Colombia - Medium Size Cities Water Supply and Sewerage Project

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1119 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT September 18, 1972 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMNDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Instituto Nacional de Fomento Municipal (INSFOPAL) with the guarantee of the Republic of Colombia for the equivalent of US$9.1 million to help finance water supply and 8ewerage projects for seven medium-size cities. The loan would have a term of 25 years, including 4 years of grace, with an interest of 7-1/4 percent per annum. The proceeds of the loan would be relent to six municipal enterprises in Armenia, Pereira, Tulua, Santa Narta, Manizalez, and Neiva, and to Aquavalle, a regional authority respon- sible for water supply in Buenaventura. The loan funds would be passed on by the borrower to the seven beneficiaries mentioned above on the same terms as the Bank loan. PART I: THE ECONOMY 2. The Bank's most recent economic report (Economic Position and Prospects of Colombia, R-72-21) was distributed to the Executive Directors on January 14, 1972. The next Bank mission to assess the Colombian economic situation is scheduled for October-November of this year. 3. The Colombian economy grew by 5.2 percent per annum on the average in the 1960's; from 1968 through 1970 annual growth exceeded 6 percent. In 1971, the growth in gross domestic product declined to an estimated 5.5 percent largely because an unexpected and sharp decline in coffee prices from mid-1970 through 1971, and unusually heavy and prolonged rainfall--which together broke the momentum of growth and disrupted development. Although the medium- term economic outlook is good, with coffee prices moving upwards, Colombia continues to be confronted by two structural problems--rural poverty and a high rate of urban unemployment. In addition, Colombia's heavy dependence on coffee exports--which still account for over 50 percent of total merchandise exports--has led to frequent balance of payments problems, and has therefore been an obstacle to economic development.  - 2 - 4. Concerning unemployment, the rate at which Colombia's labor force is growing makes the problem especially difficult: for the next 10-15 years the labor force is projected to grow at 3.5 percent per year, one of the highest rates in the world. Open unemployment in Bogota reached a peak of 12 percent in 1967 and has declined since, but it still averaged 8 percent in 1970. If productivity increases in the future at the same rate as in the past--3.2 percent per annum--output would have to grow at least by 6.7 percent to absorb the increment in the labor force. A faster growth rate would be needed to reduce the backlog of the unemployed, as concluded in recent International Labor Office and Bank studies. 5. Since foreign exchange earnings and public revenues still largely depend on sharply, fluctuating world coffee prices, the authorities recognize that non-traditional export growth--i.e., all exports except coffee and petroleum-- is the key to expanding the economy. They have had considerable success: non-traditional exports rose from US$45 million in 1963 to about US$300 million in 1971, to represent 40 percent of total merchandise exports. One of the instruments used to achieve such rapid export growth has been Colombia's flexible exchange rate system adopted in March 1967, which the Government plans to continue. Another device providing considerable stimulus is the Tax Credit Certificate, which raises the effective export exchange rate by 15 percent over the nominal market rate. 6. In the years ahead two obstacles to Colombia's growth will be the fiscal constraint upon public investment and the foreign exchange constraint on imports. With regard to the fiscal issue, the Government has>made good progress in increasing the level of public revenues. The foreign exchange constraint will still be binding for several years, even with a strong export performance, and the country will need sizable amounts of external assistance. As confirmed by the Consultative Group for Colombia at its last meeting last February, Colombia's public sector will need external loan commitments in 1973-75 of about US$400 million per year. 7. The main sources of external financing for Colombia in the 1963-71 period are shown in Annex II. Thanks to the relatively large assistance from official development agencies, Colombia's debt structure is favorable; suppliers' and financial credits account for only one-tenth of the total medium and long-term debt. This has been an important factor in holding down the debt servicing burden despite the large capital inflow. Colombia's long-term public external debt repayable in foreign currency amounted to US$2,018 million at the end of 1971, US$1,354 million excluding undisbursed conmitments. Interest and amortization payments came to US$133 million in 1971, representing about 13 percent of goods and services exports, only slightly higher than the average 1967-70 debt service ratio. This ratio can be expected to rise gradually during the next several years, but assuming continued financial assistance on favorable terms it should peak at roughly 20 percent in the early nineteen-eighties. With continued high growth on the order of seven percent per year, together with further strong expansion of non-coffee exports and progress toward wider employment opportunities and an improved distribution of personal income, Colombia should remain credit- worthy for sizable amounts of external assistance from the Bank and other members of the Consultative Group.  -3- 8. Despite recent favorable growth, there remain serious problems in agriculture. Average per capita income in the rural areas is only half that in the towns and income distribution is very skewed. This distribution of income is undoubtedly related to the concentration of land ownership: 1960 agricultural census figures showed that the largest 10 percent of farms accounted for 81 percent of all farmland. Partial results from the 1970 agricultural census indicate that the distribution of land may have improved somewhat during the last ten years, but not to any substantial degree. The Government, through its agrarian reform agency, has made modest progress in helping small farmers and hitherto landless peasants, but much still needs to be done to distribute the benefits of agriculture more widely. 9. As in many other developing countries, there has been a large and steady migration from its rural areas to the cities, particularly to the largest urban centers of the country; the urban populatibn now accounts for about 57 percent of the total, compared with less than 40 percent in 1960. Despite the heavy migration to the cities, the Colombian authorities are fully aware that a large percentage of the population will continue to depend on agriculture, and that therefore they must give adequate attention to economic and social programs for improving living conditions in rural areas. 