Colombia - Power Sector Adjustment Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14800 PERFORMANCE AUDIT REPORT COLOMBIA POWER SECTOR ADJUSTMENT (LOAN 2889-CO) JUNE 30, 1995 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (annual averages) Currency Unit = Colombian Peso (Col $) 1985 US$1.00 Col$ 142.3 1986 US$1.00 Col$ 194.3 1987 US$1.00 Col$ 242.6 1988 US$1.00 Col$ 299.2 1989 US$1.00 Col$ 382.6 1990 US$1.00 Col$ 502.3 Abbreviations and Acronyms k (kilo) 10 (thousand) M (Mega) 10' (million) G (Giga) 10' (billion) T (Tera) 10 (trillion) P (Peta) 10 (quadrillion) E (Exa) 10" (quintillion) CASEC Comité Ambiental del Sector Eléctrico Colombiano CHB Central Hidroeléctrica de Betania CONPES Consejo Nacional de Política Económica y Social CORELCA Corporación Eléctrica de la Costa Atlántica CVC Corporación Aútonoma Regional del Cauca DNP Departmento Nacional de Planeación ECOPETROL Empresa Colombiana de Petroleos EEB Empresa de Energía de Bogotá EMCALI Empresa Municipales de Cali EPM Empresas Públicas de Medellín ESMAP Energy Sector Management Assistance Program FEN Financiera Eléctrica Nacional FODEX Fondo de Monedas Extranjeras FONADE Fondo Nacional de Desarrollo ICEL Instituto Colombiano de Energia IDB Inter-American Development Bank IRR Internal Rate of Return ISA Interconexion Eléctrica S.A. JNT Junta Nacional de Tarifas (National Tariff Board) LRMC Long Run Marginal Cost MCPS Monitoring Committee of the Power Sector MME Ministerio de Minas y Energia MHCP Ministerio de Hacienda y Crédito Público PSAL Power Sector Adjustment Loan SCPS Superior Council of the Power Sector SINSE Sistema de Información del Sector Eléctrico TAP Tariff Adjustment Program Fiscal Year Government: July 1 - June 30 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Colombia Power Sector Adjustment Loan (Loan 2889-CO) Attached is the Performance Audit Report (PAR) on the Colombia: Power Sector Adjustment Loan (Loan 2889-CO, approved in FY87) prepared by the Operations Evaluation Department (OED). The operation which, in its preparation stage, was successively envisaged as a "policy-based sector operation", an investment loan, and a combination of an investment and a fast disbursing loan, was approved as a sector adjustment operation. It mainly aimed at (i) developing a strong central planning and coordinating capability in the sector, (ii) progressing towards proper regulation, (iii) establishing a strong policy framework for efficient operation and adequate financial performance, and (iv) increasing awareness of the social and environmental issues in the sector. Adverse political and economic circumstances, together with an unrealistic design and the lack of ownership by Government and the sector of the measures at the core of the operation, led to major defaults. These delayed the disbursement of the second loan tranche. The Borrower proved unable to meet the conditions for third tranche release, resulting in its cancellation; disbursements came, therefore, to only 75 percent of the original loan amount. Substantial improvements in investment planning and in dealing with social and environmental issues in the sector took place, and the Energy Board was established as the nucleus of a future regulatory setup. The macro-economic, financial, and loss reduction objectives were not achieved. Neither was the expected management improvement in three utilities. The project's main lessons are that (i) ownership is required in all the entities involved, implying not only intellectual agreement but commitment to action by decision makers; (ii) realism about achievable goals versus desirable or even urgently needed goals is necessary; and (iii) the transformation, late at the design stage, of an investment loan into an adjustment operation requires a re-thinking of the list of measures to be enacted and their timing, to ensure that the operation still meets the Bank's quality criteria. Since the operation fell short of achieving most key objectives, the project outcome is rated as unsatisfactory. However, sustainability of the limited benefits that can be directly related to the loan is rated as likely. Institutional development is rated as negligible because recent positive developments in the sector only materialized following the 1990-92 financial crisis, after loan closing. The Borrower, on the other hand, considers this rating excessively harsh, ascribing substantial (albeit lagged) causality to this operation. Attachment 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. ■啗 FOR OFFICIAL USE ONLY Contents P reface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 B asic D ata Sheet .................................................. 5 Evaluation Sum m ary ............................................... 9 1. B ackground ................................................... 13 The Political and Economic Setting ................................... 13 The Colombian Power Sector in the 1980's ............................. 14 The Colombian Power Sector and the Bank .............................. 14 2. T he P SA L .................................................... 17 3. The Bank's Approach ............................................ 19 Government and the Bank's Approach in the Mid-1980's .................... 19 Building up Ownership by the Country of the Power Sector Reform ............. 20 4. Factors Affecting Program Definition and Implementation ................. 21 Political and Econom ic Instability ..................................... 21 Borrower Authority and Ownership ................................... 21 C om plexity .... ..... ............................... ....... .. . .. 2 1 A m biguity in Priorities ............................................ 22 Centralism versus Realism .......................................... 23 Investment Loan versus Sector Adjustment Loan .......................... 24 Was an Alternative Approach Possible? ................................. 25 Relations w ith IDB ............................................... 26 5. C onclusions ................................................... 29 R esults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 R atings . . . . . . . . . . . . . . . . . . . . .. . .. . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . 30 L essons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 Recom m endations ................................................ 32 Annexes A. Actions Planned in the Context of the PSAL ............................. 33 B. A Brief History of Loan Preparation .................................. 35 C. Comparison of Projected and Actual Financial Results ...................... 37 D. Comments received by the Borrower ................................... 41 E. Update on Sector Development and Bank Involvement ....................... 43 This report was prepared by Mr. Jean-Francois Landeau (Task Manager) and Mr. Rend Ribi, (Consultant) who audited the project in December 1994. Mmes. Maryvonne Mauprivez and Stacy Ward provided administrative support. This doctunent has a restricted distribution and may be used by recipients ordy in the Performance of their Lofficial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  3 Preface This is a Performance Audit Report (PAR) on the power sector adjustment operation the Bank has supported in Colombia. The associated loan (Power Sector Adjustment Loan -- PSAL --) amounted to US$ 300 million to be disbursed within 15 months of loan effectiveness against general imports except for specified ineligible items. The loan was subdivided in three tranches of US$ 150, 75, and 75 million, respectively. The Bank's Board of Directors approved the operation in December 1987; two directors opposing it. The loan was made effective in June 1988 at about the limit date stipulated in the Loan Agreement of March 1988; it was closed in September 1990, i.e. 15 months later than anticipated in the above agreement, after cancellation of US$ 75 million corresponding to the third tranche. This history reflects the difficulties experienced with the exceedingly complex operation prepared and implemented in a difficult political and economic environment and against the background of the changes in personnel and approach related to the Bank's 1987 re-organization. The PAR reflects the results of a desk audit based on the Project Completion Report (PCR) prepared by the Trade, Finance, Industry, and Energy Division of Country Department III in the Latin America and the Caribbean Regional Office, which the Operations Evaluation Department (OED) conveyed to the Bank's Executive Directors in June 1994. As further supporting evidence, the audit uses the loan documents, in particular the President's Report (PR), the files concerning the operation, as well as the outcome of interviews with several Bank staff which, at the time, were involved in loan preparation and supervision. The audit is grateful for the opportunity it had to exchange views on the PSAL and its outcome with Interamerican Development Bank (IDB) staff who were involved in Colombia's power sector. The PCR provides a valuable analysis of the outcome of the operation both from the view of the Bank and the Colombian authorities. The two parties differ in their views about the main strengths and shortcomings of the venture and to some extent also about the lessons to be learned from the outcome. The present audit analyzes the more fundamental flaws of the operation, which were underlying the shortcomings discussed in the PCR, in particular the sheer complexity of the operation and the lack of a common outlook of the main players (the various branches of Government, the municipalities, the utilities, IDB, the Bank, and the co- financiers) on how to deal with and what priorities to assign to basic sector development issues. Following standard OED procedures, copies of the PAR draft has been sent to the Government and to the Borrower. The comments received were taken into account and are reproduced as Annex D to the report.  