Colombia - Second Cali Water Supply and Sewerage Project

Document of "ILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. 1679c-CO COLOMBIA SECOND CALI WATER SUPPLY AND SEWERAGE PROJECT STAFF APPRAISAL REPORT January 8, 1978 Water Supply and Sewerage Division Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso - Col$ US$1 = Col$36.46 (as of 3/11/77) MEASURES AND EQUIVALENTS 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square meter (m2) = 10.8 square feet (sq.ft) 1 cubic meter = 35.3 cubic feet (cu.ft) 1 US gallon (gal) = 3.785 liters (1) 1 million US gallons per day (mgd) = 43.9 liters per second (1/sec) 1 milligram per liter (mg/l) = 0.058 gram per US gallon GLOSSARY OF ACRONYMS cvc = CorporaciZn del Valle de Cauca EMCALI = Empresas Municipales de Cali IDB = Inter-American Development Bank INAS = Instituto Nacional de Salud INSFOPAL = Instituto Nacional de Fomento Municipal USAID = US Agency for International Development FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY EMPRESAS MUNICIPALES DE CALI (EMCALI) STAFF APPRAISAL REPORT ON THE PROPOSED SECOND CALI WATER SUPPLY AND SEWERAGE PROJECT TABLE OF CONTENTS Page 1. THE WATER SUPPLY AND SEWERAGE SECTOR ............... 1 Introduction ..1 National Context . ........ . 1 Population 1 Urban Grovth I Sector Context se..... 2 Service Levels 2 Finances 2 Past Investments and Financing ... 3 Sector Organization 3ooe. ....... ....****. 3 Govermnet Objectives ............ 4 Constraints see ... c ccc.... ....- 4 Bank Objectives ........... 5 II. THE BORROWER 6 Introduction 6....... 6 Background .c. . 6 Organization ........c...... 6 Personnel Review 7 Billing and Collection 7 Accounting Practices and Procedures 7 Planning and Budgeting ......c c 8 Audit ........ . 8 Work Coordination ......cccc....cc 9 Insurance ......... . 9 Review of the First Project ....... 9 This report was prepared by Messrs. Robert Wildeman, Ernesto Maisch and Jorge Culagovski. This document has a rericted distribution and may be used by recipients only in the performance of ibhir official duties. Its contents may not otherwise be disclosd without World Bank authorization.  TABLE OF CONTENTS (Continued) Page III. SERVICE LEVELS AND DEMAND ...... .............. ...... . .. . . . 13 City of Cali - Water Supply .......... ...................... 13 Sanitary Sewerage .......... ................. ........ 15 Stormwater Drainage ................... . .......... . 17 Municipality of Yumbo - Water Demand .......... . ....... 18 IV. THE PROJECT ........................................... 20 Objectives ..................................... 20 Scope ............***.......***s...................... 20 Detailed Features ............ ..................... 21 Water Supply Subproject ....... ...................... 21 Yumbo Subproject . .............. .. .. ... ..... .. ... . 21 Reforestation Subproject ................ ....o 22 Cauca Interceptor Subproject ........................ 22 Stormwater Subproject ........ .o................ ... . . 23 Sanitary Sewers Subproject .......................... 23 Other Project Components ............................ 24 Cost Estimates 0........... .0o...00.....0 ....... 24 Financing ............ o-***** .......*e ...........-... .. 24 Implementation .*.......................... . ... ............. 25 Procurement .... .............. .. ... ...... ... .......... 26 Disbursement ............... ........................ 27 V. FINANCIAL ANALYSIS ....... .................................. . 29 Past Finances - Consolidated Overview ............o ... 29 Banking and Funds Flow ... ................. . 30 Water and Sewerage Department ......... o ....o ........... 31 Past Finances ........................................ 31 Tariffs .................................... o ...o ... o::: 31 Financing Plan ................ . .............. .*. . . 32 Special Aspects of the Financing Plan ............... 33 Financial Covenants ......... .. . ..... .. 35 Future Finances .... .. ................ ...... ..... 36  TABLE OF CONTENTS (Continued) Page Power Department ......... ............................. ..... 37 Past Finances and Present Position .......... ........ 37 Future Investments and Financing Plan ............... 37 Financial Covenants *..* ..... .. ......*. 38 Future Finances ..... *..........**.**.... .*****e.... 39 Summary Balance Sheets ....... .... . .. .. ... . . .... . . 40 Telephone Department . **...*..*........ ..**. 40 Past Finances and Present Position .................. 40 Future Investments and Financing Plan ........*....... 40 Financial Convenants ......... .. . . .. . . .. . . . .. . . .. . . . . 41 Future Finances . .................................... 42 Summary Balance Sheets ... .......... ....... . . ......... . 43 Consolidated Forecast ......... .... 43 Summary Balance Sheets ........ . . . . . . . . . . . . . . .... . 44 VI. ECONOMIC ANALYSIS ....... o ........ 45 Summary .............. ...................... 45 Population Benefited ................................. 45 Internal Economic Rate of Return ........ ..... 45 Sewerage Subprojects ......... .. ......................... .... .... 45 Table of Costs and Benefits ..................o..o..s. 46 Yumbo Subproject ...... ........ . .* ........ ......... 47 Table of Costs and Benefits ...................... 47 Cali Water Supply Subproject ........................ 48 Table of Incremental Costs ... .................... 48 Sensitivity Analysis .............................. . .. . . .. .. . . . 48 VII. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ... ....... 51 ANNEXES 1. Organization Chart 2. Revised Cost Estimates - Loan 682-CO 3. Tariff Schedule 4. Table of Cost Estimates 5. Water and Sewerage Operating Results 6. Power Operating Results 7. Telephones Operating Results 8. Monitoring Indices 9. Additional Information Available in Project File. MAPS 1. City of Cali   EMPRESAS MUNICIPALES DE CALI (EMCALI) STAFF APPRAISAL REPORT ON THE PROPOSED SECOND CALI WATER SUPPLY AND SEWERAGE PROJECT CHAPTER I THE WATER SUPPLY AND SEWERAGE SECTOR Introduction 1.01 Empresas Municipales de Cali (EMCALI), a municipally-owned public utility, has requested Bank financing for a proposed second water supply and sewerage project. The information normally obtained during appraisal was collected by a supervision mission in October 1976. A second mission, which consisted of Messrs. Robert Wildeman, Ernesto Maisch, and Jorge Culagovski, completed field appraisal in February 1977. Technical studies for the project were carried out by EMCALI, together with their consultants, Planes Indecom of Colombia. The total financing required is estimated at US$33.7 million. A Bank loap of US$13.8 million is recommended to cover the foreign exchange component as well as interest and commitment charges during construction. National Context Population 1.02 The total population of Colombia is about 24.2 million people and is growing at an average annual rate of 2.8%. Unlike many Latin American countries, the urban population is widely distributed among several inter- mediate and large cities. Of the total population, about 15% are living in the capital city, Bogota, which now has a population estimated at 3.5 million. Medellin and Cali, the second and third largest cities respectively, have already surpassed the one million mark, while Barranquilla has over 700,000 inhabitants; Cartagena, Bucaramanga, Manizales and Pereira each have about 300,000 and 13 other cities have over 100,000 inhabitants. Urban Growth 1.03 Colombia has experienced high rates of urban growth. The proportion of the urban population (living in towns of more than 2,500 inhabitants) increased from 31% of the population in 1938 to 61% in 1973 and is estimated to exceed 70% or about 16 million people by the end of 1977. During the period from 1951 to 1964, which coincided with widespread rural violence, urban growth peaked at an average annual rate of 5.5%, but decreased to an average annual rate of 4.6% during the 1964-75 period. This was 50% more than the rate of total population growth, which also decreased from a peak of 3.2% during the 1951-64 period, to 2.8% during the 1964-75 period. This rate is expected to remain relatively constant over the next few years.  1.04 Recent estimates of the rates of net migration indicate that the predominantly urban orientation of the migration continues to hold, and net inflows have tended to converge on those cities which have the best employment opportunities. Given the age selectivity of migration, the population of the cities is relatively young. More than 64% of the urban population are less than 25 years old. The labor force under 25 years old in the cities tends to be especially high, and in recent years, it has risen from 29% in 1964 to 32% in 1973. The urban population includes a disproportionate number of women; 115 women for each 100 men, compared with 91 women for each 100 men in the rural areas. About 20% of the population of Cali ranks among the urban poor. This compares to an estimated 25% for Latin America as a whole. 1.05 Industry is concentrated around the four largest cities, Bogota, Medellin, Cali and Barranquilla, which account for over 80% of the industrial employment and output. The continued migration to the cities has created intractable problems of unemployment and urban poverty, and has put severe pressure on the infrastructure resources of the communities. The urban growth resulted in a significant housing deficit. Sector Context Service Levels 1.06 The availability of water supply and sewerage facilities in Colombia ranks among the highest in Latin America. However, even though the aggregate growth in services has been fairly rapid during the last 10 years, service levels vary by both family income and size of city. One-fourth of the aggre- gate urban population still do not have direct access to public water supply, and about 60% do not have direct access to public sewerage systems. In the rural areas, about 33% of the aggregate population have access to water, while only 13% have access to public sewerage systems. 1.07 Sewage and industrial wastes are largely untreated. So far, pollutant loads have been low compared with the natural purification of the receiving rivers, and wastewaters have been dispersed without much nuisance or causing harmful deoxygenation of the river waters. Problems, however, have emerged in Bogota, Cartagena and Cali. The Bank is considering a River Rectification and Regulation Project for Bogota, a study of which was financed under the Bank's loan 741-CO. The Bank is also considering an Urban Develop- ment Project for Cartagena which would address this problem. The existing problem for Cali would be solved with the proposed project. Finances 1.08 Urban water and sewerage systems are financed partly from internally generated funds, and partly from direct grants from the National Government. The local taxing power of urban governments is limited by the regional admin- istration for all cities except Bogota. Prior to 1968, most urban infra- structure was financed by National Government agencies and subsidized from  - 3 - national funds. The 1968 reforms, however, created among other things a decentralization of responsibility for public services to the cities, with the requirement that tariff structures be more effective for income distribution purposes, and that they be set at levels at least sufficient to recover all costs. Water sewerage and storm water drainage systems not susceptible to user charges are frequently financed through a betterment levy (impuesto de valorizacion) imposed on the presumed beneficiaries of public infrastructure. Such levies have been particularly successful in Colombia, especially regarding urban road and sewerage systems construction. Past Investments and Financing 1.09 Annual investments in the sector increased from US$21.6 million in 1965 to US$55.8 million in 1975, and total investments for that period were US$392 million. Of this, 72% was expended by the municipal entities, 20% by INSFOPAL, and 8% by INAS communities. About 35% of the total investment was financed by the national budget, 20% from external sources, and the remaining 45% from domestic credits and internally generated funds. 1.10 External assistance for the sector started about 15 years ago, and US$232.4 million was committed from 1961-75. Of this amount, 68.2% was from the Bank, 24.0% was from the Inter-American Development Bank (IDB), and the remainder from USAID, Eximbank, and the German Kreditanstalt. The Bank has already made 6 loans amounting to US$158.6 million for Bogota, Cali and Palmira, as well as to INSFOPAL for 15 medium-size cities and 30 towns. IDB 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. In addition, USAID made a sector loan of US$29 million in June 1971 for urban development. Sector Organization 1.11 The water supply and sewerage sector comprises three main categories: (i) The Empresas: Twenty-one cities with populations ranging from 25,000 to 3 million have their own municipal entities to provide public services. These cities have a combined population of about 8 million, or about one-third of the total population. From 70% to 96% of this population receive water supply services, and about 50% to 80% are connected to public sewerage systems. In general, the empresas are reasonably well-run, and finance their system expansion with internal funds, suppliers' credits, and loans from the National Government and foreign lending institutions.  -4- (ii) INSFOPAL: The remaining cities with more than 2,500 inhabitants have their water supply systems coordinated by the Instituto Nacional de Fomento Municipal, which was recently reorganized as a government agency in charge of the finances, planning and technical assistance for the sector. The total population served by these systems is 6 million, or one-fourth of Colombia's population. Approximately 70% of the inhabitants in this group have direct access to piped water while only 50% are connected to a sewerage system. The quality of services is poorer than that of the empresas previously described, administrative competence is usually less, and their operating deficits and investments are generally financed with Government grants. (iii) INAS: The rural communities of fewer than 2,500 inhabitants have their systems planned and executed by the Instituto Nacional de Salud (INAS). About 33% of the population in this group receive water supply services, while only 13% have access to sewerage facilities. Government Objectives 1.12 The Government's objective is to extend by 1980 water supply and sewerage facilities to a least 80% of the total urban population. Within this objective, the Government has pursued a policy of improving the infrastructure services in the smaller and medium-size cities, which it hopes will slow down the migration into the four largest urban areas. An important expression of this policy has been a program of lending for medium-size cities by INSFOPAL, which was supported by a Bank loan of US$9.1 million in 1973 and US$27.0 million in 1975. The purpose of these loans was to help finance water and sewerage facilities in 15 cities with populations from 50,000 to 700,000. The Government's effort in attaining these objectives has been directed not only to providing funds for priority projects, but also to strengthening certain key agencies, so that they would become more efficient and would be better able'to identify, plan and evaluate projects in the sector. Constraints 1.13 At the national level, a major constraint is the generation of sufficient savings to implement the necessary public investment program, and to ensure adequate resources for private investment activity. At the local level, the major constraint has been primarily institutional problems, espe- cially poor planning by the local entities and the traditionally low tariffs which have made it difficult to raise large capital sums needed for new works. Inflation and opposition to tariff increases have aggravated the situation. In some of the cities water demand has not increased at quite the rate forecast, and consequently some of the empresas have experienced diffi- culty in financing their share of the investment costs. In this connection, the mobilization of internal resources through increased tariffs is of  -5- vital importance. The magnitude of the required increases, however, is in many cases such that the Government goals may not be reached on schedule. Bank objectives 1.14 In lending to Colombia for Water Supply and Sewerage, the Bank assists the Government in achieving four major objectives. These objectives are interdependent and complementary. One objective is to improve the standard of living of the lowest 50% of the population, while providing some additional employment and raising labor productivity. A second objective is to help Colombia relieve the existing and potential near-term problems of pollution, both in the disposal of sewage (paragraph 1.07) and solid wastes. A third objective is to support programs that will bring about improvements in management practices and, particularly, that will help to strengthen public institutions and financial intermediaries. A fourth objective is to establish financial policies that will ensure an adequate level of investments in a framework of self-financing within the sector. 