10. Colombia has an urban and regional structure which is unique in Latin America. The centers of development are widely dispersed throughout the country because until recently Colombia's difficult geography enforced the semi-isolation of regions and led to the growth of decentralized urban centers. In contrast to the monocentric urban structure of many Latin American countries, Colombia has four major centers (Bogota, Medellin, Barranquilla, and Cali) of over 500,000 inhabitants each, and 100 urban centers with over 10,000 inhabitants. There are about 24 cities in Colombia with a population of between 50,000 and 300,000--termed "medium-size cities". Because of these characteristics, the Colombian Government considers that it has the opportunity to build on the existing regional and urban structure. 11. Recognizing that the heavy flow of inmmigrants from rural to urban areas will continue, the Government's aim is to attract these people to medium-size cities instead of to the already overcrowded metropolitan centers. The planning authorities are, therefore, seeking to promote social and economic development in smual and medium-size cities. This involves (a) programs for improvement of infrastructure, including water supply and sewerage systems; (b) credit programs for small and medium industries in the cities; (c) expansion of the Government's low-income housing program, focussing on low-cost solutions such as sites and services; and (d) improve- ment of public administration, both local and national, in urban areas.  -4- 12. As a reflection of its growing concern about the mounting economic and social pressures in the cities, the Government has recently proposed guidelines for a revision of its development program, giving increased emphasis to urban development, to balanced regional growth, and to stimulation of a pattern of demand which will maximize employment. The planning authorities in Colombia also hope a program can be formulated that will better serve the needs of the lower income groups. One of the principal elements of this program is to stimulate urban housing. We shall maintain close contact with the Colombian authorities to adjust our own lending program to the changes which emerge from the current re-evaluation. PART II: BANK GROUP OPERATIONS IN COLOMBIA 13. The proposed loan, which would be the fifty-first made to Colombia, would bring the total amount of Bank loans to Colombia to US$941.6 million (net of cancellations). Of the foregoing amount, US$759.1 million is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia. 14, Bank disbursements as a percentage of total disbursements by official lenders to Colombia should peak at about 40 percent in 1973-74 and then decline. The Bank's share of total debt service is also projected to peak at about 40 percent in 1974-75 before turning down, and the Bank Group share of total debt disbursed and outstanding should stay at about 33 percent during the next several years (assuming that Bank lending over the next few years averages about US$1 20 million per annum). 15. Historically, the majority of Bank loans to Colombia has been for electric power and transportation, although beginning in 1966 an increasing share of the loans has been for agriculture, industry, and telecommunications, and more recently, for education and water supply. Disbursements have been completed on twenty-six loans and the one IDA credit. Of the twenty-four with undisbursed balances, progress on the  majority is satisfactory. IFC has made investment and underwriting commit- ments in 18 enterprises in Colombia, totalling about US$19.7 million of which IFC now holds US$10.2 million. Annex I contains a summary statement Of Bank loans, the IDA credit, and IFC investments as of August 31, 1972, and notes on the execution of ongoing projects with particular reference to those which are encountering problems in execution and giving rise to delays in disbursements. 16. For this fiscal year, we are proceeding with an active lending program for Colombia. In addition to appraising the Medium-size Cities Water Supply and Sewerage project, the staff has recently appraised a fifth development finance companies project, the Guatape II hydroelectric project, and a sixth railway project. I hope to be able to recommend loans for most, if not all, of these projects during the next months. In addition, a loan for presentation in the latter part of fiscal year 1973 for a third education project is under preparation. 17. Over the past few years, Bank lending in Colombia has become increasingly diversified. In earlier years, the Bank focussed primarily on power and transport. As Bank activities in Colombia expanded and as the Bank assumed increasing responsibilities as head of the Consultative Group for Colombia, it has moved increasingly into industry, agriculture, and the social sectors. In formulating conditions for lending and in selecting fields ot activity, the Bank has been motivated by the following principal considerations: (a) to provide capital for high-priority sectors where other sources of external finance have been difficult to mobilize; (b) to assist the Colombians in obtaining capital from other sources on adequate terms; (c) to contribute to important institution-building objectives, including the development of an improved fiscal system and institutions capable of inoreasing publio savings; (d) to give support to Government programs and projects designed to remove the balanoe of payments constraint on accelerated economic development; and (e) to associate the Bank increasingly with the efforts of the Colombian Government to distribute the benefits of economic progress more widely. lb. In accordance with these considerations, we expect over the next few years to make a substantial contribution to the expansion of agriculture and industry, with perhaps as much as 60 percent of our total lending in those two sectors. We would hope that through our lending in agriculture we shall be able to assist in tackling the problems of the lower income groups in the rural sector. A major objective in both fields will be to continue to help remove the balance of payments constraint on development. We shall be oontinuing with additional projects in water supply, education, and in other projects involving some urban development--  - 6 - where we have important institution-building objectives--as well as providing direct support to Government efforts to provide widening opportunities for the development of human capacities, and for broadening the geographical distribution of the benefits of economic growth. While our future lending for transport and power will be significant, we would hope progressively to encourage other members of the Consultative Group to assume a growing role in these fields. 