Colombia - Power Development Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3750-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$170 MILLION TO FINANCIERA ELECTRICA NACIONAL WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A POWER DEVELOPMENT FINANCE PROJECT March 8, 1984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso - Col$ Average Calendar 1983 Exchange Rate Effective Feb. 29, 1984 US$1 = Col$78.861 US$1 = Col$92.53 Col$1 = US$ 0.0127 Col$1 = US$0.01081 WEIGHTS AND MEASURES 1 ton (t; metric; 1,000 kg) = 1.100 short tons (sh. tons) 1 kilowatt-hour (kWh) = 1,000 watt hours . megawatt (MW) = 1,000 kilowatts (103 kW = 106 W) 1 gigawatt (GW) = 1,000 MW (103 kW = 106 kW) 1 gigawatt-hour (GWh) = 1,000,000 kWh (106 W) paid quarterly in advance = p.q.a,. GLOSSARY OF ABBREVIATIONS BR = Banco de la Republica (Central Bank) CARBOCOL = Carbones de Colombia CEV = Electricity Certificates CHEC = Central Hidroelectrica de Caldas Limitada CHIDRAL = Central Hidroelectrica del Rio Anchicaya Limitada CONPES = National Economic and Social Policy Council CORELCA = Corporacion Electrica de la Costa Atlantica CVC Corpor-acion Autonoma Regional del Valle del Rio Cauca DNP = National Planning Department ECOPETROL = Empresa Colombiana de Petroleos EEEB = Empresa de Energia Electrica de Bogota jEMCALI = Empresas Municipales de Cali ENE = National Energy Study EPM Empresas Publicas de Medellin FEN = Financiera Electrica Nacional (National Electricity Deve:Lopment Bank) FRG = Federal Republic of Germany GDP = Gross I)omestic Product ICEL = Instituto Colombiano de Energia Electrica ]:DB = Inter-lmerican Development Bank ISA = Interconexion Electrica S.A. JNT = National Tariff Board OAS = Organization of American States OED = Operations and Evaluation Department (IBRD) UNDP = United Nations Development Programme FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY COLOMBIA POWE:R DEVELOPMENT FINANCE PROJECT LOAN AND PROJECT SUMMARY Borrower: Financiera Electrica Nacional (FEN) Guarantor: Republic of Colombia Amount: US$170 million equjivalent (including front-end fee) Terms: Repayment in seventeen years, including four years of grace, at the standard variable interest rate and other charges. Accord- ing to a fixed amortization schedule based on the expected aggregate of the amortization schedules of the individual sub- loans to be made. Project The project aims at assisting Colombia during 1984-85 to main- Objectives taim the construction rhythm of ongoing electricity development and projects, which will supply the electric energy needed to facil- Description: itate growth of industrial and commercial activities, as well as help supply electricity to a larger segment of the country's population, only 54% of which now have access to it. The parti- cipation of the international capital market, which had dimi- nished sharply from past years, has been enlisted in this.1/ The proposed project also seeks to support the development of FEN, the recently-established financial arm of the power sector, created to tap domestic and external capital markets on its behalf. Support is provided under the project to assist FEN in its role of strengthening power sector financial management. The proposed project consists of subprojects representing a two-year time-slice of priority ongoing electricity development investments, several of which are already partly financed with Bank loans. Criteria and procedures for subproject selection have been agreed with FEN. Based upon these criteria, a group of subprojects has been selected on a preliminary basis, with final selection and sub-loan amounts to be based upon detailed proposals in each case. Subprojects will consist of a portion of the civil works, goods and services associated with the investments, including interest during construction on existing Bank loans where justified, and the proposed subloans to be made by FEN to the utilities would finance foreign exchange costs not 1/ Approval of the Board of Executive Directors of the negotiated terms and conditions of proposed US$30 million Bank participation in the US$200 million B-loans is to be sought on the basis of President's Memoranda distributed separately. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - covered from other sources. Procurement under the proposed Bank loan, as well as the Bank's share of the cofinancing loans, would be under international competitive bidding in line with Bank guidelines. The project would be implemented over a 2-year period, beginning in the second quarter of 1984. Estimated Costs: Investments in Progress of ISA, EEEB, EPM and CVC 2/3/ (US$ million) Local Foreign Total l. Civil works, goods and services 704.0 694.0 1,398.0 2. Interest during construction - 204.0 204.0 Total 704.0 898.0 1,602.0 Financing Plan: Local Foreign Total 1. Existing external financing - 528.0 528.0 2. A-Loan - 170.0 170.0 3. B-Loans - 200.0 200.0 4. Other external loans 25.0 - 25.0 5. Internal cash generation 466.0 - 466.0 6. Local currency FEN loans 170.0 - 170.0 7. Other 43.0 - 43.0 Total 704.0 898.0 1,602.0 2/ Estimates do not include two rural-based utilities whose eligibility to participate in the project is contingent upon their meeting certain conditions, including the preparation of viable financing plans. 3/ Investments by one utility in construction projects of another utility are not included nor are permanent working capital increases. Inclusion of these items, which are being financed by internal sources, would bring aggregate investment requirements to US$2,049 million.  Estimated Disbursements: CY: 1984 1985 1985 Cumulative 100.0 70.0 170.0 Rate of Return: Projects which are prospective candidates for Bank financing have higher estimated internal rates of return than when originally appraised by the Bank. For all hydroelectric facilities included under the project, representing about 80% of project cost, the average cost per installed kW is estimated at a low US$700. Sub- transmission and distribution facilities would represent the least--cost means of bringing electricity to the final consumer. Risks: There is a risk that the local currency share of invest- ments may not be available in a timely manner. However, the expected internal cash generation of the four major utilities and the measures already taken by the Colombian authorities to mobilize domestic savings, as well as future actions that have been agreed should enable project financing to materialize as scheduled. There is another risk, which is attendant upon FEN's ability to fulfill its role as a development banking institut-ion. However, the establishment of sound lend- ing and operating criteria, the support provided under the project for the entity's monitoring and advisory role and the broad-based composition of its Credit Committee are considered adequate to minimize this risk. Staff Appraisal Report: Report No. 4771-Co, March 8, 1984.  f O I  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FINANCIERA ELECTRICA NACIONAL FOR A POWER DEVELOPMENT FINANCE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Financiera Electrica National (FEN), with the guarantee of the Republic of Colombia, for the equivalent of US$170 million for a power deve- lopment finance project. The loan would have a term of 17 years, including four years of grace, and would bear a front-end fee of US$423,940. PART I - THE ECONOMY 2. An economic mission visited Colombia in July 1982 and its report (4444-CO) was distributed to the Executive Directors in August 1983. This mission was followed by a small updating mission which visited the country in February 1984. This section reflects both missionts 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. 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 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 and educational opportunities for women,  - 2 - 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 about 50% and life expectancy rose from 48 years in the early 1950s to 63 years currently. The child mortality rate declined from 11 per thousand in the early 1960s to 3.5 per thousand in the late 1970s. Infant mortality fell to 55 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 196Qs and, by the late 1970s, 79% 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 adequate 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 substilution supported by high tariff protection and the provision of economic inf-rastructure 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 conr 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 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  - 3 - 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 ccrrect 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 1% 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 depreciation 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 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 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.  - 4 - 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 out:put was hard-hit both in 1982 and 1983 as the production of coffee, cotton and oil seeds dropped as a result of low international prices, reduced fer- tilizer 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 intro- duction of import restrictions in Venezuela--a major trading partner--in 1983, and the reduction in Colombia's coffee export quota in the Inter- national Coffee Agreement significantly below the 1981 coffee export level. Net foreign exchange reserves declined by about US$1,800 million in 1983 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. In 1983 the Government introduced 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 has been accelerated withl a view to regaining the 1975 real exchange rate over the 1983-84 period; the housing construction industry has been provided with incentives to mob;ilize an increasing amount of resources; and open market operations have been discontinued to increase liquidity in the economy. Temporary import restrictions have been 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 stabili- zation 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 restricitions in the financial system. The effects of the above measures are beginning to be felt in 1984. However, 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 in foreign exchange reserves. The Goverrnment will thus have to intensify its external resource mobilization and export promotion efforts during 1984 to strengthen rapidly Colombia's external sector. Development Strategy 12. The Government's strategy for accomplishing its development object- ives is set forth in the 1983-86 National Development Plan. This strategy emphasizes growth with equity with the purpose of expanding the benefits of deve;Lopment 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  - 5 - growth while maintaining price stability. The strategy strengthens the pre- vious 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 pro- vision of transport infrastructure. Economic decentralization, regional autonomy and the uniting of regional growth centers through improved trans- port, communication and financial links are directed towards creating an integrated national market. The development plan's strategy also 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 nutri- tion and welfare goals. Industrial policy objectives are to provide an envi- ronment of certainty, along with adequate credit an(' infrastructure, so that entrepreneurs are encouraged to invest and expand output. Because of 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, broad- ening coverage of services and strengthening the social service institu- tions. Programs in the housing, health, and education sectors are to be better focused and integrated, and selected low income and 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 program, the new directions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 13. Colombia became a net oil importer in 1976, and by 1984 petroleum imports are projected to absorb about 14% of merchandise exports. 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 availabilities, 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 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 con- sumption and encouraging production. The prices paid to producers (primarily foreign companies) for "incremental" and "new" crude provide adequate produc- tion incentives, and the retail prices of petroleum products have been increased substantially in recent years, reflecting, on the whole, inter- national levels.  14. Colombia's agricultural growth performance has slowed down rarkedly ir, 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 thie 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 beczome 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 in;Erastructure 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. A large 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, houasing, nutrition and health, industry (including mining), water and sewerage, and education sectors. Overall, public fixed investment is projected to average 9% of GDP diuring 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. 