1.15 Naturally, many operations in the water supply and sewerage sector serve more than one of the ends listed above. Thus, the proposed second Cali water supply and sewerage project is designed to improve the living conditions of the poorest sectors of Cali's populations, to give the neighboring Munici- pality of Yumbo an input that will enable it to attract industry and thus increase employment and production, and to strengthen the financial situation of EMCALI which, both in terms of assets and employees, is the largest enter- prise in the area.  -6- CHAPTER II THE BORROWER Introduction 2.01 The proposed project would be the second Bank operation in the water supply sector in Cali. The borrowing and executing agency would be the Empresas Municipales de Cali (EMCALI), which is a decentralized municipal agency respon- sible for the administration, construction and maintenance of the water supply, sewerage, power and telephone facilities within the city of Cali. In 1956 EMCALI agreed to provide power service and in 1966 extended telephone service to the Municipality of Yumbo, an adjacent community where most of the indus- trial activity of the region is located. Background 2.02 EMCALI was created in 1931 as a separate water agency administered directly by the municipal government. The facilities, which were previously operated as a city department, consisted of the San Antonio water treatment plant and the related distribution system. The plant was inaugurated on December 31, 1930 with an installed capacity of 0.9 m3 per second. In 1944, E14CALI acquired Colombiana de Electricidad y Telefonica del Pacifico, a privately held company authorized to sell power and telephone services in Cali. In 1961, EMCALI was fully decentralized and was established under law as an autonomous government agency. In 1962, it assumed responsibility for providing sanitary sewerage and stormwater drainage services. Organization 2.03 Until 1972, EMCALI was headed by a six-member Board of Directors, which consisted of three representatives nominated by the City Council, and one representative each nominated by the Mayor, the Banco de la Republica, and the Banco Fidecomisario. Since 1972, EMCALI has been governed by a seven member Board of Directors appointed for a two-year term by the City Council. The Mayor of Cali is the ex officio Chairman of the Board and is appointed by the Governor of the State of the Valle del Cauca, who is in turn appointed by the President of Colombia. The General Manager is appointed by the Mayor but his term in office must be ratified by the Board of Directors. 2.04 Effective March 1, 1977 the organizational structure was decentral- ized into three self-contained operating units, so that water and sewerage, energy and telephones would function independently, and the units report directly to the General Manager. Previously they functioned as divisions responsible only for the physical characteristics of production and distri- bution. The organizational structure is shown in Annex 1 and is divided into six major departments--planning, financial, administration, water and sewerage, energy and telephones--each headed by a sub-manager reporting directly to the General Manager.  7- Personnel Review 2.05 In recent years, there have been frequent changes in the position of General Manager, appointments to which have been clearly political. These changes contributed significantly to the difficulties encountered by EMCALI in the recent past. The next level of management has undergone little change, and is generally considered competent. At the present time, EMCALI has a total of 2,506 staff members, of which 988 work in the water and sewerage division, 388 work in the energy division, 609 work in the telephone division, and 474 are assigned as headquarters administrative staff. Among the total staff members working in EMCALI, 12 hold executive positions and 53 have specialized training in engineering. Insofar as an index of one employee per 1,000 persons served is generally considered as more than adequate for water and sewerage enterprises, the existing level (0.95) indicates that EMCALI is not overstaffed. Billing and Collection 2.06 EMCALI customers are presently billed at the end of each month for up to six services: water, sewerage, energy, telephones, garbage collection and valorization. Garbage collection is provided by another municipal agency. However, in order to expedite administrative processing, the service is billed and collected on behalf of this agency in conjunction with the water and sewerage bill. Meters are read monthly. With the exception of telephone service which is billed separately, all five services are rendered on the same account. Sewerage charges are proportionately fixed at 60% of the water bill. 2.07 In addition, EMCALI collects connection charges and guarantee deposits. Customers can either make their payments at the central office of EMCALI, or to designated commercial banks. Delays in payment are minimal since there is a surcharge after the 10th of the month, and services are suspended if payment is not made within 60 days of the billing date. Services are normally reinstated once the consumer has made satisfactory arrangements to repay the delinquency. Accounting Practices and Procedures 2.08 The accounting system of EMCALI is computerized, and provides for the separation of costs by department and by specific work functions within each department. The accounting practices and procedures are considered adequate. EMCALI performs an annual physical inventory and the recorded levels of inventories are considered reliable. However, more useful and timely information through the accounting system should be established. The problem appears to be more of a lack of definition of what is required by management rather than a lack of capability on the part of either the staff or the accounting system. Assurances were obtained during loan negotiations that by June 30, 1978 EMCALI would: (i) prepare a program, satisfactory to the Bank, for the improvement of its management information and budgeting (paragraph 2.09) and internal auditing procedures (paragraph 2.10), and for the strengthening of the coordination of the administration and operation of its divisions (paragraph 2.11); and (ii) to the extent that would be required  - 8 - by the Bank, employ consultants whose qualifications, experience and terms and conditions of employment would be satisfactory to the Bank to assist the borrower in the carrying out of the program referred to above (Sections 3.02 and Schedule 2 Part C 2, Loan Agreement). Planning and Budgeting 2.09 The financial department is responsible for evaluating the various financial alternatives available to EMCALI. It is also responsible for the preparation of the current and capital budgets. Budget controls are weak and there is still no systematic comparison of actual vs. budgeted results, nor are there reliable analyses of the budget variances. Assurances were obtained during loan negotiations that EMCALI would set up a budgetary control system satisfactory to the Bank under such terms and conditions as described in paragraph 2.08 above (Schedule 2, Part C 2, Loan Agreement). Audit 2.10 EMCALI is audited by three separate groups fulfilling three separate roles. The first two, the Municipal Audit Group and the Internal Audit Group, are required by law, whereas the last one, the External Auditor, is a require- ment of the Bank. The following is a description of the functions of each group: (i) Municipal Audit Group. This group, also referred to as the "Auditor Fiscal," assists in the budget preparation, verifies the legality of payments, and checks inventory quantities. The municipal audit is a requirement of Colombian law, and the group reports directly to the Municipal Council. (ii) Internal Audit Group. The function of the Internal Auditors, who report directly to the General Manager, is similar to that of the Municipal Auditors, and has been concentrated almost entirely on the auditing of expenses; little or no auditing of revenues is conducted. The group has almost no expertise in computing technology, and as a result, the internal control over the computer has been largely ignored. In addition, the group conducts no procedural audits nor does it contribute significantly to the management style of EMCALI. Improving the performance of this section would provide EMCALI with an important tool for controlling all aspects of its operation. Assurances were obtained during loan negotia- tions that EMCALI would improve its internal control procedures under terms and conditions as described in paragraph 2.08 above (Schedule 2, Part C 2, Loan Agreement). (iii) External Audit. This function has been performed since 1968 by competent auditors acceptable to the Bank. Although the practices and procedures of the municipal and internal auditors are comparable to those of independent auditors, there are some important differences between the two functions. The primary concern of the municipal and internal auditors is to  -9- induce compliance with established policies and procedures. However, there is a need to obtain reliable financial data prepared by professional practitioners independent of manage- ment, both in fact and in mental attitude. Therefore, assurances were obtained during loan negotiations that the engagement of external auditors satisfactory to the Bank would continue, and that their report, complete with the annual financial statement, would be submitted to the Bank not later than four months after the end of the fiscal year (Section 5.02, Loan Agreement). Work Coordination 2.11 The overall coordination between the departments needs to be streng- thened, and significantly so between those departments having planning and financial management responsibilities. Assurances were obtained during loan negotiations that EMCALI would continue the reorganization started on March 1, 1977 to strengthen coordination of its planning and financial management as an integrated program with the internal control functions under terms and condi- tions as described in paragraph 2.08 above (Schedule 2, Part C 2, Loan Agree- ment). Insurance 2.12 All EMCALI properties are adequately insured against loss or damage. In addition, all supply and construction contracts of the proposed project would be insured against loss and damage in shipment, accidents, fire and property damage. Review of the First Project 2.13 The first Bank operation in the water supply sector in Cali (Loan Agreement 682-CO) was appraised in 1970. The original loan of US$18.5 million is fully disbursed. Civil works are completed and all machinery and equipment is installed. The Puerto Mallarino water treatment plant, which is the largest project component, is expected to become fully operational by January 1978. The project aimed at increasing the overall production and service levels of water in the city. In this respect good progress has been made. The percentage of total population served by water increased from 70% in 1970 to 96% in 1976. In addition, about 80% of the population is served with sewer connections. 2.14 Initially, progress under the project was slower than anticipated, mainly because of political and institutional problems and shortfalls in internal cash generation. The Bank agreed in 1974 to modify the content of the project by deleting the completion of two sub-projects, the Aguablanca sanitary interceptor and the Napoles stormwater drainage canal, estimated at the time of appraisal to cost US$2 million and US$1 million respectively. At the same time, EMCALI agreed to make financial provision to start const- ruction of the deleted subprojects by 1976 and complete them by 1978. Largely  - 10 - because of financial difficulties, EMCALI was unable to comply with the agreement, and in the meantime, the technical features, designs, costs and benefits have changed very substantially (paragraph 3.09). 2.15 As shown by the figures in Annex 2, the project increased in price by 64% during the 1970-76 period; from US$29.8 million in 1970 (net of the two subprojects that were deleted in 1974) to US$49.0 million in 1976. Of the total cost increases of US$19.2 million, the Puerto Mallarino subproject accounted for US$9.3 million, or about 50% of the total, and the other subprojects accounted for the balance of US$9.9 million. The combined contingency provision was quite insufficient, and construction costs doubled in contrast to the 44% increase estimated at the time of appraisal. 2.16 Financial assistance, however, remained unchanged at US$27.5 million, and consisted of US$18.5 million from the Bank and US$9.0 million from the National Government. Correspondingly, the portion of the project required to be financed from its own resources increased from US$2.5 million to US$21.5 million. In order to maintain its construction program, EMCALI relied on the unsecured creditors to cover the deficiency. This steady erosion of EMCALI's financial position is discussed in Chapter V. 2.-17 Traditionally, Cali's demand for water has exceeded available supply. The Puerto Mallarino subproject was intended to eliminate the water shortage that had characterized Cali in the past. However water consumption has grown at a considerably slower pace than originally anticipated under Loan Agreement 682-CO. Therefore considerable excess production capacity now exists. Demand in m 3/sec Capacity in m 3/sec Appraisal Actual Installed Excess Year Forecasts Consumption Capacity /1 Capacity 1970 3.10 - 3.80 - 1972 3.91 3.57 3.80 0.23 1974 4.83 3.65 3.80 0.15 1976 5.75 3.95 3.80 -0.15 1978 projection 6.90 4.25 8.30 4.05 1980 projection 7.79 4.63 8.30 3.67 1982 projection 8.75 5.00 8.30 3.30 /1 Installed capacity reduced by 0.8 m 3/sec to reflect the minimum flow of the Cali River. 2.18 Population and demand forecasts used in the appraisal estimates were based on extrapolated growth rates and urbanization trends from the 1945-68 period (paragraph 1.03), and reflected the consumption characteristics of the higher income groups then served. The difference between forecast and actual consumption during the 1969-76 period is attributable to the lower growth rates and urbanization trends, together with the lower per capita consumption of the poorer income groups, which accounted for the largest portion of the new consumers during the period. As a result, the volume of water sold was 71% of the appraisal estimates for the 1970-76 period as a whole.  - 11 - Item 1971 1972 1973 1974 1975 1976 Population (in millions): Appraisal estimates 1.04 1.09 1.16 1.22 1.29 1.36 Actual results 0.85 0.89 0.94 0.97 1.01 1.04 Population Served (as %): Appraisal estimates 80.0 86.0 90.0 90.0 90.5 90.5 Actual results 76.5 81.3 90.1 93.1 95.0 95.8 Consumption (1/cd): Appraisal estimates 250 260 270 280 290 300 Actual results 267 269 237 234 229 224 Water Sales (m 3/year x 10 6): Appraisal estimates 76.0 89.0 102.0 112.0 123.0 135.0 Actual results 66.5 71.1 73.2 76.6 79.9 82.1 2.19 The lessons learned from this project necessarily involve consider- ations other than those associated with just the physical constiuction of production facilities. In this connection it is obvious that the interaction between (i) population growth, (ii) per capita consumption, and (iii) cost overruns are fundamental considerations to planning and executing projects. Specifically the lessons gained from this project were incorporated into the proposed project and underscore the importance of: (i) Population Growth and Demand. Projections of future demand requirements depend almost entirely on the assumptions made as to changes in population growth and urbanization trends, which in Colombia have changed significantly in the last few years. The downward trend in growth rates at the national level has been reflected in the trend at the local level. As a very tentative generalization, this suggests that after a certain stage of development, a tendency exists toward a less top-heavy distribution of urban size, and also leads to some expectation of a gradual decline in the growth rates of the large urban areas. This has been reflected in a downward revision of demand requirements for the proposed project. (ii) Per Capita Consumption. The majority of new consumers recently connected to the Cali system are from the lower-income groups. There is considerable evidence to suggest that consumption by this segment of the population is considerably lower than that of the medium to higher income groups, and that the per capita consumption of the lower-income groups does not appreciably increase beyond a certain level. This has been reflected in a flattening out of the estimated future per capita consumption for the proposed project.  - 12 - (iii) Cost overruns. Higher than anticipated inflation rates have resulted in substantial cost overruns. The acute- ness of the shortage of resources squeezed the financial capability of EMCALI. Great care was taken in the pro- posed project to ensure that the investment costs reflect realistic estimates of future inflation. To protect the financing plan and ENCALI's future financial viability, provision has been made for automatic monthly tariff increases.  - 13 - CHAPTER III SERVICE LEVELS AND DEMAND City of Cali - Water Supply 3.01 Cali is now served by three water treatment plants: the San Antonio plant, which draws water from the Cali River, the Cauca River plant and the Bank-financed Puerto M4allarino plant, which draw water from the Cauca River and which operate by pumping. The three plants provide a maximum installed capacity for the city of 9.1 m /sec (paragraph 2.17). During the last 6 years, the percentage of total population served by water increased from 70% in 1970 to 96% in 1976. Residential users in 1976 accounted for almost 73% of total consumption, commercial users 15%, industrial users 4%, and government users 8%. During 1976, approximately 16% of the users accounted for 52% of total consumption, 38% accounted for 31% of total consumption, and 46% of the users accounted for the balance. The water consumption during the previous 5 years was distributed among the following users: 1972 1973 1974 1975 1976 Item 16m % 10m63 % 16m 106l 3 % 106m % Residential 53 72 53 72 55 72 58 73 61 73 Commercial 10 15 11 15 11 15 12 15 12 15 Industrial 3 5 4 5 3 4 3 4 4 4 Government and its agencies 5 8 5 8 7 9 7 8 7 8 71 100 73 100 76 100 80 100 84 100 3.02 The population of Cali as recorded in the 1973 census was 0.94 million inhabitants. This was about 23% lower than estimated by a study conducted by a consulting firm in 1969, and which formed the basis for esti- mating the demand requirements in the first project. The downward trend in growth rate is matched by a similar trend in the population of the country as a whole, and leads to some expectation that lower growth rates are likely to be permanent. Bogota, the capital city, for example, has experienced a similar situation. As a result the average annual urban growth rate has been reduced from 6.0% as estimated under the first project, to 3.9% during the coming decade. This rate is a composite of the following factors:  - 14 - (i) the average annual population growth rate of 2.6% for the country as a whole as evidenced during the 1964-73 period, and which has been taken as the basis for estimating the future natural population growth. (ii) an estimated average annual rate of migration from the rural areas of 1.3%. 3.03 The projections on rural migration are less certain, since they depend not only on the assumptions made on employment opportunities and the rise in income levels, but also on changing standards of housing, water supply, sewerage, streets, and social services, both in the rural areas affected and Cali. The tentative nature of the growth rates, however, does not pose a significant risk to the proposed project, since its main emphasis is on improving the sanitary infrastructure for an existing population. On the basis of the foregoing assumptions, the population of Cali is expected to increase from a level of 1.05 million as estimated at the end of 1976, to 1.22 million at the end of 1980, and 1.54 million by the end of 1986. City af Cali Population and Consumption Estimates Etopu Consumaption Production Average Maximeu PopulatiCoounpton Loss flanj Daily Demand Capacity m3/sec Year Total noJt-h Served % 1/cd !- x I lx0 X Z M3 x 106 m /sec X D3-/see Installed Excess 1972 0.889 4.2 0.723 81.3 269 71.1 6.90 27.5 98.0 3.10 15.0- 3.57 3.80 0.23 1973 0.939 5.6 0.846 90.1 237 73.2 2.95 25.9 98.0 3.13 15.0 3.59 3.80 0.21 1974 0.966 2.8 0.899 93.1 234 76.6 4.64 23.5 100.2 3.18 15.0 3.65 3.80 0.15 1975 1.007 4.2 0.957 95.0 229 79.9 4.30 24.9 106.5 3.38 15.0 3.88 3.80 -0.08 1976 1.049 4.2 1.005 95.8 224 82.1 2.75 26.5 111.7 3.54 15.0 3.95 3.80 -0.15 1977 1.090 3.9 1.053 96.6 224 86.1 4.87 25.0 114.8 3.64 15.0 4.14 8.30 4.16 1978 1.132 3.9 1.101 97.3 224 90.0 4.52 23.0 116.8 3.70 15.0 4.25 8.30 4.05 1979 1.176 '3.9 1.149 97.7 224 93.9 4.33 23.0 121.9 3.86 15.0 4.44 8.30 3.86 1980 1.222 3.9 1.198 98.0 224 97.9 4.25 23.0 127.1 4.03 15.0 4.63 8.30 3.67 1981 1.270 3.9 1.245 98.0 224 101.8 3.98 23.0 132.2 4.19 15.0 4.82 8.30 3.48 1982 1.320 3.9 1.294 98.0 224 105.8 3.92 23.0 137.4 4.35 15.0 5.00 8.30 3.30 1983 1.371 3.9 1.344 98.0 224 109.8 3.90 23.0 142.6 4.52 15.0 5.20 8.30 3.10 1984 1.425 3.9 1.397 98.0 224 114.2 3.90 23.0 148.3 4.70 15.0 5.40 8.30 2.90 1985 1.481 3.9 1.451 98.0 224 118.6 3.90 23.0 154.0 4.88 15.0 5.61 8.30 2.69 1986 1.538 3.9 1.507 98.0 224 123.2 3.90 23.0 160.0 5.07 15.0 5.83 8.30 2.47  - 15 - 3.04 Given the expected population growth, the planned increase in service coverage, improved metering, and the tariff increases already in effect for excess water use, the total water consumption for the city is expected to increase at an average annual rate of 4.1% during the 1977-86 period. Per capita consumption, which was as high as 269 liters/person/day in 1972 has been gradually declining over the last 5 years, and was as low as 224 liters/person/day during 1976 (paragraph 2.18). The declining consumption was partly the result of low-income, low-consumption consumers being connected to the system, and probably in part due to price elasticity, about which rela- tively little is known. As service levels approach the 100% mark, the impact on the average per capita consumption of additional population connected to the system is expected to be relatively slight. On the other hand, the impact of price elasticity is expected to be offset by future increases in income levels. Accordingly, the recent decline in per capita consumption is expected to level off at 224 liters/person/day, and remain unchanged over the next decade. 3.05 As improvements are made to the system, unaccounted-for water which now stands at 27% of production is expected to be reduced to 23%. On the basis of available information, maximum hourly demand is about 1.5 times the aggregate daily average. To the extent possible, hourly demand fluctuations are evened out through use of water storage tanks. The proposed Water Supply Subproject is aimed primarily at extending the distribution system to the urban poor. City of Cali - Sanitary Sewerage Service Levels 3.06 About 80% of the population is connected to the sewerage system. Of the total area of Cali, about 75% is serviced by a combined sewerage system; 18% by a separate sewerage system; and about 7% is not serviced at all. Combined sewers carry both sanitary sewage and stormwater drainage, as opposed to separate sewers which carry the household and industrial wastes only. EMCALI is discontinuing the construction of combined sewers. Stormwater drainage canals have been laid transversely to the sewers, and were designed to reduce flooding by providing drainage facilities for stormwater flowing down from the surrounding hills. As an added safety device, and in order to prevent sewers from backing up during the rainy season, relief sewers connect the sewerage system to the stormwater drainage canals. The relief sewers were designed to carry the excess over a certain volume of combined sewage from the existing sewers to stormwater canals. 3.07 The topography and the place of disposal of sewage in Cali is such that sewage from the southern zones must be carried outward through the existing and somewhat smaller trunklines and interceptors of the northern zones. As shown on the map, the population growth in recent years has been largely concentrated in the southern zones of the city, and there are now 400,000 people, or 40% of the population, living in these areas. With the increased volume of sewage, the existing system is of insufficient capacity,  - 16 - so that sewage is backing up and is diverted through the relief sewers and out into the surface stormwater drainage canals. As a result the original drain- age canals are now being used as raw sewage interceptors. 3.08 About 200,000 inhabitants living in the southeastern part of the city are discharging sewage directly into one of the stormwater drainage canals, which traverses a densely populated area en route to the Cauca River. Another 200,000 inhabitants living in the southern and southwestern zones are discharging sewage into a stormwater drainage canal which flows into the Cauca River upstream from the water treatment plants. The population discharging sewage into the latter canal is expected to increase from 200,000 to 400,000 inhabitants by the year 2000. Presently, the contamination of the Cauca River at the intakes of the two water treatment plants reaches at certain periods a level of 500 times the bacteriological load that is admissible at the intake of a water treatment plant. The two water treatment plants supply about 85X of the total potable water to the city. Consequently, the health risk is serious. Any failure in the operations of the treatment plants could spread waterborne diseases in epidemic proportions. The proposed Cauca Interceptor Subproject is designed to deal effectively with the problem by collecting the sewage from the southern part of the city and discharging it 300 meters downstream from the existing water treatment plants into the Cauca River. 3.09 The first Cali Water Supply and Sewerage Project included the Agua Blanca Interceptor which the Bank agreed in 1974 to delete when the content of the project was modified (paragraph 2.14). The Aguablanca Interceptor was estimated at the time of appraisal to cost US$2 million. If the Aguablanca Interceptor had been completed at the end of 1976, the additional funds neces- sary to upgrade it to meet the new requirements would have resulted in a total investment larger than that required for the Cauca Interceptor. The Cauca interceptor in fact replaces the Agua Blanca Interceptor, but its technical features, designs, costs, and benefits are substantially different from those conceived in the original project. As shown by the figures below, the service area is much larger, and the total length of the interceptor will be increased by 75%; from 7.4 km to 12.5 km. In addition, the diameter of the proposed Cauca River interceptor is larger, and its flow capacity is 6.0 m3 /sec instead of 4 m3 /sec. The design horizon has also been increased by 15 years from 1985 to 2000. This would accommodate an increase in the population to be served, which is expected to increase from 380,000 to 600,000 inhabitants. The Cauca Interceptor subproject is the result of the study of three alternative solutions (paragraph 4.10). Item Aguablanca Interceptor Cauca Interceptor (in 1970 prices) (in 1977 prices) Design horizon (year) 1985 2000 Drainage area (ha) 2,278 3,250 Total length (km) 7.4 12.5 Flow (m /sec) 4.0 6.0 Population served 380,000 600,000 Cost (US$ millions) 2.0 5.8  - 17 - City of Cali - Stormwater Drainage 3.10 Cali and its suburbs are located in the Cauca Valley and extend upwards into the foothills which circumscribe the valley to the west. During the rainy season, which occurs twice a year, from April to June and from October to December, sudden rainstorms interceded by light showers are common. Because of the shape of the drainage area and the steep slopes of the surround- ing hills, the run-off is intense. 3.11 The topography of Cali is such that rainwater drainage does not require extensive underground collectors, and is concentrated in a few surface stormwater drainage canals. Two of the existing facilities originally con- structed by CVC are the stormwater drainage canals that are currently being used as raw sewage interceptors. These canals, in fact, form the basic framework for the stormwater drainage system in Cali. The existing stormwater drainage canals became overloaded during the rainy season, and frequently flooded certain parts of the city. The problem was reduced by the construc- tion of the Canaveralejo Reservoir, which was constructed at a somewhat higher altitude at the western outskirts of the city, and which was financed by the first project. The reservoir was designed to retain some of the run-off water, so as to even out the flow and reduce the discharge requirement of the exist- ing stormwater drainage canals. As a result, the flooding was partially reduced. 3.12 While the facilities were adequate to relieve the problem in the western part, the situation persisted in the southern cone. The Canaveralejo Canal, which drains the reservoir, diagonally traverses the southern part of the city, en route to the Cauca River. During the rainy season, the canal is subject to large discharges and spills over and floods large areas in the southern part of the city. Initial feasibility studies indicated that the problem would be eliminated with the construction of the Napoles Canal which was included in the first project. 3.13 When the Bank agreed in 1974 to modify the content of the first project, the Napoles Canal, which was estimated at time of appraisal to cost US$1 million, was excluded because of financial constraints (paragraph 2.14), and because the technical aspects appeared not to best meet the require- ments. The original concept envisioned the Napoles Canal as the additional overflow facility for the Canaveralejo Reservoir. As a result of two major floods in 1974 and 1975, engineering consultants were hired to restudy the precipitation, run-off frequency and peak flows of the entire drainage area. Consequently, the Napoles Canal was redesigned to eliminate flooding through its own drainage area and function independently of the Canaveralejo Reservoir. Therefore the proposed Napoles Canal reflects a different concept than the canal included under the same name in the first project. To reduce flooding from Canaveralejo Canal the consultants recommended enlarging the capacity of the reservoir. This work however has been postponed for some years because of financial constraints.  - 18 - The Municipality of Yumbo - Water Demand 3.14 The Municipality of Yumbo is located about 10 km north of Cali. Its economic growth, related largely to industrial development, has been constrained by inadequate infrastructure. The situation has it-proved soewhat in recent years, particularly with the construction of a new road connecting Yumbo to Cali, and Yumbo to the Palmaseca International Airport. In addition, recent improvements to the highway between Cali and the seaport of Buenaventura have given the industrial community in Yumbo easier access to international shipping. Energy and telephone services are already provided by EMCALI, and under the proposed project Yumbo would be connected to Cali's water supply. 3.15 The industrial community of Yumbo, including about 65 industries employing about 4,000 people, still does not have direct access to a potable water supply system. Consequently, certain industrial users have constructed their own facilities, while other smaller consumers have made arrangements to have their potable water trucked in from Cali. In addition to potable water, some of the industries use water that does not require extensive treatment. Water for these uses is drawn from the following sources: (i) The Cauca River provides about 0.8 m 3/sec. Since Yumbo is located downstream from Cali, the water is highly polluted and not suitable as a source for drinking water. .~~~~~~~~~~~~~~ (ii) Groundwater, providing about 0.2 m 3/sec from 106 wells, is adversely affected by a high content of calcium and magnesium. Water hardness is about 400 mg/l as compared to 50 mg/l from the Cali water supply system. 3.16 The residential population, on the other hand, is served by a small municipally owned water treatment plant which has a production capac tt of 0.07 m /sec. The capacity of the plant is limited by the flow of the Yusfio River from which it draws water. At present, the plant is operating at about 0.06 m /sec, and only about 60% of the residential demand is satisfied. As a result, there is rationing, and poor and intermittent service. At times, water service is shut off for up to 24 hours, so that the risk of contaminate. groundwater infiltrating the distribution system is significant. Waterborne diseases are not uncommon, particularly among infants. The situation is nol: much better during the rainy season, when the discharge of the river is higler. The treatment plant still does not have sufficient capacity, and in order to satisfy the demand, untreated river water is mixed with treated water for distribution to the consumer. The distribution system is generally in a poor state of repair, mostly because the Municipality has been unable to finnance an effective operating and maintenance program. 3.17 As shown by the following table the residential population of Ytmbo is expected to increase from 32.4 thousand in 1976 to 52.8 thousand by the end of 1986. The growth in population is expected to decrease from an annuai rate of 7% during the 1972-76 period, when there was an exceptionally high growth due to the establishment of many industries, to 5% during the 1976-86 period. Tae decrease in growth is also commensurate with the trend in Cali and in other parts of the country.  - 19 - 3.18 3During 1976, water3production and consumption in Yumbo totalled 1.8 million m and 0.9 million m respectively. Unaccounted-for water, which was 0.9 million m3, represented 50% of production. Per capita consumption, which has been estimated at 190 liters per person per day, and which is expected to remain unchanged during the next decade, indicates that had the water been available, consumption would have been about 2.2 million m during 1976. In spite of low production, service levels are high, and it is estimated that 96% of the population have a water connection. Similarly, almost everyone who has a water connection has a sewerage connection. 3.19 Statistics for water consumption, however, are not considered reliable, since more than 50% of the connections are not metered. Corres- pondingly, it is difficult to establish whether the high proportion of un- accounted for water is a function of the distribution network, improper billing practices, or both. Therefore the proposed project would include a leak detection program and installation of meters. Operation, maintenance and billing would be handled directly by EMCALI. Assurances were obtained during loan negotiations that investments will not be made until EMCALI and the Municipality of Yumbo have entered into an agreement satisfactory to the Bank defining the procedures under which the network will be operated and maintained (paragraph 4.07, and Section 5.07(b), Loan Agreement). 3.20 Given the expected population growth, the metering program, and access to a safe potable supply of water, yearly residential consumption is estimated to be 2.7 million m by the end of 1980, and to increase at an average annual rate of 5% thereafter. As water meters are installed, and the leak detection program carried out, unaccounted-for water is expected to progressively decline to 25% by the end of 1986. On the other hand, industrial consumption is estimated to be 1.9 million m' by the end of 1980 and to increase at an average annual rate of 8% thereafter. This is considered conservative insofar as it excludes additional demands that may result from major growth in the industrialization of the area. Pulatimn ad Ceamptolo Ealluat. 000 000 day 2 o day 6 ., . d d - Z d 1072 24.7 7.0 10.5 75 I00 3.3 SO 6.6 _ _ 0. .07 15 .00 _ a a 1973 26.5 7.0 21.2 40 1g0 3.0 50 7.0 _ _ 7.4 .09 i5 .10 a a 1970 20.3 7.0 24.1 05 185 4.5 so 9.0 _ _ 9.0 .10 13 .11 a a _ 1972 30.3 7.0 27.3 90 185 5.1 50 10.2 _ . 10.2 .12 13 .16 o a a 1970 32.4 7.0 31.1 90 190 S., S0 11. _ . . 11. .14 is .10 _ 1977 34.0 2.0 32.0 90 190 6.2 50 12.4 4.1 22 5.4 17.0 .21 IS .24 . * 1973 33.9 5.0 34.4 96 190 *:5 40 10.8 4.4 is 5.9 10.7 .19 is .22 1979 37.5 5.0 36.0 96 192 6.3 32 10.4 6.7 23 0.2 10.0 .19 is .22 1980 39.4 5.0 37.8 96 192 7.3 30 10.4 5.1 23 0.8 17.2 .20 15 .24 *.5 0.2 29 1938 02.4 5.0 39.7 96 192 7.6 29 10.7 5.5 23 7.3 18.0 .21 1s .2 4.0 0.0 E7 1902 43.5 5.0 61.0 96 193 6.1 20 11.3 0.0 25 0.0 19.M .22 25 .26 5.1 7.0 27 1943 43.6 5.0 43.0 90 193 0.5 27 11.0 6.4 25 8.5 20.1 .23 1s .27 5.0 7.} 22 1906 X7.9 5.0 46.0 96 193 8.9 26 12.0 7.0 25 9.3 11.3 .24 12 .20 5.6 7.6 U 1915 50.3 5.0 46.3 96 194 9.0 20 11.7 7.5 i3 10.0 22.7 .26 13 .3U 0.6 6.3 U 1900 52. 52.0 50.0 96 194 9.0 2s 13.1 0.1 25 3.0 U2.9 20 U1 .3_ 0.5 a 7 25  - 20 - CHAPTER IV THE PROJECT Objectives 4.01 The proposed project aims to relieve the existing and potential near-term problems of Cali through: (i) improving sanitary conditions in Cali by moving a raw sewage discharge to a point downstream from the the city's main intake of water, and by separating domestic and industrial sewage from stormwater run-off; (ii) increasing utilization of EMCALI's installed water production capacity by extending the distribution network in Cali and supplying water to the adjacent municipality of Yumbo; (iii) improving standards in certain low-income areas by providing facilities to reduce flooding in them, and extending water supply and sewerage networks; (iv) increasing the area available for orderly urban growth; and (v) improving the efficiency of E14CALI's management and strengthen its financial position. Scope 4.02 The water supply components of the project will be constructed in areas which have an above average concentration of urban poor or low provision and access to services. The components would benefit about 160,000 people, of which about 45% or 70,000 are among the urban poor (paragraph 6.02). This includes the Municipality of Yumbo which will be connected to EMCALI's system by the construction of a water transmission pipeline. 4.03 Although about 80% of Cali's population is connected to the sewerage system, the quality of the service is poor, and constitutes a health hazard, for several reasons. Firstly, about 75% of the area of the city is serviced by a combined system carrying both sanitary sewerage and stormwater drainage. Concentration of recent population growth in the southern zone, where 40% of Cali's population live, has rendered inadequate the existing system, so that often sewage backs up and out into the surface stormwater drainage canals. Secondly, about 200,000 inhabitants living in the southeastern zone discharge sewage into a stormwater drainage canal which traverses a densely populated area. Thirdly, another 200,000 inhabitants discharge sewage into a stormwater drainage canal which flows into the Cauca Rivers upstream from the intake for  - 21 - two water treatment plants that supply about 85% of Cali's potable water. The contamination level of the Cauca River has reached 500 times normal health standards. The proposed Cauca Interceptor sub-project, Sanitary sub-project, and Stormwater sub-project will remedy these situations. The Stormwater sub-project aims at stabilizing 535 hectares already urbanized, as well as 1,500 hectares that will enable orderly growth of the city. Detailed Features Water Supply Subproject 4.04 The water supply subproject comprises: 3 (i) construction of a 7,500 m water storage tank in Ciudad Jardin to improve water distribution in this sector; (ii) construction of the La Normal pumping station to convey treated water from the low level distribution network to the high level distribution network; -(iii) installation of distribution network in the low income neighbor- hoods; and purchase and installation of 20,000 house connections, including water meters, and purchase of maintenance equipment. Yumbo Subproject 4.05 The Yumbo subproject comprises: (i) construction of a 12 km water transmission pipeline varying from 24" to 30" in diameter to transport water from Cali and to interconnect the water with the existing water distri- bution network of the Municipality of Yumbo; and construction of additional service pipes for connecting industrial consumers along the route; (ii) rehabilitation of the existing water distribution system, establishment of a leak detection and repair program, pitometric investigations, installation of house water meters. 4.06 In selecting the design criteria, the following alternatives were studied: (i) construction of a system of wells and distribution system; or (ii) utilization of the excess capacity of the Cali treatment plants by bringing the water by pipeline. The first alternative was rejected because it was higher in capital and operating costs than the second alternative for any discount rate up to 22%. The construction of a pipeline utilizing Cali's water production facilities is the least-cost solution, and is therefore recommended.  - 22 - 4.07 Apart from the social merits of providing potable water to the resi- dential community of Yumbo, and the possible incentives for future industrial expansion with an assured supply of potable water, the proposed subproject is also attractive on financial and technical grounds. Excess production capac- ity already exists in Cali, so that the incremental costs of producing the additional water will be negligible. On the technical side, the proposed sub-project consists only of a transmission line; that for the residential community will connect directly to an already existing distribution network, and for the industrial community, will require only a small investment in secondary distribution mains. Assurances were obtained during loan negotia- tions that investments in the Yumbo Subproject will not be made until EMCALI and the Municipality of Yumbo have entered into an agreement satisfactory to the Bank under terms and conditions as described in paragraph 3.19, including provisions requiring the connection to the transmission line of all new industrial consumers under the jurisdiction of the Municipality of Yumbo (Section 5.07(b), Loan Agreement). Reforestation Subproject 4.08 The reforestation subproject comprises the purchase and planting of about one million trees in the Cali, Canaveralejo and Pance River basins. This is required to increase the water retention capacity of the surrounding area. The subproject aims at regulating the run-off from these areas by decreasing their peak flow and consequently decreasing the demands on the existing drainage system. Adequate legislation for forest conservation already exists. Cauca Interceptor Subproject 4.09 The Cauca Interceptor Subproject comprises: (i) Construction and installation of a 3.0 km, 0.45 m diameter sewage collector to receive sewage from the zone of Ciudad Jardin; construction and installation of a 2.1 km, 0.40 m diameter sewage collector to receive sewage from the zone of Ciudad Universitaria; construction and installation of a 5.4 km, 0.60-2.35 m diameter main sewage interceptor to receive sewage from the two collectors, as well as from adjacent zones in the southern and eastern parts of the city, and convey it by gravity into a sewage pumping station; (ii) Constrlction of pumping facilities with an initial capacity of 2.64 m /sec, and construction and installation of a 2 km pressure pipeline to convey sewage from the pumping station to a point 300 m downstream from two existing water treatment plants; (iii) Construction and installation of a 1.14 km; 1.0-1.20 m diameter secondary sewage collector; and  - 23 - (iv) Rehabilitation of two regulatory stormwater drainage lagoons, which are silted and heavily polluted by sewage. 4.10 In selecting the design criteria, the following alternatives were studied: (i) moving the intake works for the water treatment plant upstream from the sewage discharge point; (ii) treating the sewage before it enters the river; and (iii) constructing an interceptor. Moving the intake works was rejected because of: (i) the high costs of con- structing the pressure pipeline and operation and maintenance of the pumps; and (ii) because large segments of the existing canals, particularly those portions which traverse densely populated areas, would still have to be protected from sewage discharges by the construction of a parallel interceptor in order to eliminate the total sanitation problem. Construction of a sewage treatment plant was eliminated because of (i) the high costs of constructing, operating and maintaining the plant; and (ii) the costs of constructing an alternative for the interception of sewage discharge to the existing drainage canals that traverse the residential areas. The Cauca Interceptor subproject is the least-cost solution at any positive discount rate. Stormwater Subproject 4.11 The Stormwater Subproject comprises: (i) Rehabilitation of 8.0 km of stormwater drainage canal (Canal Sur); rehabilitation and reinforcement of the confluence of the Ferrocarril, San Fernando and Canal Sur; and separation of storm- water drainage between gravity discharge and pumping discharge; (ii) Construction of about 22 km (0.20 m - 1.4 m diameter) of the storm- water drainage network in various low income neighborhoods; and (iii) Excavation and construction of 2.5 km of concrete-lined exten- sion to the existing Napoles Canal; construction of confluences to feeder lines; Sanitary Sewers Subproject 4.12 The Sanitary Sewers Subproject comprises: (i) Rehabilitation of old sewers; and (ii) Construction of sewerage laterals and trunk lines in various low income neighborhoods.  - 24 - Other Proiect Components 4.13 These components comprise: (i) Sewage and treatment studies to establish the degree and type of treatment required to reduce the contamination of the Cauca River to an acceptable level, and preparation of preliminary designs for sewage treatment facilities. (ii) Purchase of equipment for maintaining the water, sewerage and stormwater drainage systems. (iii) Engineering services for the detailed design and construction supervision of the project. Cost Estimates 4.14 The estimated cost of the project is US$25.7 million excluding interest during construction of US$8 million. The table of cost estimates is shown in Annex 4, and includes: (i) 10% of construction costs for engineering and administration; (ii) 15% of base costs for physical contingencies; and (iii) 16% of the 1977 US$ Project Cost for price escalations and exchange corrections. 