19. In the past, several Bank loans for electric power, water supply, transportation, and education have had impact on urban development in Colombia. Also, as executing agency for a UNDP project on urban development and trans- port in Bogota, the Bank is cooperating with the Government in developing criteria for preparation of urban development projects within well-conceived sector policy objectives. While we hope to become involved further in urban development, our role will be considerably smaller than in the commodity - produc- ing sectors. The US Agency for International Development (AID) has become increasingly involved in a variety of urban development activities through urban sector loans in Colombia and the IDB is also making loans in this field. PART III: WATER SUPPLY AND SEWERAGE SECTOR 20. Most of the water supply and sewerage systems in Colombia have not kept pace with the rapid growth of the urban population. This has been partly due to the inability of most municipalities to generate funds through adequate tariffs. Even though the growth of the systems has been relatively rapid during the past six years, one-fourth of the urban population still does not have direct access to public water supply and sewerage services. About 50 percent of the urban population has access to sewers and less than 30 percent of the rural population is connected to septic tanks or latrines. Many systems have deteriorated because of deficient maintenance, and expansion has left many overloada. Since sewage and industrial wastes are not generally treated, the receiving bodies of water may become seriously polluted in the near future, particularly in the highly industrialized areas. In this connection, as part of the second loan (741-CO) to the Bogota Water Supply Company, the Bank is providing assistance to study a River Regulation and Pollution Control Project. As a result of the deficiencies described above, waterborne diseases in Colombia are the second most frequent causes of hospitalization and they cause one in eight of all deaths. 21 . The Colombian water supply and sewerage sector comprises three major groups: larger cities, of which 21 have organized municipal companies to provide water supply and sewerage services; cities and towns with over 2,500 inhabitants which have water supply and sewerage systems under the control of the Instituto Nacional de Fomento Municipal (INSFOPAL); and rural communities.with less than 2,500 inhabitants where the Instituto Nacional para Programas Especiales de Salud (INPES), has embarked on a program to improve sanitary conditions.  - 7 - 22. Besides the Empresas, INSFOPAL and INPES, there are regional authorities and independent municipalities operating in the sector. The autonomous Regional Corporation of the Bogota Plain, Ubate and Chiquinquira Valleys (CAR) is a planning and coordinating agency for Greater Bogota, having jurisdiction in an area of 6,000 sq. km. A second regional system (Madrid-Mosquera-Funza) is being built. These systems are independent of INSFOPAL and INPES. The Cauca Valley Authority (CVC) aunplies water to communities under its jurisdiction. The Institute for Agrarian Reform (INCORA) and the Coffee Federation have likewise built small rural systems in areas of particular interest to them. 23. The 21 cities with their own municipal companies provide water supply and sewerage services to about 6 million Colombians. The operating companies in the two major cities of Colombia--Bogota and Medellin--appear able to cope to a fair degree with the water supply problems of these fast-growing urban centers. However, the two next largest cities, Cali and Barranquilla have serious financial asid administrative problems. The 17 remaining companies serving medium-size cities have experienced difficulties in providing adequate services. 24. INSFOPAL provides water supply services to about 3 million people through 750 separate systems under its control. INPES provides services to about 2.2 million people in rural commmnities. This institute, created in 1968 is, like INSFOPAL, a dependency of the Ministry of Health. Its main activities are rural sanitation involving water supply and sewerage for communities with less than 2,500 inhabitants, biomedical and epidemio- logical research and training of professional and auxiliary personnel in the public health sector. Water supply and sewerage systems are constructed by departmental branches of INPES, and priority investments depends on local interest and willingness to contribute labor and materials. 25'. Colombia's capacity to finance the needed investment in the water supply and sewerage sector--including the ability to provide local currency to supplement foreign loans--is closely related to internal cash generation of the sector. This has been its weak spot: cash generation has been low. The larger Empresas have been able to generate up to 25 percent of invest- ment needs, while the smaller ones have used praotically all of their internally generated resources for administration, operation or maintenance expenses and for debt service. Some of the Empresas have financed the expansion of the water supply systems with funds generated from other services, such as eleotric energy or telephone service; frequently, the result has been to reduce the investment in theae sectors below priority needs or to rely on additional assistance from the central government. 26. In recent years, the Government has become inoreasingly aware of the need to expand public savings through adequate user charges for the purpose of accelerating development of the country's public utilities. By the actions to provide adequate tariffs in the proposed project, the beneficiary entities in the medium-size cities would be taking a step for- ward towards achieving financial viability and thus to be able to expand their systems in the future with increasing amounts of their own resources.  - 8 - 27. Three major sources of investment financing have been available to Colombia's water supply and sewerage sector: contributions from the Government budget, internal cash generations of the companies, and foreign loans. The Government planning authorities have recently completed a survey of the investment requirements for the water supply and sewerage sector through 1980 and have concluded that to meet minimum standards Colombia will have to allocate the equivalent of about US$70 million per anmum for water supply and sewerage projects in the next eight years. This compares with about US$3I million per annum for the 1965-70 period. 