Colombia - Energy Sector Technical Assistance Project

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U 2 1 - I H; [I - _ 4 _ 0 ) p - P 9-9 0 1 gq.4U a.;. - I ii -, *1 II * MI .p.  CURRENCY EQUIVALENT (as of November 1994) Exchange rate used in this study: US$ I = 840 Pesos FISCAL .EAR OF GOVERNMENT OF COLOMBIA January 1 - December 31 ENERGY CONVERSION FACTORS 1 TOE 7.3 bbl 1 MTOE = 12.4 TWh (heat content equivalent) I kcal = 3.968 Btu I CF of gas = 1000 Btu I kWh 860 kcal I m3 gas = 9000 kcal  -ii - FOR OFFICIAL USE ONLY ACRONYMS ACIEM Colombian Association of Electrical and Mechanical Engineers ANDI Asociaci6n Nacional de Industriales BOO Build, Own, Operate CARBOCOL Carbones de Colombia SCI Colombian Association of Engineers CNE National Energy Commission (Comisi6n Nacional de Energia) COLGAS Compaflia Colombiana de Gas CONPES Consejo Nacional de Politica Econ6mica y Social CORELCA Corporaci6n Electrica de la Costa Atlantica CVC Corporaci6n Aut6noma del Valle del Cauca DANE Departamento Administrativo Nacional de Estadistica DNP National Planning Department (Departamento Nacional de Planeaci6n) DSM Demand-side Management ECOPETROL Empresa Colombiana de Petr6leos EBB Empresa de Energia de Bogoti EEC European Economic Community EMCALI Empresas Municipales de Cali EPM Empresas P6blicas de Medellin ESMAP Energy Sector Management Assistance Program FEN Financiera Energetica Nacional INEA Instituto Nacional de Energias Alternas IBRI International Bank for Reconstruction and Development ICEL Instiuto Colombiano de Electrificaci6n ICONTEC Instituto Colombiano de Normas Tecnicas IDB Interamerican Development Bank IPC International Finance Corporation (World Bank Group) ISA Interconexi6n Electrica S.A. JNT Junta Nacional de Tarifas de Servicios Piblicos MHCP Ministry of Fmance and Public Credit MIS Management Information Systen MME Ministry of Mines and Energy OED Operations Evaluation Department, World Bank OLADE Latin American Energy Organization PCR Project Completion Report PROMIGAS Promotora de la Incorporaci6n de Gasoductos de la Costa Atlantica SIC Superintendencia de Industria y Comercio SIE Energy Information System TA Technical Assistance TERPEL Terminales de Distribuci6n de Derivados de Petr6leo Ltda. UNDP United Nations Developmert Program USAID US Agency for International Development This doumet has a resticted disibution and may b w d by rcpen oy in the pea*rna ohi ofwcL duisIts nts may not otwiw be dilosed withot Wod Bn a ithohutWli  - iii - ABBREVIATIONS $ Colombian Pesos bbl Barrel Bpd Barrels per day BTU British Thernal Unit cat Calorie CF Cubic foot CFd Cubic feet per day CIF Cost, Insurance and Freight CNG Compressed natural gas DSM Demand side management gal US gallon GDP Gross domestic product GWh Gigawatt-hour (109 Wh) IRR Internal rate of return kCF Thousand cubic feet kW Kilowatt J Joule LPG Liquid petroleum gas I Liter MBTU Million BTU MCF Million cubic feet MUS$ Million US$ MW Megawatt (106 W) NPV Net present value TJ TeraJoule (1012 J) TOE Ton of oil equivalept. TCF Tera cubic feet (IO-)  - iv - COLOMBIA ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT Loan and Project Summary Borrower. Republc of Colombia Implementing Agency: National Planning Department (Departamento Nacional de Planeacion, DNP) Beneficiaries: Ministry of Finance, Ministry of Mnes and Energy, Energy and Gas Regulatory Commission, Intercone)i6n Eletrica SA (ISA) Pove. Not applicable. Amount: US$11 million equivalent. Terms: Repayment in 17 years, including four years of grace, at the standard variable interest rate. Commitment Fee: 0.75 on undisbursed loan balances, beginning 60 days after signing, less any waiver. Financing Plan: See Schedule A Net Present Value: Not applicable Staff Appraisal Report: Not applicable  Estimated Project Costs (US$ 000): Components Local Foreign Total Regulation, Pricing, Energy PoQicy 550 4,500 5,050 Power Sector Assistance 260 2,500 2,760 Gas Sector Assistance 50 150 220 Environment 140 1,300 1,440 Energy Demand Management 100 750 850 Subtotal 1,100 9,200 10,300 Physical Contingencies 60 400 460 Price Contingencies 170 1,000 1,170 Project Coordinating Fee 70 400 470 Total 1,400 11,000 12,400 Proposed Financing Plan (US$ million) IBRD 11.0 Government 1.4 Estimated Disbursements (Bank FY) 1995 1996 1997 1998 1999 1.0 2.4 3.0 2.6 2.0 Cumulative 1.0 3.4 6.4 9.0 11.0 Economic Rate of Return: Not Applicable Poverty Category: Not Applicable Environmental Classification: B Staff Appraisal Report: Not Applicable  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THIE IBRD TO THE EXECUTIVE D)IRECTORS ON A PROPOSED LOAN TO COLOMBIA FOR AN ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT I submit to your approval the following memorandum and recommendation on a proposed loan to Colombia for the equivalent of US$ tI million to help finance a project for Energy Sector Technical Assistance. The loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including 4 years of grace. Background I. Colombia has abundant energy resources: proven oil reserves are currently on the order of 3.2 billion barrels, equivalent to a Reserves/Production (RIP) ratio of around 20 years; proven (8.3 rillion cubic feet ) and probable gas reserves amount to around 8.8 trillion cubic feet, equivalent to a R/P ratio of about 70 years; coal reserves are estimated to be on the order of 2.2 billion tones (R/P in excess of 100 years); the hydroelectric potential is around 90 gigaWatt (GW), of which less than 10% (about 8 GW) has been installed. Despite the abundance of energy, the sector faces serious problems: the electricity subsector was in dire financial straits until recently, exacerbated by a dramatic supply crisis in 1992-93 which curtailed supply by up to 25%; the coal subsector has had a prolonged shortage of funds withn the principal state-owned enterprise; finally, despite the volume of reserves, natural gas has been supplied to a minimal proportion of potential users. 