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; 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 to tackle some of these issues were approved by Congress in 1983, including measures related to broadenirg the base and increasing the average rate of the sales tax, increasing othler indirect taxes, reducing the earmarking of revenues, reducing tax evasion, and strengthening tax administration which are expected to have an effect in 1984. Since this effort is likely to coinr cide with increased private sector demand for investment resources, the  - 7 - importance of measures to expand domestic savings cannot be over-stressed. The recent capital market liberalization should encourage savings. A signi- ficant increase in voluntary private savings is not likely, however, as 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 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 cotntry's resource potential and restore higher economic growth, the current account deficit of the balance of pay- ments is projected to average US$1.7 billion per year during 1984-86, equiva- lent to 4% of GDP. Almost half of the deficit is projected to be financed 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 norr-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 4% 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 1% of GDP by 1990. To achieve real GDP growth of about 4% 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 US$6.1 billion in current prices for the 1984-86 period, for an annual average requirement of about US$2.0 billion. Net foreign investment is expected to account for US$0.9 billion during 1984-86. This should provide about 15% of the gross external financing required. Of the remaining 85% (US$5.2 billion) about US$2.5 billion, has been either committed or is expected to be secured from multilateral and bilateral sources, while the difference, US$2.7 billion, will need to be borrowed abroad from financial markets and supp- liers' 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 commer- cial sources, this share is expected to remain at about 20% during 1983-86. The public debt service ratio at the end of 1982 was 18% and is expected 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.  - 8 - PART II - BANK GROUP OPERATIONS IN COLOMBIA 20. The proposed loan, the 102nd to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$3,818.9 million (net of can- cellations). Of this amount the Bank held, as of September 30, 1983 US$2,831.8 million; IDA made one credit of US$19.5 million for highways in 1961. Disbursements have been completed on 66 loans and the IDA credit. During 1972-77 disbursements averaged US$86 million equivalent per year, then declined slightly to US$82 million in 1978 but increased to US$215 million in 1980 and US$250 million per year in 1981 and 1982, reflecting the higher level of commitments in the late 1970s. While disbursements in Colombia have been slower than those recorded in the Latin American Region for similar pro- jects, concentrated efforts to overcome problems to initiate project execu- tion have resulted in a 27% increase in disbursements during FY83 compared to the previous year and in the current year disbursements have continued at the higher level. The gradually improving performance of social sector institu- tions in the execution of Bank-financed projects, the gradual containment of inflationary pressures and the effects of the recently-introduced fiscal re- forms, which should improve counterpart funding, and the increased Bank lend- ing for infrastructure projects, all point to ai higher level of disbursements in the future. IFC has made investments and utderwriting commitments of US$119.8 million in 29 enterprises and, as of September 30, 1983, it held US$48.8 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of September 30, 1983. 21. During the past 17 years, Bank lending to Colombia has become quite diversified. While before 1966, 22 loans out of a total of 25 loans made to Colombia were for power and transport projects, since then, from a total of 75 loans only 21 have been made to these sectors. In addition, all four loans for education, 13 of the 15 loans for industry, 15 of the 17 agricultu- ral loans, one loan for nutrition, two loans for urban development, all nine loans for water supply and sewerage and one for coal exploration, were made after 1966. The diversification was indeed a desirable aim as it helped pror- vide close contact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's role can only be a marginal one and, thus, to enable lending to be focused upon sectors in which the Bank's presence can have a meaningful impact. 22. Bank lending to Colombia in FY83 consisted of loans for rural edu- cation and agricultural research totalling US$78.4 million equivalent. In addition to the loan presented in this report, the current program includes already approved loans for coal exploration and earthquake reconstruction, and loans for agricultural diversification, small scale industry, development finance and multipurpose water and power development. Work is also underway on projects for water supply and sewerage, electric power, agricultural extension and marketing, fertilizers, irrigation and teacher training for possible consideration by the Executive Directors during the next two years. 23. The proposed Bank lending is consistent with the Government's deve- lopment strategy. To help Colombia develop renewable sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank ir- tends to assist in the development of coal mines which hold potential to help Colombia meet part of its energy requirements and in diversifying exports. Bank financing in the energy sector would also assist in strengthening major  institutions and in mobilizing external finance, as most of the projects would require substantial cofinancing. 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 Bank lending for inr frastructure that would facilitate the increasing inter-regional flow of goods and services. Finally, several loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. Proposed lending for rural electrification, further rural development, agri- cultural credit, water supply and sewerage, and irrigation projects are prin- cipally designed to improve the standard of living of the poor. 24. The operations of external lenders in Colombia are shown in Annex V I. While IBRD, IDB and bilateral sources provided about 75% of total exter- nal financing to Colombia in the 1961-72 period, thei share had decreased since then to some 60% for the 1975-82 period and is expected to decline fur- ther to about 30% of external capital requirements during the eighties. Like the Bank, IDB has given increased emphasis to projects with a poverty orient- ation and has financed projects in low-cost housing, urban and rural develop- ment, agrarian reform, university education, water supply, rural electrifica- tion and land erosion control. In the future, it proposed to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased employment. USAID has supported prog- rams in education, rural development and small farm development, but is phasing out its program in Colombia. The Governments 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 POWER SECTOR Energy Resources and Policies 25. Colombia is rich in energy resources, particularly hydroelectricity and coal. Its reserves of oil and natural gas are modest by international standards, yet significant at the national level. In terms of known re- serves, about 55% of Colombia's primary energy potential lies in hydroelec- tricity, 40% in coal and only 5% in oil and natural gas. In contrast, con- sumption of commercial energy relies primarily upon oil products (50%) and less on natural gas (20%), coal (22%) and hydroelectricity (8%). 26. Colombia traditionally enjoyed a positive trade balance in energy because of its relatively rich energy endowment and modest consumption (at about one ton of coal equivalent per annum, per capita energy consumption is below average for middle-income developing countries). In 1976 the country became a net importer of energy, and by 1981 oil imports reached almost US$400 million, mainly because of a 7% annual fall in oil output between 1970 and 1979. The Government moved in the late-1970s to redress the negative energy trade balance through: (i) pricing measures to increase the cost of energy to consumers, changing relative prices to encourage consumers to move away from oil, and providing incentives to producers; and (ii) direct public sector investments, particularly hydroelectricity and coal. As a result, the previous trend has been reversed since 1980, with production increases in petroleum, aggregate energy consuamption growth lower than GDP, and  - 10 - petroleum's share of total primary energy consumption falling, and hydroelec- tricity, coal and natural gas increasing. 27. Known oil reserves at the end of 1981 totalled about 700 million barrels, or only about 10 years consumption at present rates of utilization. Policies pursued during the 1960s and the early 197Cs contributed to a dete- riorating oil situation. Prices to consumers and producers were kept artifi- cially low, thus promoting consumption and dampening incentives for develop- ment of new reserves through exploration. In recent years the Government moved forcefully to remedy this by bringing internal consumer prices closer to international levels (internal prices were increased by more than three- fold in real terms between 1974 and 1980, and, since the latter year, have fluctuated around 80%-90% of international prices) and by enabling producers to benefit from a large part of the price increases. As a result, explora- tion has increased from 11 wells per year in 1975 to 61 in 1981, with known reserves expanding by about 10% in 1981, after several years of steady dec- line. Also, crude oil production has been increasing at over 5% per annum since 1980 to some 80% of domestic consumption at present. Average growth in consumption has not surpassed 0.5% per annum during the last five years, and self-sufficiency in oil may be within reach during the mid-198 i. 28. Measured natural gas reserves stood at about 4.2 trillion cubic feet at the end of 1981, or almost 40 years consumption at present rates of utilization. Most reserves, production and consumption are concentrated on the northern coast, and total consumption growth averaged about 7% per annum over the last five years. Thermal power plants now account for about half of total gas use. Industry represents the bulk of the remainder with oil re- fineries also important consumers. There is significant excess supply in the northern region, and further important increases in consumption are tied largely to several gas-processing options currently being studied. The best alternative appears to be an ammonia-urea plant (the Bank is the Executing Agency for a UNDP-financed feasibility study). As a consequence of the gas surplus on the northern coast, the Government has not yet defined a clear pricing policy for natural gas. Prices for new deliveries are negotiated ex-posi: with producers, which is a disincentive for exploration. Although consumer prices are relatively low (less than US$2 per thousand cubic feet), the exltent to which they result in misallocation of resources is not clear because the viability of future gas-consuming projects remains to be estab- lished 29. Colombia's coal resources are substantial, with reserves estimated at some 16 billion tons, of which only about 20% can be classified as mea- sured. At planned rates of use, reserves would last hundreds of years. In view of the magnitude of reserves, Government policy encourages domestic conr- sumption in substitute for natural gas and fuel oil, and promotes coal ex- ports. Since 1979, the UNDP and the Bank have been working jointly with the State coal corporation, CARBOCOL, that together with an EXXON subsidiary has undertaken a project to produce 15-mtpy from El Cerrejon North. The recent- ly-approved loan for a coal exploration project will assist in assessing the economic potential of several other promising areas. 30. Coal production grew at about 7% per annum on average over the 1970s to reach a level of about 5 million tons in 1981. Production came from  - ii - about 400 small and medium-scale mines, virtually all of which are norrmecha- nized. More than half of coal production and consumption is concentrated in the highlands near Bogota. Sixty percent of all coal is consumed by indus- try, and most of the rest by the power sector. Colombian coal is bituminous, with high calorific value and low sulphur content, and some possesses coking properties. In 1982, domestic coal prices, which are set by market forces, typically ranged between US$25-35 per ton delivered to large consumers in the industrial centers of Bogota, Medellin and Cali. This is well below inter- national prices, but high internal transport costs imposed by the long dis- tance to ports and difficult terrain for now all but rule out exports of coal from the interior of the country. 