Colombia - Urban Infrastructure Services Development Project

Document of The World Bank Report No: 17057-CO PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$75 MILLION TO FlINDETER GUARANTEED BY THE REPUBLIC OF COLOMBIA FOR AN URBAN INFRASTRUCTURE SERVICES DEVELOPMENT PROJECT May 21, 1998 Finance, Private Sector and Infrastructure Sector Management Unit Country Management Unit for Colombia, Ecuador and Venezuela Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective June 30, 1997) Currency Unit = Colombian Peso (COP) COP 1,087.72 = US$1.00 US$0.00092= COP 1.00 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS DFT Dep6sito a Termino Fijo (index of bank deposit rates) FEDESARROLLO Fundaci6n para la Educaci6n Superior y el Desarrollo (Foundation for Higher Education and Development) FINDETER Financiera de Desarrollo Territorial (Local Development Bank) GDP Gross Domestic Product GOC Government of Colombia ICB International Competitive Bidding IDB Inter-American Development Bank IFI(s) Intermediary Financial Instiution (s) MDP Municipal Development Project PDT Programa de Desarrollo Territorial (Municipal Development Program) SOE Statement of Expenditures SUPERBANCARIA Superintendencia Bancaria (Banking Superintendency) UISDP Urban Infrastructure Services Development Project Vice President: Shahid Javed Burki Country Manager/Director: Andres Solimano Sector Manager/Director: Krishna Challa, Acting Task Team Leader/Task Manager: Eleoterio Codato  Colombia Public Infrastructure Services Development Project CONTENTS A: P]ROJECT DEVELOPMENT OBJECTIVE 2 1. Project development objective and key performance indicators 2 B: STRATEGIC CONTEXT 2 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 7 C: PROJECT DESCRIPTION SUMMARY 7 1. Project components 7 2. Key policy and institutional reforms supported by the project: 7 3. Benefits and target population 8 4. Institutional and implementation arrangements 8 D: PROJECT RATIONALE 12 1. Project alternatives considered and reasons for rejection 12 2. Major related projects financed by the Bank and/or other development agencies 13 3. Lessons learned and reflected in the project design 14 4. Indications of borrower commitment and ownership 14 5. Vlalue added of Bank support in this project 14 E: SUMMARY PROJECT ANALYSIS 15 1. Economic 15  ii 2. Financial 15 3. Technical 16 4. Institutional 17 5. Social 17 6. Environmental assessment 17 7. Participatory approach 18 F: SUSTAINABILITY AND RISKS 18 1. Sustainability 18 2. Critical Risks 18 3. Possible Controversial Aspects 20 G: MAIN LOAN CONDITIONS 20 1. Effectiveness Conditions 20 2. Other 20 H. READINESS FOR IMPLEMENTATION 21 I. COMPLLANCE WITH BANK POLICIES 21 Annexes Annex 1: Project Design Summary 22 Annex 2: Project Description 23 Annex 3: Estimated Project Costs 25 Annex 4 A: Cost Benefit Analysis Summary 26 Annex 4 B: Cost Effectiveness Analysis Summary 28 Annex 5: Financial Summary for FINDETER 30 Annex 6: Procurement and Disbursement Arrangements 31 Table A: Project Costs by Procurement Arrangements 33 Table B: Allocation of Loan Proceeds 33  iii Annex 7: Project Processing Budget and Schedule 34 Annex 8: Documents in the Project File 35 Annex 9 A: Statements of IBRD Loans and IDACredits 37 Annex 9 B: Statement of IFC's Commited and Disbursed Portfolio 38 Annex 10: Country at a Glance 39 Additional annexes, where applicable: Letter of Sector Policy, Eligibility Criteria for Beneficiaries and Subprojects, and summaries of the Environmental Assessment, Social and Environmental Analyses, Indigenous Peoples' Plan, Resettlement Plan, etc. Map: IBRD 18370R1  Colombia Urban Infrastructure Services Development Project Project Appraisal Document Latin America and the Caribbean Regional Office Finance, Private Sector and Infrastructure Sector Management Unit Date: May 21, 1997 Task Team Leader/Task Manager: Eleoterio Codato Countiy Manager/Director: Andres Solimano Sector Manager/Director: Krishna Challa, Acting Project ID: CO-PE-6861 Sector: Urban Development Program Objective Category: Economic Management (EA) (UY) Lending Instrument: Specific Investment Loan (SIL) Program of Targeted Intervention: [ ] Yes fx] No Project Financing Data [x] Loan [ ] Credit [ Guarantee [ ] Other [Specify] For Loans/Credits/Others: Amount (US$mn/SDRm): 75 million Proposed terms: [ Multicurrency [x] Single currency, US Dollars Grace period (years): 5 [ Standard Variable [ ] Fixed [x] LIBOR-based Years to maturity: 17 Commitment fee: 0.75 % Service charge: not applicable Financing plan (US$m): Source Local Foreign Total FINDETER 21.25 0.00 21.25 IBRD 0.00 75.00 75.00 Financial Intermediaries 18.35 0.00 18.35 Autonomous Public Entities and Private Companies 10.40 0.00 10.40 Total 50.00 75.00 125.00 Borrower: Financiera de Desarrollo Territorial (FINDETER) Guarantor: Re]public of Colombia Responsible agency: FINDETER 1999 2000 2001 2002 2003 Estimated disbursements (Bank FY/US$M): Annual 5.0 15.5 20.0 20.0 14.5 Cumulative 5.0 20.5 40.5 60.5 75.0 Project implem,entation period: 4 years Expected effectiveness date: 10/30/98 Expected closing date: 06/30/03 OSD PAD Form.: July 30, 1997  Page 2 A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The objective of the Urban Infrastructure Services Development Project (UISDP) is to contribute to the expansion and solidification of the credit market for public autonomous and private providers of local public services by enhancing FINDETER's capacity to offer long-term financing for urban infrastructure investments. This objective is complemented by those of the Second Municipal Development Project, financed by the Interamerican Development Bank (IDB), which aims at: (i) expanding and solidifying the subsovereign credit market by enhancing FINDETER's capacity to finance municipal investments; (ii) strengthening the financial and management capacity of municipalities to get better access to commercial borrowing and improve the provision of municipal infrastructure services; and (iii) helping FINDETER become an efficient second-tier financial institution. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 17107-CO Date of latest CAS discussion: November 6, 1997 The project supports the CAS goal of improving infrastructure services by establishing a financing mechanism for public autonomous and private providers of urban public services. Indirectly, it also supports two other goals, namely: (i) attaining public sector responsiveness and efficiency, and (ii) ensuring sustainable development by supporting the thrust of the reforms mandated under Colombia's Urban Public Services Law (Law No. 142 of July 11, 1994) and facilitating access to long term capital for sustainable economic growth, respectively. 2. Main sector issues and Government strategy: Because of the nature of the proposed project there are two sets of issues that need to be discussed. The first set of issues has to do with the provision of urban infrastructure services, while the second is related to local infrastructure finance and the role of FINDETER. Urban Infrastructure Service Provision There are approximately 1,060 municipalities in Colombia, of varied size and capabilities. The larger and fiscally strong municipalities have moved quickly to take up new responsibilities and utilize their new resources efficiently, while smaller municipalities are responding more slowly, hampered by weak managerial, technical and financial capacity. Low service coverage: Due to rapid urbanization, there is a growing demand for public services in Colombian cities. The coverage of municipal services varies considerably with city and region, but smaller cities and towns, as well as low- income areas in larger cities, still lack the most basic infrastructure. Over 40 percent of urban streets nationwide are unpaved. Street maintenance is neglected and traffic management remains non-existent even in the larger cities. And at least 30 percent of solid waste in most cities remains uncollected. Inadequate service delivery capacity of municipalities: Since the onset of decentralization policies of GOC in 1983, local governments in Colombia have become increasingly responsible for the provision of a wide range of public services including water and sanitation, solid waste disposal, health, education, urban transport, market places, among others. The central government's on-going drive toward greater decentralization and private sector participation (especially Law 142 of 1994) mandates municipalities to  Page 3 modernize their service provision. Municipal governments have been the main beneficiaries of the decentralization process started in 1983 which have included measures to strengthen the democratic process at the local level, foster community participation in local development, and eliminate the inefficiencies associated with the provision by central agencies of services that are local in nature. However, despite efforts to improve the institutional capacities of local governments, many continue to be unable to adequately discharge their new responsibilities. Institution building is by definition a long term enterprise and will continue to require continued effort through appropriate policies and incentives to improve the capacity of Colombian municipalities to deliver public services. Private sector participation in urban services. The Constitution of 1991 gave municipalities responsibility for managing urban services. Law 142 of 1994 has made this mandate operational. The law: (a) requires that service companies adopt business accounting and management practices, including self-financing of capital investments; (b) sets deadlines for conversion of urban service providers into public-, mixed-, or private-sector enterprises, and (c) establishes commissions to regulate each service. FINDETER, however, is not yet prepared to assist local governments in complying with this key law. The organization has lent overwhelmingly to the central administration of municipalities, and relatively little even to public-sector urban service companies. It has made virtually no loans to private urban service providers. GOC strategy calls for FINDETER to galvanize private-sector participation in urban services through both technical assistance and finance. However, the organization currently largely lacks the staff capacity and mechanisms to provide such services. Local Infrastructure Finance and the Role of FINDETER In recent years, the Colombian economy has been confronting increasingly difficult challenges. The sharp deterioration of Central Government finances in the context of a persistent real appreciation of the Colombian peso, continued inflationary pressures, and sluggish economic performance, together with higher unemployment, led the Government and the Central Bank to adopt, in early 1997, a series of restrictive fiscal and monetary measures designed to reverse these trends and restore macroeconomic equilibrium. These measures have resulted in substantially higher real domestic interest rates, the implementation of mechanisms to discourage external borrowing, stricter limits on overall public indebtedness, and severe budget cuts, primarily affecting the public sector investment program. Within this difficult overall context, three interconnected trends have particular importance for FINDETER. First, competition has greatly increased in the financial services industry; Government deregulation has removed many of the differences among the five types of IFIs (banks, financial corporations, leasing companies, finance companies, and savings and loans), and has allowed IFIs to enter new lines of financial business. Increasingly, all are competing for the others' formerly protected markets. Removal of regulatory barriers and national ownership requirements has permitted the entry of foreign banks. Also, both IFIs and Colombian companies are increasingly raising funds on international markets, an alternative that creates competition between the local and international markets. Most of the formerly public banks have become private, and are competing more aggressively. This much greater competition has resulted in compressed lending margins. Second, the capital markets have grown in importance and are expected to continue expanding, albeit gradually, offering new sources of longer-term liabilities. In particular, the privatization of the social security system is channeling large amounts of resources to private pension fund administrators. Third, new Government regulation requires IFIs to develop a much greater sophistication in managing exchange rate, term, interest rate, and liquidity risks. Colombian IFIs are currently struggling to create systems to manage these risks, many for the first time. In sum, these changes have created a much more competitive environment, which offers FINDETER both risks and opportunities, which are further explored below. a) The changing regulatory environment of financial markets:  Page 4 The credit market. Because of the fast growth of subnational indebtedness during the 1990s, and the central government's concerns for the fiscal impact of such a rise, a series of regulations were adopted to limit expansion of the credit market. On the demand side, the GOC limited local governments' borrowings to the level where debt service reached 30 percent of gross income-until the enactment of Law 358 in December of 1996, which allows local governments to borrow until debt service reaches 40 percent of savings. On the supply side, it increased the required debt-service coverage ratios of IFIs on loans to local governments from 120 percent, then to 130 percent, and finally to 150 percent; and set the conversion factor for weighting the risk of loans to local government at 150 percent, in contrast to most corporate loans weighted at 100 percent. These regulations reduced the attractiveness to IFIs of FINDETER's single loan product, which has remained unchanged since 1990. In particular, the limits to onlending rates and the greater capital requirements substantially cut the profitability of FINDETER loans for IFIs that are already highly leveraged. One indication is that a portion of subprojects approved by FINDETER are not being financed because of lack of IFI interest in brokering the credit. FINDETER loans have also become less competitive to local government entities. A few IFIs now offer large local governments interest rates below those of FINDETER (in part, because some IFIs at the moment have access to resources that are cheaper than those available through FINDETER rediscounts), although FINDETER continues to offer much longer terms. Facing pressures to produce infrastructure during their three-year terms, many mayors choose IFIs' quick processing and disbursement over the narrowing