Colombia - Mesitas Hydroelectric Power Project

Document of FILE COpy The World Bank FOR OFFICIAL USE ONLY Report No. P-2402-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA DE ENERGIA ELECTRICA DE BOGOTA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE MESITAS HYDROELECTRIC POWER PROJECT November 1, 1978 This decument has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Average Calendar 1977 August 15, 1978 Currency Unit = Peso - Col$ Col$ US$1 = Col$36.985 39.08 Col$1 - US$0.027 0.02559 WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 1 square kilometer (km) = 0.386 square mile (mi2) 1 cubic meter (m3) = 35.315 cubic feet (ft2) = 264.2 gallon (gal) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t; metric; 1,000 kg)= 1.100 short tons (sh. tons) 1 kilowatt (kW) = 1,000 Watts (103 kW = 106 W) 1 kilowatt-hour (kWh) = 830.3 Kilocalories (kcal) 1 Gigawatt-hour (GWh) = 1,000,000 kWh (106 kWh) 1 kilovolt (kV) = 1,000 Volts (V) ...per... = / ...per second; ...per hour = .../s; .../h ...per day; ...per year = .../d; .../a GLOSSARY OF ABBREVIATIONS CHEC = Central Hidroelectrica de Caldas CHIDRAL = Central Hidroelectrica del Rio Anchicava S.A. CORELCA = Corporacion Electrica de la Costa Atlantica CVC = Corporacion Autonoma Regional de el Valle del Rio Cauca DNP = National Planning Department EEEB = Empresa de Energia Electrica de Bogota EMCALI = Empresas Municipales de Cali EPM = Empresas Publicas de Medellin GDP = Gross Domestic Product ICEL = Instituto Colombiano de Energia Electrica IDB = Inter-American Development Bank ISA = Interconexion Electrica S.A. JNT = Junta Nacional de Tarifas de Servicios Publicos KfW = Kreditanstalt fur Wiederaufbau FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY Page 1 of 2 COLOMBIA MESITAS HYDROELECTRIC POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: Empresa de Energia Electrica de Bogota (EEEB) Guarantor: Republic of Colombia Amount: US$84.0 million equivalent Terms: Repayment in 17 years, including 4 years of grace; interest at 7.35% per annum. Project Description: The project forms part of the 1978-82 national power expansion program and it includes: (a) construction of the Mesitas hydroelectric facility consisting of two surface powerhouses, each with three generating units totalling 600 MW, and tunnels and penstocks, as well as a pumping station for an existing head pond, and three 230 kV transmission lines; (b) strengthening of the Sesquile dam against possible future earthquake damage; (c) an asset valuation study; and (d) technical assistance to EEEB on financial planning and staff training. The project is an unusually low-cost power development, as large dams are unnecessary. The Mesitas facility would meet about 9'5% of projected incremental energy demand in the EEEB system during 1982-84, including that attributable to 70,000 new subscribers to be connected annually over this period. Improvement of EEEB's structure of tariffs and rates would be a major institutional focus of the proposed loan. The project is subject to the risks normally associated with underground civil works under difficult geological conditions. However, the actions that have been taken to minimize risk should ensure that the project will be carried out as scheduled. This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page 2 of 2 Estimated Cost: Local Foreign Total (US$ Million Equivalent) Mesitas Civil Works 44.2 28.0 72.2 Major Equipment 4.9 47.1 52.0 Miscellaneous Equipment 5.5 23.1 28.6 Transmission System 0.3 4.4 4.7 Engineering 14.8 0.9 15.7 Sesquile Civil Works 1.5 2.3 3.8 Equipment 0.8 1.2 2.0 Engineering 0.7 - 0.7 Technical Assistance 0.4 0.4 Base Cost 72.7 107.4 180.1 Physical Contingencies 8.5 15.8 24.3 Price Contingencies 31.2 25.2 56.4 Total Project Cost 112.4 148.4 260.8 NOTE: During the period 1978-82, EEEB will carry out other works with an estimated cost of US$303.2 million equivalent, will require an increase in working capital estimated at US$34.3 million, and will invest approximately US$296.5 million in ISA. Financing Plan: Local Foreign Total (US$ Million Equivalent) Internal Cash Generation and Commercial Borrowings 112.4 - 112.4 Proposed IBRD Loan - 84.0 84.0 Colombian Electricity Fund Loan - 10.2 10.2 Co-financing from Foreign Commercial Banks - 54.2 54.2 Total 112.4 148.4 260.8 Rate of Return: Using revenues and fuel savings as a proxy for benefits, the internal rate of return on the project investment is 10.4%. Appraisal Report: Report No. 2078b-CO, dated October 31, 1978.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA DE ENERGIA ELECTRICA DE BOGOTA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE MESITAS HYDROELECTRIC POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Empresa de Energia Electrica de Bogota (EEEB), with the guarantee of the Republic of Colombia, for the equivalent of US$84.0 million to help finance the Mesitas Hydroelectric Power Project. The loan would have a term of 17 years, including four years of grace, with interest at 7.35% per annum. PART I: THE ECONOMY 1/ 2. The latest economic report on Colombia (1548-CO) was distributed to the Executive Directors in May 1977. It assesses current developments and provides a medium-term perspective of the Colombian economy. An updating report is being prepared and is scheduled for distribution to the Executive Directors in November 1978. Country data sheets are provided in Annex 1. Background 3. During the past two decades, Colombia has made substantial progress in the transition from a predominantly rural and agricultural economy made up of largely self-contained regions to a more integrated urban-industrial economy. The productive base of the economy has been widened appreciably, and there has been substantial diversification of production in both the agricul- tural and industrial sectors. These improvements have been accompanied by rapid growth of non-traditional exports and by the development of a modern sector relying to a considerable extent on imported inputs. As a result, the country has become less dependent on coffee as a source of foreign exchange earnings and strong fluctuations in domestic economic conditions resulting from unpredictable shifts in world coffee prices, while still considerable, have become more manageable. Although substantial progress has been made during the past two decades, Colombia is still an only partially developed country with a limited modern sector superimposed on a large, traditional and economically poor base. Per capita income is low by developed world standards, unemployment is high, and in 1977, 53.3% of the rural and 34.0% of the urban population had incomes under the absolute poverty level as defined by the Bank's methodology. 1/ Substantially unchanged from President's Report, Aviation Development Project (Report No. P-2383-CO).  - 2 - 4. Colombia's population growth declined during the last two decades from 3.2% in the 1950s to 2.8% at present. Most of the decrease in popula- tion growth during this period can be accounted for by a rapid decline in the crude birth rate -- from 47.2 births per thousand persons in 1964 to 41.3 in 1968 and 31.1 births per thousand in 1975-76. A number of factors are believed to account for the declining birth rate: rising per capita income, rapid rural/urban migration, expanded economic opportunities for women and the increased effectiveness of family planning programs. Rural/ urban migration declined somewhat from the early 1960s on as progress was made in eliminating the widespread violence which had occurred in the countryside during the 1950s. As a consequence, investment, output and employment in agriculture has expanded considerably. Nevertheless, approxi- mately 64% of the current population lives in urban centers and there are now 16 cities in Colombia with population of over 100,000 persons. While Colombia's population is not considered excessive relative to the country's resource base, economic growth, particularly in the directly productive goods and service sectors where permanent jobs can be created, will have to be accelerated in order to expand employment opportunities at a pace sufficient to keep up with rapid growth of the labor force. 5. Available information suggests that there has been some improvement in income distribution in Colombia since the 1950s. These gains appear to have occurred as a consequence of a number of factors including reduced population growth, migration of underemployed surplus labor from rural areas, and rapid growth of employment in higher productivity jobs in industry and agriculture. Since 1967, policy efforts to improve the welfare of the poor have emphasized employment generation and more recently public investment in health, education, nutrition and urban development designed to reach the poorest 50% of the population. Future prospects for improvements in income distribution and in the welfare of the lower income groups appear favorable. Continued emphasis on growth of the productive sectors of the economy and on programs to encourage small-scale industry and agriculture should provide increased employment opportunties throughout the country, and rising real wages for unskilled and semi-skilled labor in both rural and urban areas. Continued upgrading of social services provided to the poor are expected to reinforce these trends and improve the level of welfare of these segments of the population. 6. The Colombian authorities introduced a dramatic change in develop- ment strategy in 1967, replacing the then existing protectionist policy of import substitution with measures designed to expand and diversify the country's exports. These policies were highly successful in expanding exports, thereby alleviating the foreign exchange constraint and making possible a substantially higher level of investment. As a consequence, real GDP rose by an average 6.5% annually between 1967 and 1974, well above the historical average. Merchandise exports expanded more than fourfold during this period, and most significantly, non-traditional exports became an increasingly important source of foreign exchange earnings, in part compensating for slow growth of receipts from coffee exports. By 1974, non-coffee exports comprised 56% of total merchandise exports, up from less than 30% in 1967.  - 3 - 7. Despite improvements in economic efficiency, strong growth of output and export diversification, the country faced some potentially serious problems at the time the new administration took office in 1974. Weakening balance of payments, in part related to the slowdown of growth in the indus- trial countries, loss of self-sufficiency in petroleum production, deteriora- tion of public finances, accelerating inflation, and declining iavestment, threatened to reduce growth of output and employment. As a consa~quence of these developments, the Government introduced an economic stabilization program which combined basic reform of the fiscal, monetary, and trade systems with measures aimed at accelerating long-term economic growth. 8. In order to strengthen public finances, the Government undertook a comprehensive tax reform designed to improve the progressivity and elas- ticity of the tax system. Distortions which had developed in the financial system caused by forced investment requirements placed on financial institu- tions and by differential tax treatment of financial instruments were elimi- nated. In order to increase the efficiency of the economy through greater reliance on market forces, price controls on a number of important agricultural products were removed, thereby providing greater stimulus for increasing farm production. Modifications in petroleum pricing policy aimed at regaining self-sufficiency in production of crude petroleum by improving incentives for explorati.on and exploitation were introduced. Concurrently, measures were taken to reduce the subsidy on local consumption of petroleum products, with the dollar equivalent price of gasoline being raised in successive steps by 175% between August 1975 and January 1978. Tariff levels and non-tariff barriers to trade were reduced significantly in order to increase external competition and the efficiency of domestic firms. While these reforms were successful in improving the public finances and reducing inflation in 1975, they also served to reduce economic growth and the slowdown of domestic economic activity which began in 1974 continued through most of 1975. Recent Economic Developments 9. During the last two years the Colombian economy has been strongly affected by developments in the external sector. As the result of a serious frost in Brazil's major coffee producing area in late 1975, coffee exports from that country declined sharply, triggering a fourfold increase in the world price of coffee by 1977. As a consequence, Colombia's export earnings from coffee increased from US$670 million in 1975 to nearly US$1.7 billion in 1977 and incomes throughout Colombia's rural areas rose sharply. Lagging supply of consumer goods, especially of basic foodstuffs, production of which was adversely affected by drought conditions in most of the country's interior, failed to keep pace with rising demand and inflation accelerated from 24% in 1976 to 45% in the twelve months ending June 1977. Inflation in Colombia has generally been moderate relative to that experienced by other countries in the region, seldom exceeding an annual rate of 20%. The magnitude of acceleration of inflation which took place from early 1976 to mid-1977 was unprecedented in the country's recent history. 10. The authorities responded rapidly by introducing a broad range of fiscal, monetary and trade policies designed to gain control over the explosive increase in prices. Beginning in late 1976 reserve requirements were raised,  - 4 - rediscounting at the Central Bank was reduced and public sector borrowing from the Central Bank was eliminated. The authorities temporarily suspended their policy of periodically adjusting the exchange rate and prices of petro- leum products. In January 1977, a 100% marginal reserve requirement was placed on increases in commercial bank deposits exceeding the December 31, 1976 level. To delay the impact of rising foreign exchange receipts on the monetary base, exporters were required to accept 90-day US dollar denominated certificates of exchange in lieu of cash payment for their exports. In order to sterilize a portion of the increase in foreign exchange earnings from coffee exports, the Coffee Federation agreed to invest a large portion of its receipts in Central Bank bonds, the proceeds of which were frozen in a special account. To increase supplies in the domestic market, a number of measures were taken to liberalize imports and food imports by the state marketing agency, IDEMA, were increased sharply. In addition, restrictive fiscal measures were introduced to curb growth of aggregate demand and the Treasury registered a budgetary surplus for the first time in recent years. 11. As a consequence of these measures, a favorable second semester harvest and a slower rate of accumulation of foreign exchange reserves, inflation declined sharply beginning in July 1977. By the end of the year, the annual rate of inflation had fallen to 29%. With inflation subsiding, periodic exchange rate adjustments were reintroduced and in January 1978 the price of gasoline was raised by 20%. 1/ With few other exceptions, however, the stabilization policies were continued in effect throughout the first three quarters of 1978 and by September 1978, inflation had subsided to an annual rate of 12.6%. 12. Despite the domestic stabilization program and the lack of dynamism in world markets, expansion of the Colombian economy increased steadily in 1976 and 1977. Growth of real GDP increased from 3.8% in 1975 to 4.4% and 5.9%, respectively, in the subsequent two years. Accelerated growth during this period was the direct result of strong expansion of domestic demand related to the rise in incomes of coffee producers. Output of the industrial and service sectors responded strongly to rising demand, while agricultural output, adversely affected by the drought, showed only negligible increases in both years. Because strong growth occurred in relatively labor-intensive sectors of the economy (manufacturing, commerce and services), the urban unemployment rate declined to an estimated 8% by the end of 1977, from an average 12% during the first half of the 1970s. In addition, there is evidence of labor shortages and rising real wage rates in rural areas during this period, and it is believed that rural unemployment also declined. 13. World coffee prices have declined since their 1977 peak and are now moving back toward their real historic average. The 1976-77 boom in world coffee prices has left Colombia with an unprecedented level of foreign exchange reserves, US$2.0 billion through mid-1978, equivalent to nearly one year's merchandise imports at the current rate. While public 1/ Gasoline prices were raised by an additional 33% effective October 12, 1978.  finances also benefitted from the surge in coffee revenues, non-coffee tax collections, especially from the income and wealth taxes, have lagged behind growth of nominal GDP. Public investment expenditure was curbed during the past two years as part of the stabilization effort and will now have to be expanded so as not to further delay execution of important projects aimed at improving the country's social and economic infrastructure. Non-coffee tax revenues will be one of the major sources of financing of such investment and it is expected that they will be strengthened as tax proceeds from coffee exports continue to decline. Development Strategy and Prospects 14. The development strategy embodied in the 1975-78 Development Plan aimed at accelerating the rate of growth of GDP and at distributing the benefit of such growth more equitably. This was to be achieved by increasing the allocative efficiency of the economy through greater reliance on market forces, by providing incentives for increasing private sector investment, by expanding economic and social infrastructure, and by improving public services provided to the poorest half of the population. Substantial progress has been made in carrying out this strategy during the past three years. Public sector investments have focused increasingly on projects designed to alleviate rural and urban poverty and on expanding and improving infrastructure. Compre- hensive integrated rural development and nutrition projects aimed at increasing incomes and welfare of the lowest income groups have been introduced. Urban development projects designed to provide improved services and employment opportunities to residents of slum areas in Colombia's major cities have been initiated to alleviate urban poverty. These programs have been complemented by policies to encourage the development of small- and medium-scale enterprises and to decentralize industry away from the three largest cities. This latter policy, together with credit programs designed to increase output and employ- ment in agriculture, have been designed to alleviate rural poverty and reduce rural/urban migration. Public sector infrastructure investments have been concentrated on improvement and extension of highway and communications systems. Special priority has been given to the development of domestic energy sources to reduce the country's growing dependence on imported oil. 15. Increased emphasis on provision of improved social services is reflected in the increased proportion of National Government expenditure on education, health, and water and sewerage systems, which rose from 33% in 1974 to 38% in 1977. The economic dislocations caused by the coffee boom and the need to concentrate economic policy on short-term management problems have limited expansion of public and private invest- ment and required temporary suspension of some of the measures designed to free the price system and stimulate growth of non-traditional exports. 