Colombia - Secondary Education Project

The World Bank FOR OFICIAL USE ONLY Report N. P-6070-CO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR, RECONSTRUCTION AND DEVEJDPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED IOAN IN AN AMOUNT EQUIVALENT TO US$90 MILLION TO COLOMBIA FOR A SECONDARY EDUCATION PROJECT NOVEMBER 19, 19S3 MICROGRAPHICS Report No: P- 6070 CO Type: MOP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalent Currency Unit = Colombian Peso (Col $) Col$1.00 = US$0.001233 (September 1993) US$1.00 = Col$81U.8 (September 1993) Fiscal Year January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ICA International Coffee Agreement DNP Departamento Nacional de Planeaci6n (National Planning Department) DRI Desarrollo Rural Integrado (Rural Development Agency) EC European Community FINDETER Financiera del Desarrollo Territorial S.A. (Financial Development Corporation) FIS Fondo de Inversidn Social (Social Investment Fund) ICETEX Instituto Colombiano de Crddito Educativo y Estudios Tdcnicos en el Exterior (Colombian Institute of Educational Credit and Training Abroad) INEM Instituto Nacional de Enseflanza Diversificada (Diversified Secondary School) MEN Ministerio de Educacidn Nacional (National Ministry of Education) MEP Municipal Education Plan MA Multi-Fiber Agreement NAFTA North American Free Trade Agreement PCU Unidad Coordinadora de Proyecto (Project Coordination Unit) FOR OFFICIAL USE ONLY COLOMBIA SECONDARY EDUCATION PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Colombia Benefielarles: Ministry of Education (MEN), Local Governments, and Private Schools Loan Amount: US$90.0 million equivalent Terms: Repayment in 20 years including a 5-year grace period, at the Bank's standard variable interest rate. Financing Plan: Local Foreign Total -US$millon- Local Governments 30.0 - 30.0 Financial Intermediary/ies 30.0 - 30.0 National Government IBRD 2U 20 Total Costs 60.0 90.0 150.0 Rate of Return: Not Applicable Poverty Category: Program of Targeted Interventions Staff Appraisal Report: 11834-CO Map: IBRD No. 24591 This document has a restricted distribution and may be used by recipients on y in the performance of their official duties. Its contents may not otherwise be disclosed witho. V. orld Bank authorization. MEMORANDUM AND RECOMAMATION OF THE PRESIDENT OF THE IN ERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMPIA FOR A SECONDARY EDUCATION PROJECT 1. The following memorandum and recommendation on a proposed loan to the Republic of Colombia for US$90.0 million equivalent is submitted for your approval. The loan would be repayable over a period of 20 years including five years of grace, at the Bank's standard variable interest rate. PART I. COUNTRY POLICIES AND THE BANK GROUP'S ASSISTANCE STRATEGY I. Recent Economic and Social Performance 2. During the 1980s Colombia achieved one of the highest and most stable growth paths in Latin America. Its prudent and gradual approach to macroeconomic management yielded positive GDP per capita growth at a time of decline for most countries in the region. Productivity in most sectors, however, remained stagnant. Recognizing that macroeconomic measures alone would be insufficient to raise productivity in the long term, the Economic Modernization Program (MMP)-a set of structural reforms and supporting macroeconomic policies to improve the efficiency of resource allocation and use-was launched in early 1990. On taking office in mid- 1990, the Gaviria Administration asserted its commitment to the EMP and sharply accelerated its implementation. 3. Trade Reform. The centerpiece of the EMP was a trade reform program, which envisaged the gradual elimination of quantitative restrictions (QRs) on manufactured imports and scheduled reductions in the levels and dispersion of tariffs to reach an average tariff rate of 15 percent in 1994. Taking advantage of a strong balance of payments, the Government advanced the timetable for implementation. QRs on industrial imports--which formerly covered 80 percent of domestic production--were lifted ahead of schedule in November, 1990. In August, 1991, the Government advanced the 1994 tariff targets for immediate implementation. The Government also went beyond the original scope of the EMP by extending trade liberalization to agriculture. The state monopoly on imports of key agricultural products was eliminated and replaced with a variable tariff scheme. In addition, the Government concluded a free trade agreement with Venezuela which has accelerated the economic integration of the two countries, leading to a near tripling of Colombian exports to Venezuela between 1990 and 1992. 4. Complementary Reforms. To improve resource mobility and facilitate the supply response to the trade liberalization, reforms in the financial sector authorized ownership of -2- financial institutions by foreign investors and free entry into all segments of the market subject only to prudential requirements. Access to foreign exchange was improved, and the Government liberalized direct foreign investment. More recently, Congress approved the new Central Bank law which provides greater autonomy to the monetary authorities. The labor regime was modified to reduce labor rigidities and facilitate industry restructuring. Reforms in the public sector were undertaken to improve the efficiency and focus of public expenditures. Public monopolies were eliminated in sectors critical to trade flows, including railways, ports, shipping, and agricultural marketing. Most of the Government's non-oil industrial holdings were divested, as were three of the five banks nationalized during the banking crisis of 1982-85, and further divestment is underway. 5. Decentralization. In addition to these reforms, the Government has renewed its decentralization efforts. Following the mandate of the 1991 Constitution, Congress passed in June, 1993, the Ley de Competencias y Recuros. This law redistributes functional and fiscal responsibilities for the delivery of social services among different levels of government. Municipalities will now be responsible for providing basic services including health, education at the primary level, drinking water, basic sanitation and housing. The Departments, on the other hand, will act as liaisons between central and local governments. They are to design regional development plans and complement municipal actions through cofinancing, technical assistance, training or temporarily acting on behalf of those local governments unable to assume their new duties themselves. The Law also provides local governments with the resources that will enable them to execute their new responsibilities by transferring to them a significant and growing share of the nation's current income. Most of these transfers are earmarked for specific sectors including education, health, housing, water and sewerage. 6. Within the framework for decentralization, the Government is developing financial incentives and administrative controls in order to induce effective spending on social priorities. These incentives and controls consist mainly of: (a) earmarked revenue transfers; (b) matching grants; and (c) regulatory provisions. The authorities have created the Social Co-financing Funds to foster municipal interest in projects congruent with national priorities. These funds are designed to reduce the discrepancy between local and national priorities in social spending and are primarily aimed at investment in social, urban infrastructure, and rural projects. They are restricted to capital investment. Although the basic structure of the cofinancing funds has already been defined, their specific technical features are still being developed and much remains to be done before they become fully operational. 7. Economic Performance. Overall the economy has responded positively to these reforms as witnessed by continued economic growth and the surge in non-traditional exports (see Figure 1). GDP growth is expected to be around 4.5 percent for 1993, up from 3.5 percent in 1992, and inflation and the public sector deficit will probably be within the Government's original targets for the year (22 percent and 1 percent of GDP respectively). The recent discovery of oil reserves in Cusiana and Cupiagua (see paragraph 12) provides Colombia with new wealth which can be used to raise the standard of living of its population. International capital markets have reacted positively to Colombia's developments. With Standard and Poor's recently assigned -3- investment grade rating to Colombia (the second Latin American country to obtain this rating), the Euromarkets have welcomed Colombian bonds and notes worth US$325 million. Figure 1: The Economy at a Glance GDP Real Growth Rate per capita GDP Real Growth Rate Total External Debt Non-Traditional Exports (as percent of GDP) and Total Exports of Goods 4409 44n.0 as tge ge see lseI us Ia s 00 toes Sge me IN wa 8. Poverty Reduction. Colombia has reduced poverty steadilr over the last three decades. Solid economic growth, a drop in population growth, and expanded coverage of water supply, health care, and primary education have produced sharp improvements in infant mortality, life expectancy, and literacy. These indicators are now better than regional or country income group comparators. Nonetheless, Colombias' social development lags behind the best performers in the region, and disparities in income, wealth, and living standards among regions and socioeconomic groups remain striking and contribute to social unrest. Service deficits remain unacceptably high (for example, effective health care is estimated to reach only 35 percent of the population) but, more importantly, the positive trends of service coverage indicators often mask serious shortfalls in service quality and efficiency-most water treatment systems are in disrepair or poorly operated, and the high enrollment ratio in primary schools partly reflects a high repetition rate. -4- 9. Recent Difficulties. In spite of the Government's achievements under its structural reform program, Colombia is now going through a difficult period, and the risk of a pause or reversal in reforms has increased as it approaches Congressional and Presidential elections in May, 1994. The across-the-board nature of the trade reform could be eroded by pressures from interest groups, as has already happened with textiles and agriculture. There is still work to be done in streamlining the regulatory framework of the securities markets, while continued progress in public sector reforms is needed to further improve the efficiency of public expenditures. The drug-related and guerrilla violence continues with attacks on the Caflo Limdn oil pipeline and sporadic incidents in major urban centers. Progress in social expenditure programs has been hindered by weak administrative capacities in line agencies, limited capacity of local governments to deliver assistance, uncertainty created by the ongoing decentralization process and fiscal restraint. 