5 Basic Data Sheet POWER SECTOR ADJUSTMENT (LOAN 2889-CO) Loan Position (Amount in US$ million) As of September 19, 1994 Loan Original Disbursed Cancelled Repaid Outstanding 2889-CO 300 225 75 - 225 Cumulative Estimated and Actual Disbursements FY88 FY89 FY90 Appraisal Estimate (US$M) 150 150 Actual (US$M) 150 75 Actual as % of Appraisal 100 50 Project Dates Original Actual Initial Memorandum 12/30/85 Negotiations 11/87 Board Approval - 12/08/87 Effectiveness (1st tranche) 06/16/88 06/06/88 Credit Closing 06/30/89 09/30/90 6 Staff Inputs (staff weeks) FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Total Preappraisal 3.1 57.4 74.0 - - - - - 134.5 Appraisal - - 29.4 - - - - - 29.4 Negotiations - - 4.7 37.7 - - - - 42.4 Supervision - - - 39.2 72.1 20.9 16.7 0.2 149.1 Other Total 3.1 57.4 108.1 76.9 72.1 20.9 16.7 0.2 355.4 Mission Data Monthi No. of No. of Staff year weeks persons weeks Preparation 1 10/85 1.5 3 4.5 Preparation 2 06/86 3.0 6 14.0 Preparation 3 09/86 2.0 1 2.0 Appraisal 02/87 2.0 5 8.0 Preparation Post Ap. 01/88 1.0 1 1.0 Preparation Post Ap. 02/88 1.0 2 2.0 Supervision I 03/88 1.0 1 1.0 Supervision II 05/88 0.5 3 1.5 Supervision III 07/88 2.0 5 9.0 Supervision IV 09/88 1.0 1 1.0 Supervision V 10/88 2.5 7 9.5 Supervision VI 01/89 2.0 2 4.0 7 Mission Data (Continued) Month/ No. of No. of Staff year weeks persons weeks Supervision VII 04/89 1.5 2 3.0 Supervision VIII 06/89 1.5 1 1.5 Supervision IX 10/89 1.0 4 3.0 Supervision X 03/90 1.5 3 4.5 Supervision XI 06/90 1.0 2 2.0 Supervision XII 09/90 1.5 2 3.0  9 Evaluation Summary Introduction 1. The Loan. The present audit discusses the outcome of the Power Sector Adjustment Loan (Loan 2889-CO) of US$ 300 million, which the Bank extended to the Government of Colombia in 12/87. After preparation had started in 1985, the operation was successively envisaged as a sector adjustment operation, a sector investment loan, and a mixture of the two. After the Bank's Loan Committee had misgivings with this latter proposal, the loan, immediately after the Bank's 1987 reorganization, became a straight sector adjustment loan, divided in three tranches of US$ 150, 75, and 75 million respectively. Disbursements were foreseen against the cost of general imports excluding a list of specific items. The first tranche became effective in 06/88 (as foreseen at loan approval), the second in 08/89 (5 months late), and the third was cancelled in 09/89. The entire operation was closed in 06/90, one year later than originally expected. Objectives, Strategy, Instruments 2. The main objectives of the operation were: (i) developing a strong planning and coordinating capability within Interconexi6n SA (ISA), the utility owned by the other main companies of the sector, to ensure that future development is at least cost to the economy; (ii) progressing towards a broad regulatory framework with well defined rules for investment decisions and for the efficient operation of the utilities, based inter alia on an enhanced coordination within the sector, with the rest of the energy sector, and with the macro-economy; (iii) providing a policy framework for efficient operation on a sound financial basis including rates reasonably in line with long term marginal cost of supply; and (iv) increasing the sector's awareness of social and environmental concerns, and its capability to deal with these issues (PR, para.84). The operation also aimed at supporting the Government in the implementation of its 1987-90 economic adjustment program (PAR, para. 2.1). 3. The main measures included in the operation were: (i) the creation of an Energy Board which would become the main regulatory body of the energy sector and hence of the power sector; (ii) the implementation of a reduced but still balanced 1987-90 investment program in generation, transmission, and distribution; (iii) management improvement in Empresa de Energia Elctrica de Bogota (EEB), Instituto Colombiano de Electricidad (ICEL), and Corporaci6n El6ctrica de la Costa AtlUntica (CORELCA); (iv) rehabilitation of sector finances, inter alia through adjustments in tariff structures and levels, equity injections, lengthening of the terms of the sector's debt, and improved financial discipline; and (v) institutional strengthening of ISA (PAR, para. 2.2). Implementation Experience 4. The lack of ownership by Government and sector of large parts of the adjustment program contributed to major difficulties in the sector's compliance with the conditions of effectiveness. Indeed, the Bank was able to release the first tranche of the loan only after a first amendment to the Loan Agreement adjusted a number of dated covenants. The release of 10 the second tranche required a further amendment revising the loss reduction targets and making the establishment of the Energy Board a condition for the release of the third tranche. In mid 1990, a year after the original closing date, it was evident that compliance with the conditions for the release of the third tranche would require more time and a further amendment. This and the fact that the new Government and the Bank considered that Colombia could better achieve the sectoral goals of the PSAL through the Public Enterprises Reform Loan, at the time under preparation, induced Government to ask for the cancellation of the third tranche of the PSAL. (PCR, paras. 4.1 to 4.7) 5. The implementation of the PSAL was hampered inter alia by lack of ownership (see PAR paras. 4.2 and 4.3), civil unrest (PAR, para. 4.1), underestimation by the Bank of the role of regionalism in Colombia (PAR, paras. 4.9 and 4.12), a weak design, subject to constant modification (see para. I above and PCR, paras. 4.13 to 4.17), excessive complexity (PAR, paras. 4.4 to 4.6), lack of clear-cut priorities (PAR, paras. 4.7 and 4.8) and unclear distribution of responsibility and authority between various branches of Government and sector entities (PCR, paras. 4.2 and 4.3). Outcome 6. The macro-economic objectives were not achieved, as (i) the sector's internal cash generation was substantially lower than anticipated (ii) Government, while reasonably successful in mobilizing funds for the public sector in general, was singularly unsuccessful in doing this for the power sector, and (iii) only 75 percent of the PSAL and some 45 percent of the contemporary IDB loan were disbursed, which corresponds to a shortfall of US$ 235 million over the period 1987-1990. Over this same period Government had to contribute to the sector some US$ 500 million more than expected at program appraisal (PAR, para. 5.1). 7. The financial objectives were not achieved, and by far. Thus, inter alia, (i) over the period 1987-1990, gross internal cash generation fell US$ 444 million, i.e. 15 percent short of the expected amount, mostly because of the incomplete implementation of the agreed tariff adjustment program (which concerned both structures and levels); (ii) the debt/equity ratio which was expected to decrease from 58:42 in 1987 to 47:53 in 1990, actually deteriorated to 62:38; (iii) Government contributions to the sector increased; and (iv) accounts receivable, expected at about 66 days' billings by 1990, actually were still at 100 days' billings (PAR, para. 5. 1). 8. The dollar amount of the 1987-1990 sector investment program was about as expected at appraisal. But under- investment in sub-transmission and distribution continued hampering the reduction of physical losses in the system (PAR, para. 5.1, PCR, para. 5.3, and PCR, Annex 5, paras. 8 to 10). 9. ISA developed an improved least cost planning methodology and used it to determine the 1991-2000 sector investment program (PCR, Annex 5, paras. 11 and 12). 10. The Energy Board, whose creation the PR presented as imminent, took some three years to become operational (PAR, para. 5.1). 11 11. Although a specially created Management Steering Committee was involved in the further implementation of the Guavio Project, the cost of the plant increased by another US$ 410 million and project completion was delayed by an additional year to 1993, i.e. seven years later than expected at the start of construction in 1981 (PCR. Annex 5, paras 13 to 16). 12. The Monitoring Committee for the Power Sector, originally created to watch over the implementation of the PSAL, started to produce results, that, though limited, helped assess sector performance to an unprecedented degree, and contributed to increasing awareness of the sector's weaknesses (PAR, para. 5.1). 13. The expected improvements in the management of EEB, ICEL, and CORELCA did not materialize (PAR, para. 5.1) 14. The loss reduction program, which, in its original form, was utterly unrealistic, did not entirely achieve even its revised objectives (PCR, Annex 5). 15. The environmental and social component was doubtlessly the area in which the operation achieved the highest measure of success. The actions taken provided the sector with an improved capability to deal with these important issues. They further resulted in reasonably satisfactory solutions to long-standing problems that had emerged in connection with the implementation of the Chivor and Guavio hydropower projects. (PCR, Annexes 3 and 4). Ratings 16. The audit rates the overall outcome as unsatisfactory, the sustainability of the limited benefits accruing from the operation as likely, and the institutional development achieved as negligible (PAR, paras. 5.2 to 5.4). Lessons 17. The various parts of the PCR set forth an array of valid lessons from the experience with the PSAL. The main lessons drawn by the Audit refer to the need for (i) ownership by the country of the objectives and the measures envisaged; and (ii) a realistic approach to design of this type of operations. 18. Ownership is required in all the entities involved and at a level that leads not only to intellectual agreement but also to timely action. Where ownership and commitment are missing, conditionality rarely helps. 19. The audited operation provides a telling example of the vast distance between the desirable or even the urgently needed on the one hand and the achievable on the other. Therefore, the pressure exerted by the Bank's operational policies should not lead the institution to disregard country realities, such as regionalism in Colombia. If what can realistically be achieved is too modest in relation to normal standards, the Bank should refrain from lending to the sector altogether --as it has done since 1987. 12 20. Transformation of the planned sector loan from an investment loan to an adjustment operation, should have induced in-depth re-thinking of the operation both in terms of the specific measures to be included and their timing to assure that the product meets the quality criteria associated with the selected instrument. Recommendation 21. The audit recommends that, in connection with the planned resumption of World Bank lending to the Colombian power sector, the Country Department re-assess the effectiveness of the IDB/World Bank relation in supporting sector development. The aim would be to determine areas where a different approach of the two institutions, in particular a more intensive co-operation, would promise greater impact on the country and its power sector, on the one hand, and a more efficient use of the human and financial resources to be committed by the two banks, on the other. 13 1. Background' The Political and Economic Setting 1.1 Unlike many other developing countries, Colombia was not seriously affected by the 1973-74 first energy crisis, as, at the time, it was a net exporter of oil, albeit marginally so. By 1976, however, it had become a net oil importer, which it remained until 1986, i.e. through the second energy crisis of the late 1970s and early 1980s, a period which also witnessed a worldwide recession and the start of the debt crisis. For Colombia, these years were characterized by a collapse of the price of the country's most important export staple, coffee; a decline of manufactured exports; high priced oil imports; severe increases in real interest rates, a concomitant escalation in debt service; and a rapid decline in international inflation, which was not matched in Colombia. These factors, together with Government's slow adjustment to the new circumstances, led to a low 1.6 percent per annum growth of GDP over the early 1980s, a current account deficit of over 6 percent of GDP, a public sector deficit of 7 percent of GDP, and overvaluation of the Colombian Peso (Col$)2. 