2. Since taling office in 1990, the Gaviria government has launched major economic reforms, characterized by opening trade through reduced tariff barriers, exposing economic agents to competition and fostering private sector participation in areas where the public sector traditionally prevailed. Some areas where this policy is being applied are the ports, the railways, state-owned banking, state-controlled industial enterprises and social security. The Samper Government (1994- 1998) policies have emphasized socially oriented priorities, but it has continued the Gaviria-era strucural reforms. The energy sector is another area where the Government is currently promoting these policies; an initial target for reform, due to the prominence of its problems, is the power subsector, to be followed by the hydrocarbons industry starting with natural gas. 3. Energy will soon occupy an even more prominent position within the economy: Colombia will fice an oil boom from newly discovered oil fields that could put the economy on a faster growth path; by the end of the centunty, Colombia can become a competitive upper-middle-income economy with a fist-growing service sector, a more selective but also more efficient and outward- oriented manufactwing sector, and a strong export base, if the oil windfill is effectively managed and its competitive edge is consolidated. 4. The Energy Sector. Until 1990 there was, in practice, no single insttution responsible for overall energy policy, and although the Ministry of Mines and Energy (MNE) nominally exercised this function, it was overwhelmed by sector enterprises with vastly greater resources. As a  -2 - consequence, oil policy was largely deternuned within ECOPETROL, the state oit corporation; power sector policy was determined through a complex interaction of five major generating companies and ISA, an interconnection and generation enterprise (created in the late 60s with Bank support); natural gas policy feil within the realm of ECOPETROL and its development was, at least until the late 80s, a secondary consideration; since the late 70s coal policy has been entrusted to CARPBOCOGL a sate agency currently being resctured. Electricity pricing was the responsibility of a Tariff Board which determined both bulk and retail tariffs, whereas prices for oil products were promulgated by MME. Coal is the only product which has been exempt from state-dictated prices. 5. The energy sector has acquired an increasingly high profile within f'e country's economy. The discovery and commercial development of the Cusiana oil field with proven reserves of 2,000 million barrels will undoubtedly have a major impact on the Colombian economy and energy sector. It wilt ensure steady growth of oil revenues and will provide a gas source in the center of the country to maintain, after year 2000, the development of the gas market when supplies, heretofore concentrated on the Atlantic coast, will start to decline. 6. The power subsector has experienced major problems during the last decade. In the 80s it becane the source of considerable financial difficulties due to overbuilding of generating facilities which led to significant macroeconomic dislocations. Paradoxically, it also faced a supply crisis due to an unprecedented drought in the early 90s, which aggravated sectoral problems caused by inadequate planning, low efficiency, and poor maintenance These crises provided the impetus for embarldng on radical institutional reforms. 7. Despite the large volume of reserves, the natural gas industry is at an early development stage, and its availability has been limited to gas and oil-producing regions. Major cities such as Cali and Medellin lack supplies in the absence of a national pipeline network. Power sector problems prompted the Government to focus on natural gas development and LPG distribution as economic substitutes for electricity. During the last two years, two major factors have converged to provide new impetus to the development of the natural gas industry and to raise its profile in the Government's agenda: on one hand, massive power rationing highlighted the vulnerabilty of the electricity sector to hydrological contingencies which the use of natural gas could mitigate both by substitting electricity at the final-use stage and by fueling low cost, efficient, turbines; on the other, very large volumes of associated gas were discovered which practically doubled the country's reserves. In order to develop the natural gas industry's potential, ECOPETROL undertook the organization of a trunk gas pipeline system which will reach the major urban markets by late 1995. 8. A number of the problems that the sector faces have institutional origins. In the 60s and 70s the state increasingy became the major owner in energy enterprises, with a consequent slackening of efficiency incentives and the virtual disappearance of accountability. The symptoms of serious problems in the energy sector became alarming in the nid-80s with the power sector's financial crisis; it then became evident that energy policy should be given a cohesive nature in order to address the issues of excessive investment in electricity generation and the underdevelopment of the gas subsector. In 1990 an OED study', developed during a two year period with the OEBD, Colombi-Tlhe Power Sector and the World Bank. 1970-1987. Repot No. 8893 (June 28, 1990).  -3 - participation of Colombian experts, identfied many of the weaknesses of the power subsector and recommended its restructuring through the introduction of adequate regulation and private sector participation. Since 1991 the Bank has supported the reshaping of the powver sector in order to introduce market forces by promoting competition and private sector participation. 9. Government Policy. The Government has a well-defined policy for electricity within a sector-wide perspective and clear objectives for the gas sector set out in the National Gas Plan. A definite policy for the oil sector has yet to be structured; nevertheless, it is a Governent objective to reduce its presence in the oil industry and it has already sold its petroleum distribution companies. An overall energy policy has not yet been formulated in detai but the Government recognizes its need and has requested support for this purpose. 