10. The agriculture sector has experienced particular difficulties, contracting 0.9 percent during 1992. Several factors influenced the observed outcome: a severe drought, low international prices for both exportable and importable agriculture products (especially coffee), the effect of the apertura (i.e., trade reform) which has increased import competition, iAck of credit availability and intensification in rural violence. In the face of declining rural incomes, and under increasing pressure from agricultural interests, the Government recently adopted an Agricultural Recuperation Program containing a package of trade, credit, and other agricultural policy reforms. The program also included short-term soc.l measures such as a commitment to allocate US$7-9 million in 1993-94 for rural investment projects with a high employment content in areas where the reduction in planted acreage has most severely affected employment. The new agriculture trade measures signify a break with the new across-the-board nature of the trade liberalization adopted in 1991-92 and have opened the way to concessions to other ailing subsectors (e.g., textiles). Importantly, opposition within the sector has been expressed against the pace of the trade reform rather than against the liberalization itself. 11. Medium Term Economic Prospects. Colombia will soon face an oil boom from the newly discovered Cusiana and Cuiagua oil fields that could put the economy on a faster growth path-sustained GDP growth of more than 5 percent a year is certainly within reach in the medium term. Although the country is not unfamiliar with external shocks-as it encountered in 1975-80 a coffee bonanza that increased international coffee prices more than fourfold in a period of two years-the risks involved in managing the expected boom should not be minimized. Increased oil production will boost both exports (by more than US$4 billion per year after 1996) and fiscal revenues (Colombia's public sector is expected to capture 80 percent of the windfall). The economy will need to adjust to an appreciated exchange rate. By the end of the century, Colombia can become a competitive upper-middle-income economy with a fast-growing service sector, a more selective but also more efficient and outward-oriented manufacturing sector, and a strong export base. A leaner and more focused public sector should sharply increase the attention to basic needs and ensure that the poor have access to the opportunities provided by a growing economy. -5- 12. . Based on proven reserves between 2,000 and 2,200 million barrels in the newly discovered oil fields of Cusiana and Cuplagua, overall oil production in Colombia is expected to increase from approximately 480,000 bpd in 1993, to around I million bpd in 1997, and oil exports from about 220,000 bpd to 800,000 bpd during the same time period (see Figure 2). These estimated levels of production would double the participation of the oil sector in total GDP by the end of the 1990s. Investment requirements for this project are estimated to amount to US$5.5 billion between now and the year 2000. In turn, the present value of the net income flows to be generated by the Cusiana and Cupiagua project between 1993 and 2005 amounts to approximately US$15 billion, equivalent to 28 percentofGDP. To put this figure in perspective, the implied windfall gain is larger in relative terms than those Indonesia and Nigeria experienced with the fourfold oil price increase in 1974 (17 percent and 23 percent of GDP respectively). With respect to the balance of payments, the resulting net flow of foreign exchange between 1994 and the year 2000 is projected at about US$10 billion, more than the current level of existing reserves (about US$8.5 billion). This would allow Colom-bia to follow a selective foreign debt strategy by reducing obligations with expensive creditors. Figure 2: Projected Cusiana and Cuplagua Production & Exports s* *MO"* MO.de of eered per day sooo 600 sooo Soo 4000 .400 000 00 2oo - 200 1000- 100 0 1994 1995 1996 1997 1998 1999 2000 Exports Production 13. In line with its development policy agenda, Colombia is expected to consolidate the gains of the structural reform of the past three years and accelerate the pace of economic growth. In response to the newly created incentive structure, the implementation of an appropriate regulatory framework and the foreign exchange revenues from Cusiana, productivity is expected to improve and GDP per capita growth is expected to rise above 3 percent. Private investment is projected to average about 13 percent of GDP and public investment 9 percent of GDP, with the ICOR back to levels achieved during the 1970s. The adjustment to the oil boom will be reflected in shifts of the savings-investment balances in the economy. The current account balance will go from deficit to surplus, accompanied by the same trend in public savings-investment balance (Table 1). Colombia will experience a sharp improvement in creditworthiness during the 1990s due to lower external debt and higher growth in GDP and exports. As a result, its exposure indicators will drop by half by the end of the decade. Table 1 - Selected economle indicators, 1992-2000 f n&aOM Btimat -Pojected- 1992 1993 1994 1996-2000 (Avg.) Roal. yowth rates GDP 3.5 4.5 5.0 5.5 GDP per capita 1.8 2.8 3.2 3.7 Private consumption per capita 1.8 4.5 2.2 3.6 National accounts (as % of current GDP) Oross domestic investment 17.6 24.1 23.0 21.3 olw Private investment (includes change in stocks) 10.6 15.8 14.4 12.7 olw Public investment 6.9 8.3 8.9 8.6 ICOR 5.1 4.5 4.8 3.9 Savings-investnent balances (as % of current GDP) Public sector -0.3 -0.9 -1.3 0.6 Private sector 2.4 -2.6 -1.2 -0.6 Current account balance 2.2 -3.6 -2.5 0.0 Creditworthiness indicators (end of period) DOD/GDP 34.1 34.9 33.9 17.9 DOD/exports 160.9 163.3 154.8 78.6 Total debt servicelexpots 36.7 33.5 25.8 15.8 Inflation (end of period) 25.1 21.0 20.0 14.0 II. External Environment 14. In spite of the fact that Colombia has diversified its export base, the country remains vulnerable to changes in prices of international commodities; it will also be impacted by regional and multilateral trade agreements, illegal drug trade and interest rate movements. 15. International Commodity Prices. Regardless of strong growth in manufactured exports, commodity exports will continue to account for more than two-thirds of Colombia's export -7- revenues. While coffee exports have dropped to around 15 percent of total exports, fluctuations in international coffee prices will still impose an important adjustment burden on the economy through their fiscal impact and their economic and social effects in the coffee-growing regions. Prospects for a recovery in international coffee prices from current low levels appear very limited. After the breakdown of the International Coffee Agreement (ICA) in 1989, coffee prices fell more than 50 percent from peak values. In 1991-92, a failed attempt to revive the ICA exacerbated the fall in coffee prices. Recently, prices have started to stabilize; one possible factor influencing this recovery has been an export-quota agreement reached by major Latin American and African producing countries. 16.' Colombia is the third largest 1 n American expcrter of bananas with annual exports of almost TUS$350 million, making the oanana industry an important source of rural employment. World oversupply of bananas is expected to persist for some time, bringing a further decline in real prices. In July, 1993, the European Community (EC) replaced its old banana trade regime of a common EC external tariff of 20 percent with a new regime that sets quotas for preferred suppliers andlimits imports to two million tons from non-preferred suppliers. The EC imports almost 40 percent of the world's banana production and Colombia is a top non-preferred supplier for many BC countries. The new EC policy will hurt producing regions in Colombia with a direct negative impact on rural income. In response, Colombia recently filed (along with Costa Rica) a complaint against the new EC policy in GATT, and discussions between the EC and major Latin American producers are expected to take place soon. 17. Since 1990, oil sector export revenues have exceeded coffee export revenues. As a result of exploitation of the Cusiana and Cupiagua oil fields, the share of oil exports in total exports of goods is expected to almost double between 1993 and the year 2000 (from 22 percent to a,proximately 40 percent). The increased dependency on oil exports will obviously make Colombia more susceptible to fluctuations in international oil prices during the coming years. 18. Regional and International Trade Agreements. Colombia has been negotiating a free trade agreement with the other two members of the G-3 Group: Mexico and Venezuela. Negotiations are progressing at a rapid pace and are near completion, raising the possibility of implementing the agreement as early as January 1, 1994. This agreement would help Colombia consolidate its integration with Venezuela, expand trade and investment flows with Mexico, and eventually seek access to the North American Free Trade Agreement (NAFTA). In the short- term, however, NAFTA could result in a falling market share of Colombia' exports to the United States as trade is diverted to Mexico. With respect to other trade agreements, the Multi-Fiber Agreement (MFA) has had a negative impact on Colombia's textile industry. The MFA restricts volume exports to a level well below the industry' export potential, thus limiting employment growth in the sector. 