16. The new Government in Colombia which took office in August, is now in the process of formulating its development strategy. Recent statements by the authorities indicate their intention to continue with the same basic development strategy as the past administration. Increased emphasis is to be placed, however, on achieving more balanced growth through expansion of infrastructure in the country's least developed regions, and  on stimulating growth and diversification of non-traditional exports, especially foodstuffs. With import substitution opportunities largely exhausted and given the relatively limited size of Colombia's domestic market, renewed emphasis on export led growth is expected to provide a firm basis for sustained increases in output and employment. 17. Given the country's strong resource base and its high level of international reserves, Colombia should be able to achieve annual real GDP growth of between 6% and 7% during the 1978-82 period. Maintenance of this level of growth will require rapid expansion of non-coffee exports and increases in savings and investment rates. Public sector investment is expected to expand rapidly during this period because of the large unmet needs for infrastructure, social services and energy development. Financial requirements for this higher level of investment will be substantial and public sector savings will have to be sustained at the current high levels. Given the continued decline in coffee revenue which is expected, improvements will be required in administration of non-coffee taxes. Of equal importance is the continued upward adjustment in prices charged for the goods and services provided by the public decentralized agencies. Growth of non-coffee exports, especially of manufactured goods, will no doubt be strongly influenced by the rates of economic growth of Colombia's major trading partners, but appropriate domestic incentives will play an even more important role in expanding exports. In this regard, it is expected that Colombia will follow an exchange rate policy designed to maintain the competitiveness of Colombian exports and that additional export promotion measures will be adopted to encourage both product and market diversification. 18. Greater efforts to increase efficiency and production in the agricultural and industrial sectors will also be needed to complement incentives given to non-traditional exports. Programs to meet these needs in the agricultural sector, including integrated rural development, expansion of farm credit, improved research and extension services, and upgraded marketing facilities, are already in place and will need to be strengthened. Accelerated development of the country's capital markets is expected to increase private savings and improve allocation of financial resources and thereby provide the basis for more rapid growth of industry. Ongoing and future infrastructure investments by the public sector should facilitate improvements in economic efficiency and lead to more rapid growth of output and employment in both industry and agriculture. 19. Projections of Colombia's energy balance indicate a rapidly growing deficit that is expected to reach significant proportions in the early 1980s in the absence of an aggressive energy development program. To avoid the constraint on growth that large scale shortages of energy would entail, high priority is being given to the development of additional energy sources. The strategy which is being pursued is to reduce the nation's dependence on petroleum as an energy source by developing substitutes such as hydropower, coal and natural gas. Major projects are being executed and others prepared to expand hydroelectric power generation and incentives are being given to private foreign companies for accelerated exploration and development of the country's hydrocarbon potential. Exports of coal  - 7 - and natural gas are expected to offset a portion of the large petroleum imports projected for the mid to late 1980s. Conservation of existing resources resulting from higher energy prices is expected to slow the growth in energy demand. While the total investment cost of future energy development is still being determined, preliminary estima,s Ladicate th_. the required investment could run as high as US$8.0 billion in current prices over the next decade. Even under the most optimistic assumption regarding foreign private investment, suppliers' credits and domestic resource mobiliza- tion, external credits of about US$4.0 billion would be required in this sector alone during this period. Any significant delay in implementing the country's energy development program would most likely have serious adverse repercussions on future economic growth. 20. Because of the expected continued decline in world coffee prices, accelerating oil imports and the high import content of future investment projects, the current account of the balance of payments is expected to be in deficit throughout the early to mid-1980s. Increased mineral exports including coal, natural gas, and nickel, and completion of the large invest- ments in energy development are expected to relieve the pressure on the balance of payments by the late 1980s. Colombia is expected, therefore, to continue to be a large net importer of capital for some time to come. Its future external resource requirements reflect the need to supplement domestic savings in order to carry out the public sector investment program and to provide increasing amounts of foreign exchange to finance required imports of capital and intermediate goods. Assuming that the Colombian authorities permit a drawdown of international reserves to the equivalent of three months' imports in the years immediately ahead, gross external capital requirements are projected at US$4.7 billion between 1978 and 1982, or an annual average of about US$950 million. About half of Colombia's capital inflow during this period is expected to be provided by official multilateral and bilateral sources, with commercial finance credits becoming increasingly important. 21. Colombia's public external debt repayable in foreign currency amounted to US$3.6 billion at the end of 1977, of which US$2.6 billion was disbursed and outstanding. The Bank/IDA share of this external debt was 28% and is expected to rise to 30% by 1982, before declining to 27% by 1985. Although the public debt service ratio fell during the past two years as export growth accelerated, this ratio is expected to increase from 9.9% in 1977 to about 11.5% in 1982. Balance of payments prospects beyond 1980 will depend heavily on the timely development of domestic energy sources and on progress made in executing several natural resource- based export oriented projects currently under preparation. Given the expected continuation of sound economic and financial management and timely execution of the country's energy program, it should be possible to prevent the external sector from again becoming a constraint on economic growth and to maintain Colombia's creditworthiness for the required external borrowing.  - 8 - PART II: BANK GROUP OPERATIONS IN COLOMBIA 22. The proposed loan, the 77th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$2,023.2 million (net of cancella- tions). Of this amount, US$1,477.5 million is now held by the Bank; IDA made one credit of US$19.5 million for highways in Colombia in 1961. Disbursements have been completed on 46 loans and the IDA credit. IFC has made investments and underwriting commitments of US$53.7 million in 24 enterprises and now holds US$18.5 million. Annex II contains a summary statement of Bank loans and the IDA credit as of August 31, 1978, and IFC investments as of September 30, 1978. The Annex also contains summaries on the execution of the 29 on-going projects. 23. Since FY68, Bank lending in Colombia has become more diversified and has been concentrated on production-oriented programs and activities which emphasized social as well as economic benefits. Eight of the eleven agricul- tural loans have been made since then, nine of the twelve loans for industry, all three loans in the education sector, all seven loans for water supply and sewerage, one loan for a nutrition project and one loan for an urban development project. This compares with only nine loans since FY68 in the power and transport sectors. 24. Bank lending to Colombia in FY78 consisted of loans for nutrition improvement, water and sewerage, urban development, power generation and interconnection, development finance companies and development of an export processing zone, totalling US$354.6 million equivalent. In addition to the proposed project, the FY79 program includes the recently approved aviation development project and proposed loans for water and sewerage, further urban development, mining, coal engineering and agricultural credit for land reform beneficiaries. Work is also under way in medium-city water supply systems, slum improvement, transportation, further mining development, power, including rural electrification, small farm development and industry for possible consideration by the Executive Directors during the next two years. 25. The proposed Bank lending conforms closely with the Government's development strategy. To help Colombia develop domestic sources of energy, a substantial part of the proposed lending would be for hydropower. The Bank would also assist the development of coal mines, which hold potential in helping Colombia meet part of its energy requirements and in diversifying exports. Bank involvement in the energy sector would help mobilize additional external financing as some of the projects would require co-financing. Other future loans would finance agriculture and industry to assist the Government in its efforts to raise overall productivity, income and employment, and to strengthen and diversify exports. Closely related to these objectives would be the proposed Bank lending for transport infrastructure in more backward areas of the country to integrate them into the modern economy. In this context, we are assisting the Government in preparing a rural and feeder roads project. Finally, a relatively large number of loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. The proposed urban development and slum improvement, rural electrification, small farm development, credit for land reform beneficiaries and water supply and sewerage projects are principally designed to improve the standard of living of the poor.  - 9 - 26. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB, and AID provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approxi- mately 48%. Like the Bank, IDB and AID have given increased emphasis to social projects. For instance, the IDB has assisted projects in low cost housing, urban and rural development, agrarian reform, university education, water supply, and land erosion control; in the future IDB proposes to assist Colombia in its plans to develop sources of domestic energy and to expand the activity of the productive sectors to help generate increased employment. AID has supported programs in education, urban development and small farm development. More recently, it has moved to small project loans aimed chiefly at improving the distribution of income. It is expected to phase out its aid program in Colombia in 1979 with the commitment of a US$6 million nutrition loan. PART III - THE ENERGY SECTOR AND POWER REQUIREMENTS Energy Resources and Requirements 27. Colombia is endowed with substantial primary energy resources (hydropower, natural gas, petroleum and coal), the most promising of which is hydropower, estimated at a potential 100 GW, of which only 2.3% have been developed to date. Coal resources have been barely explored, but reserves are estimated to range from 20-40 billion metric tons, at which level they would be the largest in Latin America. A recent discovery of natural gas in the Guajira Peninsula, amounting to 3.5 trillion cubic feet, has brought proven reserves to a level well above 5 trillion cubic feet. On the other hand, because of insufficient exploration, known reserves of crude oil have fallen and are estimated to amount to less than nine years of 1976 output. However, only one of Colombia's nine sedimentary basins (the Magdalena River Valley) has been explored on a systematic basis, although the state oil company, ECOPETROL, in association with foreign oil companies, is now explor- ing other basins. Additionally, investigation of nuclear, geo-thermal and solar energy is underway. 28. Since 1965, output of primary energy has lagged behind overall economic growth, mainly because of declining crude oil output. By 1975, production of crude (321 trillion Btu) had fallen to 78% of 1965 output and 72% of the 1970 level. While over 1965-75 total energy output increased by 3.6%, from 603 trillion Btu to 625 trillion Btu annually, energy consumption increased by almost 80%, rising from 275 trillion Btu to 489 trillion Btu. (Exports and losses account for the difference between production and consump- tion figures.) By 1976, hydrocarbon imports exceeded exports by US$35.6 million equivalent. Projections of Colombia's energy balance indicate an expanding deficit that could reach significant proportions in the early 1980s and become a constraint on economic growth (paragraph 19). Energy Development Objectives and Strategy 29. As stated, the Government's objective is to overcome the energy deficit by developing domestic energy sources and by promoting rational use of them. To this end, it has adopted several measures. First, it has recast  - 10 - its hydrocarbon pricing and regulation policy to stimulate output of petro- leum, natural gas and coal. Foreign oil companies have reacted favorably to these measures and have initiated new explorations. Second, CARBOCOL, a Government agency established to develop the country's coal resources, has concluded contracts with various foreign companies to undertake exploration and development of several coal fields, particularly the largest, El Cerrejon, in the Guajira region. Third, considerable substitution of gas for petroleum products in industry and thermal power generation is being carried out on the Atlantic Coast. Fourth, a program for expansion of power generation and transmission facilities to meet forecast demand over the 1977-84 period has been drawn up (paragraphs 37 and 38). Fifth, the Government has concluded a contract with the French Minatome Group to explore the country's uranium potential. Lastly, the Government has adopted a policy calling for charging the full cost of energy to consumers in order to promote rational energy use and self-generate an important share of the financial resources required for investment in the sector (paragraph 36). The Power Market, Service Levels and Institutional Framework 30. Electric power is the fastest-growing form of energy in Colombia. Its share of total energy consumption has risen from 14% in 1960 to 24% in 1975. Colombia's installed capacity at the end of 1976 was 3,300 MW, includ- ing self production; hydro stations account for 68% of total energy generated. Since 1967, production of electricity has been growing at an annual rate of 10.5%, i.e., one and three-fourths times as fast as the growth rate of GDP. Power sales have also been rising rapidly (9.2% per annum since 1972). Annual per capita electricity generation stands at 600 kWh, which is below the average for Latin America. Households (42% of the total), industry (35%) and commerce (13%) are the major electricity users. 31. About 60% of Colombia's 24.2 million population has electricity. The urban population, in 1977 estimated to be about 64% of the population, has greater access to electricity. 1/ In 1976, for example, 85% of households in large cities (population of 50,000 or more) had electrical service while in rural towns (population between 50-2,500) the corresponding figure was 36%; in other rural areas, 16%. With the assistance of external lenders, the Government is carrying out programs to increase the supply of electricity to rural areas. 32. The Ministry of Mines and Energy is charged with formulating national policy for power generation, transmission and distribution. In defining investment priorities, it shares responsibility with the National Planning Department (DNP). The Government cannot enforce its policies directly on the municipally controlled power companies, but Interconexion Electrica, S.A. (ISA), a generating and transmission company controlled by the largest municipal power companies and by the Government-owned national power companies, provides a mechanism for reaching agreement on major issues affecting the sector. ISA's role in the sector has been strengthened during preparation of the San Carlos Hydropower Project (Loan 1582-CO, July 14, 1978), in spite of certain original reluctance by the shareholders. 1/ Residents of cities with 2,500 or more inhabitants.  - 11 - Its by-laws were amended to the effect that in the future the entity will be responsible for (a) planning expansion of the interconnected system (paragraph 33) and (b) constructing and owning all future generating plants in the system except for those of regional interest, such as Mesitas, which may be undertaken by the shareholders after approval by ISA. 33. The development of Colombia's power sector has been assisted by the gradual consolidation of isolated facilities into regional systems and the interconnection of these systems, through ISA, to facilitate development of low-cost hydro resources. The entities which provide electricity service comprise: (a) independent municipal companies, of which the largest are Empresa de Energia Electrica de Bogota (EEEB), Empresas Publicas de Medellin (EPM) and Empresas Municipales de Cali (EMCALI); (b) entities under the national Government, the most important of which are Corporacion Autonoma Regional del Cauca (CVC), Corporacion Electrica de la Costa Atlantica (CORELCA), and Instituto Colombiano de Energia Electrica (ICEL), all of which have numerous local subsidiaries; and (c) ISA, the shareholders of which are EEEB, EPM, CVC, CORELCA and ICEL. 34. Public utility tariffs are regulated by the Junta Nacional de Tarifas de Servicios Publicos (JNT) in the DNP. JNT, which was established in the late sixties with Bank support, has the power to approve requests from the power companies for tariff increases. The power companies, however, are free to set rates lower than those approved by JNT and have sometimes done so. Power Development and Its Financing 35. Colombia's power sector has developed rapidly. Between 1950-1977 installed generating capacity increased by 3,000 MW or thirteenfold. A substantial part of this expansion was financed with internal cash generation (in the case of the large municipal companies, which were responsible for half of the expansion, about 40% of total capital outlays) and with contribu- tions from the National Treasury, chiefly to ICEL, CVC and CORELCA. The Bank and IDB were the main source of foreign financing for the power sector (US$607 million equivalent combined), although in recent years suppliers' credits increased their participation. From 1971-74, power rate adjustments lagged behind cost increases and the companies' finances deteriorated. As a result, construction of new works was delayed and the operating efficiency of the companies suffered. 36. Beginning with 1975, rate adjustments have accelerated, with average yearly increases through 1977 marginally exceeding average annual inflation. Investment outlays have once again increased and in 1975 totalled US$187.6 mil- lion equivalent, i.e., 31% over the preceding year. In early 1978, the Govern- ment and the major power companies initiated a program of tariff increases  - 12 - aim of generating an adequate portion of investment funds for planned expan- sion. In line with this, average tariff levels in companies accounting for the bulk of sales in the sector will have been increased by some 37% by the end of 1978, with further increases of 33% already approved for 1979. To ensure a satisfactory level of self-financing in subsequent years, the major companies have adopted a policy of maintaining satisfactory annual rates of return on revalued assets. Power Requirements and Proposed Investments 37. Over 1977-84, power requirements in the interconnected system are projected to grow at 10.6% per annum, i.e. slightly faster than in the past. To meet this demand, effective generating capacity would have to be increased by 130%, or about 4,300 MW; of this, about 540 MW were completed in 1977 and 2,040 MW are under construction. 