Colombia - Second Bogota Distribution Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. P-4020-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 USt171 MILLION TO EMPRESA DE ENERCIA ELECTRICA DE BOGOTA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE BOGOTA DISTRIBUTION II PROJECT November 4, 1985 This document ha a resticted distribution ad ny be used by recipients oly in the performance of their offi dudtes. hls contebt -y not otherwise be disdosed without World Bank autbhoriatom.  CURRENCY EOUIVALENTS Currencv Unit = Colombian Peso (Col$) GolSl = 100 centavos (ctv) ColS152.06 = US$1.00 (September 1, 1985) Cols$,000 = US$6.58 (September 1, 1985) AVERAGE EXCHANGE RATES ( ColS/USS) 1980 1981 1982 1983 1984 47.3 54.5 64.1 7R.9 100.8 WEIGHTS AND MEASURES I/ 1 meter = 3.281 feet (ft.) I square kilometer (km2) = 0.386 square mile (mi2) I cubic meter (m3) = 35.315 cubic feet (ft3) I barrel (bbl) = n..159 cubic meter i kilogram (kg) = 2.206 pounds (lb) I ton (t) = 1,000 kilogram i kilowatt (kW) = 1,000 watts (W) I Joule (J) = I Watt. second = I Ne-;eton. meter = 2.3988.1I-4 kcal = 9.478.1f-4 Btu I ton oil equivalent (toe) = 42.2.109 J I kilowatt-hour (kWh) = 3.6.ln6 J 1 kilovolt (kV) = 1,000 Volt (V) 1 kilovolt ampere (kVA) = 1,000 Volt ampere (103 V4) I Hertz (hz) = I cvcle per second I/ The Sl (Systeme International) and its multiples are used whenever possible in this report.  FOR OFFICIAL USE ONLY ABBREVIATIONS k (kilo) - 103 (thousand) M (Mega) - 106 (million) G (Giga) - 109 (billion) T (Tera) - 1O12 (trillion) _ P (Peta) - 1015 (quadrillion) E (Exa) 1018 (quintillion) CONPES Consejo Nacional de Politica Economica y Social (National Economic and Social Policy Council) CORELCA Corporacion Electrica de la Costa Atlantica CVC Corporacion Autonoma Regional del Cauca DNP Departamento Nacional de Planeacion (National Planning Department) EAAB Empresa de Acueductos y Alcantarillados de Bogota EEEB Empresa de Energia Electrica de Bogota EMCALI Empresas Municipales de Cali EPM Empresas Publicas de Medellin FEN Financiera Electrica Nacional (National Electricity Development Bank) FONACE Fondo Nacional de Desarrollo ICEL Instituto Colombiano de Energia Electrica IDB Inter-American Development Bank ISA Interconexion Electrica S.A. JNT Junta Nacional de Tarifas (National Tariff Board) KfW Kreditanstalt fuer Wiederaufbau UNOP United Nations Development Program FISCAL YEAR = CALENDAR YEAR . | This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  COLOMBIA BOGOTA DISTRIBUTION II PROJECT Loan and Project Summary Borrower: Empresa de Energia Electrica de Bogota (EEEB) Guarantor: Republ:.c of Colombia Amount: US$171 million equivalent Terms: Repayment in 17 years, including 4 years grace, with interest at the Bank's standard variable rate. Project Description: Sectoral Objective: The Bank's principal objective ln the Colombian power sector is tc achic-ve greater efficiency in the operation of t:he country's electric utilities. The substantial ene-rgy losses prevalent throughout the sector constitutet cone of the major deficiencies in the current operations of these utili- ties (EEEB's energy losses have reached almost 23X of gross generation). Improved subtransmission/distribu- tion systems and theft prevention measures represent effective methods for reducing such losses. Since EEEB is one of the largest power utilities in Colombia, improved efficiency in EEEB's distribution system would have a major impact on total losses experienced by the sector. Project: The principal objectives of the project are to achieve greater efficiency in EEEB's operations and to extend electric service to a larger segment of Bogota's population. The project consists mainly of the 1985-90 time-slice of EEEB's distribution and subtransmission program, including the expansion and improvement of Bogota's network, studies to improve EEEB's distribution and operational planning, a training program for EEEB's staff and a program for reducing the system's losses. Around 240,000 new customers will be connected to the power service, 1,100 KVA in subtransmission substations will be built, and about 10 km of 230 kV and 75 km of 115 kV lines will be constructed, together with 350 MVA in distribution substations and 1,000 MVA of distribution transformer capacity and more than 1,400 km of new primary and secondary distribution circuits.  - ii - Risks: No technical risks are anticipated although timely completion of the project will depend upon EEEB's project management ability. Establishment of a project coordination unit and implementation of a training program for the Improvement of EEEB's organization and management are expected to reduce this risk. Estimated Cost: Local Foreign Total --US$ million- Subtransmission 5.9 12.5 18.4 Distribution 141.2 80.3 221.5 Maintenance and Laboratory Equipment 0.3 15.1 15.4 Training and Technical Assistance - 2.0 2.0 Studies 0.8 - 0.8 Energy Losses Reduction Program 1.0 1.0 2.0 Engineering, Administration 13.0 - 13.0 Total Base Cost 162.2 110.9 273.1 Physical Contingency 16.2 11.1 27.3 Price Contingency 21.6 26.6 48.2 Total Project Cost 200.0 148.6 348.6 Interest during Construction - 41.0 41.0 Total Financing Required 200.0 189.6 389.6 - - Financing Plan: Local Foreign Total -US$ million Suppliers' credits - 18.6 18.6 IBRD Loan (Project) - 130.0 130.0 (IDC) - 41.0 41.0 EEEB 200.0 - 200.0 Total Financing 200.0 189.6 389.6 Disbursements: Bank FY 86 87 88 89 90 91 (Project Only) Annual 15.9 24.3 26.7 26.1 21.7 15.3 Cumulative 15.9 40.2 66.9 93.0 114.7 130.0 Rate of Return: 12.1% Appraisal Report: Report No. 5506-CO, dated May 28, 1985  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMEI,DATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA DE ENERGIA ELECTRICA DE BOGOTA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE BOGOTA DISTRIBUTION II PROJECT 1. I submit the following report and recommendation on a proposed loan to Empresa de Energia Electrica de Bogota, with the guarantee of the Republic of Colombia for the equivalent of USS171 million to help finance the Bogota Distribution II project. The loan would have a term of 17 years, including 4 years of grace, with interest at the Bank's standard variable rate. PART I - THE ECONOMY 2. An economic mission visited Colombia in July 1982 and its report (4444-CO) was distributed to the Executive Directo.s in August 1983. A mission to review the external sector and agriculture visited Colombia during April/May 1983, and its report (4981-CO) was distributed to the Executive Directors in April 1984. Macroeconomic policies were also reviewed in the President's Report (P4055-CO) for the Trade Policy and Export Diversification Loan of May 2, 1985. Country data sheets are presented in Annex I. A. Background 3. The Colombian economy has made considerable progress since the early 1950s, evolving from a largely agricultural and rural base, integrated and industrialized, into one that is more open. Tte growing economic activity, rapid rural-urban migration, increased p.Lrticipation of women in the labor force, and expanded public services have contributed to reductions in poverty and improvements in income distribution. Financial and capital markets have evolved pari passu with the growing needs of the economy, and the country has become an active participant in international capital markets. The state enterprises are few, follow adequate pricing policies, and many have some form of private sector participation. The country's energy balance has been changing in recent years and the country is expected to become a net petroleum exporter in 1986 and, increasingly, an exporter of thermal coal. 4. Export promotion has been a concern of the Colombian authorities for some time. Beginning in 1967 authorities adopted an outward-looking development strategy, expanding and diversifying exports. Export promotion policies, including frequent small devaluations of the peso, export tax rebates and other incentives were introduced and the authorities began lower-  ing tariffs somewhat and relaxing capital market controls as a means of raising efficiency and increasing the profitability and competitiveness of Colombian goods in external markets. These measures were successful in relieving the foreign exchange constraint and stimulating growth and employment. B. Economic Performance During the 1970s 5. In the mid 1970's, the economy was subjected to strong inflationary pressures 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 turnaround in the balance of payments. Incomes rose rapidly stimulating aggregate demand, and inflation accelerated. Economic growth also rose, and unemployment fell substantially in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 1X of GDP during 1976-78 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. 6. While beneficial in many respects, the foreign exchange boom had some negative effects. 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 non-coffee exports. The Government also sought to check inflation by maintaining high reserve requirements and expanding controls over credit thereby reducing, in real terms, the financing available to the private sector through the official capital market. 