Colombia - Second San Carlos Hydro Power Project

Document of FILE COpy The World Bank FOR OMCIAL USE ONLY Report No. P-2515-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INTERCONEXION ELECTRICA, S.A. WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A SAN CARLOS II HYDRO POWER PROJECT May 30, 1979 This document hbs a restrictd distributIn and may be _ns by recipients only in the perforance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriation.  CURRENCY EQUIVALENTS Average Calendar 1978 Mid-1979 Estimate (estimate) Currency Unit - Peso - Col$ Col$ US$1 = Col$39.32 43.10 Col$1 = US$0.0254 0.0232 WEIGHTS AND MEASURES 1 meter (m) 2 3.281 feet (ft) 2 1 square kilometgr (km ) 0.386 square mile (mi3) 1 cubic meter (m ) 35.315 cubic feet (ft ) = 264.2 gallon (gal) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t;metric;1,000 kg) = 1.100 short tons (sh. to s) 1 kilowatt (kW) s 1,000 Watts (10 kW = 10 W) 1 kilowatt-hour (kWh) 830.3 kilocalorieg (kcal) I Gigawatt-hour (GWh) 1,000,000 kWh (10 kWh) 1 kilovolt (kV) 1,000 Volts (V) ... per... / ...per second; ...per hour = .../s;.../h ...per day;...per year = /d;.../a GLOSSARY OF ABBREVIATIONS CHEC = Central Hidroelectrica de Caldas CHIDRAL = Central Hidroelectrica del Rio Anchicaya S.A. CORELCA = Corporacion Electrica de la Costa Atlantica CVC = Corporacion Autonoma Regional de el Valle del Rio Cauca DNP = National Planning Department EEEB = Empresa de Energia Electrica de Bogota EMCALI = Empresas Municipales de Cali EPM = Empresas Publicas de Medellin GDP = Gross Domestic Product ICEL = Instituto Colombiano de Energia Electrica IDB = Inter-American Development Bank ISA = Interconexioni Electrica S.A. JNT - Junta Nacional de Tarifas de Servicios Publicos FISCAL YEAR January 1 to December 31  - i - FOR OFFICIAL USE ONLY COLOMBIA SAN CARLOS II HYDRO POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: Interconexion Electrica, S.A. (ISA) Guarantor: The Republic of Colombia Amount: US$72.0 million equivalent Terms: Repayment in 17 years, including four years of grace; interest at 7.9% per annum. Project Description: The project forms part of ISA's 1978-85 expansion program to provide the additional power required through the mid- eighties and comprises mainly the second phase of the San Carlos hydro power development. (The first phase is being financed partly by Loan 1583-CO.) The project includes: (a) San Carlos II: construction and erection of a second penstock, four turbine-alternators and transformer groups totalling 620 MW, and ancillary equipment and works; (b) Calderas: construction of a 15 m high rock-fill dam on the Calderas River, inlet and discharge tunnels, and a surface power station with an 18 MW generating unit; (c) construction of two 230-kV transmisson lines, between San Carlos and Medellin (90 km) and between Esmeralda and Yuma (200 km), and expansion of the various terminal substations; (d) consult- ant services for engineering, civil works and supervision; (e) a study of dispatch aspects of the interconnected sys- tem, as well as related training; and (f) a study of ISA's manpower and training requirements, and an associated train- ing program. Once completed, the San Carlos hydro plant would be the largest power generating facility within the integrated system, with an aggregate installed capacity of 1240 MW. The project would continue the Bank's institution- building efforts in the sector started in 1950. In parti- cular, it would support further consolidation of the considerable progress over the past two years in achieving centralized sector planning and coordination through ISA, as well as in improving the finances of ISA and its share- holders, and would assist ISA in preparing for the more complex operational responsibilities it will face in future. Moreover, the project would help meet the heavy forecast requirements for specialized manpower in the sector. The project is subject to virtually the same risks as San Carlos I, i.e., those associated with large civil works in difficult terrain. This document his a rstricted distribution and may be used by recipients only in the performance of their ofllcial dutie. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs: US$ million equivalent Local Foreign Total San Carlos II Engineering 10.1 1.4 11.5 Electro-mechanical Equipment 5.1 41.7 46.8 Transmission 7.9 22.6 30.5 Calderas Engineering 0.6 0.8 1.4 Civil Works 4.1 4.1 8.2 Electro-mechanical Equipment 1.9 4.3 6.2 Studies and Training 0.7 2.9 3.6 Physical Contingences 2.6 7.8 10.4 Price Contingencies 12.6 25.9 37.5 Total Project Cost 45.6 110.5 156.1 Note: During the period 1978-84, ISA will carry out other works with an estimated cost of US$2.4 billion equivalent and will require an increase in working capital of US$53 million. Financing Plan: US$ million equivalent Local Foreign Total Net Internal Cash Generation and Shareholder Contributions 45.6 8.4 54.0 Proposed IBRD Loan - 72.0 72.0 Suppliers' Credit - 30.1 30.1 Total 45.6 110.5 156.1 Rate of Return: For the overall San Carlos development - 14%. Appraisal Report: Report No. 2464b-CO, dated May 30, 1979.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INTERCONEXION ELECTRICA, S.A. FOR THE SAN CARLOS II HYDRO POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Interconexion Electrica, S.A. (ISA), with the guarantee of the Republic of Colombia, for the equivalent of US$72.0 million to help finance the San Carlos II Hydro Power Project. The loan would have a term of 17 years, includ- ing four years of grace, with interest at 7.9% per annum. PART I: THE ECONOMY 1/ 2. An economic report on Colombia (2235-CO) was distributed to the Executive Directors in January 1979. An updating mission visited Colombia during February 1979 and is preparing its report. Its findings are sum- marized below. Country data sheets are provided in Annex I. Background 3. During the past two decades, Colombia has made substantial progress in the transition from a predominantly rural and agricultural economy made up of largely self-contained regions to a more integrated urban-industrial economy. The productive base of the economy has been widened appreciably, and there has been substantial diversification of production in both the agricultural and industrial sectors. These improvements have been accompanied by rapid growth of non-traditional exports and by the development of a modern sector relying to a considerable extent on imported inputs. As a result, the country has become less dependent on coffee as a source of foreign exchange earnings, and fluctuations in domestic economic conditions resulting from unpredictable shifts in world coffee prices, while still considerable, have become more manageable. Although substantial progress has been made during the past two decades, Colombia is still only partially developed with a limited modern sector superimposed on a large, traditional and economically poor base. Per capita income is low by developed world standards, the maintenance of high employment is a persistent problem, and in 1975 an estimated 55.0% of the rural and 24.0% of the urban population had incomes under the relative poverty level as defined by the Bank. 4. Colombia's population growth rate declined sharply in the past two decades; from well over 3% in the 1950s, to about 2.8% in the early 1970s and to an estimated 2.1% at present. 2/ This was in large part the result of a rapid decline in the crude birth rate; one of the most pronounced declines 1/ Unchanged from President's Report, Third Bogota Water Supply, Sewerage and Drainage Project (Report No. P-2525-CO, dated May 2, 1979). 2/ Estimated 1978 growth rate. This rate differs from that given as the most recent estimate in the Social Indicators Data Sheet (Annex I) which is an average for early 1970s.  - 2 - ever recorded in a Latin American country. Rising per capita income, rapid rural/urban migration, expanded economic opportunities for women and increased effectiveness of family planning programs are included among the factors responsible for the lower birth rate. Although rural/urban migration slowed from the early 1960s on as progress was made in eliminating the widespread violence in the countryside, approximately 64% of the current population lives in urban centers and there are now 22 cities with populations exceeding 100,000 persons. Colombia's population is not considered excessive relative to the country's resource base. Economic growth will have to average around 7%, however, especially in the directly productive and service sectors, in order to increase employment at a pace sufficient to keep up with growth of the labor force. 