Colombia - Water Supply and Sewerage Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY =8t/ p956 /- Co Repot No. P-4748-CO MEMORANDUM 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$150 MILLION TO BANCO CENTRAL HIPOTECARIO WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A WATER SUPPLY AND SEWERAGE SECTOR PROJECT May 26, 1988 Ths ocument bas a restricted distribution and may be used by reeipients only in the performance of their ofricial duties. Its contents may not otherwise be diselosed withgout World Banlk atorzto.|  CURRENCY EQUIVALENTS Currency Unit = Peso Colombiano (Col$) US$1 - Col $287.75 1/ Col$1 US$0.003475 I/ ABBREVIATIONS BCH Banco Central Hipotecario (Central Mortgage Bank) CENAGUAS Centro Nacional de Aguas (National Training Center for the Water and Sanitation Sector) DWSS Directorate of Water Supply and Sanitation (Directorio de Agua Potable y Saneamiento Basico) FFDU Fondo Financiero de Desarrollo Urbano (Urban Development Fund) FONADE Fondo Nacional de Proyectos de Desarrollo (National Fund for Development Projects) JNT Junta Nacional de Tarifas (National Tariff Board) MOPT Ministerio de Obras P6blicas y Transporte (Ministry of Public Works and Transport) SRP Sector Reform Program (Programa de Ajuste Sectorial) FISCAL YEAR January 1 - December 31 1/ As of May 17, 1988.  FOR OFFICIAL USE ONLY COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT Loan and Prolect Summary Borrower: Banco Central Hipotecario (BCH) Guarantor: Republic of Colombia Beneficiaries: Water and Sewerage Operating Entities Amount: US$150 million equivalent Terms: 17 years, including five years of grace, at the Bank's standard variable interest rate Onlending Terms: BCH would onled loan proceeds in peso- denominated subloans to operating entities, through financial intermediaries, at variable interest rates sufficient to cover the cost of funds to BCH plus a reasonable margin for intermediation. The Government would compensate BCH for any losses that may arise from future devaluations in excess of domestic price increases. Financing Plan: Operating Entities _ 55.8 Local Governments 55.4 National Government 50.0 BCH 68.5 Financial Intermediaries 41.3 FONADE 14.0 Bank Loan 150.0 TOTAL 435.0 Economic Rate of Return: Minimum of 1O, with revenues as proxy for benefits. Staff Appraisal Report: No. 7120-CO Map: IBRD No. 18370 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO CENTRAL HIPOTECARIO WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A WATER SUPPLY AND SEWERAGE SECTOR PROJECT 1. The following memorandum and recommendation on a proposed loan to Banco Central Hipotecario (BCH), with the guarantee of the Republic of Colombia, for US$150 million equivalent is submitted for approval. The proposed loan would be on standard IBRD term with 17 years maturity, including 5 years of grace and would help finance a Water Supply and Sewerage Sector Project. 2. Background: About 40? of Colombia's population still lacks access to piped water and about 60? does not have adequate seweragelsanitation facilities. Service remains particularly deficient in smaller cities, towns and rural areas. The shortcomings of the water supply and sewerage sector in Colombia stem largely from the absence of an appropriate sectoral policy framework and the weakness of the National Institute for Urban Development (INSFOPAL), the technical and financial lead agency for the urban subsector for the past three decades, in guiding and supporting sector development. In particular, INSFOPAL was unable to use the provision of credit as a means for promoting the institutional and financial strengthening of sector companies. With few exceptions, these companies continue to be poorly managed and to suffer from chronic financial short-falls because of inadequate tariff levels, inefficient operations and over-ambitious investments. 3. The current 1988-1992 sector investment program (about US$820 million) includes primarily investments in the large cities of Bogota, Cali and Medellin. To alleviate poverty by providing better social infrastructure services, the Government has decided to invest an additional US$600 million over 1988-1992 to improve water supply and sewerage services in communities predominantly outside the large cities. Conscious of the past poor performance by sector institutions, the Government is undertaking a Sector Reform Program (SRP) which introduces: (a) sweeping changes in sector organization in support of its decentralization policy which transfers the responsibilities for providing water and sewerage services to municipal governments; (b) a new financing policy emphasizing investment contribu- tions from operating companies, local governments and domestic credit and reduced reliance on external loans and subsidies from the national budget; and (c) a sec- tor lending policy with conditionality to commit operating companies to improve their efficiency and financial performance. 