7. The 1977-79 economic program was partially successful in restrain- ing aggregate demand growth, but relatively high inflation persisted. In response to increasing restraint on aggregate demand and troublesome financial market distortions, the authorities began in lace 1979 to adjust the program. The rate of peso devaluation was advanced somewhat, and in early 1980 credit restraints were relaxed. At the same time, interest rates on certificates of deposit-and on lending therefrom-were freed from controls. To offset the inflationary effects of these measures, the authori- ties further liberalized import payments and adopted the policy of not expanding the subsidized selective credit operations of the Central Bank in excess of the resources captured from private savings for this purpose. Real GDP growth decelerated to 4% in 1980 from an average of almost 6Z since 1960, unemployment started to creep up, and inflationary pressures continued. C. Recent Economic Developments 8. During 1981-83 the economic situation took a turn for the worse in part on account of external factors, with real GDP growth slowing down to 2.3% in 1981 and about 1% on average in 1982-83. Agricultural output was hard-hit as a result of low international prices, reduced input use and adverse weather. Industrial activity deteriorated on account of depressed aggregate demand, and unutilized capacity continued to increase, particularly in manufacturing. Unemployment reached almost 14% of the labor force at the end of the year, up from about 7% at the end of 1981. Inflation, however, slowed down in 1983 to a 20% average for the year, down from 28% in 1981 and 25% in 1982.  9. After experiencing a surplus for six years, a deficit of about US$1.4 billion emerged in the resource balance in 1981 and increased to average about USS1.8 billion in 1982-83. These deficits resulted mainly from a drop in exports in real terms: in addition to domestic factors, major reasons were the slowdown in world demand, major devaluations and import restrictions in neighboring countries, and the reduction in Colombia's coffee exports from their previous high levels. Net foreign exchange reserves declined by about US$1.8 billion in 1983 to about US$3.1 billion, equivalent to ioout six months of imports of goods and non-factor services. On the fiscal side, a slowdown in revenue growth, together with increased current expenditures resulting from a system of automatic transfers and large infra- structure investments in energy and transport led to growing deficits: the overall Central Government cash deficit grew from 2.12 of GDP in 1980 to 4.1% in 1983, while that of the consolidated public sector rose from 3.6% to 7.0%. 10. In 1983 the Government introduced policies to stimulate aggregate demand, and expand non-coffee exports. The rate of peso devaluation was accelerated; the housing construction industry was provided with incentives to mobilize more resources; and selective credit to the productive sectors was expanded. Temporary import restrictions were introduced for stabiliza- tion in addition to measures to reduce the fiscal deficit and ease distor- tions in the financial system. These efforts were insufficient to reverse the deteriorating trends particularly in light of the tight international capital market. Colombia, unlike other Latin American countries, has not had a debt oroblen because of the high share of official debt in total debt out- standing and the term structure of such debt. Nevertheless, the Latin American debt problem produced a reduction in the credit lines available to Colombia and difficulties in obtaining medium-term loans needed to complete ongoing projects, which contributed in turn to further declines in foreign exchange reserves and to strains in the financial system. 11. During 1984-85 Government policy began to focus increasingly on: additional revenue and expenditure measures to contain the fiscal deficit and monetary expansion; acceleration of the exchange rate devaluations, further increased incentives to exports; measures to improve the profitability of the commercial banking and to resolve the external debt problems of the private sector. The policy reforms began to take hold during the second half of 1984. Real GDP growth increased to 3.1%, the unemployment rate fell to 13% of the labor force at year's end while inflation was brought down to 16.4% on average in 1984. Merchandise exports grew at over 16% in nominal terms compared to 1983; the current account deficit in the balance of payments was reduced by about US$1 billion to 5% of GDP. The losses in foreign exchange reserves, which had accelerated during the first half of 1984, were reduced during the second half of 1984 and reserves remained at about USS1.8 billion (four months of gncds a..d n.f.s. imports). The policies have been deepened in 1985 and the results to date, on the whole, have beer positive. Inflation remains under control, while economic growth has picked up modestly, although the unemployment rate remains higher than in recent years. The balance of payments position has been stabilizing. D. Growth and Balance of Payments 12. With further adjustments during 1985-86, Colombia's growth prospects for the rest of the decade are good. The current account deficit  of the balance of payments is projected to average about UJS$1.3 billion per year during 1985-86, equivalent to about 4% of CDP. The deficit is projected to be financed by increasing disbursements of existing and new public and private sector loans and by direct foreign investment. By the end of this period, net official international reserves would have been maintained at a level of about four and a half months of imports of goods and non-factor services. This should be sufficient to support an average growth of real GDP of 2.5% during 1985-86. Total investment will have to be maintained at over 18.5% of GDP to complete energy and mining projects; and to avoid too large an increase in foreign indebtedness, gross domestic savings would need to average about 18% of GDP compared to 16.4% during 1981-84, with the public sector generating a significant part of the additional savings. Beyond 1986, real GDP growth should resume at near historical rates, about 4.5% per year on average. The current account deficit should also improve rapidly from 1987 on as a result of increasing export proceeds from new non-traditional exports (particularly crude petroleum and coal), declining to some 1.6% of GDP by 1990. 13. Total gross external medium- and long-term capital requirements (including the private sector) are projected to total about US$5.6 billion for the 1985-86 period. Net foreign investment is expected to account for US$750 million during 1985-86, most of which would be to complete existing energy projects. About USS3.9 billion is expected from multilateral, bilateral and other sources, while about US$1 billion will be the new money needed from commercial banks mainly to complete petroleum and coal projects for export. At the end of 1984, Colombia's public and publicly guaranteed medium- and long-term external debt, disbursed and outstanding, amounted to US$8.0 billion (22% of GDP). The Bank/IDA share of this external debt i.e. excluding non-guaranteed private was 22.8% which is expected to reach less than 25% by 1986. The public debt service ratio in 1984 was 23.5% and is expected to peak at about 30% in 1987 and then decline gradually to below 30% in 1990. The World Bank's share in M&LT public debt service (excluding non- guaranteed private) is expected to be less than 24% during 1985-86. With sound economic and financial management and the development of new export activities, Colombia is expected to maintain its creditworthiness through and beyond the 1985-90 period. PART TI - BANK GROUP OPERATIONS IN COLOMBIA 14. The Droposed loan, the 115th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$5,005.2 million (net of cancellations). Of this amount the Bank held, as of September 30, 1985, US$3,758.3 million; IDA made one credit of US$19.5 million for highways in 1961. Disbursements have been completed on 72 loans and the IDA credit. Before 1979, disbursements averaged US$86 million equivalent Per year, but had increased to US$286 million in FY84 and to US$591 million in FY85, reflecting in part the higher level of commitments in the late 1970s and efforts to build the pipeline. While disbursements in Colombia have been slower than those recorded in the Latin American Region for similar projects, concentrated efforts to overcome problems and to speed the initiation of  project execution have resulted in a significant increase in disbursements during FY84 and FY85. Improving performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of infla- tionary pressures and the effects of the recently-introduced fiscal reforms, which should improve counterpart funding, all point to a higher level of disbursements in the future. IFC has made investments and underwriting commitments of US$144.2 million In 29 enterprises and as of September 30, 1985, it held US$67.3 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of September 30, 1985. 15. Since the initial loan was made in 1949, Bank lending to Colombia has become quite diversified. Although through the mid-1960s, 88% of the loans made were for power or transport, since then the Bank has broadened its participation in lending for agriculture and industry, and initiated lending for irrigation and watershed management, education, water supply, telecommu- nications, urban development and nutrition. By the late 1970s, 53% of the loans made to Colombia were for projects other than transport and power. Of the loans made since 1978, 35% were for power and transport, 16% for industry, 18% for agriculture and irrigation, 8% for water supply, 6% for urban development, 4% for telecommunications, 2% each for petroleum develop- ment and export diversification, and 8% for education, nutrition and multi- purpose projects. The diversification was indeed a desirable aim as it helped provide close contact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's presence can have a meaningful impact. 