31. Colombia's hydroelectric potential, at about 100 GW, is amongst the largest in the world. Although the country has made strides in developing this potential, only some 4% has been developed to date (para. 34). How- ever, plants now under construction will virtually double capacity by 1988. Since the plentiful hydro-reserves can be developed at relatively low cost, they represent an option of high priority. However, the optimal mix of gene- ration sources needs to be determined to take advantage of projected inr- creased supply of coal and existing availability of a natural gas surplus. This matter is currently being studied. Energy Investment and Financial Issues 32. In Colombia, electricity, petroleum and natural gas prices are set by the Government. In spite of positive Government actions in recent years, there is still a need to develop long-term pricing policies that reflect the opportunity cost of the various energy sources and provide, within the Government's broader objectives, appropriately balanced incentives for their development. It is not clear whether current prices actually provide such incentives. Towards this end, the Government has undertaken a major effort to improve sector knowledge through a National Energy Study (ENE), the first stage of which was carried out between 1979 and 1982 by the National Planning Department (DNP) with the help of local consultants and technical assistance from UNDP and the Federal Republic of Germany (FRG). The report on ENE's first stage is under Government review. This study provides significant information needed for energy planning, including preliminary evaluation of demand growth and investments that could best serve such growth. A second stage of the ENE is now about to commence with several specialized studies.1/ The effort has already elicited foreign technical assistance from official sources. FRG will provide assistance on modeling and data gather- ing, France on industrial energy savings, Italy on rural electrification, and the Organization of American States (OAS) on energy use in transportation. Several energy sector agencies and the Ministry of Public Works will provide counterpart staff and DNP will coordinate the external assistance. Finally, in support of Government efforts to sharpen its energy investment strategy, the Bank will carry out a study on selective issues through the energy assessment program financed by UNDP. 1/ Among others, studies on natural gas available for ammonia-urea fertili- zer production and the aforementioned coal exploration studies.  - 12 - 33. Over the past five! years, Colombia has been successful in mobiliz- ing external financing for energy development, through direct foreign invest- ment (in oil and gas first and lately in coal) and external loans to the energy agencies, includiig power companies. EIowever, current conditions in the international capital market are making financing more difficult to obtain. Local financing reqiuirements are covered by internally generated resources and Government contributions, with the incipient local capital market providing only a marginal share of financing. To increase internal resource mobilization by the main energy agencies, prices charged to con- sumers of petroleum products and electricity have been significantly increased in real terms (paras. 26 and 36). Furthermore, in 1980 the Govern- ment created the National Coal Fund that receives revenue from a tax on coal production and finances coal exploration (80%) and small and medium-scale coal mining operations (20%). In 1982 a power development bank--the borrower for the proposed project--was established to mobilize domestic as well as foreign resources for the power sector. Institutional Arrangements in the Power Sector 34. Through the 1950s, a large number of power companies were set up by local governmental authorities and, lacking interconnection with each other, were operated independently in response to regional and departmental needs. Some 17 years ago, the country's total electricity capacity stood at a mere 1,681 MW (equivalent to about: 88 watts per inhabitant) and reached only about 35% of the population. Although large hydropower sites held the potential of increasing substantially the supply of electricity at lower cost than other- wise possible, they were too big to be tapped by any one company. With encouragement from the Bank, the Government persuaded the regional power com- panies to break with tradition and pool their resources in a shared effort to develop the country's large hydroelectric potential (para. 37). To accom- plish this, Interconexion Electrica, S.A. (ISA) was created as an indepen- dent, national generation and interconnection company, of which the share- holders now include all the largest municipal power utilities and the Govern- ment-owned power companies.3/ In addition to plant construction, ISA has integrated the regional power systems. At the same time, the Government has taken measures to improve the sector's prospects for efficient growth; it estaLblished the National Tariff Board (JNT) in DNP to approve requests from the power companies for tariff increases, and it has fostered the consolida- tion of numerous small utilities, particularly in the North Atlantic Region. The Bank participated actively in the creation of both ISA and JNT. 35. The Ministry of Mines and Energy is charged with formulating national policy for the generation, transmission and distribution of electri- city. It shares with the National Social and Economic Policy Council (CONPES), DNP and ISA responsibility for defininIg investment priorities. ISA defines a generation and transmission expansion program for the interconnect- ed system; after approval by the Ministry, DNP and CONPES, this becomes the National Power Expansion Program. The Program is reviewed annually by ISA 3/ Empresas Publicas de Medellin (EPM), Empresa de Energia Electrica de Bogota (EEEB), Corporation Electrica de la Costa Atlantica (CORELCA), t'orporacion Autonoma Regional del Valle del Rio Cauca (CVC), and Instituto Colombiano de Energia Electrica (ICEL).  - 13 - and revisions, if necessary, are proposed. On the basis of requests from the companies, JNT in DNP approves rate increases; the power companies, however, are free to set rates lower than those approved. Although the Government cannot enforce its policies directly on the municipally controlled power com- panies, a mechanism for reaching agreement on major issues affecting the sector is provided by ISA, in which the Government has major holdings through ICEL and CORELCA. Sector planning and coordination have improved markedly since the creation of ISA, and the Bank has supported this evolution through its lending. National Least-Cost Power Expansion Program 36. Colombia has shared in the world-wide economic recession since 1980 V and, over the same period, has effected upward adjustments in electricity ta- riffs 44% in excess of the consumer price index (pFra. 66). Taking account of the consequent slowing of electricity demand growth, on May 26, 1983, CONPES approved a revised National Power Expansion Program for plants enter- ing service during 1987-96, representing a 31% reduction in investment expen- ditures previously planned during 1983-86. The plan is based upon a phased resumption of the average annual economic growth rate of 5.5% achieved from 1965-80, estimated fuel prices and the satisfying of a consequent projected 7.9% average annual electricity demand growth during 1983-2000. (Electricity demand growth has historically correlated closely to overall economic growth at an elasticity ratio of 1.5.) For the first time in Colombia, this plan also takes account of the probability of one-year construction delays for plants to enter service after 1987, based upon recent experience in con- structing the country's first large hydro facilities. During the first six months of 1983, actual electricity demand rose by 7% over the same period of 1982, compared to the 3.5% projected in the plan for the whole of 1983, which appears to justify the new Expansion Program. To ensure that significant variations in demand are suitably taken into account, by April 30 of each year, ISA will update, and the Government will review and furnish to the Bank for its comments, electricity demand growth projections and the associated investment program (Section 5.03 of the draft Power Financing Agreement and Section 3.13 of the draft Guarantee Agreement). The results of this exercise will serve as input for an annual review of sector financing strategy (para. 65). To strengthen its demand forecasting capability, ISA together with con- sultants financed by UNDP is carrying out a study, for which the Bank is executing agency. Power Market and Supply 37. Electric power has become the fastest-growing form of energy use in Colombia. Its share of total energy consumption has risen from 6.5% in 1970 to 11.4% in 1980. Generation increased by an average 10% annually during 1970-1980, although it has slowed to 5.4% per annum in 1981-82. Annual per capita generation in 1982 was about 750 kWh, below average for Latin America. Effective installed capacity at the end of that year was 4,835 MW, including self-producers, with public entities accounting for 95% of the total installed capacity and generation. Diversified peak demand was about 3,854 MW, and total energy generation in 1982 amounted to 21,525 GWh, of which 21,300 GWh was supplied by ISA and its shareholders. Hydro plants accounted for about 69% of the total electricity generated.  - 14 - 38. About 54% of Colombia's 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. 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, 13%. Various programs including the Bank-financed First and Second Integrated Rural Development Projects and the Village Elec- trification Project as well as programs financed by IDB, Kreditanstalt fur Wiederaufbau and the Colombia Coffee Growers Association, are aimed at irr- creasing rural coverage. In 1982 there were about 2.8 million electricity subscribers of which 88.5% were residential and 9.2% commercial. Electricity sales in 1982 totalled about 16,70B GWh including minor sales to Ecuador and Venezuela. Recent Developments 39. During the past three years the sector has suffered financial prob- lems caused mainly by lower than expected revenues resulting from tariff ad- justment delays, slow demand growth, rationing, and higher than expected lo- cal cost shares of investments as well as insufficient availability of finan- cing. Local borrowings needed by the sector have outpaced the domestic bank- ing system's lending capability (para. 42). Moreover, Government-related lending earmarked for the sector was held back and monetization of external borrowings was authorized only on a highly selective basis because of the lhigher priority accorded to short-term economic management of inflation. 40. As a result, when the current national administration took office in August 1982 the sector's financing deficit for the year was estimated to amount to US$430 million; at the same time, the previously-favorable lending climate for Colombia in the international capital market became affected by developments in other Latin American countries and began to deteriorate. In the Fall of 1982, the authorities moved quickly to review the sector finan- cing plan and to authorize badly-needed tariff increases for EEEB (a 22% lump increase and 3.25% monthly, amounting to 73% during the next 12 months-- presently the monthly increase has been reduced to 2.3% to take account of lower inflation), and EPM (,a 20% one-time adjustment and continuance of 2.2% a month, or 52% over the same period) and to adopt a financing program to cover the sector's 1982 shortfall, as well as the aforementioned new borrow- ings needed in 1983-84. In doing so, the authorities have also recognized the constraint on sound sector development and finances represented by the 13 mostly rural-based local utilities loosely grouped under the holding company, ICEL. The Government, therefore, confirmed explicitly the need to restruc- ture the ICEL-group and also to take special measures, still under study, to assist the Atlantic Coast regional company, CORELCA, in strengthening the eight coastal utilities undler its wing. Further, studies were initiated by the National administration on the possibility of inter-regional unification ofE tariff structures over the long term. In addition to tariff measures, the authorities took other actions to mobilize needed local resources. In 1982 and 1983 legislative and other regulatory measures were enacted to create a development bank for the power sector, FEN, and to put it on an operational footing. As a result of a well-orchestrated effort by the Government, FEN and private sector managers in the financial system, FEN attracted consider- able private financial savings in its initial placement, and substantial loans to the power companies have been finalized.  - 15 - 41. In May 1983, the Government reviewed in detail the justification for, and financial feasibility of all new investments in the large 1982-90 power investment program taking account of prevailing economic conditions and competing demands from other priority sectors, and reduced by almost one- third planned capital outlays for electricity (para. 36). The new author- ities have thus set a course of managing more directly the impact of electri- city development on the rest of the economy through careful assessment of proposed investment programs in terms of economic and technical soundness, compatibility with overall public investment expenditure plans, and financial feasibility at the national and sectoral level. This approach would help avoid the severe cashflow difficulties of recent years. Moreover, it would bring under regular scrutiny those investments undertaken by individual con-r panies that do not come under the aegis of the National Power Expansion Prog- ram (which includes generation plant and transmission lines, but not sub- transmission or distribution), thereby contributing to the efficiency of re- source allocation. The proposed project would support this evolution by helping to mobilize resources needed to maintain construction rhythm of key projects, and assisting the Government to review on a regular basis the justification for new investments, and the sector's financial performance and investment capability. Capital outlays for new electricity development pro- jects would be authorized by the Government only if the project in question would be economically justified and there would be available adequate financ- ing that would not affect negatively the existing financial obligations of the company (ies) concerned (Section 3.02 of the draft Guarantee Agreement). Furthermore, except for ongoing projects for which financing is available, the power utilities would undertake capital expenditures in excess of one percent of the value of net fixed assets in service only under the conditions specified immediately above (Section 4.03 of the draft Power Financing Agree- ment). The Borrower, FEN 42. Introduction. Given the structure and relatively small size of Co- lombia's financial institutions, by 1981 it had become evident that the rapid growth over the previous three years of the power sector's requirements for medium and long-term local currency financing could not be adequately met. Further, the large volume of resources involved also implied a need for a specialized institution to oversee the sector's finances, coordinate an over- all financing strategy, and monitor the economic efficiency with which loan proceeds were used. In conjunction with the Guavio Hydro Power Project (2008-CO), the Government confirmed its intention to set up such an institu- tion. In an important elaboration of the original concept, the Colombian authorities decided to empower the new entity to raise capital in external as well as local markets, to enable concentrating a substantial share of overall resource mobilization for the sector, with attendant economies. FEN was established by Law 11 of January 1982 and Decree 1471 of May 1982, as a financial entity of the State with a share capital subscribed by the Nation (95% of subscribed capital) and the country's main power companies (the 5% balance). FEN is charged with: (a) structuring and coordinating power sector finances; (b) making medium and long-term loans (1 to 20 years) as well as opening letters of credit to finance the shareholding electric utili- ties' investment programs; (c) mobilizing domestic savings by financial paper issues and other instruments;(d) conducting foreign credit operations, sub- ject to the regulations pertaining to public entities; and (e) administering  - 16 - for its shareholding utilities bond issues and trusts, and guarantee, agent or payment contracts. 43. Although FEN's mandate envisages borrowings in the international capital market on behalf of the power companies, it had been anticipated that the individual utilities would continue to secure all their own external capital requirements during the early years of FEN's operations. However, present market uncertainties vis-a-vis Latin Aaerica have cast doubt upon the utilities' access to external commercial sources for the financing needed during 1984-85. Given the volume of ongoing and future electricity invest- ments and the number of utilities involved, the concept of concentrating a substantial part of resource mobilization in a specialized intermediary offers advantages. Instead of the companies having to stagger sequentially their forays into the capital market, FEN's going to the market at this time on behalf of their consolidated requirements permits a smoother cash flow thereby diminishing the cost of late payments to contractors, and others. Despite its recent creation, FEN is one of the largest financial entities in the country in terms of capital base and has already recorded a notable success in the domestic market (para. 51). The proposed Bank and cofinancing loans would introduce FEN to the external market. At the same time, it would be inadvisable to consider directing all lending to the sector through FEN, principally because the primary financing and appraisal requirements of large, complex projects can be more effectively handled directly with the utility involved. 44. Organization, Administration and Personnel. FEN's main share- holders comprise the National Government, ISA, EEEB, EPM, CVC, ICEL, CHEC, and CORELCA who form its General Assembly. It is managed by a Board of Directors and a General Manager. The Board is chaired by the Minister of Mines and Energy and its remaining members are the Chief of DNP, the General Manager of the Banco de la Republica (BR) and three representatives of the power company shareholders. The General Manager is elected by the Board for a two-year, renewable term. Provision is also made for an independent audit- or (para. 67). FEN's Bylaws cover the important aspects of the entity's role and operations and are acceptable. Changes that would, in the Bank's opinion, affect adversely FEN would not be introduced into the entity's Bylaws or legal framework (Section 5.01(b) of the draft Loan Agreement). 45. FEN's organizational structure comprises a General Secretariat, Administration, Finance, Technical, and External Operations. It has a core professional staff of 25, who are in place and are well qualified. To administer efficiently the proposed project, FEN would augment its technical staff by June 30, 1984 with conisultants who will provide technical assistance to existing staff in the areas of project analysis and monitoring, and opera- tional procedures (Section 3.01(c) of the draft Loan Agreement). They will also carry out, by December 31, 1984, under terms of reference satisfactory to the Bank, a study of the entity's technical staffing needs. Based upon the results of this study, and the Bank's comments upon it, FEN will employ the additional staff needed (Section 3.01(d) of the draft Loan Agreement). 46. Credit Policy and Regulations. FEN's credit policy requires estab- lishment of the economic and financial feasibility of the projects it finances. Its lending is project-based, within a framework that: (a) calls  - 17 - for the power company borrowers to achieve/maintain a sound level of manage- rial, operational and financial performance; (b) specifies conditions govern- ing procurement and disbursement to ensure that proceeds are used in an eco- nomically efficient manner and for specified purposes; (c) provides for causes of suspension of disbursements and acceleration of loan maturity; and (d) requires regular reporting, as well as post-project evaluation. Its variable interest rate policy ties the rate to be charged to FEN's total cost of funds plus a reasonable profit (paras. 67-69). FEN would not introduce any change in its credit policy that, in the Bank's opinion, would affect negatively the entity or the proposed project (Section 5.01 (b) of the draft f Loan Agreement). 47, FEN's Credit Committee, composed of BR, Ministry of Mines and Energy, DNP, the President of FEN and one representative of the power sector, considers loan applications. The composition of the %ommittee would promote progress toward regular review at the national level of all planned power in- vestments. Upon the Committee's favorable recommendation, the proposed loan is presented for final approval by FEN's Board of Directors. 48. Lending Operations. FEN has two ways of lending in the usual course of its business. First, a local bank, with FEN's authorization, may lend to a power company based upon prior agreement with FEN that the bank will in effect borrow from FEN a high percentage of the face loan amount to be lent to the utility; in effect,, a rediscounting arrangement. Secondly, FEN may make a direct loan to a power company, which must be secured with local bank guarantees or, in the case of resources originating from external sources, guaranteed either by banks or by the Government. FEN's maximum lending exposure to an individual utility was originally governed by a statur- tory regulation too restrictive to enable FEN to lend both locally and exter- nally mobilized resources, but this has recently been revised and adequate arrangements are now in place. 49. In its locally-based lending, FEN intends to use primarily the re- discount mechanism, as the banks' participation will increase the financing available to the utilities. Normally in making loans, banks would be required by the Government to invest an additional amount (16.5%) in Agricultural Fiduciary Fund paper that gives an annual yield of about 8%, well below the market interest rate. To assist FEN in being able to offer attractive margins to the banks without raising the interest rate charged to its borrowers, or increasing the discounted share of the loan, FEN's re- discount operations have been exempted from these forced investments. 50. Market Operations. FEN's operations in the local financial market will be a major determinant of its lending capability (paras. 67-69). To tap the financial savings market, FEN is empowered, inter alia, to issue bonds, sell promissory notes, term certificates of deposit, and other financial pa- per. Although the financing requirements of the power sector are mainly for medium- and long-term loans, under current tax regulations and in an infla- tionary environment, FEN would be expected to encounter difficulties in raising medium- and long-term funds locally. Even if there were incentives, it might take some time for FEN to be able to attract substantial invest- ments of this type. In the interim, this implies a considerable reliance on term transformation, i.e., borrowing short and lending long. FEN has not yet been provided with access to short-term borrowing from BR to cushion it against an unexpected drop in savings mobilization, similar to that available  - 18 - to other banks. An adequate quota would be assigned prior to loan effective- ness under the same conditions applicable to similar financial intermediaries operating in Colombia (Section 6.01 of the draft Loan Agreement), and these arrangements would be maintained thereafter (Section 5.01(e) of the draft Loan. Agreement). 51. Initially, FEN has followed closely the design of paper issued successfully in the recent past. In 1983 it was authorized to place and maintain in circulation through end-1984 Col$ 7,000 million (US$88 million) in Electricity Certificates (CEVs), representing its first financial issue. The CEVs quickly sold out, in 90 and 180-day paper, and have been promptly renewed totally in 180-day paper. These favorable results may be attributed to FEN's having chosen a proven instrument and having projected a strong pro- fessional and financial image. Timing was another factor. Because of the priority accorded to electricity investment financing, the National Monetary Board had authorized FEN to ernter the market at a time when the pricing of other available issues was relatively less competitive. Estimates of FEN's future ability to mobilize finance take account of the market conditions that prevailed during the entity's first venture (para. 52). In line with the recommendation of the Monetary Board that it investigate innovative mecha- nisms to attract resources, FEN has recently requested authorization to issue an additional COL$15,000 million, two-thirds in CEVs and the balance in 2-year bonds with an upward sliding return for investors who hold them beyond a minimum period. FEN is also looking into other options for future place- ments. To promote progress toward a deepening of market receptivity, by December 31, 1984, FEN would prepare a plan of action acceptable to the Government and the Bank to encourage mediumr and long-term private investment in FEN paper, and the Government would promptly thereafter put the plan into acticyn (Section 4.11 of the draft Loan agreement and Section 3.03 of the draft Guarantee Agreement). 52. To help ensure that FEN mobilizes domestic savings at a level conr- sistent with its capturing an appropriate share of incremental financial re- sources (paras. 64 and 68), targeted annual amounts of funds to be raised from local investors have been agreed. These would be reviewed annually by FEN, the Government and the Banik, and updated with Bank concurrence, in light of the power sector's financing requirements and other factors (para. 65) (Section 4.12 of the draft Loan Agreement). Further, the Government would take all measures necessary on its part to provide FEN with adequate access to the domestic capital market to meet the above-mentioned targets (Section 3.04 of the draft Guarantee Agreement). Bank Participation 53. Since 1950, the Bank has made 27 loans to Colombia's power sector, totalling US$1,374 million. In addition, the Bark is assisting with the pre- paration of three generation and transmission projects now at the feasibility stage.; Rio Grande Multipurpose project (water supply and power, EPM), Calima III Hydro Power (CVC) and Urra (Alto Sinu) Hydro Power (CORELCA and ISA). Past loans have assisted the expansion of generating capacity, and transmis- sion and distribution facilities in the systems serving Bogota, Medellin, Cali, Cartagena, Bucaramanga and Manizales, including expansion of electri- city distribution to low income areas (874-Co, 1973; 1807-CO, 1980; and 1868-CO, 1980). The Bogota Distribution Project (1807-CO, 1981) has been the first Bank loan to Colombia to support exclusively distribution expansion  - 19 - and, in addition to other beneficiaries, would directly benefit about 340,000 lower income consumers. In addition, the Bank has supported rural electrifi- cation under 246-Co (1960) and 313-CO (1962), the First and Second Integrated Rural Development Project (1352-CO, 1977; 2174-CO, 1983), and the Village Electrification Project (1999-CO, 1983). Other recent loans included the 500-kV Interconnection Line (1583-CO, 1978), and for hydro power generation, the San Carlos I and II (Loans 1582-CO, 1978; 1725-CO, 1979), Mesitas (1628- CO, 1979), Guadalupe IV (1868-CO, 1980), Playas (1953-CO, 1981) and Guavio Projects (2008-Co, 1982) which would, respectively, complete the task of in- terconnecting the country's regional power systems begun under 575-CO (1968), * and add a total of 3,253 MW of capacity to the national interconnected sys- tem. In addition to coordinating a technical assistance project to strength- en system planning (para. 36), the Bank is the executing agency for another UNDP-financed project which would enhance the sector's construction manage- ment capability for large hydroelectric facilities. Further, in connection with Bank lending, marginal cost: tariff studies have been carried out for the major markets by ISA's shareholders. The adoption of the results of the stu- dy into the various tariff structures is under discussion with the Govern- ment. Taken together, the above-mentioned projects reflect the Bank's parti- cipation 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. 