4. The organizational changes, mandated in Decree 77 of 1987, include: (a) the' abolishment of INSFOPAL; (b) the transfer of sector management from the Ministry of Health to the Ministry of Public Works and Transport (MOPT) and within MOPT the creation of a Directorate for Water Supply and Sanitation (DWSS) as the sector's technical regulatory and support agency; (c) the transformation of the INSFOPAL owned regional and municipal operating companies into autonomous departmental, regional or municipal utilities; and (d) the designation of the Urban Development Fund (FFDU) of BCH as the primary intermediary for future sector investments. Over the past twenty years, FFDU has developed into Colombia's most efficient and important 'ender for municipal infrastructure projects. In preparation for its enlarged role in the water supply and sewerage sector, FFDU is strengthening its organization, staff and operating procedures.  -2- . Rationale for Bank Involvement. The proposed Project would contribute to some of the most Important objectives of the Bank's country strategy, including rationalizing investments, improving public expenditure management and control, stimulating domestic resource mobilization and assisting the country in its efforts to alleviate poverty. Since 1968, the Bank has made 12 loans totalling US$425 million for water supply and sewerage investments. PCRs for completed projects concluded that loan beneficiaries largely achieved physical objectives, but often were unable to reach institutional and financial targets. Three multi- city loans to INSPOPAL were unsuccessful in achieving the policy improvements necessary for efficient sector growth. With the adoption of the SRP, the Government is addressing these shortcomings. The Bank assisted in the development of the SRP and its continued support would help assure that the reform momentum is sustained. The sector loan approach would be continued in the future to deepen the sector adjustments being initiated by the Government. 6. Project Obiectives. The proposed Project would assist the Government in implementing the first stage of the SRP. Specifically, it wouldt (a) provide water supply services to about 1.9 million and sewerage services to about 1.3 million, mostly poor people; (b) help introduce the lending and financial policies adopted under the SRP; (c) strengthen sector institutions on the national and local levels; (d) promote more cost effective and appropriate investment projects; and (e) establish a permanent training capacity for sector personnel. 7. Project Description: The Project would supports (A) a line of credit to BCH/ FPDU for the financing of about 80 subprojects, involving the rehabilitation and expansion of water supply and sewerage systems in about 400 communities, improvement of solid waste services in about 10 cities and institutional strengthening of project executing agencies; BCH/FFDU would be responsible for the identification, appraisal and supervision of these subprojects; BCHIFFDU's funds would be on-lent through commercial financial institutions which would assume the credit risk; (B) a program for strengthening FFDU's operating capacity; (C) a program for strengthening DWSS' capacity and the executiorn by DWSS of studies to improve norms and procedures for the design of sector projects; and (D) the establishment of a national training center (CENAGUAS) and the execution of training programs to benefit sector staff of about 8000. The total cost of the Project is estimated at US$435 million equivalent with a foreign exchange component of US$150 million. A break-down of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key processing events and the status of Bank Group Operations in Colombia are given in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report No. 7120-CO dated May 26, 1988, is also attached. 