16. The Bank's dialogue with the Government has focused upon the need to mobilize additional domestic resources, to diversify and expand exports, to develop rapidly the country's energy resources, and to free the economy from excessive controls. The discussions involved fiscal, interest rate and pricing policies, as well as incentives for exports and reduction in the level of effective protection. Positive results have been obtained particularly in the power sector, where power rates were increased sharply and a least-cost expansion was formulated and launched. Similar results have been achieved in respect of some other public services, including anpropriate charges for water for irrigation and domestic use and petroleum prices. 17. The Bank has been supporting the Government's efforts to increase economic growth and exports with financial stability, raise utilization of domestic energy sources, provide key infrastructure, and improve the living conditions of the poor. More recently, in response to Colombia's adjustment process the thrust of the Bank's support has shifted towards loans to finance directly productive activities, such as agriculture and industry, support efforts to raise productivity, income and employment, increase and diversify exports and help develop renewable sources of energy through lending for hydropower and arranging associated cofinancing. Loans recently approved by the Board and in advanced stage of preparation reflect -he emphasis on: (i) increasing output rapidly; (ii) reorienting production towards exports and efficient import-competing goods; (iii) supporting quick-yielding infra- structure investments, particularly those that enable the use of existing facilities more intensively; and (iv) increasing resource mobilization.  - 6 - 18. The Bank's tending in FY85 consisted of loans for agricultural diversification, small-scale industry, petroleum, development banking, water supply and sewerage and trade policy and export diversification totalling US$707.5 million. The Trade Policy Project is designed to support the first phase of trade policy adjustments in Colombia. Besides the already approved public health and port rehabilitation projects, work is underway on projects for water supply and sewerage, irrigation rehabilitation, agricultural tech- nology transfer, and financial sector management. In infrastructure, the Bank is stressing rehabilitation, modernization and a more intensive use of the existing facilities in ports rehabilitation, water supply and rural feeder roads. Finally, several projects in preparation will also support the Government's efforts to help the poorer segments of the population. Proposed lending for further rural development, agricultural credit, and water supply and waste, will help improve the standard of living of the poor, while being designed to make better use of existing capacity and reduce losses. 19. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB and bilateral sources provided about 75% of total exter- nal financing to Colombia in the 1961-72 period, their share has decreased since then to some 49% for the 1975-82 period and is expected to decline further to about 40% of external capital requirements during the eighties. IDB has given increased emphasis to energy-related projects, in addition to those for low-cost housing, urban and rural development, agrarian reform, university education, water supply, rural electrification and land erosion control, which are aimed at improving living standards of the lower-income population. In the future, it proposes to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased capacity utilization and employment. USAID has supported programs in education, rural development and small farm develop- ment, 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 ENERGY SECTOR Energy Resources and Policies 20. Colombia is rich in energy resources, particularly in hydroelec- tricity and coal. Its reserves of oil and natural gas are modest by interna- tional standards, yet significant at the national level. The country's recoverable coal reserves are estimated at 16 billion tons (441.6 EJ) and its hydropower potential, at 100 GW, is capable of yielding about 440 TWh (4.62 EJ) per year (231 EJ over 50 years). Compared to this, gas reserves are only 4.07 trillion cubic feet (5.1 EJ) and oil reserves are 734 million barrels (4.3 EJ). As regards the latter, on the basis of recent success encountered by Occidental Petroleum in its oil exploration in the Llanos area, prelimi- nary estimates now suggest that Colombia's oil pred_ction will exceed its internal consumption in the near future.  - 7 - Estimated Recoverable Reserves and Production (1983) Reserves Production Reserves/Prod EJ Mtoe (Z) GJ Mtoe (X) (years) Hydroelectricity 231.0 5,475 33.9 160 3.8 21.4 Renewable Coal 441.6 10,466 64.7 96 2.3 12.9 4,550 Natural Gas 5.L 121 0.8 167 4.0 22.5 30.3 Crude Petroleum 4.3 102 0.6 322 7.7 43.2 13.2 682.0 16,164 100.0 745 17.8 100.0 As the table above shows, there is an imbalance between reserves and produc- tion for different sources of energy. For example, the huge reserves of hydroelectricity and coal account for only 21.4% and 12.9% respectively of annual production while the rather modest gas and oil reserves contribute 22.5% and 43.2% respectively to annual production. Current consumption of commercial energy relies primarily upon oil products (41%) and less on gas (17%), coal (15%) and electricity (27%). The table below shows the distribu- tion of this consumption by sector. Energy Consumption (1983) Sector GJ Mtoe % Transport 230 5.5 27 Residential/Commercial 84 2.0 10 Industry 242 5.8 28 Electric Sector 280 6.7 31 Other 38 0.9 4 Total 874 20.9 100 21. Colombia traditionally enjoyed a positive trade balance in energy because of its relatively rich energy endowment and modest yearly per capita consumption which, at about 0.7 ton of oil equivalent, is below average for middle-income developing countries. However, in 1976 the country became a net importer of energy, and by 1981 the (net) cost of oil imports reached almost USS400 million. This came about because of a decline in total domes- tic energy production, resulting from a 7% annual fall in oil output between 1970 and 1979. As this situation was threatening to compromise balance of payments prospects, the Government moved in the late 1970s to redress the negative energy trade balance through: (i) pricing measures designed to increase the overall cost of energy to consumers, change relative prices to encourage consumers to move away from oil, and provide incentives to producers; and (ii) direct public sector investment and improved incentives for private sector investment in the energy field, particularly for petroleum exploration and secondary petroleum production, hydroelectricity and coal.  - 8 - As a result, since 1980, the previous trend has been reversed: petroleum production has increased, GDP has grown faster than aggregate energy consump- tion, and petroleum's share of total primary energy consumption has fallen while that of hydroelectricity, coal and natural gas has increased. 22. In Colombia, electricity, petroleum and natural gas prices are set by the Government; coal prices are market-set. The price levels for petro- leum products are close to international prices, while natural gas prices have been maintained at relatively low levels as a financial incentive for consumption. The development of an integrated energy investment program and adecuate incentives for each subsector will depend on the availability of reliable information regarding the investment requirements of different energy sources, particularly coal. To this end, the Government has under- taken a major effort to improve sector knowledge through a National Energy Study (ENE). Its first stage was carried out during 1979-82 by the National Planning Department (DNP) with the help of local consultants and technical assistance from the Federal Republic of Germany. This study provides signif- icant information needed for energy planning, including a preliminary evalua- tion of energy demand growth and investments that could best serve such growth. 23. A second stage of the ENE, consisting of several specialized studies, is almost completel/. This current effort has elicited consider- able foreign technical assistance from official sources. The Federal Republic of Germany is providing assistance on modeling and data gathering, France on industrial energy savings, Italy on energy studies for isolated regions, the Organization of American States (OAS) on energy use in transpor- tation and the European Economic Community on industrial uses of energy. Several energy sector agencies provide counterpart staff and DNP coordinates the external assistance. The third phase of the study, concerned with energy strategy formulation, is about to start. Work in this phase will be focused on identification and comparison of the costs and benefits of devel- oping each of the country's energy resources. Once such work has been completed, selection among alternative energy sources will be possible and a long-term strategy for development of Colombia's energy resources can be formulated. Recently, DNP and the Ministry of Mines and En'rgy asked that the Bank assist in its review of these studies and in the formulation of a strategy for the energy sector. These tasks are accorded high priority in the context of the Bank's country and economic sector work for Colombia and funding for some studies are being envisaged under ESNAP. Sector Financing 24. Over the past five years, Colombia has been successful in mobi- lizing external resources to finance energy development. This has been achieved through direct foreign investment (in oil and gas first and lately in coal) and external loans to the energy agencies, including power compa- nies. However, the current conditions in the international lending markets are making external financing more difficult to obtain. Local financing I/ Among others, studies on natural gas available for ammonia-urea fertilizer production and coal exploration studies to assess the economic potential of several promising areas in the Atlantic and Central Regions.  - 9 - requirements are covered primarily by internally generated resources and Government contributions, with the incipient local capital market tradi- tionally providing only a marginal share of financing. 25. The establishment in 1982 of a financial institution for the power sector (Financiera Electrica Nacional-FEN) designed to mobilize domestic as well as foreign funds for the sector's utilities has increased the contribution of the domestic capital market to the sector's financing and enabled the sector to maintain a presence in the increasingly cautious international capital markets. Despite its recent creation, FEN has become one of the largest financial institutions in the country. It has already recorded notable success in the domestic market and served as the borrowing agency for a major power development finance loan from the Bank (2401-CO) and various cofinanciers. By going to capital markets on behalf of the consolidated power sector, FEN has mobilized resources which the individual utilities would not otherwise have been able to access and this institution promises to make a substantial contribution to the alleviation of the financial constraints currently confronting the sector. As regards more traditional sources of local cost financing, in order to increase internal resource mobilization by the main energy sector agencies, prices charged to consumers of petroleum products and electricity have been increased significantly in real terms. Furthermore, in 1980, the Government created the National Coal Fund (FNC) which receives revenue from a tax on coal production valued at the mine-head. This revenue is currently allocated to finance coal exploration (80%) and to assist small and medium-scale coal mining operations (20%). Institutional Arrangements in the Power Sector 26. Sector Organization. At present, public electricity services are provided by: (a) municipally-owned companies, of which the largest are EEEB (in Bogota), EPM (in Medellin) and EMCALI (in Cali); (b) national enterprises whose principal purpose is the distribution of power to particular regions (ICEL, CVC and CORELCA); and (c) a generating and transmission company (ISA). 27. 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. Less than 20 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 povulation. Although large hydropower sites held the potential of increasing substantially the supply of electricity at lower cost than otherwise possible, they were too big to be tapped by any one company. With encouragement from the Bank, the Government persuaded the regional power companies to break with tradition and pool their resources in a shared effort to plan and develop the country's large hydro- electric potential. To accomplish this, Interconexion Electrica S.A. (ISA) was created as an independent, national generation and interconnection company, whose shareholders now include all the largest municipal power utilities and the Government-owned power companies. By 1984 Colombia's  - 10 - installed capacity had climbed to 5,049 MW - more than triple the pre-ISA level - and reached 54% of the population. The successful execution of a series of major power generation Projects had produced an experienced and highly-regarded local engineering/construction industry and the planning methodologies employed in the sector had achieved an enviable level of sophistication. 28. In addition to its planning and plant construction functions, ISA operates the interconnected power system. Though adequately staffed and technically capable, ISA is burdened with a slow and complicated decision- making process. Its shareholders (EEEB, EPM, CORELCA, ICEL and CVC) are inclined to allow their regional and sometimes conflicting interests to take precedence over national goals. Furthermore, the financial constraints that most of the companies are facing have caused them to reduce their contribu- tions to ISA. The resulting arrears had reached about US$170 million equiv- alent by end-1984. In an effort to advance national interests in ISA, the Government has strengthened its representation on ISA's Board. In addition, the Government intends to penalize the companies that have debts to ISA, by impeding their access to FEN loans. 29. Several other actions have been taken by the Government to improve the sector's institutional structure and hence its prospects for efficient growth. It established the National Tariff Board (JNT) in DNP to approve requests from the power companies for tariff increases; and it has fostered the consolidation of numerous small utilities, particularly in the North Atlantic Region. The Government has also recognized the constraint on sound sector development and finance represented by the current organization of ICEL--a holding company which groups together twelve largely rural-based utilities (electrificadoras)-and it has explicitly confirmed the need to restructure the ICEL group. 30. As the discussion above suggests, the current sector organization does not provide for particularly effective operations. The sector lacks a central authority to enforce planning and tariff decisions, based on a national plan. The decision-making process is tortuous and slow, and dependent on negotiations between the central government, the utilities and the local governments. The current resource constraints have highlighted the need for change, but the importance of the power sector in the country's economy, its suhstantial share in Colombia's foreign indebtedness (25Z of the public foreign debt) and the magnitude of its investment program clearly require that any improvements in the sector's institutional organization should only be adopted in the context of a thorough review of overall sectoral Policy. The Government recognizes this and has requested that the Bank assist in carrying out such a review. To this end, the Bank has been supporting efforts by both the Government and ISA to develop and monitor sector-wide financial projections, more flexible investment plans and other data. Acknowledging the long-standing and deeply entrenched tradition of regional autonomy that underlies the sector's existing organizational struc- ture, the Government and the Bank approached the institutional problems through a workshop this June that marshalled the skills and resources of those familiar with the sector to consider the objectives of the power sector and strategies that might achieve them. The outcome of this workshop led to a number of recommendations that are being further studied by the Government and the Bank.  - 11 - 31. Planning and Coordination. The Ministry of Mines and Energy is charged with formulating national policy for the generation, transmission and distribution of electricity, including coordination and supervision of power sector planning. It shares with the National Social and Economic Policy Council (CONPES), DNP and ISA the responsibility for defining investment priorities. ISA defines a generation and transmission expansion program for the interconnected system; after approval by the Ministry, DNP and CONPES, this becomes the National Power Expansion Program. The Program is reviewed annually by ISA and revisions, if necessary, are proposed. On the basis of requests from the companies, JNT approves rate increases. Although the Government cannot enforce its policies directly with the municipally- controlled power companies, ISA is intended to provide a mechanism for reaching agreement on major issues affecting the sector. Sector planning and coordination have improved markedly since ISA's creation and Bank lending has strongly supported this evolution; although, as was mentioned above (paras. 28-30), some further improvements in the sector's institutional arrangements will have to be implemented before the planning, pricing and coordination system can function satisfactorily. 32. Least-Cost Power Development Program. Colombia's economic growth was affected by the world-wide economic recession from 1981-83. Taking account of the consequent slowing of electricity demand growth, on May 16, 1983, CONPES approved a revised National Power Expansion Program for plants entering into service during 1987-96. In October 1984, ISA presented the latest revised Program with a two-year deferment of all major future projects. The plan is based upon a gradual and phased resumption during 1985-2000 of the long-term average annual economic growth rate of about 5% achieved from 1965-80; estimated fuel prices; and a projection of 6.5% growth in average gross annual electricity consumption during the 15-year period from 1985-2000. To ensure that significant variations in demand are suitably taken into account, ISA together with the Government (as provided under Loan 2401-CO), will continue to review and update the Program. The Bank is currently reviewing with DNP and ISA the financial implications of this revised investppnt Program: 33. In support of ISA's efforts to strengthen its planning methodology, a UNDP-financed study, for which the Bank acted as the executing agency, was completed by end-1984. The study was devoted to the refinement of ISA's existing planning models. Another UNDP and Bank-financed study providing assistance in construction management is now underway and it is anticipated that its benefits will extend, through ISA, to its shareholders as well. Power Market and Supply 34. 