10 Government policy for the power subsector consists of: (a) introducing competition by creatig a wholesale market for electricity und an open-access transmisson network managed by an independent grid operator company; (b) disengag itself from direct participation in electnicty production and distribution through divestment of power plants and udtiles and undertaldng the development of new generating stations with private sector participation; (c) introducing reguation as a means to both attract the private sector and to prevent monopolistic behavior where market mechanisms are ineffective; and (d) introducing pricing reforms to reflect costs amd to narrow the focus of subsidies in order to target the needies sectors of the population. 11. In the gas subsector the Government aims at developing this relatively neglected resource and, in the process, correcting the uneconomic use of electricity for heating. The Government's policy in this respect consists of: (a) promoting the increased share of gas-fired electricity generation in order to reduce the reliance on hydro-electric generation and increase system reliability; (b) attracting the private sector to build an infrastructure of gas pipelines and distribution networks and developing new markets for gas; (c) stimulating exploration and development of new gas reserves to supply expected increases in demand; (d) creating an efficient gas trading and transportation system with private sector participation; and (e) fostering a market similar to that being developed for power. 12. The Government has taken the first sters towards implementing these policies: the incorporation of private capital in power generation and gas transmission has been initiated; the independent grid operator company is being organized; an Energy Regulatory Commission has been created, together with a much-needed Energy Policy Unit to address overall sector issues. 13. The Regulatory Commission is continuing to promote the pricing adjustment policies which have been implemented in the last few years. Electicity tariffs have been continuously revised in order to reach economic cost levels and eliminate price distortions within consumer sectors; the following table summarizes average tariff levels as a percentage of economic costs during 1991-1993 as well as the target levels for 1994-1997: YEAR 1991 1992 1993 1994 1995 1996 1997 Percent of Economic Cost 72.7 70.9 83.0 87.0 92.7 97.7 100  The tariff adjustment program is being implemented on schedule and the targets for 1994 have already been met. 14. On average natural gas prices cover economic costs. Natural gas costs are on the order of $1 per miUion Btu (Mbtu) at the wellhead; wholesale and retal costs vary considerably according to location; for example, they are on the order of $1.8/Mbtu for wholesale deliveries and $3.8/Mbtu for retail delivery in Bogota compared to values which are expected to be 2o7% higher in Cali once the pipelines are put in place. Prices are set by MME and exhibit wide ranges of variation fom one market to another which reflect the fragmented nature of the industry. With the development of new trunk pipelines and the interconnection of producing fields, bulk prices should become more uniform and a pricing policy will have to be developed to address the issues which will arise .l the context of an integrated gas industry structure. 15. Environmental policy, embracing socioecononic and sociocultural problems, is now being actively taken into account in power sector planning and a Ministty of the Environment was recently created. A further step in this direction consists of consolidating energy-related regulations and developing sector-specific guidelines. 16. Due to these reforms, the implementation of energy policy in Colombia is at a critical point: major responsibilities have been vested in new institutions such as the Energy Regulatory Commission and the Ener Polcy Unit, and the open-access power grid and gas sector and pipeline operating companies have yet to be organized. There is an urgent need for strengthening the new agencies in order to enable them to discharge their functions efficiently. 17. Country Assistance Strategy. Colombia's prospects and the Bank's Country Assistance Strat (CAS) were discussed by the Board on December 16, 1993. The proposed project is fuly consistent with the CAS. The country assistance program seeks to help the Government consolidate and increase its structural refonns, to support private-sector-led growth, to improve the delivery of basic services, to address the degradation of the natural resource base, and to strengthen institutional capacities. The strategy recognizes that the country's extenal position will become substantially stronger and the Bank's efforts wil consequently focus on the quality of new lending, with a volume of resource transfers which takes into account the Government's priority of managing significant foreign exchange inflows. Policy reform, insttutional development and improved implementation will be stressed. The Bank will maintain a sound lending program with emphasis on technical assistance to help the Govemment in the process of decentralization and modernization of the State. The proposed Technical Assistance responds directly to this strategy by focusing on the institutional aspects of the energy sector and the implementation of reforms. i8. The 1994 World Development Report explores ways for developing countries to imnprove the provision and quality of infrastructure services, including electricity and piped gas. The report identifies the basic cause of poor past performance as inadequate institutional incentives for improving the provision of infrastructure, which has been the case in the Colombian power and gas sectors. The report recommends addressing the problem through commercial management, competition and user involvement.  19. The Bank's role regarding the electric power sector was formulated in detail in a 1993 Policy Paper2 which provides guiding pr; iples for Bank support of power sector restructuring programs. The recommendations consist of: (a) transparent regulation requiring countries to separate their govenunent's role as operator and owner of utilities from its policy formulation role, through independent regulatory bodies; (b) importation of services which the Bank would assist in financing for improving efficiency; (c) commercialization and corporatization whereby the Bank will aggressively support power sector strategies designed to reorganize the operation of utilities as commercial concerns; (d) commitment lendcng focused on countries clearly engaged in improving sector performance in line with the preceding principles; and (e) encouraging private sector investment. Excepting the importation of services, which does not apply to Colombia -a country with a proven record of managerial capability-, the Govermment is proving its commitment to insatitional reform by directing its efforts towards implementing all of the proposed recommendations. 