5. Available information--while scanty--suggests that some improvement has occurred in income distribution and welfare of the lowest income groups in Colombia since the 1950s. These gains were probably the consequence of several factors, including migration of surplus labor from rural to urban areas, rapid growth of employment in high productivity jobs in industry and the services and reduced population growth. Policy efforts, particularly since 1967, have been directed increasingly toward improving the welfare of the poorest 50% of the population. These efforts have emphasized both employment generation and greater public investment in health, education, nutrition and urban development. The Bank has strongly supported these efforts. Continued emphasis on growth of the productive sectors of the economy, on industrial decentralization and on programs to encourage small- scale industry and agriculture should provide increased employment oppor- tunities and higher real wages for unskilled and semi-skilled labor in both rural and urban areas. Further improvement in the public services provided to the poor should reinforce these trends and raise the level of welfare of this segment of the population. 6. The Colombian authorities introduced a dramatic change in develop- ment strategy in 1967, shifting emphasis from the then existing protectionist policy of import substitution to measures designed to expand and diversify exports. These policies were highly successful in expanding exports, thereby alleviating the foreign exchange constraint and making possible a substantially higher level of investment. As a consequence, real GDP rose by an average 6.5% annually between 1967-1969 and 1974, well above the historical average. Merchandise exports in current prices expanded nearly threefold during this period, and most significantly, non-traditional exports became an increasingly important source of foreign exchange earnings, in part compensating for slow growth of receipts from coffee exports. By 1974, non-coffee exports comprised 56% of total merchandise exports, up from about 30% in 1967. 7. Despite the growth of output and the diversification of exports, the country faced some potentially serious problems at the time the new administration took office in 1974. Weakening balance of payments in part  - 3 - related to the slowdown of growth in the industrial countries, loss of self-sufficiency in petroleum production, deterioration of the public finances, accelerating inflation, and declining investment threatened to reduce growth of output and employment. As a consequence of these develop- ments, the Government introduced an economic stabilization program which combined basic reforms of the fiscal, monetary, and trade systems with measures aimed at accelerating long-term economic growth. 8. In an effort to strengthen the public finances, the Government undertook a comprehensive tax reform designed to improve the progressivity and elasticity of the tax system. Some of the distortions which had deve- loped in the financial system caused by forced investment requirements placed on financial institutions and by differential tax treatment of financial instruments were eliminated. Interest rates were raised in an effort to increase private savings and improve resource allocation. In order to increase the efficiency of the economy through greater reliance on market forces, price controls on a number of industrial and agricultural products were removed, thereby providing greater stimulus for increasing production. Modifications in petroleum pricing policy aimed at regaining self-sufficiency in the production of crude petroleum by improving incen- tives for exploration and exploitation were introduced. Concurrently, the Government initiated policies designed to reduce the subsidy on local consumption of petroleum products, which eventually led to a 220% increase in gasoline prices by 1978. Tariff levels and non-tariff barriers to trade were reduced significantly in order to increase competition and the effi- ciency of domestic firms. While these reforms were successful in improving the public finances and reducing inflation in 1975, they also served to reduce economic growth and the slowdown of domestic economic activity which began in 1974 continued through most of 1975. Recent Economic Developments 9. During the past three years, the Colombian economy has been dominated by developments in the external sector. As the result of a serious frost in late 1975 affecting Brazil's major coffee producing area, coffee exports from that country declined sharply triggering a fourfold increase in the world price of coffee by mid-1977. This caused Colombia's export earnings from coffee to increase to nearly US$1.8 billion in 1977 from US$764 million in 1975, and produced an unprecedented rise in incomes and demand in the country's rural areas. Lagging supply of consumer goods, particularly basic foodstuffs--the production of which was adversely affected by drought conditions in most of the country's interior--failed to keep pace with rising demand and inflation accelerated from 24% in 1975 to 44% in the twelve months ending June 1977. Inflation in Colombia has been moderate relative to that experienced by other countries in the region, seldom exceeding an annual rate of 20%. The acceleration of inflation which took place during the period, therefore, was unprecedented in recent history, and efforts to lower the rate of inflation have dictated economic policy since that time.  10. The authorities responded rapidly by introducing a broad range of fiscal, monetary and trade policies designed to gain control over the explosive increase in prices. Beginning in late 1976 reserve requirements were raised and rediscounting and public sector borrowing from the Central Bank were discouraged. The authorities temporarily suspended their policy of periodically adjusting the exchange rate and prices of petroleum products. In January 1977, a 100% marginal reserve requirement was placed on increases in commercial bank deposits exceeding the December 31, 1976 level. To delay the impact of rising foreign exchange receipts on the monetary base, exporters were required to accept 90-day US dollar denominated certificates of exchange in lieu of cash payment for their exports. In order to sterilize a portion of the increase in foreign exchange earnings from coffee exports, the Coffee Federation agreed to invest a large portion of its receipts in Central Bank bonds, the proceeds of which were frozen in a special account. To increase supplies in the domestic market, a number of measures were taken to liberalize imports. Food imports by the state marketing agency, IDEMA, were increased sharply. In addition, restrictive fiscal measures were introduced to curb growth of aggregate demand and in 1977 the Treasury registered an overall budgetary surplus for the first time in recent years. 11. As a consequence of these measures and a favorable second semester harvest, inflation declined sharply beginning in July 1977. By the end of the year, the annual rate of inflation had fallen to 29%. With inflation subsiding, periodic exchange rate adjustments and gasoline price increases were reintroduced. With few other exceptions, however, the stabilization policies were continued in effect throughout 1978 and by year end inflation had subsided to an annual rate of 17.8%. 12. Because of the lack of dynamism in world markets, slow growth in agricultural production, capacity constraints in the industrial sector and a decline in real investment, the Colombian economy expanded only moderately in 1976 and 1977. Growth of real GDP increased from 3.8% in 1975, to 4.6% and 4.8% respectively in the subsequent two years. The higher growth was a direct result of the expansion of domestic demand brought about by the rise in incomes of coffee producers. Output in the trade and personal services sectors of the economy (including transport and communications) responded strongly to the rising demand, while agricultural output, because of the drought, rose by only 2.2% p.a. on average for the 1976-77 period. Industrial sector output rose by only 5.4% p.a. during this period, despite the strong growth in domestic demand. Because growth occurred in the rela- tively labor intensive sectors of the economy -- personal services, trade, transport and communications and manufacturing -- the urban unemployment rate had declined to an estimated 8% by the end of 1977, from an average 12% during the early 1970s. In addition, there is evidence of labor shortages and rising real wage rates in rural areas during this period, and it is believed that rural unemployment also declined. 