38. Investments in generation and transmission during 1977-84 are expected to amount to about Col$250 billion in current prices (about US$5 billion in 1976 prices), some 60% of which would be foreign exchange. This includes the start of construction of projects that will form part of the 1985-90 expansion program. To provide for an orderly expansion of the sector, ISA and its shareholders will start shortly the preparation of a power sector development master plan covering the period 1980-90 in detail, and 1991-2000 in more general terms. The Bogota Power Market 39. The city of Bogota and its suburbs account for most of EEEB"s sales. At the end of 1977, EEEB served 481,700 customers, who in that same year consumed 3,174 GWh. Households (39% of the total), commercial (19%) and industrial (31%) are EEEB's major customers. The company's sales have been growing rapidly, at an annual rate of 10.8%, i.e., faster than the national average of 9.2% per annum. In line with the country's favorable economic outlook and Bogota's growing urbanization, EEEB's gross energy requirements are expected to rise somewhat faster in the future (about 11% per annum). Upon commissioning in 1982, the Mesitas facility will provide energy equiva- lent to EEEB's projected incremental energy demand through 1983 and most of 1984. Beyond 1984, however, EEEB will depend on electricity purchases from ISA to meet its gross energy requirements (it is expected that Mesitas will become fully utilized as soon as it enters into service). Bank Participation in the Power Sector 40. Since 1950, the Bank- has made 20 loans to Colombia's power sector, totalling US$526 million. Sixteen loans have assisted the expansion of gene- rating capacity and transmission and distribution facilities in the systems serving Bogota, Medellin, Cali, Cartagena, Bucaramanga and Manizales, includ- ing expansion of electricity distribution to low income areas (874-CO, 1973). In addition, the Bank has supported rural electrification under loans 246-CO (1960) and 313-CO (1962), and under the ongoing Integrated Rural Development Project (1352-CO, 1977). The most recent lcans, for the 500 kV Inter- connection Line and the San Carlos I Hydropower Projects (Loans 1582-CO  - 13 - and 1583-CO, July 14, 1978) would, respectively, complete the task of interconnecting the country's regional power systems begun under 575-CO (1968), and add 620 MW of hydro capacity to the national interconnected system. 41. EEEB has received three Bank loans, totalling US$85.6 million equivalent, in support of three separate generation, transmission and distri- bution expansion programs. The first two loans (246-Co, 1960; and 313-CO, 1962) assisted in financing the addition of 305 MW to hydro and thermal plant capacity, transmission lines and distribution system expansion. The works financed included the rebuilding of distribution networks in several, mostly rural, towns near Bogota, as well as expansion of rural sub-transmission. The third loan (537-CO, 1968) supported a 200 MW increase in EEEB's hydro plant capacity, and expansion of transmission and distribution facilities. Despite delays, all works under the three projects were successfully carried out. A Project Performance Audit Report (SecM77-536, June 1977) of Loan 537-CO observed that project objectives had been met, both in terms of project execution and institutional performance. With respect to financial perform- ance of the utility, EEEB had exceeded the 9% covenanted annual return on partially-revalued assets. Moreover, despite the fact that the cost of total investments for the Third Expansion Program (1968-74) were substantially higher than anticipated at the outset, EEEB was able to generate from revenues a satisfactory 45% of total costs. 42. Past Bank lending to Colombia's power sector was reviewed in the OED report entitled "Bank Operations in Colombia, an Evaluation" (Report No. Z-18) of May 25, 1972. The report concluded that Bank financing was successful in assisting the power companies to develop hydroelectric plants at lower unit cost than they otherwise would have been able to do. In turn, this permitted greater urban coverage as well as cheaper and more reliable electricity supply to industry. The report commended Bank efforts in the establishment of JNT and the central interconnected system which facilitated further power sector development. Among other things, the report recommended that in the future the Bank pay increased attention to the companies' finan- cial planning, tariff structures and energy losses. These points have been addressed under the aforementioned recent loans for power development. Complementary measures are provided for under the proposed project. PART IV: THE PROJECT Background and Objectives 43. The project, prepared by EEEB through consultants (Ingetec, Colombia), will provide approximately 24% of the planned increase in national generation capacity during 1978-82. The project was appraised by Bank missions which visited Colombia in December 1977 and in January 1978. Negotiations were held in Washington, D.C., during the week of September 18, 1978, with a Colombian delegation led by Miss Leonor Montoya, Director of Public Credit, and Mr. Roberto Caceres, General Manager of EEEB.  - 14 - 44. The objectives of the project are: (a) to satisfy part of forecast power demand at least cost; (b) to minimize the risk of earthquake damage to an existing dam (Sesquile); and (c) to strengthen EEEB's financial planning and management capacity. Project Description 45. The project comprises: (a) construction of the Mesitas hydropower development; (b) remedial work on the Sesquile dam; (c) a study of the value of EEEB's assets; and (d) provision of a senior financial advisor to assist EEEB with financial planning and management, and the establishment of training programs for EEEB's key financial staff. 46. Mesitas. The precipitous fall of the Bogota River west of the city of Bogota permits the development of an unusually low cost power generation project (Mesitas), which consists mainly of tunnels and penstocks connected to two surface powerhouses having a total capacity of 600 MW. The tunnel alignment and the two powerhouses would be situated southward of, and generally parallel to EEEB's four present hydropower plants along the Bogota River. The water for Mesitas will be provided by the first stage of the Chingaza water supply project for Bogota, financed partly by Loan 747-CO in 1971, and will increase EEEB's annual average hydro generation from 2,320 GWh to 4,305 GWh. The Mesitas works consist of: (a) the El Paraiso power plant, the first downstream of the two plants, with water supplied through a 1.4 km tunnel, a 379 m syphon, an 11.1 km tunnel, and a 4 km penstock. The power- house will contain three 90 MW units; (b) the La Guaca Power Plant with water supplied through a 373 m tailrace tunnel from El Paraiso, a 171 m shaft, a 1.3 km tunnel, a 3.3 km penstock, a 187 m shaft, and a final 2.1 km tunnel. The powerhouse will contain three 110 MW units; (c) an additional pumping station for the existing Muna head pond with three 10,000 horsepower pumps and a 412 m x 3.5 m diameter steel penstock; and (d) a double circuit 230 kV, 8 km transmission line linking the El Paraiso and La Guaca plants; a double circuit 230 kV, 6 km line linking the plants to the ISA central network; and a double circuit 230 kV, 86 km line linking the plants to EEEB's La Torca substation east of Bogota. 47. Sesquile. The Sesquile dam, financed in part through Loan 246-CO in 1960, is located on the Siecha River just upstream from its confluence with the Bogota River, approximately 56 km from Bogota. The reservoir (Guatavita) provides 74% of the storage available for power generation in the Bogota River system of power plants. The dam is an earthfill structure founded on sand  - 1S - dumped into a dredgc.d era: tior Following the dam's completion, observation of liquification failures Luring eartiaquakes in Japan in 1964, Alaska in 1964, and California in 1971 led to a much better understanding of liquefaction in loose sands during earthquakes. Foundauion liquefaction and consequent slumping of the Sesquile dafm are possible under seismic conditions originating from an active fault 45 kiloneteris distant. ALthough the ribk of such a failure is slight, there is no renponsit'ie option other than to proceed with appropriate strengtheoling -t cf 6ar- rhe strengthening works will comprise construction of stabilizirig bcrns upSt.r eam and dowrnstream of the dam, and densification of loose sand underlying the downstream berm through a series of vertical and horizontal drains. About 1.4 milliod m of earthwork will be required. 48. Asset Study. Qualified consultants will be employed to carry out a study to obtain a new valuation of its fixed assets (paragraph 63). 49. Financial Advisor and Training. A senior financial advisor will be engaged to assist EEEB with financial planning and management, and training will be provided for EEEB's Key financial staff (paragraph 55). Costs and Financing 50. Total project cotr ' 3 .:u;d atV US$260.8 million equivalent, of which US$148.4 million, or about c,7. correspoind to the foreign exchange component. Costs for the Mesitas and Sesquile works are based upon estimates prepared by Ingetec for EEEB, including two already-awarded civil works con- tracts covering approximately 90%". of the Mesitas civil works (paragraph 65). Price contingencies, equivalent to about 30% of base costs, reflect estimates of yearly price increases. Physical contingencies amount to approximately 26% of the base cost of the underground works, 14% for surface works and 10% for equipment. The cost of consulting services for engineering and construction supervision, most of which will be provided by local consultants, includes 4,720 man-months at an average base cost of US$3,475 per man-month. Consultant services for the asset study, which are assumed to be foreign, are based on 35 man-months at US$8,000 per man-month, including travel costs; the senior finan- cial advisor represents US$100,000; and training for EEEB's financial staff, US$20,000. The asset study and financial advisory services would be provided by consultants whose qualiFicationis, experience and terms and conditions would be satisfactory to the Bank and ELEB (Section 3.02 of the draft Loan Agreement). 