20. The Bank has supported the Government in the process of power sector institutional reform since 1991. The Bank has helped to shape and to define a new vision for the energy sector by: (a) supporting analyses of the sector's problems and identifying the issues; (b) exploring the options for addressing them; (c) fostering constructive debate concerning past conceptual and systemic deficiencies attnbutable to inadequate institutions; (d) designing a reform program starting with the power subsector; and (e) by supporting the implementation of this program. As an essental component of institutional reform in the energy sector, the TA project will also focus on the gas subsector where the development of a natural gas industry wili complement power policy by lowering electricity generation costs and substituting end-use electricity consumption, thereby fostering a rational pattem of energy use consistent with Colombia!s resources. The Bank's involvement at an early stage seeks to ensure an effective development of the natural gas subsector and to avoid problems which affected the power subsector in the past. 21. in regard to environmental and energy demand management issues the project will aim at providing the energy sector with a head start in developing regulations and incorporating them into its expansion strategy, thereby supporting other institutions, such as the Ministry of the Environment, with viable guidelines to enable sector development whilst simultaneously respecting environmental constraints. 22. Project Objectives. The proposed TA projeci provides a direct application of the country assistance strategy by preserving the momentum gained over the immediate past regarding institutional reform by passing from the study and design stages to the more resource-intensive phase of recommended actions. The objectives of the project are: (a) to implement regulatory reforms by strengthening the newly created entities in charge of regulation and energy policy fomulation and implementation for the power and gas sub-sectors in order to help them build experience and thereby increase their chances of performing efficiently; (b) to implement strategies specifically designed for the energy sector, respecting environmental concerns and constraints and attracting private investment in the sector; and (c) to develop a demand-side management strategy and assist in its implementation. 2 World Bard's Role in the Electdc Power Sector, The World Bank, 1993  23. Objectives specific to the power sub-sector are to achieve the divestment of state-owned assets or enterprises, to attract new private investments for system expansion, and to execute the instiutional reforms required for putting in place a fiUy competitive market at the generation level. Objectives specific to the gas sub-sectors are to assist in developing the industry's structure and regulations for building up a gas market, and to assist in seting up the required organizations. The enviromnental care objecive is to develop a consistent set of environmental guidelines for energy sector development. Demand-side management objectives are to develop standards and guidelines for efficient energy use and to disseminate them among consumers and industries. 24. In the regulatory and policy making areas, the project will seek to implement regulatory reforms by strengthening the recently created regulation and energy policy orgapizations in order to help them build up experience, thereby increasing thei chances of performing efficiently. Objectives specific to the electricity sector are to achieve the divestment of state-owned assets and enterprises, to attract new private sector investment for system expansion and to continue the institutional reforms required for putting in place a competitive market at the generation level. Objectives specific to the gas sector are to assist in developing the industry's structure and regulations for building up a gas market and to assist in setting up the required organizations. The environmental care objective is to develop a consistent set of environmental guideEnes for energy sector development. Demand side management objectives are to develop standards and guidelines for efficient energy use and to disseminate them among consumers and industry. 25. PIroject Desription. According to the project objectives, the proposed Technical Assistance has been broken down into the following components (refer to Amex 4 for details): (a) Overall Regulation, rding and Energy Poicy: assistance to the Energy Regulatory Commission and to the Energy Policy Unit for developing a compeive industry, disseminating information regarding utiiities' performance, protecting uses, pncing services efficiently, controlling and focusing the allocation of subsidies to the poor, and structuring energy strategies, taking into account enviromnental and socioeconomic constraints; (b) Specific Power Sector Assistance: hiring of engineering and investment banling assistance and privtizaon exports to help mobilze private capital (both domestic and foreign) for new power generation and distribution projects, divestnent of exsting public-sector controlled power plants, corporatization and privatization of utilities, and creation of the new grid company (ISA-Transmission) to facilitate competition between electricity generators; (c) Specific Gas Sector Assistance: assistance in developing a new industry structure and regulations for the natural gas market incorporating private sector participation and competition; assistance to the Govenmment in attracing private companies to the sector;  7- (d) Environment: assistance in executing sectoral environmental assessments together with project environmental assessments, formulating energy sector enviromnental regulations and guidelines, and promoting user awareness and participation in the definition of energy sector projects; (e) Energy Demand Management and Safety Enhancement: development of a demand side management strategy for efficient energy use; assistance in devising mechanisms for disseminating information to help users in making fuel and equipment choices. 