1.2 The successful implementation by the government of President Betancur of the 1984- 86 stabilization program, helped by the resurgence of the coffee price, resulted, by 1986, in a 1.7 percent surplus in the country's current account, the virtual elimination of the public sector deficit, and an adequate devaluation of the Col$. However, the mid-1980s, the period of preparation of the Power Sector Adjustment Loan (PSAL), witnessed a bout of domestic violence. Disturbances continued during the government of President Barco, which coincided with the implementation period of the PSAL. 1.3 The year 1986 saw the enactment of laws aimed at tax reform and the decentralization of Government. The first, together with a tighter control of public expenditures, provided the basis for a sound public budget. The second introduced the popular election of mayors and the gradual transfer to the municipalities of responsibilities and financial resources previously assumed and controlled by higher levels of Government. 1.4 In 1987, coffee, coal, and oil prices fell again drastically, curtailing the country's export earnings and contributing to a sharp decline of its foreign exchange reserves (over US$ 200 million in the first quarter of 1987 alone). Thus, Government was forced to adopt a further adjustment program, covering the period 1987-1990, aiming at preserving the gains achieved under the earlier stabilization program. At the macro-economic level, the PSAL was to support this program, outlined for the years 1987-1988 in the Minister of Finances' letter of policy.' One of the policy's crucial elements for the power sector was the strict limitation of public investment and the shift of such expenditures from infrastructure to the social sectors. 1. This chapter often uses information and results of analyses presented in the three volumes of the 1990 OED study: Colombia, the Power Sector and the World Bank, 1970-1987, to be referred to as the "Power Sector Study". 2. PR for PSAL, para. 6. 3. Annex 3B of the PR. 14 Annex I of the PCR provides an overview of the political and economic background during implementation of the PSAL. The Colombian Power Sector in the 1980s 1.5 During the period 1970-1987, seven companies or groups of companies generated, transmitted, and distributed virtually all the electric power for public consumption: * the municipal companies in the main cities: Empresa de Energia E16ctrica de BogotA (EEB), Empresas Piblicas de Medellin (EPM), and Empresas Municipales de Cali (EMCALI); * the Government-owned Corporaci6n Aut6noma del Valle de Cauca (CVC) in the Cauca area, Corporaci6n El6ctrica de la Costa Atldntica (CORELCA) with its group of local utilities in the northern part of the country, and Instituto Colombiano de Energia El6ctrica (ICEL) with its group of local and regional utilities in the rest of the country; and * Interconexi6n S.A. (ISA), a company owned by the other main utilities of the sector and responsible for sector planning, as well as construction and operation of large power plants supplying bulk energy to other utilities and of the main interconnecting facilities. 1.6 The Ministry of Mines and Energy (MME), the National Planning Department (DNP), in particular its National Tariff Commission (INT), and, since its creation in 1982, the National Electricity Fund - FEN - (owned to 95 percent by Government and to 5 percent by the utilities of the sector) were the central entities with a major role in the sector and its regulation. 1.7 By 1986, the sector supplied some 2.8 million subscribers with 20,000 GWh from an installed capacity of 7,600 MW. Per capita consumption was about 1,170 kWh, which compared with 900 kWh in Brazil and 1700 kWh in Chile. In excess of 60 percent of the total population and 45 percent of rural people had access to electricity. The Colombian Power Sector and the Bank 1.8 Practically since it started operating, the Bank was heavily involved in the Colombian power sector. Indeed, in the period 1950-1969, it made 16 loans (out of a total lending program of 37 operations in the country) to seven different utilities in the sector; of the first five operations in the country (all in 1950 and 1951) three were for power. In the 1970s and 1980s the Bank continued its strong support of the sector as it made 15 loans for over US$ 1.9 billion, supplemented by another US$ 1.9 billion from IDB. Thus, the two institutions provided about 80 percent of the long term borrowing the sector contracted over the period. Since it made the PSAL in 1987, the Bank refrained from further lending for power in Colombia because of structural problems in the sector. 15 1.9 During the 1950s and the first half of the 1960s, the Bank supported the development of strong regional utilities essentially through financing generating facilities. From 1965 on, it directed a substantial part of its efforts towards sponsoring centralization of sector control, in particular the creation and strengthening of ISA. ISA's shareholders, i.e. the country's other main electricity utilities, never endorsed these objectives. 1.10 In the 1980s, the Bank reluctantly acknowledged the substantial discrepancies between its views and those of the sector entities on sector development and policies. Hence, for a time, it concentrated on supporting individual utilities with projects that, at the time, were considered to be needed independently of sector structure and organization. The most important such project was the Guavio hydroelectric power plant originally carried out by EEB and for which the Bank provided in 1981 a loan of US 359 million, which, at the time, was an inordinately large amount (about US$ 14 per capita!). Towards the mid-1980s, because of the dangerously deteriorating sector performance, the Bank's main thrust reverted to addressing sector-wide reform issues. The main operations carrying this thrust were the FEN loan in 1984 and the PSAL, discussed here, in 1987. The lack of success of the latter demonstrated the need for an entirely different approach. It also led to the hiatus in lending to the sector that, at the end of 1994 still persisted, although the dialogue between Colombia and the Bank on power sector reform continued. An update on the Bank's involvement in the sector and on recent reform efforts is provided in Annex E.  17 2. The PSAL 2.1 The ambitious program supported by the PSAL of US$ 300 million (to be disbursed in three tranches) - the Government being the Borrower - pursued the following main objectives:' * developing a strong planning and coordinating capability within ISA to ensure that future development is at least cost to the economy; * progressing towards a broad regulatory framework with well defined rules for investment decisions and for the efficient operation of all utilities, based inter alia on an enhanced coordination within the sector, with the rest of the energy sector, and with the macro-economy; * providing a policy framework for efficient operation on a sound financial basis including rates reasonably in line with long term marginal cost of supply; and * increasing the sector's awareness of social and environmental concerns, and its capability to deal with these issues. 2.2 Whereas the above objectives are those set forth in the President's Report, it is evident that the Bank also saw the loan as supporting the pursuit of macro-economic goals by helping Government implement its 1987-90 economic adjustment program (para.1.4). 2.3 The following points cover the main measures to achieve these objectives; Annex A sets forth details illustrating in particular the complexity of the operation (see also paras. 4.4 to 4.6): * An Energy Board (Comisi6n Nacional de Energia - CNE) in which MME, DNP, and all the energy sector agencies would be represented, would become the main regulatory body of the energy sector and hence, of the power sector. A committee reporting to MME would monitor all the power utilities on a continuous basis. * The sector would carry out a reduced but still balanced 1987-1990 investment program in generation, transmission, and distribution costing about US$ 2 billion in current terms. The submission of a draft plan for the investment required to the year 2000 would be a condition of the release of the second loan tranche. * The sector would implement an action program for improving (i) management of EEB, ICEL, and CORELCA, and (ii) sector finances. The latter would call for (i) adjustments in tariff structures and levels, (ii) equity injections in individual entities, inter alia, to reduce their debtlequity ratio, (iii) lengthening the average term of the sector's debt, and (iv) improved financial discipline. 4. PR, para. 84. 18 ISA would have the authority to own, construct, and operate all future major generation and transmission plant, except for the UrrA development, long before assigned to CORELCA. 2.4 Loan preparation, appraisal, and negotiation required some 5 man-years, and supervision - though concentrated essentially in two years - absorbed another 3.5 man- years. Thus, in the period 1986-1990, the Bank had, in average, nearly two persons dedicated full-time to the project. The input is more than double that used for the FEN loan which was also fairly complex, and it is likely to exceed by far that for the Guavio project, for which the PCR is not yet available but which, by 1987 (when the bulk of the Bank's input was over), had absorbed about 4.5 man-years. This shows that the shortcomings of the project cannot be attributed to a lack of dedication or resources. The following analysis tries to identify some of the factors that were determinant for the meager payoff the Bank and the sector reaped from the Bank's major effort. 19 3. The Bank's Approach Government's and the Bank's Approach until the Mid-1980's 3.1 In the early 1980s, the Bank had retreated from the essentially sectoral approach it had taken in the late 1970s in connection with ISA's San Carlos Hydroelectric Project to supporting again individual regional utilities: EEB (Bogota Distribution Project and the Guavio Hydroelectric Project); EPM (Guadalupe IV and Playas hydro projects); and CORELCA (Village Electrification Project).5 These operations, for any practical purpose, did not address country-wide sectoral issues.' 3.2 During the above years of worldwide recession, the situation of the Colombian power sector worsened, imposing an ever heavier burden on the Treasury. Therefore, the Bank, in its efforts to help the country in overcoming its macro-economic difficulties and in view of its long-standing involvement in Colombia's power sector, returned to supporting Government's efforts to obtain a measure of control over the sector. Thus, in 1984, it made the Power Development Finance Loan (Loan 2401) to FEN, which during the next few years did not develop as expected.' 3.3 In 1985, the government of President Betancur, despite the success of the economic recovery program started in the previous year, could not fail to be worried by the lack of progress in the power sector, as the sector's financial performance deteriorated further, ironically in part because of the otherwise successful macro-economic program. Indeed, the effects of the devaluation of the Col$ (a main part of the program) on the sector's debt and financing requirements were not reflected in the tariffs the utilities were charging. 