19. Illegal Drugs. The demand for illegal drug exports has had, and will continue to have, a damaging impact on Colombia's society by creating a powerful and wealthy criminal class. Drug exports also have an effect on macroeconomic management. There can be little question that the large capital inflows observed in 1991-92 were fed in part by drug money, in response -8- to both, financial incentives in Colombia and to more forceful pursuit of drug-related financial assets by U.S. authorities. In the future, the volume of illicit activity in Colombia will continue to be influenced by drug policies in other countries, particularly the United States. Stricter enforcement of anti-drug laws could reduce the demand for drugs from Colombia; on the other hand, stronger surveillance of the drug cartel's capital assets held outside Colombia would increase the share of drug revenues which flow into the country. On the trade side, drugs have had a negative effect on Colombia's other exports. Colombian exporters incur higher costs than competitors due to longer delays in other countries' customs and higher expenses in packaging and storage resulting from meticulous scrutiny. Often, merchandise becomes unsalvageable after inspection delays, adding to exporters' costs. Flower and furniture exports have been particularly affected by these practices. 20. International Interest Rates. As a result of lower international interest rates, a strong external position and prudent monetary management, Colombia has been prepaying external debt with official institutions. The country is expected to continue retiring expensive external debt as long as its external position remains strong and debt retirement consistent with its monetary policies. III. Colombia's Development Objectives and Policies 21. Although its medium-term economic prospects are favorable, Colombia still faces important challenges to fulfill its development potential. To create a supportive environment for private sector development, the Government must continue removing distortions in the signals sent to producers, overhaul regulations now irrelevant to the country's development model, address infrastructure bottlenecks, upgrade the skills of the labor force, and curb violence. The Government also needs to strengthen its social outreach to ensure that the poor share the benefits of development and to put in place incentives and controls to stem environmental degradation. These priorities are clearly set forth in the Government's development plan, La ReoWucidn Pac(fica. To deliver on the plan, the Government needs to upgrade the weak institutional capacities in its line agencies, make decentralization work, and enlist the private sector in the provision of public services. 22. Colombia's 1990-94 development plan is an effort to redefine the role of the state in a liberalized economy. Its premises are that the state should: (a) concentrate its action where it can have the greatest effect on growth and equity, (b) make its programs more responsive to local needs through decentralization, and (c) enlist private sector participation to improve efficiency. The plan focuses on a set of strategic programs in social and physical infrastructure, environmental management, science and technology, and institutional development. 23. In the social sectors, five-year targets are set to achieve universal primary education, boost secondary education coverage, expand access to primary health care, develop targeted programs for vulnerable groups, increase connection rates for water ;nd sewerage, and help low- income families access housing. Physical infrastructure programs focus on transport and irrigation. The cntral government will concentrate on direct road investment along primary -9- trade corridors, contract out all road works, and transfer regional and feeder roads to the departments. In railways, public expenditures will be limited to track rehabilitation while private Investors will operate the rolling stock. The large irrigation investment program seeks to increase agricultural productivity. Small and medium-scale irrigation is to be decentralized, and the operation of irrigation districts transferred to user associations. The plan proposes to strengthen environmental protection agencies, including a new ministry, and to start programs for watershed management and natural parks. Institutional development aims to underpin decentralization through financial incentives and technical assistance to local governments. 24. Efficient resource allocation based on clear price signals should be the basis for Colombia's output and income growth. The recent liberalization of trade, finance, and foreign investment has removed the main distortions that for many years have misallocated resources. In the financial sector, fo: -ed investments have been reduced and the returns paid on those that remain are being brought gradually closer to market levels. In trade, the tax reimbursement scheme for exports includes a subsidy element for Government-picked priority sectors or export destinations. Government's commitment to maintain a sound fiscal stance has been important in creating space for private investment and to prevent acceleration of inflation. Regulations and regulatory bodies built for a "dirigiste state" in a protected economy are largely irrelevant to Colombia's new development model. Colombia not only needs less regulation; it needs a different sort of regulation to foster competition. For instance, tight controls have stifled the volume and diversity of instruments in 'e securities markets but failed to curb insider trading or fcster transparent disclosure. Policy change can be fast, but the detailed design and implementation of a market-friendly regulatory environment requires time-consuming efforts. 25. Long-standing problems of efficiency and pricing in the water supply and power sectors are due mainly to a tradition of political interference, management instability, soft budget constraints in municipal enterprises and inadequate national policies for pricing and utility supervision. A new regulatory environment is needed to shield utilities from political interference, allow private entry, foster efficiency gains and ensure that these gains benefit the users. The transport system has not kept pace with the growth of trade flows, an especially serious problem since a large share of production and consumption is in the central regions of Colombia. In addition to completing the privatization of ports, the Government needs to address shortfalls in the funding, timeliness, and quality of maintenance of primary highways. Another challenge is to carry out in an orderly fashion the proposed decentralization of regional and feeder roads, critical for reducing food costs and raising farm income. 26. Further progress in poverty reduction requires a change in delivery modes to expand service coverage while improving equity, efficiency and service quality. The Government plans to pursue these objectives in three main ways. It will increase social spending and concentrate that spending on basic services and programs selected for their impact on the very poor. It will improve responsiveness to local needs through decentralization; and efficiency and user choice by promoting private delivery of services and replacing subsidies to service producers with targeted grants to eligible beneficiaries. However, it has yet to pin down the specifies for implementing these policies. The risks are that social programs could be stalled or derailed by -10- weak administrative capacities in central and local Government agencies. Continuous senior staff turnover in the central government and protracted administrative, budgetary and political processes have slowed down sector policy definition and hindered project development. The high turnover of local governments also frustrates capity building efforts in many constituencies, and the risk of waste in local investment is daunting. Strengthening local governments is a long-term undertaking, and the ambitious targets of the Revoluci6n Pacfica may be difficult to achieve. 27. Capacities for environmental manage nt are weak, and past policies for pricing natural resources, infrastructure development, and the titling of new land have encouraged environmental damage. Environmental awareness has grown in the past few years, however, and the new Constitution includes environmental management among the main duties of the state. The Government has launched programs to strengthen park and watershed management, promote reforestation, and make environmental assessments mandatory for all major investments. It intends to unite the previously dispersed responsibilities for environmental protection under a new ministry. But developing effective environmental management capabilities will be a long-term undertaking. In the short term, the Government needs to design ways for the new ministry to relay its action through regional agencies, local governments, and market incentives. It could set priorities among environmental objectives (managing water and protecting biodiversity should be high an the agenda) and integrate its environmental agenda with sectoral strategies for energy, mining, agriculture, industry, and infrastructure. IV. Bank Group's Country Assistance Strategy 28. The thrust of the Bank's assistance effort in Colombia in the 1980s and early 1990s was to establish a policy environment supportive of long-term private-sector-led growth. There has been much progress on this front. However, needed institutional reforms have been slower in coming. This has strained implementation capacities and constrained new lending and disbursements. Hence, a Bank strategy responsive to the next stage in Colombia's development is built upon recognizing the progress in the structural reforms, the strong external position, the adoption of a coherent medium-term development agenda, and the weak implementation record. 