26. Specific outcome/unplementation indicators linked to each of the major project objectives are as follows (refer to Annex 4 for milestones and timetable): (a) The consolidation of a competent team of experts within the Energy Regulatory Connission who will produce regulations for use of the transmission system, rule on regulated prices and conduct a first comprehensive regulatory review of a power uility before the end of the project; (b) Development and publication of a comprehensive energy strategy; (c) The sale of assets or shares in 3 power utilities and the awarding of contracts for not less than 400 MW of new generating capacity; the creation and satisfactory operation of the new transmission company; (d) The development of a plan for a new gas industry structure and the creation of the new company (or companies) involved in the plan; (e) The publication of an energy sector environmental policy, and the publication of the appropriate legislation and guidelines together with an upgrading of staff skills for environmental management and planning; and (f) The publication of a demand-side management strategy together with a plan for implementing recommendations and disseminating information to users. 27. The planned outputs of the project are summarized in the action plan in Annex 4. Monitoring of project progress will involve both control of technical assistance output through progress reports and review meetings with consultants, and tracking of implementation actions by the Government. The recipients of technical assistance will be the institutions involved in sectoral reforms, namely the Mnistty of Finance, the Ministy of Mines and Energy through its Energy Policy Unit and its Institute of Alternative Energies, ISA, and the Energy Regulatory Commission. This list may be extended to other institutions, such as the Superintendency of Public Services, insofar as energy matters are concerned. 28. Rationale for Bank Involvement. The Bank's active involvement in assisting policy formulation and implementation began in 1991 with the discussion of the 1990 OED report which  -8- was widely debated in a semina organized by the Colombian authorities in 1991. This seminar was followed by a number of similar events sponsored by the Bank which provided a forum for the participants to discuss sector issues, and particularly the politically sensitive questions regarding sectoral structure, the role of Government in the sector, as well as the array of possible solutions. 29. The Bank has supported power sector reforms over the last three years through a phased approach: a first phase, sponsored with ESMAP funds, defined the issues, identified the origins of many of the problems and the options for institutional reform. The first phase (between March and July 1991) ended with a seniinar and a workshop where the Government, backed by sector authorities, firmly endorsed the power sector restructuring program. There followed a second phase (between August and December, 1991), supported by Japanese Grant Facility funds, where a number of task forces staffed with representatives from the sector, together with considerable consulting support, drafted an Electricity Law which was approved by Congress, and enacted in July 12, 1994. A third, much more resource-intensive phase, was initiated by the end of 1992: its purpose consists of producing the detailed power sector regulations based on the Government's policy and the findings of Phase 2. The consultants hired for the development of phases 2 and 3 have been financed by the Bank through the Public Sector Reform Loan. 30. The Bank's participation in institutional reform has now matured into a project with tangible results, such as the creation of the Energy Regulatory Conunission and a firm commitment to seting up a workable competitive market for electricity generation. Effictive action has also materialized in the area of private sector participation which has been promoted through: (a) the instailation of 95 MW (Mamonal) of private generation in an industrial complex in Cartagena; (b) a 150 MW BOO contract awarded through international competitive bidding (ICB) to Seviliana de Electricidad, a Spanish utility (both of these projects are already in operation); (c) a 880 MW BOO contract (ICB) in Barranquilla awarded to a consortium led by ABB and urrently being negotiated; (d) the award of a 150 MW ICB project awarded to ENRON (Termovalle); and (e) invitation to pre-qualification for a 300 MW BOO thermal plant on the Atlantic Coast (La Loma). The generation capacity of these plants totals 1575 MW, which represents 16% of the total installed capacity in Colombia. These developments are to be followed shortly by the organization of the open access network operated by an independent transmission company. These achievements should be seen as the consequence of the effort that went into devising the sector's reforms. The TA project will support the restructuring program which will require greater funds given the increasing complexity of the tasks which lie ahead. 31. The Technical Assistance project seeks to facilitate and speed up the transition from publicly-owned sector organizations in power and gas to competitive enterprises with private participation. The introduction of private sector participation will include divestiture of selected assets and private participation in new investment. The project will respond to the need for getting new institutions and the regulatory system to perform adequately; it thereby addresses the policy recounendations formulated in the OED study. The start-up and leaning processes involved in setting up the new entities can be exceedingly lengthy and prone to error. The TA project is designed to hasten the process whilst avoiding potentially costly significant mistakes. In order to ensure a successful transfer of knowledge, the project will inevitably have to span a significant  -9- period of time (estimated to be around 4 to 5 years); otherwise, given the volatility of institutional memory, the resources are likely to be lost. 32. Complementing the TA project, an investment project (Power Market Development) is being prepared to develop the infrastructure required for the creation of a competitive bulk market for electricity sales. In the context of a comprehensive strategy statement expected to be provided by the Government to implement the power sector reform proposals described above, this follow- on project will: (a) strengthen and expand the national load dispatch center and the financial settlement center, to ensure the smooth functioning of the mechanisms for energy interchange and the corresponding cash flows; (b) strengthen and expand the interconnected transmission system, removing existing bottlenecks, aimed at increasing the competition for sales of electricity, and facilitating entry to the market; and (c) train those ISA-TRANSMISSION 3personnel responsible for load dispatch and settlement. 33. The Bank's involvement in the development of strategies and advice on consultant selection, supervision and evaluation will provide valuable benefits by ensuring that objectives are being achieved and by keeping the process on track through periodical project audits. In order to sustain this process, the Bank can bring to bear its knowledge gained through previous sector studies, and its experience with sector reforms (both successful and unsuccessful), including privatization in Argentina, Chile, Peru, Bolivia, Pakistan, Jamaica and the Philippines. 34. Lessons from previous Bank Involvement. The Bank has lent more than US$ 2 billion in 31 operations to support the Colombian energy sector, mainly by financing investments in power generation and transmission. The 1990 OED review found that the projects generally met their physical objectives, and helped develop technical capabilities in the beneficiary agencies, but failed to establish a sustainable institutional and financial framework for the sector. 35. The last tranche of the 1987 Power Sector Adjustment Loan w>, canceled due to the institutional pitfills encountered during its execution. The corresponding PCR, confirms OED's findings (refer to Annex 1 - Lessons from the Bank Experience in the Power Sector): (a) a complex and cumbersome institutional sttucture with pervasive political and regional pressures that block management efficiency incentives; (b) poor financial performance in individual utilities and the sector at large; (c) low and distorted electricity tariffs; and (d) a sectoral investment program that overly stressed generation at the expense of distribution, and suffered from large time and cost overruns. The TA will support restructuring programs for the power and the gas sectors aimed at addressing all of the primary institutional causes of these problems and will draw on the experience gained in similar projects (e.g. Pakistan, Jamaica). 36. Key lessons which have been learned from other Bank TA loans include the need to: (a) limit the scope and size of the technical assistance loan to keep it focused and manageable; (b) ensure consistency and coordination between the legal/regulatory reform and the corporate restructuring/privatization process; (c) ensure the continuity of the reform program, during and after the execution of the technical assistance operation; and (d) have well-defined loan 3 A new company, to be cseated from existing assets of ISA, dedicated to power transmission, economic load dispatch and financial seltlement among participants of the national power pool.  -10- administration and financing arrangements in place up-front. The proposed TA has been designed with these principles in mind. 37. Costs and Financing. The total cost ofthe project is estimated to be about US$ 12.4 million, with a foreign currency element of about 89%/. The amount of the Bank loan, would be US$ 11 million (Schedule A). 38. Implementation. The project will be managed at two levels: a Coordinating Group will be in charge of overall orientation, and an Executing Unit will be in charge of project administration. The Coordinating Group will be made up of representatives from the National Planning Department, the Mnistry of Mines and Energy, the Mnisay of Finance and, the Energy Regulatory Commission. A project coordinator will be in charge of the executing unit and will be assisted by consultants hired to do specific tasks as required (Annex 4 presents the Project Implementation plan). All reports and recommendations of the consultants engaged to assist in the execution of the project witl be submitted to the Bank. The Executing Unit will have primary responsibility for preparing terms of reference and short lists, and selecting consultants, subject to Bank approval. Bank staff will hold a project launch workshop in Colombia short after loan signing in order to review planned startup actions. Inputs required to supervise the project are estimated to total about 12 staff-weeks per year during the first two years and 10 staff-weeks per year subsequently. A midterm review of the project to detemiine the need for adjustments will be held before October 31, 1997, or whenever 50% of the loan has been committed, whichever is earlier. Annex 2 summarizes the Operational Guidelines for loan administration and consultant hiring, contracting and supervision. Draft TOR's for consulting assistance to prepare/implement the project components are available in the project files. 39. The Government and the Bank agreed to use UNDP to administer the contracts and payments under a management arrangement satisfactory to the Bank (Annex 3). Its management fee of US$ 0.4 million will be financed from the proceeds of the loan. UNDP will disburse directly to consultants and will maitWain supporting documentation on file for review by Bank supervision missions. 40. Project Sustainability. By supporting the implementation of institutional reforms which promote private sector participation, economic pricing, environmental protection, and efficient energy uses, the project will help the Govermnent establish conditions for a sustainable operation and development of the energy sector. 41. Environmental Aspects. The Project has no adverse environmental effects. It has been designed to introduce environmental considerations and guidelines into energy sector developments and will include Sector Environmental Assessments and Project Environmental Assessments. Because of the special attention given to these issues it belongs to Environmental Category B. 42. Poverty Category. Not applicable to this project. 