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 27% in 1983. Generation increased by an average of about 10% annually during 1970-1980, although it has slowed over the last years to 5.8% per annum in 1980-83. Effective installed capacity at the end of that year was 5,049 MW, including self-producers, with public entities accounting for 95% of the total installed capacity and generation. Peak demand was about 4,530 MW, and total electrical energy generation in 1983 amounted to 22.7 TWh. Hydroelectric plants accounted for about 65% of the total electricity generated.  - 12 - 35. About 54% of Colombia's 27.5 million population has electric nower, compared to 26% in 1950 and 45% in 1970. The urban population, comprising about 65% 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 and 2,500) the corre- sponding figure was 36%; in other rural areas, 16%. Various programs, including the Bank-financed First and Second Integrated Rural Development Projects and the Village Electrification Project as well as programs financed by I10, Kreditanstalt fuer Wiederaufbau (KfW) and the Colombia Coffee Growers Association, are aimed at increasing rural coverage. In 1983 there were about 3.3 million electricity subscribers of which 89.9% were residential and 7.7% commercial. Residential consumption accounted for 48.6% of 1983 electricity sales (which totalled 17.4 TWh) and industrial consumption accounted for 28.2%. EEEB generated 17% of the total electricity supplv, EPM 22%, CORELCA 20%, CVC and ICEL 20%, ISA 19%, and others the remaining 2%. 36. During 1978-1983, gross production of electricitv increased at an average annual rate of about 7.3% compared with a CNP growth rate of 4.3%. However, sales increased at an annual average rate of only about 6.0% because energy losses increased from 18.4% in 1978 to 22.6% in 1983. Approximately half of these losses are technical (network) losses in the distribution system, while the remainder are thefts. A portion of the energy thefts can be traced to large consumers but theft by squatters tapping into lines is also presumed to be substantial in some areas. Tn 1984, a joint DNP/ISA committee was established to study the issue of energy losses and to recom- mend solutions for the problem. In addition, the proposed project is designed to assist EEEB in reducing both technical losses and theft (para. 43(f)). Recent Developments 37. By the early 1980's, Colombia had already embarked upon an extensive investment program for the power sector, concentrated primarily on several large-scale generation projects requiring substantial long-term financial commitments. Since then, the availability of both external and domestic financing has been severely reduced (paras. 9 and 10) and the stabilization of Colombia's external and fiscal balances has become one of the most urgent issues facing the country at this time. As a consequence of the power sector's substantial share in both Colombia's anticiDated invest- ment requirements (28% of total public investment) and its foreign indebted- ness (over 25Z of public sector foreign debt), the sector has also been obliged to shoulder its share of the burdens imposed by the resource constraints that confront the country. Specifically, during the past three years, the sector has suffered from financial problems caused by the rationing and insufficient availability of financing and by delays in rate adjustments, compounded by slower than anticipated demand growth. Local borrowings needed by the sector have outpaced the domestic banking system's lending capability. Various shareholders lacked funds to pay fully for the electricity supplied to them by ISA and their share in the cost of ISA's development program. As a consequence, ISA has fallen behind in its contractual payments to suppliers and contractors and this, in turn, has caused construction delays. In addition to similar problems, CORELCA and ICEL have not received their budgeted Government contributions on schedule. Moreover, the sector has suffered because Government-related lending has been  - 13 - held back and the financing of local costs with external borrowings authorized only on a highly selective basis. 38. The developments described above, combined with the 1982 civil disturbances reflecting consumer discontent with Increased electricity charges and the quality of service, have led the Government to review the investment program and the financing plan for the sector. Through the exercise of redefining the sectoral financing program, the Government has focused increasingly on the macroeconomic and institutional implications of the 1984-90 power investment program. In May 1983, it reviewed in detail the justification for, and financial feasibility of, all new investments in the aforementioned program, taking account of competing demands from other priority sectors, and in December 1984, decided to reduce by about one-half the previously planned annual capital outlays for tl'e sector. In the context of the Government's overall review of its policies for the sector, both ISA and the Government will continue to monitor the current investment program to ensure that it remains consistent with the evolving sectoral strategy. Bank Participation in the Power Sector 39. The Bank has made 29 loans since 1950 for the Colombian power sector, totalling US$1,739 million. Several OED reports have found previous Bank lending to the sector to have been generally successful. One of these reports "Power Interconnection (575-CO) and Chivor Hydroelectric Projects (681-CO)" (Report No. 2720, October 29, 1979) commented upon the Bank's participation in Colombia's efforts 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 difficulties, progress was made toward more coordinated sector development. Despite implementation delays and increased costs, both projects were successfully executed. In the past, the bulk of Bank lending for power was devoted to the expansion of Colombia's generating/transmission capacity. While Bank-financed power projects have often contained distribution components, the initial Bogota Distribution Project (Loan 1807-CO, 1980) was the first Bank loan to Colombia to support exclusively distribution expansion. In continuing the efforts initiated through that first distribu- tion project (and expanded in subsequent rural electrification projects), the Bank will be reaffirming the importance of a smoothly functioning distribu- tion system for the efficient utilization of Colombia's existing generation capacity. Broadly stated, the Bank's objectives for the power sector are: (a) to achieve greater efficiency in the operation of Colombia's electric utilities; (b) to improve resource mobilization for the sector as a whole; and (c) to improve the sector's institutional arrangements. Until recently, the Bank sought to promote development of sector-wide strategies for the power sector by addressing these broad sectoral issues in the context of lending operations with individual utilities. This lending strategy has, however, been evolving toward a greater focus on sectoral lending. Reflecting this evolution, the Bank has oriented its most recent efforts towards the establishment of a sector-wide financing facility (FEN) and plans to extend these efforts through a future power sector loan, to be channelled through FEN.  - 14 - PART IV - THE PROJECT 40. The Project was prepared by EEEB, with the assistance of consul- tants, and appraised by a Bank mission which visited Colombia in November 1984. Negotiations were held in Colombia during the week of April 28, 1985 with a Colombian delegation led by Mr. L. Avella, Deputy Manager of EEEB. Further background on the project is contained in Annex III. Loan documents were approved by the authorities on November 1, 1985. A Staff Appraisal Report is being distributed separately to the Executive Directors. EEEB's Expansion Program 41. By 1990, EEEB's system will have to be expanded to serve about 940,000 customers with a peak load of 1,470 MW and an annual energy demand of about 7,900 GWh. This will mean an increase of 240,000 customers, 410 MW and 2,200 GWih from estimated 1984 levels. The 1985-1990 expansion program designed by EEEB to meet these requirements .s well-balanced, with appro- priate emphasis given to generating plants, subtransmission facilities and both rural and urban distribution. The generation expansion plan is very ambitious and represents the largest investment of EEEB's expansion program (60%). It includes construction of two major hydroelectric plants-Mesitas (600 MW) and Guavio (1.000 KW)-both with the Bank's financial support; and acquisition of two thermal plants--Zipa IV and V (132 MW) from ISA. The distribution expansion program is an indispensable complement to this genera- tion expansion, as the efficient delivery of generated electricity depends heavily on the quality and reliability of the distribution network. The distribution program consists of the final stages of the Bogota Distribution I Project, which included EEEB's 1979-1985 subtransmission and distribution program (partially financed by the Bank's Loan 1807-CO), the proposed project, and a rural electrification program for the area surrounding Bogota, partially financed by KfW and for which EEEB will seek the Bank's participa- tion. One further component of EEEB's expansion program is a control center to be completed by mid-1988 and financed by the Bank under the Guavio Loan (No. 2008-CO). The investment program necessary to carry out this expansion program, with provision for future expansion which may be needed after 1991, is summarized below: EEEB's 1985-1990 Investment Program (millions of current US$) Foreign Local Total Generation 478.9 447.3 926.2 Distribution Urban 169.4 210.3 379.7 Rural 51.4 67.5 118.9 Control Center, Gen. Plant 28.8 10.5 39.3 Future Investments 347.9 403.4 751.3 Studies - 27.1 27.1 Total 1,076.4 1,166.1 2,242.5  - 15 - The Plo ect 42. Objectives and Strategies. The project proposed for Bank financing consists of EEEB's 1985-1990 program for the expansion and improvement of its subtransmission and distribution system and modernization of the existing system for the urban areas. This project, which builds on the first Bogota Distribution Project (1979-1985), is a major component of EEEB's 1985-1990 expansion program. The main objectives of the proposed project are to achieve greater efficiency in EEEB's operations and to extend electric service to a larger segment of Bogota's population. The strategy chosen to achieve these objectives involves: (a) enhancement of the benefits derived from EEEB's investments in generation and transmission by ensuring efficient delivery of generated power; and (b) reduction of energy losses (both tech- nical losses and theft). The project will implement this strategy through investments in the subtransmission and distribution system and by strength- ening EEEB's organizational structure, technical and managerial capabilities, and financial position. 