28. The IDB, AID, and the Bank have been the chief sources of external finance. IDB made loans totalling US$43.2 million to the sector during 1961-69 for the cities of Medellin, Cartagena, Cucuta, and Cali, and to INSFOPAL. Following the depletion of the Social Progress Trust Fund, the IDB made no further loans to INSFOPAL. AID has provided assistance total- ling over US$13 million for water and sewerage projects and for preinvest- ment studies leading to projects financed by multilateral and bilateral credit institutions. The Bank has made four loans for water supply total- ling US$122 million for the cities of Bogota (two loans), Cali, and Palmira. 29. The main constraint on the development of the water supply" and sewerage systems in the medium and smaller size cities has been their inability of most of them to prepare technically suitable projects and also inability to raise enough financing from tariffs. Also, overhead costs of project identification and loan administration were too high in the case of separate projects for medium size cities. 30. To help break the financial and technical constraints mentioned above and to assist Colombia in its efforts to stimulate balanced growth of water supply and sewerage systems in medium-size cities, the Bank is proposing to channel the funds from the proposed loan through a single agency, INSFOPAL, acting as an intermediary between the Bank and the bene- ficiary cities. The aim is not only to provide funds for priority projects in medium-size cities, but also to help transform INSFOPAL into a more efficient agency that will be better able than in the past to plan, identify, and evaluate projects in the sector. The need to satisfy the urgent water and sewerage requirements of several million Colombians living in medium- size cities, and to avoid appraisal and supervision of a great number of small projects, have both been important considerations in determining this approach..  - 9 - PART IV: THE PROJECT 31. Appraisal of the proposed medium-size cities water supply and sewerage project was carried out in October and November 1971 and loan negotiations were held in June 1972. The head of the Colombian delegation was Mr. Rafael Paredes, Director General of Instituto Nacional de Fomento Municipal (INSFOPAL); the Government was represented by Mr. Isidro Parra, Chief of the External Finance Unit of the National Planning Department. 32. This operation would support the Colombian Government's policy of raising living standards in medium-size cities and thus divert some of the rural migration to a large number of medium-size cities instead of encouraging a further inflow into the largest urban centers such as Bogota and Medellin. It would also further two of the Bank's objectives in its lending strategy for Colombia: to help development institutions capable of increasing public savings--which in the case of the proposed loan would involve introduction of adequate water supply and sewerage rates; and to associate the Bank with the Colombian Government's efforts to distribute the benefits of economic growth more widely. 33. The proposed loan would be for water supply and sewerage projects to be executed from 1972 to 1975 in seven cities with populations between 80,000 and 300,000 namely: Armenia, Manizales, Neiva, Pereira, Tulua, Buenaventura, and Santa Marta (see attached map). The project for Buena- ventura does not include sewerage works. Out of a number of projects originally proposed by the Colombian authorities, the seven listed above were chosen on grounds of technical and financial feasibility as demonstrated by detailed studies. A loan and project summary is attached as Annex III to this report and an appraisal report (PA- 100 )is being circulated separately to the Executive Directors. 34. The improved water supply and sewerage services will be provided in areas predominantely inhabited by lower income groups. The populations of the seven cities are growing at rates from 5 percent to 6.4 percent annually, and they will have a combined population of 1.8 million by 1980. These projects would ensure that a population of 1.6 million would be served with an adequate supply of wholesome water--that is, about double the population which has a supply at present. The project should substantially inprove sanitary conditions in the urban areas affeoted. Also, pollution of streams in built up areas will be considerably reduced. 35. The size and content of the seven projects and their financing plans have been determined by the following two objeotives, first, to service by 1980 an approximately equal percentage of the population of each of the cities; and, second, to establish in the cities concerned fairly uniform tariffs in terms of pesos per cubio meter of water no higher than the charges currently  - 10 - prevailing in the largest cities. The first objective reflects mainly equity considerations. The second reflects the Government's desire to increase substantially present subsidized water rates and the judgment that such increases are feasible politically only if the average consumer does not pay much more for his water in one city than in another. Both are consistent with the basic goal of these projects: to provide better services at reasonable prices in alternative centers of growth. It should be noted that the water supply conditions in the seven cities do not differ widely so that following these principles will not lead, over the long run, to ignoring real cost factors. In the short run, however, the different sizes of the projects and the variations in the cost of water pr,,oduction, has led to substantial differences in the financing plans of the various beneficiaries and also in the projected financial rates of return. The percentage contributions of the Bank to the total project coats ;are about the same in all cases; the contributions of the Government were treated as a residual. It follows that the Central Oovernment's contribution varies a great deal between the different cities. All these differences are brought out in Annex III, Table 1. 36. Each enterprise has a program of tariff increases which will bring about fairly equal water rates per cubic meter among the cities by the end of the project period. Most of this equalization is to be achieved during the first year of the project and this first round of tariff increases has been proposed as a condition of effectiveness of the subsidiary loans. As indicated in Annex III, Table 2, the required increases range from 57 to 117 percent over 1971 tariffs, except for Santa Marta where only a 20 percent increase is necessary. The proposed tariffs are similar to those in the other cities to which the Bank has lent and, in at least three of the cities-- Manizales, Pereira, and Tulua--the central government and the city authorities have already approved increases and the new tariffs are being implemented in steps. In some of the other cities, public resistance to the proposed tariff increases.can nevertheless be expected and the effectiveness of individual subsidiary loan agreements may, therefore, be delayed. 