29. The Bank's strategy for Colombia remains essentially unchanged from the strategy presented in March, 1993. The program objectives remain to help the Government consolidate and deepen its structural reforms, to support private-sector-led growth by improving the skills of the labor force and ensuring efficient provision of infrastructure and utility services, to improve the delivery of basic services so that the poor participate in the benefits of growth, to address the degradation of the natural resource base, and to strengthen institutional capacities. 30. The Bank's efforts will focus on the quality, rather than the quantity, of new lending. Policy reform, institutional development and improved implementation will be more important than the volume of resource transfers. While the Government also sees the role of multilateral institutions shifting, from one of resource transfers to one of technical assistance, it remains committed to a strong borrowing program with the Bank in order to advance and secure the -11- reform process. However, new lending from multilaterals will most likely be accompanied by selective prepayments of older loans, as has been the case in 1992 and 1993. 31. The Bank will maintain a sound lending program with emphasis on technical assistance to help the Government in the process of decentralization and modernization of the state. The Government has indicated that Bank involvement is important in supporting its instit onal development and decentralization efforts, as a means of subjecting implementing agencies and sub-national governments to greater discipline. The Bank will concentrate its private sector development effort on measures aimed at improving the social, physical, and regulatory infrastructure. For example, we plan to support a comprehensive reform of the power sector which would create an environment which attracts private capital into the sector. Improvements in Coloiabia's financial markets and financial regulations are expected to reduce the need for public intervention in capital markets and the need for Bank-financed credit operations. As in most other Latin American countries, maturities in Colombia's capital markets are predominantly short and medium-term. In order to fostr private investment in projects of long gestation, such as those in the infrastructure, power and water sectors, the country needs to develop a market for long-term instruments. This is an area where the Bank might play a useful role by supporting the underwriting of securities, the extension of maturities of securities, and the generation of asset-backed securities. 32. Project vehicles will mainly include sector investment loans conditional on progress of sector reforms and supporting a time-slice or subset of Government investments in the sector. In the context of decentralization, loans for infrastructure, rural development, and the social sectors will channel funds through national agencies for subprojects implemented by regional and local governments. Funding arrangements through conditional credit or matching grants will be designed to promote equity, efficiency and sound financial management. Our lending will recognize sharp disparities in institutional capacity among subnational governments. Up-front eligibility criteria for investment subprojects will concentrate our assistance on capable local agencies. This could detract from equity as the poorest constituencies tend to be also the weakest-hence the need to use regional relays, provide vigorous outreach to help weaker agencies graduate into our programs, and use new delivery modes including NGO and private sector participation. Key to this process will be to continue strengthening the capacity of national intermediaries (e.g., DRI Fund, FINDETER) to leverage Bank advice and supervision. -12- 33. ComposItho. The proposed lending program for FY94-95 is designed to achieve four broad objectives: Ptivate Sco aA%1Dment. Lending will focus on improving economic infrastructure, an essential base for a competitive private sector, and on providing indirect support to the private sector by helping the Government design and implement regulatory environments, especially in the capital markets and energy sectors, develop human resources, strengthen public sector management and facilitate technology transfer in agriculture. Infrastructure operAons; will respond to the need to reform and expand utilities, and upgrade urban and regional finfrastructure. The Private Sector Energy Development Project, for example, envisages the use of financial instruments to encourage private sector involvement in power generation. Other projects with important private sector development impact include Financial Sector & Capital Markets Development, Secondary Education, Bogotd Transport, Santafd Water, Agricultural Technology Transfer and technical assistance on public secto financial mangeen and energy sector reforms. Egyc Reucton.This component will improve the lives of Colombia's poor both now and in the future by expanding coverage and improving delivery of basic services. Bank assistance will be geared towards ensuring that local governments are provided with appoprite incentives and support to discharge their expanded role in the delivery of social services. Ongoing projects are improving primary health care, child care and primary education. New projects with significant poverty reduction components include Secondary Education, Natural Resource Management, Bogotd Transport, Agriculture Technology Transfer and Santaft Water. Enirmnmtl AUMnW=w§. The main t1teme of our environmental work in Colombia is Ianaemen of natural renewable resources with emphasis on water resource manaemet. This theme is consistent with the watershied-base organization of regional environmental protection agencies in Colombia, and a high priority for the Government in the context of management of hydroelectric resources and severe pollution of major wateways. An umportant component of the Natural Resource Management Project addresses protection and rehabilitation of critical watersheds in the Western Highlands; indigenous community groups participated in the preparation of this project and are expected to remain actively involved. Other projects with significant environmental impacts are Private Sector Energy Development and Santaf6 Water. Instiuioal rngghning- Virtually every proposed project will have a significant institutional development component to improve implementation capacities in both the central and subnational governments. -13- 34. Program Size. Lending volumes will be subject to continuity in the structural reforms, the pace of the sector reforms needed to make project benefits sustainable, and project-specific conditions. We do not foresee the use of program-wide triggers, but consistent lack of progress in reforming the key sector would likely result in lower lending levels in those sectors. Steady progress in our program could result in lending of about US$1.6 billion in 16 loans in those sectors during FY94-97--or about US$400 million per year. We see this amount as a maximum, as Colombia's external position rules out adjustment lending, and higher volumes of investment lending would likely conflict with quality objectives given the weak absorptive capacity of agencies in the infrastructure and social sectors. Considering individual sector and project risks, the expected value of our lending is about US$325 million per year. 35. Economic and Sector Work. The increasing emphasis on sector policy reform and institutional development will require high quality, well-focused ESW as the foundation for lending operations and policy dialogue. During FY93 and early FY94 the Colombia ESW program will prepare the fr-amework for a fr-uitful dialogue with the next administration in four critical areas: The Poverty Assessment Report-the result of a major cooperative effort between the Bank and the Government-will produce a framework for poverty reduction programs and Bank operations; the Private Sector Assessment will identify remaining constraints to the development of Colombia's private sector; an Agriculture Sector Review will identify a package of policy changes which will accelerate productivity growth over the medium- to long-term while reducing the risk of backsliding on trade policy; finally, a Transport Sector Strategy paper will extend the transport master plan recently prepared for the Government to institutional, implementation, and financial issues. Following these four reports, the next phase of ESW will focus on the level and efficiency of public expenditures and the maaeetof fiscal resources in an environment characterized by growing public sector resources from the oil boom and by decentralized responsibility for most public expenditures. 36. Portfolio mlmetto. Although portfolio performance has improved as a result of actions taken during the past two years (Tale 2), there is still room for further improvement. Several projects continue to experience delays between loan approval and effectiveness, slow disbursements and weak financial management of implementing agencies. The Government and the Bank are currently completing a study of implementation problems in Bank-financed projects Which attempts to identify the underlying reason for past portfolio performance. Up-front conditions are being used to secure institutional reforms early, test borrower commitment to reforms, and concentrate our lending on capable institutions. The Department recognizes that all Bank operational emphases cannot be pursued in each project and is encouraging task managers to streamline project focus and design in order to keep projects and the lending program consistent with the absorptive capacity of implementing agencies. -14- Table 2 -Selected Indicators of Portfolio Performance and Management FY92 FY93 Portfolio Performance No. of Projects under Implementation 27 27 Ave. Implementation Period (years) 1/ 5.0 4.8 % Projects Rated 3" or 4" 29 15 Average Ratings 2.0 1.8 Disbursement Ratio (%) 2/ 21 16 / This is the average age of a project in the Bank's portfolio. 21 Ratio of disbursements during the year to undisbursed balance of the Bank's pordolio in tbo beginning of the year 37. The Bank is improving portfolio management through expanded use of local consultants in the Resident Mission. In FY93, the Resident Mission hired a local long-term consultant to work under the direction of the Infrastructure and Human Resources Divisions to assist in project implementation and supervision, as well as to provide input into the design of new projects. Experience to date suggests that stronger field office supervision support will help speed internal processing, develop institutional capacity in the implementing agencies, solve minor problems quickly and signal emerging problems for earlier solution. Given the excellent results in FY93, this model will be continued and expanded further in FY94: each Sector Division will have one full-time local consultant working out of the Resident Mission. These consultants will also collaborate on solving cross-sectoral implementation problems; in particular they will work with government counterparts to prepare an action plan to improve portfolio performance based on the soon-to-be-completed implementation study. 38. Creditworthiness and IBRD Exposure. IBRD exposure in Colombia has historically been high because Colombia was an early and active borrower from the Bank. Recently Bank net disbursements have become negative and debt outstanding and disbursed (DOD) has declined. Under the new macroeconomic conditions in Colombia, IBRD exposure ratios are projected to decline substantially. Recently, the Government took advantage of large international reserves to reduce its external debt and prepaid US$230 million and US$140 million of IBRD debt in 1992 -1s- and 1993 respectively. Together with the projected growth in exports, this is expected to bring down the ratio of IBRD debt service--excluding prepayments--to exports from a peak of 7.9 percent in 1990 to under the 6 percent Bank guideline next year; it would remain below 6 percent even if lending reaches US$1.6 billion during FY94-97. IBRD debt is expected to remain about 20 percent of total medium and long-term public debt in the near term, increasing to about 25 percent by the end of the decade as the total debt burden declines. From a medium-term perspective, the risks to the Bank are expected to decline as overall debt service indicators improve due to reduced financing needs of the Government, and Colombia's strong foreign exchange position. Although the downside risk of policy slippage is low, constant monitoring is required given the large debt owed by Colombia to the Bank (US$3.2 billion at the end of FY93). 39. IFC and MIGA. The IFC is playing an important role in Colombia. The Corporation's strategy for Colombia is focused on helping medium-sized manufacturing companies to cope with the effects of economic liberalization by improving competitiveness and supporting large mining and infrastructure projects. The Corporation will also assist the Colombian capital markets sector through: (a) credit lines to local financial institutions to finance investment programs of small and medium size companies, (b) funding of leasing companies, and (c) support of new financial operations. In addition, IFC has been supporting the Colombian Government in its effort to privatize thermal and hydro-generation power plants. At the end of FY93, IFC's total gross commitments to Colombia amounted to US$450 million, of which US$64 million were direct equity participation. The IFC does not currently face exposure constraints in Colombia. The Bank is working with the IFC on the Private Sector Assessment for Colombia. Colombia has not yet ratified its membership in IGA. 40. Cooperation with Other Institutions. A main objective in coordination with other institutions is to maintain consistency and work-sharing, mainly with the IDB, which has programmed lending of about US$400 million a year in FY94-96. The IMF has no program in Colombia, but will conduct annual consultations. We will continue to help Colombia mobilize concessional resources (such as those of the JGF and GEF) to build our lending pipeline and promote innovative or global programs. V. Agenda for Board Consideration 41. The broaO. outlines of the proposed strategy are not likely to be the subject of much controversy. Recent discussions with the government have confirmed agreement on both the level and composition of the proposed lending program. However, the Bank's approach to Colombia may have important implications for other Latin American countries in similar stages of development. Colombia has four characteristics that will become increasingly common in Latin America: a strong fiscal position; substantial progress toward a reduced role of the state and a liberalized policy environment; good and improving access to international capital; and highly sophisticated senior level government counterparts. These characteristics present an added challenge to the Bank to remain a relevant and valued partner in Colombia's development program. The lending strategy set out above, comprising a relatively high level of new lending -16- with strong institutional strengthening and technical assistance components, adequately meets this challenge. 42. The proposed strategy assumes that the new Government taking office in August, 1994, will continue to borrow from the Bank even if macromanagement considerations require prepayment of some existing obligations. The principal risk to the strategy is that institutional capacity will not develop as required within the framework of decentralization to ensure efficient investment in infrastructure and the social sectors. In particular, the central government may not be able--through financial incentives and technical assistance--to assure effectiveness and accountability among the subnational governments which are primarily responsible for implementation. A secondary risk is that on-going efforts to reform key sectors, for example, the power sector, may stall under the next administration. In either of these circumstances, the Bank would not undertake significant lending in the affected sectors. PARI II. THE EDUCATION SECIOR AND THE PROJECT 43. The Colombian Government's economic and social development plan for 1990-94 makes education the centerpiece of its social development strategy. This strategy also builds on the decentralization process of the last decade, accelerated by Colombia's Constitution of 1991, and presages a more streamlined role for the Ministry of Education (MEN). Goals under the new Plan de Apenum Educatius are to: (a) achieve universal primary school enrollment and boost the coverage of secondary education, and improve the quality of education at all levels; (b) decentralize the management of schools to make education more responsive to the needs of local communities; (c) promote competition between Colombia's large private secondary education sector (comprising 40 percent of schools nationally) and the public sector to improve the availability and quality of education; and (d) improve the targeting of subsidies to disadvantaged students. The implementation strategy centers on cofinancing educational investments with the departments and the municipalities and supporting the municipalization of education by building local capacity for planning, cofinancing, and project execution. The Government has asked the Bank to participate in the realization of these goals. 44. The main sector issues in secondary education are: (a) low student enrollment resulting from historically low rates of internal efficiency in primary education combined with high drop out rates after 5 to 6 years of schooling and past underinvestment in public secondary school facilities; (b) limited and unequal access to quality public secondary education for students from the lowest socio-economic strata; (c) low efficiency reflected in high repetition in the early years of secondary schooling and high dropout rates; (d) unsatisfactory quality of public education due to poor student preparation in primary school, inadequate secondary school management, lack of teacher preparedness, lack of textbooks and shortages of other supplementary educational materials, and inadequate physical facilities; and (e) weak institutional and managerial capability to implement the decentralization of education in both MEN and at the regional and local levels. -17- 45. While giving priority to secondary education, the Government has not lost sight of the importance of early childhood development or primary education. However, the expansion of secondary education and improvement of its quality is an appropriate goal at this time, given the fact that during the past 20 years the Colombian urban labor force has nearly attained universal primary education and the social returns to investment in secondary education, conservatively estimated at about 11 percent, remain relatively high compared to secondary education investments in most other Latin American countries. 46. Project Objectives. The objectives of the project are to support Government initiatives designed to: (a) implement a new national government strategy of cofinancing investments in education with the departments and municipalities; (b) provide incentives to regional and local governments to achieve national educational development targets; and (c) support the assumption by municipalities of an expanded role in education by building local capacity for the planning, co-financing, and execution of investments. 