51. The proposed loan >'L uai LItion would finance 32% of total project cost (57% of the projecni i toreign exchange cost). The remaining foreign exchange costs would be .covered by an already-secured loan of US$10.2 million equivalent from the Colombian Electricity Fund, while US$54.2 million is expected to he c-financed by foreign commercial banks (paragraph 58). Local costs, US, m million equivalent, would be financed by EEEB through internally gen.erated funds and commercial borrowings. Effec- tiveness of the proposed IURt) lee-, vr- ld be conditioned upon receipt of evidence that EEEB has madea ; nba saicsfactory to the Bank, for the balance of project financiag (SectiLon 8.01 of the draft Loan Agreement).  - 16 - 52. The Bank loan would finance: (a) 73% of the foreign exchange cost of underground civil works and 14% of the foreign cost of major equip- ment related to Mesitas, together with 100% of the foreign exchange cost of engineering, above-ground civil works, equipment for the pumping station, transmission lines, equipment erection and other small items; and (b) 100% of the foreign exchange cost of the Sesquile Dam strengthening and of the asset study, senior financial advisor and training services. The Borrower, EEEB 53. EELB is an autonomous company owned by the Municipality of the Special District of Bogota. It was established by private Colombian interests and has operated the city's electric service for the past 77 years, since 1951 under municipal ownership. It has an installed capacity of 689 MW, 80% of which is hydro and the balance coal-fired thermal. 54. EEEB is administered by a seven-member Board of Directors and a General Manager appointed by the Board. The General Manager is responsible for day-to-day operations and is assisted by four Assistant Managers heading, respectively, the administrative, financial, technical and operations branches of the organization. The Board of Directors is headed by the Mayor of Bogota, and consists of two members elected by the Municipal Council, three members chosen by the Council from lists submitted by associations representative of banks, commerce, and industry in Bogota, and one member chosen by the President of Colombia. This composition was worked out in connection with the Bank's initial loan to EEEB (246-CO) and has generally proven to be satisfactory. 55. Although EEEB has had a history of stable and competent management, there has been a considerable turnover among its senior management in recent years. As a result, the number of experienced senior officers are now few and they are mostly engaged in the technical and engineering aspects of the company. Although day-to-day financial operations continue to function satisfactorily, the financial staff needs strengthening to be able to take care of the company's increasingly complex financial planning and debt management. Accordingly, the proposed project provides for a senior financial advisor to assist with financial planning and management, and for training programs for key financial staff (Section 3.02(c) of the draft Loan Agreement). 56. EEEB had 2,225 employees at the end of 1977, including a technical staff of 102, an administrative staff of 601, and 1,522 operations persornnel. The history of the company's staff growth over the past ten years in relation to the number of customers served and energy sold shows a steadily improving trend, 216 customers and 1587 MWh per employee in 1977 compared with 174 customers and 1021 MWh per employee in 1968. These figures compare favorably with those of electric utilities serving similar markets. 57. Finances. Over its 18-year relationship with the Bank, EEEB has maintained a satisfactory financial position. Its internal cash generation during the past ten years has provided more than 50% of its annual invest- ment needs, including substantial recent contributions to ISA. The balance of the company's investment funds have been obtained through borrowings, most of which have been secured from IBRD and IDB; no government funding has been required.  - 17 - 58. At the end of 1977 EEEB's debt to equity ratio was 35/65 calculated on the basis of revalued assets, with over 80% of the debt in long-term obli- gations to the Bank and the IDB. The Company's debt service coverage ratio for 1977 was 2.4. The favorable structure of EEEB's debt and its program of tariff increases through 1980 (paragraph 60) place it in a good position to obtain the additional debt financing which it will need from commercial sources over and above that envisaged to be provided by IBRD. Several commer- cial banks have made formal offers of a co-financing operation with the Bank to EEEB, which would cover the remaining foreign exchange cost of the Mesitas project. The most favorable proposal received thus far by EEEB is for 12 years, including 5 years of grace; interest at 3/4% over LIBOR for the first three years, 7/8% over LIBOR for remaining term; management fee 0.5%; commitment fee, 0.5%. 59. EEEB's total financial requirements for 1978-82 are estimated at US$929 million equivalent and consist of: (a) the planned investments in the Mesitas and Sesquile facilities (the proposed project); (b) investments to modernize and expand the Company's subtransmission and distribution system (US$277 million); (c) investments in new central facilities (US$21 million); (d) interest during construction (US$41 million); (e) investments in ISA, mainly for construction of new generating facilities (US$296 million); and (f) increases in working capital (US$34 million). Approximately 55% of these funds are expected to be generated internally by EEEB from revenues and direct capital contributions from users. The balance would be obtained through borrowings, mainly from international sources, including the proposed US$84 million equivalent Bank loan. 60. The projected cash generation in EEEB's financing plan is based on the Company's approved program of tariff increases through 1980, and on the assumption that the end-1980 tariff level will be maintained in real terms thereafter. The tariff program calls for an across-the-board increase of 2.2% each month through the end of 1980, and was approved by JNT in October 1977. The program also includes one-time increases of 8.0% to residential rates and 15.0% to all other rates which took place on May 1, 1978. The resultant real increase in the average rate from January 1, 1978 to January 1, 1981 would amount to an estimated 54% for the period. 61. EEEB's net operating income with the above program is expected to produce rates of return on estimated fully revalued assets ranging from 7.8% in 1978 to 16.8% in 1981, and then declining back to 12.4% by 1984. These rates of return are consistent with that agreed upon by EEEB in the Shareholder's Agreement for the San Carlos Hydropower Project (Loan 1582-CO of July 14, 1978), since, on average, they are expected to produce a rate of return on fully revalued assets of not less than 12% annually over 1978-80 and thereafter (Section 5.06 of the draft Loan Agreement). At the same time, in order to ensure adequate internal cash generation, EEEB has agreed to achieve annually a 73% cumulative ratio of internal cash generation as a percentage of total investments in fixed assets and contributions to ISA over 1981-84 (Section 5.05 of the draft Loan Agreement). These performance targets are consistent with the aforementioned tariff program (paragraph 60).  - I.0 - 62. EEEB's debt service coverage ratio during 1978-80 is projected to be above 3 times as a result of the substantial revenue increase projected and the grace period of the foreign borrowings obtained during the period. In subsequent years, the ratio is expected to fall to about 2.5 times, which would still be satisfactory. EEEB has agreed that, unless the Bank should otherwise agree, it would not incur debt in any fiscal year which would reduce the coverage of its maximum future debt service by internal cash generation below 1.5 times (Section 5.08 of the draft Loan Agreement). It is expected that the company's debt/equity ratio will increase slightly from the current proportion of approximately 34/66 during the next two years, and decline to 31/69 by the end of 1984. Lastly, to ensure adherence to the financing plan until project completion, EEEB has agreed not to undertake, without prior agree- ment of the Bank, investments in any year in excess of 1% of the value of its net fixed assets in service other than for (a) the proposed project, (b) any other generation expansion in excess of 100 MW which would be justified as part of the national least-cost expansion program and for which adequate financing would be available, (c) its obligations to ISA, and (d) transmission/ distribution expansion up to US$45 million equivalent in each of the years 1979-82 (Section 5.04 of the draft Loan Agreement). 63. Notwithstanding the satisfactory financial performance expected as a result of the above measures, the real value of EEEB's assets, as opposed to the estimated value which resulted from the company's first attempt in 1977-78 to revalue fully, has not yet been clearly determined. The proposed project, therefore, provides for a study to be carried out, by March 31, 1980, to serve as a basis for determining in agreement with the Bank: (a) the current value of net fixed assets in operation and works in progress, (b) a method for annual revaluation, and (c) by September 30, 1980, the advisability of revising the required annual rate of return (Section 3.02(b) of the draft Loan Agreement). 