54. Previous Bank lending to Colombia's power sector has been found generally successful in several OED reports. For instance, the most recent report, "Power Interconnection (575-CO) and Chivor Hydroelectric Projects (681-CO)" (Report No. 2720, October 29, 1979), commented upon the Bank's par- ticipation in Colombia's effort to evolve a stronger and more efficient power sector organization. Through the creation of ISA in conjunction with these projects, and the steps taken to overcome financial and institutional diffi- culties, real progress was made toward more coordinated sector development. Despite implementation delays and increased costs, both projects were suc- cessfully implemented. Also, the report entitled "Bank Operations in Colom- bia, an Evaluation" (Report No. Z-18) of May 25, 1972, concluded that Bank financing was successful in assisting the power companies to develop hydro- electric 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 interconnected 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, distribution programs and energy losses. These points have been addressed under the aforementioned re- cent loans, which have been the first Bank operations since late 1972 because sector financial difficulties precluded needed expansion of generation faci- lities in the interim. Complementary measures to sustain investment capabi- lity, and thus ensure completion of high priority projects in a reasonable period, and to strengthen financial planning are a main focus of the proposed project.  - 20 - PART IV - THE PROJECT Background 55. The project was prepared by FEN and the Bank, and was appraised by a Bank mission that visited Colombia in March 1983. Negotiations were held :Ln Washington, D.C., and Cartagena, Colombia, during the weeks of January 2, 1L984 and January 30, 1984, respectively, with a Colombian delegation led by I)ra. Florangela Gomez, Vice-tMinister of Finance, Dr. Jorge Serpa, Director of I'ublic Credit, Ministry of Finance, and Dr. Antonio Hernandez, President of FEN. The Staff Appraisal Report (4771-CO of March 8, 1984) is being circulated separately to the Executive Directors. Project Objectives 56. Of the two main project objectives, the first is to assist Colombia in its efforts to provide the electricity supply required to support growth and employment. At the present time, the country needs support to sustain, during 1984-85, the scheduled construction pace of several high priority electricity development projects in its scaled down investment program. De- lays, mainly attributable to unforeseen geological characteristics and insufficient financing availabilities, have already added 1 to 2 years to estimated completion dates of various large hydroelectric facilities. Fuirther significant slippage is estimated to entail heavy electricity ration- ing, despite the aforementioned slowing of demand. Several of these projects have Bank loans associated with a portion of their foreign exchange cost, but substantial additional external financing is required both to complete the original financing plans and to cover cost increases. Although it had been expected at the time these projects were appraised that the private financing sc readily available up to 24 months ago would continue to be obtainable as needed, and on attractive terms, market conditions and experience today have proven otherwise. For example, in 1980 private external lenders provided 55% of the sector's external capital requirements and, although it had been anti- cipated that this share wou:Ld continue its upward trend and average about 75% during 1981-90, this has not materialized. Therefore, the project also seeks to re-enlist the support of foreign commercial lenders to the power sector, through a US$170 million Bank loan together with a proposed US$200 million B-loan cofinancing package which is well advanced.2/ 57. The second objective is to support the development of FEN. As Borrower for the Bank and B-loans, these would be the first external loans to FEN. Since they would partially finarce a time-slice of an investment pro- gram, this operation represents a first sector lending project for power in Co:Lombia. It provides an opportunity to help ensure that, from an early stage of FEN's operational life, the institution would have the capability to be an effective channel for such lending and would foster reciprocal capabi- lity in the power utilities. Ongoing efforts to strengthen the financial management of the sector, as reflected in existing loan and other agreements, would be buttressed further by the direct support to FEN to monitor the uti- lities' financial performance and prospects, and act as power financing 2/ Approval of the Board of Executive Directors of the negotiated terms and conditions of proposed BEInk participation in the B-loan is to be sought on the basis of President's Memoranda distributed separately.  - 21 - strategy advisor to the Government and the sector. Additionally, the loan would further enhance FEN's image! in the domestic capital market and, thus, help facilitate its access to future savings. The Project, Cost and Financing E'lan 58. The proposed project consists of the 1984-85 program of priority ongoing electricity development investments of ISA, EEEB, EPM and CVC, with contingent inclusion of ICEL and CORELCA (para. 63), as well as a program to assist FEN in strengthening its technical capability (para. 45). The time- slice is subdivided into subprojects corresponding to that portion of elec- tricity development projects that would be underway during the period, even though completion of the works may extend beyond it. All subprojects under the project are to be: (a) part of the National Power Expansion Program (para. 36), in the case of generation and transmiss-on; (b) the least-cost solution for completing the network path to the final consumer, in the case of subtransmission and distribution; or (c) additions to general plant needed to complement (a) and (b) above. Additionally, for subprojects to be financed with the proposed loan or with the Bank's share of the B-loans: (a) project costs originally expected to be financed by commercial lenders would be eligible but project cost overruns would not be, except for the Mesitas HIydro Power Project (para. 59) (Supplemental Letter No. 2 to the draft Loan Agreement); (b) interest during construction on existing Bank loans would be eligible for financing in the cases of ISA, EEEB and EPM, all of which compa- nies have under construction during 1984-85 additions to fixed assets, partly supported by Bank loans, that are large relative to the capital assets already employed by these companies (Section 2.02(a,i) of the draft Loan Agreement); and (c) retroactive financing from January 1, 1983, would not exceed US$29 million equivalent of the total of the proposed loan and the Bank's proposed share (US$30 million) of the B-loans (representing 15% of total Bank lending for the project) (Sections 2.02(d,i) of the draft Loan Agreement). On this basis together with the procurement norms described in para. 61, the subprojects eligible for financing under the proposed loan, and the Bank's share of the cofinancing loans would include San Carlos I and II (1,240 MW), Playas (200 MW), Guadalupe IV (213 MW) and Guavio (1,000 MW), as well as the Bogota Distribution Project. Subprojects eligible for financing by commercial banks under the B-loans would include Chivor II Emergency Works, Tunjita and Rucio River i)iversions, Jaguas (170 MW), Salvajina (270 MW) (partly financed by IDB), Termozipa V (66 MW), Termocerrejon I and II (340 MW), Betania (500 MW), Termotasajero (150 MW) and other smaller instal- lations, transmission lines and substations, subtransmission, urban and rural distribution, and load dispatch centers. Sub-loans from FEN to the utilities under the project would finance foreign costs. The total cost of ISA, EEEB, EPM and CVC's ongoing investments during 1984-85 is estimated at US$1,602 million (excluding permanent working capital increases and aggregate invest- ments in projects of other utilities which are being financed from internal sources and, together, would bring aggregate investment costs to US$2,049 million). Foreign costs of the project comprise US$898 million including civil works, goods and services, interest during construction and studies. Existing financing would cover US$528 million of these requirements, or 59%; the proposed loan, 19%; the B-loans, 22%. US$704 million of local costs are being financed from internal cash generation, 66%; local currency FEN loans, 20%; user contributions, 10%; and future external borrowings, 4%.  - 22 - 59. The Mesitas Hydroelectric Project, partly financed by a US$84 mil'Lion Bank loan, was originally to be completed in early 1982. However, geological problems encountered in tunnel excavation have caused a delay in excess of one year. Additionally, EEEB suffered revenue losses of about US$40 million in 1981, despite tariff adjustments in that year of about 20% higher than the consumer price index, as a result of the heavy rationing caused by an atypical, severe drought. EEEB's ensuing financial difficulties contributed to the bankruptcy of a main contractor, who was replaced in 1983. The project is now expected to be completed in mid-1984. At the time of Bank appraisal, late 1977, total project cost was estimated at US$260.8 million, of which US$148.4 million represented foreign cost and US$112.4 million, local. Current projiect cost estimate is US$407.3 million, including US$233.1 million of foreign cost and US$174.2 million of local. The cost increases derive from: (a) additional quantities of civil works because of unforeseen geological characteristics; (b) higher base cost of equipment; and (c) doubling of price contingencies resulting mainly from higher inflation than expected in the early years of construction and, in minor part, from delay in completion of the works. Notwithstanding the substantial cost increases, the project scope is not amenable to scaling down and it remains economically justified. In addition to a unit cost that remains low, US$670 per installed kW, the projectss internal rate of return exceeds the appraised estimate because EEEB's electricity tariffs (the proxy for benefits) have increased 66% more than project costs. In addition to tariff adjustments, EEEB and the Government have made strong efforts to cover the higher costs. The company is meeting entirely the local cost component, and US$28 million more than the US$54 million of external commercial borrowings originally planned have been secured. It is envisaged that FEN sub-loans would cover the remaining foreign cost of about US$63 million. Because other sources of financing are not available, US$43.2 million are proposed to be financed by Bank resources and US$19.7 million by the commercial lenders in the cofinancing B-loans. Subloans and Onlending Terms 60. Sub-loans financed under the proposed loan would require prior Bank approval, except that sub-loans up to a total of US$4 million for a given subproject would be free-limit sub-loans (other than the first 3 such sub- loans). Bank approval of free-limit sub-loans would, however, be required prior to authorizing corresponding disbursements from the loan account (Sect-ion 2.02(a) and (c) of the draft Loan Agreement). Each sub-loan will be based upon detailed applications conforming to the aforementioned criteria. FEN would approve applications for sub-loans under the cofinancing B-loans only if the utility submitting the application would be eligible to borrow under the proposed Bank loan (Section 2.03(d) of the draft Loan Agreement); in particular, the utility in question would need to remain current in pay-- ments to FEN under all loans from the entity (para. 69), and ICEL and CORELCA would need to fulfill certain conditions precedent to their participation in any of the external financing to be provided under the project (para. 63). Onlending terms of sub-loans will be calculated upon the basis of full cost recovery by FEN on the Bank and B-loans, and the foreign exchange risk will be borne by the utilities. Sub-loans financed with the proceeds of the Bank and B-loans will be denominated in dollars equivalent to the various curren- cies in which the principal of the loans would be payable, and repayable in the peso equivalent of these various currencies. Interest rate, fees and  - 23 - terms of the sub-loans are proposed to be a blend of the terms of the Bank and cofinancing loans, plus a 0.5% spread over the interest rate; maximum sub-loan term would be 15 years, including a 4-year grace period (Section 3.02(a) of the draft Loan Agreement). The -1* t^lume of in-progress and future electricity investments calls for the long-term maturities proposed. FEN will enter into satisfactory sub-loan agreements wit each sub-borrower (Section 3.02(a) of the draft Loan Agreement). Procurement and Disbursement Under the Bank Loan 61. Most contracts to be financed would have been let in advance of Board presentation. As stated above, retroactive financing, from January 1, 1983, would be limited to US$29 million of the aggregate Bank loan and its financial share of the cofinancing loan. Under the proposed loan, sub-loan proceeds will be disbursed against contracts for goods and civil works that have been procured through international competitive bidding, in accordance with Bank guidelines. The Bank's proposed share of the B-loans would be sub- ject to the same procurement criteria as the Bank loan, and the commercial lenders' share would follow procurement norms of the Bank, IDB, KfW or other institutional lenders in the case of subprojects partly financed by these entities, and local procedures of the Government--which are satisfactory to the Bank--in the remaining cases. The approximately 18 man-months of consultant services to be engaged by FEN will be obtained according to Bank guidelines; 100% of foreign expenditures, and 50% of local, would be financed. 