43. Program Objective Category. The Project belongs to the category of Public Sector Management and Private Sector Development.  44. Procurement. The loan witl finance consulting services, computers and ancillary equipment, and training. Methods for procurement and disbursement are shown in Schedule B. Procurement of goods to be financed with proceeds from the loan would follow procedures in accordance with Bank Guidelines for procurement. The contracting of consulting firms for services totaling about US$ 9.9 million to caffy out sectoral, institutional and management studies under the various components of the project, and of individual consultants for the strengthening of MME and the operations of the Project Coordinating Unit, would be in accordance with Bank Guidelines for the use of consultants and use the Bank standard contract form. Prior Bank review or approval of budgets, short lists, selection procedures, letters of invitation, proposals, evaluation reports and contracts under the Bank's Consultant Guidelines shall not apply to contracts estimated to cost less than US$ 100,000 equivalent each, in an aggregate not expected to exceed US$ 500,000. However, this exception to prior Bank review shall not apply to: (a) the terms of reference for such contracts; (b) single-source selection of consulting firms; (c) assignments of a critical nature, as reasonably determined by the Bank; or (d) amendments of contracts for the employment of consulting firms raising the contract value to US$ 100,000 equivalent or above. Procurement of computing equipment and software, and necessary communications and ancillary equipment for the imnplementation of the energy regulation information system, and strengthening of the electricity dispatching center, and the general strengthening of MME units, for an estimated amount of about US$ 0.5 million, would be procured through International Competitive Bidding (ICB) using mainly a 2-step bidding procedure, with standard Bank bidding documents, in packages of not less than US$ 100,000 each. An estimated US$ 0.6 milion of the loan proceeds would be used for the reimbursement of training expenses such as tuition fees and travel expenses for courses and seminars in accordance with a plan to be previously approved by the Bank, and for fees of individual consultants acceptable to the Bank. The administrative expenses of UNDP, which would be hired as procurement agent under a Management Service Agreement with DNP to expedite project implementation, would be paid with proceeds from the loan directly to UNDP. Prior review of documentation and procurement decisions will be required for all procurement including the proposed UNDP management service agreement. 45. Disbunements. The Planning Department will request disbursements and submit these requests through the Executing Unit to UNDP for processing. UNDP will disburse payments directly to consultants. Expenditures for individual contracts of goods or services, for which prior review by the Bank is not required will be disbursed against Statements of Expenditures (SOEs) certified by the Banco de la Republica of Colombia. Detailed supporting documentation for expenditures will be kept by UNDP and submitted by the borrower to the Bank. The application for withdrawal submitted by the Borrower to UNDP will be in amounts of about US$ 500,000. UNDP will submit full documentation for all contracts requiring Bank's prior review. Conditions of disbursement for training will be that the corresponding expenditures have been included in a plan satisfactory to the Bank, submitted by the Executing Unit. The responsibility of the Executing Unit. Disbursements, representing mainly expenditures under short term technical assistance, will be made over a five-year period, which is close to the 4-year average disbursement profile for technical assistance projects in the Latin America and Caribbean Region. Since the implementation of energy sector reforms has already started, retroactive fmancing not to exceed US$ I million (i.e., 10% of  -12- the loan amount) would be applied to finance eligible expenditures made after July 31, 1994. The closing date of the proposed Loan would be December 31, 1999. 46. Accounts and Audit. UNDP will maintain separate accounts for receipt of project funds and payments for all project activities. Accounts and statements of expenditures of the project and ofthe Executing Unit, would be audited each year by auditors acceptable to the Bank in accordance with the Bank's Auditing Guidelines. The audited reports would be submitted to the Bank not later than four months after the close of the fiscal year. 47. Actions Agreed. During negotiations, agreement was reached on: (a) a project implementation plan, including timetable, presented in Schedule 5 to the loan agreement; (b) that the Borrower will furnish to the Bank (i) not later than August in each year, a forecast for the sources uses and funds during the next calendar year, and (ii) 30 days after the end of each calendar semester, a report on the results of the Project and on the meeting of the targets set in the implementation program; and (c) that at the time of submitting to the Bank each report to be submitted pursuant to the provisions of paragraph (b) (ii) above, review jointly with the Bank the time-table for the Implementation Program, and revise such time-table if so agreed with the Bank 48. Conditions of effectiveness will be (i) the signature of a project administration agreemnent, satisfactory to the Bank, between UNDP and the Government, and (fi) the coordinating group and the executing unit shall have been established in form and subsistence satisfactory to the Bank. 49. Benefits. The proposed loan would assist the Government in the implementation of legaVregulatory reforms for the energy sector and the strengthening of associated public institutions, which would improve efficiency and attract private investors to the energy sector. Economic pricing of electricity and gas would eliminate a financial burden to the Government by allowing these sectors to fund their own investment needs, and would reduce energy waste and pollution. Sector efficiency would be further enhanced through increased private participation, and scaling-down of government intervention which would be focused on market regulation. Environmental monitoring and management of energy-related operations would be much improved. 