD. PER CAPITA (1969-71-100) 100.0 99.0 124.0 114.3 114.5 PER CAPITA SUPPLY OF CALORIES ( OF REQIREM~EIITS> 98.0 87.0 108.0 110.6 128.6 PROTEINS (~mAS PER DAT) 54.0 46.0 55.0 67.3 89.7 OF UHICH AiNmAL AND PULSE 28.0 24.0 25.0 /c 34.1 34.5 CHILD (AGES 1-4) DEATH RATE 11.2 6.0 4.0 5.7 5.2 MA.Ti LIFE EXPECT. AT NIRTH (YEARS) 33.1 58.9 63.7 64.7 67.4 INFANT MORT. RATE (PER TODUS) 93.4 70.6 53.9 60.6 54.2 ACCESS TO SAFE IATER (ZPOP) TOTAL 30.0 Ja 63.0 64.0 /d 65.4 URBAR 54.9 We 88.0 7m73 - 78.1 RURAL 6.8 l. 28.0 46.0 7d 46.2 ACCESS TO EXEETA DISPOSAL (2 07 POPULATION) ToTAL .. 47.0 44.4 /d 52.9 URUAN .. 75.0 60.0 7d 67.0 kuRAL .. 8.0 14.o7 24.5 POPULATION FEM PHTSICIAN Z640.0 2330.0 1710.0 /f 1917.7 1065.8 POP. pED NURS&NG PERSON 4220.0 730.0 800.0 72- 815.8 764.4 POP. PER HOSPITAL D TOTAL 360.0 650.0 580.0 /f 367.2 326-3 SURA .. 380.0 490.o 7e 411.5 201.5 URAt. .. .. .. ~ 2636.3 ADISSIONS PER HuSPITAL BED .. 22.9 29.8 fe 27.3 20.0 NORISING AVEXACE SIZE Of HOU5EHOLD TOTAL .. 5.7 / . URBAK .. 5.W .. RURAL .. 5.9 . AVERACE HO. OF PERSONS/ROGM TOTAL .. 1.8 /h URKAN .- 1.6 . RURAL .. 2.4 7 ACCESS TO ELECT. (2 OF INELLINGS) TOTAL 47.0 /e 58.1 / . 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STATEM10T OF VAEK LOANS AND IDA CREDITS IN COLOMIA (as of March 31, 1984) (Ussmillion) Loan Amount (less Cancellation) Number Year Borrower Purpose Bank IDA Undisbursed 66 fully disbursed loars and one IDA credit 1,406.1 23.5 1/ - 1163 1975 Colombia Agriculture 21.0 4.6 1352 1977 Colombia Rural Dev. 52.0 5.3 1357 1977 Bn de la Republica Agricultural Cr. 64.0 1.1 1450 1977 Empresa. Nacional de Telecomanicaciones Communications 58.3 25.5 1471 1977 Colombia E[Ighways 90.0 7.3 1487 1978 Colombia Nutrition 25.0 8.1 1558 1978 Colombia Urban Develop- ment 24.8 11.2 1582 1978 Thterconexion. Electrica, S.A. Pbwer 126.0 20.1 1583 1978 Colombia power 50.0 11.2 1593 1978 Zona Franc& Industrial y Industrial ComerclaI de Cartagena Export 15.0 4.5 1624 1979 Colombia Airports 61.0 1.9 1628 1979 'Empresa de Energia Electrica de Bogota Power 94.0 2.0 1694 1979 Colombia Urban Develop- ment 13.5 10.1 1697 1979 Empresa de Acueducto y Alcantarillado de Bogota Water Supply 27.9 3.8 1725 1979 Interconexion Electrica, S.A. Power 72.0 35.7 1726 1979 Instituto Nacional de Famento Municipal Water Supply 31.0 23.6 1737 1979 Instituto Colomblano de la Reforma. Agraria Agriculture Cr. 20.0 12.7 I/ includes exchange adjustment of US$4.0 million. The status of the projects listed In Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. - 29 - Annex II Page 2 of 4 A. STATEMENT OF BANK LOM~S AND IM CREDITS (as of Narch 31. 1984) Number e Borroer Purpose IM Undisbursed 1807 1980 Empresa de Energía Electrica de Bogota Pbwer 87.0 49.3 1825 1980 Empresas Publicas de Medellin Communications 44.0 11.3 1834 1980 Banco de la Republica Industrial Cr. 32.0 2.2 1857 1980 Banco de la Republica Industrial Cr. 150.0 85.9 1868 1980 Empresas Publicas de Medellin Pomer 125.0 87.4 1953 1981 Empresas Publicas de Medellin Poer 85.0 75.3 1966 1981 Colombia Rural Roads 33.0 18.2 1996 1981 Instituto Colombiano de Hidrología Irrigation 37.0 25.3 1999 1981 Corporacion Electrica de la Costa Atlantica Power 36.0 26.0 2008 1981 Empresa de Energía Electrica de Bogota Power 359.0 294.3 2069 1981 Instituto Nacional de los Recursos Naturales Renovables y del Medio Vaterched Ambiente Management 9.0 7.8 2090 1982 Ferrocarriles Nacionales de Colombia RailVays 77.0 77.0 2121 1982 Fondo Vial Nacional Highuays 152.3 139.4 2174 1982 Colombia