13. Preliminary estimates for 1978 show a strong increase in real GDP resulting primarily from continued stimulus to aggregate demand from high coffee receipts and from an expansion of investment. In addition, favorable weather conditions permitted a sharp recovery in agricultural  output. Real GDP growth is estimated at 8% for the year, with agricultural production estimated to have grown by as much as 9% over the low level of 1977. While coffee prices fell considerably in 1978 from their 1977 levels, this decline was more than offset by expanding export volume as Colombia undertook a more aggressive coffee export policy. Consequently, receipts from coffee exports rose to nearly US$2.1 billion for the year. The accompanying rise in domestic demand and a modest recovery in export markets caused manu- facturing and transport and communications to grow by 8.5% each and trade (including commerce) by 9.0%. Construction activity, which had continued at a low level during the past several years, recovered strongly in 1978, partially as a result of an increase in speculative demand arising from an inflow of funds from contraband activities. Only the mining sector, in which output fell by 2.3% as a result of declining oil production, failed to show signifi- cant growth in 1978. Open unemployment in urban areas is estimated to have fallen to 7.6% by June 1978. 14. Colombia's balance of payments was also highly favorable in 1978, continuing the trend of the previous three years. Largely as a result of the increase in coffee exports, although non-coffee exports rose modestly (7.0%) in real terms also, Colombia's net official international reserves rose by US$664 million, reaching US$2,493 million by the end of the year, equivalent to about nine months imports of goods and non-factor services. This increase in reserves occurred despite a nominal 25% increase in import payments, reflecting the rise in domestic demand, continued overvaluation of the exchange rate and liberal import policies. There were few significant modifications in trade and exchange rate policies in 1978. The slow rate of peso devaluation was continued during the first three quarters of the year, but accelerated in the fourth quarter when the pace of reserve accumu- lation began to slow. In general, trade and exchange rate policies were directed towards reducing the impact on the monetary base of reserve accumula- tion by delaying the monetization of export receipts and advancing import payments. These measures complemented monetary policies which were aimed at restraining growth of the money supply. 15. Colombia's public finances generated a large surplus in 1978 thereby permitting the Government to relax somewhat the policy of fiscal restraint which formed part of its anti-inflationary program during the previous two years. Current savings of the public sector rose to an estimated 6.0% of GDP, compared with 5.5% of GDP in 1977, and covered about 90% of public sector investment. Both the Central Government 1/ and the consolidated decentralized agencies increased their savings in 1978, the former by 29% and the latter by 153%. The strong increase in savings of the decentralized agencies, which rose to 1.4% of GDP from 0.7% in 1977, was the result of increased charges for the services they provide and of restraint on current expenditures. Large increases in customs duties and in sales taxes brought about by the growth in domestic demand were the main factors responsible for the increase in savings of the Central Government. As a consequence of this improved financial situation, public sector fixed 1/ Comprised of the National Government, the National Highway Fund and the Social Security Agencies.  -6- investment rose during the year, reaching 6.9% of GDP compared with 6.3% of GDP on average for the 1975-77 period. Some of the heaviest investment took place in the development of hydropower and in the petroleum sector, for both explora- tion and development. 16. Despite continuation of the stabilization programs largely unchanged from last year, the rate of inflation accelerated sharply in early 1979. On an annual basis, inflation had reached 22.7% by the end of April. At the same time, the international price of coffee fell sharply, prompting the Government to take measures to avoid a large financial deficit for the Coffee Federation. In the past, such deficits were financed in part through recourse to the Central Bank. The Federation, an autonomous entity which manages the domestic and external marketing of Colombia's coffee, purchases coffee from producers at a fixed price in pesos and then sells it on the world market. Since the Federation stands ready to purchase all coffee offered at the fixed price, it also bears the financial burden of stock accumulation in periods of declining world prices. After paying taxes and marketing costs equivalent to nearly 25% of the international price, the Federation could not sustain the high domestic purchase price given the lower world coffee price without incurring huge losses. To avoid this, the domestic purchase price of coffee was lowered by 12% and the exchange certificate system was abolished for coffee exports. This latter measure will result in the conversion to cash over the next several months of around Col$10 billion in outstanding exchange certificates. To offset the monetary impact of this measure, reserve requirements on term deposits of commercial banks and financial corporations are to be increased gradually over the next few months, to 25% from 20% at present, and prior import deposit requirements have been raised substantially, to 95% from 40% and 60% previously. In addition, the interest rate on dollar denominated certificates issued by the Central Bank was raised to 14% from 7% in an attempt to absorb some of the funds flowing from the exchange certificates. In a separate measure, retail gasoline prices were increased in mid-March and Sunday sales of gasoline were outlawed. Gasoline prices have been raised by 67% since September 1978. Development Strategy and Prospects 17. The development strategy embodied in the 1975-78 Development Plan aimed at accelerating the rate of growth of GDP and at distributing the benefits of such growth more equitably. This was to be achieved by increasing the allocative efficiency of the economy through greater reliance on market forces, by providing incentives for increasing private sector investment, by expanding economic and social infrastructure, and by improving public services provided to the poorest half of the population. Substantial progress has been made in carrying out this strategy during the past four years. Public sector investments have focused increasingly on projects designed to alleviate rural and urban poverty and on expanding and improving infrastructure. Compre- hensive integrated rural development and nutrition projects aimed at increasing incomes and welfare of the lowest income groups have been introduced. Urban development projects designed to provide improved services and employment opportunities to residents of slum areas in Colombia's major cities have been initiated. These programs have been complemented by policies to encourage the  - 7 - development of small- and medium-scale enterprises and to decentralize industry away from the three largest cities. This latter policy, together with credit programs aimed at increasing output and employment in agriculture, have been designed to alleviate rural poverty and reduce rural/urban migration. Public sector infrastructure investments have been concentrated on improvement and extension of highway and communications systems. Special priority has been given to the development of domestic energy sources to reduce the country's growing dependence on imported oil. 18. Increased emphasis on provision of improved social services is re- flected in the increased proportion of total National Government expenditure on education, health, and water and sewerage systems, which rose from 33% in 1974 to 38% in 1977. The economic dislocations caused by the coffee boom and the need to concentrate economic policy on short-term management problems have limited expansion of public and private investment and required temporary suspension of some of the measures designed to free the price system and stimulate growth of non-traditional exports. 