3.4 In 1984 and 1985, the Bank made two further loans to the sector, Loan 2449 to EPM, for the Rio Grande Multipurpose Project and Loan 2634 to EEB for the Bogota Distribution II Project, which were oriented towards individual utilities and therefore could do little to achieve sector-wide change. By 1985, both, Government and the Bank, and even substantial parts of the power sector were increasingly aware of the need for sector reform. The Colombians were looking for the Bank as a long time promoter of such reform, to play a major role in a radical change. Accordingly, Government asked the Bank for assistance in the preparation and implementation of a financial rehabilitation program for the sector. The Bank, in turn, acknowledging the lack of success of earlier operations in the institutional field felt that the most important element needed to optimize the chances of success of a reform effort was, before starting with major changes, to achieve a reasonable consensus among the entities that were likely to be involved in the sector's future development. 5. Power Sector Study, sections 1.6 and 1.7 of Volume II. 6. However, EEB's Guavio Hydroelectric project, inter alia because of the massive time and cost overruns, soon became by itself a major sector issue by far transcending the realm of the original implementing agency, EEB. 7. See e.g. Project Audit Report: Power Development Finance Project (Loan 2401-CO) para. 21. 20 Building up Ownership by the Country of the Power Sector Reform 3.5 To help achieve ownership (of which the above consensus is an integral part), the Bank, in agreement with Government, invited current and former ministers, congressmen and major players in the energy sector and the power sub-sector, as well as representatives of the financiers (especially IDB) to discuss sector issues in the framework of a three-day workshop that took place in June 1985 in Santa Marta. The emphasis was first on identifying the issues and setting objectives for addressing them. The group then examined possible approaches starting from ideal solutions and subsequently introducing the constraints of the actual Colombian environment. After the workshop, most participants praised the Bank for taking the initiative and highly valued the learning experience. This seems to have misled the Bank into believing that the sector was finally ready for actual implementation of basic reform, and that the planned PSAL could lead straight into this fundamental change. 3.6 Undoubtedly, in 1986, ownership of the needed reform was much stronger than in previous years. But subsequent developments showed that such ownership existed at the level of the intellectual understanding for the broad principles but not at that of the commitment to politically painful individual measures, such as providing Government with appropriate and specific regulatory authority, implementing loss reduction programs, adjusting tariff structures and levels, and settling overdue accounts. Furthermore, as interested as Government may have been in a fundamental change in the sector, its highest priority was undoubtedly the funding of the large financing gap that, in the mid-1980s, afflicted the sector. Thus, the follow-up on the results of the Santa Marta workshop, that took place in the two years after the event, essentially remained on an intellectual plane. This also applies to the work carried out in the framework of the UNDP/World Bank Energy Sector Management Assistance Program (ESMAP) and which included the preparation of the bases for a country-wide energy policy '. The study ultimately provided major input for the PSAL and for the slow build-up of ownership of a power sector reform. 8. Basis for a Formulation of a Colombian Energy Policy, a report by consultants to ESMAP, December 1986. 21 4. Factors Affecting Program Definition and Implementation Political and Economic Instability 4.1 The audit agrees with the PCR! that the political unrest and the economic difficulties that prevailed during preparation and implementation of the PSAL had a negative influence on the outcome of the operation, not least because they reduced the priority accorded to the dialogue between Colombia and the Bank especially on the co-ordination of action at the macroeconomic and the sectoral levels. The failure to reflect properly the devaluation of the Col$ (which, inter alia, drastically increased the debt service of the sector expressed in local currency) in the tariffs charged is a case in point (para. 3.3). Under the circumstances the much less ambitious approach mentioned in paras. 4.18 to 4.20 might have been less vulnerable to the adverse environment. Borrower Authority and Ownership 4.2 The Borrower of the loan was the Government of Colombia, with the leadership legally assigned to MME, but with the Ministry of Finance (MHF) playing a major role, in particular at the operation's early preparatory stage. However, the understanding of the operation by the various branches of Government was far from uniform and Government had no efficient mechanisms to deal with such in-house conflicts,10 two facts that certainly did not escape the Bank staff involved, but were not taken into account in the design of the operation. The situation was aggravated by another two facts. First, Government's influence on the individual utilities, in particular those owned by municipalities, was already for a long time limited and diffuse, and the laws passed in the mid-1980s, aiming at decentralization of Government, further weakened it. Second, these companies participated only marginally in the preparation of the loan, and hence owned only to a limited degree the measures concerning them in the context of the PSAL. 4.3 Finally, it is important to note that the PSAL aimed, at the same time, at starting a reform that would lead to an efficient regulation of the sector, i.e. at a fundamental change in the ways Government would deal with the sector and at drastic measures (e.g. in plant ownership, losses reduction, tariffs, and accounts receivable), the success of which required that substantial components of the above regulation be in place. Complexity 4.4 With 130 conditions of the loan, subsidiary goals, and detailed targets," the operation was extremely complex. Annex A complementing para. 2.3 outlines the actions which were to be carried out. 9. PCR, paras. 8.2 and 8.6. 10. PCR, Part II, para. 203. 11. PSAL, First Progress Report, October 1988, para. 4. 22 4.5 Concurrently with the PSAL, the Bank had seven ongoing operations in the sector, six of them with individual utilities (EEB, EPM, CORELCA, and ISA), one with FEN. Each of these loans included conditions which became tied to those of the PSAL. In the context of these operations, the Bank dealt with some issues (e.g. loss reduction) in different ways. Under the PSAL it wanted to approach these problems with more consistency across the sector. But, as the utilities did not identify with the approaches, the new conditions merely increased complexity and uncertainty within the sector. 4.6 It is likely that every single action required to fulfill the numerous conditions of the loan was by itself not only desirable but necessary to lead the sector to work properly. However, there were too many factors and these overstressed the limited capacity of the central Government to ensure successful implementation of the reform. Ambiguity in Priorities 4.7 Government and the Bank weighed the priority of the various actions differently. Indeed - oversimplifying to an extent the situation - Government gave the power sector deficit and debt problem the highest priority, in particular as long as the Ministry of Finance was the dominant organization representing Colombia in the discussions concerning the PSAL. Until the second half of the 1980s, the Bank was also considering the sector finances the highest priority issue; but it did so in a far more specific way than Government (which e.g. failed to address the issue it had created for the sector when it drastically devalued the Col$). Thus, the Bank documents concerning the operation considered before it was transformed into the PSAL 12 still set forth meeting the sector's immediate financial requirements, improving the sector's financial performance, and providing electricity at the least economic cost as the primary objectives of the operation. Later, 13 while Government's priorities began to emphasize a quick injection of external funds, the Bank pushed the sector reform aspects increasingly to the fore. However, the Bank's position with respect to the priorities does not seem to have been uniform across units: Programs, with their broader view of the issues, tended to emphasize broad reform, whereas Projects, with their more specific experience of the sector took a more pragmatic approach taking into account to a higher degree the prevailing institutional constraints. The PR reflects this ambiguity as it fails to spell out a ranking of the issues to be addressed. Apparently, during program implementation, the Colombian side felt that this ambiguity was still there. 14 12. Yellow Cover PR of 04/06/87, para. 3.03. 13. See e.g. 10/22/86 memo from the Loan Officer to the Programs Division Chief 14. See e.g. PCR, Part II (i.e. the operation seen from the Borrower's perspective), (paras. 195, 205, and 206). 23 4.8 The lack of clarity in the priority of the large number of actions required also had a negative impact when the Borrower violated in quick succession many of the conditions set, forcing the Bank to address, also in quick succession, a seemingly disparate array of issues. The Colombian side interpreted this, not necessarily correctly, as a shift of emphasis by the Bank. " Centralism versus Regionalism 4.9 In the 1950s and early 1960s, the Bank supported various regional entities, whose development was limited, in part by their geographical isolation. When, in the mid-1960s, large scale interconnection became a feasible venture that promised high economic returns, the Bank was a major force behind this development and the associated thrust towards national integration of the power sector. Thus, it became the champion of ISA and of a strong Government influence in ISA, and was successful in helping develop ISA as a central planner of the sector and a major generation and transmission company. However, the utility's setup as a venture jointly owned by the other main power utilities did not serve well the role the Bank had envisaged for it, namely to take the lead in a disciplined and integrated sector development in order to achieve an optimal contribution to the country's economy. Indeed, sector regulation remained weak, and Government, though ultimately providing the funds to cover increasing sector deficits, had little influence over ISA. When, in the 1980s, the Bank made major loans to EEB, EPM, and CORELCA (para. 3.1), in part hoping to induce these utilities to meet their obligations towards ISA, it became embroiled .on both sides of the centralism/regionalism controversy, which - rooted in geography - pervades Colombia at many levels, not least in the power sector. Supporting centralism for large generation and transmission facilities was not promising to start with. It became even less tenable for the Bank, when, in the mid-1980s, Congress passed legislation supporting decentralization and giving municipalities, among which were the owners of EEB, EPM, and EMCALI, further latitude to deal with power sector issues outside the national framework. 