47. Project Description. The project would fund pilot programs in 87 of Colombia's over 1,000 municipalities, located in or near the 10 to 15 largest cities, within 11 of Colombia's 33 departments and territories. (The participating departments, which represent a mix of income levels, are those which are considered administratively capable of managing central government resources; the municipalities selected include the capital cities of each department, and others with at least 10,000 population, having high levels of primary enrollments, at least three public secondary schools, and located within 50 kilometers of the capital city). To obtain assistance under the project, each municipality would be required to: (a) prepare a secondary education plan that delineates an integrated set of development objectives and investment priorities; (b) agree to conditionality on increasing coverage, improving quality and efficiency, and establishing effective administrative and decision-making arrangements for the planning and management of education; and (c) present a financial plan of municipal expenditures demonstrating financial capacity to undertake the required incremental expenditures and presenting evidence of an adequate internal accounting system, consistent with the requirements of subproject financing under the ongoing Municipal Development Project (La. 3336-CO). 48. Provision for the funding of municipal secondary education development plans and MEN initiatives in support of secondary education is made under the following project components. Increasing Coverage: a program providing grants and loans to local governments to help them fund new school construction and the rehabilitation of an estimated 50 percent of some 1,250 public school facilities and equipment. Expanding Access: an education vouchers program providing 55,000 vouchers to give low income students the choice of attending private schools with excess capacity where public school places are not available. Educational Quality Enhancement: a program to upgrade educational quality, including funding for School Improvement Plans (SIP) to encourage principals and teachers to diagnose their school and formulate programs to improve school quality and efficiency, in-service training for principals and teachers and provision of 4.2 million textbooks and instructional materials. Finally, Management and Institutional Strengthening: the project would (a) provide management and institutional strengthening in the departments and municipalities and in MEN, based on the -18- adoption of a plan prepared by MEN for implementing the decentralization of education; (b) improve quality and reliability of educational statistics; (c) assist MEN in conducting national assessments of student achievement in math and reading at the secondary school level; and (d) conduct policy and evaluation research. 49. Project Costs and Financing Plan. The proposed project would be financed by a Bank loan of US$90.0 million or 60 percent of total project cost. Foreign exchange expenditures are estimated at US$40.0 million equivalent. The Bank loan will cover 100 percent of these foreign expenditures and 45 percent of estimated local costs. National and local governments and financial intermediaries in Colombia would finance the remaining US$60 million. The initial cost-sharing formula for all assistance, with the exception of school construction, would consist of the central government providing 80 percent of the costs and municipalities 20 percent. After three years, the National Government's share would likely be reduced to 60 percent and the municipalities' share increased to 40 percent. 50. Prq)ect Management and Implementation Arrangements. MEN would be responsible for overall project planning and execution. The Vice-Minister of Education would be directly responsible for all project operations and would report to the Minister of Education. A Project Coordination Unit (PCU) reporting directly to the Vice-Minister, would be charged with the day to day management of the project. The PCU would consist of a Coordinator and a team of 13 professionals drawn from MEN's own permanent staff and outside consultants. The PCU would have the responsibilities for project planning and promotion, technical support and supervision, and monitoring and evaluation of project execution and impact. Part-time supplementary support for project management would be provided to the PCU by staff in MEN's Directorate for General Education and Directorate for Educational Planning. The project would finance the PCU's operating expenses (roughly estimated at US$1.7 million), including the services of a fiduciary agent to assist MEN in contracting and paying for goods and services required by the PCU. 51. The departments and municipalities would each play important roles in project management. The Departmental Secretaries of Education would be mobilized by MEN to provide coordination and technical support for project activities in their departments. Ib this end, MEN would sign formal agreements with the Governors of each department, by which the Departmental Secretary of Education would undertake to: (a) secure the active participation in the project by the pilot municipalities in their department; (b) provide technical assistance to municipalities in preparing their Municipal Education Plan (MEP) and related sub-projects; (c) allocate resources for MEPs; (d) support project execution at the municipal level; and (e) monitor project implementation. The mayors of participating municipalities would also sign a formal agreement with the Governor under which they would confirm their commitment to the goals of the project and accept responsibilities for project execution and monitoring. The estimated costs and financing plan are given in Schedule A. Arrangements for procurement and disbursements are given in Schedule B. The timetable of key events for project processing is summarized in Schedule C, and the Status of Bank Group Operations in Colombia is provided in Schedule D. -19- A map is attached. The Staff Appraisal Report (SAR) No. 11 834-CO, dated November 19, 1993, is also attached. 52. Project Sustainability issues relate to: (a) institutional and financial capacity of municipal governments to operate and maintain facilities built under the project; (b) the commitment of policy-makers to support educational innovation and provide budgetary support sufficient to sustain project impact; and (c) building political support, including among the teachers union, to maintain the voucher program. The government has actively addressed these issues through new legislation which transfers to municipalities the responsibilities and resources for the social sectors, as mandated by the new Constitution. Independent of legislative action, sustainability issues also would be addressed by: (a) the institutional strengthening measures under the components of improving quality and strengthening the management and administration of educational services; and (b) the use of up-front conditionality requiring participating local governments to meet financial soundness and fiscal performance criteria consistent with those used in the Municipal Development Project. 53. IAssons from Previous Bank Involvement. Since 1968, the Bank has invested US$150 million in four education projects. The first two projects helped Colombia establish a sTstem of diversified secondary schools (INEM) and were reviewed in OED's report Colombia: SUsi y Of the First and Second Education P ets (June, 1989) and other publications. The review of the first two operations found that the INEM system was both costly and inefficient: many graduates failed to enter the labor market, with little correlation between vocational skills obtained and subsequent employment. The third and fourth projects addressed rural primary education. Important lessons from the first and second primary education projects include: (a) sufficient managerial capacities should exist as a condition for lending; (b) projects should build on existing administrative arrangements rather than imposing new ones; and (c) sector lending should be carefully phased, with a first operation of modest size to provide the Borrower with sufficient experience to handle subsequent operations; and (d) the need to address the issues of educational quality, measurement, evaluation and monitoring. These lessons were incorporated into the design and size of the proposed project, which c, -ers less than 10 percent of Colombia's municipalities and represents about one third of proj. xted investments in the subsector. It also places emphasis on expanding access and enhancing the quality of secondary education as well as on building local capacity for system monitoring and evaluation. 54. Rationale for Bank Involvement. The latest country strategy for Colombia for FY94-96 places special emphasis on human resource development and poverty reduction within an overall agenda of support for private sector development, decentralization, and growth with equity. In human resource development, the Bank's priorities are to attain a better quality of primary education now that universal access largely has been achieved, and expand and improve secondary education, thus helping build skills and aptitudes in agriculture and industry needed for economic growth. The Bank supports the Government's policies and programs to reduce poverty and income disparities with effectively targeted social outreach programs which enhance equity, efficiency, and service quality. It also supports the Government's strategy to increase social spending, improve responsiveness to local needs through decentralization, and to improve -20- efficiency by promoting private delivery of services and replacing subsidies to service producers with targeted grants to eligible beneficiaries, such as the proposed vouchers for secondary education. 