37. Of the seven beneficiaries, five are responsible not only for water suppLy but also for other public services such as power, telecom- munications, and slaughterhouses. In order to ensure the financial viability of these beneficiaries as a whole, financial targets had to be set also for these other services so as to ensure that they will be able:to generate sufficient cash for their own projected expansion programs. 36. The minimum estimated economic rates of return for the individual projects are as follows: Armenia, 17 percent; Manizales, 11 percent; Neiva, 10 percent; Pereira, 13 percent; Tulua, 9 percent; Buenaventura, 14 percent; and Santa Marts, 13 percent.  - 11 - Benefits were measured by the additional quantities of water provided, valued at the proposed water supply and sewerage tariffs, after deducting incremental operating costs due to the project. Variations in the rates of return are explained by differences in topography, hydrology, existing facilities, investing phasing and incomes. Not all benefits are captured by this method, which equates willingness to pay with economic benefits. Health benefits are examples of benefits which may be understated or completely omitted by this analysis. 39. The total cost of tbb'project, plus the coat of managerial assistance to INSFOPAL, is US$15.5 million equivalent, excluding interest during con- struction. Local costs are estimated at US$12.7 million and foreign costs at US$2.8 million. The US$9.1 million Bank loan would finance one-half of the cost of construction (US$7.4 million equivalent); the cost of consulting services for INSFOPAL and the seven beneficiaries assistance (US$0.5 million equivalent); and interest on the Bank loan during construction (US$1.2 million equivalent). The local currency expenditures to be financed under the loan amount to US$5.1 million equivalent. A sunmary of the disbursement schedule is contained in Annex III. The loan includes retroactive financing after May 31, 1972 of up to US$150,000 to cover the cost of consultants incurred prior to the signing of the loan. The balance of the local costs, equivalent to US$7.6 million, would be provided by Government (the equivalent of about US$6.8 million) to INSFOPAL and from internal generations of the beneficiary entities. INSFOPAL would lend the Government contribution to the beneficiaries and use the repayments for further investment in the sector. 40, The proposed amount of local cost financing by the Bank is fully justified since Colombia has a well-conceived development program, but in spite of its efforts to mobilize domestic resources for its support, still requires external assistanoe in exoess of the foreign exchange component of development projecta auitable for external financing. 41. The loan would be ohanneled to the beneficiaries through the Instituto Nacional de Fomento Municipal (INSFOPAL), a national water supply agency, under subsidiary loan agreements. INSFOPAL was created in 1936 under the Ministry of Public Works. In 1968 it was placed under the Ministry of Health. The principal functions of INSFOPAL are: (a) to prepare public investment programs in the water supply and sewerage sector; (b) to construct water supply and sewerage projeots for communities with more than 2,500 inhabitants that do not have their own company; (c) to supervise the construction of projects financed with Government funds; (d)to establish standards of construction and operation; (e) to submit applications for tariff inoreasea to the National Public Servioes Tariff Board for those systems under its jurisdictionj and (f) to operate and maintain those aystems.  _ 12 - 42. INSFOPAL operates in over 750 towns with more than 2,500 inhab- itants, which have no public service corporation, through a variety of institutions such as departmental water supply corporations called acuas, departmental offices called direcciones seccionales, and local systems. In 1970, systems under INSFOPAL's control covered areas having 25 percent of Colombia's population. 43. INSFOPAL's resources come principally from Government transfers. Its investment has averaged the equivalent of about US$7.5 million per year for the period 1966-71. The Government proposes to step up its contribution to the equivalent of about US$17 million in 1972 and to about US$20 million in 1973, as part of its policy to expand INSFOPAL's water supply and sewerage program for medium-size and small cities. INSFOPAL has received loan assistancelfrom external lending agencies: the Inter-American Develop- ment Bank (DB) has lent INSFOPAL a total of US$10.6 million in 1962 for a large number of its systems, and AID has made available to INSFOPAL peso proceeds from several program loans during 1960's. 44. AID has financed a number of feasibility studies for water supply and sewerage projects for medium-size cities, including those which provided the basis for the proposed Bank loan recommended in this report. AID is also planning to help INSFOPAL finance part of its expanded 1972-1973 investment plan. For this purpose it has allocated local currency proceeds equivalent to US$7 million from a recently-signed sector loan for urban development to the Colombian Government. Arrangements have been made to ensure coordination of the AD-financed projects and those to be carried out with the proposed Bank loan (see paragraph 46 below). 45. The management of INSFOPAL has been uneven over the years and its administration and organization poor. To correct this deficiency, INSFOPAL has recently reached agreement with the Pan American Health Orga- nization (PAHO) for managerial assistance provided for under the proposed loan. Further, as part of its plan to work closely with the Bank to improve its planning, project preparation and implementation of projects, INSFOPAL has established an External Credit Offioe (ECO) to implement the projects using both national and foreign resources. This unit would carry out the responsibilities of INSFOPAL under the proposed loan, inoluding project supervision and execution, bidding review, data collection, loan withdrawal applications, and reporting. The External Credit Office has eight profes- sional staff members, including one project engineer, two engineers in charge of loan administration, two financial analysts, and one accountant. ECO will also have a full-time staff member to supervise AD-financed pro- jects in order to ensure that they meet the projeot criteria of ECO.  - 13 - ECO's manager reports directly to the Manager of INSFOPAL. It will receive assistance from consultants in organization, supervision of projects, and preparation and evaluation of projects. 