62. Loan proceeds would be disbursed into a dollar-denominated revol- ving fund in BR to be established by FEN, solely for the purposes of the pro- ject. The Bank would make an initial deposit into the fund of US$50 million, equivalent to estimated sub-loan disbursements during the first 90-day period after loan effectiveness. Disbursements from the special account would be made for eligible expenditures under each approved sub-loan. Special account replenishment of the dollar equivalent amount of disbursements from that account would be made upon receipt of withdrawal applications from FEN, except that after disbursement of a total US$100 million, the Bank would begin to recuperate the initial deposit. These applications would be under a certified statement of expenditures by the sub-borrower concerned. Documen- tation for these expenditures would be retained by FEN and available for review by the Bank at all times (Section 4.01(b) of the draft Loan Agree- ment). Disbursements are estimated at US$100 million in 1984 and US$70 million in 1985. In addition to annual external auditing of FEN (para. 67), the revolving fund account will be audited annually by independent, external auditors acceptable to the Bank (Section 4.02(a) of the draft Loan Agree- ment). The Closing Date of the loan would be December 31, 1986. Loan Structure 63. In addition to a draft Loan Agreement with FEN and a draft Guarantee Agreement with the Republic, the loan documentation includes a draft Power Financing Agreement between FEN and ISA, EEEB, EPM, CVC, CORELCA and ICEL which establishes the general subloan terms and conditions. Further, in this draft Agreement, the utilities reconfirm the relevant  - 24 - financial performance covenants of the Guavio loan in respect of rate of return on annually revalued assets and internal cash generation. The Agree- ment also provides for a capital expenditure limitation (para. 41), and the standard consultation clause on debt service coverage (Sections 4.03-4.06 of the draft Power Financing Agreement). In the case of ICEL, for which it has not been possible to establish financial targets or even a reasonable finan- cial forecast, (para. 64) and in the case of CORELCA, they would be eligible to receive proceeds from the proposed Bank and cofinancing B-loans only after preparation by November 30, 1984, of Government--endorsed investment and financing programs, satisfactory to the Bank. For each company, these pro- grams should cover the years 1984-87, plus the additional years during which the proposed La Miel (ICEL) and Urra (CORELCA) power generation projects would be carried out. The programs would be accompanied by a Government com- mitment to take all actions necessary, including timely provision of funds, to enable ICEL and CORELCA to carry out the programs, as well as to service any sub-loans which they may receive from the proposed external loans (Section 3.11 of the draft Guarantee Agreement). In the event that a plan satisfactory to the Government and the Bank would not materialize by the date mentioned above, the company involved would become ineligible to borrow under the loans, and the approximately US$40 million of total Bank and B-loan pro- ceeds that would be held in abeyance for them until that time would be com- mitted to priority ongoing projects of other companies (Section 2.03(c) of the draft Loan Agreement). In addition, the Government would: (a) by December 31, 1984, establish in ICEL adequately staffed Financial and Operations Departments; and (b) cause ICEL to caLrry out, by December 31, 1984 a study to determine the value of its assets (Section 3.12 of the draft Guarantee Agreement). Additionally, ISA would participate in the annual review of the power sector's investment program and financing strategy, in a financial study to be carried out by FEN, and irL the design of an appropriate construction price index for the sector (paras. 36 and 65-66, and Sections 5.01-5.03 of the draft Power Financing Agreement). Any failure by the parties to the Power Financing Agreement would constitute an event of suspen- sion under the Loan Agreement (Section 5.01(d) of the draft Loan Agreement). Financial Outlook of the Power Sector 64. Based upon the scaled-down National Power Expansion Program, the sector's total 1983-87 investmLent program, which is contingent upon, inter alia,, financing availabilities (para. 41), amounts to Col$771.4 billion (US$7.6 billion), of which 47% corresponds to ongoing works. The program in- cludes construction, interest during construction and working capital in- creases. The sector's net internal cash generation would finance 19% of the total; national budget contributions and connection charges 10%; and borrow- ings 60%, of which 12 percentage points corresponds to existing loans, 45 percentage points to future loans, and 4% to the proposed Bank and cofinanc- ing :Loans. The remaining Col$79.5 billion (US$785 million), or 10%, is the estirmated financing gap. This scenario is distorted by the heavy deficits forecast by CORELCA and ICEL, in contrast with an adequate picture of the four remaining companies (para. 63). (Section V of Annex III summarizes the utilities' performance under existing financial covenants.) In fact, one of the strong features of ISA, EEEB, EPM and CVC is their low debt/equity ratios. Therefore, if their performance targets - sales, tariffs and operat- ing expenses - are met, they would be able to increase their indebtedness to the levels in their forecasts without jeopardizing their financial situaitions.  - 25 - 65. In light of the magnitude of the investment program and financing uncertainties, tariffs, revenue efficiency and financing strategy will require concerted, periodic analysis (para. 41). FEN is about to carry out a study on sector finances and formulate a proposed financing strategy consi- dering alternative scenarios. The study would be completed by September 15, 1984 and would be discussed with the Government, ISA and the Bank. ISA would coordinate with FEN in its preparation and, together with its shareholders, give all necessary assistance. This exercise will be repeated annually by FEN (paras. 36, 69 and Section 4.13 of the draft Loan Agreement, Sections 5.01 and 5.02 of the draft Power Financing Agreement and Sections 3.05 and 3.06 of the draft Guarantee Agreement). 66. Since 1977, Bank loans to the power sector have provided for annual asset revaluation based upon changes in the consumer price index as a proxy for the replacement value of assets in operation and construction, and to project operating and local investment costs. ISA has demonstrated that an index based on civil works construction in the San Carlos Hydro Project during 1977-82 is 7% per annum higher than the consumer price index, and 32% accumulated for the period. The Government, with assistance from ISA would design an appropriate price index for use by the electric utilities. After review and comment by the Bank, an agreed index would be computed and pub- lished quarterly, starting in January 1985 (Section 3.06 of the draft Guaranr- tee Agreement). Financial Outlook of FEN 67. FEN is in process of organizing and computerizing its internal accounting and auditi-ng functions. Initial evidence of its work is posi- tive. FEN has confirmed that systems compatible with sound principles will be maintained. FEN will engage the services of independent, external audit- ors satisfactory to the Bank, in line with the usual Bank requirements (Section 4.02 of the draft Loan Agreement). 68. FEN has four main sources of funds: its own capital, official funds, resources obtained from the domestic (paras. 50-52) and external capi- tal markets, and retained earnings. FEN's capital sets the ceiling to the entity's obligations with the public which, as set out in its Bylaws, may not exceed 20 times its paid-in capital plus legal reserves. To protect its capital from being eroded by inflation and to enable it to lend to the power companies at reasonable rates, legislation has been enacted to exempt FEN's income from taxation. FEN will annually capitalize its profits (Section 3.14 of the draft Guarantee Agreement). FEN's actual and projected net worth through 1987 is projected to increase from Col$10,148 million in 1982 to Col$30,595 million in 1987, or about 25% per annum on average. FEN's loans to the utilities are projected to increase from Col$16,791 million in 1983 to Col$185,613 million net of repayments in 1987. Of total lending estimated over this period, the A and B-loan proceeds each represent about 12%. Provi- sion for liquidity represents the other main use of funds during the period, rising from Col$ 1,175 million in 1983 to Col$ 10,790 million in 1987. Outlays for fixed and other assets and debt amortization would amount to Col$1,033 aillion, net of short-term funds mobilized from local investors which are continuously rolled over. The only debt projected to amortize during the period is from official sources (see below) and is amortized over 25 years.  - 26 - FEN's sources during the 5-year period would comprise retained earnings, Col$19,944 million; local investors, rising from an estimated Col$8,500 million in 1983 to a total Col$62,900 million outstanding by 1987; external borrowings, Col$91,854 million; official funds, Col$11,391 million; repay- ments of principal by borrowing utilities, Col$51,793 million; and capital resources, Col$503 million. 69. In view of the importance of the official funds to FEN's sources of financing, adverse changes in the statutory provision for them would not be made (Section 5.01(b) of the draft Loan Agreement). FEN's liquidity would need to be monitored carefully given the entity's reliance upon term trans- formation and the risk of collection delays. Thus, FEN will maintain at all times a liquidity buffer equivalent to not less than two months of estimated annual expenses plus one month of the principal amount that would become due and payable to local investors during the year; these estimates would be agreed during the annual review discussed below (Section 4.06 of the draft Loan Agreement). FEN has a:Lso confirmed that it will not approve new lending to any borrower which is in default under any existing loan authorized by FEN either as a direct or rediscounted loan (Section 4.14 of the draft Loan Agreement). Additionally, FEN would maintain a debt-equity ratio, including all indebtedness, that would not exceed 7:1 (Sections 4.04 and 4.05 of the draft Loan Agreement). Benefits and Risks 70. The proposed project will assist Colombia to maintain the construc- tion rhythm of ongoing electricity development projects which will supply the el,ectric energy needed to facilitate growth of those industrial and commer- cial activities which currently use it, as well as help supply electricity to a larger segment of the country's population, only 54% of which now have access to it. The participation of the international capital market is being en:Listed in this endeavor. The support provided for the development of FEN is expected to enhance power sector financial management, in addition to buttressing the entity's ability to mobilize substantial investment financing needed by the power utilities. 71. A return on investment for the project has not been quantified. However, it has been established that the projects which are prospective sub- loan candidates for Bank financing would have higher internal rates of return than the 13%-15% estimated at the time of original Bank appraisal. Tariffs (the proxy for benefits) have increased more rapidly than projected, while average costs are approximately the same. Further, for all hydroelectric facilities included under the project, representing about 80% of project costs, the average cost remains a low US$700 per kW installed. Subtrans- mission and distribution facilities would represent the least-cost means of bringing electricity service to the final consumer. There is a risk that the local currency share of investments may not be available in a timely manner. However, the expected internal cash generation of the four major utilities, the measures already taken by the Colombian authorities to mobilize savings, as well as future actions that have been agreed should enable project financing to materialize as scheduled. There is another risk, which is attendant mainly upon FEN's ability to fulfill its role as a development banking institution. By virtue of its financial significance, there may be pressures brought to bear upon its decisions. However, the establishment of  - 27 - sound lending and operating criteria, the support provided for its monitoring and advisory role and the broad-based composition of its Board and Credit Committee--as spelled out in the entity's Bylaws--together with the agreements reached with the Government and the power utilities on the conditions under which new projects would be initiated, should help minimize this risk. PART V. LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between FEN and the Bank, the draft Guarantee Agreement between the Republic of Colombia and the Bank, the draft Power Financing Agreement between FEN and ISA, EEEB, EPM, CVC, OORELCA and ICEL, and the report of the Committee provided for in Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 73. Special conditions of the loan are listed in Section III of Annex III. An additional condition of effectiveness would be the assignment of a short-term borrowing quota to FEN by BR (para. 50). 