interest rate and term advantage of FINDETER loans. In sum, FINDETER loans have become less attractive to its two main clients, the IFIs and local governments, because it has not responded effectively to the changes in its regulatory and market environment. The institution has recently succeeded in reducing the length and complexity of its loan application process somewhat; however, it has made no other changes in its products. Moreover, as its market share has stagnated, the organization has come to view IFIs as unfair competition, rather than as partners in local government lending. The bond market. The development of capital markets and institutions and the lifting of Colombia's prohibition in 1991 on local government bonds, has resulted in an emerging market for local government paper in Colombia, one of the first in Latin America. However, bonds still account for a modest share of local government credit (5 percent to 18 percent between 1991 and 1997). The largest municipalities dominate this market, although some intermediate ones have also issued bonds. Thus far, most emissions have been made in the national market to refinance existing municipal debt, but a few large municipalities have plans to issue debt on international markets. Bond issues on local and international markets represent an important opportunity for FINDETER. The organization's strong equity position (see Section C.4 below) -48 percent of its funding- and the low credit risk of its assets, which consist overwhelmingly of commercial bank debt, would make a properly structured issue highly attractive on Colombia's capital markets, and help this market develop. An international issue by FINDETER could have favorable characteristics that would promote both Colombia's track record to investors and local government lending. However, FINDETER has lacked the financial staff and a liabilities strategy necessary to pursue this opportunity wisely. Here, too, the organization has yet to adapt to changing markets and regulations. b) FINDETER's potential in the new environment: The dynarnism of the credit and capital markets and the changes in the regulatory environment have outpaced FINDETER's response capacity to date. Yet, these same changes provide the institution with an important opportunity to develop new roles and products, in order to become a more efficient instrument of local government finance and development. To do so, it must capitalize on its strengths, and overcome some weaknesses.  Page 5 Strengths FINDETER has an established history with its municipal clients. Its US$1 billion in loans have financed critical physical investments that include water and sewerage systems (35 percent of loans in 1995), urban roads (29 percent), schools (17 percent), and parks and markets (19 percent). The organization has virtually no late payments and no defaults on its portfolio. The terms of FINDETER loans still compare favorably with most available elsewhere, either through the other loans of commercial banks or through the emerging municipal bond market. Although the interest rate differential between FINDETER and other IFIs has narrowed, the length of FINDETER loans (8 to 12 years) continues to be much longer than that of IFIs (typically, three to five years), providing a better match for the economic life of the infrastructure financed. However, the effectiveness of its current long-term financing is hampered by the lack of any debt-indexation mechanism in the context of a relatively high (but stable) inflation economy. In addition, FINDETER has achieved a strong financial position. Equity now accounts for 48 percent of its funding, compared with Superbancaria norms that require a minimum of 9 percent for financial institutions. Thus, FINDETER has ample room to leverage its equity with more loans, and to innovate carefully both in making loans (assets) and raising funds (liabilities). FINDETER also has strong public sector support. The GOC has repaid the debt service on much of the Banks' project lending for FINDETER, in order to contribute to the capitalization of the organization. Because of its track record and knowledge of local government, the GOC has looked to FINDETER to administer an increasing portion of its infrastructure grant programs (cofinancing) to municipalities. It has also given FINDETER a prominent role in its social sector strategy, and is counting on FINDETER to help galvanize private-sector participation in urban services. Wealmesses Despite these strengths, however, studies conducted as part of project preparation have identified specific areas of its operations which need addressing for it to play a more effective and efficient role in the municipal credit market. Broadly defined, these areas are: (i) FINDETER's operation as a second-tier bank; (ii) the quality and sustainability of subprojects, and (iii) technical assistance delivery. (i) Operation as a second-tier bank. Although, FINDETER is a second-tier financial institution, it has only recently begun to meet three critical challenges that lie at the heart of this function. First, it needs to further its capacity to meet the needs of its two key clients, commercial banks and local service providers. Its single loan product has remained unchanged for the six years since the organization's founding, even though the regulation and markets affecting urban service provision have changed drastically. Second, the organization has only begun to manage many of the risks of banking, including term risk, liquidity risk, and -most important of all- exchange rate risk. Yet the organization does not have systems to manage these risks. Overall, FINDETER must hone its capacity as a second-tier bank, through financial innovation in its assets and liabilities, and by managing risks much better. In addition, strengthening the banking function requires separating its grant management from lending. The sheer volume of the cofinancing resources managed by FINDETER through its grant funds -for urban development, for roads, and, most recently, for social investment- has increased greatly in the past three years. And central government increasingly designates these grants for use by specific local governments on pre-defmed projects before they reach FINDETER, thus increasing the potential for politicizing their use. (ii) Quality and sustainability ofsubprojects. FINDETER has tried to carry out many of the tasks of the subproject cycle with its own staff. This and other problems (detailed in Section 10) have led  Page 6 the institution to perform unevenly in managing its subproject cycle and therefore in ensuring the quality and sustainability of subprojects. Appraisal methods that had been developed for the first Municipal Development Project (MDP) financed by both Banks were, in some cases, used incompletely, with the result that many subprojects, especially in the water sector, suffered from technical, financial and institutional shortcomings. (iii) Technical assistance and institutional strengthening. Apart from preinvestment assistance linked to subproject preparation, FINDETER has done little to facilitate technical assistance and institutional strengthening more broadly to its municipal clients. Yet, the organization spends large sums of money in its technical assistance function, which has primarily focused on preinvestment support. FINDETER estimates that its total operational costs have increased from 2 percent to 4 percent of its loan portfolio from 1993 to the present. This burden blunts the organization's competitive edge as a second-tier bank. Nevertheless, Colombia lacks and badly needs an organization that coordinates technical assistance to help local governments modernize and meet the great changes required by new urban service regulation, such as Law 142. Recognizing the need to address these issues, FINDETER has elaborated a corporate strategic plan to be implemented between 1997 and 1999. Said plan includes, among others, actions for: (i) the diversification of financial products and funding; (ii) the improvement of risk management capacity; (iii) the improvement of its cost accounting system; (iv) the strengthening of quality control of subproject review; (v) the development of a municipal information bank and advisory services; and (vi) product promotion, and other initiatives to fulfill its mandate. The implementation of the plan is supported by the parallel IDB operation (see Section C.3 below).. Many of the changes envisaged under said plan have already been implemented (see Section D.4 below). Government Strategy The GOC has responded to the above mentioned issues principally by pursuing greater decentralization politically and operationally. It has taken various legal measures to empower municipalities by reformning local taxation (Law 14 of 1983), revising the legal status of local governments (Law 11 of 1986), and allocating increased shares of central government's revenues to municipalities (Law 12 of 1986), and mainly, transferred responsibilities for the provision of local services from central agencies to municipalities (Decrees 77, 78 and 80 of 1987). These changes have had a dramatic impact on municipal revenue and expenditures, allowing municipal investments, for example, to grow from 0.7 percent in 1988 to 1.8 percent of GDP in 1994 (IBRD Report No. 15298-CO). Transfers have led a striking increase in municipal revenues. They roughly doubled from 1988 to 1994, from 0.76 percent to 1.49 percent of GDP. The rapid increase in transfers has had little or no negative impact on local fiscal effort; rather, municipalities have maintained or increased their fiscal revenues. Own-source municipal revenues have increased almost as fast as transfers -from 1.13 percent to 2.05 percent of GDP. More recently, Law 142 of 1994 on the provision of urban public services further emphasized decentralization by requiring major service provider utilities to become self financing and financially autonomous service companies. The government has particularly placed an emphasis in this regard on water utilities requiring them to develop management plans and operate on a business-like basis. The government's strategy in this regard is clearly aimed at upgrading the management capacity of local government entities in order to enable them to comply with the new requirements. Secondly, the government strategy is to support reforms in FINDETER that will make it stronger and more efficient with a view to furthering the GOC's modemization agenda on decentralization, private sector participation and the deepening of financial markets. To assist in the implementation of this strategy, the GOC authorized FINDETER to obtain financing from the Bank and the IDB.  Page 7 3. Sector issues to be addressed by the project and strategic choices: Given the clear Govermment strategy for FINDETER and the recognition that no single project can address all of the sector issues related to urban infrastructure services provision in Colombia, choices were made based on FINDETER's mandate, strengths and weaknesses, and the comparative advantages of the Bank and the IDB. As a result, the Bank was asked to assist in establishing a financing mechanism for public autonomous and private service providers in support of the Govermment's reform agenda for the provision of urban public services, while the parallel IDB operation will support the structural reforms in FINDETER to address the institutional issues discussed above through a program of technical assistance for institutional strengthening and the continuation of FINDETER's financing of subloans for other subnational entities. With its own capital, FINDETER will establish, as part of the parallel IDB operation, a financing mechanism for technical assistance to local governments in order to support the upgrading of municipal management capacity on a demand basis. The proposed Bank project will assist in addressing the following issues: * increase service coverage by contributing to the financing of infrastructure investments to develop, improve or expand the provision of local public services in eligible sectors; * develop the credit market for public autonomous and private providers of local public services, by focusing project funds only on such providers and, thus, contribute to the implementation of GOC's modernization agenda on decentralization, private sector participation and the deepening of financial markets; and, * along with the parallel IDB operation, enable FINDETER to reestablish itself as a leading institution in local infrastructure lending and municipal development. C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Component Category Cost Incl. % of Bank- % of Contingencies Total financig Bank- (US$M) (US$M) financing Urban Infrastructure Investments: consisting of subprojects undertaken by public autonomous and private physical 125.0 100.0 75.0 60.0 entities to develop, improve or expand provision of urban public services in eligible sectors (including detailed engineering design and construction supervision costs to be financed by counterpart funds from project entities) Total 125.0 100.0 75.0 60.0 2. Key policy and institutional reforms supported by the project: Through the financing of investments in urban infrastructure services, including supervision and quality control, the project will support two policies which figure prominently in the GOC's reform agenda in the infrastructure sector. Specifically, the project will: (i) assist the GOC in implementing the provisions of Law 1.42 (corporatization of public entities providing urban infrastructure services); (ii) promote private sector participation in public infrastructure; and (iii) contribute to the deepening of financial markets.  Page 8 3. Benefits and target population: The project will improve urban infrastructure services in Colombian cities and towns. It will also enhance the productivity of urban centers which generate the great bulk of national GDP-through improving the efficiency of their physical plant, resulting in increased land values in beneficiary areas. The project is not explicitly targeted to low-income groups, as most infrastructure investments are likely to benefit the general population of municipalities and departments where FINDETER projects are financed. Nevertheless it is expected that certain categories of investments, such as markets and expansion programs in water and sanitation, will have a highly positive impact on the urban poor, and particularly on lower-income women. Indirect benefits would accrue from the revision of FINDETER's subproject review and evaluation criteria, resulting in the execution of more cost effective projects. 