4.10 Regionalism has its dynamic, creative side, rooted in the local community which to most people is a less abstract concept than the national society. The reason for the negative image of regionalism, especially in the Bank, may reside, at least partly, in the fact that it can be associated with diseconomies at the national level, which are to a good extent quantifiable, whereas the benefits (especially those derived from the strong commitment to objectives agreed in a regional framework) usually are not, though they may be no less real. Whether it has, on balance, a positive or a negative impact, regionalism in Colombia is a fact with which both, Government and the Bank, have to live, and, this being so, it seems specially important to tap the strengths of the phenomenon, e.g. competition, an important factor, in the "corporatization" and ultimately the privatization of the sector envisaged most recently. 4.11 There were two substantial shortcomings in the way the Bank handled this issue in the context of the PSAL. First with the weak sector regulation in place in the mid-1980s, the assignment of construction, ownership, and operation of all major new generation and transmission plant to ISA, had little chance of being implemented as long as the hostile 15. PCR, Part II, para. 205. 24 attitude to centralization that was known to prevail in ISA's board persisted. Second, whereas it made sense for the Bank to negotiate with Government several agreements directly affecting individual utilities' operations to ensure a uniform approach, this implied heavy reliance on Government's ability and willingness to enforce compliance from the utilities, two factors that were known to be weak. The audit was unable to assess to what precise extent the companies were involved in the preparation and negotiation of the above agreements. It could only ascertain that such involvement was sufficiently peripheral to allow the utilities to claim that they were not bound by the conditions which Government agreed on their behalf and which went beyond the obligations the companies had contracted in connection with operations of which they were the direct beneficiaries. 4.12 It is also clear that, at several opportunities, Bank staff was split on the centralism/regionalism controversy, with the Programs' department coming down more often than the Projects' units on the side of strengthening the center. Investment Loan versus Adjustment Loan 4.13 As mentioned in paras. 3.6 to 3.8 and 8.7 of the PCR, and, as set forth in Attachment 2 to this PAR, the PSAL went through a metamorphosis involving several steps. The Bank started its preparation in 1985 characterizing it as a "policy based sector operation". Later it successively envisaged it as a sector investment loan, a mix of a fast disbursing and an investment loan, and finally as a fast disbursing sector adjustment loan. The various mutations (which, at times, changed within the Bank the responsibility for the operation from Programs to Projects or vice versa) took place from end of 1985 to mid-1987. They seem to reflect the changing outlook on the economy's development and on Government's prospects to raise about US$ 1 billion for the public sector, in general. Of these funds, US$ 200 to 400 million (the amount changed over time) were to be earmarked for the power sector, and Government was eager to receive the Bank loan as soon as possible to help cover the sector's financing gap in 1987 and 1988. Further, in the second half of 1986, it took the incoming Barco administration some time to find their bearings, which led to a few short-lived changes in Government's approach to the power sector operation, including the temporary consideration (in agreement with the Bank) of an Energy Sector Adjustment Loan in parallel with the power sector operation (Annex B 2, paras. 4 and 5). 4.14 The most problematic mutation doubtlessly was that reflecting the decision to go for an adjustment loan. Before the Bank took this step, it envisaged two US$ 150 million loans, one quick disbursing to Government against eligible general imports and one to FEN to cover mostly interest during construction (IDC) on the Bank's Guavio loan and the cost of goods and services to be procured in accordance with Bank rules. The audit is not competent to judge whether the change to a straight adjustment loan was justified in the context of the Bank's broad policies related to Colombia's macro-economic development. Opinions clashed at the time. The main purpose of the change, was to respond to the uneasiness expressed at the May 1987 Loan Committee meeting on the operation and concerning the appropriateness of financing large amounts of IDC on the one hand and of the up-front action by Colombia in the institutional and financial areas, which members of the committee considered weak, on the other. However, it also appears that Bank management had doubts about the realism of the many hard measures foreseen and of their timing. Further, Colombia's reasonably good macro-economic performance contrasting with its power sector's poor showing, was a factor making a clear-cut decision for or against the operation difficult. 25 4.15 The above change occurred in mid-1987, when a major re-organization of the Bank took place. Immediately before this event, Bank staff was working under substantial uncertainty and, after it, in a new setup and new managers. At the same time, the adjustment of the operation had to be done in a short time and under substantial pressure, as suggested by the quick succession of several visits by Colombian cabinet members in Washington, all related to the processing of the PSAL. This evidently was not an ideal environment for dealing in depth with an operation as complex as that discussed here. 4.16 The change to an adjustment loan did not account properly for the fact that it largely disconnected the utilities which had to comply with some of the main conditions from the financing. As the loan did not envisage disbursements against expenditures by the utilities, these did not see themselves as beneficiaries of the loan. In a reasonably mature power sector, direct incentives to the utilities doubtlessly help achieve good performance. 4.17 When going from a mixed adjustment/investment operation covering some three and a half years to an adjustment loan disbursing in one and a half year, the Bank did not basically change the content of the program. It eliminated only the measures that most obviously could not be carried out before the envisaged closing date. In the course of this process, it naturally tried to compress the schedule of required actions as much as possible but, at the same time, to avoid the suggestion that it disregarded the country's realities. It may have been successful with respect to individual conditions, but certainly not with the package of conditions as a whole, which - with hindsight - cannot escape being perceived as utterly unrealistic. Was an Alternative Approach Possible? 4.18 The many factors discussed above and in the PCR, most of them known at the time of processing the loan, increased the risk that the operation would fail. Each of them taken individually affected it to an extent that was not necessarily alarming. However, taken together, they should have been perceived as putting it in jeopardy. Indeed, already in 1987, the OED mission, reviewing the Bank lending in the power sector over the period 1970-1987, came to the conclusion that the Bank, with the PSAL, had again been far too optimistic.16 It seems worthwhile, in this context, to repeat OED's general finding: "It is evident that. without a good dose of optimism, very little can be achieved in a context as difficult as that of the sector discussed here. This stated, there is a flagrant discrepancy between a reasonably supportive and optimistic outlook and the utterly unrealistic presentation of the chances for a successful implementation of many of the measures the Bank considered crucial in connection with e.g. the Guavio and the FEN operation." This seems also applicable to the PSAL. 4.19 The question is whether, on the basis of the facts known in the mid 1980s, a different approach could have been taken with better chances of success. A first requirement would have been to identify a set of measures that had a reasonable chance of being implementable within the accorded time, a chance that, in the ex-post opinion of all the participants, the conditions of the PSAL did not have. Hence, an alternative approach would have included first a setting of priorities that would possibly have ranked even some exceedingly urgent 16. To be precise, the mission had come to this conclusion in 1987-88, but it was only formulated in paras. 55 to 58 of Chapter I in Volume II of the study, which was published in 1990. 26 actions as second priority to, presumably, first steps toward a sector regulation that the main Colombian players in the sector would have been able to own in the relatively short term. This means that such regulation would not have included the ISA monopoly on construction and ownership of major generation and transmission additions to the sector. A series of operations, in preference to a single one, could have addressed the issues in the adopted sequence of priorities. It is noteworthy that, at least at the preparation stage of the PSAL, the Bank envisaged such a sequence of operations." 4.20 Another alternative, of course, would have been to stop lending to the sector as early as 1986/87. Such a step would have been highly justified on the basis of the pervasive lack of compliance with conditions agreed under previous operations. The main reason for the Bank not adopting this position seems to have been the reasonably satisfactory performance of Government and the country at the macro-economic level (PAR, para. 4.14). Relations with IDB 4.21 Between 1970 and 1987, IDB and IBRD approved financial contributions to the power sector development in Colombia at similarly high levels (some US$ 2 billion each). This suggests that the institutions wielded substantial leverage. Exercising such leverage to optimize their joint impact on the sector and the economy called, in turn, for close coordination, if not cooperation." The audit did not analyze in detail the relations between the two banks in the context of the PSAL. Nevertheless, it found that the closer ties that developed in connection with the Guavio project for which IDB and IBRD ultimately provided well over US$ 1 billion in financing still left substantial areas not so much of disagreement than of indefinition. 4.22 One area in which apparently the dialogue between the two organizations failed to achieve a reasonable level of clarification was that of the objectives of the PSAL, which IDB seems to have considered all along as an operation pursuing essentially macro-economic objectives. Thus, IDB appears to have understood that the World Bank had set priorities among the numerous goals, something it had not done (at least not to the degree assumed). The PSAL documents certainly do not suggest such clear-cut priorities. Therefore, it seems evident that a more intensive and substantial dialogue on the sector priorities would have been desirable. This also applies to the specific measures to reduce losses and to strengthen ISA. Indeed, though the IDB operation was with ISA, the corresponding documents do not mention that, in the context of the PSAL, ISA was to become the sole builder, owner, and operator of major additions to Colombia's generation and transmission system. There are strong indications that IDB never believed in the feasibility of the measure. 