64. Tariff Structure. EEEB's average tariff level has 'been improving and is scheduled to continue doing so, in real terms, over the next two-and- one-half years. However, its tariff structure is distorted. EEEB's charges to industrial and commercial electricity consumers are higher than the corresponding residential charges, even though the cost of residential service would be at least equal to the cost of service to industrial or commercial customers. Since late 1977, the gap between residential and other rates has widened by the allocation of a smaller portion of overall tariff increases to the residential category and by the exemption of residential consumers using less than 300 kWh per month from tariff increases. A study on cost of service to final consumers and pricing implications, to be carried out under the San Carlos Hydropower Project, is expected to detail the precise dimensions of the structural imbalance. In view of the importance to the energy sector, and to the Colombian economy as a whole, of minimizing distortions in energy pricing structure, EEEB has agreed to take account of the study's recommendations and to establish a program in agreement with the Bank to correct this problem in its tariff schedule (Section 5.09 of the draft Loan Agreement). Such program would revise the structure of EEEB's tariffs and rates so that the aggregate cost of service to each category of consumers (residential, industrial, commercial and governmental) would be covered approximately by the aggregate price charged to each category. It is anticipated that the revised schedule would also take account of the government's income redistribution policies with respect to the lowest-income consumers.  - 19 - Procurement, Implementation and Disbursements 65. All the items to be financed by the proposed loan (except for con- sulting services) have been, or would be procured through international compe- titive bidding (ICB) under Bank guidelines. Approximately 90% of the Mesitas civil works have been under contract since September 1977. The largest part of these, the tunnel and shaft works, for which the proposed loan would cover US$28.1 million in foreign exchange costs, was contracted under ICB consistent with the Bank's guidelines with Impregilo (Italy). The power shortage projected for the early 80's made it imperative for EEEB to proceed with the work even though no assurance of financing from the Bank was available. 1/ If EEEB had been required to delay the start of the work until approval of the proposed Bank loan, at least 800 GWh of electricity would have been lost in 1982, approximately 15% of the estimated Bogota requirement. This would have caused severe power rationing. 66. EEEB is expected to contract the remaining civil works for Mesitas and the civil works for the Sesquile Dam as well as to procure all the equip- ment under ICB consistent with the Bank's guidelines. Colombian manufacturers have bid for some of the equipment contracts with an estimated total cost of about US$15 million equivalent. They would be given a preference of the lower of 15% or the applicable custom duty for bid evaluation purposes. Project works are expected to be completed by December 31, 1981. 67. The loan would be disbursed over three-and-a-half years. Disburse- ments would be for: (a) 100% of the foreign expenditures for underground civil works; (b) 100% of foreign expenditures for other civil works awarded to foreign contractors, or 26% of total expenditures, representing the foreign cost of locally-awarded contracts; (c) 100% of the foreign expenditures for equipment erection contracts and imported equipment, or 94% of the ex-factory cost of locally-manufactured materials and equipment; (d) 8% of the cost of consultant services for engineering and construction supervision (based on the estimated foreign costs of these services); and (e) 100%, representing the foreign cost, of the asset valuation study, financial advisory, and training programs for financial staff. All disbursements would be fully documented. The loan is expected to be fully disbursed by June 30, 1982. Benefits and Risks 68. With an estimated growth in power requirements of about 11% per year, the total number of customers served by EEEB would increase from 481,700 1/ In September 1977 when EEEB let the contracts, the chances for resolving the outstanding issues affecting the then appraised San Carlos I Hydro- power and 500 KV Interconnection Projects (mechanism for centralized planning, construction and ownership, and operation of the national interconnected system, sector financial performance, and fuel subsidies to CORELCA) within a reasonable period of time, appeared slim. Under these circumstances, therefore, the Bank was not prepared to appraise the Mesitas project. These issues were finally resolved in November 1977 and the Bank proceeded with the Mesitas appraisal in December 1977.  - 20 - in 1977 to approximately 752,200 in 1982. Of the 270,500 new connections, 235,300 would be residential, including over 40,000 in the lowest income category (those consuming less than 100 kWh/month). Without Mesitas, the needed expansion in service would be drastically curtailed and severe power rationing would be required. Even with the planned expansion, capacity margins will be low through 1985, and load shedding will be likely during poor hydrological periods. 69. An internal rate of return of 10.4% on the Mesitas Project was calculated using as a proxy for benefits the projected revenue from the incremental electricity sales and new customer connections in EEEB's distri- bution network that can be attributed to Mesitas, and the reduction in fuel consumption which Mesitas will engender in existing thermal plant during the two years in which its full output is being absorbed by the growth of demand in the Bogota market. The costs attributed to Mesitas consist of investment and operating costs for the project and associated transmission and distri- bution facilities. The internal rate of return is close to the estimated opportunity cost of capital in Colombia of 11%. This close correspondence between the project's internal return, as measured by future tariffs (projected average EEEB revenue of 2.40 US cents/kWh in 1981, deflated to mid-1977 market prices), and the opportunity cost of capital, indicates the appropriateness of the tariff increases approved through 1980. 70. The results of a sensitivity analysis indicates that the return is rather insensitive to variations in fuel savings benefits and to operation and maintenance costs. However, a 10% decrease in benefits, combined with a 10% rise in all costs would reduce the return to about 8%. The possibility of lower-than-expected revenues due to slower growth of sales or lower tariff increases than planned is, however, the principal uncertainty associated with the internal rate of return. Since EEEB has agreed to maintain an adequate level of income, it seems unlikely that the internal rate of return will fall below 10.4%. The main physical risk is associated with the underground works. The geology of the region is difficult, with swelling shales, water, and methane gas (these caused significant problems during construction of the last downstream plant of the existing system in the 1960s). Although the geological conditions will not be completely known until encountered during the work, the problem areas have been identified and the tunnel and penstock alignments have been designed to minimize construction problems. Geology was also a critical factor in the decision for a two-stage design (e.g., two penstocks and power- houses) instead of a one-stage design. Some of the Mesitas tunnel sections may require unusually heavy support, and gas and water could be troublesome at times. However, it is not expected that this will cause undue difficulties for the contractor, who is well experienced. Finally, Mesitas is in a seismically active area and is designed accordingly. This is another reason why the penstocks have been kept short. Ecology 71. Mesitas causes no major population displacements since most project elements are underground. Tunnel and other earthwork spoil will be disposed of in areas selected for minimum impact on arable lands or water sources. This is specified in the civil works contracts. Most of the properties needed for access to work areas, penstocks and powerhouses, involving 368 hectares (247 properties), have been purchased. There remain, however, 31 properties  - 21 - to be acquired whose owners have not yet accepted the proposed prices. In line with this, EEEB has requested the official national appraisal agency to review the situation. This matter is being closely followed by EEEB and the Bank and is expected to be resolved satisfactorily. Rights of way and land needed for the transmission lines have not been acquired inasmuch as the layouts of the lines are still being worked on. No major problems are expected to arise in the remaining acquisition, since the areas involved are relatively remote and unpopulated. EEEB would complete the acquisition by June 30, 1980 (Section 3.04 of the draft Loan Agreement). PART V: LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Bank and EEEB, the draft Guarantee Agreement between the Republic of Colombia and the Bank and the report of the Committee provided for in Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 73. Special conditions of the loan are listed in Section III of Annex III. An additional condition of effectiveness would be that EEEB has made satisfactory arrangements for the balance of project financing (paragraph 51). 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 75. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments November 1, 1978  - 22 - ANNEX I Page 1 of 6 pages COLOMBIA - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES COLOMBIA /a LAND AREA (THOUSAND SQ. KtM.) - MOST RECENT ESTIMATE) TOTAL 1138.9 SANE SAME NEXT HIGHER AGRICULTURAL 224.8 MOST RECENT GEOGRAPHIC INCOME INCOME 1960 Lb 1970 ft ESTIMATE lb REGION Ic GROUP /d GROUP /e GNP PER CAPITA (US$) 220.0 370.0 710.0 1066.7 867.2 1796.4 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 491.C 606.0 671.0 911.1 578.3 1525.0 POPULATION AND VITAL STATISTICS TOTAL POPULATION, MID-YEAR (MILLIONS) 15.4 20.6 25.0 URBAN POPULATION (PERCENT OF TOTAL) 53.0 /f 60.3 64.3 57.9 46.2 52.2 POPULATION DENSITY PER SQ. KM. 14.0 18.0 22.0 25.6 50.8 27.6 PER SQ. EM. AGRICULTURAL LAND 71.0 93.0 111.0 77.6 93.3 116.4 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 46.6 46.6 44.1 42.0 42.9 34.8 15-64 YRS. 50.4 50.4 52.7 52.2 53.5 56.0 65 YRS. AND ABOVE 3.0 3.0 3.2 3.7 3.5 5.7 POPULATION GROWTH RATE (PERCENT) TOTAL 2.9 2.9 2.8 2.7 2.5 1.6 URBAN 6.0 /g 5.5 /h 4.5 4.3 4.7 3.4 CRUDE BIRTH RATE (PER THOUSAND) 46.1 It 44.3 /i 40.6 /i 35.8 37.8 27.0 CRUDE DEATH RATE (PER THOUSAND) 14.7 11.0 8.8 9.1 10.8 9.9 GROSS REPRODUCTION RATE 3.2 3.2 3.1 2.6 2.5 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115.4 177.3 USERS (PERCENT OF MARRIED WOMEN) .. .. 31.0 15.1 20.0 19.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1970-100) 98.0 100.0 109.1 102.1 107.3 103.8 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 94.0 92.0 94.0 103.9 105.3 110.4 PROTEINS (GRAMS PER DAY) 50.0 51.0 47.0 60.3 63.0 77.7 OF WICH ANIMAL AND PULSE 28.0 29.0 24.0 26.7 21.7 22.2 CHILD (AGES 1-4) MORTALITY RATE 16.3 .. 12.1 8.7 8.0 1.9 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 54.7 58.5 60.9 62.6 57.2 63.0 INFANT MORTALITY RATE (PER THOUSAND) 100.0 /I 70.0 97.1 56.9 53.9 38.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 63.0 64.0 60.7 56.8 67.7 URBAN *- 88.0 86.0 78.0 79.0 83.5 RURAL .. 28.0 33.0 34.9 31.8 41.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OP POPULATION) TOTAL .. 47.0 48.0 61.1 30.9 70.3 URBAN *- 75.0 73.0 80.3 45.4 90.7 RURAL .. 8.0 13.0 25.4 16.1 38.3 POPULATION PER PHYSICIAN 2400.0 2170.0 2180.0 1899.3 2706.8 1310.8 POPULATION PER NURSING PERSON 3740.0 2040.0 1920.0 1220.1 1462.0 849.2 POPULATION PER HOSPITAL BED TOTAL 580.0 510.0 530.0 422.3 493.9 275.4 URBAN .. .. 320.0 258.2 229.6 129.9 RURAL .. .. 9670.0 2281.6 2947.9 965.9 ADMISSIONS PER HOSPITAL BED .. 23.0 25.0 25.6 22.1 18.9 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 6.0 5.9 5.2 5.2 3.9 URBAN .. .. .. .. 5.0 RURAL .. .. .. .. 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. .. 2.0 2.0 0.9 URBAN .. .. .. 2.1 1.5 0.8 RURAL .. .. .. 2.7 2.7 1.0 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 47.0 /f .. *- 51.2 64.1 59.2 URBAN 83.0 of .. .. 77.3 67.8 78.0 RURAL 8.0 71 .. .. 12.8 34.1 12.5  -23 - ANNEX I Page 2 of 6 pages COLOMBIA - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES COLOMBIA /a - MOST RECENT ESTIMATE) SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 Ab 1970 Lb ESTIMATE /b REGION Ic GROUP /d GROUP /e EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 77.0 98.0 105.0 103.5 99.8 97.6 FEMALE 77.0 100.0 108.0 102.9 93.3 87.4 SECONDARY: TOTAL 12.0 23.0 36.0 37.2 33.8 47.8 FEMALE 11.0 22.0 36.0 37.9 29.8 42.6 VOCATIONAL (PERCENT OF SECONDARY) 31.0 /k 21.0 17.0 14.7 12.8 22.7 PUPIL-TEACHER RATIO PRLMARY 38.0 38.0 33.0 32.8 34.9 25.4 SECONDARY 11.0 17.0 19.0 17.8 22.2 24.9 ADULT LITERACY RATE (PERCENT) 63.0 73.0 81.0 74.9 71.8 96.3 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 7.0 11.0 15.0 26.9 12.4 32.3 RADIO RECEIVERS PER THOUSAND POPULATION 139.0 105.0 117.0 173.5 104.5 201.9 TV RECEIVERS PER THOUSAND POPULATION 11.0 38.0 .. 69.4 28.1 97.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCGLATION PER THOUSAND POPULATION 56.0 109.0 69.0 72.8 45.2 70.9 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 6.8 4.3 4.6 4.4 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 5100.0 /f 6200.0 6700.0 FEMALE (PERCENT) 18.9 24.6 24.6 21.4 25.7 17.4 AGRICULTURE (PERCENT) 47.0 /f 39.0 .. 37.8 46.2 38.4 INDUSTRY (PERCENT) 19.2 21.0 PARTICIPATION RATE (PERCENT) TOTAL 30.6 29.7 29.7 30.8 33.8 33.7 MALE 49.8 44.9 44.7 47.2 48.1 50.8 FEMALE 11.6 14.6 14.6 13.2 17.3 12.6 ECONOMIC DEPENDENCY RATIO 1.8 1.6 1.6 1.7 1.4 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 41.2 /f.l 31.9 fL 27.2 28.9 23.6 20.2 HIGHEST 20 PERCENT OF HOUSEHOLDS 67.7 / 60.1 /1 54.4 57.7 52.3 47.9 LOWEST 20 PERCENT OF HOUSEHOLDS 2.1 /f,l 3.5 /1 5.2 3.2 4.3 3.2 LOWEST 40 PERCENT OF HOUSEHOLDS 6.8 /f1 10.1 /I 14.3 10.7 13.1 13.7 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. 251.9 191.9 RURAL .. .. 145.0 200.6 193.1 157.9 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 154.0 403.1 319.8 448.8 RURAL .. .. 153.0 258.0 197.7 313.1 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 24.0 24.8 19.8 23.2 RURAL .. .. 55.0 65.2 35.1 54.5 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1973 and 1977. /c Latin America & Caribbean; /d Intermediate Middle Income ($551-1135 per capita, 1976); /e Upper Middle Income ($1136-2500 per capita, 1976); /f 1964; /R 1951-64; /h 1964-70; /i Official estimates based on registration data show crude birth rate for 1960 as 39.0, average 1961-70 as 36.0 and average 1971-76 as 31.0; /I Registered only; /k Includes teacher-training at the third level; /1 Economically active population. September, 1978  - 24 - ANNEX I Page 3 of 6 pages COY TO COLNTRISS BY REGION AND INCOME GROUP/a _ CeDI~~~~~Lotoc Surpcag Region/I-ncon Group Lov IncT-elb Lower Middle InercediaCe Middle Upper Middle High I-cle/f Countries Incoueac Ixoc/I d IntoOe/a Gil EPourtera 3enin malai Agegola ihana R(ihouti Gebon Burundi Mali Hota-ani Ivory Co.et Reunion Central African ep. M.oathbique C -eron Mauritios Chad Saiger Cape Verde Nxibih Conorne Ananda Congo, PR, Seychellaa Ethiopia Sierra L.nce oquatorisi Guin-a AFRICA SOUTH GarAbia, The Sonalia Lihelia OF SAHARA Gui..a Ta-cania Mauritania CuiOO*-Bia.au Togo Nigeria K-nya Ugand Rhodee.ia LeSotho Upper Volta Sax Toe & Pri-oipe Madaga-car Zaire Seega loacilond NOTH AFRICGu EGgypt Maroc- Algeria Hebraic leraxl Kuneit ANRTH ARICA Y- Anet Jordac Irac ones Lihva 4EG A I"IDDL Yep n P.DR. Syrian .R. Iraq GAST Tuniiai Lehanun SUit% Axehir Onited Arah tnir. Alghani aca aldi-na Hangladxah Nepal SOUTH ASTA Hhutan p oiacan RcrIF- Sri Lank. Ind ia Ca,,hodia Neo Hehrids Chin-, Rep. of Fiji nericen Sanca Indoccaia Papua Nen Guinea Gilbhrt Golande Hong Corg Brunei OAST AUTH Lao P.D.R. Philippinee K-ota, Rep. of Franch Polynelio Solnoon 11-ande Thailand Macau Uta VTet Nan Tongs MaL ia NRa C.aledoti. we-tern S.atoa UrPO TU -rtory of the Pacific Singapore IaitGBl MuinG Alnttgua Guatexal Argentina Eahanas El Salvador Reline- Gatic Marbadna B-rnuda LASIN AMgRICA Guyana GoLobi= M... arench Gai.no Martiniou AND CARIIHCEAN hnduras Costa Rica ParagvuU Guadeiocpo GenezeeI sU. Vincetn D nica Peru NetihenVndo Ontillee Virgin Iola-ds (U SA) Dainican Rnp. St. Kiltl-N-via Panraa EctOdor St. Lucia Puerto - ico Sur ina=e Trinidad I loibgo Otuguny Tur-ey Cyprue Channel sleoda Tal. of Men ..erox Telende EUROPE Mal t Gihralcer Portugal creaca innanta Greenland Yugoelavia Spa,. Auetra ia Finland SIaly Nortay Uiloed S-a-ee INDUSTRIALIZED Austria France Japon Suuth Africa COCNTRIES Belgiu= Geacany FGd. Rep. of Lun--rug Sweden C-nodo I-oland Netherlands S-iteenind D-Lpaark Irnlaxd N.. Zaala-d United tiogdon Albania Garnot D.nc Rep. USSR Ruigaria Hnngary CENTRALIY ?LANNED China ?.R of Korea Dn. ap, of ECONOMIES Cob M'ongolit ,ee-hnelvaksia Pulaod n sed on 7 lA GNPC po capita 1976 ITS dollars. 7i s5O or Ieee per capit. /c 2IHI-55C per capit. ,'d 55. .-1125 par t pita / 5136-2500H per ca pit,. F'Ucu /f over $2500 per capit.  - 25- AWEX I Page 4 of 6 pagea. DEFINITIONS OF cOCIAL INDICATORS Noe:Although the d.ta are drawn frce sources genrarlly judged the ..Sr authoritative and reliable. it should alse be noted that they may not be inter- nationallv ocpaprable because of the lack of etandardiced definitionse and concepts used by different countries in collecting the data. The data are, nonethelasa, useful to describe order of magnitade, indicete trends, and characterize certain maJor differencee between countries. The adios td ro-p avr nfor each Indlootor ere papulation--ighrsd geometric means, excluding the extreme values of the indicator and the, nat pop.l.ted coantry in each group. Coverage of countries osoog the indicetors depend. on availability of data and is not sunfferm. Due to lack of deta, gronp averages for Capital Surplus Oil Exporters and indicators of .-.es. to water and excrete di.po.al, hoasing. income distribution and poverty are dimple population-weighted geosutric means without the ...1.iuson of extreme -liuee. LAN p E fti-nuod sq. kin) Fopulation per hospital bed - total, urban, and rural - Population (total, Total - Ttota eurface area comprising lend area and inland waters urban, sand rural) divided by their respective number of hospital bode Aoriicultural -- Mast recent estimate of agricultural area used temporarily avallable in public and private general and specialized hospital and re- or permanently for crops, pastures, market and kitchen gardens or to habilitation centers. Hospitals are establishments permanently staf fed by lie fallow. at least one physician. tEtabli$hments providing principally custodial care arre nut included. Rural hospitals, however, include health and madi- iNP PSI CAPITA (Ull) - GNP per capita estImates at current market prices, cal cancers not permanently staffed by a physician (but by a medical as- calculated by same conversion method as World Bank Atlas (1971-77 basis); liatent. nurse, midwife, etc.) which nffer in-patient accomqodatim and 1960, 1970, and 1977 data, provide e limited range of medical facilities. Admissiona Per hospital bed - Total number of admissions to or diechargee ENERGY CONSUMSPTION PER CAPITA - AnnualI consumption of commercial energy from hospitals divided by the, umbar of beds. (coel and lignite, patrolsum, naturel gse sad hydro-, ula and ge- thermal electricity) in kilograms of coal equivalent per capita. HOUSING Average sins of household (persons Per household) - total. uybso. mad rural - POPUL,ATION AND VITAL STATISTItS A hou...hold ccnsiato of a group of individuaLle who share L