4. Institutional and implementation arrangements: Background on the Borrower and Executing Agency: FINDETER is an autonomous, quasi-public financial organization, which is linked to the central government through the Ministry of Finance. It was established in 1989 (by Law 57 of 1989, Statutes approved by Decree 789 of 1990 and modified by Decree 1916 of 1993) as a result of the decentralization process and the restructuring of the Banco Central Hipotecario. It officially began operating in 1991 and currently has as its chief functions to: (a) finance subnational investments through a rediscounting mechanism, and (b) administer, through a trust facility, resources transferred to it by other public entities. The law and its statutes also allow other types of financial operations such as the issue of financial instruments, and the receipt of deposits from public entities. FINDETER's operations are subject to the regulations of the Banking Superintendency-Superbancaria. Its financial management is sound and consistent with Bank requirements. FINDETER has an authorized capital of US$ 120.3 million equivalent comprised of 1 million shares. The Republic of Colombia owns 91.51 percent of the shares and the remaining 8.49 percent is owned by the 29 departments that comprise the Nation. According to its statutes, FINDETER does not distribute profits. Consequently, all profits are either transferred into statutory reserves, used to increase the capital, or as contributions to special programs. This, along with asset revaluation, and the government's program for capitalization, has given FINDETER a very strong financial position. Currently, its equity ratio is 62 percent. This translates into an important financial strength for FINDETER as it has ample margin for leverage. A more detailed financial analysis of FINDETER can be found in the project's technical files. In terms of organizational structure, FINDETER's highest authority is the Board of Directors, which has six members: (a) the Minister of Finance, who presides it; (b) the Minister of Economic Development; (c) the Economic Secretariat of the Presidency; (d) the Chief of the National Planning Department, and (e) two representatives of subnational entities. Senior management is led by the President of FINDETER, who is assisted by six senior executives in charge of the principal operational areas. As a result of its newly formulated strategic plan, FINDETER is introducing changes in its organization in order to improve its operation as a second-tier institution. The key areas to be restructured are the financial management and loan processing departments. In addition, FINDETER is making organizational modifications in order to facilitate changes in the content and delivery of the technical assistance it will offer to subnational entities. FINDETER does not lend to local governments and service providers directly, but rather operates as a second-tier bank by channeling its loans through intermediary financial institutions (IFIs), mainly commercial banks. The transfers from central government to local governments, or revenue from service tariffs or fees, serve as the main collateral for these loans. After appraising a project proposal, FINDETER approves it and then authorizes an IFI to lend to the requesting entity. Until now, FINDETER has rediscounted up to 85 percent of the total loan amount from the IFI, while the IFI retained 15 percent or more of the loan in its own portfolio. Also, FINDETER has lent to IFIs at 2.5 percent over an index of  Page 9 bank cleposit rates (DTF), setting a maximum rate (DTF + 5 percent) at which IFIs can onlend to local governments. IFIs keep 100 percent of the credit risk on the entire loan. Since its creation in 1989, FIND]ETER has financed roughly US$1 billion in loans to over 700 municipalities (about 60 percent of Colombia's municipalities) and has pioneered urban service lending in Colombia. FINDE]TER has a good, long standing relationship with the Bank as the executing agency for several projects, including the first Municipal Development Project (MDP; loan 3336-CO). Although the MDP has represented only a small subset of FINDETER's operations, the Government of Colombia (GOC) considers that the Bank's involvement has been instrumental in helping the institution improve infrastructure project quality, incorporate lessons learned into its credit policies and regulations, and assist the smaller municipalities in developing infrastructure investments. As a result, in 1995, the GOC, reiterating and emphasizing FINDETER's central role in financing urban infrastructure services, authorized the institution to seek new financing from the multilateral banks. Lessons from independent evaluations of previous projects, which can be found in the technical files, have guided the project's objectives and design (see discussion of lessons leamed in Section D.3 below). Institutional Arrangements FINDETER is the borrower and executing agency and the Republic of Colombia is the guarantor. The Borrower will deposit the loan proceeds in a special foreign-exchange account to be established in a commercial bank acceptable to the Bank. FINDETER will continue to operate as a second-tier institution, which rediscounts loans made to eligible subborrowers by IFIs. For purposes of the project, FINDETER will rediscount the loans granted by the IFIs, on terms and conditions specified in the project operational manual; specifically, FINDETER shall rediscount up to 100 percent of the total loan amount from the IFI for loans with latter maturities of 8 years or more, while continuing to rediscount up to 85 percent of all other loans. Even though subnational entities, consisting of local governments and their agencies or enterprises, including private or mixed capital companies operating on behalf of local governments may borrow from FINDETER, only autonomous public enterprises and private or mixed capital companies will be eligible subbotTowers under the project. The eligible financial intermediaries will be financial institutions that habitually receive and invest voluntary savings of the public, are supervised by, and are in good standing with thie Superbancaria, and have been appraised by FINDETER, using criteria and methods satisfactory to the Bank, as being creditworthy, able to assess subsovereign credit risk, and having appropriate financial controls, especially with respect to portfolio performance. Implementation Arrangements The project will be implemented over a period of about four years, from October 30, 1998 to December 31, 2002. The closing date will be June 30, 2003. The implementation of the UISDP will be governed by a project operational manual. A preliminary version of this document has been reviewed and discussed during project preparation. The project operational manual is to be issued by FINDETER, to the Bank's satisfaction, as a condition of loan agreement effectiveness. Once approved, the project operational manual may be changed only with the concurrence of the Bank. Eligible sectors for financing under the UISDP are: water and sewerage, urban transport (exclucing metro systems), environmental protection (including drainage and flood control), solid waste management, bus terminals and river wharves, market places, parks and green areas, slaughterhouses, local telecommunications, education, health, gas distribution and other sectors that may be agreed upon between the BorTower and the Bank. The project operational manual shall also include subproject appraisal methods and criteria, as well as subproject preparation guidelines and procedures used by FINDETER's staff, intermediaries and subborrowers in carrying out their respective functions under the project.  Page 10 Maximum individual subproject size for the UISDP will be $15 million equivalent. Subprojects estimated to cost more than $10 million equivalent will be presented to the Bank's project team for ex-ante review, while subprojects estimated to cost $10 million equivalent or less will be (i) authorized by the Bank after receiving summary information thereon and (ii) reviewed ex-post by the Bank, by sampling (see below). The project operational manual also includes the eligibility criteria for participating IFIs and the financial conditions of the subloans. FINDETER will rediscount credits at a variable rate to be determined semiannually and based on its funding costs in such a way as to ensure adequate levels of return on equity, as agreed between the Borrower and the Bank. Maturity and grace periods for subloan amortization will be established for each sector of investment, with maximums of 12 and 3 years, respectively. Intermediaries will assume the credit risk and charge a spread to be determined by market conditions. For purposes of the project, onlending terms and credit policies, as established in the project operational manual, shall be changed only with the concurrence of the Bank. The legal instruments for onlending will consist of: (a) commitment agreements to be executed between FINDETER and an eligible project entity in respect to the execution of a subproject; (b) subloan agreements to be executed between the IFIs and the subborrowers in respect to the financing of a subproject; (c) if the subproject plan includes contributions by third parties, sponsoring agreements to be executed between said sponsors and the subborrower; and (d) promissory notes to be executed between subborrowers and IFIs and endorsed by the IFIs to FINDETER once all other applicable instruments under (a), (b) and (c) above are in place. FINDETER has been using similar instruments for its ongoing operations and agreed to provide the Bank with model instruments, satisfactory to the Bank, it intends to use for purposes of the project as condition of loan effectiveness. Subproject appraisal, monitoring and evaluation In the UISDP, FINDETER will focus on ensuring that the subprojects it finances comply with agreed upon economic, financial, institutional and environmental guidelines included in the project operational manual. The detailed design and appraisal functions are expected to be the responsibility of eligible project entities who will contract directly the specialized consulting services needed to carry out such tasks. The costs of these services may be financed by FINDETER through other funding sources, or be recognized as a counterpart investment. Consultants will use the sectoral guidelines and subproject design instruments provided by FINDETER. FINDETER's role will be to: (a) develop and continually update project appraisal tools; (b) disseminate and promote these tools among eligible project entities and financial intermediaries, and (c) rapidly review and confirm that the appropriate analyses have been completed, in accordance with project operation regulations and existing sectoral policies. FINDETER has been reviewing, completing and updating the guidelines and preparation manuals for each sector-in the water and sewerage sector this effort has been done in collaboration with the Water Regulatory Commission, of the Economic and Social Development Ministry. For the UISDP, sectors in which subprojects may be financed will be declared eligible as soon as the appropriate guidelines and instruments for the respective sector are completed and agreed upon with the Bank, and are included in the project operational manual. Given the lessons learned in the context of the MDP, and in order to improve subproject quality, FINDETER will: (a) ensure that new appraisal instruments and methods in each sector are applied consistently; (b) confirm that required demand studies are carried out, and that size and design of subprojects are based on projected demand for services; (c) verify that community consultations (especially with low-income groups) have been carried out, in order to ensure the capacity to pay of potential beneficiaries and/or identify the sources of subsidies, should these be necessary; and (d) promote and disseminate sectoral appraisal guidelines and instruments among eligible project entities, financial intermediaries, and consultants.  Page 1 1 FINDETER will also seek to improve the appraisal, execution and monitoring of subprojects through: (a) the use of its information system to list and make available to its clients names and references of available consultitng services in the different sectors; (b) inclusion of basic eligibility and selection criteria for consultants who will design and/or appraise subprojects, based on a points system that takes into account both technical capacity and previous performance; (c) require that participating financial intermediaries place greater emphasis on the supervision of projects, which would be contracted independently following procedures acceptable to the Bank, and (d) carry out ex-post evaluations annually of no less than 10 percent of all subprojects financed each year, as part of a process of continuous feedback and adjustment of guidelines and methods. Finally, recognizing that project quality and sustainability depend not only on appropriate design, but also on the success of the start up, implementation and management of projects, FINDETER will require a business plan -duly approved by the appropriate sectoral authorities- for each public service investment it finances. In the absence of such a plan, the subproject to be financed will include the development of a business plan in order to ensure its financial sustainability and autonomy in the long run. Tariffs and cost recovery FINDETER will include in the commitment agreements with project entities and/or cause to be included in subloan agreements between IFIs and subborrowers, the obligation that the tariffs or other charges applied for the respective service, shall generate revenues for the project involved that: (a) in the case of certain urban public service subprojects, such as water and sewerage, urban sanitation, and local telephone services, following the requirements and timetables under Law 142 of 1994, will, at least, be sufficient to recover all fixed assets over their economic life, a reasonable level of profits for the service operator as regulated by the law, as well as the operating costs of the respective system, including those connected with administration, operation and maintenance. This will also be verified by the executing agency through the service operator's Management and Performance Plan (Plan de Gesti6n y Resultados) mandated by Law 142, which should either have been approved by the competent authorities prior to subloan approval or be an integral component of the subproject to be financed using project resources; and (b) in other cases of public service subprojects to be financed through tariffs, but which are not covered by Law 142, or for subprojects