4.15 Base cost estimates were prepared by consultants in June 1975, and were updated to price levels of June 30, 1977 after verification by direct inquiries of civil works contractors and equipment manufacturers. 4.16 The project contains an estimated 240 man-months of consulting services to assist in the preparation of engineering drawings, specifica-- tions, bidding procedures, and construction supervision. The estimated cost of these services, in prices of June 1977, is US$1.2 million, or an average cost per man-month of US$5,000. The designs for the Cauca Interceptor and Yumbo Transmission Line have been already awarded to Hidrosan-Inca and Inesco Ltda, Colombian consultants that were found to be acceptable to the Bank. Financing 4.17 The foreign exchange requirements amount to US$13.8 million including US$2.4 million interest during construction. The Bank loan would finance the full foreign exchange requirements of the project. The Government of Colombia has agreed to provide or cause to be provided financing in the amount of US$11.4 million equivalent and the balance would come from the internal resources of EMCALI. The Bank loan includes interest during construction which is justified because of EMCALI's cash flow position. Despite water supply tariffs well in excess of incremental cost (para. 6.06), and the recovery of a substantial share of investment through betterment levies (para. 5.11),  - 25 - which will enable it to cover 41% of its requirements through internally generated funds, EMCALI faces a tight financial situation during the project's construction period. The emphasis of the proposed project on sanitation (59% of the project's total cost corresponds to the sewerage component), means that a large share of EMCALI's incremental investments will produce no significant receipts from operations. In addition, the gradual utilization of the excess water production capacity from the Puerto Mallarino Plant which was due to an overestimation of water demand growth (para. 2.18), means that the incre- mental volume of water sold from the plant will not produce enough revenues to cover the debt service payment related to the first project. Implementation 4.18 The project would be carried out by EMCALI. Assurances were obtained during negotiations that EMCALI, to the extent that would be required by the Bank, would employ engineering consultants satisfactory to the Bank in the pre- paration of detailed designs of the project, the supervision of the carrying out of the project, and the carrying out of the sewage treatment studies (Section 3.02, Loan Agreement). The project would be carried out during the 1978-1981 period. Construction is expected to be completed by the end of 1981. The estimated annual investments by category are as follows: Annual Project Investment Including Contingencies (in Col$ millions) Category 1978 1979 1980 1981 Total of Total Materials and equipment 61.0 88.7 14.6 - 164.3 12.4 Civil works, local materials and equipment 86.0 202.8 144.7 39.3 472.8 35.8 Consultants 27.5 16.7 9.8 9.7 63.7 4.8 Physical contingencies 26.2 46.2 25.4 7.3 105.1 8.0 Price and exchange contingencies 62.2 215.4 172.9 64.1 514.6 39.0 262.9 569.8 367.4 120.4 1,320.5 100.0 4.19 Bank staff would review the preparation of (i) terms of reference for engineering consultants; (ii) the annual investment program; and (iii) long-range sector planning. Two or three supervision missions a year are anticipated. The following bar chart shows the design, bid and construction implementation dates of the proposed project. Agreement was obtained during loan negotiations on the implementation schedule (Section 3.01a, Loan Agreement).  - 26 - SECOND CALI WATER SUPPLY AND SEWVERAGE PROJECT FIG 4 -BAR CHART FOR DESIGN, BID AND CONSTRUCTION CLOENDAR YEAR 1971 1918 1919 1990 1981 II ACTIVITY QUARTER I iIIZ I ZlIiIi 4j~Jj 4 I LAND ACQUISITION 2 FINAL PROJECT DESIGN 3 WATERt SUPPLY Ci.C,dd J.a,dinSol. T-,l Itfl b. NelO-k, If 010 PIO4n aaii,IL L. L Noenlo Ponsp, S-i..0f *ma.11Auu d. Ff... --neb-fl .. Mainl-nnC Equnlp-nh 4 I~t8.......io -6 0111 Y-rnIo I - - * - ....nu 5 Reoresal,o 016-a 6151 SEWERAGE AND DRAINAGE 0 C-uc InlIC-OIIIII I*It 7 St-.I Wmler SutPr0e-t *Sitati*ISII1 8 SaflasY Sewe Sobp-ojec,mlos S S.-vg. T-e -tron Studi., 10 MufIfalsEq.ip-et inIa....ua * Design 11.1..... Bidding Coo..ct-n., E..CuIOo. f Activity Wo-l B.nk -1 /264 Procurement 4.20 All contracts would be awarded through international competitive bid- ding in accordance with Bank guidelines, except for civil works contracts under US$300,000, and up to an aggregate amount of US$2.0 million, which would be awarded on the basis of competitive local bidding procedures satisfactory to the Bank. Foreign suppliers are expected to win most contracts for equip- ment and pumps. Colombian contractors are expected to win contracts for pipes and civil works. For bid evaluation purposes, a margin of preference of 15% or the level of custom duties, whichever is lower, would be allowed for local manufacturers for equipment and material. The proposed bidding package is as follows:  - 27 - Forecast Date Forecast Value Bid for Invitation US$ million 1. Supply of materials for house connections 2/78 0.50 2. Construction of a storage tank 2/78 0.20 3. Supply of pipe for Yumbo water line 3/78 2.20 4. Installation of pipeline for interconnection with Yumbo and pumps 4/78 1.00 5. Supply of equipment for La Normal Pumping Station 6/78 0.35 6. Civil works for La Normal Pumping Station 6/78 0.20 7. Supply of maintenance equipment 3/78 0.80 8. Supply of pipe for Cauca Subproject 2/78 1.50 9. Supply of equipment for Navarro 8/78 1.40 10. Installation of sanitary sewer trunks including civil works for Navarro Pumping Station 8/78 2.50 11. Construction and rehabilitation of stormwater drainage channels 2/78 2.15 12. Installation of networks in the low income neighborhoods 2/78 2.00 13. Rehabilitation of old sewers 4/78 1.25 In addition, consulting firms would be selected for supervision of the project construction and the studies of future sewerage treatment requirements. Assur- ances should be obtained during loan negotiations on the number and size of the bids to be placed for the project components defined above (Part A4, Schedule 4, Loan Agreement). Disbursement 4.21 The loan would be disbursed over a four-year period against (i) 100% of foreign expenditures for imported goods; (ii) 25% of the ex-factory cost of locally manufactured goods; (iii) 25% of civil works; (iv) 100% of foreign expenditures or 40% of total expenditures for consulting services; and (v) interest and other charges during construction on the Bank loan. Retro- active financing for up to US$200,000 is proposed for the payment of consultant fees incurred after June 30, 1977, to prepare final designs of the project components (Schedule 1 para. 4, i Loan Agreement). The loan would be disbursed under the following categories:  - 28 - Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (1) Materials and equipent 5,500,000 (a) iported 100% of foreign expenditures (b) locally manufactured 25% of the ex- factory costs (2) Civil works 2,200,000 25% (3) Consultant services 900,000 100% of foreign expenditures or 40% of total expenditures (4) Interest and other charges 2,400,000 Amounts due on the loan accrued on or befote November 14, 1981 (5) Unallocated 22,800,000 TOTAL 13,800,000 4.22 The closing date would be June 30, 1982. The estimated quarterly disbursements of the loan are shown in the following figures: 3^ nV & U*fS*t. . 03 mlsew I 1977178 March 31, 1978 0.21 1.5 June 30, 1978 0.42 3.0 1978/79 SNtember 30, 1978 1.96 14.2 Drcber 31, 1978 3.49 25.3 March 31, 1979 4.98 36.2 June 30, 1979 6.46 46.9 1979/80 September 30, 1979 7.95 57.7 December 31, 1979 9.44 68.5 March 31, 1980 10.16 73.8 June 30, 1980 10.89 79.1 1980/81 September 30, 1980 11.62 84.4 December 31, 1980 12.34 89.6 Merch 31, 1981 12.70 92.2 June 31, 1981 13.05 94.7 1981/82 September 30, 1981 13.41 97.4 December 31, 1981 13.77 100.0  - 29 - CHAPTER V FINANCIAL ANALYSIS Past Finances - Consolidated Overview 5.01 In recent years EMCALI's overall financial position has been poor and despite substantial increases in water and sewerage and power tariffs in 1975 and 1976, EMCALI was unable to generate sufficient funds to reverse the erosion of its finances which had taken place during the 1972-74 period. To cover its debt service requirements, working capital needs and the large contributions required to finance new works, on which there were sizeable cost overruns, EMCALI resorted to heavy medium-term borrowing at high rates of interest, and by the end of 1976 had taken up Col$ 540 million (US$15 million) for these purposes. Of this amount, Col$ 327 million was related to the water and sewerage division, Col$ 142 million to the power division, and Col$71 million to the telephone division. In addition to the bank loans, water and sewerage owed the power and telephone divisions Col$ 198 million. Despite these borrowings, EMCALI's overall liquid position as of December 31, 1976 stood at less than one month's cash operating expenses: this is below the required minimum to meet day-to-day expenses. A summary balance sheet as of December 31, 1976 analyzing water and sewerage, power and telephones is shown below. The finances of each division are discussed in subsequent paragraphs. Summary Balance Sheets As of December 31, 1976 (Col$ millions) Water/ Sewerage Power Telephones Total Assets Net Fixed Assets 3,312 840 710 4,862 Cash -5 88 -3 80 Other Current Assets 218 212 221 651 Other Assets 28 54 2 84 Total Assets 3,553 1,194 930 5,677 Liabilities Due to/from Other Divisions 198 -129 -69 _ Equity 1,921 933 472 3,326 Long-term Debt 1,342 226 348 1,916 Current Liabilities 92 164 179 435 Total Liabilities 3,553 1,194 930 5,677 Debt/Equity Ratio 41/59 19/81 42/58 37/63 Current Ratio 2.3 1.8 1.2 1.5  - 30 - 5.02 EMCALI's poor overall operating performance for the period 1972-76 mainly resulted from higher operating expenses due to the higher than anticipated rates of inflation, lower than anticipated water sales and the failure to implement timely and adequate tariff increases. Consolidated net income which was Col$ 70 million in 1973 decreased to Col$ 59 million in 1974. Some improvement was shown in 1975 and 1976 when, following tariff increases, net income was Col$ 78 million and Col$ 92 million respectively. However, these earnings were totally inadequate to meet EMCALI's overall requirements. An analysis of the results shows that, while on average, the power rates of return were generally in line with the covenanted targets, after 1972, the water and sewerage and telephone divisions consistently failed to meet their covenanted rates of return by considerable margins. The under-mentioned tables are indicative: Item 1972 1973 1974 1975 1976 Water and Sewerage Rate of Return - Actual /1 3.4 2.3 -0.1 0.6 2.9 Rate of Return - Covenanted /1 4.0 4.5 5.0 5.5 6.0 Power Rate of Return - Actual /1 9.8 5.3 8.6 5.2 8.5 Rate of Return - Covenanted /1 7.0 7.0 7.0 7.0 7.0 Telephones Rate of Return - Actual /1 8.2 5.1 3.0 -0.9 -4.7 Rate of Return - Covenanted /1 7.0 7.0 7.0 7.0 7.0 /1 Fixed assets have been revalued using the cost-of-living index, as required under Loan 682-CO. Banking and Funds Flow 5.03 EMCALI views the utility as a single public sector enterprise and maintains one bank account covering all three divisions. Under this arrange- ment the internally generated funds from one division can be used to support the others, and therefore help the enterprise meet its overall financial objectives. The power division, for example, has traditionally produced a cash surplus, a portion of which has been transferred to the other divisions-- mainly the water and sewerage division. The financing plans assume that the cash generated by all three divisions would in future be reinvested in their respective investment programs. Correspondingly, the future tariff levels and investment program for each division have been structured so that water and sewerage, power and telephones are on a self-financing basis. Although the power and telephone divisions took up loans and are currently paying debt service, ostensibly on the amounts transferred to the water and  - 31 - sewerage division, EMCALI decided that the amounts owing by the water and sewerage division to the power and telephone divisions would be can- celled effective June 30, 1977, the justification being that while it would be difficult to implement appropriate water tariffs (paragraph 6.06) or obtain the amounts through general taxation, there was scope for indirect taxation through the power and telephone divisions, whose main source of revenues are from the higher income groups and business community. Assurances were obtained during loan negotiations that: (i) effective June 30, 1977, EMCALI would only permit the use of funds of one operating division by another if those funds are surplus to the operational, debt service, and investment requirements of the transferring division; futhermore (ii) any transferred funds would be treated as a loan from the transferring division on commercial borrowing terms and conditions (Section 5.08, Loan Agreement). Water and Sewerage Department Past Finances 5.04 The water and sewerage division was mainly responsible for EMCALI's poor overall financial performance during the 1972-75 period. The financial performance of the division fell considerably short of all targets: water sales (paragraph 2.18) were lower than anticipated; following inflation operating expenses were higher than expected; tariff increases were delayed and insufficient. Furthermore, the cost of improvements to the water and sewerage system considerably exceeded the original estimates; the first Bank-financed project alone sustained cost overruns of US$19 million (para- graph 2.15). As a result, it was impossible for EMCALI to finance its 30% share of the first project and, in fact, during the 1972-76 period, net internally generated funds accounted for only 13% of total investment costs. Furthermore, since EMCALI could not secure additional government or external financing to cover the cost overruns, the entire burden fell on the internal resources of the enterprise. Although the power and telephone divisions contributed Col$ 141 million during the 1972-76 period to help finance the deficits, the amounts were insufficient, and the balance was financed by a build-up of suppliers credits, contractors accounts and borrowings from local banks (paragraph 5.01). Despite these borrowings, as of December 31, 1976, the water and sewerage division had overdrawn its bank accounts. Tariffs 5.05 Water tariffs for domestic consumption are structured so that higher income groups bear a larger proportion of the costs. This is accomplished through 13 progressive rate categories, with each rate category related to a progressively higher range of property assessment values. Each rate category has a fixed monthly minimum, and additional charges are levied for consumption over that amount. Water and sewerage charges are in the range of 4-5% of the salaries of the lower-income groups. Of the total consumption within each category, about 60% is subject to an excess consumption surcharge. From  - 32 - January 1, 1976, water rates have been increased by 1.5% per month on excess consumption. Assurances were obtained during loan negotiations that the rates would continue to increase monthly, automatically, and at the current rates stated above until December 31, 1981 (Section 5.04(a), Loan Agreement). Water tariffs for industrial users are based on actual consumption. The sewerage tariff is proportionately fixed at 60% of the water bill. The tariff structure is acceptable. All areas connected to the Cali water system are subject to the same uniform tariff structure which is shown in Annex 3, and would include the Municipality of Yumbo, to be connected under the proposed project. 