50. Risks. The project poses no significant technical risks and enough momentum seems to have been developed to carry the power and gas sector reform implementation over, which is supported by the Central Govenmient administration that took power in September, 1994. The major risks relating to the implementation of the sector reforms include: (a) insufficient institutional capabilities in government to develop and enforce the regulations needed for the successful implementation of the new energy sector structures; (b) a political reluctance to authorize tariff adjustments, and the opposition to reform of interested groups such as the unions, the management of existing utilities, and some local govenmients; and (c) the possibility of a slow response from the private sector. These risks will be mitigated substantially through: (a) training (funded by the loan) and in-house technical assistance during the first years of operation of the new Energy Regulatory Commission; and (b) advice regarding the prudent use of Government guarantees to private investors together with mechanisms designed to prevent unjustified and excessive use of such guarantees and pre-established rules for phasing them out.  - 13 - 51. 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 17, 1994  - 14- SCHIEDULE A PROJECT COSTS AND FINANCING (US $000) COSTS LOCAL FOREIGN TOTAL 1. REGULATION, PRICING, ENERGY S50 4,500 S,050 POLICY Regtlatoiy Commission Assistance 300 3,000 3,30t Energy Policy Unit 250 1,500 1,750 2. POWER SECTOR ASSISTANCE 260 2500 2760 Gen. and Dist. Divestment 70 1,000 1,070 Private Sector Investment in future Plants 60 850 910 Grid Operator 130 650 780 3. GAS SECTOR ASSISTANCE SO IS0 200 Organizing Gas Industy Enterprises 50 150 200 4. ENVIRONMENT 140 1,300 1,440 Sectoral Environment Assessment 40 400 440 Project Environment Assessment 100 900 1,000 S. ENERGY DEMAND MANAGEMENT 100 750 350 Demand-Side management strategr. 100 750 850 promotion of safe and efficient gas use TOTA BASE COST 1,100 9,200 10,300 Physical Contingencies 60 400 460 Price Contingencies 170 1,000 1,170 Project Coordination Unit 70 400 470 TOTAL PROJECT COSTS 1,400 11,000 12,400 FINANCING Borrower 1,400 - 1,400 IBRD Loan - 11,000 11,000 TOTAL FINANCING 1,400 11,000 12,400  - 15 - SCHEDULEBI Allocated costs, US$ 000's A. PROCUREMENT METHIOO ICB LCB Other NBFd VTOTAL Consulting Services L/ 9,500 1,000 10,500 19,5001 19,5001 Computing, Communications and Ancillazy Equipment bl 500 50 550 [5001 [500] Training Expenses c/ 600 200 800 16001 [6001 Consulting Services for the Project Coordination Unit a/ 400 1S0 550 14001 [4001 UNDP administrative fees TOTAL S00 0 10,500 1,400 12,400 1500 110,5001 [110001 a/ Contactng of Consulting firms and individual consultants in accordance with Bank guidelines. kl Two step International Competitive Bidding c Expenditures acceptable to the Bank to be reimbursed. d/ Non-Bank Financed: contracting under Borrower's procurement procedures. Note: Figures in parentheses are the respective amounts financed by the Bank Loan. B DISBURSEMENT Amount of the Percentage of Expenditures to be Loan Allocated financed with Proceeds from loan Category US$ 000's Consulting Services 9,900 100% for expenditures Equipment and Maerials 500 100% for expenditures Reimbursement Expenses for Training Program 600 100%/0 for expenditures UNDP Administration Fees TOTAL 11,000 Estimated Disbursements (Bank FY) 1995 199 1997 1991 1999 Anmual 1 2.4 3 2.6 2 Cumulative 1 3.4 6.4 9 11 Economic Rate of Return: Not applicable Poverty Category: Not applicable Enviromnent Classification: B  - 16- SCHEDULE C COLOMBIA ENERGY SECTOR TECHNICAL ASSISTANCE PROJECT Timetable of Key Processing Events (a) Time taken to prepare: 18 months (b) Prepared by: Ministry of Mines and Energy, Department of National Planning, and ISA, with Bank assistance (c) First identificationtpreparation nission: May 1993 (d) Appraisa mission departure: November 1993 (e) Negotiations: November 1994 (f) Planned date of effectiveness: Febnruy 1995 (g) List of relevant PCRs and PARs: Colombia - The Power Sector and the World Bank - OED Report No. 8893 of June 28, 1990. Power Sector Development Finance Project (Loan 2401-CO) - Project Completion Report No. 12116 of June 30, 1993.  -17- SCEDULE D A. STATEMENT OF BANK LOANS & IDA CREDITS IN COLOMBIA (as of September 30. 1994 Amount (less Ln/Cr Fiscal cancellations) Undis- Number Year Borrower Purpose Bank IDA bursed 118 Loans and one IDA Credit fully disbursed 5,300.57 23.48 2449 1984 EPM Rio Grande Multipurp. 156.80 3.08 2470 1985 EMC Cucuta Water/Sew 18.50 4.39 2667 1986 HIMAT Irrigation I 114.00 42.48 2909 1988 Fondo Vial CajaAgraria 15.00 7.71 2961 1988 CajaAgraia WS &WasteSector 150.00 59.80 3010 1988 BCH Ed Sector 100.00 48.03 3025 1989 Colombia 5th Sm Med Entp 80.00 3.78 3113 1990 B. de la Rep. Sm-Scale IrTig 50.00 36.78 3157 1990 Colombia Rural Rds Sector II 55.00 11.20 3201 1990 Fondo Vial Comm Child Care & Nu. 24.00 10.68 3250 1991 Colombia Rural Dev Invest 75.00 34.71 3278(S) 1991 Colombia Public Sector Reform 304.00 1.05 3321 1991 Colombia Indust Restruct 200.00 141.44 3336 1991 Coloanbia Munic Devt 60.00 24.09 3449 1992 Colombia IFI-Restrc.&Divst. 100.00 75.90 3453 1992 Colombia Third National Roads 266.00 165.66 3575 1993 Colombia Agricultural Credit 250.00 250.00 3608 1993 Colombia Export Development 50.00 50.00 3615 1993 Colombia Municipal Health Serv. 50.00 49.55 3669 1994 Colombia Public Fin. Mgmt. 30.00 28.95 3683 1994 Colombia Secondary Eduic. 90.00 90.00 3692 1994 Colombia Natural Resource Mgmt. 39.00 39.00 2,277.30 1,178.28 TOTAL 7,577.87 23.48 Of which repaid 4.222.82 11.47 Total held by Bank & IDA 3,355.05 12.01 Amount sold 50.99 Of which repaid 50.99 Total undisbursed 1.178.28  ^-18- B. STATEMENT OF IFC INVESTMENTS (as of SeDtember 30, 1994 Loan Equity Total (in Millions of US$) Total Gross Commitments 429.43 57.10 486.53 Less cancellations, teminations, exchange adjustments, repayments, writcoffs, and sales 329.73 39.87 369.60 Total Comniitments now held by IFC 99.70 17.22 116.92 Total Undisbursed IFC 10.00 1.20 11.20