8. Agreed Actions. The Government has agreed tot (a) cause BCH/PFDU to set variable interest rates pegged to the market-based Certificate of Deposit rate and sufficient to cover the costs of funds and administrative expenses; (b) an annual review with BCH/FFDU and the Bank of the sector's five-year investment program and progress in meeting the institutional and financial targets of the SRP and the Project and the taking of any remedial actions found necessary by the review; (c) implement a system to monitor performance of sector companies and, beginning at the end of 1989, publish annual reports on such performance; (d) cause DWSS to complete its establishment as a functional unit by June 30, 1989 and to execute Component D in accordance with a plan of action satisfactory to the Bank; (e) designate BCH/FFDU as primary intermediary for the financing of sector projects; and (f) carry out sector development in accordance with the objectives and policies of the SRP as described in its policy letter dated May 5, 1988. In addition, the Government and BCH have a2reed that thR anv-nm-y -..tA  -3- BCH for losses arising from future devaluations in excess of domestic price increases. The agreement spelling out the mechanisms for such compensation would be concluded before Loan signature. 9. BCHIFFDU has agreed to adopt an Operating Manual Statement satisfactory to the Bank establishing the conditionality for subprojects to be supported under the SRP. The Statement would: (a) limit loan financing by BCH/FFDU to 802 of total subproject cost; (b) specify upper limits for the provision of equity contribu- tions from Government; and (c) require project executing agencies to: (i) demons- trate adequate managerial, financial and operational autonomy and capacity; (ii) achieve pre-established operational and financial performance targets; (iii) obtain prior approval by the Tariff Board for the implementation of tariff levels sufficient to achieve financial performance targets; (iv) execute institutional strengthening programs; and (v) present sound investment projects. BCH/FFDU has also agreed to: (a) carry out an institutional strengthening program in accordance with a plan of action agreed with the Bank; and (b) enter into an agreement with CENAGUAS providing for CENAGUAS to become functional by March 31, 1989 and to carry out Component D in accordance with a plan of action satisfactory to the Bank. 10. Special conditions of effectiveness would be: (a) the adoption of the Operating Manual Statement by BCH/FFDU; (b) the presentation of satisfactory standard sub-lending documents and (c) agreements satisfactory to the Bank, between: (i) BCH/FFDU and the National Fund for Development Projects (FONADE) to establish a fund for financing pre-investment studies; (ii) BCH/FPDU and MOPT regarding the on-lending of loan funds for the execution of Component C; and (iii) BCH/FFDU and CENAGUAS regarding the execution of Component D. 11. Benefits. The Project would directly benefit some 3.2 million, mostly low- income people with new water supply and/or sewerage connections and provide asso- ciated improvements in public health and standard of living. Economic benefits for individual subprojects would substantially exceed 1OZ which is the minimum acceptable internal rate of return for SRP subprojects. SRP would benefit the country's economy by stimulating sector savings through efficiency gains in the operation of sector companies and the formulation of more cost-effective and technologically appropriate investment projects. 12. Risks. The reform of the sector's institutional and policy framework is ambi- tious and complex, and will require a sustained effort in the years ahead. The main risks include the possibility of: (a) political pressures undermining the strong conditionality now introduced; (b) unwillingness of small municipalities to form viable regional water utilities; (c) instability in the management of project executing agencies; and (d) deficient management of the Project by BCHIFFDU. The Project includes specific measures to help minimize these risks. An annual review of important Project and Program issues would lead to timely plans of action to remedy identified shortcomings. To ensure adherence to the subproject conditionality, the Bank would review all subprojects, prior to approving disbursements. Another risk is introduced by the Government's plan of converting FFDU of BCH into an autonomous Territorial Development Bank. If the Colombian Congress were to approve this plan, the intermediary arrangements for the Project would change. The risk associated with such changes would be mitigated by the fact that the Bank would have the right of approval of any new intermediary arrangements. Nevertheless, the introduction of these arrangements might delay project execution. Considering the magnitude and complexity of the reform process being undertaken by the Government, it is likely that not all of  -4- the project objectives will be fully met. Even so, the Project would contribute significantly to the development of a much more robust and efficient water supply and sewerage sector in Colombia. 