55. Agreements Reached. Several actions are proposed to ensure successful implementation of the project. Prior to negotiations, the Government submitted the following for the Bank's review and agreement: (a) the legal procedures to be followed by the national and departmental governments in transferring responsibility for secondary school construction and maintenance to the municipalities; (b) a manual setting forth the policies and administrative procedures to be used in managing the voucher program, and the procedures to be used by the Colombian Institute of Educational Credit and Training Abroad (ICEIEX) and the municipalities for assessing qualifications of schools; (c) a proposed plan for implementing decentralization of education in 1993-95; (d) a report confirming the final staffing plan for the PCU; the recruitment of a Project Director with terms of reference and qualifications approved by the Bank; and the appointment of a fiduciary agent for the activities of the PCU; and (e) copies of three agreements signed between MEN and the Governors, and at least one agreement between each such Governor and a Mayor regarding their participation in and implementation cf the proposed project, and a draft operations manual of the project. At negotiations, the Government agreed: (a) that the legal procedures for transferring secondary school property to municipalities would be incorporated in the regulations of the new law on inter-governmental transfers for social expenditures (Law 60), which are expected to be prepared by MEN and DNP, and issued by March, 1994. Meanwhile, MEN will devise a plan to provide training and/or technical assistance to departments to facilitate their working with the municipalities in the implementation of these regulations; (b) that the draft manual on the policies and administrative procedures to be used in the management of the voucher program would be incorporated into the project operations manual; (c) to revise by March 1994 its proposed plan for implementing decentralization of education to include a strategy with targets and actions which would be taken jointly with other agencies; (d) to submit the formula it proposes to use for transferring national funds for social development (sUuado Jiscal) to local governments for review by the Bank; (e) that MEN would issue a resolution establishing the project Coordination Unit by December 31, 1993. The unit would be established on the basis of the document submitted to the Bank prior to negotiations and in accordance with agreements reached at negotiations; (f) that MEN would immediately begin implementing the agreement signed with a fiduciary agent to provide services to the Coordination Unit. It was further agreed that MEN will maintain such services for the duration of project implementation; (g) that future legal agreements signed between MEN and the participating departments and between the departments and the municipalities would refer to the conditionality for project funding, and municipal and district education plans would be expected to contain relevant targets and plans to sustain increases in educational expenditures resulting from their investments; (h) to review project operational arrangements and financial flows arrangements annually with the Bank and make adjustments, if needed. It further agreed to increase the amount of technical assistance provided to the departments and municipalities, if found necessary to improve project implementation; (i) that DNP, MEN, and the Financial Development Corporation (FINDETER) would prepare model sub-projects to guide municipalities in implementing their MEP. These models would be prepared by March, 1994, and submitted to -21- the Bank for review, after which they will be incorporated in the MEP manual; (j) on the holding of a mid-term review of project implementation towards the end of June, 1996, based upon the monitoring indicators and key performance targets of the project; and (k) on monitoring indicators and key performance targets. Conditions of effectiveness would be that: (a) three senior managers for the PCU be employed with terms of reference and qualifications satisfactory to the Bank; (b) the work program for the first year of project implementation be prepared and submitted to the Bank for review; (c) the Social Investment Fund (FIS) would have ratified the project agreement, executed and delivered subsidiary agreements, and be fully operational for implementing the project; (d) FIS weld have furnished to the Bank standard draft contracts with fiduciaries and sub-project executors; (e) FINDETER would have ratified the project agreement, executed and delivered subsidiary and trust agreements, and incorporated technical and financial criteria for education sub-projects, satisfactory to the Bank, in its operational manual; (f) FINDETER would have furnished to the Bank standard draft contracts for execution of sub- projects; (g) operations manuals for the project as well as for the FIS, ICETEX and FINDETER, satisfactory to the Bank, would have been issued; (h) evidence be provided of the appointment of a procurement advisor/s for the project with terms of reference and qualifications satisfactory to the Bank; (i) standard bidding documents for civil works and goods and materials under LCB, acceptable to the Bank, would have been prepared; (j) one or more independent auditors, satisfactory to the Bank, would have been hired to audit project accounts, Statements of Expenditures and Special Accounts; and (k) a system for project monitoring, satisfactory to the Bank, be ready to be put into operation immediately. 56. Environmental Aspects. The project does not present environmental risks other than the relatively minor risks associated with the construction of school facilities. These would be addressed in the design and approval stage of investment subprojects. The project would help improve the environmental status of school facilities by requiring that school renovations and construction make adequate provision for water and sanitation. A "C" environmental rating has been assigned. 57. Program Objective Categories. The project is primarily under the human resource development POC. Although the project is not a part of the core poverty program, strong emphasis is placed on poverty alleviation, especially through the voucher program and school expansion and quality improvement components. Contributions to other program objectives include more efficient public sector management and fostering private sector development. Gender-related inequities in access to education, reviewed during project preparation, are not an issue in Colombia. 58. Project Benefits. The project will support on average 60 percent of the total investment requirements for the 87 municipalities with the potential benefits as follows: (a) increasing access to secondary education for an estimated 90,000 primary school graduates in 87 municipalities; (b) providing opportunities for secondary education for up to 22,000 students of low-income families; (c) enhancing the quality and efficiency of education in the 1,250 public secondary schools in the 87 municipalities through the provision of up 4.2 million textbooks, teacher and principal training and instructional materials and equipment; (d) strengthening the administrative -22- and managerial capacity of 11 departments, 87 municipalities, and up to 1250 public school administrations to plan and implement education improvement programs; and (e) increasing the overall level of investments in education, and secondary education in particular, made by regional and local governments. 59. Project Risks. The major risks to project implementation are: (a) insufficient implementation capacities in MEN, FIS and other government agencies could result in slow project execution; (b) the institutional weakness of local government and the high turnover of key municipal personnel could jeopardize the pursuit of coherent education programs at the local level; (c) local governments may not be willing to participate in the project, because they lack confidence in the central government's commitment and ability to deliver on its promises; (d) local governments may not be able to invest in secondary educational facilities to the extent needed to reach the enrollment targets; and (e) the voucher program may not gain the requisite political acceptance, although the first year of the program has been generally successful. The project design, including the sequencing of Bank assistance, implementation arrangements, a flexible management approach, and the use of technical assistance would help diminish these risks. 60. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington D.C. November 19, 1993 -23- Schedule A COLOMBIA SECONDARY EDUCATION PROJECT Estimated Cost and Financing Plan Estimated Costs by Component % Foreign % btal Local Foreign Ibtal Exchange Base Cost ------ US$ million ---- Increasing Coverage 37.5 15.7 53.2 29.3 40.2 Expanding Access 7.5 0.0 7.5 0.0 5.7 Quality Enhancement 42.8 16.7 59.5 28.0 45.0 Management Strengthening 9.4 2.5 11.9 21.0 9.0 Base Costs 97.2 34.8 132.0 26.3 Physical Contingencies 1.9 0.8 2.7 29.6 2.0 Price Contingencies 11.3 4.4 15.7 28.0 11.8 Total Project Costs 110.4 40.0 150.4 26.5 113.7 * Tbtals may not add exactly due to rounding. Financing Plam Local Foreign 7btal - US$million - Local Governments 30.0 - 30.0 Financial Intermediarylies 30.0 - 30.0 National Government IBRD - 2Q& 20 lbtal Costs 2 U0.0 1,0. -24- Schedule B COLOMBIA SECONDARY EDUCATION PROJECT SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (US$ million equivalent) Procurement Method Project Element ICB LCB Other N.B.F. Total Cost Civil Works/Pees - 43.8 13.6 - 57.4 (26.3) (8.1) (34.4) Furniture - 3.1 2.2 5.3 (1.8) (1.4) (3.2) Equipment, 7.2 6.8 12.2 - 26.2 Instructional (4.3) (4.1) (7.3) (15.7) Materials and Reference Ths 'extbooks 23.6 - 23.6 (14.2) (14.2) Studies - - 5.3 - 5.3 (3.2) (3.2) Ibchnical - - 2.3 - 2.3 Assistance (1.4) (1.4) Vouchers - - 8.3 - 8.3 (5.0) (5.0) School Improvement - - 16.1 - 16.1 Plans (9.6) (9.6) Project Unit - - 1.9 - 1.9 (1.1) (1.1) Project - - 3.6 - 3.6 Administration (2.2) (2.2) (Fdires) Ibtal 30.8 53.7 65.5 - 150.0 (18.5) (32.2) (39.3) (90.0) Note: Figures in Parenthesis are the respective amounts financed by the Bank loan. N..E: Not Dank-Financed. -25- Schedule B COLOMBIA SECONDARY EDUCATION PROJECT Estimated Schedule of Disbursements (US$ million) Accumulated Undisbutsed Bank FY Disbursements Disbutsements Balance Semester Ending Amount % Amount % Amount % EM December 31 0.0 0 0.0 0 90.0 100 JWme 30 1.8 2 1.8 2 88.2 98 December 31 4.5 5 6.3 7 83.7 93 Jun 30 4.5 5 10.8 12 79.2 88 December 31 6.3 7 17.1 19 72.9 81 June 30 7.2 8 24.3 27 65.7 73 EM December 31 9.0 10 33.3 37 56.7 63 June 30 9.0 10 42.3 47 47.7 53 December 31 9.0 10 51.3 57 38.7 43 June 30 9.0 10 60.3 67 29.7 33 December 31 9.0 10 69.3 77 20.7 23 June 30 9.0 10 78.3 87 11.7 13 December 31 4.5 5 82.8 92 7.2 8 June 30 4.5 5 87.3 97 2.7 3 December 31 2.7 3 90.0 100 0.0 0.0 Estimated IBRD Disbursements IBDFY 1224 12 1 