Rural Develop- ment 53.0 52.2 2192 1982 Fondo del Ministerio de Educacion Rural Education 15.0 13.3 2303 1983 Instituto Colombiano Agricultural Agropecuario Research 63.4 62.7 234911 1983 Carbones de Colombia, S.A. Coal Exploration 9.5 9.5 237911 1984 Colombia Earthquake Re- construction 40.0 40.0 23012/ 1984 Financiera Electrica Nacional Power Develop- ment Finance 170.0 170.0 - TOIL 3,818.8 23.5 Of which has been repaid 837.5 4.1 Total no outstanding 2,981.3 19.4 Amount sold 51.0 - Of shich has been repaid 51.0 - Total now held by Bank and In& 2,981.3 19.8 Total undisbursed 1,435.8 1/ Not yet effective. 2/ Not yet signed. - 30- Annex II Page 3 of 4 B. STATENET OF IFC INVESTPENTS (as of March 31, 1984) Fiscal Type of Amount in US$ Million Year Obligor Business Loan Equity Total 1959 Lamias del Caribe, S.A. Fiber-board .50 .50 1960-1965 Industrias Alimenticias Noel, S.A. Food products 1.98 .08 2.06 1961 Envases Colombianos, S.A. Metal cans .70 - .70 1961-1968 Morfeo-Productos para el Hogar, S.A. Home furniture .08 .09 .17 1961 Electramanufacturas, S.A. Electrical equipment .50 - .50 1962 Corporacion Financiera Development Colombians financing - 2.02 2.02 1962-1963 Corporacion Financiera Development Nacional financing - 2.04 2.04 1963-1967 Campania Colombiana de Textiles 1.98 .15 2.13 1968-1969 Tej1dos, S.A. 1964-1970 Corporacion Financiera de Development Caldas financing - .81 .81 1964-1968 Forjas de Colombia, S.A. Steel forging - 1.27 1.27 1966 Almacenes Generales de Warehousing 1.00 - 1.00 Deposito Santa Fe, S.A. 1966 Industria Ganadera Livestock 1.00 .58 1.58 Colombiana, S.A. 1967-70-74 EWUA de Colombia, S.A. Textiles 5.00 2.61 7.61 1969 Campania de Desarrollo de Tourism - .01 .01 Hoteles y Turismo, Ltda. (KOTURISMO) 1969-1973 Corporacion Financiera del Development Norte financing - .45 .45 1969 Corporacion Financiere del Development Valle financing - .43 .43 1970 Promotors de Hoteles de Tourism .23 .11 .34 Turism Medellin, S.A. 1970-1977 Pro-Hoteles, S.A. Tourism .80 .24 1.04 1973-1975 Corporacion Colombiana de Housing - .46 .46 Ahorro y Vivienda 1974 Cementos Boyae, S.A. Cement 1.50 - 1.50 1975 Cementos del Caribe, S.A. Cement 3.60 - 3.60 1.976 Las Brises Mining 6.00 - 6.00 1977 Promotora de la Interconexion de los Gasoductos de la Costa Atlantica S.A. Utilities 13.00 2.00 15.00 1977 Compania Colombiana de Clinker, Cement and S.A. Construction Material 0.97 1.76 2.73 - 31 - Annex II Page 4 of 4 B. STATENENT OF IFC iNVESTMENTS (as of Narch 31, 1984) (Continued) Fiscal Type of Amount in US$ Million Year Obligor Business Loan EquItZ Total 1981 Leasing Bolivar Leasing 9.00 .17 9.17 - 1981-1982 Petroleos Colombianos Ltd. Chemicals sad Petrochemicals 12.15 3.86 16.01 1983 FrigorEficos Colombianos, S.A. Food Processing 1.00 0.54 1.54 1984 Cementos Rioclaro S.A. Cement and Construction Material 21.91 5.00 26.91 1984 Carbones del Caribe S.A. Mining 10.65 1.64 12.29 I Total Gross Commitments 93.55 26.32 119.87 Less cancellations, termina- tions, repayments and sales 62.28 9.60 71.88 Total commitments now held by IFC 31.27 16.72 47.99 Total undisbursed (including 33.56 7.06 40.62 participants) - - - 32 - ANNEX III PROCUREMENT ARRANGEMENTS Procurement Method Project Element ICR LCB Other Total Cost Equipment and materials 15.7 0.3 - 16.0 including pipes (10.1) (0.2) - (10.3) Civil Works 10.4 4.0 - 14.4 (3.1) (1.2) - (4.3) Consulting services - - 2.4 2.4 and training (0.7) (0.7) TOTAL 26.1 4.3 2.4 32.8 (13.2) (1.4) (0.7) (15.3) Limits on Type of Procurement and Prior