5.06 Additional revenues would be obtained from a program of reassessment of property values, started in early 1977, which moves the affected proper- ties into higher rate categories. The reassessment is complete and is gradually being applied to water and sewer charges over three years. About 20% of the properties affected have already entered the billing cycle. The new assessment would generate not less than Col$ 340 million in additional water and sewerage revenues during the 1978-81 period. Assurances were obtained during loan negotiations that the program of reassessment of property values would be fully brought into the billing cycle by June 30, 1979 (Section 5.04(b), Loan Agreement). This would be closely monitored during supervision missions. 5.07 The net effect of the combined measures--automatic monthly tariff increases and higher property assessments--would be to raise average water and sewerage tariffs by 22% in 1977, 28% in 1978, 15% in 1979, 10% in 1980, and 13% in 1981. Further minor increases are required to meet the rate of return covenant (pjragraph 5.14). The average tariff inciuding sewerage was Col$ 3.60 m in 1976, and 3would reach Col$ 8.64 m/ , in current prices, by the end of 1981 or Col$4.50/m in 1977 prices compared with a tariff of Col$4.40 in 1977. Financing Plan 5.08 Looking forward, the capital requirements of the water and sewerage division during the 1978-81 period total US$42.9 million. This amount includes the .proposed project of US$33.7 million, improvements to existing systems of US$2.1 million, and an increase in working capital of US$7.1 million. About half of this amount is required to finance higher inventory levels due to inflation, while the balance is required to restore EMCALI's liquidity posi- tion. About 41% of the requirements would be financed from net internally generated funds: 26% from loans; 31% from the proposed Bank loan, and 2% from contributions. The proposed Bank loan of US$13.8 million would finance all the foreign exchange costs of the project, including interest and other charges on the Bank loan during construction. 5.09 The following summarizes the cost of the project, the additional funds r-cuired during the period of execution, and the sources of funds:  - 33 - -------------1978-1981-------------- (Col$ millions) Application of Funds US$ Col$ _ Proposed Project 25.7 1,321 59 Interest during Construction 8.0 456 20 33.7 1,777 79 Other Works 2.1 106 5 Working Capital Requirements 7.1 366 16 42.9 2,249 100 Source of Funds Funds Provided by Operations /1 31.7 1,675 75 Less Debt Service 14.7 761 34 Net Internally Generated Funds 17.0 914 41 Contributions and Other 0.7 26 1 Banco Central de Hipotecario 5.7 300 13 Government Loan 5.7 300 13 Proposed IBRD Loan 13.8 709 32 42.9 2,249 100 /1 Includes Col$ 587 million betterment levy revenues (paragraph 5.11). 5.10 To protect the financing plan and EMCALI's future financial viabil- ity, assurances were also obtained during loan negotiations that EMCALI will not undertake without the agreement of the Bank any investments in the water and sewerage division during the period of execution of the proposed project, if the aggregate cost of all its investments in excess of those agreed to in paragraph 5.09 exceed US$1 million in any year (Section 5.07(a), Loan Agreement), nor would it in the future incur any new long-term debt for water and and sewerage without the Bank's agreement, unless the net revenues before betterment levies, interest and depreciation for the fiscal year next preceding such incurrence or for a later 12-month period ended prior to such incurrence, whichever amount is the greater, shall be not less than 1.3 times the maximum debt service requirements for any succeeding fiscal year on all debt, including the debt proposed to be incurred (Section 5.06, Loan Agreement). Special Aspects of the FinancinR Plan 5.11 In Colombia, as in some other countries, certain investment costs are recovered through a betterment levy (impuesto de valorizacion) imposed on the presumed beneficiaries of public infrastructure. Such levies have been particularly successful in Colombia, especially for urban road and  - 34 - sewerage systems construction. EMCALI proposes to charge and collect in four annual installments not less than Col$ 587 million (about US$11.5 million) during the 1978-81 period and Col$ 203 million (about US$4.1 million) during the period 1982-84 through such levies for certain works included in the project. This would represent about 50% of the total cost of the project, including interest during construction. Assurances were obtained during loan negotiations that betterment levies would be charged and collected, in the proportions and under the terms stated below for each subproject (Section 5.09, Loan Agreement). Disbursements of the Bank loan on account of expen- ditures for each subproject in respect to which valorizacion must be collected will be made only after the Bank receives satisfactory evidence that all neces- sary authorization and approvals required to charge and collect valorizacion in respect of such works shall have been obtained (schedule 1, para. 4 Loan Agreement). ------------ Col$ millions ------------- % of Cost 1982- Subproiect Components Recovered Total 1978 1979 1980 1981 1984 Interconnection with Yumbo 100 329 82 82 82 83 - Cauca Interceptor 55 373 53 53 53 53 161 Napoles Canal 30 33 - 6 6 6 15 Sanitary Sewers 22 55 4 8 8 8 27 790 139 149 149 150 203 5.12 To complete the financing plan, in addition to the Bank loan, EMCALI proposes to obtain in the form of two additional loans Col$ 600 million in counterpart financing. They include: (i) a loan from the National Government of Col$ 300 million amortized over 20 years with 4 years of grace at an annual interest rate of 16%; The proceeds of the loan will be with- drawn during the period 1978-81; (ii) a loan from the Banco Central de Hipotecario of Col$ 300 million amortized over 10 years with 2 years of grace at an annual interest rate of 24%. The proceeds of the loan 2il1 be withdrawn under the same terms and conditions as the one above. 5.13 Assurances were obtained during loan negotiations that the counter- part funds would be provided under the terms and conditions satisfactory to the Bank. The loans would be received in accordance with the schedulz belcv. The Bank loan will only become effective after EMCALI obtains these loans on terms and conditions, including the schedule of disbursement, satisfactory t'- the Bank (Section 8.01(a), Loan Agreement).  - 35 - --------- Col$ millions ---------- 1978 1979 1980 1981 Total National Government 50 130 100 20 300 Banco Central Hipotecario 18 135 120 27 300 68 265 220 47 600 Financial Covenants 5.14 Present forecasts indicate that the water and sewerage department would need to achieve the following annual rates of return on its net revalued fixed assets in operation: 3% during the 1978-81 period; 4% in 1982; 4.5% in 1983, and 5% in 1984 and thereafter. To achieve these rates, EMCALI would need to raise the average tariff, in addition to that already agreed (para. 5.05), by a further 4% in each of the years 1978 and 1979, which is not considered a major constraint. Assurances were therefore obtained during loan negotiations that tariffs for 1978 and up to and including 1981, would be at least sufficient to generate a financial rate of return of 3.0%, increasing to 4% in 1982, 4.5% in 1983, and 5% in 1984 and thereafter, on the revalued cost less accumulated depreciation of revenue producing fixed assets in service in any fiscal year (Section 5.05(a), Loan Agreement). Assurances were also obtained during loan negotiations that the existing methodology would continue to be used to revalue fixed assets (Schedule 5, para. 5, Loan Agreement). 5.15 Despite the substantial tariff increases, the financial rate of return during the 1978-81 period would be considerably lower than the 8.0% covenanted for the same period in the previous Loan Agreement 682-CO: the latter was based on a much higher estimate of the volume of water sold (paragraph 2.18) and it is no longer reasonable to expect that EMCALI can reach this target in the foreseeable future. In addition to being more realistic, the lower rate of return now proposed is acceptable for the following reasons: (i) The covenanted annual financial rates of return will require EMCALI to set up tariffs at levels above the estimated average incremental cost of water supply (para. 6.06). Besides, tariffs far above the average incremental cost of water would discourage consumption while significant idle capacity exists in the Puerto Mallarina treatment plant; (ii) The proposed 3% rate of return target would generate sufficient funds to cover future debt service requirements, working capital needs, and the contributions needed to finance new works. An 8% rate of return on the new rate base would require further significant tariff increases during the 1978-81 period and given present tariff levels (paragraph  - 36 - 6.06), this would not be appropriate and would only serve to generate excess cash estimated at Col$ 522 million (US$10 million). (iii) Unlike other water utilities in Latin America, EMCALI also acts as a conduit through which the Municipality of Cali raises additional funds. A tax of 4% on gross water and sewerage, telephones and power revenues is collected by EMCALI. In addition, the water and sewerage division absorbs the cost of maintaining city parks, which have traditionally been treated as operating costs in the rate of return computations. 5.16 Taking into account municipal taxes and park maintenance, EMCALI's forecast financial rate of return would be of the order of 5% for the 1978-81 period, increasing to about 7% by the end of 1984, which is among the highest rates achieved in the sector in Latin America. Future Finances 5.17 On the basis of the proposed tariffs, revenues should more than double from an estimated Col$ 379 million for 1977 to Col$ 906 million during 1981. The estimated operating expenses include additional amounts for the expected higher level of activity as well as for general price increases. The projec- tions also include the additional revenues and expenses that would result from connecting Yumbo to EMCALI's system. The operating ratio before depreciation would remain at about 57% throughout the period, which is considered acceptable. 1977 1978 1979 1980 1981 Average Revalued Rate Base (Col$ millions) /L 1729 2169 2376 2589 2935 Rate of Return (%) 2.2 3.0 3.0 3.0 3.0 Operating Ratio (%) 3 57.5 55.9 56.6 59.1 58.4 Average Tariff (Col$/m ) 4.40 5.82 6.95 7.66 8.64 Annual Increase (%) 22.3 32.2 19.4 10.3 12.8 /1 The rate base has been reduced to exclude stormwater drainage assets and a water treatment plant which will not be required until 1982. 5.18 On the basis of the foregoing the financial structure and liquidity position of the water and sewerage department would become substantially stronger over the next 5 years. As shown by the figures below, which are an extract from Annex 5, the current ratio would be satisfactory throughout the period. The debt/equity ratio would be 29/71 at the end of 1981 which would be acceptable.  - 37 - Summary Balance Sheets (Col$ billions) 1977 1978 1979 1980 1981 Assets Net Revalued Fixed Assets 4.10 5.32 6.72 7.84 8.68 Cash - 0.07 0.21 0.23 0.28 Other Current Assets 0.24 0.29 0.32 0.38 0.43 Other Assets 0.04 0.03 0.04 0.03 0.03 Total Assets 4.38 5.71 7.29 8.48 9.42 Liabilities Equity 2.91 4.00 4.98 5.77 6.48 Long-term Debt 1.34 1.55 2.08 2.49 2.66 Current Liabilities 0.13 0.16 0.23 0.22 0.28 Total Liabilities 4.38 5.71 7.29 8.48 9.42 Memo Working Capital (in Col$ millions) 0.11 0.20 0.20 0.39 0.43 Current Ratio 1.79 2.27 2.30 2.76 2.55 Debt/Equity 32/68 28/62 29/61 30/70 29/71 Power Department Past Finances and Present Position 5.19 The power division has averaged over the last few years a rate of return higher than that to which EMCALI had committed itself to the Bank (paragraph 5.02), and has always produced a cash operating surplus. However, EMCALI has weakened the liquidity of the power division by permitting the uncontrolled transfer of funds to the water and sewerage division, so much so, that in order to maintain its liquidity, the power division had to take up medium-term bank loans. As at December 31, 1976 these loans stood at Col$ 142 million (paragraph 5.01). Future Investments and Financing Plan 5.20 Effective January 1, 1976 automatic monthly tariff increases of 2.2% per month were implemented. This will raise the average power tariff by about 30% per year during the 1978-81 period. Unlike the water and sewerage division, no investment in production facilities is required since EMCALI buys its power in bulk from a regional supplier. The power department proposes to finance most of its investment program through internally generated funds. Assurances were obtained during loan negotiations that the power rates would continue to increase monthly, automatically, and at the current rates of increase stated above until June 30, 1979 (Section 5.05(ii)a, Loan Agreement).  - 38 - 5.21 Looking forward, the capital requirements of the power department during the 1978-81 period total US$15.2 million. This amount covers extensions and improvements to the existing systems estimated to cost US$8.3 million, and will require an increase in working capital of US$6.9 million. About 90% of the requirements would be financed from net internally generated funds and 10% from contributions and other sources. The following summarizes the cost of the proposed investments, the additional funds required during the period of execution, and the sources of funds: _ __1978-81 (Col$ millions) Application of Funds US$ Col$ % Proposed Investments 8.3 428 55 Working Capital 6.9 353 45 15.2 781 100 Source of Funds Funds Provided by Operations 16.6 851 109 Less Debt Service 2.9 149 19 Net Internally Generated Funds 13.7 702 90 Contributions and Other 1.5 79 10 15.2 781 100 Financial Covenants 5.22 The Power Department's investment program could eventually be expanded, if necessary, without jeopardizing its financial viability since the cost of the present program will be financed entirely by internally generated funds and customers' contributions and since the indebtedness capacity of the Department is rather large. On this basis, assurances were obtained during loan negotiations that EMCALI would not undertake any invest- ments in the Power Division in excess of US$30 million equivalent during the execution of the proposed project (US$7.7 million in 1978, US$7.2 million in 1979, US$7.3 million in 1980, and US$7.8 million in 1981) that would exceed in aggregate in any one year US$1 million without prior consent of the Bank (Section 5.07(a), Loan Agreement), nor in the future would it incur any new long-term debt for power without the Bank's agreement, unless the net revenues before interest and depreciation for the fiscal year next preceding such in- currence, whichever amount is the greater, shall be not less than 1.3 times the maximum debt service requirements for any succeeding fiscal year on all debt, including the debt proposed to be incurred (Section 5.06, Loan Agreement). In order to achieve its  - 39 - objectives the power department would require a rate of return of 8% on its net fixed assets. While EMCALI has already agreed to specific tariff increases in the power division, assurances were obtained during loan negotiations that tariffs would be at least sufficient to generate a financial rate of return of not less than 8% of the revalued cost less accumulated depreciation of fixed assets in service during any fiscal year (Section 5.05(a), Loan Agreement). The net effect would be to raise the tariff, in addition to what EMCALI has already agreed to, by an additional 4% in 1978 and 2% in 1979. Small tariff increases such as these are not considered a major problem. Assurances were also obtained during loan negotiations that the existing methodology would continue to be used to revalue fixed assets (Schedule 5, para. 5, Loan Agree- ment). Future Finances 5.23 The earnings and cash flow of the power department should be favor- able during the 1978-81 period. Revenues will quadruple throughout the period from Col$ 1,000 million to Col$ 4,032 million. Expenses are expected to increase consistent with the general price increases. As shown by the figures below, the operating ratio before depreciation will gradually increase from 85% in 1977 to 92% in 1981. This is the result of additional increases in the cost of bulk power, a portion of which EMCALI is absorbing. The rate of return would remain steady at 8%. 1977 1978 1979 1980 1981 Average Revalued Rate Base (Col$ millions) 918 1239 1480 1682 1853 Rate of Return (%) 8.8 8.0 8.0 8.0 8.0 Operating Ratio 85.0 87.6 89.2 90.5 92.2 Average Tariff (Col$/KWH) 0.77 1.04 1.37 1.73 2.24 Annual Increase (%) 30.5 31.7 31.7 26.2 29.5 5.24 As shown by the figures below, which are an extract from the detailed financial projections in Annex 6, the financial structure and liquidity position of the power department would become substantially stronger over the next 5 years. The current ratio would be acceptable throughout the period. The debt/equity ratio would only be 3/97 at the end of 1981. Debt service coverage would be satisfactory.  - 40 - Summary Balance Sheet (Col$ billions) 1977 1978 1979 1980 1981 Assets Net Revalued Fixed Assets 1.21 1.51 1.74 1.96 2.12 Cash 0.01 0.02 0.02 0.03 0.04 Other Currenct Assets 0.27 0.31 0.48 0.65 0.88 Other Assets 0.07 0.07 0.06 0.05 0.04 Total Assets 1.56 1.91 2.30 2.69 3.08 Liabilities and Equity Equity 1.16 1.53 1.87 2.23 2.55 Long-term Debt 0.21 0.18 0.17 0.15 0.15 Current Liabilities 0.19 0.20 0.26 0.31 0.38 Total Liabilities and Equity 1.56 1.91 2.30 2.69 3.08 Working Capital (Col$ millions) 0.09 0.13 0.24 0.37 0.54 Current Ratio 1.34 1.63 1.89 2.21 2.42 Debt/Equity 11/89 8/92 6/94 4/96 3/97 Telephone Department Past Finances and Present Position 5.25 Since 1973 the telephone division has been unable to obtain a rate of return equal to that to which EMCALI had committed itself to the Bank (paragraph 5.02). This has resulted in cash deficits during the 1973-76 period. In addition, the telephone division transferred about Col$ 50 million to the water and sewerage division during the 1972-76 period. Like the other divisions, the telephone division took up medium-term bank loans, which at December 31, 1976 stood at Col$ 71 million, and delayed settlement of its creditors. These arrangements did not prevent the division from having an unsatisfactory cash posit*on as of the end of 1976. The telephone department owes the Bank's borrower TELECOM, the national long distance entity, about Col$ 160 million (about US$4.4 million) as of September 30, 1977 for bills which it has collected from subscribers on behalf of TELECOM and has failed to remit. TELECOM needs these funds for its own expansion under Bank loan 1073-CO. EMCALI has agreed with TELECOM to pay back its outstanding debts to this entity in 10 equal monthly installments starting March 1978, including interest, guaranteed by a local bank. This guarantee will also apply to monthly bills to be collected by EMCALI on behalf of TELECOM during 1978. Future Investment and Financing Plan 5.26 Effective May, 1976, telephone rates for local calls were increased from Col$ 0.10 per impulse to Col$ 0.16; effective October 1, 1977, they were increased to Col$ 0.25 per impulse and will be automatically increased to  - 41 - Col$0.30 per impulse on December 31, 1977. At the same time, an application is before the authorities for an increase in TELECOM's long-distance rates, which should result in an increase in EMCALI's participation. In addition to the measures described above, assurances were obtained during loan negoti- ations (Section 8.01(b), Loan Agreement) that all steps would be taken, including the appropriate Resolucion of EMCALI's Board of Directors and by the Junta Nacional de Tarifas del Departamento de Planeacion to enable EMCALI to increase its tariffs for telephone services during 1978, so as to obtain the annual rate of return for 1978 provided for in paragraph 5.28. This was specified as an additional condition of effectiveness. Looking forward, the capital requirements of the telephones department during the 1978-81 period total US$52.9 million (US$11.9 million in 1978, US$17.5 million in 1979, US$17.0 million in 1980, and US$6.6 million in 1981). EMCALI plans a major increase in telephone service and expects to install about 38,000 telephones during the 1978-81 period. This would raise the population served from 61% at the end of 1977 to 84% by the end of 1981. To meet this target additional investments of US$49.2 million and an increase in working capital of US$3.7 million would be required. About 24% of the requirements would be financed by net internally generated funds, 29% from customers' deposits and other contributions, and 47% from medium term suppliers credits. The following summarizes the cost of the proposed investments, the additional funds required during the period of execution, and the sources of funds. --------- 1978-81 --------- (Col$ millions) Application of Funds US$ Col$ % Proposed Investments 49.2 2,531 93 Working Capital Requirements 3.7 194 7 52.9 2,725 100 Source of Funds Funds Provided by Operations 35.2 1,808 66 Less Debt Service 22.5 1,155 42 Net Internally Generated Funds 12.7 653 24 Customers Deposits and Other Contributions 15.2 782 29 Medium-Term Suppliers Credits 25.0 1,290 47 52.9 2,725 100 Financial Covenants 5.27 To protect the financing plan and EMCALI's future financial viability, assurances were obtained during loan negotiations that EMCALI would not under- take any investments in the telephone division in excess of those specified in paragraph 5.26 during the execution of of the proposed project that would  - 42 - exceed in aggregate in any one year US$1 million without prior consent of the Bank, (Section 5.07(a), Loan Agreement) nor would it in the future incur any new medium or long-term debt without the Bank's agreement, unless the net revenues before interest and depreciation for the fiscal year next preceding such incurrence or for a later 12-month period ended prior to such incurrence, whichever amount is the greater, shall be not less than 13 times the maximum debt service requirements for any succeeding fiscal year on all debt, includ- ing the debt proposed to be incurred (Section 5.06, Loan Agreement). 5.28 While EMCALI has already agreed to specific tariff increases in the telephone department, assurances were obtained during loan negotiations that tariffs would be at least sufficient to generate a rate of return not less than 5.5% in 1978, increasing to 8.0% in 1979 and thereafter on net revalued fixed assets in service (Section 5.05(a), Loan Agreement). This would require substantial tariff increases in addition to those already agreed to. Assurances were also obtained during loan negotiations that the existing methodology would continue to be used to revalue fixed assets (Schedule 5, para. 5, Loan Agreement). 5.29 The earnings and cash flow should be favorable during the 1978-81 period. Revenues will more than triple during the period from Col$ 193 million to Col$ 730 million. Expenses are expected to increase consistent with the increased level of operations and the general price increases. The operating ratio will gradually decrease from 91.1% to 74.1%. This is the result of tariff increases and economies of scale due to an increased volume of business. Future Finances 5.30 As shown by the figures below, which are an extract from the detailed financial projections in Annex 7, the financial structure and liquid position of the telephone division would also become substantially stronger over the next 5 years. The current position would be acceptable throughout the period, although it could be tight in 1979. The debt/equity ratio would be 28/72 in 1981, which would still leave a margin for further borrowing.  - 43 - Summary Balance Sheet (Col$ billion) 1977 1978 1979 1980 1981 Assets Net Revalued Fixed Assets 0.98 1.49 2.20 2.90 3.69 Current Assets 0.26 0.31 0.37 0.43 0.49 Total Assets 1.24 1.80 2.57 3.33 4.18 Liabilities and Equity Equity 0.70 1.05 1.47 1.94 2.55 Long-term Debt 0.29 0.54 0.61 0.98 L.17 Current Liabilities 0.25 0.21 0.49 0.41 0.46 Total Liabilities and Equity 1.24 1.80 2.57 3.33 4.18 Working Capital (Col$ millions) 0.01 0.10 -0.12 0.02 0.03 Current Ratio 1.04 1.48 0.76 1.05 1.07 Debt/Equity 23/77 30/70 24/76 29/71 28/72 Consolidated Forecast 5.31 The consolidated financial position of EMCALI would improve considerably throughout the 1978-81 period. The overall current position would be adequate: the debt/equity ratio would be satisfactory and at the end of 1981 would be 26/74. The consolidated weighted average rate of return on overall revalued fixed assets will average about 5.5%.  - 44 - Summary Balance Sheet (Col$ billions) 1977 1978 1979 1980 1981 Assets Net Fixed Assets 6.29 8.32 10.66 12.70 14.49 Current Assets 0.78 1.00 1.40 1.72 2.12 Other Assets 0.11 0.10 0.10 0.08 0.07 Total Assets 7.18 9.42 12.16 14.50 16.68 Liabilities Equity 4.77 6.58 8.32 9.94 11.58 Long- and Medium-term Debt 1.84 2.27 2.86 3.62 3.98 Current Liabilities 0.57 0.59 0.98 0.94 1.12 Total Liabilities 7.18 9.42 12.16 14.50 16.68 Average Revalued Rate Base (Col$ millions) 3331 4311 4974 5847 7109 Rate of Return (X) 4.10 5.0 5.6 5.9 6.0 Working Capital (Col$ millions) 0.21 0.43 0.42 0.78 1.00 Current Ratio 1.36 1.75 1.43 1.83 1.89 Debt/Equity Ratio 27/73 26/74 26/74 27/83 26/74 5.32 Annex 8 shows the indicators that would be monitored during project execution. Assurances were obtained during loan negotiations that EMCALI will include in its quarterly reports information on the progress made in achieving these targets, and will carry out remedial actions that may be suggested by the Bank (Section 3.04(b), Loan Agreement). During supervision missions, EMCALI's performance will be discussed with its staff and evaluated on the basis of these indicators.  - 45 - CHAPTER VI ECONOMIC ANALYSIS Summary 6.01 The overall program consists of six subprojects, as well as two smaller components: sewage treatment studies and the purchase of maintenance equipment. The internal economic rate of return of the project is estimated at 22%. Of the six subprojects, the Cauca subproject, the Stormwater sub- project and the Sanitary Sewers subproject are interrelated. The estimated aggregate internal economic rate of return for these subprojects is 21%; these subprojects, the cost of which is US$13.0 million, account for 59% of the total project cost. The estimated internal economic rate of return of the Yumbo subproject is 13%, the cost of which is US$4.0 million, and represents 18% of the total project cost. The estimated incremental rate of return as a proxy for the internal economic rate of return of the Cali Water Supply subproject is 36%. The cost of this subproject is US$3.2 million, or 14% of the total project cost. This high rate of return reflects the low marginal costs compared to average tariffs, since considerable excess water production capacity currently exists. Internal economic rates of return were not computed for the following subprojects because of the predominance of non-quantifiable factors, but there is strong evidence that the incremental benefits of the services provided by these subprojects are high: (i) the Reforestation sub- project; (ii) Sewage Treatment studies; and (iii) Maintenance Equipment. The cost of these subprojects, for which no quantitative economic analysis was carried out, amounts to US$1.9 million, or 9% of total project cost. All costs include engineering and administration, and physical contingencies, but exclude price escalation and interest during construction. Population Benefited 6.02 The proposed project will be concentrated in areas which have an above average concentration of urban poor, or low provision and access to services, including poor environmental conditions. The project would benefit directly about 250,000 people, of whom 180,000 or about 70% are among the urban poor earning less than US$150 per capita per year and who are among the poorest 40% of the country. In addition, about 160,000 people of whom about 45% or 70,000 are also among the urban poor will benefit through water house connections. A major feature of the program is the reduction of contamination levels of the Cauca River at the intakes of two existing water treatment plants. Presently, the contamination levels are 500 times greater than normal health standards allow. The two water treatment plants supply about 85% of the total potable water of the city, affecting virtually the entire population. Internal Economic Rate of Return Sewerage Subprojects 6.03 The Cauca, Stormwater and Sanitary Sewers subprojects are all inter- related, so that an aggregate internal economic rate of return was calculated for the combined total. The subprojects, which aim at improving the living conditions and social opportunities of the people, have benefits well beyond  - 46 - those that can be measured directly through the tariff structure. Consequently, externalities such as improved physical and environmental conditions were quan- tified through increased land values. However, intangible benefits such as overall improvements in public health and labor productivity were excluded. The sewerage subprojects presented a positive net present value for any dis- count rate up to 21%. This high return indicates that a substantial part of the costs can be recuperated through taxation on increased land values and still leave additional benefits to the property owners. To this end EMCALI will charge a valorization tax that will recover about 45% of the subproject cost (paragraph 5.11). The costs and benefits are shown in the following table: Calculation of Internal Economic Rate of Return Costs and Benefit, in Col$ millions of June 1977 Costs --Beein------------Benefits Construction Operating ---Increase in Land Values- Year Costs Maintenance Total Urbanized areas Non-Urbanized areas Total Net 1978 66.9 66.9 - 66.9 1979 221.0 221.0 - 221.0 1980 152.3 4.7 157.0 - 157.0 1981 33.1 4.7 37.8 190.1 181.8 371.9 334.1 1982 4.7 4.7 95.1 41.4 136.5 131.8 1983 4.7 4.7 95.0 42.0 137.0 132.3 1984 4.7 4.7 44.4 44.4 39.7 1985 4.7 4.7 46.2 46.2 41.5 1986 4.7 4.7 46.2 46.2 41.5 1987 4.7 4.7 49.2 49.2 44.5 1988 4.7 4.7 51.6 51.6 46.9 1989 4.7 4.7 53.4 53.4 48.7 1990 4.7 4.7 16.2 16.2 11.5 1991. 18.3 4.7 23.0 - 23.0 1992 4.7 4.7 - 4.7 1993 4.7 4.7 - 4.7 1994 4.7 4.7 - 4.7 1995- 1/ 4.7 4.7 - 4.7 2012 1/ Includes replacement costs of pumps of Col$18.3 million in each of the years 2001 and 2011. 