6 122 122 1222 2000 20 Annual 1.8 9.0 13.5 18.0 18.0 18.0 9.0 2.7 Cumulative 1.8 10.8 24.3 42.3 60.3 78.3 87.3 90.0 Note: Project Completion Date: June 30, 2000 Pvoject Closing Date: December 31, 2000 -26- Schedule C COIDMBIA SECONDARY EDUCATION PROJECT 'imetable of Key Project Processing Events (a) Time taken to prepare: 14 months (b) Prepared by: World Bank Michael Potashnik (Task Manager, LA3HR) Himelda Martinez (EA3PH) Eduardo Velez (LA2HR) Maria Helena Maldonado-Villar (Consultant, LA3HR) Luis Secco (Consultant) EMesto Schiefelbein (Consultant) Stephen Hoenack (Consultant) Colombian Government tafael Orduz (Vice Minister of Education) Javier Serrano (MEN) Carmen Helena Vergara (DNP) Clemencia Chiappe (Consultant) Inter-ministerial team of MEN and DNP officials (c) First Bank Mission: June 1992 (d) Appraisal Mission: February 22 to March 10, 1993 (e) Date of Negotiations: October 5 to 8, 1993 (f) Planned date of effectiveness: March 1994 (g) Relevant PCRs and PPARs: Loan 552-CO of 1968; Audit Report 0992 of 01/1976 Loan 679-CO of 1970; Audit Report 1314 of 10/1976 Loan 920-CO of 1973; Project Completion Report 4931 of 02/1984 Schedule D A. STATEMENT OF OANK LOANS & IDA CREDITS IN COLOMBIA fas of Segtember 30, 19931 Amount (less Ln/Cr Fiscal -cancellationsi Undis- Number Year Borrower Purpose Bank IDA bursed 114 Loans and one IDA Credit fully disbursed 7,888.58 23.48 2449 1984 EPM Rio Grande Multipurp 164.50 17.27 2470 1985 EMC Cucuta Water/Sew 18.50 5.55 2512 1985 EAAB Bogota Water IV 129.00 24.12 2611 1986 Colombia Public Health 36.50 0.60 2634 1986 EEEB Bogota Dist Il 171.00 18.10 2667 1986 HIMAT Irrigation It 114.00 50.27 2829 1986 Cavecinales 2nd Ntl Hwy Sector 180.30 2.32 2909 1987 Fondo Vial Caja Agraria 15.00 8.08 2961 1988 Caja Agraria WS & Waste Sector 150.00 93.48 3010 1988 BCH Ed Sector 100.00 57.11 3025 1989 Colombia Sth Sm Med Entp 80.00 2.90 3113 1990 B. de la Rep. Sm-Scale Irrig 78.20 44.87 3157 1990 Colombia Rural Rds Sector II 55.00 26.21 3201 1990 Fondo Vial Comm Child Care & Nu 24.00 14.77 3250 1991 Colombia Rural Dev Invest 75.00 46.44 3278 1991 Colombia Public Sector Reform 304.00 101.25 3321 (S) 1991 Colombia Indust Restruct 200.00 200.00 3336 1991 Colombia Munic Devt 60.00 42.58 3449 1992 Colombia IFl-Restrc.&Divst. 100.00 100.00 3453 1992 Colombia Third National Roads 266.00 207.07 3575 1993 Colombia Agricultural Credit 250.00 250.00 3608 1993 Colombia Export Development 50.00 50.00 3615 1993 Colombia Municipal Health Ser Am Am 2,671.00 1,412.97 TOTAL 10,559.58 23.48 Of which repaid 3.420.11 1Q,,7 Total held by Bank & IDA 7,139.47 12.71 Amount sold 50.99 Of which repaid Aln 1,412.97 Total undisbursed B. STATEMENT OF IFC INVESTMENTS (as of SenteMber 30. 193 Loan Equity Total (in Millions of US Dolars) Total Gross Commitments 394.43 64.37 458.80 Less cancellations, terminations, exchange adjustments, repayments, writeoffs, and sales 285.06 37.51 322.57 Total Commitments now held by IFC 109.37 26.86 136.23 Total Undiabursed IFC 0.09 10.74 10.83 -28- Annex Tables for Part I Country Policies and Bank Group Assistance Strategy -29- COLOMBIA Annex Table I- Bank Fact Sheet Bank LeAding Program, FY94 By Sector and Leading Istrument (% of Total Committeents/Disbursements) Past Current Planned FY91 FY92 FY93 FY94 FY95-97 Committments (US$ 639 366 350 224 1371 Sector (% Agrlculture 11.7 71.4 8.5 Industry and Finance 31.3 27.3 14.3 2.9 Energy Power 24.8 Public Sector Management 47.6 13.4 Infrestructure & Urban Dev. 9.4 72.7 29.0 56.2 Human Resources 14.3 40.2 7.7 Environment 17.4 Mining & Other Extractive Multisector Total 100.0 100.0 100.0 100.0 100.0 Lemdin lastrment(% Adjustnent Loans 47.6 0.0 0.0 0.0 0.0 Specific fav. Loans & Others 52.4 100.0 100.0 100.0 100.0 Total 1000 I 10 10 1. Dsb (US$) 269.8 286.4 205.1 301.9 1161.6 IFC Approvals (US$m) 96.0 23.5 sector (% ASri-business 5.2 Cap. Markets 1.0 100.0 Chem-Pertilizer 62.5 Infrastructure 31.3 Manufacturing Oil-mining Total 100.0 100.0 hIveshnent Instrument (%) Loans 99.0 Equity 1.0 98.7 Quasi-equity 1.3 Total 100.0 100.0 -30- COLOMBIA Annex Table 2- Priority Poverty Indcators 15-20 Most Recent Yem Ago Esdmate Poverty Lines Upper Poverty Linm (headcount, %) .. 48.0 Lower Poveuty Lin (acount %) .. 18.8 ODP Per Capita 550 1290 mä.rffeton Wage (unrifr1). CPI (food) 24 28 Socialindicators Share of Public Exemditu~s for .. 4 Basic Social Services in ODP Gros Primary Enrollet 118 110 Under-Five Mortality .. 43 nmunination .f. 85 Child Mahntrition .. 10 Overal Life Expectancy 63.0 68.8 Total Fertility Rate 4.4 2.7 -31- COLOMIA Anex Table 3 - Key Socal Indicators of Development (1993) Same Region/Income Group 15-20 vears Mos Recent Latin Lower Ago Estnate Ameica, Middle- Caribbean Icome HU~aa Resources S~ue, Groth, Sructure of Population Total Population (in thousandM) 23,776 32,345 433,190 629,102 14 and Udr (% of population) 42.1 35.4 36.2 37.3 15-64 (% of population) 53.6 60.6 59.3 57.8 Percentag in Urban Areas (% of population) 60.7 70.0 73.5 58.6 Populaton Growth Rat (% por annu) 2.1 1.7 1.9 2.0 Deterauina~e of Pop~ation Growth Fertiity Cude Birth Rate (per thousand pop~ation) 31.9 24.1 17.0 29.5 Mortality Crude Death Rate (par thousand populaton) 8.0 5.8 6.9 8.5 Infant Mortalhy Rate (p« thousand lW b~rths) 64.6 30.0 47.4 49.5 Lf Expcacy at Birth (years) 63.0 68.8 67.6 65.3 NatraRes~s Area (hous~ad sq. km) 1,139 1,139 20,397 22,765 Density (populaion per aq. km) 21 28 21 27 Amce to Sofe Watr (% of population) Urban (% ofpopulation) 86.0 89.0 .. 78.2 Rural (% ofpopulation) 33.0 87.0 .. 46.9 Invesnnt in Huan Capital Population per Physlcan (aumbe of persons) 1,952 1,152 936 Hospital B"d (number of persons) .. 703 .. 509 Education (% of GDP) 6.4 Gross Eurollment Ratos (% f school-age group) Primary (total) 118.0 107.0 107.4 100.5 Male 116.0 34.0 .. 103.6 Female 120.0 180.0 .. 97.4 Secondary (total) 39.0 52.0 47.2 58.3 Male 39.0 51.0 .. 60.1 Female 39.0 53.0 52.8 56.5 Testiary (% oftertiary S~uats) 19.8 26.7 Male Female . . . . . . .• Literacy Rate Gverali (% of population; age 15+) 80.8 86.7 84.5 77.1 -32- COLDMBIA Annex Table 4 - Re Economic Indicators 1988 1989 1990 1991 1992 NATIONAL ACCOUNTS (as % GDP at Current Market Prices) Gross Domestic Product Agrloulture 16.7 16.1 16.2 16.5 15.7 Industry 36.2 36.9 36.7 36.0 34.9 Services 47.0 47.0 47.0 47.6 49.4 Consumption 75.6 75.8 75.7 75.7 79.1 Gross Investment 22.0 20.0 18.5 16.8 17.6 of which: Private Investment (GDFI) 12.7 11.1 10.2 7.7 8.6 Government Investment 6.8 7.0 6.4 6.5 6.9 Exports of GNFS 16.3 18.0 20.6 21.1 19.3 Imports of GNFS 13.9 13.8 14.8 13.6 16.0 Gross national saving 22.8 21.5 21.8 24.1 20.9 Gross domestic saving 24.4 24.2 24.3 24.3 20.9 Mmandwmitems GDP (million US$ at current prices) 39,213 39,538 40,274 42,160 48,577 GDP per Capita (million US$ at current prices) 1,297 1,284 1,285 1,322 1,496 PUBLIC FINANCE (as % of GDP) Current Revenues 21.8 22.9 23.0 24.6 25.5 Current Expenditures 17.1 17.8 16.2 17.8 18.6 Budgetary Savings 4.7 5.0 6.8 6.8 6.9 Capital Expenditures 6.9 7.7 7.5 7.1 7.6 External Borrowing (net) 0.9 1.1 -0.5 -1.3 -2.4 REAL ANNUAL GROWTH RATES (%) Gross Domestic Product 4.1 3.4 4.3 2.1 3.5 Gross Domestic Income 1.5 4.0 1.1 2.8 2.3 REAL ANNUAL PER CAPITA GROWTH RATES (%) Gross Domestic Product 2.3 1.6 2.5 0.3 1.7 Total Consumption 1.5 2.2 -1.4 -0.7 3.3 Private Consumption 1.1 1.7 -3.7 -0.9 2.1 MONETARY INDICATORS M2/GDP 18.7 .. 19.3 17.9 20.6 Growth of M2 (%) 21.1 .. .. 20.8 45.0 Private sector credit growth/total credit growth (%) 64.8 .. 76.1 78.8 83.5 -3- COIDMBIA Anon Table 5 - Key Economic Indicators 1988 1989 1990 1991 1992 BALANCE OF PAYMENTS (US$ M) Exports (goods and nfs) 6761,3 7330.5 8689.7 9114.9 9257.0 Of which:Mcrehandise (FOB) 5342.7 6031.8 7082.4 7507.4 7263.1 Imports (goods and afs) 6364.8 6411.0 7089.4 6633.3 8264.7 Of which:Merchandise (FOB) 4515.3 4557.8 5107.9 4548.0 6029.1 Resource Balanee 396.5 919.5 1600.3 2481.6 992.3 Net factor Payments 1784.6 2309.8 2279.3 2119.9 2148.7 Of which: MLT interest payments 1213.0 1383.0 1340.0 1281.0 1149.0 Net current transfers 963.5 898.2 1026.5 1697.2 1733.8 Current accoust balance -214.2 -246.8 642.7 2389.4 973.3 Direct investment 158.4 547.1 484.1 432.6 740.0 MLT oans (net) 618.9 105.8 -177.2 -296.2 -939.4 Oficial 334.0 102.0 -39.0 -150.0 -405.0 Private 284.9 3.8 -138.2 -146.2 -534.4 Other Capital (including errors and omissions) -203.8 -243.8 -315.2 -606.7 828.3 Changes In net reserves -359.3 -162.3 -634.4 -1919.0 -1602.2 Net Int. Reserves (mill US) 3247.8 3616.1 4211.5 6029.4 7389.3 MoaUMUM Items Gross Reserves as months of imports (GNFS) 5.76 5.62 5.77 8.80 9.24 Exports as % of GDP 17.24 18.54 21.58 21.62 19.06 Imports as % of GDP 16.23 16.21 17.60 15.73 17.01 Resource Balance as % GDP 1.01 2.33 3.97 5.89 2.04 REAL ANNUAL GROWTH RATES (1987 PRICES) Merchandise exports 1.60 11.02 18.44 -8.38 4.41 Manufactures 15.50 10.30 17.11 29.56 -3.62 Merchandise Imports 13.30 -1.50 10.48 -20.52 35.61 PRICE INDICES (1987=100) Export price index 100.1 101.8 100.9 116.7 108.1 Import price index 105.1 107.7 109.2 122.4 119.6 Terms of Trade price idex 95.2 94.5 92.4 95.4 90.4 Real Exchange Rate 96.4 92.8 82.0 84.7 92.5 Consumer Price Index (% growth rate) 28.1 25.8 29.1 30.4 27.0 Real Interest Rates 4.2 6.3 5.6 5.2 -0.3 GDP deflator (% growth rate) 27.8 24.7 28.2 27.1 21.7 -34- COLOMBIA Annex Table 6 - Key Exposure Indicators 1988 1989 1990 1991 1992 (million US$ at current prices) Total Debt Outstanding (TDO) a/ 16,995 16,878 17,929 17,331 16,660 Net Disbursements a/ 723 -69 -375 1,223 -1,100 Total Debt Service (TDS) b/ 3,099 3,719 3,718 3,664 3,762 Debt and Debt Service Indicators TDO/XGS 229.0 210.1 189.3 168.1 162.0 TDOIGDP 43.3 42.7 44.5 41.1 34.3 TDS/XGS 41.8 46.3 39.3 35.5 36.6 Concessional/TDO 6.2 6 6 5.6 5.2 (Percentages) IBRD/IFC Exposure Indicators IBRD/IFC DS/Public DS 24.1 22.1 24.1 25.8 27.9 Pref. Cred. DS/Public DS 44.2 44.0 43.8 49.5 55.0 IBRDIIFC DS/XGS 9.0 8.0 7.9 7.7 9.3 aI ln&ludes public and publicly guaranteed debt, private non-guaranteed debt, use of IM cWedits, and ahot-term capital. bI Includes public and publicly guaranteed debt, private non-guaranteed debt, uee of IMF credits, and interest on horterm capital. MAP SECTION ．不