4.23 Attachment 3 sets forth a comparison of the financial figures appearing in the documents underlying the PSAL and IDB's contemporaneous Second Supplementary Loan for the Guavio Hydroelectric Project (US$ 350 million) to ISA, approved in 11/87, less than one month before the PSAL. Beyond confirming the desirability of improved coordination in 17. See e.g. para. 10.02 of the 07/30/86 Project Brief. 18. Sector Study, Volume II, section 2.10. 27 general, the comparison permits to identify inter alia the following areas where closer ties between IDB and IBRD might have been especially beneficial in the context of the PSAL: As late as in November 1987, IDB assumed that the World Bank operation to be approved in December, would be the one IBRD had envisaged before mid-1987, i.e before it turned to considering a straight sector adjustment operation (paras. 4.13 to 4.17). As set forth in Attachment 3, most of the projections used by the two institutions in the documentation underlying their respective operations were in reasonable agreement at least for the period 1987-90, except for the projected average revenue per kWh which IDB assumed at a level 10 percent lower than that used by IBRD for 1990 and subsequent years. Further, IDB estimated for 1991/92 sector investments some 25 percent lower than those anticipated by the World Bank. 4.24 After IDB resumed lending to the power sector in the early 1990s, IBRD is now considering similar steps. Therefore, the time seems highly appropriate to intensify coordination between the two banks. This should primarily aim at optimizing the impact of the funds to be provided by the two institutions. It should be achieved by ascertaining more thoroughly the commonality of objectives and the complementarity of the specific goals and measures to be pursued and implemented in the context of the banks' operations. In view of the budget constraints in the two organizations, it might be worthwhile to investigate possibilities to reduce the duplication of activities in connection with the lending to the Colombian power sector. This would also help reduce the discrepancies in approaches, judgements, and conclusions, that, at times, affect the credibility of the two institutions in the sector.  29 5. Conclusions Results 5.1 Annexes 3, 4, and 5 of the PCR set forth a quite comprehensive analysis of the results achieved in pursuing the numerous objectives of the PSAL. In the audit's view, they can be summarized as follows: The macro-economic objectives were not achieved, as (i) the internal cash generation was substantially lower than anticipated (see below under finances and Attachment 3), (ii) Government, while reasonably successful in mobilizing funds for its public investment program in general, was singularly unsuccessful in doing this for the power sector, and (iii) only 75 percent of the PSAL and some 45 percent of the associated IDB loan were disbursed, which corresponds to a shortfall of US$ 235 million over the period 1987-1990. Over this same period Government had to contribute to the sector some US$ 500 million more than expected at program appraisal.'9 The financial objectives were not achieved, and by far. Thus, inter alia, (i) over the period 1987-1990, gross internal cash generation fell US$ 444 million, i.e. 15 percent short of the expected amount, mostly because of the incomplete implementation of the agreed tariff adjustment program (which concerned both structures and levels); indeed, tariff adjustments were just about able to compensate for inflation; (ii) the debt/equity ratio which was expected to decrease from 58:42 in 1987 to 47:53 in 1990, actually deteriorated to 62:38; (iii) Government contributions to the sector increased (see previous point); and (iv) accounts receivable, expected at about 66 days' billings by 1990, actually were still at 100 days' billings; Attachment 3 compares the actual results with those expected by the Bank in the first and second half of 1987 and by IDB in the second half of 1987. The dollar amount of the 1987-1990 sector investment program was about as expected at appraisal. But the expenditures for already committed generation and transmission items were higher than planned (except for Guavio, where the investment over the period was lower than expected although total cost increased) leading to a further under-investment in sub-transmission and distribution which hampered the reduction of physical losses in the system.20 ISA developed an improved least cost planning methodology and used it to determine the 1991-2000 sector investment program.2' 19. PCR, Annex 2, paras. 4 to 7 and Annex 5, paras 2 and 3. 20. PCR, Annex 5, paras 8 to 10. 21. PCR, Annex 5, paras. II to 13. 30 * Although a specially created Management Steering Committee oversaw the implementation of the Guavio Project, the cost of the facilities increased by another US$ 410 million and project completion was delayed by an additional year to 1993, seven years later than the commissioning date expected at the start of construction in 1981.22 * The Energy Board, whose creation the PR presented as imminent, took some three years to become operational. * The Monitoring Committee for the Power Sector, originally created to watch over the implementation of the PSAL, after incurring about a one year's delay, started to produce results, that, though limited, helped assess sector performance to an unprecedented degree, and contributed to increasing awareness of the sector's weaknesses.24 * The expected improvements in the management of EEB, ICEL, and CORELCA did not materialize.25 * The loss reduction program, essentially taken over from earlier Bank operations, was unrealistic from the start and was amended to allow disbursement of the second tranche of the loan. Nevertheless, by 1990, the sector had not achieved the revised targets, though mainly because of EEB's poor performance.26 * The environmental and social component was doubtlessly the area in which the operation achieved the highest measure of success. The actions taken provided the sector with the capability to deal appropriately with these types of issues. They further resulted in reasonably satisfactory solutions to long-standing problems that had emerged in connection with the implementation of the Chivor and Guavio hydropower projects.27 Ratings 5.2 The audit leads to standard overall ratings of the results of the PSAL that differ from those OED made on the basis of the PCR alone: 22. PCR, Annex 5, paras. 13 to 16. 23. PCR, Annex 5, paras. 5 to 7. 24. PCR, Annex 5, paras. 17 to 20. 25. PCR, Annex 5, paras. 21 to 27. 26. PCR, Annex 5, paras. 28 to 35. 27. PCR, Annexes 2 and 4. 31 Table 5.1: Standard Ratings PCR Audit Outcome marginally satisfactory unsatisfactory Sustainability of Benefits uncertain likely Institutional Impact negligible negligible 5.3 The main issue with these ratings2 is the contents of the operation to which they refer. Taking the original concept of the operation and looking at the achievements with respect to the objectives both in terms of time and content, the audit concludes that the outcome qualified as "unsatisfactory". However, with respect to the set of objectives which were realistically achievable, it can see the results qualifying as "marginally satisfactory" provided one attributes to the PSAL most of the changes which occurred in the sector in the 1990s and which undoubtedly lead into the right direction. The audit agrees with the PCR, that without the commitment to the cause of reform which was triggered by the PSAL, the above changes would most probably not have occurred. However, it also concludes that (i) the PSAL tried to push the sector into a direction (e.g. towards a quasi-monopoly of ISA in generation) which was an impasse, (ii) it took the deep crisis of 1990-92 before decisive steps towards fundamental reform were taken, and (iii) the policy directives that took shape in the early 1990s, have yet to be implemented in full, as illustrated by the Bank's 1992 policy papers on energy and power sector issues.29 Finally the 65 percent "weighted success as of 09/30/90" set forth in the PCR"o is not based on a sound methodology. 5.4 On the sustainability of benefits from the operation, the audit concludes that, where benefits materialized (e.g. through (i) the tariff adjustments, as insufficient as they were, and (ii) the actions in the environmental and social aspects of sector activities), their sustainability appears likely. Lessons 5.5 The various parts of the PCR set forth an array of valid lessons from the experience with the PSAL. To the audit, the main such lessons are variations on those resulting from most unsuccessful operations and which therefore are common place but also apparently rather difficult to heed: the need for (i) ownership by the country of the objectives and the measures envisaged and (ii) a realistic approach to the operation's design. 28. While the Region does not object to the audit's ratings, the Government disagrees with the institutional development rating (see Annex D), suggesting a stronger link than could be ascertained by the Audit between the PSAL and the positive developments that took place in the sector in the 1990s. 29 See Annex E for latest sector reform development. 30. PCR, Part III, Tables 6 and 7. 32 5.6 Ownership is required in all the entities involved and at a level that leads not only to intellectual agreement but to commitment to action. Where ownership and commitment are missing, conditionality might help, but more often than not, only if, after a reasonably short time, coercion leads to such ownership and commitment. 5.7 In terms of realism, the audited operation provides a telling example of the vast distance between the desirable or even the urgently needed on the one hand and the achievable on the other. Therefore, the pressure exerted by the Bank's operational policies describing the objectives to be ultimately achieved in the power sector and the ways to progress in their direction, should not lead the institution to disregard the country realities, such as regionalism in Colombia. If what can realistically be achieved is too modest, the Bank should, as it has done since 1987, refrain from lending altogether. 5.8 Fundamental changes in the character of an operation such as the transformation of the planned sector loan from an investment loan to an adjustment operation, usually call for an in-depth re-thinking of the operation both in terms of the specific measures to be included and their timing to assure that the product meets the quality criteria for the given type of operations. Recommendation 5.9 The audit recommends that, in connection with the planned resumption of World Bank lending to the Colombian power sector, the Country Department re-assess the effectiveness of the IDB/World Bank relation in supporting sector development. The aim would be to determine areas where a different approach of the two institutions, in particular a more intensive co-operation, would promise greater impact on the country and its power sector, on the one hand, and a more efficient use of the human and financial resources to be committed by the two banks, on the other. 33 Annex A Actions Planned in the Context of the PSAL 1. The following summarizes the large number actions foreseen in the context of the PSAL. It is mainly intended as supporting evidence for the discussion of the operation's complexity and lack of realism. The measures are presented in accordance with Section B of Part III of the President's Report (PR) for the operation. Sector Regulation 2. In this area, the loan supported the creation of the Energy Board (Comisi6n Nacional de Energia - CNE) in which MME, DNP, and all the sector entities would be represented, and which would become the main regulatory body of the energy sector, and hence, of the power sector. As such, it would enforce Government's broad policies as far as they affect the sector and its subsectors and coordinate the application of these policies in the sub-sectors. On the basis of its own staffs investigations, it would regulate the use of the country's energy resources, watch over the investments in the sub-sectors by approving investment plans and supervising their implementation. A committee reporting to MME would monitor an a continuous basis all the power utilities. Sector Investment 3. The quality of the power sector investment was to improve, inter alia through strengthening of ISA. This utility, beyond remaining the main sector planning entity would become the sole builder and owner of major additions to the country's generation and transmission plant. In the context of the adjustment program, the sector would (i) carry out a severely curtailed but still balanced investment program in support of Government's planned reduction of public sector expenditure and (ii) through ISA, prepare a long term least cost investment program taking into account financial constraints. The Bank operation would also support completion of the Guavio project on the basis of a financing plan that would have to be updated first. Institutional Framework 4. The PSAL, beyond including as a major measure the creation of the Energy Board, would help develop an institutional framework to assure (i) efficient sector development and operation and (ii) close monitoring of sector performance through an appropriate organization looking at the individual entities in a uniform way. Utility Management 5. The PSAL was to foster management improvements in the sector's worst performing utilities, EEB, ICEL, and CORELCA. Specific management studies were 34 Annex A planned to lead to action programs whose implementation would also start under the PSAL. In the case of EEB and CORELCA, the actions would have to complement those already foreseen under ongoing operations funded by the Bank. Ecological and Social Aspects 6. In the context of the PSAL, ISA was to develop and implement an appropriate program dealing with ecological and issues related to the sector's development and operation. As a first priority, ISA would address problems that emerged during the construction of the Chivor and Guavio hydro projects. Financial Adjustment 7. The sector's financial recovery was to take place in accordance with the arrangements agreed between Government, IDB, and the World Bank. Tariffs would continue to be adjusted on a monthly basis and to converge on LRMC. The sector was expected to achieve major progress towards eliminating arrears and reducing illegal consumption. Government was also to provide major equity contributions to ICEL and CORELCA. Co-Financing 8. The PSAL was intended to support the mobilization of the funds needed to complement the sector's 1987-90 investment program. The total amount required was estimated at some US$ 1030 million. At the time od loan approval US$ 300 million were expected from IDB, another US$ 300 million from Japan, US$ 200 million from Government's external financing package ("jumbo loan"), and the remaining US$230 million in form of export credits from supplier countries. 35 Annex B A Brief History of Loan Preparation 1. This is to complement paras. 3.6 to 3.8 and 8.6 of the PCR by providing further background concerning the unsettled and shifting environment in which the PSAL developed. In the audit's view, this deficit of solid ground shared by the various parts of Government, the utilities, and the Bank was a primary factor for the unsatisfactory setup and hence the poor outcome of the project. This presentation essentially uses the various Project Briefs, the Executive Project Summary, and related discussion documents.' 2. In the mid-1980s, the Bank had considerable difficulties with the sector, as, inter alia, in 1983, the Bank had attempted to carry out a study of the energy sector as a whole, which the Colombians refused to support as, based on the study they had carried out in the late 1970s, they felt that what they needed was a strategy and not a new assessment; further, in 1985, they envisaged to build the Urrd hydroelectric plant on top of what was emerging as a substantial surplus capacity. 3. In January 1985, the Ministry of Finance asked for Bank assistance in reviewing the sector's finances and in February, a Bank mission discussed with Government a possible sector operation that would focus inter alia on reduction of electricity losses. In June, the Bank sponsored Santa Marta workshop initiated a turnabout in the country's willingness to address the fundamental issues of the sector. As discussed in Chapter II of this PAR, the Bank overestimated the depth of this new willingness. Nevertheless, in July Government officially asked the Bank for a sector operation and the Bank agreed to consider a policy based loan. In September, Government indicated its interest in using the sector operation to obtain external financing to improve the sector's debt structure. Thus the idea of a quick disbursing loan accompanied by a co-financing developed. By the end of 1985, the Bank was considering as a working hypothesis a US$ 200 million Bank loan together with US$ 200 million of co-financing from commercial banks under a "B loan" for financing distribution rehabilitation and expansion, as well as the acquisition of spare parts etc. for the regional utilities.2 Another fallout of the Santa Marta workshop was Colombia's request that the Bank support a study of the issues in the energy sector as a whole. Supported by LAC's Programs and Projects Departments, the Colombians carried out the energy sector work, which proposed an energy sector strategy, in record time. 4. One factor that was affecting the processing of the operation was its classification. As mentioned above, in 1985, it was considered a sector adjustment operation, though the December 1985 Project Brief already gave it many features of an investment operation. During the first half of 1986, the planned operation changed to include a Bank loan of US$ Annex B 1. Among these especially the former Loan Officer's 06/23/87 memo to the new Chief of the Country Division after the Bank's re- organization. 2. December 1985 Project Brief, para. 3.01. 36 Annex B 300 million with co-financing of the order of US$ 400 million, the Bank funds earmarked to about 50 percent for interest during construction, 40 percent for hardware, and 10 percent for other items of the 1987-1990 sector investment program.' In 1986, the Bank was implementing the recommendations of the Denning report which, inter alia, assigned the responsibility for sector investment loans (SILs) to the Projects Departments and that for sector adjustment loans (SADs) to the Programs Departments. In August 1986, the planned operation was reclassified a SIL. In September, however, Government asked for sector adjustment loan with a quick disbursing component and the Bank recognized that it would be difficult to find components eligible for Bank financing under a SIL concept. It therefore considered reclassifying the operation, when Government (which in mid-1986 had changed after the elections that had taken place earlier that year), in a further couple of turnabouts first requested a SIL type operation, a request that it rescinded three weeks later. By that time, the Bank had already decided to continue preparation of the loan under the SIL concept, i.e. with Projects assuming the overall responsibility. 5. In the meantime the Energy Sector Report brought to light the economic, structural, and managerial issues in all the sub-sectors including power. and the Bank, in agreement with Government, started to prepare in parallel with the power sector loan an energy sector adjustment operation. Ideally the energy sector operation should have come first, but Government gave absolute priority to the power sector loan. Further, in early 1987, Government, in view of large financing negotiated in another context, felt that it did not need the funds earmarked for the energy sector operation. Thus, only the power sector operation went ahead. It was appraised and processed in the first half of 1987 as an investment loan and without an energy sector operation underpinning it in the area of the broad nationwide issues. The proposed operation involved a fast disbursing loan to Government of US$ 150 million funding general imports and a more conventional loan of US 150 million to FEN for IDC, mostly on the Bank's Guavio loan (2006-CO), and for goods and services procured under the Bank's procurement guidelines. In addition Bank participation of up to US$ 50 million in B loans was envisaged to complete the financing scheme. Though formally not requiring Loan Committee review, because of its complex features, the loan was submitted to such review, which resulted in a reconsideration of the entire operation, when the new organization of the Bank became effective, in July 1987. Indeed, to respond to the concerns expressed by the Loan Committee, the Bank's new country management decided to present the operation as a sector adjustment operation involving a US$ 300 million loan to Government to be disbursed in three tranches against general imports. The corresponding recasting of the loan required another five months. In December 1987, the Bank's Board approved the loan but not without strong criticism and opposition by two members (PCR, paras. 3.12 and 3.13). 