19. The Government, which took office in August 1978, intends to continue with essentially the same development strategy as the previous administration. Under this strategy, economic growth is to be promoted through expansion of non-coffee exports and through measures to stimulate investment and increase the efficiency of resource allocation. This Government proposes to give greater emphasis to expansion of economic and social infrastructure, however, with particular stress on improving transport and communications networks. Improvement in transport and communications infrastructure is expected to encourage increased inter-regional trade which, together with alleviation of the foreign exchange constraint, should further stimulate investment and economic growth. Measures to encourage industrial decentralization have been introduced to complement the actions taken to unify regional markets. 20. Rapid expansion of domestic energy resources is to be given high priority with the view to regaining self-sufficiency in energy as early as possible. Even under the most optimistic assumptions regarding development of such resources, however, Colombia will continue to rely heavily on energy imports until the mid-1980s when exports of coal and natural gas are expected to reduce the country's net energy deficit. Small scale agriculture and industry will continue to receive strong support through credit, and low income rural areas are to be helped through rural electrification, health and education programs and through expansion of feeder road projects. Innovative programs such as the integrated rural development (DRI) and nutrition projects financed by the Bank are expected to receive continued high priority. Public investment programs in education, health, water and sewerage and urban development (especially those directed at alleviating urban poverty) are to be continued as well. 21. Given the country's strong resource base and its high level of international reserves, Colombia should be able to achieve annual real GDP growth averaging about 7% during the 1979-83 period. Maintenance of this level of growth will require rapid expansion of non-coffee exports and high savings and investment rates. Public sector investment is expected to expand faster than GDP during this period because of the large proposed programs  - 8 - for infrastructure, social services and energy development. Financial require- ments for this higher level of investment will be substantial and public sector savings will have to be sustained at the current high levels. Given the expected decline in coffee revenue, improvements will be required in the administration and collection of non-coffee taxes, and additional tax measures may be required. Of equal importance is the continued upward adjustment in prices charged for the goods and services provided by the public decentralized agencies. Growth of non-coffee exports, especially of manufactured goods, will no doubt be strongly influenced by the rates of economic growth of Colombia's major trading partners, but appropriate domestic incentives will also play an important role. In this regard, it is expected that Colombia will follow an exchange rate policy designed to maintain the competitiveness of Colombian exports and that additional export promotion measures will be adopted to encourage both product and market diversification. 22. Greater efforts to increase efficiency and production in the agricul- tural and industrial sectors will also be needed to complement incentives given to non-traditional exports. Programs to meet these needs in the agricultural sector, including integrated rural development, expansion of farm credit, im- proved research and extension services, and upgraded marketing facilities, are already in place and will need to be strengthened. Further development of the country's capital markets is expected to increase private savings and im- prove the allocation of financial resources, thereby providing the basis for more rapid growth of industry. Ongoing and future infrastructure investments by the public sector should facilitate improvements in economic efficiency and lead to more rapid growth of output and employment in both industry and agriculture. 23. Projections of Colombia's energy balance indicate a rapidly growing deficit that is expected to reach significant proportions in the early 1980s in the absence of an aggressive energy development program. To avoid the con- straint on growth that large scale shortages of energy would entail, high priority is being given to the development of additional energy sources. The strategy which is being pursued is to reduce the nation's dependence on petro- leum as an energy source by developing substitutes such as hydropower, coal and natural gas. Major projects are being executed and others prepared to expand hydroelectric power generation and incentives are being given to pri- vate foreign companies for accelerated exploration and development of the country's petroleum, coal and natural gas potential. Exports of coal and natural gas are expected to offset a large portion of the petroleum imports projected for the mid to late 1980s. Conservation of existing resources resulting from higher energy prices is expected to slow the growth in energy demand. While the total investment cost of future energy development is still being determined, preliminary estimates indicate that the required investment could run as high as US$8.0 billion in current prices over the next decade. Even under the most optimistic assumption regarding foreign private investment, suppliers' credits and domestic resource mobilization, external long-term financing of about US$4.0 billion would be required in this sector alone during this period. Any significant delay in implementing the country's energy development program would most likely have serious adverse repercus- sions on future economic growth.  24. Because of the expected continued decline in world coffee prices, accelerating oil imports and the high import content of future investment projects, the current account of the balance of payments is expected to be in deficit throughout the early to mid-1980s. Increased mineral exports including coal, natural gas, and nickel, and completion of the large invest- ments in energy development are expected to relieve the pressure on the balance of payments by the late 1980s. Colombia is expected, therefore, to continue to be a large net importer of capital for some time to come. Its future external resource requirements reflect the need to supplement domestic savings in order to carry out the public sector investment program and to provide increasing amounts of foreign exchange to finance required imports of capital and intermediate goods. Assuming that the Colombian authorities permit a drawdown of international reserves to the equivalent of three months' imports in the years immediately ahead, gross external capital requirements are projected at US$6.3 billion between 1979 and 1983, or an annual average of about US$1,260 million. About half of Colombia's capital inflow during this period is expected to be provided by official multilateral and bilateral sources, with commercial financial credits becoming increasingly important. 25. Colombia's public external debt repayable in foreign currency amounted to US$4.2 billion at the end of 1978, of which US$2.7 billion was disbursed and outstanding. The Bank/IDA share of this external debt was 29% and is expected to rise to 31% by 1983, before declining to 29% again by 1985. Although the public debt service ratio fell during the past two years as export growth accelerated, this ratio is expected to increase from 10.2% in 1978 to about 14.7% in 1983. Balance of payments prospects beyond 1980 will depend heavily on the timely development of domestic energy sources and on progress made in executing several natural resource- based export oriented projects currently under preparation. Given the expected continuation of sound economic and financial management and timely execution of the country's energy program, it should be possible to prevent the external sector from again becoming a constraint on economic growth and to maintain Colombia's creditworthiness for the required external borrowing. PART II: BANK GROUP OPERATIONS IN COLOMBIA 26. The proposed loan, the 81st to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$2,169.6 million (net of cancella- tions). Of this amount, US$1,593.7 million is now held by the Bank; IDA made one credit of US$19.5 million for highways in Colombia in 1961. Disbursements have been completed on 47 loans and the IDA credit. IFC has made investments and underwriting commitments of US$53.66 million in 24 enterprises and now holds US$17.93 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of March 31, 1979. The Annex also contains summaries on the execution of the 29 on-going projects. 