74. I am satisfied that the proposed Bank loan would comply with the Articles of Agreement of the Bank. PART VI. RECOMMENDATION 75. 1 recommend that the Executive Directors approve the proposed loans. A. W. Clausen President Attachments March 8, 1984  - 28 - Ann.ex 1 Page i of 5 T A B L E 3A COLCIEIA - SOCIAL INDICATORS DATA SHEET COL0MBEIA REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) /b ,.bRECENT MIDDLE INCOME MIDDLE INCE _e,o- 1970' ESTIMATE- LAT. AMERICA & CARIB ELtROPE AR (TOSAND SQ. DI) TOTAL 1t38.9 1138.9 1138.9 AGRICULTURAL 350.5 350.5 356.5 G0P PER CAPITA (US$) 270.0 440.0 1380.0 2088.2 2453.6 ENERGY COHNSUOPrIO PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 519.0 730.0 970.0 1407.6 1580.8 PoPULATION AND VITAL STATISTICS POPULATION,MID-YEAR (THOUSANDS) 15754.0 21266.0 26425.0 URBAN POPULATION (7. OF TOTAL) 48.2 59.8 64.4 65.9 47.8 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILL) 38.3 STATIONARY POPULATION (MILL) 62.0 YEAR STATIONARY POP. REACHED 2110 POPULATION DENSITY -& PER SQ. aM. 13.8 18.7 22.7 35.6 82.0 PER SQ. KM. AGRI. LAND 44.9 60.7 72.6 93.2 157.2 POPULATION AGE STRUCTURE (X) 0-14 YRS 46.8 46.2 36.4 40.1 31.9 15-64 YRS 50.3 51.1 60.2 55.8 60.9 65 AND ABOVE 2.9 2.8 3.4 4.1 7.2 POPULATION GROWTH RATE (7) TOTAL 3.1 3.0 2.0 2.3 1.6 URBAN 5.7 5.2 2.6 3.7 3.4 CRUDE BIRTH RATE (PER THOUS) 46.7 38.4 29.4 31.5 25.0 CRUDE DEATH RATE (PER THOUS) 15.8 10.7 7.7 8.1 9.1 GROSS REPRODUCTION RATE 3.3 2.6 1.8 2.0 1.7 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUS) .. 115.4 192.8 USERS (%, OF hARRIED WOIEN) .. 34.0 46.0/c FO0 AND NUTRITION INDEX OF FOOD PROD. PER CAPITA (1969-71-100) 100.0 99.0 124.0 113.0 108.4 PER CAPITA SUPPLY OF CALORIES (; OF REQUIR5MENTS) 98.0 89.0 108.0 111.3 129.6 PROTEINS (GRAMS PER DAY) 54.0 48.0 55.0 67.9 92.3 OF WHICH ANIMAL AND PULSE 28.0 24.0 25.0/d 34.1 34.6 CHILD (AGES 1-4) DEATH RATE 14.0 7.1 3.5 5.3 10.4 HiELTH LIFE EXPECT. AT BIRTH (YEARS) 53.1 58.9 63.3 64.6 67.2 INFANT MORT. RATE (PER THOUS) 103.0 77.0 55.1 62.6 71.4 ACCESS TO SAFE WATER (%POP) TOTAL 30.0/e 63.0 64.0/f 64.8 URBAN 54.97;1 88.0 73.07 77.8 RURAL 6.871 28.0 46.071 44.3 ACCESS TO EXCRETA DISPOSAL X OF POPLULATION) TOTAL .. 47.0 44.4/f 54.6 URBAN .. 75.0 60.07T 69.8 RURAL 8.0 14.0/f 29.8 - POPULATION PER PHYSICIAN 2640.0 2180.0 1920.0/d 1776.0 1094.8 POP. PER NURSING PERSON 4220.Oj 730.0 1220.077 1012.2 762.5 POP. PER HOSPITAL BED TOTAL 360.0 450.0 600.0/d 477.0 334.0 URBAN .. 380.0 490.071 667.5 216.0 RURAL .. .. .. 1921.6 ADMISSIONS PER HOSPITAL BED .. 22.9 29.8/d 27.2 20.0 ROUSING AVERAGE SIZE OF HOUSEHOLD TOTAL * 5.7/h URBAN .. 5.57W RURAL .. 5. 97W AVERAGE NO. OF PERSONS/ROOM TOTAL 1.8/h URBAN .. t.67 .. RURAL .. 2.47W ACCESS TO ELECT. (X OF DWELLINGS) TOTAL 47.0/e 58.1/h .. URBAN 8 3. o7- 8 7. 57W EURTAL 8.1e 13.2/h .. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - -_ -_ _ _ -_ _ -_ - -_ - -_ -_ -_ _ -_ _ -_ _ _ -_ _ -_ _ _ - -_ - -_ - -_ -_ _ -_ _ -_ _ -_ _ -_ _ _ -  - 29 - Annex I T A B L E 3A Page 2 of 5 COLOMBIA - SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) /b RECENT MIDDLE INCOME MIDDLE INCTOME 1960/b 1970/b ESTIMATE/b LAT. AMERICA 4 CARIB EUROPE EDUIICATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 77.0 108.0 128.0 105.0 102.2 MALE 77.0 107.0 127.0 106.3 107.2 FEMALE 77.0 110.0 130.0 103.6 97.9 SECONDARY: TOTAL 12.0 25.0 46.0 40.0 56.5 MALE 13.0 25.0 43.0 38.6 63.4 FEMALE 11.0 24.0 49.0 41.2 48.9 VOCATIONAL (% OF SECONDARY) 30.8/i 20.2 21.61d 34.0 22.4 PUPIL-TEACHER RATI0 PRIMARY 38.0 38.0 31.0 30.7 24.7 SECONDARY 11.0 17.0 20.0 16.7 22.1 ADULT LITERACY RATE (X) 63.0 80.8/h 81.0 79.5 69.7 CONSBlPrION PASSENGER CARS/THOUSAND POP 5.7 11.2 18.6/d 45.6 52.9 RADIO RECEIVERS/THOUSAND POP 125.1 104.3 116.3 228.2 165.5 TV RECEIVERS/THOUSAND POP 9.5 38.1 86.9 108.3 124.2 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCUL.ATION PER THOUSAND POPULATION 50.0 .. 50.2 64.1 96.3 CINEMA ANNUAL ATTENDANCE/CAPITA .. .. 2.9 2.9 2.9 LABOR FORCE TOTAL LABOR FORCE (THOUS) 4727.0 6353.0 8982.0 FEMALE (PERCENT) 19.2 24.8 24.7 24.8 34.5 AGRICULTURE (PERCENT) 51.4 37.9 25.8 31.3 40.7 INDUSTRY (PERCENT) 19.2 21.0 21.2 23.9 23.4 PARTICIPATTON RATE (PERCENT) TOTAL 30.0 29.9 34.0 31.3 42.0 MALE 48.8 45.1 51.i 49.8 55.2 FEMALE 11.5 14.8 16.8 14.8 29.1 ECONOMIC DEPENDENCY RATIO 1.7 1.6 1.2 1.4 0.9 INCQ4E DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5% OF HOUSEHOLDS 41.2/e,j 31.9/ HIGHESt 20% OF HOUSEHOLDS 67.7/e,j 60.1/j LOWEST 20% OF HOUSEHOLDS 2 l/e j 3.5/. LOWEST 40% OF HOUSEHOLDS 6:8Z8 10.17. pOVERTY TARGeT GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 214.0/d 289.8 RURAL .. .. 197./d 184.5 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 267.0/d 519.8 RURAL .. .. 122.0/d 372.1 409.0 ESTIMATED POP. BELOW ABSOLUTE POVERTY INCOME LEVEL (I) URBAN .. .. 34.0/d RURAL .. NOT AVAILABLE NOT APPLICABLE N O T E S /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; "Data for 1970" between 1969 and 1971; and data for 'Most Recent Estimate" between 1979 and 1981. /c 1978; /d 1977; /e 1964; /f 1976; /g 1962; /8h 1973; /i Including teacher training at the third level; /j Economically active population. May 1983  - 30 - Annexi1 Page 3 of 5 OE?FItofIONi Or SOCIAL .ItolAfORP describe orda- of iantd,ltdic-te re,,ds, and c --cri etin ..J.r difterarce b..ee.. otrs The pefeetos grups are Ih,f aecutygopo h ujctoutysd~jtcutygoprc s-Ife, ItKigher a--rge mou-s tiht the onr tru f the scobjet coutry (cceptfor 'lgo Ioose"Illfpres'gop afee"ide ttstrf Ice and fiddle Elast is bhoser b--aerfttrctg- so-i-r-u1eura Totl Tglurac I nti, conyileing land area end inla-d atr 1960, ~ 3iih'hilldfrasdclshc telset e ogiutrlE......teoicoocf sn -utdtes.po....ilyctersnn 0`-linfaelera Paan-as a dietaonuse ly, pacIaltusa 191 n ls Ot, oruato_pa oata 1d onl,uran ad ut-iPoIltio ttl en Ei AIT 01 m e uio iiae a crn trnrpies olalei ulcan rnt gnrledepcate fsta o can-td yst occrao etopn u lac Otat_0_fil_at_l; rhbltar I) ceners Id pta ae aitihetspo nrtyetye lobe. ' 1 ly0 an ff -aa hyu etnOtrplin eolsaos rudn rdi aS utd 0~~~~~~~~~~~~~~~~~~~~~cr n o Onua.Orlhsitl ceo,iouehat n ENERGY COtNSUMP'TIOt PEP CAPITA -idulaprn oaatito rannladcl 'nrantpreetgysafoO haoa p(hutp hf a--dloe hroreegjoltlglageelot ooa a odhdo,nceruatot,out ndoe r.eihfarl-alnaosoeton andgeohaocieleorlOt) I blopaso fcoo eqcolrn co n cot;prolor, i etedrage f cdlal aclfoee.Potsttla icl eOhae Ibb, 111,an 190 dte cean oiohoa ooluo bOepnicial(genra na plal - ,_an rural l "Y "%.I' -d~ ~ ~~ ~ ~~~~~~naycl,cclrunlcptatoad olndaentyett do,lrJc .......TolTCOeulce osiai r ncue ony hcde ttl Icta rourlc I-erlfuadl-d fJl ;iO,11,ad10 atsoecoOaiu a oa nc Phe Yo aesIone toot dta, a l ancncPuitltti- Oh lollYT , (IooO Ond den 19neragr . .. hltthuofllproo aruind-rtl.cthnndua cutul popolatlon by age and arc an.c b oeenroliy 1 at,c frtiic is ouehld fo pocuciat% icaPl lpnnyoaea. - Prooocnpraoteo fr onclly rnrcoerco o'treeOctu~nularofpartons .d~ poro -1na.ra.adurlcrtnse lrotseasoinlofoccpncanyaolntfnnnueineliooucry'yan trtnonuennnooolluran,tdrualocoyldnooetcoby capta ocoo oco, ad osee lft opnotcy caililogan 1. dollign rapenonay. ban lugatonlod no-ptsd ettanlotreean fen. TE pntone l don frnlc oe 1ohu hreIolInooco ac aeucnurcininerlOnyooriognoSinnslclncatnl naoilonilcIrnocnonlne-oa.ra.rrr P lacn--ap,.enfononn. Cooucptbntinlocorrlelnrnoadelnelhlornrolon oresspretg donlcnacorhrroyluncotn lacri of unit nc neyrod unchon run, ciPoaoacol-nu,sAl btodl lh dgul o-One touy sole ana fr le roo tootaicnfaoennylots torfocotl. Otcnnnnarytnollcnnfoltcoanhoytoanltolunyenrnngsatceprnlh youaiouocsettando.th clto h cntcrnuacr-Iirn ooo-g crltuc;nrslylnldtchlrnagdbi istlaufho opoatin c th your lo ..n h aoo occ fyauhnujtodtnd yrr tgn fptayeooln o 1061, OfO, nd ohydana pcllnoalyt In dnonu-o; o1opocec yen cu. a. ngtinlnunccIntO - cnscontoas obon lotaiholtou [i,,onrLlyiltned on'ly Kl bOL"h -anlbdoa.oc-dnccroln ..onn.cctonanlicoiolntiui yoouuooo or hruone penonr - filcnnh-I ytro) acolo-tg (I- udo- Zur 1- ocftrl, nncfl'rcfo ruttait. 0rtltsed poclclnefo 150hI lhCfP ad 01-01, annurn c aduc yulac_n c ,dIcii cor in con. yronpnycerlN; 1060, 0910, and_f-fi darn. d ondlb""; Inud..cPat(e.n.. nl-cruldonao oouado i-ou atnc or r hunn uuu..l-Ptootconoorli populolon lihI lol, and 12 an.Cnoeoic ot hnruhfetotcnldoucuann faIe n Grs ardntonic-oognohnfaEnroonncl rnnni1tron n he oclrycdolerrodI i rolenoyoenac-yn O adccccedI mnoon oylno)-Al ye frocur o ai lrcIcc ata ocal fityaracngr odnginlch ll, ndhoaoaco1ocu yh ncr cotud fyoolcun t--dt n uneto 196d-0rtp c ffo197 a'nonrc-ccn -dcooon, ,- ionh, -o i tnnncnSe,ncnlnc.n.ncnttu.n. 'Inann)~~~~n .t..<c..O ___ tin"' -SOuOccOuOOcr."tiuc an0ttu 60nldoo uo9ropao yrn.19ont8inn 01-00 0 don-ny cu -lc (coo oopnnne,undofangettnsnoo f toepliah,,rnalee,sd, oynai 00 fcnlflau PooreetorrIoeae y ALhad rphtolpol edtdn-oto Ico otrcoo atnfncI onn, ooo on n n an honarhld Irorl 1961-iS,1011 and[hill tot. and clot count unon codpat 00 ce.-tnotgeof,tocal ot onhfcoc; (fcc ta cctaorl o cuooItatco e; nnoocoio o otEl c1, nod lO doc nIf iyrrofoo EeJay teeylofoidfndehc.rnlnounoenrot-na.at nlcl-etoptoo Ouquireteto tur al noinonlt ttiatltned by 010 yrocfr fcc ciinun cotcltyocoaocccnycntd, totol,na-, -nt inale bor torca. t-l ioaoeofhrnc,,aoonlyc aool_atnacuin erotcn fc-loiunfti -nooIntaagnop tncy ecseerotn, f hiO cr as toidteonnn ocri. netlOG,100 Ad (8 oc. nei r bto o 10 toninianchan. ar onrthnmoto 1 ratohtnl proeh an 0mn ,lcco eacoutnoti cuoln rcIn ieted ol anial procin a en corait on oh oct1, ynoeooh i ml innon Sn ettnulco rt trt natinal efnnet Ttoduld othnt;[6-f,ltuoloac.hontcaadnyclonnofprlnnono ed(adcoo rernalia nocon turlyrrtancalancoio-rrciontoyloufccnoft cta. utoronn, doelEtc frc nna, o- uo,Incaoynda1-h-t l, n f fdaa ONcCIoI hllt EtIlse l-lahaeenOoodIdni otn.rloeacnPcchinElanl,ocIuoontuoonlPnlrrnntn a0egrooyl'l years ,conbildron lnohitatc gro..y;forncoo deor'.cyung porooni ,nioitrnolh ocrorot .ycoreoclhyonnr-tn ,aooycoreiolhyoroont of~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ci-Ei-1- AttI .... Oconttte daa daniro fre lif tuflr; 1106, IbI and 11 (d luo.hcooic p icIni flOitItO OcailnI I doff ...a. taoA (oOItrlncrdndhrfoarolfreinn hfolonctidoaonrnpocnctocotfnrl lci,n yeatofag "oncoolulRoh;lt,lfadolua Aleolot I'llntnotidulcconunoo tnibrorhc-nno Ocon o nTodaerI ercn o pyncoco -toal oio, nlrual-nonoinuly douao to yoto_tnic nn-cuEr_urrrnc t_n hcateofyrnlelttao,ofsr,AOaualihrnnbocntrtf fudlo aancnupclluoclooortuordurfaonaceaorccreacdhuthaclrnccfietio hOurlilnncr kccl(flpcnaclnl-uranitdurol 00 hatTrt pocote bnrilo, nrfgt,an Oc01cricli pcony coan oo It_t- -'clr of a -conage ro nrn tuiayrloacretoe fhcroenirooltoa cn ranlnncct-- noy lbnloltoiecr frnld d.cncnreuup bllcfnnn6i 9nhopt[ntdc'mntaloeon lcnnlou-tdinaott-n -n.. onno nf uotc ti.brr hots d18dL. lnrlrorto-lacuacliyyhttehnsicdodrrl ron cfooatnchnnr-olonr atlt eeh..fn.. uthl .n . fa.tnprnlfctyruporconnotoEyannof foo cot nay In fetnhbn0 the teellp' tearer ~ ~ ~ l to fo hrch ccpsa(oreooypualnltcaIuho,n Orioet nd icla -d neoluf-t Ao_ 1061;191-517  Population: 26,965,0fl0 (mid-1982) - 31 - ANwEX1 o G Per Capit: l=1,470 (1962) a/ Psge 4 of 5 hont (nilLjoc t3C Aenra* A--l inrenw (, 5hare Of GIP at Market Pri^Ce (I) at arret priee) (at onaetant 1970 priree) (at current pnces) 1983 19f1 b/ 1982 b/ t983 t/ 1960-70 1970-75 1975-83 1960 1970 1975 1980 1981 1982 1983 EATI06AL AOXI5M Groes dacetic proennt c/ 33,736 37,325 39,669 39,046 5.3 6.2 4.3 103.0 103. 103.0 103.0 103.0 tOO.O 103.0 Agriculture 8,311 a,870 9,232 9,140 3.5 5.2 3.4 34.1 29.6 29.3 27.6 26.9 26.4 25.3 Didutry 9,253 10,2m8 10,989 8,427 6.2 6.5 2.9 25.7 26.6 28.3 30.7 31.0 31.4 23.4 Services 12,577 13.892 14,757 18,501 5.9 7.2 5.1 40.2 44.3 42.4 41.7 42.1 42.2 51.3 Ccnnptial 25,189 23,691 31,034 30,800 5.4 6.6 4.3 79.4 80.t1 81.2 74.7 76.9 78.2 78.9 Grosa Invesanent 8,A9 10,147 10,224 9,245 5.1 1.3 7.6 20.5 22.0 17.8 25.2 27.2 25.8 23.7 E6ports of goods and Nl8 5,677 4,606 4,679 3,581 3.1 .3 1.1 15.6 14.2 15.5 16.8 12.3 11.8 9.2 Imports of goods anl NES 5,494 6,078 6,444 4,580 4.3 0.8 7.1 15.5 16.2 14.6 16.3 16.3 16.2 11.7 I,roes national savnuq 8,625 8,439 7,9f1 7,479 5.2 5.6 3.6 19.4 18.0 16.8 25.6 22.7 20.1 19.2 C.posjttnn of NerdWarise Trade (%) (at current Zoicea) 1975-82 1960 1970 1975 1982 1981 982 91 SE0888D MAIE Menrandi. Exorts (OEB) 4,372 3,458 3,399 3.3 6.1 1.9 103.0 103.0 103.0 103.0 1030 100.0 Maior pri-aty 2,92S 1,959 2,056 2.8 1.4 3.3 72.5 72.1 57.2 70.0 56.7 60.5 major oenfacturee 837 899 901 - 23.5 5.8 - 10.5 22.5 19.1 26.0 24.5 Other 607 6C0 442 - 4.1 -7.8 - 17.4 20.3 13.9 17.3 13.0 Merdxrdise tmonrto (CIF) 4,663 5,199 5,418 3.5 2.1 9.9 2.0 1.0 103.0 1.60 103.0 01.0 Food 307 331 324 10.0 6.1 14.8 2.4 5.1 6.0 6.6 6.4 5.9 Fetroleum 563 724 657 -21.4 13.0 46.5 2.0 - 1.0 12.1 13.9 12.0 madinery and ui-Pnt 1,584 1,831 2,016 5.2 -4.1 11.6 42.7 43.6 36.1 34.0 35.2 36.8 Other 2,279 2,313 2,481 1.8 5.6 8.5 52.9 51.3 56.9 47.4 44.5 45.3 1974 1975 1976 1977 1978 1979 190 198 b/ 1982 b/ 1983 b/ PRICB3 Am mm89 TE OF 8617 9 GDP deflator 27.6 20.8 23.6 28.3 17.1 24.1 .1 24.4 23.3 19.9 Etdan,g rate 26.1 30.9 34.7 36.8 39.1 42.6 47.3 54.5 64.1 78.9 Eaort price itd. 246.6 252.5 339.8 577.9 552.2 608.3 773.6 832.0 1,045.6 1,257.4 lm8rt price irtex 216.9 275.1 330.2 375.9 430.0 518.2 621.1 750.5 99.0 1,O94.7 Ten,a of trade index 113.7 91.8 118.1 153.7 128.4 117.4 124.6 110.9 106.0 114.9 1970 1975 1981 Z/ PUB[IC FAlWCE e/ Curient rarenJe 10.6 11.2 12.9 Oarrent ertttore 5.7 7.1 9.1 spa (-) or deficit (-) 4.9 4.1 3.8 Capital exponditure 1.8 4.6 4-5 Fore2ox fimncixg f/ 3.3 3.1 2.3 1960.70 1970-75 1975-83 OT3EE I11ICATO GE2P groath rate (%) 5.10 6.40 4.13 Gt pFer apitagwt rate (.0 2.00 4.00 2.17 9en c eaaptiOn grornt rate ( 5.03 4. 