3. see the 07/30/86 Project Brief 37 Annex C COLOMBIA POWER SECTOR LOAN (LOAN 2889-CO) COMPARISON OF PROJECTED AND ACTUAL FINANCIAL RESULTS Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1987-90 (1) Sales in TWh - SAR (04/87) 24.6 25.7 27.2 28.6 30.3 31.9 33.8 35.8 37.9 124.6 - SAR (04/87) * 19.3 19.8 21.0 22.2 23.6 25.1 26.8 28.5 30.4 97.7 - SAR (11/87) * 18.8 19.8 21.0 22.2 23.6 25.1 26.8 28,5 30.4 97.7 - IDB (11/87) * 21.0 22.4 24.2 26.0 27.8 29.5 31.1 100.5 - IDB (11/87) * 24.6 25.7 27.5 29.4 31.5 22.2 35.2 37.3 39.5 118.2 - Actual (PCR) 22.5 23.7 25.2 26.8 98.2 * Refers to the system excluding EMCALI ** Refers apparently to the entire system assuming high growth. Projection with lower growth corresponds to that in the first SAR (04/87) (2) Average Tariff in US cents/kWh - SAR (04/87) 4.22 3.87 3.69 3.91 4.19 4.48 4.79 5.08 5.39 - SAR (11/87) 4.27 3.88 3.73 3.95 4.23 4.52 4.84 5.13 5.44 - IDB (11/87) 3.80 3.80 4.00 4.20 4.40 4.60 4.70 - Actual (PCR) 4.28 4.2 4.23 4.03 (3) Total Revenues in million US$ - SAR (04/87) 871 827 820 931 1057 1200 1372 1530 1729 4559 - SAR (11/87) 876 822 837 916 1006 1130 1270 1410 1578 4321 - IDB (11/87) 842 905 1027 1156 1277 1405 1518 4365 - Actual (PCR) 908 893 953 1113 3867 (4) Cash Operating Costs in million US$ - SAR (04/87) 409 399 393 410 426 443 460 477 496 1739 - SAR (11/87) 391 326 316 330 343 357 371 383 399 1401 - IDB (11/87) 316 316 325 339 350 370 378 1331 (5) Depreciation in million US$ - SAR (04/87) 192 180 180 215 246 263 283 306 332 1007 - SAR (11/87) 192 180 180 215 246 263 283 306 332 1007 - IDB (11/87) 187 205 240 250 260 267 283 955 - Actual (PCR) 277 322 377 343 1319 Annex C 38 Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1987-90 (6) Total Operating Expenses in million US$ (4)+(5) - SAR (04/87) 602 579 573 625 672 706 743 782 828 2746 - SAR (11/87) 583 506 496 545 589 620 653 689 731 2407 - IDB (11/87) 503 521 565 589 610 638 660 2286 - Actual (PCR) 551 631 673 716 2571 (7) Net Operating Income in million US$ (3)-(6) - SAR (04/87) 270 248 247 306 385 493 629 748 901 1813 - SAR (11/87) 292 317 341 371 417 510 617 721 847 1914 - IDB (11/87) 338 384 462 567 667 767 858 2079 - Actual (PCR) 357 262 280 397 1296 (8) Other Income (net) in million US$ - SAR (04/87) 21 65 41 47 52 39 33 14 21 171 - SAR (11/87) 90 33 27 64 57 45 41 16 21 208 - IDB (11/87) 37 14 4 2 -1 1 2 19 - Actual (PCR) 87 85 93 -196 69 (9) Net Income Before Interest in million US+ (7)+(8) - SAR (04/87) 291 313 288 353 437 533 661 762 922 1984 - SAR (11/87) 383 350 368 435 474 556 658 738 868 2122 - IDB (11/87) 375 398 466 568 666 768 860 2098 - Actual (PCR) 444 347 373 201 1365 (10) Interest Charged to Income in million US$ - SAR (04/87) 162 215 143 203 262 267 259 263 249 991 - SAR (11/87) 164 213 215 251 267 236 194 168 161 947 - IDB (11/87) 216 260 291 272 238 236 285 1061 - Actual (PCR) 265 222 315 429 1231 (11) Net Income in million US$ (9)-(10) - SAR (04/87) 129 97 144 150 175 266 402 499 674 993 - SAR (11/87) 218 137 153 184 207 320 464 570 707 1174 - IDB (11/87) 159 139 175 296 427 532 575 1037 - Actual (PCR) 179 125 58 -228 134 (12) Gross Cash Generation incl. Non-Cash Expenses in million US$ (9)+(5) - SAR (04/87) 547 493 468 568 682 796 944 1067 1254 2991 - SAR (11/87) 575 530 548 650 719 819 940 1043 1200 3128 - IDB (11/87) 604 638 742 857 967 1081 1193 3204 - Actual (PCR) 721 669 750 544 2684 39 Annex C Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1987-90 (13) Debt Repayments in million US$ - SAR (04/87) 295 350 350 464 488 527 640 688 692 2119 - SAR (11/87) 322 353 366 486 499 547 629 786 693 2161 - IDB (11/87) 368 491 498 542 554 612 576 2083 - Actual (PCR) 458 512 795 531 2296 (14) Debt Service in million US$ (10) + (13) - SAR (04/87) 458 565 493 667 750 793 900 951 941 3110 - SAR (11/87) 486 566 580 737 766 783 823 953 854 3109 - IDB (11/87) 584 751 788 814 792 847 861 3144 - Actual (PCR) 723 734 1110 960 3527 (15) Cash Available After Debt Service in million US$ (12)-(14) - SAR (04/87) 89 -73 -25 -99 -67 3 44 117 314 -120 - SAR (11/87) 89 -36 -32 -87 -47 36 117 90 346 20 - IDB (11/87) 20 -113 -47 43 176 234 331 60 - Actual (PCR) -2 -65 -360 -416 -843 (16) Working Capital Adjustment in million US$ - SAR (04/87) -4 -63 32 96 3 71 82 87 90 251 - SAR (11/87) -48 -105 44 74 31 42 87 34 102 233 - IDB (11/87) 107 111 94 70 59 82 70 334 - Actual (PCR) 27 -105 45 -24 -57 (17) Cash Available After Adjustments in Working Capital in million USS (15)-(16) - SAR (04/87) 92 -10 -57 -194 -70 -68 -38 30 224 -370 - SAR (11/87) 137 69 -76 -162 -77 -5 30 56 243 -214 - IDB (11/87) incl. balancing -88 -263 -82 -18 14 98 167 -349 amounts - Actual (PCR) -29 40 -405 -392 -786 (18) Investment excl. Interest During Construction in million US$ - SAR (04/87) 1210 842 539 593 581 527 491 496 512 2192 - SAR (11/87) 1218 994 635 502 554 550 456 566 562 2062 - IDB (11/87) 636 515 570 556 494 466 443 2134 - Actual (PCR) 526 634 475 467 2102 (19) Interest During Construction in million MSS - SAR (04/87) 130 121 205 200 171 197 235 169 186 803 - SAR (11/87) 136 134 155 205 198 237 291 306 285 931 - IDB (11/87) 156 198 174 203 245 247 198 820 - Actual (PCR) 106 127 95 96 424 Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1987-90 Arex C 40 (20) Total Investment in million US (18) + (19) - SAR (04/87) 1341 963 744 793 753 723 726 665 698 2996 - SAR (11/87) 1354 1128 790 707 752 787 747 872 847 2993 - IDB (11/87) 791 713 744 759 739 712 641 2954 - Actual (PCR) 632 761 570 563 2526 (21) Contribution to Investment Before Workina Canital Adiustments (15)/(20) - SAR (04/87) 7* -8% -3% -12% -9* Ot 6t 18% 45% -4% - SAR (11/87) 7% -3% -4% -12% -6% 5% 16% 10% 41% 1% - IDB (11/87) 3% -16% -6% 6% 24% 33% 52% 2% - Actual (PCR) 0% -9% -63% -74% -33% (22) Contribution to Investment After Workina Capital Adluntments (17/(20) - SAR (04/87) 7% -1% -8% -25% -9% -9% -5% 4% 32% -12% - SAR (11/87) 10% 6% -10% -23% -10% -1l 4% 6% 29% -7% - IDB (11/87) -11% -37% -11% -2% 2% 14% 26% -12% - Actual (PCR) -S 5% -71% -70% -31% (23) External Financing in million US (20) -(17) - SAR (04/87) 1248 973 801 988 823 792 763 636 474 3366 - SAR (11/87) 1217 1059 866 869 829 792 717 816 604 3207 - IDB (11/87) 879 975 827 777 725 614 474 3304 - Actual (PCR) 661 721 975 9S5 3312 (24) Borrowing in million USS - SAR (04/87) 1094 861 698 783 714 767 744 593 455 3007 - SAR (11/87) 1099 959 786 700 685 680 692 807 596 2756 - IDB (11/87) 789 827 716 683 625 600 465 2851 - Actual (PCR) 538 609 893 823 2863 (25) Consumer Contributions and Other Non-Borro.ed Funds in million USS - SAR (04/87) 82 19 17 17 22 21 20 43 19 80 - SAR (11/87) 24 8 21 20 14 14 15 9 7 63 - IDB (11/87) 30 19 14 14 15 10 5 62 - Actual (PCR) 18 27 44 9 98 (26) Government Contributions in million USS - SAR (04/87) 73 92 87 188 87 4 0 0 0 279 - SAR (11/87) 94 92 59 150 130 100 10 0 0 390 - IDB (11/87) 60 129 97 79 85 5 4 390 - Actual (PCR) 105 85 38 123 351 41 Annex D COMMENTS FROM THE BORROWER Republic of Colombia Ministry of Mines and Energy Office of the Minister Bogota, May 4, 1995 Mr. Yves Albouy Chief, Infrastructure and Energy Division Operations Evaluation Department IBRD, Washington, D.C. Ref.: Power Sector Adjustment Project (Loan 2889-CO) Performance Audit Report Dear Mr. Albouy: In reply to your communication of April 4 last, I give below some comments of the Ministry of Mines and Energy on the above-referred report: As the Bank's report notes, there were serious deficiencies in the design of the operation which led to its subsequent cancellation without 100% of the funds having been disbursed. The report provides a very good summary of the shortcomings and problems of the operation, and of the expectations that the Bank and the Colombian Government had during the years the loan was effective. Nevertheless, regarding the ratings assigned by the audit, we feel that the assertion that "the institutional development achieved [is] negligible" (paragraph 16, page 11 [of the English version]) is too strong. While it is true that accomplishment of part of the institutional objectives took longer that than originally programmed, the fact is these objet 'ives were achieved. In a wider context, it can actually be stated that the measures in qutstiuin provided the basis for the development of the institutional framework and the regulation of the power sector that began at the start of the present decade. In this respect, therefore, the outcomes were to a large degree satisfactory. Moreover, the report does not make a detailed examination of the reasons for cancellation of the loan on the part of the Colombian Government. In our opinion, Colombia's position at that time clearly shows that the first to learn a lesson from the operation was the Government, which decided to cancel the loan and undertake a farreaching restructuring of the power sector. On the basis of the foregoing, this Ministry accordingly respectfully requests that the conclusions of the report be reconsidered as regards all points concerning the institutional 42 Annex D outcomes, since today, a number of years after the operation, the results in terms of restructuring of the Colombian power sector are quite tangible and positive. Cordially, s/Leopoldo Montanez Adviser to the Minister of Mines and Energy 43 Anner E Update On Sector Developments and Bank Involvement' Sector Reform 1. Starting in 1991, the Government, with Bank support, redefined long-term policies for the power sector. The first results of the implementation of these policies can be seen on several fronts: On institutions. (i) Approval by Congress in June 1994, of a new Electricity Law instituting the legal framework for reform, covering: the promotion of competition in the power sector; regulation of natural monopolies; adequate protection of the environment, tariffs based on economic costs (allowing a limited amount of cross-subsidies); transparent subsidies to low-income households funded from cross-subsidies (limited to 20 percent of other users' cost of service) and from national budget resources; transformation of ISA, the large national government controlled generation and transmission company, into a transmission company dedicated to provide open access to the grid; the creation of the national electricity pool, enabling the development of a bulk electricity market; formal establishment of the Energy Regulatory Commission staffed with highly respected professionals, which is playing an active role in implementing the new regulatory framework. (ii) Approval of the Public Services Law establishing the Superintendency of Public Services with ample powers to enforce rules and regulation formulated by the Energy Regulatory Commission. (iii) Performance contracts have been established between FEN, the energy sector finance corporation, and the power enterprises in order to achieve improved performance indicators (loss reduction, better financial and operation performance). On privatization. One thousand four hundred MW of new generation capacity private sector owned, equivalent to 14 percent of the current installed capacity, will be commissioned over the next four years. The fully privately owned Proelectrica generation company (100 MW) started operations in 1993. In addition the distribution company Tulua was privatized in 1994, and the Bogota Power Company (Empresa de Energia de Bogota) has invited the private sector to manage the operation and maintenance of Guavio (1000 MW). On pricing. There has been a substantial reduction in tariff distortion in all consumer classes. Moreover, tariffs have increased from 71 percent of long-run marginal cost (LRMC) in 1992 to 87 percent of LRMC in 1994. The target is 100 percent in 1997. On subsidies. Subsidies have been reduced from half a billion dollars per year to US$120 million in 1994. There is consensus that any subsidies should be transparent and financed by taxes. On competition. The market for supply of electricity to large consumers (demand greater than 2 MW) has been deregulated. Industries in Colombia are already shopping around for supply contracts and utilities will have to lower their tariffs if they do not want to lose their large customers to the competition. Bank involvement 2. An Energy Sector TA loan (US$12 million) was approved in December 1994 to support sector reform and another one of US$212 million, for the proposed Power Market Development Project, is currently being finalized. I Information provided by the Region in April 1995.     :，。－.:-HVIT二“」人J. &’り・レ‘:1-&N ユ％Tgd8H ぞ11に丁SV【1-