13. Rtcommendation. 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. Barber B. Conable President Attachments Washington, D.C. May 26, 1988  5- Schedule A COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT Estimated Costs and Financial Plan Project Cost: a/ Local Foreign Total - -USS million-------- Investment Subproiects 281.5 148.5 430.0 Water Supply 137.5 112.5 250.0 Sewerage 97.5 32.5 130.0 Solid Waste 2.0 3.0 5.0 Institutional Development 11.7 0.3 12.0 Supervision of Construction 16.0 - 16.0 Pre-Investment Studies 14.0 - 14.0 Training 2.8 0.2 3.0 Strengthening of FFDU 1.5 0.5 2.0 Studies by DWSS 1.0 0.5 1.5 Training Center 1.0 0.5 1.5 Total Project Cost 285.0 150.0 435.0. a/ Inclusive of taxes and duties, amQunting to an estimated US$20 million. FinancLng Plan: Local Foreign Total ---------US$ million-------- Operating Entities 55.8 - 55.8 Local Government 55.4 - 55.4 National Government 50.0 - 50.0 rCH 68.5 - 68.5 Financial Intermediaries 41.3 - 41.3 FONADE 14.0 - 14.0 IBRD - 150.0 150.0 Total Financing 285.0 150.0 435.0  -6- Schedule B COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT Procurement Method and Disbursements Proiect Element Procurement Method ICB LCB Other Total ------------US$ million------------ Equipment, Materials 140.0 72.0 20.0__ 232.0 (49.0) (25.2) (7.0) (81.2) Civil Works 46.0 88.0 20.0a& 154.0 (16.2) (30.8) (7.0) (54.0) Consulting Services - - 45.0b/c/ 45.0 _ - (12.8) (12.8) Training - 4.0 4.0 - (2.0) (2.0) Total 186.0 160.0 89.0 435.0 (65.2) (56.0) (28.8) (150.0) ROTEs Figures in parenthesis are the respective amounts financed by the Bank. a/ Local shopping. 1o/ Proposals from short-list of consultants. ei Includes amounts for items financed by FONADE (about US$14 million) and procured under its own procedures. Disbursements Amount I of Expenditures Category (US million) tq be Financed Expenditures for goods, services and training for Component A 146.0 552 of the amounts (Investment Subprojects) disbursed by BCHIFFDU Component B 1.0 502 (Strengthening of FFDU) Component C 1.5 100? (Studies by DWSS) Component D 1.5 1002 (Training) TOTAL 150.0 Zstimated Bank Disbursements: Bank FY 89 90 91 92 93 94 95 ------------ US$ million---------------- Annual 4.5 15.0 33.0 51.0 31.5 12.0 3.0 Cumulative 4.5 19.5 52.5 103.5 135.0 147.0 150.0  -7- Schedule C COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT Timetable of Key Project Processing Events (a) Time taken to Preparet Two and one-half years (b) Prepared by: Government and BCHIFFDU with Bank assistance (c) First Bank mission: March 1986 (d) Appraisal mission departures October 1987 (e) Negotiations: April 1988 (f) Planned Date of Effectiveness October 1988 (g) Relevant PPRs: Medium-size cities (860-CO) and Second Multi-city (1072-CO) Water. Supply and Sewera,e- projects; Report No. 6594, January 29, 1987.  -8 *, Schedul. D Page I Oros COLOMBLA WATER SUPPLY AVD SEWERAGE SECTOR PROJECT STATUS OF BANK OPERATIONS A. STATEMENT OF BANK LOANS AND IDA CREDITS IN COLOMBIA (as of Ma:ch 31, 1988) (Usimillion) Loan Amount (le89 Cance hation) Number Year 3Bo:ower Pu:ose Bank IDA Undisbursed 86 fully disbursed loans and one IDA credit 2,486.1 23.5 I/ -- 1583 1978 Republic of Colombia Power 50.0 0.3 1593 1978 Zona Franca Industrial y Industrial Come:cial de Cartagena Eport 15.0 0.4 1725 1979 Inte:conexion Electrica, S.A. Power 72.0 3.7 1857 1980 Banco de la Ropublica Industrial Cr. 142.0 3.8 1868 1980 Empresas Publicas de MedeUia Power 124.5 19.9 1953, 1981 Empresas Publicas de Medellin Power 85.0 43.3 1996 1981 Ilaeituto Colombiano de iidrologia Izrigation 34.3 2.2 1999 1981 Co:po:acio4 Electrica de la Costs Atlantica Power 34.2 8.0 2008 1981 Empresa de Energia Electrica de Bogota Power 359.0 20.2 2090 1982 Fetroca-riles Nacionales de - Colombia Railways 30.0 1.8 2121 1982 Fondo Vial Nacional Highways 149.6 16.6 2174 1982 Republic of Colombia Rural Develop. seat 53*0 33.7 1/ Includes exchange adjustment of US$4.0 mi.tlion.  -9- Schedule D Page 2 of 5 A. STATEMT OF 3ANK LOANS AP4D IPA CRIITS (as of March 31, 1988) Numbe. Year BoroPer plrposR Banks IDA Undisbursed 2192 1982 Fondo del Ministerio de Educacion Rural Education 14.1 4.3 2303 1983 instituto Colombiano Agicultural Agropecua.-o Research 63.4 29.3 2349 1983 Carbones de Colombia, S.A. Coal Exploration 9.5 6.9 2379 1984 Republic of Colombia Earthqiiae Re- const.-uction 40.0 2.9 2449 1984 Empresas Publicas de MeUdlUn Hu.tipupose powe? & water supply 164.5 128.5 2453 1984 Federacion Iacional de Agricultural Cafeteros de Colombiano diversifi- cation 50.0 21.9 2464 1984 Banco de la Republica Industrial Cr. 40.0 2.5 2470 1984 Mmpresa Municipalos de Cucuta Water Supply 18.5 11.8 2476 1984 Empresa Colombiana de Petrol. Petroleum 130.0 23.0 2477 1984 Banco de la Republica Pevelopwent Bazdg 90.0 51.5 2512 1985 Empresa Acueducto Alcantarilo-. de Bogota Water Supply 129.0 109.6 2551 1985 Republic of r1frtombia Trade Policy Export Dive:- sification 300.0 0*5 2611 1985 Republic of Colombia Health Servces Integ:ation 36.5 30.6 2634 1985 Empresao do Energia Electrica de Bogota Power 171.0 168.0 2635 1985 Emp-esas Puertos do Colombia Port Rehabili- tation 42.8 32.7 2637 1985 Dmpresas Publicas Municipales Water Supply 24.0 14.2 2667 1986 Inatituto Colombiano de Hidrologia Irrigation 114.0 110.0  - 10 - Schedule D ?a&A 3 of S A. STATEMENT OF BANK LOANS AND IPA CR5ITS (as of March 31, 1988) 2668 1986 Fondo Nacional de Caminos Vecinales Rural Trans- port 62.0 50.3 2677 1986 Republic of Colombia Trade and Agriculture Policy 250.0 4.4 2829 1987 Fondo Vial facional 2nd Hi&hwa 180.3 171.3 2889 1988 Republic of Colombia Powe: Sector 300.0 300.0 2909 1988 Caja de Credito Agraio CaJa Agaia 15.0 15.0 TOTAL 5,879.3 23.5 Of which has been repaid 1,564.6 6.8 Amount sold 51.0 - Of which has been repaid 51.0 Total now outstandia 4,263.7 16.7 (Exchange Adjustment B-Loans) .4 Total now held by Bank and IlA 4,263.3 16.7 Total undisbursed 1,443.3  - 11 - Schedule D Page 4 of 3 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1988) Fiscal Type of Amount in USS Million Year Obligor Business Lan Equity Total 1959 Laminas del Caribe, S.A. Fiber-board .50 .50 1960-1965 Intdustriss 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 Electromsnufacturas, S.A. Electrical equipment .50 - 50 1962-85 Corporacion Financiers Development Colombiana financing 6.00 2.02 8.02 1962-1963-85 Corporacion Financiera Development Nacional financing 6.00 2.04 8.04 1963-1967 - Compania Colombiana de Textriles 1.98 #-4-d 2.13 1968-1969 Tejidos, S.A. 1964-1970 Corporacion Financiers de Development Caldas financing - .81 .81 1964-1968 Forias 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 Colomb$a, S.A. Taxtiles 18.31 2.61 20.92 85-86-87 1969 Compania de Desarrollo dq Tourism - .01 .01 Hoteles y Turismo, Ltda. (ROTURISHO) 1969-1973 Corporacion Financiers del Development Norte financing - .45 .45 1969-85 Corporacion Financiers del Development Valle financing 8.18 .43 8.61 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 Colombians de Housing - .46 .46 'Ahorro y Vivienda 1974 Cementos Boyaca, S.A. Cement 1.50 - 1.50 1974 Cementos del Caribe, S.A. Cement 3.t0 - 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 1977-80 Compania Colombians de Clinker, Cement and S*A. Construction Material 0.49 2.24 2.73  - 12 - Schedule D Page 5 of 5 8. STATEMENT OF IFC INVESTMENTS (as of March 31, 1988) Fiscal Trype of Amount in USS Million Year Obligor Business Loan Equity Total 1981-85-87 Leasing Bolivar Leasing 14.00 .20 14.20 1981-1982 Petroleos Colombianos Ltd. Chemicals and Petrochemicals 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 Construction Material 22.47 5.00 27.47 1984-87 Carbones del Caribe S.A. Mining 14.78 14.78 1986 SF/Chucuri Chemicals and Petrochemicals - 5.00 5.00 1987 Prodesal' Chemicals and Petrochemicals 6.00 1.18 7.18 1987 Promotora Gasoducto Centra Chem & Petrochem .04 .04 1988 Corp. Fin. del Valle S.A. Dev. Finance 2.14 2.14 Total Gross Commitments 142.26 33.54 175.80 Less cancellations, termina- tions, repayments and sales 107.24 11.01 118.25 Total commitments now held by IFC 35.02 22.53 57.55 Total undisbursed (including 9.60 9.42 19.03 participants)  . 5. 74* cubA NAITI' DOMINICA IBARD J9$4 74- MAY 19414~~~~~~AMIC COLOMBIA t C,IAGUA q VINIZUILA BRAZIL BOLIVIA 1 PANAMA __ _ _ __ _ _ _ N,~~~~~~~~~~~~~~OI VI ~ AT ~ ARICA VENEZUELA SA NARE / ( C MEV C H A D A R c~~~~~~~~~~ A UP ESA 0* ECU ADOR '%..7~~~~~~~~~~~~~~ ~~"GN AIINI I VAUPES Y-t ~ * > iES IkkEn Poebat,on of Center Townst Ertsvtons fmeotorsh>2 X