27. Since FY68, Bank lending in Colombia has become more diversified and has been concentrated on production-oriented programs and activities which  - 10 - emphasized social as well as economic benefits. Eight of the eleven agricul- tural loans have been made since then, nine of the twelve loans for industry, all three loans in the education sector, all nine loans for water supply and sewerage, one loan for a nutrition project and two loans for urban development projects. This compares with only eleven loans since FY68 in the power and transport sectors. 28. Bank lending to Colombia in FY78 consisted of loans for nutrition improvement, water and sewerage, urban development, power generation and interconnection, development finance companies and development of an export processing zone, totalling US$354.6 million equivalent. In addition to the proposed project, the FY79 program includes recently approved loans for avia- tion development, hydro power, water and sewerage, medium-city water supply systems, and slum improvement, as well as proposed loans for nickel mining and processing, and agricultural credit for land reform beneficiaries. Work is also underway in vocational training, transportation, further mining development, power, including distribution expansion and rural electrification, oil exploration, industry, including small scale enterprises, agricultural credit, and small farm development for possible consideration by the Executive Directors during the next two years. 29. The proposed Bank lending conforms closely with the Government's development strategy. To help Colombia develop domestic sources of energy, a substantial part of the proposed lending would be for hydropower. The Bank intends to assist the development of coal mines and petroleum, which hold potential in helping Colombia meet part of its energy requirements and in diversifying exports. Bank involvement in the energy sector would help mobilize additional external financing as some of the projects would require co-financing. Other future loans would finance agriculture and industry to assist the Government in its efforts to raise overall productivity, incomes and employment, and to strengthen and diversify exports. Closely related to these objectives would be the proposed Bank lending for transport infrastruc- ture. In this context, we are assisting the Government in preparing a rural and feeder roads project to integrate the more backward areas of the country into the modern economy. Other loans under preparation for highways, ports and railroads are aimed at helping Colombia handle larger volumes of non- traditional exports and the imported inputs on which the modern sector of its economy relies for expansion. Finally, a relatively large number of loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. The proposed projects for vocational training, rural electrification, small farm development, small scale industry and credit for land reform beneficiaries are principally designed to improve the standard of living of the poor. 30. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB and AID provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then' to approximately 50% over 1975-77. Like the Bank, IDB has given increased emphasis to social projects and has financed projects in low cost housing, urban and rural development, agrarian reform, university education, water supply, and land erosion control. In the future, it proposes to assist Colombia to develop sources of domestic energy and to expand the activity of  - 11 - the productive sectors to help generate increased employment. AID has supported programs in education, urban development and small farm development. It plans to phase out its aid program in Colombia at the end of this year with the disbursement of a US$6 million nutrition loan. The Governments of the Federal Republic of Germany and the Netherlands have also provided concessional financing for social and regional integration projects. PART III: THE ENERGY SECTOR AND POWER REQUIREMENTS Energy Resources and Requirements 31. Colombia is endowed with substantial primary energy resources (hydro- power, natural gas, petroleum and coal), the most promising of which is hydro- power, estimated at a potential 100 GW, of which only 2.7% have been developed to date. Coal resources have been little explored, but reserves are estimated to range from 20-40 billion metric tons, at which level they would be the largest in Latin America. A recent discovery of natural gas in the Guajira Peninsula, amounting to 3.5 trillion cubic feet, has brought proven reserves to a level well above 5 trillion cubic feet. On the other hand, because of insufficient exploration, known reserves of crude oil have fallen and are estimated to amount to less than eight years of 1976 output. However, only one of Colombia's nine sedimentary basins (the Magdalena River Valley) has been explored on a systematic basis, although the state oil company, ECOPETROL, in association with foreign oil companies, is now exploring other basins. Additionally, investigation of nuclear, geo-thermal and solar energy is under- way. 32. Since 1965, output of primary energy has lagged behind overall econo- mic growth, mainly because of declining crude oil output. By 1977, production of crude (281.1 trillion Btu) had fallen to 69% of 1965 output and 63% of the 1970 level. While over 1965-77 total energy output increased by 10%, from 578 trillion Btu to 637 trillion Btu, energy consumption increased by 132%, rising from 271 trillion Btu to 629 trillion Btu. (Exports and losses account for the difference between production and consumption figures.) By 1976, hydrocarbon imports exceeded exports by US$35.6 million equivalent. Projections of Colombia's energy balance indicate an expanding deficit that could reach sig- nificant proportions in the early 1980s and become a constraint on economic growth (paragraph 23). Energy Development Objectives and Strategy 33. As stated, the Government's objective is to overcome the energy deficit by developing domestic energy sources and by promoting rational use of them. To this end, it has adopted several measures. First, it has recast its hydrocarbon pricing and regulation policy to stimulate output of petroleum, natural gas and coal. Foreign oil companies have reacted favorably to these measures and have initiated new explorations. Second, CARBOCOL, a Government agency established to develop the country's coal resources, has concluded con- tracts with various foreign companies and governments to undertake exploration and development of several coal fields, particularly the largest, El Cerrejon, in the Guajira region. Third, considerable substitution of gas for petroleum products in industry and thermal power generation is being carried out on the  - 12 - Atlantic Coast. Fourth, a program for expansion of power generation and trans- mission facilities to meet forecast demand over the 1977-85 period has been drawn up (paragraphs 41 and 42). Fifth, COLURANIO, a public enterprise, has concluded a contract with the French Minatome Group to explore the country's uranium potential. Lastly, the Government has adopted a policy calling for charging the full cost of energy to consumers in order to promote rational energy use and to self-generate an important share of the financial resources required for investment in the sector (paragraph 40). The Power Market, Service Levels and Institutional Framework 34. Electric power is the fastest-growing form of energy in Colombia. Its share of total energy consumption has risen from 14% in 1960 to 25% in 1977. Colombia's installed capacity at the end of 1977 was 3,765 MW, includ- ing self production; hydro stations account for 68% of total energy generated. Since 1971, production of electricity has been growing at an annual rate of 9.8%, i.e., one and a half times as fast as the growth rate of GDP. Power sales have also been rising rapidly (9.5% per annum since 1971). Annual per capita electricity generation stands at 610 kWh, which is below the average for Latin Amercia. Households (42% of the total), industry (33%) and commerce (14%) are the major electricity users. 