in which the investment must be recovered other than by means of tariffs, the agreements with the subborrowers should stipulate conditions that ensure recovery of the investment, in accordance with the agreed targets, and of all the operating, administration and maintenance costs, through charges, rentals, taxes or other contributions suited to the purpose. The specific wording of this obligation must be in accordance with the requirement laid down for each particular sector, as detailed in the project operational manual. FINDETER will verify, prior to the first disbursement from each subloan financed with project resources, that the respective subborrower has made appropriate arrangements with the competent national authorities to ensure compliance with the obligations detailed in the preceding paragraph. The cost-recovery requirements laid down in the project operational manual are consistent with the relevant Bank policies and constitute an instrument of the GOC's decentralization policy, which seeks to encourage greater fiscal discipline and improved resource management at the local level. Also, they are consistent with the requirements laid down for the Second Municipal Development Project financed by the IDB. Maintenance Each subborrower will commit to operate and maintain the works and equipment financed with project  Page 12 resources in accordance with generally accepted technical standards, and to make available the resources necessary for their efficient operation. During execution of the project and for five years afterwards the Bank will be allowed to visit and inspect all projects and programs, and, if unacceptable levels of maintenance and upkeep are found, it will be the obligation of the agency involved to take all necessary steps to correct it. Project Monitoring and Reporting: For the duration of the project, FINDETER will prepare an annual project progress report and present it to the Bank by March 31 of the following year, with the first of such progress reports to be presented by March 31, 2000. The progress reports will describe past achievements and compare them to appraisal projections, provide a critical assessment of problems arising during project execution, and propose appropriate remedial actions. Annual reviews and midterm review: Each year, by June 30, FINDETER, the Guarantor (through DNP) and the Bank project team, will carry out formal joint reviews of the project. The reviews will focus particularly in the goals, outputs and activities set forth in the Project Design Summary (Annex 1). These reviews will provide a forum to assess project issues, and if necessary, will lead to the formulation of steps for remedial action. One of the annual reviews will be a midterm review, to take place two years following the date of loan effectiveness or when 50 percent of the loan resources have been committed for subloans approved or authorized by the Bank, whichever comes first. By midterm, FINDETER shall have accomplished the following: (a) committed financing in an aggregate amount of not less than the equivalent of 50 percent of the Bank loan for purposes of the project by a date two years from the date of the Loan Agreement, and disbursements under said operations shall have taken place normally thereafter; (b) entered into firm commitments for the financing of loans with repayment terms of eight years or more, made or to be made for subprojects for, at least, 75 percent of FINDETER's portfolio balance, as calculated in a manner satisfactory to the Bank; and (c) complied with the provisions of the project operational manual on the basis of an ex-post assessment of a sample, chosen at random, of not less than 10 percent of subprojects approved under the project. If the above targets are not met, FINDETER will take remedial action as agreed with the Bank in order to meet such targets within a period of six (6) months from the date of the joint review or, if circumstances so require, a different period as jointly agreed. Accounting and Auditing Arrangements: During the execution period of the loan, FINDETER will maintain separate project accounts for each of the components. Such accounts as well as FINDETER's financial statements shall be audited annually by independent auditors acceptable to the Bank. Eligible project entities will be required to keep separate subproject accounts and have them audited by independent auditors in a manner satisfactory to FINDETER, so as to enable it to comply with its obligations under the Loan Agreement. Additionally, FINDETER's auditors shall audit subproject accounts on a sample basis. FINDETER's audit reports should be submitted to the Bank annually within 180 days of the close of the fiscal year (i.e., by June 30 of each year). D: Project Rationale 1. Project alternatives considered and reasonsfor rejection: An initial alternative was considered in which the Bank would cofinance with the IDB a second municipal development project. This alternative included the possibility of supporting institutional changes in FINDETER that would result in a deepening of the municipal credit market, while continuing to provide financing for FINDETER's municipal lending. Even though this alternative represented an improvement  Page 13 over the first Municipal Development Project, it was rejected due to difficulties in making the project operational rules satisfy the requirements of both banks, especially with regard to procurement arrangements. Given the Bank's worldwide experience in facilitating private sector participation and the high priority that the GOC attaches to private sector participation and the corporatization of public entities as a means to improve coverage of urban public services, FINDETER decided to request Bank financing for a project that would finance investments of public autonomous and private entities for developing, improving or expanding the provision of such services. The reviews and evaluations done (see Section B.2 above) confirmed that the municipal credit market in Colombia is segmented and is "capital poor" in that potential investment needs -especially on the part of medium and smaller local entities- exceed available resources. They also confirmed that when funds are available maturities were still not on par with long term financing needs. Despite progress made in that loan terms are now longer than they were in the past and a few larger local entities have been able to access capital markets, terms are up to 5 years with commercial bank loans and up to 8 years in the case of municipal bonds. For a number of market and procedural reasons, access to capital markets through bond issues remains an option only for the larger municipalities, hence leaving fewer options for a large number of other local entities. Thus, there clearly is a need for funds, and there exists a niche in the municipal credil: market for longer term lending products for local infrastructure that can be provided by FINDETER. The two projects, that is, IDB's Second Municipal Development Project and the proposed Bank project, complement each other well. While the parallel IDB operation will support changes in FINDETER to allow it to play a lead role in promoting the expansion of the municipal credit market and continue to rediscount municipal loans, the UISDP will concentrate on providing much needed financing for investments in urban public services made by public autonomous and private entities, thus supporting the GOC's goal of promoting private sector participation in urban service provision and the reforms envisaged under Law 142 of 1994. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector Issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed water supply and sewerage Multi-Cities W/S& Sewerage n.a. S urban development Urban Development I n.a. S water supply and sewerage Cali Water Supply and Sewerage n.a. U urban development Urban Development II (Cartag.) n.a. U urban development Urban Development III (Insfopal) n.a. U water supply Bogota Water Supply III n.a. S emergency reconstruction Popayan Reconstruction n.a. S water supply and sewerage Cucuta Water Supply & Sewerage n.a. S water supply Bogota Water Supply IV n.a. S water supply Barranquilla Water Supply n.a. U water supply and sewerage Water Supply & Sewerage Sector n.a. S municipal development Municipal Development Project S S urban transport Bogota Urban Transport S S water supply Santa Fe I S S Other development agencies (IDB) municipal development Municipal Development Project municipal development Second Municipal Development IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) n.a. (not applicable; loan already closed)  Page 14 3. Lessons learned and reflected in the project design: The first MDP has had an overall positive impact on the project entities which received subloans and technical assistance under it. During project preparation, lessons from FINDETER's experience to date were derived from a number of sources, including: (a) two independent ex-post evaluations of the first MDP, based on the analysis of an indicative sample of subprojects financed with IDB and IBRD resources; (b) an evaluation of a technical assistance initiative financed by the IDB during the first stage; (c) external evaluations of an earlier water sector project [Programa de Ajuste Sectorial (PAS)] financed by the Bank, and (d) IDB and Bank project team field visits. These assessments pointed to the need to improve several aspects of the subproject cycle, particularly subproject appraisal, monitoring and ex-post evaluation. A summary of the shortcomings found in FINDETER's performance in the appraisal stage of the project cycle includes the following: (a) uneven use of sectoral appraisal criteria and methods, and an ensuing uneven quality of analysis within and among sectors; (b) financial analysis limited to loan repayment capacity estimates; (c) overly long project processing periods, due to FINDETER's effort to do itself much of the analysis and preparation, without sufficient technical personnel; (d) absence of instruments such as unit cost systems with which to carry out economic analysis, especially in the water sector. The evaluations also noted deficiencies in monitoring projects under execution and an absence of an ex-post evaluation mechanism to assess quality and sustainability of works financed by FINDETER. 4. Indications of borrower commitment and ownership: As a result of a strategic planning exercise that followed the diagnostic study funded by the PHRD grant, FINDETER has drawn an action plan and started to irnplement important changes both in its organization and credit policies. For example, in the first half of 1997, FINDETER's board removed the cap on the interest rate that IFIs could charge on subloans financed by FINDETER. IFIs are now free to negotiate with individual subborrowers, thus pricing their loans in accordance with specific market conditions. Also, the former "Projects Department" (FINDETER's loan processing department) has been reorganized into a "Loan Department" and an experienced banker has been selected to manage it. This will contribute to the cultural change that will allow FINDETER to improve its operation as a second-tier institution. These measures, among others already taken, and the fact that FINDETER will be mobilizing the equivalent of about US$ 21 million of its own capital for the project are a reliable indication of its comnimitment and ownership. 5. Value added of Bank support in this project: Continued IBRD and IDB financing remains an important source of long term capital for the development of urban infrastructure services in Colombia, since the domestic capital market has thus far not mobilized an adequate level of resources for long term investments such as those contemplated under the project. Furthermore, the Bank's participation is expected to help maintain strict standards of subproject quality. During project preparation, the participation of the Bank and the IDB has already facilitated the identification of an institutional vision and strategy for FINDETER, through a strategic planning exercise (led by FEDESARROLLO, a Colombian think tank which produced the document "El Mercado de Credito Territorial y las Estrategias de Participaci6n de FINDETER", December 1996) and other studies supported by a PHRD grant (TF No. 29375-CO). Armed with a deeper understanding of the rapidly changing business environment, and with a new vision of its future, FINDETER is taking steps to integrate its operations increasingly with the capital markets within Colombia through diversification of its funding, better loan product design and pricing as well as better selection of project entities.  Page 15 E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): [X I Cost-Benefit Analysis: NPV=US$ 1.3 million; ERR= 31.8% [X ] Cost Effectiveness Analysis: All investment proposals will be evaluated by either cost-benefit analysis or cost-effectiveness analysis, as discussed in Annex 4 (A and B). Cost-benefit analysis was carried out for a sample consisting of five investment proposals for a total cost of about US$ 21.8 million equivalent (about 17 percent of total project cost). Said analysis yielded a weighted (by investment cost) average return of 31.8 percent. Overall, the economic feasibility of the project is guaranteed by a minimum economic rate of return of 12 percent for most subprojects financed by FINDETER (see Annex 4 for details). 2. Financial (see Annex 5): NPV=US$ 246.9 million; FRR= 24.14 % Demand for subloans The following exercises were carried out to help determine project size: (a) projections regarding the indebtedness capacity of subnational entities, in light of the new regulation on subsovereign indebtedness (Law 358 of 1997), and under different scenarios; (b) estimates of the anticipated evolution of current income of departments and municipalities in the medium term; (c) estimates of expected demand for the financing of basic infrastructure investments from departments and municipalities, and (d) FINDETER's potential share in the subnational credit market, given the new financial products and credit terms and c.onditions that will apply in the UISDP. These demand projections are based on the analysis of the subnational credit market carried out by FEDESARROLLO under the study mentioned above. In recent years, the level of FINDETER's net disbursements to municipalities and other project entities, including IBRD and IDB resources under the MDP, has ranged between US$130 million and US$170 million per year. To determine whether the size of the proposed UISDP is appropriate, projections regarding net credit demand from local governments and service providers were carried out under two different scenarios. Even though said projections were made for the net demand for FINDETER loans, including those to finance local governments, the high percentage of loans made in the past for water supply and sewerage, and schools (about 52 percent of all FINDETER loans), as well as those contemplated for new investment proposals under the sample reviewed (see Section E.3 below), confirms that the size of the proposed UISDP is appropriate. Under the first set of projections, it is assumed that a new lending instrument -indexed loans with partial capitalization of the nominal component of the interest rate- is introduced by FINDETER. Under this scenario, it is assumed that 60 percent of future subloans are financed using FINDETERs regular credit products, and the remaining 40 percent under the new partially indexed credit facility. Under the second one, no indexed credits are offered during the loan execution period. The analysis of these two scenarios results in projections of average overall net credit demand by central subnational administrations of between US$750 million and US$600 million, respectively, for the period 1998-2000. This would imply an annual net credit demand of US$250 million, should the partial interest capitalization instrument be adopted, and of US$120 million, if it were not. Therefore, given the level of potential demand for net resources during the project execution period, and the new credit policies likely to be adopted by FINDETER, the size of the proposed UISDP, at an average level of about US$28 million per year, including local counterpart resources, is considered to be appropriate. Fiscal and financial impact The project has no significant fiscal impact, since FINDETER does not receive any capital or operational financial contributions from the Government.  Page 16 A strong financial position is currently one of FINDETER's chief advantages. With a low debt/assets ratio of 37.9 percent, it has ample room to develop new financial instruments that will provide the necessary capital for continued operations. FINDETER has demonstrated that there is a solid demand for subloans. With the setting of adequate lending terms and conditions under the new project, it should not have any difficulties in placing the additional resources and regaining competitiveness in the municipal credit market. The introduction of new loan amortization modalities, such as the partial capitalization of the nominal component of the interest rate, is feasible, since similar instruments (the UPACs) have been in use in the Colombian market for a number of years. Finally, as the IFIs bear the entire credit risk of the loans to eligible project entities, FINDETER is protected in this regard. Therefore, the project is expected to have a positive result for FINDETER in that, together with the parallel IDB operation, it would allow the organization to grow an average of 20 percent per year as planned over the next five years. This growth is expected to be financed, practically in equal shares, by debt and equity. For the five years projected total new debt would amount to approximately US$290 million, of which US$130 million would be loans from the Bank and the IDB (US$75 million and US$60 million, respectively), and US$160 million will come from new financial instruments that FINDETER will start using in the future. An analysis of FINDETER's projected statements shows that its financial expenses will rise from 10.4 percent of income in 1996 to 39.9 percent of income in 2001, as a result of the new mix of debt. Administration expenses are expected to remain at a level average equivalent to 118 percent of the 1996 level. Consequently, as the volume of operations increase, the ratio of administration expenses to income will decrease, from 19.9 percent of income in 1996, to 11.5 percent of income in 2001. The expected combined result will allow for a healthy operating margin, although lower than that of previous years. Under the project, FINDETER shall be required to maintain a minimum level of return on equity of five (5) percent annually. Likewise, the project should have a positive result in respect to subborrowers. Because of strict utility services regulation imposed by Law 142 of 1994, project entities (whether public autonomous, mixed- capital, or private enterprises) are subject to demonstrating that their financial situation is sustainable in order to qualify for investment loans. In addition, subproject appraisal criteria should enhance efficiency in the allocation of investment resources, thus contributing to improve the financial performance of project entities. 3. Technical: FINDETER is undertaking a review of the methods, guidelines and instruments it uses to ensure the appropriate appraisal of subprojects, both as a result of the lessons learned in the first MDP and the analysis of a sample of subprojects to be financed under the proposed UISDP. On the basis of the evaluation of the first MDP, FINDETER will adjust existing economic appraisal methods as needed, establish cost-efficiency parameters for each eligible sector and corresponding type of investment, and make the necessary changes in the project operational manual and subproject preparation guidelines. By using these revised criteria and instruments, the appraisal process will be speedier and more relevant, and will enhance efficiency in the allocation of investment resources, while taking into account the need to promote the competitiveness and effectiveness of FINDETER as a second-tier financial institution. For project appraisal, FINDETER presented a sample of 70 subprojects for a total of US$72 million. The sample includes subprojects in all sectors financed by FINDETER, but a high proportion (almost 70 percent) is concentrated in the water supply, sewerage and education sectors. These sectors are likely to predominate in the execution of the UISDP and where project entities tend to be public autonomous, mixed- capital or private companies. An evaluation of the sample, supported by two groups of independent consultants, using criteria substantially similar to those expected to be incorporated in the final operational manual, identified a need to strengthen institutional and financial aspects in many of the subprojects. As a  Page 17 result of this assessment, FINDETER is reviewing and/or reformulating several subprojects in the sample, together with project entities, to improve their design and ensure compliance with economic, financial, institutional and environmental requirements. It is expected that, as a result of the review and reformulation process, about 28 subprojects from the sample, totaling some US$28 million, could eventually qualify for Bank financing, and that during the first year of the project FINDETER could commait a further US$22-25 million, for total subproject approvals of some US$50 million in UISDP resources. 4. Institutional: a. Executing agency: As mentioned before, FINDETER has a good, long standing relationship with the Bank as executing agency for several projects. Under previous and ongoing Bank-financed projects, its performance has been satisf.actory. As an autonomous, quasi-public financial organization subject to the regulations of the 'Banking Superintendency, FINDETER is relatively free of political interference. Its staff consists of a relatively stable group of capable professionals and its facilities are adequate. Its present management has demonstrated commitment to the completion of an action plan for institutional change, object of the country-Bank dialogue during project preparation and the focus of the institutional strengthening component of the parallel IDB operation. The GOC has also shown support for the far- reaching operational reforms in FINDETER that will enable it to achieve greater efficiency in term transformation, develop new financial products and diversify its funding base to include capital market funds. Although the institution will require organizational changes to execute adequately the IDB-financed project, these are considered attainable in a short period and should not hinder FINDETER's capacity to implement the proposed project. Since its founding, FINDETER has reached an acceptable degree of institutional and operational capacity that the organization can well reorient towards the requirements of the proposed UISDP and the parallel IDB operation. b. Project management: Even though FINDETER's Vice President of Finance is the representative for purposes of submitting requests for withdrawal from the Loan account, project management responsibilities are dispersed throughout FINDETER with ultimate responsibility vested in its President. Project management arrangements are described in the project operational manual which builds upon FINDETER's many years of experience with the implementation of similar projects. As mentioned above, FINDETER has reached an acceptable degree of institutional and operational capacity that should make the proposed arrangements for project management virtually risk free. 5. Social: Due to the demand based nature of the credit line envisaged under the project, it is clearly not possible to predict the specific investments which will actually be financed and, therefore, a detailed social analysis cannot be performed at this stage. However, the project operational manual will incorporate environmental and social appraisal criteria which will ensure that social aspects are taken into account in the design and implementation of subprojects by incorporating the participation of the beneficiary communities in the choice and design of investments to be financed. 6. Environmental assessment: Environmental Category [] A [x] B []C The analysis performed to prepare an Environmental and Social Impact Report (prepared by the IDB project team; copy available in the PIC) concluded that the type of projects to be financed by the project - whic]h cover a wide range but are expected to be concentrated in urban roads, water and sewerage, and education sectors- have, in general, a beneficial environmental impact. In most cases, potentially negative  Page 18 environmental effects are known and can be mitigated through the use of procedures and instruments familiar to users and legally mandated by Colombian law, as well as through the sectoral guidelines and appraisal criteria used by FINDETER that are consistent with applicable Bank guidelines. Evaluations of the first stage of the MDP identified some problems in the project cycle which affected subproject quality and sustainability. Important among these was the insufficient attention given to community participation in the design, execution and maintenance of the investments. For the UISDP, FINDETER is incorporating into the project operational manual -specifically in the manuals used for the preparation and appraisal of subprojects, by sector- guidelines regarding community participation in subproject development and execution. FINDETER is also including in the project operational manual and in the subproject preparation guidelines, which are disseminated among FINDETER clients, environmental norms and guidelines for all sectors eligible for financing, by type of subproject. FINDETER, per the project operational manual, will ensure that in the contracting of works subborrowers include environmental measures, as well as sanctions for noncompliance of same. Finally, through the annual ex- post evaluations carried out each year and financed by the project, FINDETER will monitor the environmental aspects mentioned and the level, type and effectiveness of community participation in the subproject cycle. The results of such evaluations will be discussed in the annual reviews of project implementation 7. Participatory approach: a. Primary beneficiaries and other affected groups: Participation of community groups will be ensured during subproject planning through environmental and social evaluations, and service demand studies as mandated under the project operational manual. Participation of project entities and financial intermediaries has been ensured through consultations and visits by Bank missions. Also, to ensure proper response from project entities and financial intermediaries, FINDETER will disseminate the sectoral appraisal guidelines and instruments it will use under the project. b. Other key stakeholders: The proposed project has benefited from extensive consultation and collaboration between the Bank and the IDB, given that its parallel operation to finance a Second Municipal Development Project was prepared concomitantly, with missions being fielded together. During project implementation the same level of consultation and collaboration should be maintained given that the two projects are intertwined. F: Sustainability and Risks 1. Sustainability: Project sustainability will be sought by using appropriate economic, institutional, financial and environmental criteria in the appraisal of subprojects. In the ultimate analysis, however, sustainability will depend on the financial strength and credit-worthiness of public service providers that borrow from FINDETER. Because service utilities have to comply with Law 142 by preparing acceptable management and performance plans, this would ensure proper financial management and level of cost recovery. 2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): Risk Risk Rating Risk Minimization Measure Annex 1, cell "from Outputs to Objective" 1. Deterioration of economic conditions such as a M Colombia's progress in the structural substantial fall in real GDP and/or household reforms and relatively strong incomes could adversely affect the feasibility of international reserves. market-rate loans for urban public services.  Page 19 Risk Risk Rating Risk Minimization Measure Annex 1, cell "from Outputs to Objective" 2. Lack of continued government commitment to M Historical trends, GOC's strong decentralization and private sector participation support to a well-established in the provision of urban public services framework for decentralization and private sector participation in the provision of urban public services. 3. Political interference that substantially S GOC's strong support to the role of compromises the institutional and operational FINDETER and regulation by the capacity of FINDETER. Banking Superintendency. The Bank's continuing dialogue with the country will help to maintain the present level of support. Annex 1, cell "from Components to Outputs" 1. Lack of interest as well as financial and M FINDETER has demonstrated that technical capacity on the part of service there is a robust demand for its providers to measure demand, formulate subloans. The development of new appropriate subprojects and seek FINDETER's loan products by FINDETER coupled financing. with greater dissemination of subproject evaluation criteria should contribute to maintaining a strong demand for its financing. 2. Lack of interest as well as financial and M Private sector has already demonstrated institutional capacity on the part of the private interest and readiness to participate in sector to participate in the provision of urban the provision of urban services in public services. Colombia. The normative framework (Law 142) is adequate for promoting private sector participation. 3. Deterioration of the regulatory framework and N Even with changes in government, the technical support for greater auitonomy and trend has been towards greater private sector participation in the provision of autonomy and private sector urban public services. participation in the provision of public services. The Bank's continuing dialogue with the country will help maintaining this trend. 4. Counterpart funding shortages M FINDETER's solid financial position would allow access to financial markets in the event of possible shortfalls in counterpart funds. Strong demand base for FINDETER's subloans. Overall Risk Rating M Some of the risks were identified through evaluations of the first MDP and addressed during project design. Other possible risks are clearly identified and, overall, the risk minimization measures listed above are considered adequate. Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)  Page 20 3. Possible Controversial Aspects: There are no likely controversial aspects outside of those discussed in the risk analysis section contained in Section F.2 above. G: Main Loan Conditions 1. Effectiveness Conditions: * issue the project operational manual to the Bank's satisfaction. * submit model instruments satisfactory to the Bank for: (a) commitment agreements to be executed between FINDETER and an eligible project entity in respect to the execution of a subproject; (b) subloan agreements to be executed between the IFIs and the subborrowers in respect to the financing of a subproject; (c) if the subproject plan includes contributions by third parties, sponsoring agreements to be executed between said sponsors and the subborrower; and (d) promissory notes to be executed between subborrowers and IFIs and endorsed by the IFIs to FINDETER once all other applicable instruments under (a), (b) and (c) above are in place; and. 2. Other: * By midterm, FINDETER shall have accomplished the following: (a) committed financing in an aggregate amount of not less than the equivalent of 50 percent of the Bank loan for purposes of the project by a date two years from the date of the Loan Agreement, and disbursements under said operations shall have taken place normally thereafter; (b) entered into firm commitments for the financing of loans with repayment terms of eight years or more, made or to be made for subprojects for, at least, 75 percent of FINDETER's portfolio balance, as calculated in a manner satisfactory to the Bank; and (c) complied with the provisions of the project operational manual on the basis of an ex-post assessment of a sample, chosen at random, of not less than 10 percent of subprojects approved under the project. If the above targets are not met, FINDETER will take remedial action as agreed with the Bank in order to meet such targets within a period of six (6) months from the date of the joint review or, if circumstances so require, a different period as jointly agreed. * FINDETER will include in the commitment agreements with project entities receiving loans from project resources, the obligation that the tariffs or other charges applied for the respective service, shall generate revenues for the project involved that: (a) in the case of public service projects, such as water and sewerage, urban sanitation, and local telephone services, following the requirements and timetables under Law 142 of Urban Public Services of 1994, will, at least, be sufficient to recover all fixed assets over their economic life, a reasonable level of profits for the service operator as regulated by the law, as well as the operating costs of the respective system, including those connected with administration, operation and maintenance. This will also be verified by the executing agency through the service operator's Management and Performance Plan (Plan de Gesti6n y Resultados) mandated by Law 142, which should either have been approved by the competent authorities prior to subloan approval or be an integral component of the subproject to be financed using project resources; and (b) in other cases of public service projects to be financed through tariffs, but which are not covered by Law 142, or for projects in which the investment must be recovered other than by means of tariffs, the agreements with the subborrowers should stipulate conditions that ensure recovery of the investment, in accordance with the agreed targets, and of all the operating, administration and  Page 21 maintenance costs, through charges, rentals, taxes or other contributions suited to the purpose. The specific wording of this obligation must be in accordance with the requirement laid down for each particular sector, as detailed in the operational manual. * FINDETER must verify, prior to the first disbursement from each subloan financed with project resources, that the respective subborrower has made appropriate arrangements with the competent national authorities to ensure compliance with the obligations detailed in the preceding paragraph. * Each subborrower will commit to operate and maintain the works and equipment financed with project resources in accordance with generally accepted technical standards, and to make available the resources necessary for their efficient operation. During execution of the project and for five years afterwards the Bank will be allowed to visit and inspect all projects and programs, and, if unacceptable levels of maintenance and upkeep are found, it will be the obligation of the agency involved to take all necessary steps to correct it. H. Readiness for Implementation [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [xl Not applicable. [ J The procurement documents for the first year's activities are complete and ready for the start of project im,plementation. [xil Not applicable. Ix] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [xl The following items are lacking and are discussed under loan conditions (Section G): a) the final draft of project operational manual; and b) model instruments for: (a) commitment agreements to be executed between FINDETER and an eligible project entity in respect to the execution of a subproject; (b) subloan agreements to be executed between the IFIs and the subborrowers in respect to the financing of a subproject; (c) if the subproject plan includes contributions by third parties, sponsoring agreements to be executed between said sponsors and the subborrower; and (d) promissory notes to be executed between subborrowers and IFIs and endorsed by the IFIs to FINDETER once all other applicable instruments under (a), (b) and (c) above are in place. I. Compliance with Bank Policies [xl This project complies all applicable Bank policies. Task Team Le~d&Tasl~ Manager: Eleoterio Codato _/6 Sector Manager/ Acting Di o:Krishna Challa Country "anager dr6s Soliman o  Page 22 Annex 1 Urban Infrastructure Services Development Project Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: (Goal to Bank Mission) Improvement of infrastructure Creation of mechanisms to services. facilitate private sector participation in the provision of urban public services. Project Development (Development Objectives to Objectives CAS Objectives) 1. Contribute to the - FINDETER's loan portfolio - Annual project progress - Macroeconomic stability; expansion and for urban public services reports, and FINDETER solidification of the credit increased by 10% per year in loan records and audits; - Continued govermnent market for public real terms; commitment to autonomous and private - By December 1999, less than - Annual project progress decentralization and private providers of urban public 10% of investment proposals reports, and FINDETER sector participation in the services by enhancing approved by FINDETER loan records and audits; provision of urban public FINDETER's capacity to were not financed by IFIs; services; offer long-term financing - Financial sustainability - Indicators used by the Public for urban infrastructure achieved by at least 50% of Services Regulatory - FINDETER remains free of investments. subprojects financed by Commission political interference that FINDETER based on substantially compromises its management plan by the institutional and operational project completion date. capacity. Project Outputs (Outputs to Development Objectives) 1. Improved availability and - After 2 years of the date of - Annual project progress - Political or economic terms of loans to public the Loan Agreement, at least reports, and FINDETER conditions do not autonomous and private 75% of IFI loans loan records and audits; deteriorate. providers of urban public rediscounted by FINDETER services and IFIs. have repayment terms of at least 8 years; 2. Enhanced financial - After 2 years of the date of - Annual project progress - Real household income and capacity of subborrowers, the Loan Agreement, copies reports, and FINDETER real GDP remain stable; including eligible project of management plans for loan records and audits; - Implementation of Law 142 entities, for urban service urban service improvement - Data from the Public Services on public services continues delivery. from 90% of subborrowers, Regulatory Commission without interruptions; including eligible project entities, in water and sanitation and other sectors comprised by Law 142 of 1994 are being received _ regularly by FINDETER. I_I  Page 23 Project Comnponents (Components to Outputs) [See Annex 2for a detailed description.] 1. Subproject loans made, - At least 70% of - Annual project progress - Interest as well as financial rediscounted and FINDETER's estimated loan reports, and FINDETER and technical capacity on the disbursed to public disbursements for each loan records and audits; part of urban public service autonomous or private subproject reached within providers to measure companies for improving two years from the date of demand, formulate urban infrastructure Loan Agreement; appropriate subprojects and services. - The share of IFI loans to - Annual project progress seek FINDETER's financing; service companies increased reports, and FINDETER to at least 15% of new IFI loan records and audits; - Interest as well as financial loans within two years from and institutional capacity of the date of the Loan private sector to participate in Agreement, and to at least the provision of urban public 25% by the Closing Date; services; - At least 50% of the Bank - Annual project progress loan funds is committed reports, and FINDETER - Evolution of regulatory within two years from the loan records and audits; framework and technical date of the Loan Agreement support for greater autonomy, with disbursements having and private sector taken place normally participation in the provision thereafter; of urban public services; - Have been in compliance - Annual project progress with the provisions of the reports, and FINDETER - Adequate capacity on the part Project Operational Manual loan records and audits; of FINDETER and on the basis of an ex-post subborrowers to mobilize evaluation of a sample, counterpart funds. chosen at random, of not less than 10% of completed projects financed by FINDETER and subject to the rules and procedures provided for in said Manual and the provisions of the Loan Agreement, including a proportion of subprojects financed under the project of about half of said sample.  Page 24 Annex 2 Urban Infrastructure Services Development Project Project Description Project Component 1 - US$ 125.0 million (total cost of component) Infrastructure Investments. The project's single component will support the financing and execution of subprojects through FINDETER's rediscounting of subloans provided to eligible public service providers by IFIs. Said subprojects will consist of investments to rehabilitate, improve or expand the provision of urban public services by public autonomous entities and private companies in eligible sectors under local government responsibility such as: water supply and sewerage, urban transport (excluding metro systems), environmental protection (including drainage and flood control), solid waste management, bus terminals and river wharves, market places, parks and green areas, slaughterhouses, local telecommunications, education and health, gas distribution and other sectors as approved from time to time by the Bank and FINDETER. The total cost of component includes those in connection with detailed engineering design and construction supervision. These costs are estimated at about $6.25 million and will be financed entirely by counterpart funds.  Page 25 Annex 3 Urban Infrastructure Services Development Project Estimated Project Costs Proiect Comoonent Local Foreign Total -- - ------------US $ million--------------- Infrastructure Investments - Infrastructure Subprojects 63.4 51.8 115.2 - Engineering Design and Supervision la 3.2 2.6 5.8 Total 66.6 54.4 121.0 Total Baseline Cost Price Contingencies 2.2 1.8 4.0 Total Proiect Cost 68.8 56.2 125.0 Notes: /a: estimated at five (5) percent of infrastructure subproject costs.  Page 26 Annex 4 - A Urban Infrastructure Services Development Project Cost Benefit Analysis Summary For a sample of five subprojects in the total investment amount of US$ 21.8 million equivalent (Currency: Colombian Pesos; Units: million; Base Year: 1997) Present Value of Flows Economic Analysis Benefis Water Supply - Acuagirardot 851.9 Water Supply - Emp. Pub. Pereira 1,987.5 Water Supply - Mun. Manizales 1,768.6 Water Supply - EMCALI EICE 15,258.4 Roads - Mun. Bucaramanga 5,666.1 Total Benefits 25,532.5 Costs Water Supply - Acuagirardot 816.2 Water Supply - Emp. Pub. Pereira 800.0 Water Supply - Mun. Manizales 1,548.0 Water Supply - EMCALI EICE 15,250.0 Roads - Mun. Bucaramanga 5,650.0 Total Costs 24,064.2 Net Benefits: Water Supply - Acuagirardot 35.6 Water Supply - Emp. Pub. Pereira 1,187.5 Water Supply - Mun. Manizales 220.6 Water Supply - EMCALI EICE 8.4 Roads - Mun. Bucaramanga 16.2 Total Net Benefits 1,468.3 IRR: Water Supply - Acuagirardot 13 Water Supply - Emp. Pub. Pereira 53 Water Supply - Mun. Manizales 15 Water Supply - EMCALI EICE 30 Roads - Mun. Bucaramanga 41 Weighted Average IRR 31.8 Analysis Methodology Urban transport. The project will finance mostly investments in urban roads. Some of these are very small investments. It is therefore necessary to develop a structured approach to economic analysis. Subprojects are classified according to their costs: a subproject is considered small if the investment is less than US$ 300,000 equivalent; others are large. Large subprojects are subject to full economic feasibility analysis. Small subprojects are mostly resurfacing of roads or paving of local neighborhood streets and will be evaluated on the basis of cost-effectiveness criteria (see first part of Annex 4). The benefits of road subprojects (paving, widening and rehabilitation) are savings in vehicle operating costs and savings from decreased travel time due to reduced congestion and improved road condition, while the benefits of traffic management subprojects are mostly savings from decreased travel time due to reduced congestion. Large  Page 27 road and traffic management subprojects will be considered acceptable if the estimated economic internal rate of return (EIRR) is above 12%. Terminals. The project may finance the construction, expansion and rehabilitation of transport terminals for either passengers or freight. The benefits of transport terminal subprojects are safer conditions for the handling of passengers and freight. If investment is more than US$ 300,000 equivalent, it will be subject to full economic feasibility analysis. The cost-benefit analysis for large investments will be based on returns generated by rental charges and fees for the use of the facilities, since such returns are considered a good proxy for the consumer surplus brought about by the investment. Thus, large transport terminal subprojects will be considered acceptable if the estimated economic internal rate of return (EIRR) is above 12%. Marketplaces and Slaughterhouses. The project will finance the construction, expansion and rehabilitation of markets and slaughterhouses. Like in roads, large investments in marketplace and slaughterhouse, i.e., those valued at more than US$ 300,000 equivalent will be subject to full economic feasibility analysis, while smaller ones will be evaluated on the basis of cost-effectiveness criteria (see first part of Annex 4). The benefits of marketplace and slaughterhouse subprojects are improved sanitary conditions for the processing and marketing of foodstuff which ultimately translate into health benefits and productivity gains. The cost-benefit analysis for large investments will be based on returns generated by rental charges and fees for the use of the facilities, since such returns are considered a good proxy for the consumer surplus brought about by the investment. Thus, large marketplace and slaughterhouse subprojects will be considered acceptable if the estimated economic internal rate of return (EIRR) is above 12%. Recreational Facilities. The project may finance investment in different types of recreational facilities such as parks, arenas, coliseums, libraries, swimming pools, community and cultural centers, etc. All subprojects for which financing is based on user charges or fees -such as in the case of metropolitan or regional parks, arenas, coliseums, swimming pools and cultural centers- will be subject to full economic feasibility analysis. The cost-benefit analysis of such subprojects will be based on the flow of income generated by user charges or fees. Such subprojects will be considered acceptable if the estimated economic internal rate of return (EIRR) is above 12%. Investments in playgrounds, neighborhood parks, libraries, community centers for which the use of user charges or fees are not practicable, subprojects will be considered acceptable if they satisfy cost-effectiveness criteria (see first part of Annex 4). Assumptions on Economic Costs: Market prices in Colombia, particularly for tradable goods, exchange rates and labor, provide a reasonably good approximation to the opportunity costs. Therefore, it has not been necessary to restate market prices in terms of their economic equivalents. With market lending rates for working capital at about 30% plus and inflation of about 18% per year, the opportunity cost of capital was assumed at 12%.  Page 28 Annex 4 - B Urban Infrastructure Services Development Project Cost Effectiveness Analysis Summary For Small Subprojects' and All Investments in Solid Waste, Health and Education, and Water and Sanitation Cost-Effectiveness Indicators FINDETER has been developing a series of cost-effectiveness indicators that have a minimum statistical reliability of 80 percent for investments in solid waste, water supply and sewerage as well as for small market subprojects. These indicators consist of different unit cost ratios based on least cost designs. Top values for such indicators are used as a cut-off rate in assessing the economic feasibility of a proposed investment or subproject. FINDETER will continue to develop such indicators for other types of investments and update cost-effectiveness indicators throughout the implementation of the proposed project and inform the Bank periodically (every six months) about changes in the values of such indicators. No Bank loan funds will be committed for the financing of subprojects for which the Bank has not received and accepted the applicable cost-effectiveness indicators. Analysis Methodology Cost-effectiveness analysis aims at identifying the optimal project from an economic standpoint, i.e., that which minimizes the economic cost. The analysis involves a series of steps including: (a) assessing demand properly, including efficiency gains where applicable; (b) selecting the least cost altemative; (c) choosing the right size (that which minimizes the net present value of the least cost altemative), considering economies of scale vis-a-vis the cost of capital; and (d) choosing the optimal inception moment where applicable. This methodology is to be used by FINDETER when an increase in demand for a particular service is expected. It is most suitable for new projects or expansions, while for rehabilitation subprojects only a selection of the least cost alternative would apply. Small Subprojects. Investments in roads, terminals, marketplaces and slaughterhouses individually valued at less than US$ 300,000 (equivalent) will be assessed by cost-effectiveness analysis in order to ensure least-cost designs. The cost-effectiveness indicators to be applied are those commonly accepted in the different sectors. In addition, these subprojects will be required to comply with the applicable technical standards. Sanitation. Sewerage and wastewater treatment will generate health benefits as a result of reduced ground and surface water contamination. These benefits are not easy to quantify and accrue to communities as a whole rather than to the direct recipients of these services and, therefore, no quantitative cost-benefit analysis will be required. Planning and design will follow commonly accepted technical standards, taking into account population density, ground water table level, surface water flows, and least cost alternatives. Service providers are subject to the same regulation that applies in the case of water supply (see below). Solid Waste. The main benefits are health and environment related, resulting from cleaner air and water. Because they spread not only to the direct beneficiaries but also to the whole community and are difficult to quantify; no cost-benefit analysis will be carried out for this type of investment. Subproject designs will follow least-cost criteria and will be evaluated on the basis of cost-effectiveness indicators. Health and Education. The project may finance investments in local health and education, such as construction, expansion or rehabilitation of health posts, local hospitals, schools, etc. The main benefits are improved access to health care and education services which ultimately translate into health benefits Those valued at less than US$ 300,000 equivalent.  Page 29 and increased productivity. Because such benefits spread not only to the direct beneficiaries but also to the whole community and beyond, and are difficult to quantify, no cost-benefit analysis will be carried out for this type of investment. In addition to follow sector-specific standards established by the competent authorities, subproject designs will follow least-cost criteria and will be evaluated on the basis of cost- effectiveness indicators. Water Supply. The main benefits of water supply subprojects are increased availability of clean, piped water at reduced cost, which ultimately translate into health benefits and productivity gains. In Colombia, the providers of this service have to comply with national regulation (Law 142 of 1994) which determines that, at a minimum, revenues must be sufficient to recover all fixed assets over their economic life, a reasonable level of profits for the service operator as regulated by the law, as well as the operating costs of the respective system, including those connected with administration, operation and maintenance. This will be verified by FINDETER through the service operator's Management and Performance Plan [Plan de Gesti6n y Resultados (PGR)] mandated by Law 142, which should either have been approved by the competent authorities prior to subloan approval or be an integral component of the subproject to be financed using project resources. Thus, tariffs are deemed to guarantee financial returns that permit service providers to be self-financing and financially autonomous. Therefore, no cost-benefit analysis will be required for this type of investment because the financial return is considered a lower bound to the economic return.  Page 30 Annex 5 Urban Infrastructure Services Development Project Financial Summary for FINDETER Years Ending December 31: 1994 through 1999 (In Millions of Current Colombian Pesos) 1994 1995 1996 1997 1998 1999 Average Annual Growth Actual Forecast Income Statement Items Revenues 69,424 112,402 137,332 134,036 177,632 224,199 28.1% Operating Income 37,582 54,465 95,384 66,240 93,706 123,425 32.5% Net Income 10,628 15,038 27,681 10,774 24,028 37,411 48.6% Funds Statement Items Internal Sources 64,340 105,425 137,034 124,535 171,798 218,765 30.0% Borrowings 121,756 105,010 133,677 134,411 210,552 259,572 18.8% Total Sources 186,096 210,435 270,711 258,946 382,350 478,337 22.0% Capital Expenditures 436 254 9,976 3,210 3,549 3,821 747.2% Working Capital Increase 171,857 184,919 244,321 204,321 348,942 433,010 23.6% Debt Service 13,804 25,262 16,414 51,415 29,859 41,506 51.7% Total Applications 186,096 210,435 270,711 258,946 382,350 478,337 22.0% Balance Sheet Items Current Assets 297,621 389,640 451,594 534,691 698,616 902,364 25.0% Less Current Liabilities 132,609 204,390 275,917 333,765 411,680 511,908 31.6% Net Fixed Assets 1,280 1,826 11,819 14,404 17,257 20,311 129.9% Total Assets 298,901 391,466 463,413 549,095 715,873 922,675 25.4% Debt 165,012 185,251 175,678 200,926 286,936 390,456 20.1% Equity 133,889 206,215 287,735 348,169 428,937 532,219 32.4% Total Liabilities and Equity 298,901 391,466 463,413 549,095 715,873 922,675 25.4% Financial Ratios Operating Income as a % of Revenue 54.1 48.5 69.5 49.4 52.7 55.0 3.0% Net Income as a % of Revenue 15.3 13.4 20.2 8.0 13.5 16.7 14.1% Return on Average Invested 7.8 7.1 8.3 6.0 4.5 6.4 -0.5% Capital Debt Service Coverage 10.3 12.3 5.7 14.8 7.0 7.8 16.8% Percent of Total Working Capital 37.4 57.0 56.1 61.0 49.2 50.5 8.5% Increase financed by Internal Sources CurrentRatio 1.80 2.10 2.57 2.66 2.43 2.31 0.06% Debt as % of TotalCapitalization 55.2 47.3 37.9 36.6 40.1 42.3 -4.5%  Page 31 Annex 6 Urban Infrastructure Services Development Project Procurement and Disbursement Arrangements Procurement Procurement methods (Table A) Procurement of goods and works will follow the "Guidelines for Procurement under IBRD Loans and IDA Credits" of January 1995 and revised in January and August 1996 and in September 1997 and the specific provisions set below. Since only public autonomous entities' and private companies in charge of public services are eligible for project funds, contracts for goods or works estimated to cost less than the equivalent of US$ 2.0 million and US$ 5.0 million, respectively, will be procured following the usual commercial procedures of the entity or company in question, provided such procedures shall, except as otherwise agreed by the Bank, ensure competition. Generally, said commercial procedures consist of widely accepted practices of the private sector involving competitive bidding often based on comparing three price quotations containing the required specifications and obtained from qualified bidders. However, each contract for goods or works estimated to cost the equivalent of US$ 2.0 million or more and US$ 5.0 million or more, respectively, will be procured through international competitive bidding (ICB) and will be subject to the Bank's prior review. In addition to being awarded through ICB, each contract for goods and works estimated to cost the equivalent of US$ 10.0 million or more will be advertised in accordance with the pnrocedures applicable to large contracts under paragraph 2.8 of the Guidelines. These limits are justified considering that in similar projects in the country, international participation is attracted when amounts exceed these limits. Prior review thresholds (Table B) Only contracts procured in accordance with ICB procedures will be subject to prior review by the Bank. Because of the nature of the project (which will provide financing to investment proposals on a demand basis), it is difficult to estimate the level of prior review by the Bank in terms of the total value of contracts financed from the Bank loan. It is expected that a small number of such contracts will be subject to prior review which shall be complemented by systematic post review by Bank staff of five (5) percent of the contracts. Disbursement Allocation of loan proceeds (Table C) Table C shows the allocation of loan proceeds by category and the disbursement percentages proposed in each category. Consistent with regional practice, some local expenditures are financed from Bank loan proceeds. The table below shows the estimated disbursements from the IBRD loan, by Bank fiscal year. 'Public autonomous entities operate under private commercial practices for procurement and are not bound by the Guarantor's Law 80.  