43. Description. The project consists primarily of the following physical investments: (a) Subtransmission: Installation of substation capacity and lines needed to connect existing plants and substations to the proposed distribution system; (b) Distribution: Installation of distribution substation capacity; line extensions and improvements; installation of and improvements to secondary circuits; installation of distribution transformer capacity, voltage regulators, capacitors, meters and public lighting. This component has been designed both to extend service to 240,000 new customers and to improve the existing system. Circuits to be improved have reached the end of their economic life and suffer from high losses and frequent outages. Improving these circuits will reduce energy losses while m.proving the quality and reliability of service to all customers, including current low- income urban consumers. Addition of voltage regulators and capacitors will also improve service; and the acquisition of meters and meter-testing equipment will permit the extension of service to new customers and reduce thefts by equipping EEEB to connect currently illegal customers to its normal service; (c) acquisition of maintenance equipment for substations, lines and hot lines; and laboratory equipment for testing low, medium and high voltage equipment; In addition, the project includes the following institutional development measures: (d) consulting engineering services to improve EEEB's distribution and operations planning, with particular emphasis on energy loss reduction through: (i) an evaluation of illegal customers by type and location; (ii) studies on: (1) distribution system reliability;  - 16 - (2) subtransmission system operation; and (iii) losses control systematization. (e) a training and technical assistance component (building on a program financed under Bank Loan 2008-CO) consisting of a training program for managers and professional staff to improve management, strategic planning and technical skills. (f) a program for reduction of energy losses. This is a particularly important feature of the project (see para. 51). While technical losses will be reduced by the subtransmission expansion and dis- tribution improvements described in sections (a) and (b) above, EEEB will also assign an administrative unit to take charge of planning and implementing actions to reduce energy thefts. This unit will also monitor EEEB's progress in reaching target levels for loss reduction. The establishment of thts unit is a condition of effectiveness of the proposed loan. The agreed target levels for losses, including both theft and technical losses, decline gradually from 23% of total generation in 1984 to 13% in 1990. 44. Project Cost and Financing. The estimated cost of the project is US$389.6 million (inclusive of $41 million for interest during construction) of which US$189.6 million is expected to be in foreign exchange. The cost estimates are outlined in the Loan and Project Summary (page ii of this report). These costs do not include any direct taxes or duties since EEEB is exempt from such obligations. They do, however, include the indirect taxes that EEEB's contractors will have to pay. Because of the substantial divergence between local and foreign inflation, different estimated inflation rates have been applied to local costs (in Colombian pesos) and to foreign costs (in US dollars) in order to arrive at the cost estimates. Colombian peso amounts were then converted into US dollars using forecasted exchange rates for each year. The proposed Bank loan of US$171 million would finance 90% of the foreign exchange costs of the project and 44% of total project cost. A further US$18.6 million equivalent (5% of total costs) would be sought through suppliers' credits and the remaining US$200 million (51%) would be financed by EEEB. The proposed Bank loan would include the financing of the Bank's interest and commitment charges accrued during the construction period. This is warranted in view of the foreign exchange constraints currently facing Colombia; EEEB's own inability to generate foreign exchange; and the considerable size of Bank support for EEEB's capital development program, when compared with the size of the borrower's fixed assets in operation.. The Borrower 45. The proposed Borrower, Empresa de Energia Electrica de Bogota (EEEB), is an autonomous company owned by the Municipality of the Special District of Bogota. Established by private Colombian interests, EEEB has operated the city's elecrtLc service for the past 85 years since 1951 under municipal ownership. It has an installed capacity of 1,288 MW, of which 1,151 MW is hydro and the balance coal-fired thermal. EEEB served about 700,000 subscribers at the beginning of 1985.  - 17 - 46. EEEB is directed and administered by a seven-member Board of Directors headed by the Mayor of Bogota. Two members are elected by the Municipal Council, three are chosen by the Council from lists submitted by associations representative of banks, commerce, and industry in Bogota, and one is chosen by the President of Colombia. This composition was worked out in connection with the Bank's initial loan to EEEB (246-Ca) and has generally proven to be satisfactory. Management of EEEB is entrusted to a General Manager (appointed by the Board) assisted by four Deputy Managers, responsible for: (a) Administration and Supplies; (b) Finance; (c) Technical Functions; and (d) Operations. The General Manager is also supported by two staff units: a Planning Division and a Legal Division. At the top level, the company has had a competent and stable management during most of its association with the Bank and the majority of both senior and mid-level management staff are young (under 40), dynamic and able. The organization of EEEB's almost 3,400 employees into a plethora of administrative units-- roughly 270 divisions, departments and sections-has led in some cases to a lack of communication and coordination among the units. This, combined with the need to adapt the company's technical and operational structures to handle construction of both a major hydroelectrical plant and an extensive distribution program has spurred EEEB to undertake a program, partially financed by the Bank (Loan 2008-CO), to improve the performance of the company, including its organization, planning and operational practices. In this regard, the recommendations of a study on managerial, budgeting and accounting systems, prepared by management consultants, were implemented by EEEB in the course of 1983/84 and consultants have been selected for the training and technical assistance component of this Performance improvement program. The proposed loan will finance part of the costs of this ongoing training effort (see para. 49). 47. Prior Bank Lending to EEEB. The Bank has made six loans, totalling US$615.6 million, to EEEB. The works financed by the first three loans (all of which were made in the 1960s) were completed successfully, although with delays ranging from one and a half to three years. More recently, disburse- ments on the fourth loan (Mesitas - 1628-CO) were delayed by two years and the project was completed with a cost overrun of around US$150 million (55% higher than the initial estimate) as a result of a combination of factors including geological problems encountered in tunnel excavation; financial difficulties experienced by EEEB as a result of reduced power sales following a severe drought; and the bankruptcy of a major civil works contractor. The fifth loan (Bogota Distribution - 1807-CO), which financed the project on which the proposed operation is modelled, is being disbursed with two years delay but no cost increase. The delay was due primarily to a lack of coordi- nation between the various units within EEEB responsible for the diverse activities included in this type of project. Steps hare been taken in designing the proposed project to improve EEEB's coordination capability (see para. 48). 