46. The impact of the ECO will reaoh far beyond the administration of the proposed loan since it is expected to spur administrative and tech- nical improvement in the rest of INSFOPAL. ECO's role and its potential influence on the whole of INSFOPAL are illustrated by its functions: (A) to assist the local water supply and sewerage entities in the medium-size cities in the preparation of projects for foreign financing; (b) to assist the Bank in the appraisal of projects and gradually to take over this function; (c) to assist the beneficiaries in the preparation of progress reports and disbursement requests; (d) to review and approve bidding documents and bid evaluation; (e) to oversee loan conditions; (f) to establish uniform administrative procedures for programs of construction and cost accounting; (g) to coordinate and promote training programs; and (h) to coordinate joint purchases when feasible. Further, all of INSFOPAL's projects partially financed by the AID sector loan will have to meet the technical, administrative, and financial standards of the ECO. The Bank would approve these standards and thus ensure that both the AID-financed projects and those financed by the IHRD will have the same institutional impact. 47. Organization and management in most of the entities responsible for water supply and sewerage for the beneficiary cities are weak, and rates charged for services have been inadequate. (A summary of the management and financial status for each of the seven entities benefitting under the pro-' ject is shown in Annex III). To remedy the administrative and organizational deficiencies of the beneficiary entities, technical assistance will be pro- vided through consultants whose services are called for under the proposed project. Similar assistance will be provided to improve the empresas' financial and technical capabilities. hA. The proposed loan would help finance the costs of civil works, imported equipment, and consulting services. International competitive bidding procedures will be followed in selecting contracts for civil works and equipment purchases. Foreign suppliers are expected to win contracts for large valves and piping. All civil works contracts, however, are expected to go to local firms. For the purpose of evaluating bids, a 15 percent preference would be allowed for equipment manufactured in Colombia, except for pipes for which Colombian suppliers have a substantial local advantage and are able to compete without preferential terms. The beneficiaries are exempt from import duties and the bidding will not take -into aooount regional preferenoes. 49. Colombian and foreign consultants will be retained for the final design and construction of the Armenia, Manizales, Neiva, Pereira, and Tulua projects. In the case of the Buenaventura and the Santa Marta Projects either INSFOPAL's staff or consultants will supervise the final design and construction.  - 14 - 50. Given the involvement of seven separate water supply and sewerage systems in the proposed project, more than the normal amount of project supervision will be required. For this reason, and since four other Bank loans for the sector are still in the implementation stage, we plan to station an experienced water supply specialist in Colombia as part of our resident representative office in that country to oversee the projects on a full-time basis. PART V: L-EAL INSTRUNENTS AND AUTHCMITY 51. The draft Loan Agreement between the Bank and Instituto Nacional de Fomento Municipal and the draft Guarantee Agreement between the Republic of Colombia and the Bank, as well as the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a Resolution approving the proposed loan, are being distributed to the Executive Directors separately. 52. The draft Agreements contain covenants normally included in agree- ments for public utilities projects. Attention ie drawn to the following provisions: (a) Section 9.01 of the draft Loan Agreement establishes as a condition to effectiveness of the Loan Agreement that INSFOPAL shall have received the Government contribution required for the project in 1972 and that the national budget of the Government for the fiscal year 1973 sub- mitted to the National Congress provide for the Government funds to be transferred to INSFOPAL for the project during that year. (b) Paragraph 3(c) of Schedule 1 to the draft Loan Agreement provides as special conditions of withdrawal of the proceeds of the loan for use by each Empresa the adoption by the corresponding Empresa of a five-year investment plan and the execution and delivery of its .Subsidiary Loan Agreement with INSFOPAL. 53. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 54. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments September 18, 1972  ANNEX I Page 1 THE STATUS OF BANK GROUP OPERATIONS IN COLOMBIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of August 31, 1972) US$ Million Loan Amount (less cancellationL Number Year Borrower Purpose Bank IDA Undisbursec Fully disbursed loans and credits 381.1 19.5 369 1964 Empresas ?ablicas de Medellin Power 39.0 1.2 499 1967 Empresa Nac. de Telecomwicaciones CommunicatLias 16.0 o.8 502 1967 Instituto Colombiano de la Reforma Agraria Irrigation 9.0 4.5 534 1968 Banco de la Repfiblica Industry 12.5 0.5 536 1968 Empresa de Acueducto y Alcanta- Water rillado de Bogota Supply 14.0 1.7 537 1968 Empresa de Energia Electrica de Bogot& Power 18.o 3.1 550 1968 Colombia Roads 17.2 2.0 551 1968 Ferrocarriles Nacionales Railways 12.4 0.1 552 1968 Colombia Education 7.6 2.3 575 1968 Interconexion Electrica, S.A. Power 18.o 8.o 624 1969 Colombia Agriculture 17.0 14.4 625 1969 Banco de la Repfiblica Industry 25.0 3.5 651 1969 Colombia Agriculture 18.3 16.7 679 1970 Colombia Education 6.5 5.2 680 1970 Colombia Roads 32.0 17.3 681 1970 Interconexion Electrica, S.A. Power 52.3 37.1 682 1970 Empresas Municipales de Cali Water Supply 18.5 16.0 738 1971 Empresas Municipales de Palmira Water Supply 2.0 2.0 739 1971 Colombia Agriculture 8.1 7.6 740 1971 Empresa Nacional de Telecomuni- Communica- caciones tions 15.0 14.7 741 1971 Empresa de Acueducto y Water Alcantarillado de Bogota Supply 88.o 83.5 742 1971 Banco de la Rep6iblica Industry 40.0 26.0 842 1972 Colombia Industry 60.0 60.0 8491/ 1972 Instituto Colombiano de la 927.5 328.2 Reforma Agraria Irrigation 5.0 5.0 333.2 Total 932.5 19.5 Of which has been repaid 170.7 0.2 Total now outstanding 761.8 19.3 Exchange adjustment 1.7. Amount sold 20.2 Of which has been repaid 17.5 2.7 Total now held by Bank and IDA 759.1 21.0 Total undisbursed 333.2 333.2 1/ Signed but not yet effective.  ANNEX I Page 2 B. STATEMENT.OF IFC INVESTMENTS (As at August 31, 1972) Amount in US$ million Year Obligor Type of Business Loan Equity Total 1959 Laminas del Caribe, S.A. Giber-board 0.50 - 0.50 1960 -1965 Industrias Alimenticias Noel, S.A. Food products 1.98 o.o8 2.06 1961 Envases Colombianos, S.A. Metal cans 0.70 - 0.70 1961-1968 Morfeo-Productos para el Hogar, S.A. Home furniture o.o8 0.09 0.17 1961 Electromanufacturas, S.A. Electrical equipment 0.50 - 0.50 1962 Corporaci6n Financiera Development Colombiania financing - 2.02 2.02 1962-1963 Corporaci6n Financiera Development Nacional- financing - 2.04 2.04 1963-1967- Compaflia Cqlombiana de 1968-1969 Tejidos, S.A. Textiles 1.86 0.27 2.13 1964-1970 Corporacion Financiera de Development Caldas financing - O.81 o.81 1964-1968 Forjas de Colombia, S.A. Steel forging 1.27 1.27 1966 Almacenes Generales de Deposito &nta F6, S.A. Warehousing 1.00 - 1.00 1966 Industria Ganadera Colom- biana, S.A. Livestock 1.00 0.58 1.58 1967-1970 ENKA de Colombia, S.A. Textiles 1.00 1.65 2.65 1969 Compafiia de Desarrollo de Hoteles y Turismo, Ltda. Hoturismo Tourism - 0.01. 