4.00 ICo h/ 3.54 3.70 7.46 Argiioai saevioa rate i/ 0.13 0.14 0.16 Imort ela5ticirw 1.77 0.12 1.77 a/ World Bae* Atle Mettnd. h/ Batited. hi At nraet Frires: apet sre expragd at factor coat and will not add bee of cenluiaon of net indiret t8Kee ant auat'dice. d/ IdieB bsed ona t1970103. ;/ Central 3avaonat. f/ Grose dois ts of eantrl loBem t the entire publio aeetor. j bIrcludes Social Securiw ant Yado Vial. bh,/ gged cne yeEr. iJ Ixrut to gre daceetic m-ViDgs/inoret to gSCe d-aeetic irodent- Fsbrasry 28, 1964 OIolrd,ia Division  -32 Popalation: 26,965,0D0 (mid-1992) BEL OF PAMfS, E lL CAPITAL MI) ANDM ) 1X I (NP Per Capita: US$1,470 a/ (illion 15$ at current (rices) Page 5 of 5 Prelisinay Actual Estimate Projected 1974 1975 1976 1977 1978 1979 198D 1981 b/ 1992 ti 198 1984 1985 1986 B1N. OF PAYIII S Dtports of goods and nri-factor services 1,858 2,165 2,805 3,443 4,039 4,658 5,676 4,606 4,683 4,135 4,651 5,175 6,057 ImnPrts of wods aid on-factor aervices 2,072 2,030 2,321 2,762 3,425 3,939 5,494 6,078 6,444 5,552 5,457 6,031 6,621 Rsource Balance -214 135 484 681 614 719 183 -1 472 -1 764 -1 417 -806 -856 -564 Net factor paypeits -1 - -313 -27T -301 Z55 -0 -42 -701 -9r2 41,113 -1,9S 3-14 Net trasufers 22 30 39 40 44 98 164 242 223 227 230 234 239 Current Account Balame -384 -98 210 449 357 562 136 1658 -2,242 -2,162 1689 -1,817 0 Net direct forei4ap inv.esait 36 32 14 43 67 104 52 228 268 193 200 350 350 Meilum- and lor,-tem lmsm (net) 207 261 102 196 47 6C9 692 1,433 1,200 410 539 1,064 1,323 to publk sector (182) (264) (113) (199) (80) (564) (777) (1,079) (1,096) (471) (664) (964) (1,123) to private sector (25) (-3) (-11) (-3) (-33) (45) (-85) (354) (104) (-61) (-125) (100) (Z) Other capital -223 -56 236 164 139 -38 214 137 1 -250 -250 24 24 Capital Accaunt salance 20 237 352 403 253 675 958 1,798 1,469 350 489 1,438 1,697 Cnge in Reerves (- increase) 364 -139 -562 -852 -610 -l1,27 -1,094 -140 773 1,812 1,200 379 -137 Net international reserves (official) 152 547 1,166 1,830 2,482 4,106 5,416 5,630 4,891 3,079 1,879 1,500 1,637 Resers as mxtits of inports 0.9 3.2 6.0 8.0 8.7 12.5 11.8 11.1 9.1 6.7 4.1 3.0 3.0 G6SS DISNA9U21S d/ Official grants - - - - Gross disbursements of HLT lans 376 387 257 375 299 972 1,027 1,335 1,430 oncessianal 47 42 43 25 61 30 46 53 48 Bilateral (45) (40) (40) (19) (55) (2S) (9) (22) (18) IDA ( ) ( ) ( H ( .) ( ) ( H Other maltilateral (2) (2) (3) (6) (6) (S) (37) (31) (30) %n-concessional 329 345 214 350 238 936 981 1,282 1,382 Offical expDrt credits (19) (15) (1) (7) (8) (10) (98) (32) (162) lBPD (85) (105) (75) (85) (82) (139) (218) (251) (277) otlar multilateral (24) (20) (27) (31) (33) (36) (44) (75) (64) Private (201) (205) (111) (227) (1LS) (751) (621) (924) (879) EKNAIL 1R (end of period) dl Debt outstanding ad dishiraeI 2,138 2,372 2,472 2,692 2,809 3,374 4,078 5,109 6,211 Official 1,628 1,728 1,794 1,870 1,996 2,115 2,361 2,599 2,992 IBRD (562) (634) (672) (716) (751) (838) (991) (1,165) (1,346) Ink (73) (22) (22) (22) (22) (22) (21) (21) (20) Other (1,043) (1,072) (1,100) (1,132) (1,223) (1,255) (1,349) (1,413) (1,626) Private 510 644 678 822 813 1,259 1,717 2,510 3,219 Urdisbured Debt 680 660 935 1,020 1,527 1,925 2,592 2,922 3,501 DOT SVIC d/ Total debt servic ps yt 297 239 269 315 387 636 528 664 911 of .tIch interest 103 115 125 139 168 22B 278 4C8 577 Payimts as X ex,prta of 8>ods and all services 15.3 10.7 9.4 9.0 9.3 12.9 8.6 12.6 17.6 Payqmts as I GP 2.4 1.8 1.8 1.6 1.7 2.3 1.6 1.8 2.3 Average interest rate n new loa (2) 7.4 7.5 6.7 7.3 7.9 10.1 13.3 12.0 10.6 Official (6.2) (6.3) (5.6) (7.3) (7.6) (7.7) (8.8) (7.6) (9.3) Private (8.4) (8.3) (7.6) (7.4) (8.6) (11.8) (15.7) (14.0) (12.9) Average sraturity oi now loom (years) 16.0 15.3 14.9 16.2 14.3 13.0 14.6 12.9 14.6 Official (22.7) (26.3) (23.5) (18.4) (16.5) (17.1) (17.7) (16.8) (17.1) private (10.0) (8.1) (8.0) (7.9) (9.6) (10.0) (12.9) (11.0) (9.9) BANKGRP IT )1 (2) /d iR 0D3/total WD 26.3 26.7 27.2 26.6 26.7 24.8 24.3 22.8 21.7 IB1D diabLajerenta/total gross dishabemes s 22.9 27.4 29.6 22.7 27.4 14.3 21.2 18.8 19.4 IBR3 debt service/total debt service 24.9 32.8 31.9 29.5 28.8 19.5 27.3 24.3 20.9 IDA DOD/total DM 1.1 0.9 0.9 0.8 0.8 0.6 0.5 0.4 0.3 IDA disbhraemits/total gress disbursementa - - - - - - - - IDA debt service/tot-al debt service 0.1 0.3 (.2 0.1 0.1 0.1 0.1 0.1 0.1 a/ WorLd Bark Atlas aethed. b/ Preliminary. cI Eatimte. 6/ Public and publicly granteed debt NIarc 6, 1984 6blstbia Division  - 33 - Annex II Page 1 of 4 A. STATEMENT OF BANK LOANS AND IDA CREDITS IN COLOMBIA (as of September 30, 1983) (US$million) Loan Amount (less Cancellation) Number Year Borrower Purpose Bank IDA Undisbursed 66 fully disbursed loans and one IDA credit 1,406.2 23.5 1/ -- 1163 1975 Colombia Agriculture 21.0 6.2 1352 1977 Colombia Rural Dev. 52.0 6.1 1357 1977 Banco de la Republica Agricultural Cr. 64.0 1.4 1450 1977 Empresa Nacional de Telecomunicaciones Communications 58.3 29.4 1471 1977 Colombia Highways 90.0 12.3 1487 1978 Colombia Nutrition 25.0 8.8 1558 1978 Colombia Urban Develop- ment 24.8 13.4 1582 1978 Interconexion Electrica, S.A. Pewer 126.0 21.8 1583 1978 Colombia Power 50.0 11.2 1593 1978 Zona Franca Industrial y Industrial Comercial de Cartagena Export 15.0 5.1 1624 1979 Colombia Airports 61.0 5.9 1628 1979 Empresa de Energia Electrica de Bogota Power 84.0 9.3 1694 1979 Colombia Urban Develop- ment 13.5 10.1 1697 1979 Empresa de Acueducto y Alcantarillado de Bogota Water Supply 27.9 6.1 1725 1979 Interconexion Electrica, S.A. Power 72.0 42.9 1726 1979 Instituto Nacional de Fomento Municipal Water Supply 31.0 26.0 1737 1979 Instituto Colombiano de la Reforma Agraria Agriculture Cr. 20.0 14.0 1/ Includes exchange adjustment of US$4.0 million. The status of the projects listed in Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31.  - 34 - Annex II Page 2 of 4 A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1983) (Continued) Number Year Borrower Purpose Bank IDA Undisbursed 1807 1980 Empresa de Energia E:Lectrica de Bogota Power 87.0 54.1 1825 1980 Empresas Publicas de Medellin Communications 44.0 17.8 1834 1980 Banco de la Republicsk Industrial Cr. 32.0 5.3 1857 1980 Banco de la Republica Industrial Cr. 150.0 97.3 1868 1980 Empresas Publicas de Medellin Power 125.0 98.4 1953 1981 Empresas Publicas de Medellin Power 85.0 77.1 1966 1981 Colombia Rural Roads 33.0 23.0 1996 1981 Instituto Colombiano de Ridrologia Irrigation 37.0 33.5 1999 1981 Corporacion Electrica de la Costa Atlantica Power 36.0 30.5 2008 1981 Empresa de Energia Electrica de Bogota Power 359 .0 310.3 2069 1981 Instituto Nacional de los Recursos Naturales Renovables y del Medio Watershed AAmbiente Management 9.0 8.0 2090 1982 Ferrocarriles Nacionales de Colombia Railways 77.0 77.0 2121 1982 Fondo Vial Nacional Highways 152.3 146.5 2174 1.982 Colombia Rural Develop- ment 53.0 52.2 2192 1982 Fondo del Ministerio de Educacion Rural Education 15.0 13.3 2303 1/ 1983 Instituto Colombiano Agricultureal Agropecuario Research 63.4 63.4 TOTAL 3,599.4 23.5 Of which has been repaid 767.1 3.7 Total now outstanding 2,832.3 19.8 Amount sold 51.0 Of which has been repaid 50.5 0.5 Total now held by Bank and IDA 2,831.8 19.8 -_ - Total undisbursed 1,337.7 1/ Not yet effective.  -35- Annex 1I Page 3 of 4 1S. STATEMENT OF IFC INVESTMENTS (as of September 30, 1983) Fiscal Type of mount in US$ Million Year Obligor Business Loan Equity Total 1959 Laminas 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 Electromanufacturas, S.A., Electrical equipment 50 - 50 1962 Corporacion Financiera Development Colombiana financing - 2.02 2.02 1962-1963 Corporacion Financiera Development Nacional financing 2.04 2.04 1963-1967 Ccopania Coloabiana de Textiles 1.98 .15 2.13 1968-1969 Tejidos, 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 ENKA de Colombia, S.A. Textiles 5.00 2.61 7.61 1969 Compania de Desarrollo de Tourism - .01 .01 Hoteles y Turismo, Ltda. (HOTURISMO) 1969-1973 Corporacion Financiera del Development Norte financing - .45 .45 1969 Corporacion Financiera del Development Valle financing - .43 .43 1970 Promotora de Hoteles de Tourism .23 .11 .34 Turismo 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 Boyaca, S.A. Cement 1.50 - 1.50 1975 Cementos del Caribe, S.A. Cement 3.60 - 3.60 1976 Las Brisas 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 1.22 1.51 2.73  - 36 - Annex II Page 4 of 4 B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1983) (Continued) Fiscal Type of Amount In US$ Million Year Obligor Business Loan Equity Total 1981 Leasing Bolivar Leasing 9.00 .17 9.17 1981-1982 Petroleos Colombianos Ltd. Chemicals and Pietrochemicals 12.15 3.86 16.01 1983 Frigorificos Colombianos, S.A. Food Processing 1.00 0.54 1.54 1984 Cementos Rioclaro S.A. Cement and CtDnstruction Material 21.91 5.00 26.91 1984 Carbones del Caribe S.A. Mining 10.61 1.64 12.25 Total Gross CommitmLents 93.76 26.07 119.83 Less cancellations, termina- tions, repayments and sales 61.40 9.59 70.99 Total commitments now held by IFC 32.36 16.48 48.84 Total undisbursed 22.61 7.06 29.67  - 37 - Annex III Page 1 of 2 COLOMBIA POWER DEVELOPMENT FINANCE PROJECT SUPPLEMENTARY DATA SHEET Section I: Timetable of Key Events (a) Time taken to prepare project: 11 months (b) Agency which prepared project: FEN/Bank (c) First presentation to Bank: November 1982 (d) First mission to review project: November 1984" (e) Departure of Appraisal Mission: March 7, 1983 (f) Completion of negotations: February 10, 1984 (g) Planned date of effectiveness: May 1984 Section II: Special Bank Implementation Action None Section III: Special Conditions During negotiations, agreement has been reached: (a) that the Government, FEN and ISA, together with the Bank, would review annually and update the financing strategy for the power sector. This review would take account of annually updated electri- city demand growth projections and the associated Expansion Program (paras. 36 and 65); and (b) that the Government would authorize capital outlays for new electri- city projects only if the project in question would be economically justified and there would be available adequate financing that would not affect negatively the existing financial obligations of the company(-ies) concerned. Additionally, except for ongoing projects for which financing is available, the power utilities would undertake capital expenditures in excess of the value of one percent of net fixed assets in service only under the two conditions mentioned above (para. 41); (c) that changes in FEN's statutory framework which, in the Bank's opinion, would affect adversely the entity would not be made (paras. 44 and 69); (d) that FEN will engage consultants and permanent staff in a timely manner to complement its technical staff capability in the area of project analysis and monitoring (para. 45); (e) that, by December 31, 1984, FEN would prepare a plan of action acceptable to the Government and the Bank to encourage private investment in medium and long-term instruments of FEN and, promptly thereafter, the Government would put such plan into effect (para. 51);   - 38 - Annex III Page 2 of 2 (f) on annual targets for mobilization of domestic financial savings by FEN, which targets would be reviewed and updated, as necessary, by agreement among FEN, the Government and the Bank (para. 52); (g) with the Government, that all necessary measures on its part would be taken to provide FEN with adequate access to the domestic capital market (para. 52); (h) that FEN's revolving fund accounts in BR will be audited annually by independent, external auditors acceptable to the Bank (para. 62); (i) with ISA, EEEB, EPM, CVC, ICEL and CORELCA on the onlending terms and conditions (para. 63); (j) that the Government, with the participation of ISA, would prepare an appropriate price index for the electricity sector. After review and comment by the Bank, an agreed index would be computed and published quarterly by the Government, starting in January 1985 (para. 66); (k) that FEN will engage the services of independent auditors acceptable to the Bank and maintain internal accounting and auditing systems in accordance with sound principles (para. 67); (1) that FEN will annually capitalize its profits (para. 68); and (m) that FEN will manage its finances in such a manner as to meet the agreed annual targets (para. 69). Section IV: Amendments to Prior Agreements None. Section V: Power Companies' Performance Under Existing Loan Agreements The financial performance of ISA, EEEB, EPM, CVC through 1982, the latest year for which audited information is available, has been within the range covenanted under existing loans and, except for EEEB, internally generated resources for investment over the past few years have averaged in the 50%-70% range. In EEEB's case, the annual tariff increments already authorized through end-1984 and estimated for 1985 would generate resources to cover 32% of its heavy investment program during 1984-85.   A 7- ZA NTiC O CFA NN 12'~~~~~~~~~~~~~'$ -\JLANTICO N 0~~~~~~~0' N SANTANDERNNA N '~' ~ <' A N T / \ DRAI A AS ~ / AA TE T A A R 1 N 0 V A U NPANTNDE * / N~~ QUE COLOMBIA~~~~~~~~~~~~~~~~~~~ ONo0 CO IMSANTANDE ~ IDAC! Aes '<V ~4~ 10 '- 'V~~~~~~~~~~5  I