48. Implementation. EEEB's usual practice is to use local engineering firms to assist its staff as needed for detailed design, procurement, and supervision of construction; this practice would also be followed for the project. As EEEB has already completed basic distribution studies and design standards, participation of local firms will be restricted to some comple- mentary designs and supervision of construction. Most of the construction would be performed by local contractors, including 230-kV and 115-kV substa-  - 18 - tions, 115-kV lines and primary distribution circuits. EEEB, like most utili- ties in Colombia, does not maintain a staff to implement and supervise large construction projects. However, the distribtition expansion being undertaken involves many inter-related activities such as procurement, design, material inventory, management of construction and consultants contracts. At this moment, there is a certain lack of coordination among the units dealing with these activities. It is, therefore, critical that a unit with experienced staff be created to monitor and coordinate all the project-related distribu- tion activities in EEEB. Such a unit should be headed by individuals posses- sing proven coordination skills in order to ensure that the distribution expansion is executed as planned. This unit has already been established and is now being staffed. As a condition of effectiveness, EEEB has agreed to employ staff in the unit with qualifications and experience satisfactory to the Bank. 49. Institutional Development - Training and Technical Assistance Component. The project includes measures designed to improve the company's ability to handle the demands of a rapidly expanding distribution and genera- tion network and to adapt more effectively to a changing external environ- ment. This component consists of: (i) Technical assistance for management training to facilitate improvements in EEEB's organization, managerial skills, technical and opera- tional planning, system operation, human resources management and existing internal training unit. This training program grew out of and Is closely integrated with technical assistance financed under the Guiavio project (Loan 2008-CO). The Bank's share in this management training program is expected to total US$1.4 million, of which US$.6 million is being financed under the Guavio loan and a further US$.8 million under the proposed loan. EEEB has already selected consultants to assist them in the training program which, as currently designed, uses a participatory training method to involve EEEB's staff fully in the assessment of the existing organizational constraints and in the formulation of measures for the improvement of the utility's organiza- tion and management. During negotiations, EEEB agreed to submit for Bank approval by December 30, 1985 the detailed plan for the implementation of this training program, and to employ the consultants for the program by March 31, 1985. (ii) Specialized courses for professional staff. Training for EEEB's staff of competent professionals is being provided both in Colombia and abroad. However, foreign exchange constraints have prevented EEES's administrators and engineers from benefitting from many courses, seminars and fellowships available outside the country. Since several of these foreign training opportunities offer exposure to technological advancements and tech- nical specializations not yet available in Colombia, the proposed loan will finance the foreign component of the training program-about $1.0 million for five years. The following subjects will be covered in the courses offered through the training program: (a) Planning (optimum planning for distribu- tion systems, load management and energy conservation, reliability and marginal costs for generation and distribution systems); (b) Engineering (protection, digital control and supervisory systems, load-flow management); (c) Distribution system operation (dispatch centers management and operation, optimization of urban distribution network operation, telecommunications); (d) Finance and Management (advanced finance and economics, advanced manage-  - 19 - ment, development of information mystem.). The program will provide courses for about 15 staff members per year from 1986 to 1990. Participants will be selected by EEEB in the context of its overall staff development program. 50. EEEB's Market/Energy Losses. EEBB's service area includes the District of Bogota and the areas of influence of more than 55 municipalities within the nearby departments of Cundinamarca and Meta in the central zone. EEEB's estimate of its service area's population is 5.5 million, about 20% of the total population of Colombia. The service area accounted for about 24% of the national gross electric energy requirements in 1983. As a consequence of the general economic recession in Colombia, growth in power demand in EEEB's service area has slowed over the past five years from an average annual rate of 9.7% during 1973-1978 to only 5.7% for the period from 1978- 1983. Industrial and commercial consumption were the most affected by the recession and their market share decreased substantially, while that of residential consumption increased commensurately, due mainly to the continued growth of the city of Bogota throughout the period. 51. EEEB's energy losses increased dramatically from 1978-83, rising from 16% to 23% of gross generation. Although the investments in the company's distribution system initiated under the first Bogota Distribution Project were effective in containing some technical losses, that project was devoted primarily to the expansion of the system and improvements in the quality of service and was not specifically designed to control energy losses. At the time the first project was undertaken, EEEB's system was substantially smaller than at present and energy losses were still considered to be within an acceptable range. However, the rapid growth in the size of the company's generation and distribution capacity since then has engendered a steady increase in energy losses--a sizable proportion of which can probably be traced to increasing energy theft. Energy losses result from a combination of factors whose relati've importance is rather difficult to measure. These include: (i) deterioration of the existing distribution circuits; (ii) increased circuit loads and losses because of larger consumer demand; (iii) lack of means to detect and to control energy thefts; and (iv) urban squatters illegally connected to the distribution system. A specific program to deal with the problem of energy losses is included in the proposed project. 52. EEEB forecasts that demand for its production will continue to grow at approximately 5.7% per year for the period 1985-1990, basing its projec- tions on the ISA forecasts described in paragraphs 37 and 38. The company's billings, however, are expected to grow faster than demand, achieving an average annual rate of 8.2%, as a result of the introduction of the proposed project's energy theft reduction program. Industrial and commercial consumers are expected to increase their share of the market since the forecasted GNP growth is based mainly on substantial growth in GIP (Gross Industrial Product), while residential consumption will continue to grow at about the same rate as during the 1978-1983 period. The number of consumers is expected to increase by about 5.0% per year, a slightly lower rate than the historical trend over the past five years (5.9%). This 5% takes into account not only the continuing expansionary trend of the city and the incor- poration of the current illegal consumers, but also the progressive market saturation. Losses are expected to decrease from 22% in 1985 to 13% in 1990, as a result of the planned improvements in existing circuits and actions to be taken to prevent thefts.  - 20 - 53. EEEB's Finances. (a) Past Trends: Throughout its 25-year rela- tionship with the Bank, EEEB has maintained a reasonably sound financial position. As a result of extra-fiscal measures taken under previous Bank loans, its financial structure has been steadily strengthened. EEEB's aver- age tariff rate has increased at an average rate of 13% per year since 1976. In past (during the period from 1969-1978), its internal cash generation covered more than 50% of EEEB's average annual investment requirements, including substantial contributions to ISA. 54. (b) Recent Developments: Since 1979, however, EEEB's financial situation has been adversely affected by several factors, not all of which were within the company's control. First, delays were encountered in obtain- ing Government authorization for tariff increases in 1980 and 1981. Secondly, the lack of local financing for EEEB's rapidly expanding investment requirements in the early 1980s--mainly for the Guavio and Mesitas projects-- resulted in a deficit of COL$3.4 billion (US$62 million) which EEEB has financed through arrears in its payments to ISA and to contractors. Thirdly, the percentage of unpaid bills in relation to the company's total annual sales showed a regressive tendency in 1979 and 1980 and these arrears further exacerbated the existing cash problems. Finally, in 1981 a rationing of power occurred in the interconnected Colombian system due to poor hydro- logical conditions and, as a consequence, EEEB's sales were approximately US$40 million below the expected level. While the tariff situation improved in 1983 and 1984 and borrowings from both local and external sources have covered some of EEEB's most pressing financial needs, by the end of 1983 EEEB still had accounts payable of COL$8.3 billion (US$93 million equivalent), consisting primarily of arrears to contractors (Guavio and Mesitas projects) and to ISA (EEEB's share in energy purchases and in ISA projects). The recent devaluation of the peso promises to aggravate EEEB's financial problems futher, and could force the company to reduce or delay its invest- ment program and adopt measures to improve its efficiency. On a more positive note, the establishment of Financiera Electrica Nacional (FEN) will enable EEEB to obtain some of the additional long-term local currency funds needed to sustain its investment program. 