0.01 1969 Corporacion Financiera del Development Norte financing - 0.45 0.45 1969 Corporaci6n Financiera del Development Valle financing - 0.43 0.43 1970 Promotora de Hoteles de Turismo Medellin, S.A. Tourism 0.23 0.11 0.34 1970 Pro-Hoteles, S.A. Tourism 0.80 0.22 1.02 Total gross commitments 9.65 10.03 19.68 Less cancellations, terminations, repayments and sales 7.87 1.66 9.53 Total cormnitments now held by IFC 1.78 8.37 10.15 Total undisbursed - - -  ANNEX I Page 3 C. PROJECTS IN EXECUTION Summarized below is the current status of all loans signed but not fully disbursed: Loan 369 - Electric Power (Nare Project), US$39 million, February, 1967. Construction of the Guatape I Project is substantially com- pleted and operation has commenced satisfactorily. The un- disbursed portion of the loan (about US$1.2 million) will be used for settling final accounts and retention payments. Loan 499 - Telecommunications I, US$16 million, June 1967. This project has been largely completed; however, the installation of switching equipment in some small exchanges is behind schedule owing to delays in erection of buildings. There have also been some delays in deliveries of equipment. As a result disbursements have lagged somewhat and the Bank therefore agreed to extend the Closing Date by one year to December 31, 1972. Loan 502 - Irrigation (Atlantico I), US$9 million, June 1967. This project has suffered from unexpected difficulties in selecting suitable irrigable soils. Also, difficulties were experimented in constructing the main irrigation pumping plant and the main drainage pumping plant. Construction is about two years behind schedule but is now expected to be completed by the revised Closing Date of December 31, 1973. Loan 534 - Development Finance Companies II, US$12.5 million, May 1968. This loan is fully committed for approved sub-projects, and the undisbursed balance of us$0.5 million is expected to be completely disbursed by the June 30, 1973 Closing Date. Loan 536 - Water Supply (Bogota I), US$14 million, June 1968. The major part of the First Bogota Project is in operation. Water service in most areas with poor service is rapidly improving. The operating performance of the Empresas is good. The remaining works are proceeding at a pace partly adjusted to needs dictated by the borrowing entity's temporary budget constraints, but should be completed between mid- and end 1973. The budget constraints are the results of apparently temporary shortfalls in projected borrowing sources.  ANNEX I Page 4 Loan 537 - Electric Power (Bogota), US$18 million, June 1968. The project financed by this loan is substantially completed. Lower than anticipated participation of joint financing agencies together with foreign cost increases due to the devaluation of the U.S. dollar led to a re-allocation of funds in mid-1972 among the loan categories. Delays in the definition of the distribution expansions have caused late bidding for distribution equipment. An extension of the Closing Date until end of 1973 may be required to disburse the loan amount. Loan 550 - Highway !V, US$17.2 million, July 1968. Project implementation has been somewhat lengthier than foreseen because of poor performance by contractors, rainy seasons appreciably heavier than normal, delays in payments to contractors and delays experienced by contractors in obtaining equipmaent and spares. iSome of the obstacles for progress of the project have been eliminated and the Bank has granted an extension of the Closing Date by one year to June 30, 1973. Loan 551 - Railways. V, US$18.3 million, July 1968. In October 1970, US$5.9 million of the loan was cancelled after the Borrower obtained financing for a portion of the project 'under a barter agreement with Poland. Disbursements under the loan were not quite as rapid as forecast and the Closing Date was extended first to June 30, 1972, and then to December 31, 1972. Only US$9.1 million is still undisbursed. Loan 552 - EducatLon I, US$7.6 million, July 1968. School construction is virtually completed but the procurement of furniture and equipment is seriously delayed. We have urged the executing entity for the project to take specific measures to speed up delivery of these items. The Closing Date has already been extended by one year to December 31, 1972, and will probably have to be extended again. Full-time qualified teachers are developing a new curriculum sheet that includes pre-vocational activities, but the supply of qualified teachers for some technical subJects remains insufficient; this matter is being discussed in the course of preparation of a third education project. Loan 575 - Electric Power (Interconnection), US$18 million, December 1968. The project as originally described in the Loan Agreement started operation in November 1971. Mainly due to the fact that the joint financing arrangements raised more funds than anticipated during the appraisal, the 230 kv line Guatape-Barrancabermeja, which will incorporate the northeastern region into the inter- connected system, was included in the loan. Completion of the extension is scheduled by mid-1974.  ANNEX I Page 5 Loan 624 - Agricultural Credit II, US$17 million, June 1969. The project has been affected by many problems, one of which is that INCORA now prefers to concentrate its resources on farmers who have already benefitted from the agrarian reform program, thus excluding areas presently undergoing such program. As only US$2.5 million of the US$17 million loan has been disbursed through July 31, 1972, the Government has presented a proposal for restructuring the project which is under review in the Bank. Loan 625 - Development Finance Companies III, US$25 million, June 1969. US$24.4 million of this loan is committed for approved sub-projects. The borrower's request for the extension of the original Closing Date from September 30, 1972, to December 31, 1973, to permit completion of disbursements is under consideration by the Bank. Loan 651 - Livestock II, US$18.3 million, December 1969. Disbursements under this loan have been affected by policy and administrative problems. Demand for the loans has been reduced by uncertainties associated with lack of clarity in application of the Agrarian Reform Law. However, the Government feels that proposed amendments to the Law, which have passed the Senate and are awaiting House concurrence, should help to resolve the uncertainties; higher beef prices should also contribute to an improved investment climate. During the last supervision mission, the Colombians requested some changes in the Project designed to facilitate loan implementation. The changes mainly strengthen the administrative organization, expand the project areas and increase the flexibility of the executing agency in fixing the term and grace period of the sub-loans. In addition to improve administration, these changes should increase access by smaller ranchers to loan funds. The proposed changes have been accepted. We will continue to keep this loan under close supervision in order to assess the effects of the new measures on the progress of disbursements. Loan 679 - Education II, US$6.5 million, June 1970. Disbursements under this loan amounted to US$1.3 million by August 1972, or aboat 17 percent of the loan amount. Delays in procurement of furniture and equipment are responsible for the slow rate of project execution and disbursements. Some improve- ment is expected, however, when the new project unit staff gains experience.  ANNEX I Page 6 Loan 680 - Highways VI, US$32 million, June 1970. This project started slowly and disbursements are currently about 60 percent of appraisal estimates. There have been substantial cost overruns which to some extent can be ascribed to insufficient supervision of the works. The borrower has agreed to take action to correct this problem. The loan is being kept under close review with a view to taking action if improvements are not made within a&reasonable time. Loan 681 - Electric Power (Chivor I), US$52.3 million, June 1970. Progress of the main civil works contract is generally satisfactory and in agreement with the contractual dates. Bidding for the rest of the civil works financed by the Bank is proceeding as planned. Higher than expected prices for equipment together with changes in the access road program have increased the total cost of the project by about US$21 million which is tentatively planned to be covered in part by unallocated funds of the IBRD loan (for civil works) and the IDB loan (for equipment) and possibly by contributions of ISA's shareholders. The situation will be re- viewed as cost overrun estimates become more firm. Loan 682 - Cali Water Supply and Sewerage, US$18.5 million, June 1970. Of this loan for a water supply and sewerage project in Cali, US$2.5 million was disbursed as of August 31, 1972. The Project lost about one year due to a change in the Cali Municipal Govern- ment that occurred after the loan was signed. The new Board changed the general manager twice, and a number of key personnel resigned. Weakened administrative capacity has accentuated the tight fiiiancial situation and the need to raise tariffs. Nevertheless, the Board has expressed a position against, tariff increases. Presently, a large cash deficit and lack of financial controls threaten the project and the financial viability of the company. The Bank is considering what action would be appropriate if corrective financial measures are not taken in the immediate future. Loan 738 - Palmira Water Supply and Sewerage, US$2 million, May 1971. Construction on this project was delayed by about six months due to slow project design and administration by consultants and borrowers. The situation is now improving. Bidding on equip- ment and materials has been substantially completed and bidding on construction has begun.  ANNEX I Page 7 Loan 739 - Land Settlement Caqueta I, Us$8.1 million, May 1971. This loan is financing primarily fam credits, road construction, schools and health centers for a colonization project administered by the INCORA (Agrarian Reform Agency). Road ahd building construction work is proceeding on schedule, but there was initially some delay in worldng out the details of administrative arrange- ments between INCORA and the Banco Ganadero for the operation of the credit program. Additional problems were caused by a shortage in the supply of suitable livestocck. As the result of recent discussions these problems have been largely resolved. Loan 740 - Telecommunications II, US$15 million, May 1971. All loan funds have been committed. TELECOM presently has a liquidity problem owing to the nonpayment of accounts receivable. Action has been taken in this respect and it is expected that improvements will occur before the end of the year. Loan 741 - Water Supply (Bogota II), US$88 million, May 1971. Of this loan, US$4.5 million was disbursed as of July 31, 1972. Preparatory works for tunnel construction have started and design and preparations for the other works are proceeding on schedule (refer to Loan 536 above). Loan 742 - Development Finance Companies IV, US$40 million, May 1971. -Only US$1.0 million of this loan remains uncomiitted. Disburse- ments are proceeding on schedule. Loan 842 - Development Program and Expansion Project, US$60 million, June 1972. This loan was declared effective on August 24, 1972. Loan 849 - Irrigation (Atlantico II), US$5 million, June 1972. The Borrower is in the process of fulfilling conditions to effectiveness.  A.oN22 1I COUIITRY DATA Co7Jnm1 COLOISZA AM: 1.139.000 k.2 P0PtJLATlO4z 22.3 mi'lIlo, (1971 mid-year estimate) DRNISITY. 19.6, per k,02 AREA, l~~~~~~~~~~~ace of GroWth: 3.21. (from 1965 to 1970) ibid : 81.6 per kit2 at -tbl L. POPULATION C_t1AA__T_E_IS_TItCS.ALH Cruda Birth Rare ip8a 1,000) 47 (1966) Pplto e hlca 20'96 Crude DOvath Note (per 1,000) 1s (1964) Population per phospitian 22d00 (1966) infant lorervlity (Pe r 1,000 live births) 78 (1967) putinprhptlbd 40 (1.6 INON IBT180101: DISTRIBUTION OF LAND OWYTRSNIXI.P:i o.f national Income, lowect qutntile 2.21 20of land o.,a bycp17 wners 81.1 highest quintile 66.06 2 of land ownked by smallest 102. cnmers 0.1 S,'ES8 nTO POTABL. WATER:(% Of population) ACICESS TO ELECTRICITY; (7. of population) rb ~~~~~~~~~~~~~~~~~~~~~~Uban Bural 25 Rural 7 NUTRITION: GOIP PD CAPITA; 9325 (1970) EDUCATION: Calorie intake as 7. of raquiremonts 89 (1963) Adult literacy rate 757. (1968) Per capita protei. intake (pramwa) 49 (1963) Primary school enrolment 94') (1968) CROSS NIATIONIAL PRODUICT ( 1970): ANNIUAL. RATE OF GROWTH (7. constant prices)- (valvein US$oln' 7. 1960-65 1965.70 1970 ClIP at Market prices 68853 100.0 4.1 5.1 6.3 Crsos Investment 1521 22.2 3.0 5.8 1532 .r0,, Nntional Savings 12217.7 1.3 39.. Cu rrent Account 92alan.,. .283 .4.1 Exports of Coods, 9F5 1001 L4.8 1.7 4.58. lmporcs of Good&,. 979 1116 16.3 5.0 5.5 17.1 WTPUJL..LABCR FORCE AND PRODLICTtVITY LN-1970-, Value Otd- _,,b,, 'Irce., ~ ~~~~Volvo Added Per Wdorke- (U59 million) 7 millos .(U8 8) 1. of national average Agri ru ture 188s 29.1 2.349 40.7 802 71 tnduetny 1703 26.2 1.126 19.7 1499 133 Services 2900Ii.. 4.7. ..Z. .L.Z! ..L.L 1272 111 Total/Averaga 6488 100.0 -3.64 TO00.0 1126 100 P'll" ~~~~~~~~~~~~~~~~All Governments 1' ationial Governmzent (valse, in 09$ millions) ,. or .,ur