Page 32 Estimated IBRD Disbursements (in US$ million) Bank FY 1999 2000 2001 2002 2003 Annual 5.0 15.5 20.0 20.0 14.5 Cumulative 5.0 20.5 40.5 60.5 75.0 Use of statements of expenses (SOEs): Disbursements from the loan in respect of payments made for eligible expenditures in connection with contracts for goods or works awarded following ICB procedures as described above will require full documentation. All other disbursements from the loan in respect of payments made for eligible expenditures will be made against statements of expenses (SOEs), for which full supporting documentation will be retained by the Borrower and project entities, and made available to the Bank and the auditors on request. Special account: In order to facilitat- ',sbursements, the Borrower will establish a Special Account in a commercial bank satisfactory to the Bank, to be maintained in US Dollars, with an authorized allocation in an amount equivalent to $7.5 million. The initial deposit will be limited to an amount equivalent to $3.0 million until the cumulative disbursement from the Loan plus the total amount of all outstanding special commitments entered into by the Bank reaches or exceeds $10.0 million, after which time the Special Account could reach the authorized allocation. Payments out of the Special Account will be made exclusively for eligible expenditures under the project. Replenishment of the account will be made on a monthly basis in accordance with a request or requests for deposit furnished by the Borrower.  Page 33 Annex 6, Table A: Project Costs by Procurement Arrangements' (in US$million equivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB NCB Other N.B.F 1. Sub-projects 21.0 0.0 97.7 6.3 125.0 (13.7) (0.0) (61.3) (0.0) (75.0) Total 21.0 0.0 97.7 6.3 125.0 (13.7) (0.0) (61.3) (0.0) (75.0) Note: N.B.F. = Not Bank-financed (includes elements procured under counterpart funds provided by project entities). The procurement arrangement for the items listed under "Other" will consist of the usual commercial practices of the public autonomous entity or private company in question. Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit Annex 6, Table B: Allocation of Loan Proceeds Expenditure Category Amount in Financing Percentage US$million (1) C'ivil works in respect to approved 53.6 85 % of the amounts subprojects disbursed by FINDETER to IFIs in respect to approved subloans (2) CGoods in respect to approved subprojects 21.4 85 % of the amounts disbursed by FINDETER to IFIs in respect to approved subloans Total 75.0 lFor details on presentation of Procurement Methods refer to OD 11.02, "Procurement Arrangements for Investment Operations." Details on Consultant Services can be shown more easily in the Table Al format (additional. to Table A, where applicable).  Page 34 Annex 7 Urban Infrastructure Services Development Project Project Processing Budget and Schedule A. Project Budget (US$000) Planned Actual (At final PCD stage) 308.2 365.0 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) 28 First Bank mission (identification) _//19 07/23/1995 Appraisal mission departure 06/30/1997 06/30/1997 Negotiations 11/05/1997 11/05/1997 Planned Date of Effectiveness / /19 10/30/1998 Prepared by: FINDETER Preparation assistance: PHRD grant (country-executed), Spanish Trust Fund Bank staff who worked on the project included: Name Specialty Eleoterio Codato (LCSFP) Urban Management Spec. Roberto Cucullu (LEGLA) Legal Counsel Ofelia Haase (LCSFP) Task Team Assistance Menahem Libhaber (LCSFP) Water Engineer Thakoor Persaud (LCSFP) Economist Teresa Serra (LCSES) Environmental Spec. Oscar Alvarado (LCSFP) Institutional Development Mauricio Cuellar (LCCCO) Procurement Francisco Ayala (Cons.) Economic Analysis Hernando Garzon (Cons.) Municipal Finance Marcela Huertas (Cons.) Capital Markets Development Alfonso Mejia (Cons.) Financial Analysis Edgar Martinez-Leets (Cons.) Operational Support Tim Campbell (TWUGL) Peer Reviewer Vincent Gouarn6 (TWUWS) Peer Reviewer Hemant Shah (FPS) Peer Reviewer Note: The task team leader for the parallel IDB Second Municipal Development Project is Mrs. Alicia Ritchie (RE3/SO3).  Page 35 Annex 8 Urban Infrastructure Services Development Project Documents in the Project File* A. Project Implementation Plan 1. Manual de Operaciones de FINDETER 2. Plan Estrategico Corporativo 1997-1999 3. Plan Estrategico Corporativo 1997-1999. Consolidado-Presupuesto, Agosto de 1997 4. Actores Interinstitucionales, Abril de 1997 B. Bank Staff Assessments (including IDB Staff) 1. Informe Ambiental y de Impacto Social, BID, Octubre de 1997 2. Analisis de la Muestra del Segundo Programa de Desarrollo Territorial, Septiembre de 1997 3. Financial Analysis of FINDETER (Period 1994-1996) 4. FINDETER: Potential Role in Capital Markets Development 5. Analisis de Enfoque Selecto para el Desarrollo de una Estrategia Corporativa de FINDETER, Julio 1997 6. Structure of Municipal Finances, Fiscal Decentralization and Credit Policy Reform (1987-1995), Feb. '97 C. Other 1. El Mercado de Cradito Territorial y Estrategias de Participaci6n de FINDETER FEDESARROLLO, Diciembre de 1996 2. Estudio de Evaluaci6n de Resultados de Proyectos Financiados por FINDETER Conforme a las Politicas del Programa de Desarrollo Territorial - PDT; Informe Final. Planeamiento y Gestion de Proyectos Ltda., Diciembre de 1996 3. Evaluaci6n de Resultados de los Proyectos Financiados por FINDETER Conforme a las Politicas del Programa de Desarrollo Territorial - PDT-BM; Informe Final. Grupo de Consultorias Integrales S.A. - Gerencial Ltda., Marzo de 1997. 4. FINDETER. Analisis Institucional para la Evaluaci6n de Proyectos, Junio de 1997 5. FINDETER. Capacidad de Pago de las Entidades Territoriales, 1997 6. FINDETER. Cartera de Proyectos del Programa SPDT, Abril de 1997 7. FINDETER. FINDETER y la Participaci6n Privada en Agua Potable y Saneanmiento Basico - Politica y Estrategia (Versi6n Final), Mayo de 1997 8. FINDETER. Guia de Presentaci6n de Proyectos de Inversi6n; Acueducto y Alcantarillado, Julio de 1997 9. FINDETER Guia de Referencia para la Evaluaci6n Tecnica Ex-ante en Proyectos de Acueducto, Julio de 1997 10. FINDETER. Guia para la Evaluaci6n Ex-post de Proyectos de Agua Potable y Saneamniento BAsico, Junio de 1997 11. FINDETER. Guia de Seguimiento para Proyectos; Subsectores de Acueducto y de Alcantarillado (VP-GS-01- 01/2), Junio de 1997 12. FINDETER. Inforne de Avance, Prestamo No. 3336-CO, PDT-BM, Abril 30 de 1997 13. FINDETER. Modelo de Costos - Datos de Enero a Mayo de 1997, Primer Informe, Julio de 1997 14. FINDETER. Orientaciones Tecnicas para Preparaci6n de Proyectos 15. FINDETER. Programa de Fortalecimiento de la Gestion Ambiental de FINDETER, Marzo de 1997 16. FINIDETER. Proyecciones de Balance General, 1996-2001, Versi6n Preliminar, 3 de Julio de 1997 17. FINDETER Referencia de Modificaciones Realizadas a la Versi6n Original y al Primer Borrador (versi6n original revisada) de la Primera y Tercera Parte del Manual de Operaciones de FINDETER, Septiembre de 1997 18. FINDETER. Solicitud de Endeudamiento - Credito Banca Multilateral, Noviembre de 1995 (versi6n 2/29/96) 19. Hawkins, Delafield & Wood. Review and Evaluation of FINDETER's Operation in Colombia 20. Jungito B., Roberto, Ligia Melo B. y Martha Misas A.. Descentralizaci6n y Finanzas Publicas: Colombia  Page 36 1967-1994 21. Nel Ospina Santa Maria, Pedro y Catalina Gutierrez Sourdis. Metodologia para el AnAlsis del Desempeflo Financiero de las Entidades Territoriales (Informe Final), Septiembre de 1995 (*) 22. Medina M., Y. Gabriel. Gesti6n Ambiental de FINDETER (Informe Final, 3 volumes), Diciembre de 1996 23. Ministerio de Desarrollo Econ6mico. Ciudades y Ciudadania: la politica urbana del Salto Social (documento sintesis), Julio de 1995 24. Ministerio de Desarrollo Econ6mico y Departamento Nacional de Planeaci6n. Plan de Modernizaci6n Empresarial del Sector de Agua Potable y Saneamiento BAsico (resumen ejecutivo), Abril 25 de 1997 25. Peterson, George (The Urban Institute). Colombia Municipal Development Program: Current Performance and Future Role of FINDETER, December 1995 26. Valenzuela, Luis Carlos. Realidad del Endeudamiento Territorial en Colombia; Seminario Endeudamiento Territorial e Impacto en el Modelo de Descentralizaci6n. Note: (*) documents sent to the Public Information Center (PIC)  Page 37 Annex 9 - A Colombia Statement of IBRD Loans and IDA Credits Difference Between expected Original Amount in US$ Millions and actual Last ARPP Loan or Fiscal disbursements a/ Supervision Rating b/ Project ID Credit Year Borrower Purpose No. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd Dev Obj Imp Prog Number of Closed Loans/credits: 156 Active Loans CO-PE-6852 IBRD 33360 1991 GOVT OF COLOMBIA MUNIC DEVT 60.00 0.00 0.00 5.05 5.05 0.00 S S CO-PE-6854 IBRD 36150 1993 GOV OF COLOMBIA IA MUNICIPAL HEALTH SER 50.00 0.00 0.00 37.37 26.70 7.51 S U CO-PE-6868 IBRD 36920 1994 GOV OF COLOMBIA NATURAL RESOURCE MAN 39.00 0.00 0.00 24.77 10.45 7.75 S S CO-PE-6866 IBRD 36830 1994 GOV. OF COLOMBIA SECONDARY EDUC 90.00 0.00 0.00 64.77 32.04 0.00 S U CO-PE-6889 IBRD 36690 1994 GOVERMT OF COLOMBIA PUBLIC FINANCIAL MAN 30.00 0.00 0.00 12.09 6.73 0.00 S S CO-PE-6880 IBRD 36710 1995 GOVERNMENT OF CLM AGRICULTURE TECHNOLO 51.00 0.00 0.00 45.34 19.85 0.00 S S CO-PE-6893 IBRD 38270 1995 GOVERNMENT OF COLOMBIA ENERGY TA 11.00 0.00 0.00 5.78 3.35 0.00 HS S CO-PE-6872 IBRD 4021A 1996 BOGOTA DISTRICT GOVERNMEN URBAN TRNSPRT 59.59 0.00 0.00 54.49 19.50 0.00 S S CO-PE-39291 IBRD 39730 1996 GOVERNMENT OF COLOMBIA URBAN ENVIRONMENT TA 20.00 0.00 0.00 16.66 9.65 0.00 S S CO-PE-6887 IBRD 39550 1996 GOVT OF COLOMBIA POWER MARKET DEVELOP 145.00 0.00 0.00 136.19 49.53 18.38 HS S CO-PE-6887 IBRD 3954A 1996 GOVT OF COLOMBIA POWER MARKET DEVELOP 104.30 0.00 0.00 61.31 49.53 18.38 HS S CO-PE-6894 IBRD 39530 1996 GOVERNMENT SANTAFE I (WTR/SUPPL 87.00 0.00 0.00 69.41 38.48 0.00 S S CO-PE-6894 IBRD 39520 1996 GOVERNMENT SANTAFE I (WTR/SUPPL 58.00 0.00 0.00 45.65 38.48 0.00 S s CO-PE-6884 IBRD 41960 1997 GOVERNMENT OF COLOMBIA FIN MRKTS DEV TA 15.00 0.00 0.00 14.65 2.25 0.00 S HS CO-PE-40102 IBRD 41380 1997 GOVT OF COLOMBIA REG.REF.TA 12.50 0.00 0.00 12.09 1.94 0.00 S S CO-PE-6891 IBRD 42430 1998 GOV OF COLOMBIA ANTIOQUIA EDUCATION 40.00 0.00 0.00 40.00 .39 0.00 S S CO-PE-46112 IBRD 42420 1998 GOVERNMENT OF COLOMBIA PASTO EDUCATION 7.20 0.00 0.00 6.94 -.02 0.00 S S Total 879.59 0.00 0.00 652.56 313.90 52.02 Active Loans Closed Loans Total Total Disbursed (IBRD and IDA): 227.01 6,909.26 7,136.27 of which has been repaid: 7.45 5,410.61 5,418.06 Total now held by IBRD and IDA: 872.14 1,519.16 2,391.30 Amount sold 0.00 50.99 50.99 Of which repaid : 0.00 50.99 50.99 Total Undisbursed : 652.56 20.09 672.65 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U unsatisfactory, HU = highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. Note: Disbursement data is updated at the end of the first week of the month.  Page 38 Annex 9 - B STATEMENT OF IFC's COMMITTED AND DISBURSED PORTFOLIO As of 31-Mar-98 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1963/90 Coltejer 7.22 0.00 0.00 0.00 7.22 0.00 0.00 0.00 1967170M4184/86/87/88 Enka .38 0.00 0.00 2.29 .38 0.00 0.00 2.29 1969/85/88/93/95 CF dcl Valle 0.00 7.43 0.00 0.00 0.00 7.43 0.00 0.00 1977/89/92/94/96 Promigas 15.13 1.13 0.00 47.98 9.33 1.13 0.00 33.49 1981/85/87/89/91/92/94 Leasing Bolivar 5.80 .25 0.00 1.20 5.80 .25 0.00 1.20 1987 PRODESAL 0.00 .59 0.00 0.00 0.00 .59 0.00 0.00 1990/92 ODC 11.55 0.00 0.00 27.11 11.55 0.00 0.00 27.11 1994/95 Corfinansa 4.00 1.43 0.00 0.00 4.00 1.43 0.00 0.00 1995 Corfinsura 13.06 0.00 0.00 0.00 13.06 0.00 0.00 0.00 1995/97 Icollantas 13.00 .46 5.00 0.00 13.00 .46 5.00 0.00 1996 Proyectos 10.00 5.00 0.00 0.00 1.00 2.15 0.00 0.00 1997 Suleasing 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Portfolio: 110.14 16.29 5.00 78.58 65.34 13.44 5.00 64.09 Approvals Pending Commitment Loan Equity Qnasi Partic Total Pending Commitment: 0.00 0.00 0.00 0.00  .. . . . . . . . ..... .. . . . . .. . .. . . . . . . . . . . . . . . . ... . . . . . . . . . .. . . . . .. .... .......... 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5 O 2 U-  Page 40 Annex 10 Colombia at a Glance PRICES and GOVERNMENT FINANCE 1975 1985 1995 1996 Domestic pHices Intlabon (%) (% change) 40 Consumer prices 22.9 24.0 20.9 21.6 3 O_ Implicit GDP deflator 22.9 24.9 20.8 21.2 z * Government linance o * (% of GDF) o 0 Current revenue .. 20.3 30.4 31.5 91 92 93 94 95 9S Current budget balance .. 4.3 6.9 8.1 - GDP det 0 CPI Overall surplus/deficit .. -4.6 -1.4 -2.9 TRADE 1975 1985 1995 1996 (millions US$) Export and import levels (mill. US$) Total exports (fob) .. 3,650 10,201 10,630 1sooo Coffee .. 1,702 1,832 1,577 Petroleum .. .. 2.164 2,889 Manufactures .. .. 5,160 4,879 10.000 Total imports (cif 12,921 12,755 Food DO. . .. 900 H OI Fuel and energy . 466 264 240 Capital goods .. 1,165 4,776 4,237 ___ Export pnce index (1987=100) .. .. 145 164 90 91 92 03 94 9f 99 Import pceindex(1987=100) .. .. 267 260 DExpots mlrmports Terms of trade (1987=100) .. .. 54 63 BALANCE of PAYMENTS 1975 1985 1995 1996 (millions USS) Current account balance to GDP rato t%) Exportsofgoodsandseruces 2,105 4,642 13,771 14,545 s Importsofgoodsandservices 2,007 4,989 16,211 16,541 Resource balance 98 -347 -2,439 -1,997 Net income -318 -1,710 -2,750 -3,401 Net current transfers .. 455 797 614 n n Current account balance, o Si 92 before official capital transfers .. 1,602 4,393 -4,784 -3 Financing items (net) , 1,371 4,715 6,356 Changes in net reserves 111 231 -322 -1,572 .s Memo: Reserves including gold (mill. USS) 633 2,202 8,458 10,041 Conversion rate (IocalAJSS) 30.9 1423 944.5 1,036.7 EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1995 1996 r (millions USS) Composlffon ottotal debt 1996 (mll. USS) Total debt outstanding and disbursed 3.758 14,246 25,047 29,069 A IBRD 634 2,399 2,548 2,177 21A7I IDA 23 18 11 10 G Total debt service 314 1,980 4,694 6,443 2787 IBRD 78 318 604 520 E IDA 1 0 1 1 1738 Composition of net resource flows Official grants 18 20 73 Official creditors 111 938 -472 1,531 Prvate creditors 216 392 1,109 1,592 Foreign direct investment 37 1,023 2.501 3,253 Portfolio equity 0 0 131 -21 Portfolio equity 16473 World Bank program Commitments 88 490 207 334 A - IBRD E - Bilateral Dsbursements 106 590 238 152 B-IDA D-Other multllateral F- Pdvate Principal repayments 34 165 415 351 C-IMF G-Short-term Netflows 71 424 -177 -199 1 1 Interest payments 45 153 191 170 Net transfers 27 271 -368 -369 Development Economics 8/28197  IBRD 18370R1 -I4ONOORA$ ~ ~ BAZLQtC -S.--, ((isv-/ h.-t hSi.A -h b .. d..OLVIA *1. 7~~~~~ - 5,000,000 persons S~~~~~~~~~~~~~~~aaisMsS. , h Wd % 50~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ok,-e h .e,,te 1sod5 200end,.Sbs, 250th 2,OOQOOO 3, KIL~~~~~~~~~~~~~~~~~~~~-nhs,s,j ot.p~~ T,5OMETEoskRS-p ,'isgot 1,00Q000 1,~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~tefgl M f 5~ts-tt ~ s,.ts,o~ ME TAR RivAersUA NI Department Boundaries ~ ~ ~ ~ ~ ~ ~ ~ ~ > International Boundciries~~~~~0 78. 741 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 MILES99