55. Tariff Structure. There are, of course, limits to the rate at which tariffs can be raised. EEEB's tariff has, nonetheless, improved significantly in the last few years without apparent negative repercussions. Although rate increases from 1976-83 did not keep pace with inflation, EEEB's tariffs did increase at an average rate of 131 per year during that period and, in 1984 the company's average tariffs increased by about 32%, a rate well above the actual inflation rate of approximately 18%. At the end of 1984 EEEB's average rate (at Col$6.17/kWh) was among the highest in Colombia. The tariff structure, however, lacks appropriate balance among major categories of consumers and the tariff increases of recent years have served to accentuate this imbalance. EEEB will need to take action to correct this situation. The Government issued a Decree (No. 2545) on October 12, 1984 which established a new and nationally valid tariff struc- ture which, if adopted, would remedy the imbalances in EEEB's tariff struc- ture. This new decree, though legally in force, will be put into practice gradually, according to the particular condition of the utility involved. As a condition of effectiveness, EEEB shall have begun to implement a new tariff structure within the framework of this decree.  - 21 - 56. Investment and Finance. During the period 1984-1991, EEEB's total financial requirements will reach approximately US$4.8 billion equivalent, including US$2,242.5 million for the 1985-90 investment program outlined above (para. 54), as well as investments in ISA, interest during construction and working capital requirements for the 1984-91 period. Although REEE's self-financing capacity has been limited in recent past (as described in para. 55 above), the projected 8.2% annual sales growth, combined with scheduled nominal tariff increases of 37% in 1985 and 1986, 23% in 1987 and 18% in 1988-91 should generate internal funds adequate to finance 422 of the investment required for the 1984-91 period. The remaining financing require- ments are expected to be covered by contributions from ISA (22 of require- ments) and domestic and external borrowings (56%). Financial Covenants 57. In order to ensure that EEEB continues to maintain a sound finan- cial position, the borrower has agreed: to generate funds from internal sources equivalent to at least 352 of capital expenditures; to produce a rate of return on assets of at least 12%; to limit the level of its accounts receivable to 17X of total sales by 1986; to ensure that net revenues are equivalent to at least 1.5 times the company's estimated debt service requirements; to maintain tariffs at levels adequate to meet the above rate of return and internal cash generation requirements; and not to undertake any capital expenditures beyond those required for the project, until the project has been completed. In addition, EEEB will make its best efforts to pay-off its arrears to ISA and its (EEEB's) contractors, in accordance with a time- table acceptable to the Bank, by December 31, 1986 and will, in any event pay-off such arrears by December 31, 1987 at the latest. Procurement S8. Procurement of goods to be financed by the proposed loan, sith a value of over $100,000 (except for vehicles for the Energy Losses Reduction Program), will be through international competitive bidding (ICB) under Bank guidelines for procurement. Goods estimated to cost the equivalent of US$100,000 or less up to an aggregate amount of US$2,000,000, would be procured through limited international bidding (LIB), to allow faster purchases in the case of additional goods needed for final adjustments to the project. Goods and software (mainly spare parts, standard laboratory equip- ment, and software) estimated to cost less than US$100,000 up to an aggregate amount equivalent to US$500,000 would be procured by Direct Contracting. EEEB will procure vehicles for the Energy Losses Reduction Program through local competitive bidding (LCB) to facilitate timely project execution. The total cost of these vehicles would be USS100,000, less than 0.12 of the pro- posed loan. As the amount allocated to vehicles is so small, their procure- ment through LCB will not affect the project cost, while the benefits expected from early project start-up are important. LCB Procedures, which do not preclude foreign contractors from bidding, have been reviewed and found acceptable to the Bank. Consultants' services to carry out the studies included in the Project would be contracted under Bank guidelines. Consult- ants for technical assistance and training have already been selected with the Bank's approval. Contracts for goods in excess of US$500,000 will be subject to prior review by the Bank. This should permit Bank review of approximately 80% of procurement.  - 22 - 59. The goods to be financed from suppliers credits (without associated Bank cofinancing) will also be procured under international competitive bidding (ICB) limited to suppliers offering credit under ar^eptable terms and conditions. Procurement of poles and minor distribution accessories to be financed by EEEB's internal sources will be through local competitive bidding (LCB). Costs of these local goods are competitive with foreign ones and their procurement by LC8 will not affect the project cost. Procurement of civil works to be finauced by EEEB's internal sources will also be through LCB. Local contractors have proven to be successful and competitive for subtransmission and distribution civil works. Procurement arrangements are summarized in the following table: Procurement Arrangements Procurement Method --Other--- ICB LCB FA LIB DC TOTAL COST ~~-- -=- US$ Million- 1. Subtransmission 16.1 7.4 1.0 24.5 (8.0) (1.0) (9.0) 2. Distribution 106.6 174.2 1.0 281.8 (96.1) (1.0) (97.1) 3. Maintenance and 20.1 0.1 0.2 20.4 Laboratory Equipment (19.8) (0.1) (0.2) (20.1) 4. Training and Studies 0.9 2.3 0.3 3.5 (2.3) (0.3) (2.6) 5. Energy Losses 0.6 1.2 0.6 2.4 Reduction Program (0.6) (0.6) (1.2) 6. Engineering and Admin. 8.0 8.0 16.0 TOTAL 143.4 191.8 8.0 4.9 0.5 348.6 (124.5) (0.1) (-) (4.9) (0.5) (130.0) Note: Figures in parentheses are items to be financed by Bank loan. ICB = International Competitive Bidding (for acquisition of equipment and materials) LCB = Local Competitive Bidding (for construction works, acquisition of poles, distribution accessories and vehicles, and contracting of local consultant services). FA = Force Account (services to be supplied by EEEB) LIB = Limited International Bidding (for contracting consultants to assist with EEEB's studies and losses reduction program, and for some purchases not exceeding US$100,000. DC = Direct Contracting (for spare parts, laboratory equipment and software) Disbursements 60. Funds from the proposed loan will finance: (a) 100% of foreign expenditures for imported equipment and materials; (b) 94% of the ex-factory  - 23 - cost of locally manufactured equipment and materials; (c) 100% of foreign and 50% of local expenditures for consultant's services and training; and (d) interest during construction and commitment charges for the period 1985-91. The estimated schedule of disbursements is based on the formulated procure- ment program and is in accordance with the corresponding Bank-wide standard profile. A Special Account in dollars would be establiehed in Banco de la Republica by EEEB, solely for the purposes of the Project. The Initial deposit by the Bank into the Special Account would be in an amount of up to US$9 million. This amount is adequate to cover the estimated disbursements during the first 120 day period after loan effectiveness. The bulk of the project is expected to be executed by December 31, 1990, with minor works and testing to be completed by June 30, 1991. The closing date should be December 31, 1991, six months after completion of the last contract, in order to allow for payment of retention monies and unforeseen delays. All dis- bursements will be fully documented, except for contracts with values of US$200,000 equivalent or less, for which disbursements would be based on statements of expenditures. Documentation for these expenditures will not be submitted to the Bank but will be retained by EEEB for periodic review by the Bank. Benefits and Risks 61. By expanding EEEB's distribution system, the project will extend electric service to 240,000 new customers, including a large number of low- income customers who will benefit from the systematic program of new connec- tions for consumers in marginal quarters, many of which have precarious and dangerous illegal connections at present. In addition, the proposed improvements in the existing distribution system will increase the efficiency of EEEB's operations (through reductions in technical losses and theft), thereby ensuring better quality and reliability of service for existing customers, along with improved financial prospects for EEEB and reduced need for further investments in the sector's generating capacity. Improvements in organization and management envisaged under the project should enhance the overall efficiency of EEEB which would in turn assure the provision of services to the public at minimum cost. 62. Overall implementation depends to a large extent upon project management ability, mainly to coordinate design and procurement activities and there is some risk that shortcomings in this area may impede the timely completion of the project. However, the establishment of a project coordina- tion unit (para. 48) and actions being taken to improve EEEB's overall management and organization (para. 49) should mitigate this risk to some extent.  - 24 - PART V - RECOMMENDATION 63. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments November 4, 1985 Washington, D.C.  - 25 - ANNEX I 3JLA ..JA Past 1 of 6 gm~~~IIII t glealibL AnII 1auok 197A uumma LAT. A