35. About 60% of Colombia's 25 million population has electricity. The urban population, in 1977 estimated to be about 641% of the population, has greater access to electricity. 1/ In 1976, for example, 86% of households in large cities (population of 50,000 or more) had electrical service while in rural towns (population between 50-2,500) the corresponding figure was 36%; in other rural areas, 16%. With the assistance of external lenders. the Government is carrying out programs to increase the supply of electricity to rural areas. 36. The Ministry of Mines and Energy is charged with formulating national policy for power generation, transmission and distribution. In defining invest- ment priorities, it shares responsibility with the National Planning Department (DNP). The Government cannot enforce its policies directly on the municipally- controlled power companies, but Interconexion Electrica, S.A. (ISA), a generat- ing and transmission company controlled by the largest municipal power companies and by the Government-owned national power companies, provides a mechanism for reaching agreement on major issues affecting the sector. Public utility tariffs are regulated by the Junta Nacional de Tarifas de Servicios Publicos (JNT) in the DNP. JNT, which was established in the late sixties with Bank support, has the power to approve requests from the power companies for tariff increases. The power companies, however, are free to set rates lower than those approved by JNT. 37. The entities which provide public electricity service comprise: (a) independent municipal companies, of which the largest are Empresa de Energia Electrica de Bogota (EEEB), Empresas Publicas de Medellin (EPM) and Empresas Municipales de Cali (EMCALI); 1/ Residents of cities with 2,500 or more inhabitants.  - 13 - (b) entities under the National Government, the most important of which are Corporacion Autonoma Regional del Cauca (CVC), Corporacion Electrica de la Costa Atlantica (CORELCA), and Instituto Colombiano de Energia Electrica (ICEL), all of which have numerous local subsidiaries; and (c) ISA, the shareholders of which are EEEB, EPM, CVC, CORELCA and ICEL. 38. The power sector's rapid expansion (paragraph 39) has been accom- panied by various organizational and institutional changes. Over the past 20 years, numerous isolated local utilities were consolidated into regional systems and, by the early 1960s, the systems were approaching a size which would make an interconnected system more efficient and facilitate development of Colombia's low-cost hydro resources. The task of interconnection and of constructing, owning and operating generating plants to meet the demands of an integrated system has been undertaken by ISA, which was established in 1967 for this purpose. By 1972, ISA had interconnected the Central System; by 1982, with the incorporation of the Atlantic System, the national grid will be completed (paragraphs 44-45). Currently, ISA owns and operates a 500 MW hydrostation and has an additional 1290 MW under construction (the Chivor II, San Carlos I and Jaguas hydro plants, the foreign exchange cost of which is financed mainly by the Bank and IDB). Moreover, in line with its recently- revised bylaws, ISA defines the generation and transmission expansion program for the interconnected system; after approval by its Board, this becomes the national expansion program (paragraph 43). Power Development and its Financing 39. Colombia's power sector has developed rapidly. Between 1950-1977 installed generating capacity increased by 3,515 MW or fifteenfold. A substan- tial part of this expansion was financed with internal cash generation (in the case of the large municipal companies, about 40% of total capital outlays) and with contributions from the National Treasury, chiefly to ICEL, CVC and CORELCA. The Bank and IDB were the main source of foreign financing for the power sector (US$607 million equivalent combined), although in recent years suppliers' credits and external commercial banks have increased their parti- cipation. 40. During 1971-74, power rate adjustments lagged behind cost increases and the companies' finances deteriorated, with the result that construction of new works was delayed and the operating efficiency of the companies suffered. However, beginning with 1975, rate adjustments have been accelerated, with average yearly increases through 1977 marginally exceeding average annual in- flation and substantially exceeding it in 1978. Investment outlays have once again increased and in 1975 totalled US$187.6 million equivalent, i.e., 31% over the preceding year. In early 1978, the Government and the major power companies initiated a program of tariff increases with the aim of generating an adequate portion of investment funds for planned expansion. In line with this, average tariff levels in companies accounting for the bulk of power sales  - 14 - were increased by some 37% by the end of 1978, with further increases of 33% already approved for 1979. They propose to continue doing so as necessary to generate sufficient resources for investment. Also, to promote rational energy use, the power companies and the Government, under San Carlos I, are studying the internal structure of rates with a view toward bringing them more in line with the cost of supply to each consumer category. The study is taking into account the Government's income redistribution policies with respect to rates to be charged to low income consumers. Power Requirements and Proposed Investments 41. To catch up with rising power requirements, in view of the under- investment in new facilities during the first half of the 1970s (paragraph 40) and the aim to substitute some electricity for more costly forms of energy, effective generating capacity is planned to be increased by 130%, or about 4,700 MW, by 1985. Of this total, about 580 MW were completed in 1977 and 2,600 MW are under construction. 42. Investments in generation and transmission during 1977-85 are expected to amount to about US$3.6 billion in 1977 prices. (Approximately 65% of overall investments pertain to ISA.) Of total requirements, some 60% would be foreign exchange. Thus, in accordance with national policy of financing only foreign costs with external borrowings, external financing on the order of US$600 million on average per annum, in nominal terms, would be required. A substantial share of such borrowings is expected to come from foreign capital markets, which have recently been providing increased financing to the power sector, including Bank-financed projects. 43. To provide for future sector expansion, ISA and its shareholders are preparing a power sector development master plan covering the period 1980-1990 in detail, and 1991-2000 in more general terms. Moreover, the shareholders and the Government are carrying out a 1980-2000 master plan for distribution, covering 1980-85 in detail. Overall, the consolidated master plan is expected to provide a valuable framework for long-range decisions on sector expansion, financing, pricing and rural electrification. Bank Participation in the Power Sector 44. Since 1950, the Bank has made 21 loans to Colombia's power sector, totalling US$610 million. Seventeen loans have assisted the expansion of generating capacity and transmission and distribution facilities in the systems serving Bogota, Medellin, Cali, Cartagena, Bucaramanga and Manizales, includ- ing expansion of electricity distribution to low income areas (874-CO, 1973). In addition, the Bank has supported rural electrification under 246-CO (1960) and 313-CO (1962), and under the ongoing Integrated Rural Development Project (1352-CO, 1977). The most recent loans included the 500 kV Interconnection Line and the San Carlos I Hydropower Projects (Loans 1582-CO and 1583-GO, July 1978) which would, respectively, complete the task of interconnecting the  - 15 - country's regional power systems begun under 575-CO (1968), and add 620 MW of hydro capacity to the national interconnected system; the Mesitas Hydropower Project (1628-CO, April 1979) would meet about 95% of projected incremental demand in the Bogota system during 1982-84. 45. ISA has received three Bank loans, totalling US$196.3 million. The first (575-CO, 1968) was to interconnect the central regional systems and was completed ahead of schedule at lower-than-estimated cost. Remaining funds were used to construct an additional transmission line which began operation in 1976. The second loan (681-CO, 1970) was used to construct ISA's first gene- rating facility, Chivor I, which came into operation two years behind schedule in 1977, with a US$54.5 million cost overrun. San Carlos I (see above) is pro- ceeding on schedule, at lower than anticipated cost (paragraph 56). 