6.04 In computing the benefits, improvements to the physical and environmental conditions were relatively easy to measure, since they are normally reflected in an increase in land values. In this connection, the benefits were estimated for both the land that is presently urbanized in or near the project zones, and also the land that has been earmarked for future development. The methodology is outlined as follows: (i) Increase in land values in existing populated areas. Areas presently subjected to frequent flooding will experience an immediate increase in the land values once the problem has been eliminated. For the purpose of the computations in the preceding table, the increase in values was assumed to reflect other intangible benefits such as a diminution of health hazards and an improvement in the aesthetic conditions. No other benefits were quantified. The increase in land values was estimated by comparing present land values in areas subject to flooding with similar and nearby areas free of flooding. The estimated increase in values was conservative;  - 47 - (ii) Increase in land values in areas earmarked for future expansion. One of the objectives of the proposed project is to improve land use. In order to achieve this, certain areas of the southern part of the city presently not suitable for urbanization will t- upgraded. The attendant increase in the land values for this area was estimated to be equal to the difference in the value of this land as compared with similar land not subject to flooding, and also without similar infrastructure components. Fluctuations in market conditions as a result of these improve- ments were evened out by reflecting the increases over a 10 year period. In the same way, it was assumed that real estate sales in the new areas would be proportionate to the population growth, and that the market would not be artificially manipulated by either dumping large tracts of land, or on the other hand, by withholding land from the market in anticipation of further price increases. Yumbo Subproject 6.05 The tariff structure of Yumbo will be the same as Cali. Accordingly, the appropriate average tariff for domestic and industrial consumption as well as increases in the non-urbanized land values were used as a proxy for economic benefits. The increase was reflected during the 1981-84 period to coincide with other improvements, which would result in an almost immediate increase in the market value of land. Other benefits, such as overall health improvements, were not quantified. The estimated IERR is 13%. The cost benefits are shown in the following figures: Calculation of Internal Economic Rate of Return Cost snd Banefits in Col$ millions of June 1977 CDSt------------- - - -------- -------Benefits-- - _ Operation & Revenues from lear Construction Maintenance Total Tariffsl/ From Valorization Total Net 1978 66.5 66.5 -66.5 1979 67.9 67.9 -67.9 1980 12.7 12.7 -12.7 1981 4.6 4.6 9.3 36.8 46.1 41.5 1982 5.0 5.0 10.1 36.8 46.9 41.9 1983 5.4 5.4 11.0 36.8 47.8 42.4 1984 5.9 5.9 11.9 36.7 48.6 42.7 1985 6.3 6.3 12.9 12.9 6.6 1986 6.9 6.9 13.9 13.9 7.0 1987 7.4 7.4 15.0 15.0 7.6 1988 8.0 8.0 16.3 ;6.3 e 3 1989 8.6 8.6 17.5 17.5 8.9 1990 7.5 9.3 16.8 18.9 18.9 2.1 1991 8.6 10.0 18.6 20.3 20.3 1.7 1992 9.4 10.8 20.2 21.9 21.9 1.7 1993 11.6 11.6 23.6 23.6 12.0 1994 12.4 12.4 25.3 25.3 12.9 1995 13.4 13.4 27.3 27.3 13.9 1996 14.3 14.3 29.3 29.3 15.0 1997 15.4 15.4 31.5 31.5 16.1 1998 16.5 16.5 33.8 33.8 17.3 1999 17.7 17.7 . 36.3 36.3 18.6 2000- 2012 19.0 19.0 39.0 39.0 20.0 IERR - 137 1/ Used an a pro=y for econosic benefits.  - 48 - Cali Water Supply Subproject 6.06 The average incremental cost for the Cali3Water Supply Subproject, at an 11% discounted rate, is estimated at Col$ 1.47/m in prices of June 1977. While this cost is higher than the average tariff for the lowest income 3 consumers, it is still lower than the average water tariff of Col$ 2.55/m for the city as a whole. This indicates that on a resource allocation basis, the water is overpriced. However, the large spread is necessary to cover the debt service of past investments, which is mostly being absorbed by the higher income groups. This has resulted in an incremental rate of return of 36%. The incremental costs and volumes of water are shown in the following table: Averate Iacrumntal Cost of Water is Cali Volumes in million m3 and Costs in Col$ millions of June 1977 Incremental -----Incremental Costs- ------ Tear Volume Investment Opr.& Maint. Total Assumptions 1978 - 32.8 - 32.8 Investment costs do not include costs 1979 i.9 15.1 4.3 19.4 of house connections since they are 1980 7.9 11.9 8.7 20.6 charged to the user. 1981 11.8 - 13.0 13.0 It was assumed that increases in water 1982 15.8 - 17.4 17.4 supply beyond the levels of 1984 would 1983 19.8 - 21.8 21.8 require additional investments in 1984- distribution. 2002 24.2 - 26.6 26.6 AIC - 1.47 Col$/u3 Sensitivity Analysis Sewerage Subprojects 6.07 A sensitivity analysis for the internal economic rate of return on the sewerage subprojects shows that a positive net present value would still be achieved at any discount rate up to 11% - estimated opportunity cost of capital in Colombia - even if: (i) construction costs were 35% higher than estimated; or (ii) increase in land values in already urbanized areas was 53% lower than estimated; or (iii) increase in non-urbanized land values was 44% lower than estimated.  - 49 - 6.08 Construction costs are not likely to significantly increase - in constant prices - over estimates, since they (i) include a high civil works component which by its nature is not subject to wide fluctuations; and (ii) already include 15% for physical contingencies which is considered adequate for the nature of the works involved. 6.09 Increase in land values have been projected based on actual evidence from similar areas of the city. The new land that would be made available for urbanization may have a negative impact on the value of already urbanized areas. However, this impact, although not predictable, is unlikely to offset a major part of the project benefits in vacant land. Yumbo Subproject 6.10 A sensitivity analysis for the internal economic rate of return on the Yumbo subproject shows that 11% would still be achieved even if: Mi) construction costs were 11% higher than projected; or (ii) operating costs were 24% higher than projected; or (iii) increase in land values was 20% lower than projected; or (iv) revenues from tariffs or the volume of water sold were 12% lower than projected. 6.11 Construction and operating costs are not likely to be higher than projected - in constant prices - due to the relative simplicity of the works involved. Increase in land values projections corresponds to a minimum estimate and is likely to be higher. 6.12 If revenues from tariffs turn out to be lower than projected--in constant prices--a subsequent low internal economic rate of return would indicate the inadequacy of water tariffs, rather than that the investment was not justified. Demand projections have been based on historical data and on a survey on existing industries (paragraph 3.20), and the risk of significant deviation from these projections is considered minimal. Risks 6.13 The project is technically feasible and offers limited risk. The only risk is that the project may not be implemented in the time proposed if EMCALI, because of inaction on further rate increases, will be unable to mobilize the required local currency resources. Given the assurances obtained from EMCALI that rate increases and betterment levies will be implemented in a timely fashion, and, more importantly, the general acceptance of the need to strengthen EMCALI's finances, it is expected that the project will be carried out in the intended period.  - 50 - 6.14 Frequent changes in the position of General Manager contributed significantly to difficulties encountered by EMCALI in the recent past. The current General Manager, who was appointed in 1975, is competent and is able to count on an experienced second level of management that has undergone little change. Environmental Implications 6.15 The change of the point of discharge of sewage inside the limits of the city of Cali does not noticeably change the Cauca River's condition down- stream of the town. On the other hand, the discharge of raw sewage does not pose an urgent problem since cities located downstream from Cali do not use the Cauca River as a source of water. 6.16 The project provides for studies to establish the degree and type of sewage treatment required to reduce contamination of the Cauca River on the basis of standards to be applied by the Cauca River Authority (CVC) which is responsible for river quality (para. 4.13 (i)).  - 51 - CHAPTER VII AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During loan negotiations assurances were obtained that: (a) EMCALI will, by June 30, 1978: (i) prepare a program satis- factory to the Bank for the improvement of its management information budgeting, internal auditing procedures and strengthening of the coordination of the administration and operation of its division; and (ii) to the extent that would be required by the Bank, would employ consultants whose qualifications, experience and terms of reference and conditions of employment would be satisfactory to the Bank to assist the borrower in carrying out the program (paras. 2.08, 2.09, 2.10 and 2.11); (b) EMCALI's financial statements and accounts will be audited by independent auditors acceptable to the Bank (para. 2.10); (c) EMCALI will make investments in the Yumbo Subproject only after reaching an agreement satisfactory to the Bank with the Municipality of Yumbo on the terms and conditions under which EMCALI will take over the operation, maintenance and billing of Yumbo's water supply system; and that said agreement will provide that new industries in Yumbo be required to connect to the system (paras. 3.19, 4.07); (d) EMCALI will, to the extent that would be required by the Bank, employ engineering consultants to prepare the detailed designs for the project and to assist it in the supervision of construc- tion (para. 4.18); (e) EMCALI will place the supply and civil works contracts of the project in accordance with an agreed schedule (para. 4.19); (f) EMCALI will transfer funds generated by any of its divisions to another of its divisions only if the funds to be trans- ferred are in excess of those required for the operations, debt service, and investments of the division originating the funds, and it will treat such transfers made after June 30, 1977, as loans from one division to the other, on commercial terms and conditions (para. 5.03); (g) EMCALI's rates for water and sewerage and for power services will continue to be increased automatically each month, at the current rates of increase (paras. 5.05 and 5.20); (h) EMCALI will fully implement the property reassessment program by June 30, 1979 (para. 5.06);  - 52 - (k) EMCALI's investments, other than those already agreed to, for each of its divisions will not exceed, without the Bank's concurrence, US$1 million in any year (paras. 5.10, 5.22 and 5.27); (1) EMCALI would not incur long-term debt without the Bank's concurrence, unless its net revenues before betterment levies, interest and depreciation for the fiscal year next preceding such incurrence or for a later 12-month period ended prior to such incurrence, whichever amount is the greater, shall be not be less than 1.3 times the maximum debt service requirements for any succeeding fiscal year on all debt, including the debt proposed to be incurred (paras. 5.10, 5.22 and 5.27); (m) EMCALI will charge and collect, for certain works in- cluded in the project, not less than Col$ 587 million as valorizacion during the 1978-1981 period and not less than Col$ 203 million during the 1982-84 period (para. 5.11); (n) EMCALI will obtain annually, starting in 1978, financial rates of return as set forth in the appropriate paragraphs for the water and sewerage division, the power division, and the telephone division, based on the revalued cost less accumulated depreciation of the fixed assets in service of each division (paras. 5.14, 5.22 and 5.28); (o) EMCALI's fixed assets will be revalued for all of its divisions in accordance with methods satisfactory to the Bank (paras. 5.14, 5.22 and 5.28); (p) EMCALI will prepare quarterly reports and information on the progress made in achieving the monitoring indices (para. 5.32); and 7.02 The following condition of effectiveness were specified: (a) that EMCALI enter into arrangements with the Government and Banco Central Hipotecario for the Col$ 300 million to be made available by each of them to EMCALI on terms and conditions, including a schedule of disbursements, satisfactory to the Bank (para. 5.13); and (b) that EMCALI increase its tariffs for telephone services during 1978 so as to obtain the specified rate of return for 1978 (para. 5.26).  - 53 - 7.03 The following condition of disbursement was specified: A condition of disbursement for each sub-project in respect of which valorizacion would be collected would be that the Bank receives satisfactory evidence that all necessary authorizations and approvals required to charge and collect valorizacion in respect of such works shall have been obtained (para. 5.11). 7.04 Provided the foregoing conditions are met, the proposed project would be suitable for a Bank loan of US$13.8 million. The loan would be for 17 years, including a grace period of four years and US$200,000 retroactive financing for consultant expenditures incurred after June 30, 1977.   COLOMBIA SECOND CALI WATER SUPPLY AND SEWERAGE PROJECT EMPRESAS MUNICIPALES DE CALI ORGANIZATION CHART - MARCH 1, 1977 BOARD OF DIRECTORS *~ ""-5GENERAL MANAGER ASSISTANT GENERAL MANAGER | INTERNAL AUDIT MUNICIPAL LIAISON GENERAL SECRETARIAT URBAN PLANNING - ADMINISTRATIVE ANAGE-WAEANNGR NRGN * PLANNING MANAGER I AMANAGER MANAGER SEWER DEPARTENTDEPARTMENT 4I. TELEPHONES ( ORGANiZATION AND | J BUDGETING l J PERSONNEL WATER PROJECTS PROJECTS DEVELOPMENT 1 _I I FINANCIAL PLANNING TREASURY COMMUNITY SERVICES SEWERAGE PROJECTS CUSTOMER SERVICES CUSTOMER SERVICES | TECHNICAL PLANNING | 4 COMMERCIAL l 4 AND SUPMES CUSTOMER SERVICES. OPERATIONS OPERATIONS ACCOUNTING l STATISTICS OPERATIONs MAINTENANCE AND MAINTENANCE| * COORDINATING WATER SOURCE COMMITTEE AND TREATMENr | SEWAGE DISPOSAL 2 _ AND TREATMENT World Bank-17206  ANNEX 2 Table of Revised Cost Estimates Loan 682-CO Appraisal Estimates Actual Results Item Local Foreign Total Local Foreign Total -----US$ million----- -----US$ million----- Puerto Mallarino Treatment Plant Plant 2.01 2.17 4.18 6.71 7.25 13.96 Booster Pumps 0.21 0.27 0.48 0.28 0.36 0.64 Storage Tanks 0.24 0.03 0.27 0.21 0.03 0.24 Transmission Lines 3.66 2.02 5.68 4.46 2.46 6.92 6.12 4.49 10.61 11.66 10.10 21.76 Interest during Construction 1.19 0.87 2.06 2.62 2.27 4.89 Contingencies (44.3%) 2.71 1.98 4.69 - - - Total Subproject Costs 10.02 7.34 17.36 14.28 12.37 26.65 Other Subprojects - Water Distribution Lines 2.30 0.40 2.70 2.02 0.35 2.37 House Connections 1.90 0.53 2.43 2.17 0.60 2.77 Land and Tools 0.29 0.19 0.48 0.31 0.20 0.51 4.49 1.12 5.61 4.50 1.15 5.65 Interest during Construction 0.87 0.22 1.09 1.10 0.27 1.37 Contingencies (44.3%) 1.98 0.49 2.47 - - - Total Subproject Costs 7.34 1.83 9.17 5.60 1.42 7.02 Other Subprojects - Sewerage Pumping Facilities 0.57 0.30 0.87 - - - Sewers 2.20 0.09 2.29 4.60 0.19 4.79 House Connections 1.23 0.05 1.28 7.42 0.31 7.73 4.00 0.44 4.44 12.02 0.50 12.52 Interest during Construction 0.77 0.08 0.85 2.71 0.11 2.82 Contingencies (44.3%) 1.77 0.19 1.96 - - - Total Subproject Costs 5.77 0.63 6.40 14.73 0.61 15.34 Total Project Cost 21.07 8.71 29.78 34.61 14.40 49.01  ANNEX 3 Page 1 of 2 pages EMPRESAS MUNICIPALES DE CALI WATER AND SEWERAGE TARIFFS Effective Date February 1977 p .,.gty *sdc Cha!ne for Basic Minimum I Assessent Col$ Minimum ----Col$/month-------- Average I |From To m3/month Water Sewerage Total Col$/m3 Residantial a/ Cstegory 1 000 2000 26 5.50 3.30 8.80 0.34 2 2001 5000 26 7.00 4.20 11.20 0.43 3 5001 10000 21 10.00 6.00 16.00 0.76 4 10001 20000 20 12.50 7.50 20.00 1.00 5 20001 35000 20 18.00 10.80 28.80 1.44 6 35001 50000 20 29.00 17.40 46.40 2.32 7 50001 100000 20 40.00 24.00 64.00 3.20 8 100001 150000 20 63.50 38.10 101.60 5.08 9 150001 200000 20 84.00 54.40 134.40 6.72 10 200001 300000 20 117.50 70.50 188.00 9.40 11 300001 500000 20 192.00 115.20 307.20 15.36 12 500001 1000000 20 244.00 134.40 358.40 17.92' 13 1000001 and up 20 269.00 161.40 430.40 21.52 Official bl na na 20 35.00 21.00 56.00 2.80 Comercial cl na na none 60.00 36.00 96.00 i ustrial e/ U& as _ m 110.00 " .98 17.0 a/ Consumption in addition to the basic minimum is subject to an excess consumption surcharge which is automatically increased at the rate of 1.5X per month in accordance with the following schedule: ---- Billing Rate ----- Consemption 2/1/77 12/3/77 (in m /month) (in Co1$/m ) (in Col$/m ) 21 - 30 2.2778 2.6831 21 - 50 2.3397 2.7560 51 - 90 2.4628 2.9010 90 and over 2.7091 3.1912 b/ Consumption in addition to the basic minimum is subject to an excess consumption surcharge of Col$2.2778/mr3 as at February 1, 1977, which is automatically increased at the rate of 1.5% per month. As at December 31, 1977 the amount tood at Col$ 2.683/m 3  ANNEX 3 Page 2 of 2 pages c/ In addition to the basic minimum charge, actual consumption is charged in accordance with the following schedule: Consumption Billing Rate Category (in m /month) (in Col$/m3) Industrial & Commercial 100 2.5860 Industrial & Commercial 100 and up 3.0786  ANNEX 4 TABLE OF COST ESTIMATES -------US$ million----------- --------