Review Thresholds (USS#0DO) Type of Prior Review Contract Aggregate Type of Contract Limit Review Limit Procurement Goods 100 .50 - ICB 450 300 LCB with foreign bidders having the opportunity to participate. Civil Works 500 W0500 - ICB 100 - 500 3000 LCB with foreign bidders having the opportunity to participate. <100 1500 Price quotations from at least three qualified local bidders. - 33 - ANNEX IV Page 1 of 2 CUCUT& WATER SUPPLY AND SEWERAGE PROJECT SUPPLEMENTARY DATA SHEET Section I: Timetable of Key Events (a) Time taken to prepare project: Two years (b) Agency which prepared project: Empresas Nunicipales de Cucuta and Consultants (c) First presentation to Bank: September 1983 (d) First mission to review project: September 1983 (e) Departure of Appraisal Mission: November 1983 (f) Completion of Negotiations: May 1984 (g) Planned date of effectiveness: September 1984 Section II: Special Bank Implementation Action None Section III: Special Conditions 1. Special assurances were obtained and agreements reached that: (a) EMC would enter into arrangements in order to obtain additional financial resources in the amount of Col$600,000,000; and that the Government would take the necessary actions to enable EMC to secure these additional financial resources (para. 54); (b% the Government would provide to the Borrower in a timely manner an amount of not less than Col$800 million in the form of budgetary contributions (para. 54); (c) EMC would maintain the Project Coordination Office under the supervision of qualified and experienced management assisted by competent staff in adequate numbers (para. 55); (d) EMC would furnish to the Bank before March 31, 1985 a program for the construction of the sewerage networks to be built under the project (para. 56); - 34 - ANNER IV Page 2 of 2 (e) ENC would furnish to the Bank before June 30, 1985 the final design for a waste water stabilization lagoon and would purchase before December 31, 1986 the land required for its construction (para. 56); (f) on the annual return to be earned between 1985 and 1990 (and there- after) on EMC annually revalued fixed assets through increases in water and sewerage rates (para. 63); (g) on the revenues to be produced annually in EMC operations other than water supply and sewerage (para. 63); (h) on the debt service coverage and the limitation of capital investment to be undertaken by EMC (para. 64); and (i) ENC collection arrears would be reduced to an amount not exceeding two and a hal times monthly sales (para. 65). 2. A condition of effectiveness would be the employment by EMC of consultants to assist EMC in project administration and construction supervision (para. 55). 71r- ÞANAMA VENEZUELA 7 COLOM6 A * ECUADOR - y - BRAZIL 71I PERU { r mr (| r --- •,-••e ..-r. e -----'- s E..r.q Pro,ect --.-- - Rae a n Röa ^d- e Ar -upas o~ Sr- R.ar Z.a0 R~r Acedct ----- ner a ou K:ILOMETEPS 0 1 2 IBRD 181 MARCH 19- VENEZUELA C 0 L 0 M i •BRAZI L - PERU n-- r ö Ra.. swer. .,,- T~wiie Forse i.i -T--i_0 'R::: - COLOMBIA CUCUTA WATER SUPPLY ko Pe AND SEWERAGE PROJECT ---- - Waer Mari Bu.It -p Aras * * Rse.ars -- Roads Oursde Bup.p Ar~s ® ® Pnp~ing Starians - Ri.eN -- --Zulta River A~uduct - In'rnar~ onal Boundar.es KILOMETERS 2 -3-__...___....... CUCUTA WATER SUPPLY AND SEWERAGE PROJEC a . VENEZUELA SEWERAGE SYSTEM C 0 L 0 tø B lA s..... c.-STORM DRAINAGE SY-M 1; P~. In --- ~ E T'.~ S-aP.~ l ~ C .CUDO - - ---..- Pr se - - .b.- - - . s. e Poe E~. ~c. .i.ar,. BRAZIL - D ---- 4. d. P-.ir-.~ se dø., P RU 江