46. One of the objectives of Bank assistance has been the strengthening of power sector institutions and finances. Through the late sixties, Bank efforts at institutional strengthening were most successful in the cases of EEEB and EPM. The late sixties also saw the creation of two new institutions, ISA and JNT, in which the Bank played a critical role. In the case of ISA, the entity's role in sector planning, coordination and regulation has been expanding as a direct consequence of Bank lending, and the company's importance has been growing concommitantly with its share in the sector's total generating capacity. By the mid-eighties, ISA would have the largest generating capacity in the sector. The proposed project would contribute to strengthening ISA further with the objective of preparing the institution for the more complex responsibilities that lie ahead in the power sector 47. Bank support of sound power development financing has, until recently, been most successful with the large municipal companies, EEEB and EPM. The consolidation of public power entities into regional companies, the joint participation of the major regional and municipal companies in national expansion programs through ISA and most importantly, the national adoption of a policy of adequate rate-setting have enabled the sector to attain the current overall satisfactory level of financial performance. 48. Past Bank lending to Colombia's power sector has been reviewed in three OED reports. "Third Power Expansion Program - Loan 537-CO" (Report No. 536, June 29, 1977) concluded that the objectives of the 1968 US$18 million loan to EEEB for expansion of its generating capacity (by 200 MW) and transmission, subtransmission and distribution systems had been met, despite some delays and a 12% cost overrun. A second report, "Third Medellin Power Project - Loan 369-CO" (Report No. 450, May 24, 1974) concluded that the project had been very well executed despite considerable geological difficulties. Although EPM's power rates were in general main- tained at a level which should have generated sufficient funds, anticipated revenues did not fully materialize because of power losses in the distri- bution system, a problem which has since been rectified. Overall Bank opera- tions in the sector were reviewed in OED report entitled "Bank Operations in Colombia, an Evaluation" (Report No. Z-18) of May 25, 1972. The report concluded that Bank financing was successful in assisting the power companies to develop hydroelectric plants at lower unit cost than they otherwise would have been able to do. In turn, this permitted greater urban coverage as well  - 16 - as cheaper and more reliable electricity supply to industry. The report commended Bank efforts in the establishment of JNT and the central inter- connected system which facilitated further power sector development. Among other things, the report recommended that in the future the Bank pay increased attention to the companies' financial planning, tariff structures and energy losses. These points have been addressed under the aforementioned recent loans for power development. Complementary measures are provided for under the proposed project, and would be included under possible future projects, particularly those related to distribution. PART IV - THE PROJECT Background and Objectives 49. The project, prepared by ISA with the assistance of consultants, forms part of its 1978-85 Power Expansion Program and would provide about 15% of the planned increase in generation capacity. The project was appraised by a Bank mission which visited Colombia in late 1978 and in January 1979. Negotiations were held in Washington during the week of April 30, 1979, with a Colombian delegation led by Dra. Leonor Montoya de Torres, Director of Public Credit. 50. Project objectives are to: (i) satisfy part of forecast demand at least cost by utilizing the country's large hydroelectric potential; (ii) enhance ISA's role as the major planner, coordinator and dispatch agency in the sector; (iii) improve long-term sector planning and operating effi- ciency; and (iv) assist ISA in meeting forecast manpower requirements. Project Description 51. The project comprises: (i) construction and erection of a second penstock at San Carlos, and turbine-generators and transformers totalling 620 MW; (ii) construction of a 15 m high concrete dam on the Calderas River, inlet and discharge tunnels and a power station; (iii) construction of two 230-kV transmission lines; (iv) consultant services related to (i)-(iii); (v) a dispatch study and associated training; and (vi) a manpower require- ments study and related training. Under the project, ISA and its shareholders would also carry out a study of their accounting and asset revaluation methodologies with a view to introducinR a uniform system in the power sector (paragraph 65). 52. Physical Facilities. The San Carlos hydroelectric complex, which will be located about 150 km from Medellin in northwest Colombia, is being built in three stages, the first of which (620 MW) is being financed under 1582-CO; the second is included in the proposed project. A third and final, stage (310 MW) would be added when the further capacity would be required for peaking purposes. These facilities, together with the Calderas development, constitute the second step in a series of five interrelated hydro schemes, with a total capacity of approximately 2,200 MW on the rivers Nare, Guatape and Samana, of which the Guatape complex, financed by Loans 369-CO and 874-CO, is the major step. The project works consist of:  - 1 7 - (a) San Carlos: four 6-jet vertical shaft Pelton turbines and related 155 14W generators, connected in pairs to 16/230 kV transformers and associated electrical equipment. Construc- tion and erection of a 90 km long 230-kV double circuit transmission line between San Carlos and Medellin as well as a similar 200 km long line between Esmeralda and Yumbo (Cali), including expansion of the various terminal sub- stations; and (b) Calderas: a 22 m high concrete dam impounding a reservoir with a useful volume of 40 Mm3; a 3 km long pressure tunnel; a surface power station of 15.4 MW, operating at a gross head of 210 m, and ancillary equipment. 53. Engineering Services: With Bank agreement, ISA has engaged Integral, the Colombian consultants who prepared the final design of the San Carlos plant, for all phases of project execution. Integral will engage outside expertise as needed for specialized tasks during construction. 54. Dispatch Study: In order to prepare ISA for its role as national dispatch agency, a study and related training of staff would be carried out by December 31, 1981 of the dispatch functions required for efficient, least-cost operation of the interconnected system. The study would be undertaken with the assistance of consultants, under terms and conditions acceptable to the Bank (Section 3.02 (b) of the draft Loan Agreement). 55. Manpower Study and Training: A study of ISA's manpower require- ments through 1985 would be carried out with the assistance of consultants, under satisfactory terms and conditions, by June 30, 1980, for subsequent discussion with the Bank (Section 3.02(b) of the draft Loan Agreement). The study, which would also review the present capability of Colombia's educational programs to meet the specialized requirements of the power sector at the grad- uate level, would make recommendations for (i) the creation, organization and staffing of a manpower and training department in ISA; (ii) the establishment of a training program for new and existing specialized staff in Colombia and abroad; and (iii) provision of job descriptions for staff to be recruited for further training in specific fields. An associated training program would be carried out by June 30, 1983 (Schedule 2 of the draft Loan Agreement). Costs and Financing 56. Total project cost is estimated at US$156.1 million equivalent, of which US$110.5 million equivalent correspond to the foreign exchange compo- nent. During project execution (1978-84),- ISA plans to carry out other invest- ments at a cost of US$2.4 billion equivalent, and will require an increase in working capital of US$53.0 million equivalent. Tunnel works associated with San Carlos II (at a foreign cost of about US$24.0 million) are not included in the estimate because they would be financed under the ongoing San Carlos I Project (1582-CO). The lowest evaluated bidder (ICA-Grandicon) for the major civil works for San Carlos I was 36%, or US$27.0 million, below the estimated foreign cost.  - 18 - 57. The proposed loan of US$72 million would finance 46% of the total funds required for the project, i.e., 65% of the project's foreign exchange cost. The remaining foreign exchange costs would be financed by internal cash generation and shareholders' contributions of US$8.4 million and US$30.1 million from supplier's credits. Local costs, US$45.6 million equivalent, would be financed by internally-generated cash and by ISA's shareholders through equity contributions in the form of shares and securities. 58. The Bank loan would finance the foreign exchange element of (a) the penstock, (b) miscellaneous electrical-mechanical equipment, (c) transmission lines and substations, (d) civil works and equipment associated with Calderas, (e) engineering, and (f) studies and training. About 4,750 man-months of consultant services, most of which would be secured in Colombia, would be required for engineering, studies and training, at an average base cost of US$670 per man-month. It also estimated that 60-70 staff of ISA would be trained outside Colombia for (f) at an annual cost of US$10,000 per man-year. ISA and its shareholders would finance the local costs and down payments on major equipment, with the remaining cost of major equipment financed by suppliers' credits. 59. Effectiveness of the proposed loan would be conditioned upon ISA's having made arrangements, satisfactory to the Bank, for the financing of the Jaguas Project. San Carlos II generation capability depends crucially upon the Nare River water diversion to be carried out under that project. Receipt of assurances that ISA has made satisfactory arrangements for the balance of financing required for the proposed project would also be a condition of effectiveness (Section 8.01 of the draft Loan Agreement). The Borrower. ISA 60. ISA, established in 1967, is a stock corporation formed to inter- connect the systems of its shareholders and to construct, own and operate new generating plants required for the integrated system. It is governed by a Board of Directors, representing the five major shareholders (EEEB, EPM, CVC, CORELCA incorporated into ISA in 1978, and ICEL). Major decisions require the agreement of 75% of the shares. Day to day operations are managed by a General Manager (appointed by the Board), assisted by four departments (Technical, Operations, Finance and Administration). The company has sufficient competent staff and its pay levels are satisfactory. However, in view of the rapid growth of the sector, the need for staff trained in specialized technical fields (e.g., hydrology, soil and rock mechanics, etc.), which are not taught at Colombian universities at the graduate level, is expected to outstrip available supply of trained man- power. Thus, the proposed loan would finance a study to determine training requirements, as well as the carrying out of a subsequent training program (paragraph 55). 61. In line with its recently amended bylaws, ISA: (i) plans and coor- dinates expansion of the interconnected system; (ii) constructs, owns and operates all future plants in the system except for plants of regional interest which may be undertaken by the shareholders after approval by ISA; and (iii) sets tariffs to achieve adequate annual returns on its revalued assets (para- graph 63). Any change in ISA's statutes would require prior Bank approval (Section 7.01(a) of the draft Loan Agreement).  - 19 - 62. Finances. Between 1972 and mid-1977, ISA's assets comprised only a 230 kV transmission system (financed under 575-CO), which was expected to serve for energy exchanges at cost between its shareholders. Thus, the company did not generate funds and relied upon shareholders' contributions to finance its investments until its first generation asset, the Chivor I power station (681-CO), entered into operation in September 1977. During that period, when the shareholders faced financial difficulties because of inadequate rates and rising costs, so did ISA. Under San Carlos I, the shareholders addressed the problem of cash shortages by agreeing to maintain in future a satisfac- tory rate of return on revalued assets which, inter alia, would enable them to cover their shares of project costs. The financial results of 1978 are in line with this objective. The agreed rates of return, which would be recon- firmed under the proposed project (Section 5.02 of the draft Shareholders Agreement), and the expected levels of investment financed from internal cash generation (including investments in ISA) are as follows: (i) EEEB would earn at least 12% in 1979 and subsequent years and expects to cover, from internally-generated funds, more than 60% of its total investment requirements during the 1978-85 period; (ii) EPM would earn 6% in 1979, and 9% in 1980 and thereafter and expects to generate internally in excess of 65% of its overall investment requirements over 1978-85; (iii) CVC would earn 9% in 1979 and following years, and expects to generate over 50% of its total investment requirements; (iv) CORELCA, a rapidly-growing entity which serves the relatively poor Atlantic coast with 100% thermal-based power, would achieve 5% in 1979-80, 6% in 1981, 7% in 1982 and 9% from 1983 onwards. CORELCA would rely on the Government for its contributions to ISA (Section 3.02(b) of the draft Guarantee Agreement). As anticipated under San Carlos I, CORELCA would undertake a program to improve its operating efficiency and financing planning, as well as that of three of its subsidiaries (Section 5.05(a) of the draft Shareholders' Agreement); and (v) ICEL functions essentially as a holding company for eleven, mostly- rural power utilities. It does not have any revenues of its own; the Government covers its expenses, debt service and investments, and has agreed to provide, as required, the necessary resources to ICEL for its contributions to, and energy purchases from, ISA (Section 3.02(b) of the draft Guarantee Agreement). To assist in strengthening its major subsidiaries, ICEL would undertake under San Carlos I and the proposed project, a program to improve the operating efficiency and finances of at least the five most important of them (Section 5.05(b) of the draft Shareholders' Agreement). 63. For its part, ISA would earn a rate of return on its revalued assets of 8% in 1979, 9% in 1980, 11% in 1981 and 9% from 1982 onwards (Section 5.08 of the draft Loan Agreement). Long-term take-or-pay contracts  - 20 - for the sale of Chivor energy have been finalized by ISA and the shareholders; prior agreement of the Bank would be obtained before any material amendment is made to these contracts (Section 7.O0(b) of the draft Loan Agreement). ISA's net internal cash generation would finance about 13% of the 1978-84 investment program. This is low but acceptable since the share-holders contribution to the program would be 20%. 64. ISA faces heavy debt service obligations, despite its satisfactory forecast financial performance. ISA has therefore confirmed that, until project completion, it would obtain the Bank's concurrence before undertaking any project costing in excess of 2.5% of the value of its net fixed assets in operation (Section 5.06(b) of the draft Loan Agreement) and before contracting any long-term debt unless internal cash generation is more than 1.5 times its maximum projected long-term debt service requirements (Section 5.09(a) of the draft Loan Agreement). Finally, the shareholders have confirmed that they would maintain in ISA all payments due to them from their shares and securities until project completion and in any subsequent year in which ISA would need Bank concurrence to incur long-term debt because the 1.5 debt service target would not be met (Section 3.02 of the draft Shareholders' Agreement). Uniform System of Power Sector Accounts 65. The varied formats, criteria and presentation of financial forecasts by ISA and its shareholders indicate that a uniform system of accounting would be desirable, as this would facilitate sound system planning and management. Thus, ISA and its shareholders have agreed to undertake a study which would recommend a common accounting system and asset revaluation methodology under terms of reference to be reviewed by the Bank, in discussion with the Govern- ment, by the Bank by December 31, 1979. By March 31, 1981, the draft report would be reviewed by the Government and the Bank, and the study completed by June 30, 1981 (Section 4.05 of the draft Loan Agreement, