Colombia - Second Multi-city Water Supply and Sewerage Project

Report No. 464-CO Appraisal of the Second FILE COPY Multi-City Water Supply and Sewerage Project Colombia December 22, 1974 Regional Projects Department Latin America and the Caribbean Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Deveiopment Association 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 It may not be published, quoted or cited without Bank Group authorization.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  CURRENCY EQUIVALENTS (as of January 15, 1974) Currency Unit = Colombian Pesd (Col$) US$1 Col$25 Col$l US$0.04 (see paragraph 5.09) Col$1,000,000 = US$40,000 MEASURES AND EQUIVALENTS 1 meter (m) 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 square meter (in2) 10.8 square feet (sq ft) 1 cubic meter (m3) 35.3 cubic feet (cu ft) 1 liter (1) 0.26 US gallon 1 gallon (gal) 3.785 liters I cu4ic meter per second = 22.8 million US gallons per day (m /sec) (mgd) or 35.4 cubic feet per second (ft3/sec) 1 milligram per liter (mg/l) = 0.058 Grain per US gallon GLOSSARY OF ABBREVIATIONS AND ACRONYMS DANE Departamento Administrativo Nacional de Estadistica ECO External Credit Office EXIMBANK Export - Import Bank of the United States of America FONADE Fondo Nacional de Desarrollo Economico IDB Inter-American Development Bank INPES Instituto Nacional para Programas Especiales de Salud INSFOPAL Instituto Nacional de Fomento Municipal PAHO Pan American Health Organization USAID United States Agency for International Development GOVERNMENT OF COLOMBIA FISCAL YEAR January 1 to December 31  COLOMBIA 1APPRAISAL OF THE SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ................. - ii 1. INTRODUCTION .................................. 1 2. THE SECTOR. 3 Urban Development ......................... 3 Organization ................................. 3 Past Investments ............................ 4 Sector Program ..............,.,,, 4 Bank Objectives in the Sector ................ 4 3. THE BORROWER ................................... 6 Past Performance ............................. 6 Organization ................................. 6 Staff and Management .......................,. 7 Accounting System ........................... 8 Audit ..,,,,,,,,,,,,, 8 Reorganization of INSFOPAL ................ . 9 Restructuring of the Operating Agencies 10 Management Assistance to INSFOPAL ............ 10 4. THE BENEFICIARIES .............................. 11 Organization ................................. 11 Management Systems,.......................... 12 Accounting .......... ......................... 12 Audit .......... ........................... 12 Proposed Training Program ..,,,,,,,,,,,,,, 13 5. THE PROJECT.14 5. TH PROEC ..................................... 1 Background of the Project .................... 14 Scope of the Project .................... 14 Description of the Project .................. 15 Cost Estimates ............................... 16 Loan Amount .............,,,,,,,,,,,,, 17 INSFOPAL's Program. . 17 Procurement ., ,,,, 18 Disbursement . 18 INSFOPAL's Selection of the Towns ......... 18 Execution of the Project .................... 19 This report was prepared by Messrs. F. Rodriguez and D. Ruiz. The feasibility studies forthe Project were made by INSFOPAL and its consultants; their work was supervised by Mr. K. Ringskog.  TABLE OF CONTENTS (Continued) Page No. 6. JUSTIFICATION ................................... 20 Demand Forecasts and Investment Objectives .... 20 Selection of Proposed Project ................. 20 Internal Financial Return on Investments ...... 21 Environmental Aspects .......... .. ............ 21 Institution Building . . 21 7. FINANCE ......... ................................. 22 Past Finances ................. ................ 22 Financing Plan ................. ............... 22 Water and Sewerage Tariffs ......... ........... 24 Other Tariffs ................ ................ 25 Future Finances ............. .. ............... 25 Risks ......................................... 26 Monitoring System . . 27 8. AGREEMENTS REACHED AND RECOMMENDATIONS .... ...... 28 December 22, 1974  COLOMBIA APPRAISAL OF THE SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT LIST OF ANNEXES Annex No. 1. Previous Bank Loans in the Sector 2. The Instituto Nacional de Fomento Municipal (INSFOPAL) 3. Existing Water Supply and Sewerage Facilities 4. Customers and Water Consumption, 1974-1983 5. Population and Water Consumption, 1974-1983 6. Proposed Works 7. Cost Estimates 8. Bank Loan Components 9. Estimated Schedule of Cumulative Disbursements 10. Internal Financial Rate of Return I1. INSFOPAL - Consolidated Balance Sheet 12. INSFOPAL - Consolidated Statements of Income 13. INSFOPAL - Consolidated Cash Flow Statements 14. Water Supply and Sewerage Services - Balance Sheet 15. Water Supply and Sewerage Services - Statements of Income 16. Consolidated Financing Plan. 17. Financing Plan for the Subprojects 18. Tariffs and Financial Targets 19. Other Services - Statements of Income and Cash Flow 20. Consolidated Statements of Income 21. Notes to Financial Statements and Projections 22. Method of Calculating the Rates of Return and Operating Ratios 23. INSFOPAL's Projected Cash Flow Statements 24. Monitoring Indicators Chart No. 8720 INSFOPAL - Existing Organizational Structure 8721 INSFOPAL - Proposed Organizational Structure 8727 Construction Schedule Map Location of Cities Included in the Project   COLOMBIA APPRAISAL OF THE SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT SUMMARY AND CONCLUSIONS i. This report deals with the appraisal of a water supply and sewerage project for eight cities and thirty towns in Colombia, for which a Bank loan of US$27 million is proposed. The project supports a Colombian Government policy intended to improve living conditions in the intermediate cities by providing them with an adequate infrastructure including water supply services and wastewater disposal systems. It is expected that adequate public services would help these cities foster their economic growth, thus reducing emigration to larger urban areas offering better employment opportunities and amenities, and would attract some of the population moving out of rural areas. ii. There are many deficiencies in the sanitation system of the Colombian cities, and the Government objective is to extend by the year 1980 water supply and sewerage facilities to at least 80% of the urban population. However, because of the large capital expenditures required, it is doubted that such an objective can be accomplished. Since 1968 the Bank has become extensively involved in the water supply and sewerage sector through a series of loans for Bogota, Cali, Palmira and seven medium-size cities. The proposed project is to meet water supply needs of eight more cities for the next decade: Barranquilla, Cartagena, Cucuta, Ibague, Pasto, Popayan, Valledupar and Villavicencio, and sewerage needs of six of them, excluding Valledupar and Villavicencio. In addition to this project, Cartagena would have to build sewage treatment facilities in the near future. For the other cities, sewage treatment is not required in the foreseeable future. The 30 towns which would benefit from the loan were not individually appraised. The report recommends that the "Instituto Nacional de Fomento Municipal" (INSFOPAL), the national water supply agency, select these towns and carry out detailed project appraisals which would be submitted for Bank review and approval. iii. The borrower would be INSFOPAL which would relend the loan proceeds to the beneficiaries (the above-mnentioned cities and towns) at an interest rate and repayment period equal to those of the Bank, with the sub-borrowers bearing the foreign exchange risk, and under subsidiary loan agreements acceptable to the Bank. Four of the beneficiaries are municipal utilities (empresas) which provide water and sewerage services and in some cases, public markets, slaughterhouse, solid waste collection and street cleaning services. The remaining beneficiaries are subsidiary organizations (acuas) of INSFOPAL and provide only water supply and sewerage services. In addition to conditions of effectiveness for the loan as a whole, each individual loan agreement between INSFOPAL and the beneficiaries would .ive V iLS own conditions of effectiveness. iv. This would be the second Bank loan to INSFOPAL and would continue a policy of strengthening INSFOPAL as the national agency responsible for the planning of water supply activities and for the improvement of the technical and financial management of the water utilities. This is also the objective of the  - ii - Colombian Government which recently issued a decree (No. 703), reorganizing the sector and redefining INSFOPAL's functions. INSFOPAL would administer investment funds for the sector and increasingly take charge of effective project preparation and construction supervision. Project execution under the first loan (860-CO) is proceeding satisfactorily. v. The management of the cities' utilities varies from poor to good, and the beneficiaries will need considerable assistance for improvement of their operations. Their financial position in general is tight, and initial and subsequent tariff increases are projected over the 1974 levels. However, the proposed investments are within the range of the beneficiaries' financial capacity, and the projected tariff increases appear to be reasonable. vi. The total cost of the project is estimated at US$52.9 million including funds for managerial assistance to INSFOPAL and training of water utilities' staff. About 51% of the project cost would be financed with the proceeds of the Bank loan, 31% with a Government grant to INSFOPAL, and the remaining 18% from internal cash generation of the beneficiaries. INSFOPAL would lend the Government funds to the beneficiaries. The Bank loan would cover the foreign exchange component estimated at US$16.7 million (excluding interest on Bank loan during construction) and about 31% of the local expenditures or US$10.3 million equivalent. vii. Except for civil works under US$100,000, all contracts would be placed by means of international competitive bidding. Foreign suppliers are expected to win most of the contracts for treatment plant and pump station equipment, amounting to about US$8.8 million. Colombian contractors are expected to win civil works and pipe supply contracts. For bid evaluation purposes, a 15% margin of preference would be allowed for equipment manufactured in Colombia. The beneficiaries are not liable to pay customs duties and consequently no regional preference for manufacturers in the member countries of the Andean Group will be accepted in bid evaluation. viii. Water demand has reached the maximum supply capacity of the cities' existing facilities, and without the project, the utilities would have to stop making new house connections. Sanitary conditions in the cities would also be substantially improved. The internal financial rates of return on the individual subprojects would vary from 8% in Pasto to 15% in Cucuta. ix. The project is suitable for a Bank loan of US$27 million for a term of 25 years including a grace period of 5 years, provided the conditions set forth in Chapter 8 of this report are met. The Colombian Government should 0 a; ~.a Bank loan to INSFOPAL.  COLOMBIA APPRAISAL OF THE SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT 1. INTRODUCTION 1.01 The Instituto Nacional de Fomento Municipal (INSFOPAL), a Colombian Government agency with overall responsibility for water supply and sewerage services, requested the Bank to consider financing water supply and sewerage works in the cities of Barranquilla, Cartagena, Cucuta, Ibague, Pasto, Popayan, Valledupar, Villavicencio and in 30 small towns. The cost of these works, of management assistance to INSFOPAL and of training of water utilities' staff has been estimated at US$52.9 million. A Bank loan of US$27.0 million is proposed, which INSFOPAL would relend to four independent municipal utilities (empresas) and to subsidiary organizations (acuas) of INSFOPAL itself. 1.02 ID. October 1972, the Bank made a loan* of US$9.1 million (860-CO) to INSFOPAL to help this institution finance water supply and sewerage works in seven medium-size cities. At the very start, the project execution in these cities was unsatisfactory, but INSFOPAL and the sub-borrowers have since sub- stantially improved their performance under this loan. The Bank has also made four previous loans for the water supply and sewerage sector, details of which are given in Annex 1 of this report. Project construction under these loans has been delayed because of the borrowers' difficulties in generating the counterpart funds needed for the financing of the works. Institution building has also been slower than expected. 1.03 The Bank objective in making the proposed second loan to INSFOPAL would be to develop the institutional capacity of this agency to assist the empresas and acuas in technical operations, administration, finance and project preparation. INSFOPAL would be reoriented, strengthened and trans- formed into a competent national institution through which a major share of investment funds for the sector would be channelled. It is expected thatin the future the Bank will be able to lend for water supply and sewerage on the basis of estimates of the sector requirements, with INSFOPAL sublending the funds on the basis of detailed project appraisals that it would carry out under the Bank surveillance. Moreover this report recommends taking a first step toward delegating appraisal responsibilities to INSFOPAL in its provision of funds for increasing water production in 30 small towns which will be selected and appraised by INSFOPAL. 1.04 The Colombian Government objective is to make INSFOPAL the planning and financial institution for the water supply and sewerage sector. This means the gradual elimination of the operational functions of INSFOPAL by transforming its regional operating offices and acuas into fully independent entities, and the strengthening of its financial and advisory functions. The groundwork for this reform has already been laid through the issuance of a presidential decree (No. 703), reorganizing INSFOPAL and redefining its functions. * Report No. PU-100 of July 31, 1972 and Loan Agreement of October 10, 1972.  1.05 The improvement and extension of water supply and sewerage facilities in Colombian cities have not kept pace with the rate of expansion of their urban areas. As a consequence, most of the population living in low income areas are not served by the public water network and get their supply from unsafe water sources. The Colombian Government recognizes these deficiencies in the sanita- tion sector and is pursuing a policy of providing public facilities in the inter- mediate cities in order to reduce emigration to the three largest urban centers (Bogota, Medellin and Cali) and also to make such cities attractive to the popu- lation moving out of rural areas. 1.06 To further this policy, the Government has embarked on an ambitious program to extend by 1980 water supply and sewerage systems to at least 80% of the urban population. The loan now proposed would help the Government finance such extension in 8 cities with populations of 50,000 to 700,000, increasing the total population served in these cities from 1.3 million in 1973 to 2.1 million in 1980. The loan also includes funds for (i) the drilling and equipment of wells to supply safe water to about 200,000 additional people living in 30 small towns, (ii) the purchase of 100,000 water meters and their installation in all the communities which are under INSFOPAL's responsibility, (iii) the training of staff of the empresas and acuas, and (iv) management assistance to INSFOPAL. 1.07 The Bank participation in this Government program requires the appraisal of smaller and more numerous projects than is usual in the Bank's work, and this would be administratively onerous for both the Bank and the Colombian Government if the usual methods were followed. A Group of cities has therefore been selected to form the basis of a single loan to be adminis- tered by INSFOPAL. There are further advantages in this approach. Loans to individual municipal utilities can be kept small and made in series so that the utility can demonstrate that it is improving and the perspective of receiving the next loan in the series gives it an incentive to continue to improve. 1.08 The municipal utilities of Barranquilla, Cartagena, Cucuta and Villavicencio are multi-service empresas providing in addition to water supply and sewerage, solid waste collection, markets, slaughterhouses and street cleaning services. Because these services are integrated in one company, it has been necessary to review each service and set forth finan- cial criteria which would enable the service to fully cover its operating costs and debt service. 1.09 This report is based on the findings of a Bank mission composed of Messrs. F. Rodriguez and D. Ruiz who visited Colombia in November 1973; data were revised in November 1974 during a visit by Messrs. F. Rodriguez and C. Todd. A preliminary study of the project was prepared by INSFOPAL and its Colombian Consultants, Messrs. G. Yepes, A. Mejia and H. Cajiao. The Consultants' work was supervised by Mr. K. Ringskog of the Bank staff in Colombia.  - 3 - 2. THE SECTOR Urban Development 2.01 Colombia has been experiencing rapid and uneven growth of the popula- tions of its principal cities, where public services have become inadequate. The Government intends to promote a better-balanced urban development by encouraging the growth of the intermediate cities in order to reduce emigration to larger urban areas offering better employment opportunities and amenities, and to make the intermediate cities attractive to rural migrants. One of the immediate. goals of the Government is to relieve demographic pressures on the large urban areas of Bogota, Medellin and Cali. If this policy is to succeed, more adequate public services will have to be providedin these intermediate cities. An impor- tant expression of the Bank support to this Government program has been the first Bank loan to INSFOPAL for the construction of water supply and sewerage facilities in seven medium-size cities. 2.02 The inadequacy of water supply and sewerage services has been due primarily to institutional problems and to traditionally low tariffs which have made it impossible to raise the large capital sums needed for new works. Inflation and local political opposition to tariff increases have aggravated the situation, and a vicious circle has been created where deteriorating services have made it more difficult to convince the public of the necessity for tariff increases. The Government favors these increases and the National Public Services Tariff Board created in 1968, advocates the implementation of adequate tariffs which will cover operating costs and generate funds for future investments. Organization 2.03 The Colombian water supply and sewerage sector is made up of three main groups: (a) Twenty-one cities with populations ranging from 25,000 to 3.0 million have their own municipal utilities (empresas) to provide public services. These cities have a combined population of about 8.0 million or a third of the total population. From 70% to 90% of these cities' population receives water supply services; 50% to 80% is connected to the sewerage system. In general the empresas are not well operated, They finance their system expansion with internal funds, suppliers' credits, and loans from the National Government and foreign lending institu- tions. (b) The remaining cities with more than 2,500 inhabitants have their water supply systems operated by INSFOPAL. The total population served by these systems is about 6.0 million or a fourth of Colombia's population. Approximately 70% of the inhabitants in this group have a supply of water, but only 50% are connected to the sewerage system. The quality of the services is poorer than that of the empresas previously described, administrative competence is usually less, and their operating deficits and investments are generallyfinanced with Government grants.  - 4 - (c) The rural communities (less than 2,500 inhabitants) have their systems planned and executed by the "Instituto de Programas Especiales de Salud" (INPES). These communities are responsible for the operation and maintenance of their systems. Only an estimated 30% of the population in this group receives water supply and sewerage services, the quality of which is lower than that of INSFOPAL. These communities are too poor to afford adequate services and rely on Government funds to finance their operating deficits and investments, although direct charges are intended to cover operating expenses and some depreciation. Past Investments 2.04 Annual investments in the sector increased from US$21.6 million in 1965 to US$46.3 million in 1971 and the total investment for that period was US$253 million. Of this, 75%/ were by the empresas, 20% by INSFOPAL and only 5% for INPES communities. About 35% of the total investment was financed from the national budget, 20% with external sources,30%/. with internally-generated funds and the remaining 15% with domestic credits. 2.05 External assistance for the sector started about twelve years ago, and US$196.1 million were committed from 1961 to 1972. Of this amount, 70%. was from the Bank; 25% from the Inter-American Development Bank (IDB), and the remainder from USAID, Eximbank and the German Kreditanstalt. In addition, USAID made a sector loan of US$29.0 million in June 1971 for urban development. 2.06 The Bank has already made five loans amounting to US$131.6 million for Bogota, Cali, Palmira and seven medium-size cities. Since 1961 IDB has been also active in the sector and has made 10 loans totalling US$43.4 million. Two of these, made to INSFOPAL in 1962, amounted to US$10.6 million and were for 327 towns. The IDB loans were disbursed very slowly, partly because of poor planning. Repayment by the individual towns has been generally deficient and INSFOPAL is now servicing the debt with its own resources. Sector Program 2.07 In 1972 the National Planning Department concluded a national survey of the sector to determine the total investment that would be necessary to make up deficiencies of the services and keep abreast of population growth. Average annual investment requirements (in 1972 prices) through 1980, which are only indicative because of the questionable quality of the data, were then estimated as follows: Col$1,000 million for the empresas, Col$630 million for INSFOPAL and Col$550 million for INPES. The difficulty of raising such large sums indicates that goals will have to be reduced and that the mobiliza- tion of internal resources through increased tariffs is of vital importance. INSFOPAL is now carrying out a new sector survey, as well as a study of the tariff increases required to make the sector financially self-sufficient. Bank Objectives in the Sector 2.08 The main objectives of the project are: (i) to provide adequate water supply services to at least 90% of the  - 5 - expected 1983 population of the cities of Barranquilla, Cartagena, Cucuta, Ibague, Pasto, Popayan, Valledupar and Villavicencio; (ii) to extend the wastewater collection networks to 80% of the 1983 population of the cities of Barranquilla, Cartagena, Cucuta, Ibague, Pasto and Popayan, with the exception of Cartagena where this percentage would reach only 40% in 1983; (iii) to reduce unaccounted-for water in the eight cities from the present high level of 50% to 25% in 1980 and to provide improved services to existing customers; (iv) to increase the percentage of population served by the public water network in 30 towns under INSFOPAL's responsibility, from 70% to 75%; (v) to normalize water demand and reduce water waste in all the water supply systems of INSFOPAL by installing 100,000 water meters which would also permit the implementation of adequate water rates; (vi) to help the above cities and towns establish well-organized and financially viable water utilities by undertaking the training of their staff and implementing adequate water rates; and, (vii) to strengthen and develop INSFOPAL into the advisory and finan- cial agency of the sector, on which the Bank would rely in the future for its water supply lending operations in Colombia, by providing management assistance to INSFOPAL. 2.09 Institution building probably has the greatest chance of success with the municipal empresas because of their size, present level of manage- rial competence and concentration of population. They are also the Bank's most likely potential borrowers. The four empresas which will be the bene- ficiaries of the proposed loan are all in need of assistance in technical operations, administration and finance in varying degrees, but INSFOPAL's utilities need such assistance even more. 2.10 Therefore, the strategy of the proposed loan is to make INSFOPAL assess and organize such assistance. As previously explained in paragraph 1.03, the development of INSFOPAL into a competent national institution is seen as one of the major objectives of the loan which includes funds for the services of consultants to advise INSFOPAL. The financing plan discussed in Chapter 7, includes in its sources budgetary funds from the Colombian Government which INSFOPAL will lend to the utilities. In later years, after it has received repayments, INSFOPAL would relend them in the sector. A role of increasing importance and authority in guiding the sector towards greater efficiency and full development is therefore envisaged for INSFOPAL.  - 6 - 3. THE BORROWER Past Performance 3.01 This would be the second Bank loan to INSFOPAL. This institution was not appraised for the first loan and instead the Bank recommended the creation of a separate department within INSFOPAL, the External Credit Office (ECO). Presently this office is carrying out the duties of INSFOPAL under the Bank loan and is responsible for bidding review, construction supervision and preparation of disbursement applications. However, this arrangement has not worked sufficiently well, and consequently this time INSFOPAL has been evaluated and more specific changes for improvement of this institution are now proposed. 3.02 As already indicated in this report, progress under the first project had been slower than expected, mainly because of delays in implementing the tariff increases required in the subsidiary loan agreements as conditions of effectiveness, political interference of the Boards of Directors in the management of the empresas, and a shortfall of internal cash generation. Water demand has not increased at the rate forecast in the appraisal report and consequently the empresas have experienced difficulties in financing their 25 percent share of the investment costs. Much of the blame for this slow start could also be attributed to the low quality of the personnel of ECO and INSFOPAL, which had not provided the utilities with adequate assis- tance. ECO has recently hired more competent staff who are now effectively helping the empresas. Organization 3.03 Chart 8720 shows the existing organizational structure of INSFOPAL. This agency was created in 1940 (Law No. 503) under the name of "Fondo de Fomento Municipal" and was placed in the portfolio of the Minister of Public Works. In 1957 by Decree No. 0270, its original name was changed to INSFOPAL, and in 1968 by Decrees Nos. 2561 and 3178, it was placed under the Minister of Health. 3.04 INSFOPAL is an autonomous government entity and is managed by a seven-member Board of Directors (Junta Directiva) and a General Manager who is appointed by the President of Colombia. The Board of Directors is presided over by the Minister of Health and is composed of one representa- tive each of the National Planning Department, the Colombian Society of Engineers, INPES, the Colombian Association of Municipalities, the Colom- bian Association of Agriculturists and the National Federation of Coffee Growers. 3.05 The principal functions of INSFOPAL can be described as: (a) preparation of public investment programs in the water supply and sewerage sector;  -7- (b) design and construction of water supply and sewerage systems; (c) supervision of water supply and sewerage construction financed with government funds; (d) operation and maintenance of water supply and sewerage systems; (e) formulation of design, construction and operation standards; and, (f) submission of applications for tariff increases to the National Public Services Tariff Board. 3.06 INSFOPAL has its headquarters in Bogota and is presently divided into four departments - administrative, technical, operational and ECO. About 750 communities' systems are under INSFOPAL's responsibility, which at departmental and local levels has three types of agencies: (a) municipal companies or acuas, in which INSFOPAL holds the majority of shares; (b) departmental offices or "Direcciones Seccionales," which adminis- ter and operate water supply systems in towns where municipal utilities have not yet been established; and, (c) regional offices or "Oficinas Seccionales," which assist the acuas in operations and construction supervision. There are now 16 acuas, 13 Direcciones Seccionales and 11 Oficinas Seccionales, which together operate the 750 INSFOPAL systems. Staff and Management 3.07 INSFOPAL has presently 320 employees in its central office and some 1,100 staff in its departmental and regional agencies. The general level of staff competence is low, and there is inadequate control over the number of employees, resulting in overstaffing in lower grades and shortages of higher- qualified personnel. Accordingly, productivity is low. The General Director supervises directly the operations of the acuas and Seccionales. As a result, he spends most of his time on routine administration which in principle should be delegated to lower level staff. Overstaffing is most prevalent at head- quarters, while personnel in the operating agencies should be increased and trained. The personnel is heavily unionized and any proposal to reduce staff would meet with stiff resistance of the union. 3.08 One way to achieve the reduction in personnel at INSFOPAL's headquarters would be through the transfer of some of the staff from the central office to the acuas, "Direcciones Seccionales" and "Oficinas Seccionales" which, under the proposed reorganization of the sector would become independent of INSFOPAL. In accordance with the terms of the presidential decree No. 703 mentioned in paragraph 1.04, INSFOPAL should gradually dissociate itself from its operating responsibility, and consequently its operational division and part of its  - 8 - inventory subdivision would be disestablished. In addition, the personnel in the administrative department might be decreased by one fifth, without affecting the productivity of this department. This means that about 70 employees could be transferred to the acuas,'birecciones Seccionales"and "OEftinas Seccionales," leaving some 250 staff in the central office. During loan negotiations, assurances were obtained that the study presently underway for headquarters' staffing with an appropriate personnel reduction program will be submitted to the Bank for review and comment within six *months after the signing of the Loan Agreement. 3.09 Measures would also be taken to improve the knowledge and capabi- lities of the staff. This would be done under the management assistance to INSFOPAL, in which selected personnel would be trained to make them perform their functions more efficiently. This assistance is described under para- graph 3.18. 3.10 Presently INSFOPAL lends to the municipalities funds it obtains from Government budgetary allocations. Unfortunately the municipalities do not service the debt on these loans. Although INSFOPAL draws up an invest- ment program each year, the Government does not use this program for the distribution and allocation of its funds. Allocation to each department or individual city is made by the Colombian Congress and is primarily based on political considerations. As a result, funds are frequently allocated to a city for which no project has been prepared, and other cities with greater needs and a project ready for execution do not receive any funds. As a consequence, projects badly conceived have been executed in a hurry, and abandoned later because they could not perform properly. 3.11 To obviate the unwillingness of the municipal utilities to service the debt on the INSFOPAL loans, the new decree enables INSFOPAL to require liens on the utilities' revenues in order to secure its loans. The decree also formulates the Government intention to allocate its budgetary funds for water supply and sewerage works only on the basis of INSFOPAL's investment programs. Accounting System 3.12 INSFOPAL's financial operations are not centralized in one depart- ment, but are handled in the administrative division and the External Credit Office. In addition, the budgetary division is dependent on the Planning Office. The present accounting system is unsuitable for a revenue-earning enterprise and does not reflect the current financial situation of the insti- tution. It is only designed to ensure that receipts and payments are entered under the required headings, and revenues are credited only as received, the concept of income earned being ignored in the accounts. There is practically no budgetary control. Audit 3.13 INSFOPAL's financial statements are audited by the "Contraloria General de la Republica," a Government agency, which was accepted by the  - 9 - Bank for the Audit of the External Credit Office (ECO) accounts. This agency has been satisfactorily performing the audit of ECO in the first loan to INSFOPAL and could continue its auditing services to INSFOPAL in the proposed second loan. No internal audit section exists in INSFOPAL. Only an auditor of the above agency, whose purpose is to ensure compliance with the existing government accounting re- gulations, is delegated for INSFOPAL's affairs. This auditor, however, does not review or recommend internal policies, procedures and controls. In general, pre- paration of financial statements is delayed. During loan negotiations, assurances were obtained that INSFOPAL will set up and put in operation an internal audit section within six months after the signing of the loan agreement. Assurances were also obtained from INSFOPAL that its financial statements, certified by its external auditors,will be submitted to the Bank not later than four months after the end of the fiscal year. Reorganization of INSFOPAL 3.14 The Colombian Government is conscious of the imperfections of INSFOPAL's existing organization and practices, and consequently, at the Bank's suggestion, has issued the decree No. 703 reorganizing INSFOPAL and redefining its functions. The objective of the Government is to transform INSFOPAL into the planning and lending institution for the sector. The decree stipulates that: (i) INSFOPAL should be exclusively responsible for the financial planning of the sector,, and the Government annual budgetary allocations for the sector should be based on the investment programs prepared by INSFOPAL; (ii) INSFOPAL should channel all internal and external credits to the sector; (iii) all funds invested by INSFOPAL in the utilities' systems should be recovered from these utilities; and, (iv) the existing acuas; "Direcciones Seccionales" and"Oficinas Seccionales" would be transformed into independent commercial enterprises (operating agencies) to be responsible for the operations of water supply and sewerage systems. If it is required, INSFOPAL would also promote the creation of additional enterprises to cover the entire sector. 3.15 The new status of INSFOPAL would be furthered by the establishment under its direction of a revolving fund to receive repayments by the water utilities of Government budgetary funds lent to them by INSFOPAL. An important function of INSFOPAL would be to oversee the tariffs of the local water systems so as to ensure that operating costs are covered and sufficient savings generated to finance future investments. The main elements of the decree are summarized in Annex 2. 3.16 Chart 8721 shows the future organizational structure of INSFOPAL. The new structure will not be implemented immediately, since a transition period for making the existing operating entities independent of INSFOPAL is needed. Assurances were obtained during negotiations that INSFOPAL will com- plete implementation of the proposed structure by June 30, 1976 and will afford the Bank a reasonable opportunity to comment on any modifications of the propos- ed reorganization and staff appointments.  - 10 - Restructuring of the Operating Agencies 3.17 In each department (state), the existing acuas, "Direcciones Seccionales" and "Oficinas Seccionales" would be restructured into indepen- dent commercial enterprises with the State and Municipal authorities as the principal shareholders. The present personnel in the acuas, "Direcciones Seccionales" and "Oficinas Seccionales" would be incorporated into the new companies. With this reorganization in view, INSFOPAL is now carrying out a study in each department to determine the tariff increases required to meet the State company's operating costs including debt service. The existing tariff structures would also be revised. An evaluation of staff and training requirements, and of the water supply and sewerage needs of each state would be made by INSFOPAL. The decree states that the creation of the new companies should be completed by June 1, 1975. However, it is estimated that a year more might be needed to fulfill the objectives of the decree. Assurances were obtained during negotiations that in this reorganization transition period INSFOPAL will insure that any entity in which it has a proprietary interest will increase all tariffs and service charges to cover consolidated operating costs of those entities, and generate sufficient cash flow to cover debt ser- vice requirements for all investments made from fiscal year 1974. Management Assistance to INSFOPAL 3.18 Under the first Bank loan to INSFOPAL, the Pan American Health Organization (PAHO) has been extending managerial assistance to INSFOPAL, which will end in 1975. PAHO has stationed a team of three consultants in INSFOPAL, who have carried out an evaluation of the institution and designed new management systems to suit the future responsibilities and functions of INSFOPAL. The team has been providing in-service training to the staff at all levels, and giving lectures and short seminars. Long and short term fellowships abroad in specialized fields have been granted by PAHO. The consultants are also participating in the reorganization of the sector and operating agencies. Funds for extending this assistance in the years 1976 and 1977 have been included in the proposed loan (paragraph 5.12) in order to help INSFOPAL implement the new management systems and evaluate their results. 3.19 INSFOPAL would also retain the services of Colombian consultants to help it provide managerial and technical assistance to the water companies which would benefit from the proposed loan. The cost of these services would be partly financed with the proceeds of the loan (paragraph 5.12). Such assis- tance is essential, for the success of the project will depend upor INSFOPAL's effectiveness in helping these water utilities improve their operations. Assurances were obtained during loan negotiations that INSFOPAL will continue receiving management assistance during 1976 and 1977, and will provide managerial and technical assistance to the beneficiaries; consultants acceptable to the Bank will be hired for both types of assistance which should be periodically re- viewed with the Bank.  - 11 - 4. THE BENEFICIARIES Organization 4.01 The beneficiaries of the proposed loan will be the eight cities' utilities mentioned in paragraph 1.01, and INSFOPAL's present subsidiary agencies (acuas) which under the new organization of the sector will be transformed into independent water companies. The cities of Barranquilla, Cartagena, Cucuta and Villavicencio have municipal empresas which provide water supply and sewerage services, public markets, slaughterhouses, solid waste collection and street cleaning services. Ibague, Pasto, Popayan and Valledupar have acuas which provide only water supply and sewerage services. The 30 towns which would benefit from the loan were not indivi- dually appraised. It is recommended that INSFOPAL select these towns and carry out detailed project appraisals in each of them. 4.02 Each municipal empresa was created by a decree of the city's municipal council and is managed by a board of directors numbering five to seven members appointed by the municipal council. One exception is the Cucuta Empresa's board with ten directors whose behavior in the past has been politically motivated. It is understood that, as a condition of effectiveness of the subsidiary loan agreement, INSFOPAL will require the Empresas of Cucuta to reduce the number of its directors to six as set forth in its bylaws. 4.03 To ensure independent and businesslike administration of the boards, the enabling decrees require municipal councils to appoint at least three directors from lists proposed by local banking and professional organizations. However, this requirement has not been respected by most municipalities and today all appointments are made directly by the municipal councils. This leads in some cases to excessive political interference by the boards in the daily affairs of the empresas and to deterioration of management as experienced people leave and new staff without the same competence or experience are brought in. To correct this situation when it occurs, the decree referred to in para- graph 3.14 gives authority to INSFOPAL to call for the removal of a board of directors on the penalty of suspension of disbursement of its loans. 4.04 The boards of directors have considerable authority including the power to propose tariffs and to select and dismiss the general managers. In practice, routine administration is delegated to the general managers who at present are competent and experienced. 4.05 The technical operations and financial management of the empresas vary from poor to good. Barranquilla is an outstanding example of good finan- cial management, but its technical division is weak and needs to be better organized. An example of poor management is Villavicencio where no technical and accounting records are kept. The other empresas have moderate financial skill. Lack of revenues and a shortage of qualified technicians are the principal obstacles to improvement. The first should be remedied by control- ling operating expenses and charging adequate water rates; the second should  - 12 - be improved with the assistance of INSFOPAL and under the proposed training program (paragraphs 3.19 and 4.11). 4.06 The acuas in the cities of Pasto, Ibague and Valledupar were re- cently established by INSFOPAL. The city of Popayan is also served by an acua which was created in 1956. The four acuas were previously operated by the "Direcciones Seccionales" and generated some net earnings (before depre- ciation) which were used to cover cash operating deficits of other systems of the "Direcciones Seccionales." The acuas need management assistance in administrative, financial and technical aspects, which would be provided by INSFOPAL (paragraph 3.19). Management Systems 4.07 The present number of employees in the empresas and acuas is reason- able, with a low ratio of 0.6 per 1,000 persons served in Barranquilla to a high of 1.0 in Cartagena. In general, employees' salaries and benefits are not competitive with those of private industries in the cities. The staff are unionized and their unions exert a fairly strong influence on the Empresas' management. 4.08 The empresas with the exception of Villavicencio.process their billings through computers. Three acuas (Ibague, Pasto and Popayan) and three cities of the first medium-size cities project (loan 860-CO) plan to set up a computer pool in Cali. Existing methods of collection are not satisfactory and should be improved as part of the Empresas' reorganization. The policy of disconnecting services for non-payment is not strictly enforced. Up to 15% of Barranquilla's bills are outstanding for more than three months. Collection is particularly bad in Valledupar where consumers are not billed and must inquire about their billing at the acua office. Governmental agencies in the cities are billed but only few of them pay their bills. Total billing to these agencies averages 3% of the utilities' total operating income. During loan negotiations, assurances were obtained from the Government that it will cause its national agencies to pay their bills from the utilities within three months after the date of billing. Accounting 4.09 The Barranquilla Empresa's accounting system functions well. The book value of assets is accurately reported and assets are depreciated. This utility performs annual physical inventory controls, and recorded levels of in- ventories are reliable. The accounting systems of the other empresas and the acua in Popayan lack adequate technical organization and the General Managers do not receive the information required for control of operations and financial decisions. There is no budgetary control and no inventory is performed. The other acuas are new and INSFOPAL will help them set up their accounting systems. Audit 4.10 Audit of the empresas is performed by appointees of the municipal councils, except in Cucuta where external audit is carried out by local com- mercial auditors (Urbina, Cespedes & Jaikaya), which was a condition of an IDB loan to this empresa. In the other cities, existing audit arrangements are not satisfactory. Assurances were obtained during negotiations that  - 13 - an internal audit section will be established in each empresa and acua, and their accounts audited by independent and competent accountants acceptable to INSFOPAL and the Bank. Proposed Training Program 4.11 INSFOPAL has made a preliminary study of the training requirements for carrying out effectively the proposed decentralization of the water supply agencies. It is estimated that about 2,100 administrative, technical and operational staff need to be trained. The training would be given to the staff of the acuas, "Direcciones Seccionales,""Oficinas Seccionales" and empresas of the medium-size cities. 4.12 The estimated cost of the instructors' services, teaching materials and facilities amounts to US$360,000. About 457% of this cost would be financed with a Government grant to INSFOPAL and the remainder with the proceeds of the Bank loan (paragraph 5.12). The main training courses would be held in Bogota and Cartagena, and the trainees' travels and stipends would be paid by their employers. These expenses are not included in the project cost and are consi- dered as the water utilities' contributions to the program. 4.13 INSFOPAL is considering engaging the "Universidad de los Andes" of Bogota to coordinate and supervise the program. Specialized institutions such as PAHO, the Colombian Society of Engineers and the Empresa of Bogota would direct the training in administration, finance, accounting, maintenance and metering. In addition, short courses on treatment plant operations, and leak detection and control in distribution systems, would be given by individual foreign consultants. 4.14 The training program will be carried out over a period of three years. It includes the following activities: (a) establishment of a timetable for the courses, and selection of instructors; (b) preparation of teaching material to be used at all levels and nomination of trainees; (c) holding of classes and seminars, field courses, laboratory and shop practices; and, (d) evaluation of the training. During loan negotiations, assurances were obtained that a detailed schedule and description of the training program will be submitted to the Bank for review and approval within six months after the signing of the loan agreement, and that consultants acceptable to the Bank will be hired for the training program.  - 14 - 5. THE PROJECT Background of the Project 5.01 USAID and the "Fondo Nacional de Desarrollo Economico" (FONADE) financed the feasibility studies of the subprojects for the cities of Cartagena, Cucuta and Villavicencio. These studies were prepared by Colombian consulting engineering firms with minor assistance of US consul- tants. The subprojects for the four INSFOPAL systems serving the cities of Ibague, Pasto, Popayan and Valledupar were prepared by local consultants under contracts with INSFOPAL, and then were updated and revised for this appraisal by the External Credit Office (ECO) with the assistance of Colombian consultants and under the supervision of the Bank representative in Bogota. The feasibility study for the Barranquilla subproject was financed by the city's Empresa and prepared by its consultants. Scope of the Project 5.02 The project would consist of improving and extending the existing water supply and sewerage facilities in these eight cities and in some 30 small towns served by INSFOPAL. Presently these cities have a combined population of 1.8 million growing at annual rates of 3.5% to 6%. The percen- tage of this population served now by the water supply network is around 70%; the percentage connected to the sewerage system averages 50%, with the excep- tion of Cartagena and Valledupar where it is only 20%. 5.03 The objective of the project in these cities is to provide 90% of hle_ population with adequate quantities of water of reliable quality and to extend the wastewater disposal systems to 80% of the population, except Cartagena where the latter would be 40%. Projected daily water consumption per capita ranges from 180 liters in Villavicencio to 245 liters in Barranquilla, and unaccour dA- for water is expected to drop from 50%/ now in some cities to around 25% by the year 1980, mainly by installing water meters in all house connections. All of the cities' sewage and industrial liquid waste will be discharged into receiving bodies of water without prior treatment. The sewerage systems are so designed and arranged that sewage treatment facilities can be added when needed. Projected pollutant loads from the sewerage systems in all the cities with the exception of Cartagena, are low compared with the natural selfpurification of the receiving rivers, and wastewaters would be dispersed without much nuisance or causing de- oxygenation of the river waters. In Cartagena, part of the sewage is discharged into the Bay and lagoons, steadily polluting the shoreline and bathing places along the beach. It is recommended that sewage treatment facilities be built in the near future to abate this coastal pollution. The preparation of a master plan for treatment and disposal of domestic and industrial wastewaters in the Cartagena area will be included in a proposed UNDP urban study for which the Bank might serve as the executing agency.  - 15 - 5.04 The project also aims at increasing the percentage of people served in 30 small towns from 70% to 75%. Groundwater supplies to increase the existing production by about 24 mgd would be developed. Approximately 30 wells would be drilled, equipped and connected to the existing distribution systems with short transmission pipelines (paragraph5.12). 5.05 To normalize water demand, reduce waste and permit the implementation of adequate water tariffs in all the systems of INSFOPAL, an extensive metering program is included in the project. Presently only a few of the systems are metered, and funds for the purchase of 100,000 water meters and equipment for their operation and maintenance are provided in the loan (paragraph 5.12 ). INSFOPAL would procure the meters by means of international competitive bidding and then sell them to the operating agencies, charging an administrative fee of 8%. The agencies would repay INSFOPAL the cost of the meters over 5 years with an interest rate of 12%. Description of the Project 5.06 The project includes: (a) the construction of the first stage of water treatment plants for Cartagena and Villavicencio; (b) improvement and expansion of the existing water treatment plants in Barranquilla, Cartagena, Cucuta, Ibague, Pasto, Popayan and Valledupar; (c) the construction of a raw water pumping station in Cartagena and booster pumping stations in Barranquilla and Cucuta; (d) the supply and installation of about 50 Kms of transmission pipelines in the 8 cities; (e) the construction of additional water storage tanks in Barranquilla, Cucuta and Pasto; (f) extension and rehabilitation of the water distribution networks in the 8 cities; (g) the construction of sewage interceptors, collectors and sewers in the cities of Barranquilla, Cartagena, Cucuta, Ibague, Pasto, and Popayan; (h) the procurement of operational and maintenance equipment for the 8 cities; (i) the drilling and equipment of wells for 30 towns; (j) the purchase and installation of 191,000 water meters, and of meter testing and repair equipment (91,000 for the 8 cities and 100,000 for all the systems of INSFOPAL); and, (k) management and technical services, and training of staff.  - 16 - Statistics on the water supply systems, including production and consumption, past and forecast, are shown in Annexes 4 and 5. A more detailed description of each individual subproject is given in Annex 6. Cost Estimates 5.07 Estimated costs of the city subprojects and of the INSFOPAL program (paragraph 5.12) comprising the works in the 30 towns, the purchase of water meters, management assistance and training of staff, are summarized below. Detailed cost estimates are in Annex 7. Col$ million US$ million Item Local Foreign Total Local Foreign Total I. City Subprojects Barranquilla 187.1 70.7 257.8 7.49 2.83 10.32 Cartagena 91.5 53.5 145.0 3.66 2.14 5.80 Cucuta 27.6 12.6 40.2 1.04 0.49 1.53 Ibague 24.3 17.9 42.2 0.98 0.72 1.70 Pasto 18.0 5.8 23.8 0.70 0.23 0.93 Popayan 12.7 8.9 21.6 0.50 0.36 0.86 Valledupar 8.0 6.3 14.3 0.32 0.25 0.57 Villavicencio 9.2 4.9 14.1 0.37 0.20 0.57 II. INSFOPAL's Program 69.5 59.2 128.7 2.78 2.37 5.15 Subtotal 447.9 239.8 687.7 17.84 9.59 27.43 III. Engineering and Administration 44.6 18.2 62.8 1.86 0.74 2.60 IV. Physical Contin- gencies 67.1 35.9 103.0 2.71 1.44 4.15 V. Price Contingencies 470.4 285.3 755.7 7.19 4.95 12.14 VI. Interest During Construction on Loans 117.3 119.7 237.0 3.22 3.36 6.58 TOTAL PROJECT COST 1,147.3 698.9 1,846.2 32.82 20.08 52.90 5.08 The estimates are based on the feasibility studies (updated and modified as necessary for this appraisal) and costs of similar works recently executed by INSFOPAL. The costs were further verified by direct inquiries of contractors and equipment manufacturers. Physical contingencies amount to 15% of the estimated cost of the project, reflecting the degree of certainty on its accuracy. Engineering and project administration were estimated at 10% of the net construction cost. 5.09 All cost estimates are expressed at January 1974 prices levels, with an exchange rate of Col$25 to US$1. Price contingencies of 25% per annum in 1974, 20% in 1975, 15% in 1976 and 10% thereafter for local cur- rency expenditures, and 14% in 1974, 11% in 1975 and 7.5% thereafter for foreign currency expenditures were added to the estimates. The bids recently awarded for equipment supply and civil works contracts of this  - 17 - type and magnitude have shown these cost increases. The 1974 exchange rate of the Colombian peso to the US dollar has been assumed to increase by 12% in 1974 and 8.5% annually throughout the construction period. Loan Amount 5.10 A Bank loan of US$27 million representing about 51% of the total project cost is proposed. The loan would finance the estimated foreign exchange cost of US$16.7 million (excluding interest on Bank loan during construction) and about 31% of local expenditures or US$10.3 million equivalent. INSFOPAL would relend the loan proceeds to the 8 cities and 30 towns at an interest rate and with a repayment period equal to those of the Bank, and under subsidiary loan agreements acceptable to the Bank. The sub-borrowers would bear the foreign exchange risk. 5.11 If costs are greater than the estimates, the beneficiaries would be expected to meet the overruns. Assurances were also obtained from the Colombian Government that it will make arrangements for the borrower to be promptly provided with any additional funds as needed to meet cost overruns. Should any of the subprojects be completed at a cost less than estimated, the Bank would consider applying any loan surplus toward the cost of additional related works or transferring this surplus for other subprojects. INSFOPAL's Program 5.12 Under the proposed loan, INSFOPAL would be responsible for carrying out the metering, groundwater and training programs, and technical assistance to the beneficiaries. INSFOPAL would also have to contract for additional management assistance or extend its contract with PAHO. The costs of these programs and consulting services which the loan would help INSFOPAL finance are shown below; they already include all contingencies. Col$ million US$ million Local Foreign Total Local Foreign Total Metering Program 33.3 64.3 97.6 0.97 1.84 2.81 Groundwater Program 120.0 71.2 191.2 3.30 1.98 5.28 INSFOPAL's Assistance to Beneficiaries 3.7 - 3.7 0.11 - 0.11 Management Assistance to INSFOPAL - 3.8 3.8 - 0.11 0.11 Training Program 11.3 1.4 12.7 0.32 0.04 0.36 TOTAL 168.3 140.7 309.0 4.70 3.97 8.67 The Bank loan would finance US$5.28 million of the expenditures for the INSFOPAL program; Government budgetary allocations to INSFOPAL would cover the remainder.  - 18 - Procurement 5.13 Except for civil works under US$100,000 for which contracts will be awarded on the basis of competitive bidding advertised locally and in accordance with local procedures which are satisfactory to the Bank, all contracts would be placed by means of international competitive bidding. INSFOPAL will purchase in bulk similar items of the subprojects, such as water meters, pipes and operational equipment, and then pass them to the respective beneficiaries, charging an administrative fee of 8%. Foreign suppliers are expected to win most of the contracts for treatment plant and pump station equipment, water meters and operational equipment, amounting to about US$8.8 million. Colombian contractors are expected to win all civil works and pipe supply contracts. For bid evaluation purposes, a 15% margin of preference (customs duties are substantially higher) would be allowed for equipment manufactured in Colombia. The beneficiaries are not liable to pay customs duties, and consequently no preferential treatment for manufacturers in the member countries of the Andean Group will be granted in bid evaluation. Disbursement 5.14 The loan would be disbursed against: (a) the full CIF cost of all direct imports for the 8 cities and the INSFOPAL program; (b) a percentage of the cost of all supplies, civil engineering works and services procured locally for the 8 cities. This percentage is shown for each city in Annex 8; (c) 35% of all local procurement and civil works contracts for the subprojects in the 30 towns; (d) the foreign exchange cost of consulting services; and, (e) 50% of local expenditures for the training program and management assistance. Estimated quarterly disbursements for each subproject and consolidated for the loan are shown in Annex 9. Applications for all disbursements would be made by INSFOPAL. INSFOPAL's Selection of the Towns 5.15 Disbursement of loan funds for the development of additional ground- water supplies for the 30 town water systems administered by INSFOPAL would not be automatic once the loan is declared effective. The existing water supply facilities of these towns were not appraised and the cost of the groundwater exploration and production was arrived at on the basis of a global evaluation of the INSFOPAL system's immediate needs. The selection of the towns would be made by INSFOPAL and a feasibility study would be prepared for each of them; construction would be initiated only after the Bank has approved each study.  - 19 - 5.16 During loan negotiations, assurances were obtained that the following steps will be taken prior to the Bank's approval of disbursement for a subproject in a town: (a) an acua or a departmental company would be set up in the town or departmental region in which a subproject will be carried out; (b) plans, cost estimates and financial feasibility studies for the particular subproject would be made and submitted for Bank review and approval; and, (c) adequate water rates would be implemented in the selected town to generate revenues sufficient to cover at least its operating and maintenance costs, and debt service. The cost of the subprojects in the 30 towns would be financed 1007o with the Bank loan proceeds, and with Government budgetary allocations to INSFOPAL that it would lend to the towns. Execution of the Project 5.17 The project would be executed in the FY 1976 through FY 1979. A construction schedule for the cities' subprojects and the INSFOPAL program is shown in Chart 8727. Detailed designs and contract documents will be prepared by the empresas and acuas consultants. Agreement was reached during negotia- tions that the subsidiary loan agreements will provide for the use of qualified consultants. INSFOPAL will approve the selection of consultants, supervise their work and in general assist the empresas in the administration and execution of their subproject. INSFOPAL will also periodically review the operations of the beneficiaries, and prepare terms of reference for management assistance. 5.18 Intensive Bank supervision of the project, with emphasis on the subprojects in Cartagena and Villavicencio, is contemplated. The design of the facilities for these subprojects is quite complex and will need the Bank's special attention. The Bank supervision will in particular focus on the training program, management improvement, and progress in the reorganization of INSFOPAL and the sector.  - 20 - 6. JUSTIFICATION Demand Forecasts and Investment Objectives 6.01 The project is essential to meet the selected cities' needs for water over the next decade and to prevent further deterioration in the quality of service. Demand on the existing water supply facilities has reached their capacity, and without the project, the utilities would have to stop making new house connections or allow water pressures to fall below minimum acceptable standards. Furthermore, the proposed lending supports the Government's policy of improving living standards in the intermediate cities to make these cities attractive to rural migrants, and thus achieving a more balanced urban development. By providing adequate water supply and sewerage services to areas predominantly inhabited by lower income groups, the project would promote a better distribution of the benefits of economic growth. 6.02 Annexes 4 and 5 show population growth, water production and demand, past and forecast, in the eight cities. Most of the additional connections will be made in the cities' low-income areas where average consumption per capita is expected to be lower than that in other parts of the cities, and the demand projections take this into account. It is expected that the average water consumption per capita would decrease when the distribu- tion network is extended to the low-income consumers. This was not considered in previous Bank water supply projects in Colombia, and as a result, water demand in these projects did not increase at the rate forecast in the appraisal reports. For this appraisal, water demand in the low-income premises was projected at half the consumption in other dwellings in the cities. 6.03 Data on water consumption in Barranquilla, Cartagena and Cucuta are reliable, but are of poor quality in the remaining cities. The demand projec- tions for the latter group were based on data of similar communities in Colom- bia and are considered to be reasonable. Selection of Proposed Project 6.04 The project was scaled to suit the financial capacities of the beneficiaries by postponing the construction of additional works proposed by them. Yet it would meet their most urgent needs and is the least-cost solution to increase the cities' water supply. Where comparison of alter- natives was appropriate (e.g. choice of water sources for Cartagena and sizing of transmission mains) real discount rates of 10% to 12% were used by the consultants. In some cases, existing water treatment plants will be upgraded and new plants reduced in size or deferred (Cartagena, Popayan, Valledupar). 6.05 Design standards used for the project were reviewed and generally accepted by the Bank. In some instances, per capita consumption, storage capacity and residual water pressures in the distribution networks were reduced.  - 21 - Internal Financial Return on Investments 6.06 The internal financial rate of return on the proposed investments in each city is estimated as follows: Barranquilla 10 Cartagena 11 Cucuta 15 Ibague 12 Pasto 8 Popayan 8 Valledupar 10 Villavicencio 12 6.07 The calculations of the rates are based on 1975 prices and are shown in Annex li. Benefits were measured by the revenues expected from the additional quantities of water sold after deducting incremental opera- ting costs due to the project. To the capital costs were added subsequent investments necessary to utilize the project fully during the next 50 years. Variations in the rates of return are explained by differences in operations (location and type of water sources, gravity or pumping systems), investment phasing and tariff levels. 6.08 These financial rates are lower than the expected economic return on the project, because all benefits are not fully reflected in the prices charged for water services. Health benefits, improvement in the communities' environment, increases in property values were not fully included in the calculation of the rates of return. Environmental Aspects 6.09 Provision of water supply and sewage collection services should substantially improve sanitary conditions in the urban areas of the selected cities. Pollution of streams within the cities will be reduced to a large degree. Outside the cities, the discharge of untreated sewage into watercourses will increase, but except in Cartagena, this would have no long-term adverse effects on the environment. 6.10 There is immediate need for sewage treatment in Cartagena and a study for pollution abatement in the Cartagena Bay should be undertaken without delay (paragraph 5.03). Institution Building 6.11 The establishment of INSFOPAL as an effective national institution responsible for the sector and with the capability to prepare, appraise and supervise water and sewerage projects,is an important objective of the proposed loan. In addition to improving the beneficiaries' operations, the Bank's involvement would make INSFOPAL and the municipal authorities set up better organized and financially viable empresas. It is the Bank's aim to promote, through one composite project, improvements in investment planning and financial performance.  - 22 - 7. FINANCE Past Finances 7.01 The fact that INSFOPAL functions both as a Government agency and a commercial enterprise makes it difficult to evaluate its financial position. Its revenues from present water sales are insufficient to cover its operating expenses and the deficit was Col$4.0 million in 1972 and Col$2.4 million in 1973. Only a few of INSFOPAL's systems recorded depreciation allowance in their books, thus the real deficits were much higher. Furthermore, in 1972 INSFOPAL made capital investments of Col$194 million that it received from the Government. These investments, like those made in previous years, would not be recovered from the municipalities. IBD and USAID made several loans to INSFOPAL which relent them in the sector. The municipalities do not pay the debt on these loans and INSFOPAL is now servicing the debt which amounted to Col$185 million as of December 31, 1972. INSFOPAL's operating deficit is made up by the Government. With the separation of the operating agencies from INSFOPAL and the tariff increases contemplated under the reorganization of the sector (paragraph 3.17), this deficit would be eliminated in the future. Financial statements of INSFOPAL for the last three years are shown in Annexes 11-13. 7.02 In general the finances of water and sewerage services of the empresas and acuas have been characterized by operating losses and cash shortages which have precluded substantial investments. The cash shortages are largely due to low tariffs, less than Col$0.80/m3 (US$0.15/1,000 gallons) and to high percentages of unaccounted-for water (from 34% in Cucuta to 49%/ in Pasto). The Government has made capital grants to Villavicencio, Cartagena, Valledupar and Pasto for urgent repairs in their water supply systems. 7.03 The financial performance of the Barranquilla Empresa's Water Supply and Sewerage Division in 1973 was good with a long-term debt as a percentage of its capitalization of 13%. Its earnings in this year produced a rate of return on revalued fixed assets of 10%. The financial situation of the water supply and sewerage services of the other empresas was bad in 1973, in particular Cucuta with a long-term debt as a percentage of its capitalization of 67%. Villavicencio earned in 1974 a rate of return of 1%o on the revalued rate base. The financial position of the INSFOPAL entities was tight in 1973 and two of them, Pasto and Valledupar had an operating deficit of about Col$0.5 million in this year. Substantial tariff increases in both cities in 1974 rectified this situation. Financial statements of the beneficiaries for 1974 are shown in Annexes 14 and 15. 7.04 The slaughterhouse, markets, solid waste collection and street cleaning services of the municipal empresas are labor-intensive. Operating costs often exceed revenues and other sources of income such as real estate taxes, are used to offset their losses. Financing Plan 7.05 The financing plan for the construction period (1975-79) is summarized below. Annex 16 gives the consolidated capital investments to be made in each year of the construction period, and their sources. Annex 17 shows the financing plan for each subproject.  - 23 - Applications of Funds Col$ US$ % --- million --- Expenditures on the Project Works of the Empresas and Acuas 1,300.2 37.65 56.0 INSFOPAL's Program 309.0 8.67 12.8 Interest During Construction 237.0 6.58 9.7 Other Water Supply and Sewerage 360.7 11.24 16.4 Works of the Empresas and Acuas 3 - Total Investments 2,206.9 64.14 94.9 Increase in Working Capital 118.6 3.40 5.1 TOTAL APPLICATIONS 2,325.5 67.54 100.0 Sources of Funds Net Internal Cash Generation of the Empresas and Acuas 668.9 19.02 28.2 Government Grant 10.0 0.33 0.4 Borrowings: IBRD Loan 934.4 27.00 40.0 Government contributions to INSFOPAL 563.7 16.21 24.0 Other Loan 148.5 4.98 7.4 TOTAL SOURCES 2,325.5 67.54 100.0 7.06 The sources of funds would be: (a) net internal cash generation of the utilities of Col$668.9 million; (b) a Government grant totalling Col$10 million to the cities of Ibague, Pasto and Valladupar; (c) a Bank loan of US$27.0 million at an assumed interest rate of 8%, with amortization over 20 years after a 5-year grace period. INSFOPAL would relend the loan proceeds to the beneficiaries under similar conditions, and the sub-borrowers would bear the foreign exchange risk; (d) Government contributions of Col$563.7 million which INSFOPAL would lend to the utilities at an interest rate of 12%, to be repaid to INSFOPAL in 20 years after a 5-year grace period; and (e) a loan from an industrial complex in Cartagena, to be repaid by furnishing raw water, to cover acquisition of raw water facilities at Cartagena.  - 24 - 7.07 The above financing plan was obtained by consolidating the individual financing plans for the subprojects. The consolidation was made to determine the total amounts of the Bank loan and the Government contribution for the project. The beneficiaries would pay interest and other charges on the Bank and INSFOPAL loans during construction. Since the sub-borrowers will bear the foreign exchange risk on the proceeds of the Bank loan, and because INSFOPAL will not pay back the Government contribution which it will lend to the benefiaries, no interest spread between the Bank and INSFOPAL lending terms appears to be necessary so that INSFOPAL can meet its administrative expenses. These expenses would be covered by the interest that INSFOPAL will collect on its lending of the Government funds to the beneficiaries. 7.08 During loan negotiations, assurances were obtained from the Colombian Government that its contribution funds will be promptly made available in order to ensure the efficient and rapid execution of the project. To date the counterpart funds of the Government for the first INSFOPAL project have been regularly provided, as required under the Guarantee Agreement. Water and Sewerage Tariffs 7.09 Water rates vary from one city to another and are the highest in Barranquilla (Col$2.11m3) and very low (Col$0.80/m3) in Valledupar. Sewerage services are charged as a fixed percentage of water bills and this percentage also varies from city to city. Despite substantial 1974 tariff increases of 28% in Barranquilla, 79% in Cartagena and 280% in Valledupar, further increases for all eight cities are envisaged in the financing plan. The water rates to be implemented in 1975 and subsequent years are given in Annex 18. Assurances were obtained during negotiations that implementation of the initial tariff increases in a specific city will be a condition of loan disbursement for that city's sub- project. 7.10 The proposed water rates are based on the revenues necessary to cover operating and maintenance expenses, service the debt and generate some 28% of the pro- ject costs. The subprojects were in most cases reduced so that the resulting tariffs might be kept within reasonable limits. These revenues have been calculated as rates of return and will be included as targets in the subsidiary loan agreements which would also provide for their quarterly review and tariff adjustments as required. Tariffs should yield, on average revalued net fixed assets, the rates of return shown in Annex 18 for each city during the construction period and thereafter. The existing tariff structures were reviewed and found to be satisfactory. Consi- dering the social aspects of the project, the contribution towards construction from internal cash generation and the limitation of raising the tariffs higher, the ex- pected financial returns are acceptable. 7.11 Tariff increases in Colombia must be first approved by the National Public Services Tariff Board before they can be implemented. Tariff implementa- tion is the sole responsibility of the utilities. The empresas and acuas are in the process of applying to the National Public Services Tariff Board for the first water rate increases which are expected to be approved soon by the Tariff Board. It is further recommended that the Tariff Board approve in advance the subsequent tariff increases to be implemented during the construction period. This advance approval would permit the utilities to make successive small monthly increases, thus avoiding big sudden increases which in general give rise to public outcry. However, if at any time it comes out that the approved rates for a  - 25 - utility are not producing the revenues sufficient to achieve the agreed rates of return, then theutility will be required to apply to the Tariff Board for additional tariff increases. During loan negotiations, assurances were obtained that the beneficiaries will maintain adequate water rates to meet specified rates of return, and that the National Public Services Tariff Board will promptly act on the tariff applications submitted by the beneficiaries to meet the targets set for the proposed loan. 7.12 The estimated tariffs and annual increases are given in Annex 18. The proposed tariffs are about the same as in Palmira, Bogota, and Cali, and are within the range considered acceptable by the National Public Services Tariff Board. Nevertheless, some public resistance can be expected. Large tariff increases from 39% in Ibague to 63% in Pasto over the existing levels are projected for 1975 when the construction starts; during construction some further increases will be necessary to compensate for inflation. Other Tariffs 7.13 There is no uniform tariff structure for slaughterhouse, public markets and street cleaning services. Slaughterhouse revenues depend on the number of animals killed; market revenues are generated by the renting of individual market facilities; and a municipal tax is collected for street cleaning services. The tariffs and operating expenses of these services should be adjusted to achieve the operating ratios shown in Annex 19. Future Finances 7.14 The Empresas Water Supply and Sewerage Divisions' forecast income statements are shown in Annex 15. The financial performance of the beneficiaries' water supply and sewerage services would improve during and after the construction period, because of larger sales of water, increased tariffs and reduced losses of water. Fixed assets of the Barranquilla and Cartagena Empresas, in particular for sewerage, will substantially increase during the construction period and this would lead to a decrease in the rates of return from 3.7% and 5.0% in 1976 to 3.3% and 4.4% in 1978 for the respective utilities. Thereafter the rates would respectively increase to 4.0% and 4.6%. 7.15 Operating ratios of the utilities' water supply and sewerage services would decrease progressively from as high as 90% to about 60% by 1978, and internal cash generation should cover debt service comfortably. Other services of the empresas would have operating ratios of about 75% in 1978. The empresas' consolidated income statements are shown in Annex 20. The subsidiary loan agree- ments will stipulate that funds generated by the water supply and sewerage services will be used exclusively for the subproject,and that the utilities will not incur any long-term debt for financing water supply and sewerage works without the consent of the Bank and INSFOPAL, unless the net income of the water supply and sewerage services, before interest and depreciation, is at least 1.5 times the maximum debt service in any future year.  - 26 - 7.16 Fixed assets have been revalued in some cities, based on an inflation factor as recommended by the National Planning Office, and in others in accord- ance with replacement value calculated by management consultants. In some cases the value of net fixed assets in service was estimated by INSFOPAL's consultants. Assets which have not been properly revalued by the utilities should be revalued within six months following the signing of the subsidiary loan agreements. Valuations should also be reviewed at least annually and shown on the Balance Sheets. The loan agreement stipulates, and the subsidiary loan agreements contain provisions for review of asset valuations and annual revaluation of fixed assets in a manner acceptable to the Bank. Annex 22 gives the method of calculating the rates of return and operating ratios. 7.17 INSFOPAL's forecast cash flow statements are shown in Annex 23. The projected capital investments are based on ongoing programs and a conservative appraisal of the availability of Government funds for financing these programs. It was assumed that INSFOPAL would lend to the utilities at an interest rate of 12%, with amortization over 20 years after a 5-year grace period. The projections indicate that in 1974 and 1975 INSFOPAL would not generate cash sufficient to service its debt, and Government funds would have to be used for this purpose. As from 1976, INSFOPAL would be able to finance progresS sively with its own resources an increasing share of its lending operations. In 1976 only 16% of these operations would be financed from its net internal cash generation; this percentage would reach 65% in 1983. 7.18 To ensure that INSFOPAL is making proper investments in the sector and achieving good financial management, assurances were obtained during loan negotiations that INSFOPAL will annually review with the Bank its total investment program in the sector. This review would deal with such matters as: (i) the evaluation of the sector needs and the part that the investments would cover; (ii) the terms and conditions of the INSFOPAL loans to the utilities; (iii) the status of loan repayment by the utilities to INSFOPAL; and, (iv) the proportion of the investments to be made as grants to the utilities. Risks 7.19 The empresas of Barranquilla and Cartagena are fairly well-organized and their present financial position is good. The cities are favored with good economic activities and their inhabitants are willing to pay for public services. Consequently the risk of not achieving the institutional, technical and financial objectives of these subprojects is low. 7.20 The problems in Cucuta and Villavicencio are mainly political and affect the management through the appointment of key personnel, the establish- ment of adequate rate structures and thus the overall financial situation of the empresas. It is considered that these political influences may continue  - 27 - for some time so that there will be difficulties in improving the management and adjusting the rates opportunely. Therefore, the risk that the institutional and financial objectives not be achieved is high. 7.21 The acuas of Ibague, Pasto, Popayan and Valledupar have competent general managers; but their financial situation is precarious. The present tariffs would have to be increased substantially, and the customers are expected to resist these increases. The probability of achievement of all objectives of these subprojects is medium. Monitoring System 7.22 Annex 24 shows the indicators which would be monitored during the execution of the project to measure the achievement of the technical, financial, administrative and training goals set for the proposed project. This annex also gives the values forecast for these indicators, which were discussed with INSFOPAL during loan negotiations and agreed upon. INSFOPAL will be required to include in its periodic reports information on progress made in achieving the targets described by the indicators. During supervision missions, progress in the project execution will be evaluated on the basis of these indicators, and should any remedial action be required to improve performance, appropriate recommendation would be made to INSFOPAL.  - 28 - 8. AGREEMENTS REACHED AND RECONNENDATIONS 8.01 During loan negotiations, assurances were obtained from INSFOPAL that: (a) the present number of staff at headquarters will be studied and numerical targets for staff reduction will be developed (paragraph 3.08); (b) an internal audit section will be set up and put in operation in INSFOPAL within six months following the signing of the loan agreement (paragraph 3.13); (c) its financial statements certified by its external auditors will be submitted to the Bank not later than four months after the end of the fiscal year (paragraph 3.13); (d) the implementation of the new organizational structure of INSFOPAL and the sector will be completed by June 30, 1976 and that the Bank will have an opportunity to comment on any modifications and staff appointments (paragraphs 3.16 and 3.17); (e) consultants acceptable to the Bank will continue to provide manage- ment assistance to INSFOPAL during 1976 and 1977, and will be hired for the technical and management assistance of INSFOPAL to the beneficiaries. The implementation of both assistance programs will be periodically reviewed with the Bank (paragraph 3.19); (f) a detailed schedule and description of the training program will be submitted to the Bank for review and approval not later than six months after the signing of the loan agreement, and consultants acceptable to the Bank will be hired for carrying out the program (paragraph 4.14); (g) technical and financial feasibility studies for each of its sub- projects in the 30 towns will be submitted to the Bank for review and approval, and an acua will be set up and adequate water rates implemented in each of these towns (paragraph 5.16); (h) it will annually review with the Bank its total investment program in the sector (paragraph 7.18); (i) it will periodically report on the monitoring indicators as part of its progress reports (paragraph 7.22); and, (j) each subsidiary loan agreement will be approved by the Bank and will provide for: (i) the establishment of an internal audit section in the utilities and employment of independent auditors acceptable to the Bank and INSFOPAL for external audit (paragraph 4.10);  - 29 - (ii) employment of qualified engineers acceptable to INSFOPAL for design, bidding and construction supervision (paragraph 5.17); (iii) initial tariff increases as a condition of disbursement (paragraph 7.09); (iv) the maintenance of adequate tariffs to meet specified rates of return and operating ratios, a quarterly review of water and sewerage tariffs and prompt tariff adjustments as required (paragraphs 7.09-7.13); (v) exclusive use of funds generated by the water supply and sewerage services for financing the subprojects (paragraph 7.15); (vi) the limitation of incurring any long-term debt without the consent of the Bank and INSFOPAL, unless the utility's net income, before interest and depreciation, is at least 1.5 times the maximum debt service in any future year (paragraph 7.15); and, (vii) valuation of improperly revalued assets within six months of signing the subsidiary loan agreement and annual revaluation, in a manner acceptable to the Bank, of fixed assets on which a rate of return is required (paragraph 7.16). 8.02 Assurances were also obtained from the Government that: (a) it will cause its national agencies in the cities and towns included in the project to pay their bills from the empresas and acuas within three months after the date of billing (paragraph 4.08); (b) it will promptly make available its contribution funds for the project (paragraph 7.08); (c) it will make arrangements for the borrower to be promptly provided with any additional funds required for the project, should the beneficiaries be unable to do so (paragraph 5.11); and (d) the National Public Services Tariff Board will promptly act on the tariff applications submitted by the beneficiaries to meet the rates of return set for the proposed loan (paragraph 7.11). 8.03 Under the foregoing conditions, the proposed project is suitable for a Bank loan of US$27 million for a term of 25 years including a 5-year grace period. December 20, 1974   COLOMBIA SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT PREVIOUS BANK LOANS IN THE SECTOR Amount Population Loan Number US$ million Date of Loan Borrower City Served 536-co 14.0 June, 1968 Empresa de Acueducto y Bogota 2,500,0o0 Alcantarillado de BogotA 682-CO 18.5 June, 1970 Establecimiento Pfiblico Cali 920,000 Empresas Municipales de Cali 738-Co 200 May, 1971 Empresas Pfiblicas Municipales Palmira 160,000 de Palmira 741-Co 8800 May, 1971 Empresa de Acueducto y Bogota 3,000,000 Alcantarillado de BogotA 860-co 9.1 July, 1972 Instituto Nacional de Fomento Armenia, Manizales, 1,100,000 Municipal - INSFOPAL Neiva, Pereira, Tulua, Buenaventura, and Santa Marta May 28, 1974  ANNEX 2 Page 1 of 5 pages COLOMBIA SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT THE INSTITUTO NACIONAL DE FOMENTO MUNICIPAL (INSFOPAL) This Annex describes in more detail the existing organization and financial policy of the borrower and outlines the institutional changes required in its structure. Some of the proposed changes are not stated in the body of the report because they are not considered as conditions for making the loan, but only as recommendations to INSFOPAL for improving its operations. Management System Presently INSFOPAL and its subsidiaries provide water supply and sewerage services to about 450,000 customers (about 4 million people) living in more than 560 towns. Its administration has been torn by political inter- ference over the years and as a consequence, its management has been uneven and generally weak. Under INSFOPAL's by-laws, it is responsible for preparing investment programs in the sector and as a general principle, all government funds must be channelled through this institution which would then distribute them to the municipalities according to their priority. However, this procedure is not followed. Although INSFOPAL draws up a program each year, this program is not used for the distribution of government funds. The allocation of funds to each individual department or city is made by the Colombian Congress and is primarily based on political grounds. The result is that frequently funds are allocated to a city for which no project has been prepared, and other cities with greater needs and a project ready for execution do not receive any funds. As a consequence, projects badly conceived had been executed in a hurry, and in some cases abandoned later because they could not perform properly. Govern- ment funds allocated to INSFOPAL in 1973 are shown below: Col$ million % Administrative and Operating Expenses 30.0 8.7 External Debt Service 15.1 4.4 Internal Debt Service 8.8 2.6 Investment for Water and Sewerage Works 178.01/ 51.7 "1 it" " " 93.12/ 27.1 Other 19.0 5.5 TOTAL 344.0 100.0 1/ The budget identified the empresas and acuas to which these funds were to be lent. 2/ The beneficiaries of these funds were not identified and INSFOPAL was not requested to recover them.  Annex 2 Page 2 of 5 pages In the last five years (1969-1973) INSFOPAL has made capital invest- ments of Col$930 million in its water supply and sewerage systems. Of this amount, Col$61 million was lent to the municipalities. However, the munici- palities have not paid the debt on these loans and INSFOPAL has not taken any action to recover these funds. IDB and USAID. have made various loans to INSFOPAL that it has relent in the sector. Again the Empresas have not serviced the debts which amounted to Col$184.8 million as of December 31, 1972. Audit Financial statements of INSFOPAL are audited by a special unit of the "Auditoria Fiscal de la Contraloria General de la Republica". The auditors' reports have shown the following deficiencies in INSFOPAL's financial statements: (a) fixed assets are not revalued; (b) depreciation charges and accumulated depreciation are underestimated because of lack of policies in this matter; (c) works in progress are overestimated since they include a substantial amount of completed facilities which are already in operation; and, (d) accounts receivable include the Government's commitment to pay INSFOPAL's outstanding public debt (Col$229.9 million as of December 31, 1972). Finance Annexes 11 through 13 show INSFOPAL's financial statements for 1971, 1972, 1973 and for 9 months of 1974. INSFOPAL is highly subsidized by the Govern- ment, since its consolidated revenues from water sales do not cover its operating expenses. In 1972 its operating revenues amounted to Col$48.7 million and in addi- tion,it received Col$37.9 million from the Government for operating expenses. In spite of those subsidies, INSFOPAL had in that year a deficit of Col$4.0 million. In the last three years, the acuas have not received operating sub- sidies from INSFOPAL, but they have not been able to service their long-term debt in full or pay any dividend to their shareholders. In 1972 the acuas had a combined operating deficit of Col$5.5 million. Most of INSFOPAL's past investments were financed with Government contributions and as a consequence, its liabilities are low; its long-term debt as a percentage of its capitalization was 16% at the end of 1972. Its external and internal debts are paid by the Government. As of December 31, 1972, the only outstanding external debt was a US$8.1 million loan from IDB that was disbursed before 1970. The financial problems of INSFOPAL and its subsidiaries are caused by deficient institutional organization and low tariffs. More than 40% of  ANNEX 2 Page 3 of 5 pages the towns served by INSFOPAL have populations less than 2,500, with low income. These towns should be put under INPES' responsibility. INSFOPAL's central office in Bogota accounts for large overhead expenses, and its field services are poor. Engineering INSFOPAL is responsible for preparing feasibility studies of water supply and sewerage projects for cities with populations of more than 2,500, and contract documents for civil works and the procurement of equipment. It is also in charge of construction supervision of the projects financed by the Government. To date more than 95% of the studies have been made by consultants, and INSFOPAL has undertaken only small designs for which great engineering knowledge is not required. In general the studies do not include an analysis of the financial and economic aspects of the projects. INSFOPAL has not pre- pared anylong-range program and no criteria for project selection have been established. The technical division of INSFOPAL is weak and needs to be re- orRanized. Some consultants have-taken advantage of INSFOPAL's limited technical capability by submitting reports and designs of low quality to this institution. Proposed Changes in the Sector's Organization Financial viability of small water supply systems cannot be achieved unless they are grouped together with large systems and operated by a regional entity or even a national organization. This is the concept of the PLANASA program in Brazil. Unfortunately such centralization in operations is not accepted in Colombia. The Colombian communities would not permit the use of revenues from their systems to cover operating expenses of other towns. The major cities have their own empresas, while the poorest towns are left to INSFOPAL. The new decree for the reorganization of the sector directs INSFOPAL to consider two types of utilities: (i) financially viable empresas in the wealthier cities; and, (ii) regional or departmental companies to serve the remaining towns. Water rates of these companies would be adjusted to cover at least their operating expenses. INSFOPAL is also directed to apply different lending conditions to the individual and regional type companies. INSFOPAL will lend to the former at higher rates than to the latter. Such a policy would produce effective results if certain institu- tional changes are made in INSFOPAL and the sector. These changes are listed below: (a) INSFOPAL should be exclusively responsible for the financial planning of the sector, and the government annual budgetary allocations should be based on the investment plans prepared by INSFOPAL;  ANNEX 2 Page 4 of 5 pages (b) INSFOPAL should channel all internal and external credits to the sector and establish a firm policy to recover its funds; (c) its technical and construction department should be disesta- blished and replaced by a project division. This division would not design or construct the projects financed with govern- ment funds and foreign lending participation, but would confine itself to reviewing and evaluating the projects prepared by competent consultant engineers; (d) a financial division should be set up and the "Subdireccion de Financiamiento y Credito Externo" integrated in INSFOPAL; (e) INSFOPAL should gradually disassociate itself from operating responsibilities by creating acuas, regional or departmental operating entities; (f) an investment fund would be set up by INSFOPAL and supplied with government budgetary allocations; and, (g) personnel quality at headquarters should be upgraded, and staff salaries should be set sufficiently high so as to be competitive with the private sector. The personnel of the present adminis- trative department should be reduced to the minimum required; such a reduction could be achieved by transferring personnel from the central office to the operating agencies. Chart 8721 shows the proposed organizational structure of INSFOPAL; its implementation should be completed by June 30, 1976. Reorganization of INSFOPAL On April 20, 1974, Decree No. 703 for the reorganization of INSFOPAL was approved. By this decree, INSFOPAL will continue as an autonomous agency under the Ministry of Health and with headquarters in Bogota. It will be governed by a Board of Directors and managed by an Executive Director. The Board of Directors will have five members: - the Minister of Health, who is the president of the board; - the General Director of the Ministry of Health; - the Manager of the Institute for the Development of Natural Resources (INDERENA); - a representative of the Colombian Society of Engineers, appointed by the Minister of Health from three candidates proposed by the Society; and, - a representative of the National Planning Office. The Board will be responsible for the general policy of INSFOPAL, approval of its annual budget, establishment of its internal regulations and organization, and approval of major contracts and agreements with other agencies.  ANNEX 2 Page 5 of 5 pages The Executive Director will be appointed by the President of Colombia and will be in charge of the day-to-day activities of INSFOPAL. The decree gives INSFOPAL broad administrative, technical and financial powers to carry out the government policy and programs in water supply, sewerage, slaughterhouses, street cleaning and solid waste collection in urban communities which are taken as those with more than 2,500 inhabitants. The principal objectives of the decree are to: (i) decentralize the operations of INSFOPAL and develop local organizations to administer the public services; (ii) achieve and maintain the financial viability of the local organizations by establishing adequate rate systems that take into consideration the local socioeconomic conditions, income distribution and the cost of the services; and, (iii) provide services adequate in quality and scale so that the public health will be improved and development stimulated. The decree enables INSFOPAL to establish priorities, prepare long- range programs and finance the design and construction of water supply and sewerage facilities. INSFOPAL is also authorized to borrow money, and inter- vene temporarily in the operation and administration of the empresas until the local managerial capability is improved. The decree stipulates that INSFOPAL will take the necessary steps to transform the water and sewer companies it presently administers into new independent organizations. Beginning on June 1975, INSFOPAL can only provide funds to regional or local agencies that have been established or reorganized in the manner described in the decree. Funds used for project studies and construction must be repaid on terms established by INSFOPAL, but those for institution building needed to achieve technical, financial and administrative self- sufficiency do not have to be recovered. May 28, 1974  ANNEX 3 Page 1 of 5 pages COLOMBIA SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT EXISTING WATER SUPPLY AND SEWERAGE FACILITIES Colombia is divided into 22 departments (states) and each of the cities included in this loan is the capital of a state. Physical character- istics of these cities and basic data on their existing water supply and sewe- rage facilities are shown on page 5 of this Annex. The following is a brief description of these facilities. 1. Barranquilla Its water supply source is the Magdalena River whose minimum flow is estimated at 1,700 m3/sec. Raw water is treated in two conventional plants (rapid mixing, flocculation, sedimentation, filtration and disinfec- tion) located on the west bank of the river. The treatment plants have a combined nominal capacity of 3.4 m3/sec, but presently are operated up to 3.7 m3/sec. Filtered water is first stored in three tanks situated on the plant premises and then pumped into the city's distribution system. The plant effluent is chlorinated and safe for domestic consumption. The water distribution network is made up of 710 km of concrete and asbestos-cement pipes ranging in diameters from 3 to 42 inches. It has a limited carrying capacity, causing low pressures and water rationing in some areas of the city. Unaccounted-for water averages 45% of plant produc- tion and most of the losses seem to occur in the distribution network. Ten reservoirs provide the system with a storage capacity of 68,300 m3. There is no storm sewer system and stormwaters are led away through the city's roadways. The sanitary sewerage system is deficient. In some areas, the sewers are surcharged and under pressure; two open creeks crossing the city are used as sewage interceptors, resulting in severe sanitary risks for the city's inhabitants. Wastewaters are lifted by two pump stations into the Magdalena River. 2. Cartagena The source of water supply is the Canal del Dique, a branch of the Magdalena River. Raw water is pumped through two 30-inch transmission con- duits to a conventional treatment plant located 41 km away from the intake. The plant is situated within the city and has a maximum hydraulic capacity of 0.7 m3/sec. Between the raw water intake and the plant, there is an industrial area served by a separate 45-inch concrete pipeline with a capa- city of 1.5 m3/sec. The distribution network consists of 300 kms of galvanized steel and asbestos-cement pipes with diameters from 2 to 30 inches. The network operates by gravity and only 20% of water produced is unaccounted-for. Storage capacity amounts to 24,000 m3 distributed in three tanks.  ANNEX 3 Page 2 of 5 pages Cartagena has only a sanitary sewerage system and stormwaters are drained along the paved streets. Wastewaters are discharged by pumping into Cartagena Bay and by gravity into a series of lagoons. The ground- water table is close to the surface and seepage into the sewers is high. 3. Cucuta Raw water is drawn from the Pamplonita River and transmitted to a treatment plant located 8 kms away. The safe yield of the river is estimated at 1.0 m3/sec which would meet the city's demand up to 1980. Solids content of the raw water is high,and the efficiency of a grit chamber at the plant influent is low. Rapid mixing is deficient and as a result, the plant effluent is of poor quality. The distribution network includes 294 km of pipes and six storage tanks with a capacity of 16,700 m3. Filtered water reaches the city by gravity, with the exception of two small areas served by pumping. The distri- bution network is limited in capacity and coverage. Unaccounted-for water averages 34% of plant production. Cucuta has a combined sewerage system which discharges directly into the Pamplonita River. Most of the sewage interceptors are open channels representing a sanitary risk for the city. 4. Ibague The sources of water supply are the Combeima River and some mountain creeks (El Cay). Raw water is treated in two conventional plants (El Cay and El Combeima) with a combined capacity of 0.68 m3/sec. The filters of the Combeima plant are now being constructed. Both plants are located on the same premises. The distribution network is old and its carrying capacity is very limited. Part of the downtown network should be replaced. Unaccounted-for water amounts to 35% of production. The existing six storage tanks provide a total capacity of 14,200 m3. Ibague's sewerage is a combined system which discharges into the Combeima River and the Chipalo Creek. Several open creeks crossing the city are used as sewage interceptors and water pollution is severe. 5. Pasto Raw water is drawn from the Pasto River and the Mijitayo Creek and treated in two separate conventional plants, El Centenario and El Mijitayo. The plants are located within the city limits and have a combined nominal capac- ity of 300 1/sec. The Mijitayo Plant has an installed capacity of 120 1/sec, but its production is limited to the yield of the Mijitayo Creek which averages only 65 1/sec. The distribution network is inadequate and has many small and corroded pipes. Losses are high and reach 49% of water produced. The distribution  ANNEX 3 Page 3 of 5 pages system should be extended to newly built-up areas. Service storage is provided by three tanks with a total capacity of 3,600 m3. Sewage and stormwater are collected in the same conduits and dischar- ged into the Pasto River. The city's sewage can be dispersed without much nuisance into the river, and no sewage treatment is required in the foreseeable future. 6. Popayan Its water supply sources are the Molino and Las Piedras Rivers. Raw water from the Molino River flows in an unlined canal to a conventional treatment plant (El Tulcan) which has a capacity of 120 1/sec. The Piedras River supplies another plant of the contact clarifier type (El Tablazo) with a capacity of 250 1/sec. The latter plant has also an intake on the Cauca River. Both plants function well. The distribution network is made up of 74 km of steel and asbestos- cement pipes. There are substantial leaks in the network and unaccounted-for water amounts to 45% of production. Two reservoirs provide a storage capacity of 6,000 m3. The city has a combined sewer system which needs to be extended. Wastewaters are discharged into the Molino and Ejido Rivers that cross the city. Some parts of the city experience flooding in rainy seasons. 7. Valledupar Raw water is drawn from the Guatapuri River and conducted to a treatment plant where it is flocculated and clarified in sedimentation tanks. The plant is not equipped with filters. It has a nominal capacity of 240 1/sec, but is presently overloaded to 350 1/sec. The plant effluent is of poor quality and unsafe for domestic consumption. There is no detailed inventory of the distribution network which is limited in coverage. It is estimated to include about 100 kms of pipes ranging in diameters from 2 to 16 inches. A 6,000-m3 storage tank is now being constructed and financed from a USAID loan. The city has a sanitary sewer system which is being extended with financing under the same USAID loan. Sewage is drained by gravity into the Guatapuri River. 8. Villavicencio The city has two sources of water supply: various small mountain creeks and the Guatiquia River. The safe yield of the creeks is about 80 1/sec and the capacity of the Guatiquia system is 150 1/sec. Water from both sources is not treated and the quality of water served is exceedingly bad. Rationing is severe in the city.  ANNEX 3 Page 4 of 5 pages The distribution network is divided into three separate sectors, all supplied by gravity; 45% of the water produced is unaccounted-for. Four tanks provide the system with a storage capacity of 3,200 m3. Sewage and stormwaters are collected in the same conduits and discharged into various creeks flowing to the Guatiquia River. Sewage inter- ceptors should be constructed to reduce pollution of the creeks within the city limits. Risks of contamination from sewage are high in Villavicencio. May 28, 1974  COLOMBIA SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT CHARACTERISTICS OF BENEFICIARIES - - - - - - - - - - - - - - - - - - - - - - - - - - CITIES - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Physical Data Barranquilla Cartagena Cucuta Ibague Pasto Popa,an Valledupar Villavicencio Population - Mid-1973 670,000 320,000 270,000 210,000 116,000 83,000 74o000 75,000 Population Growth - % 3.1 4.4 5.0 4.5 4.0 4.5 6.0 6.0 State Capital of Atlantico Bolivar Santander Tolima Narino Cauca Cesar Meta Average Elevation (meters-MSL) 40 5 320 1,200 2,600 1,800 180 500 Average Temperature (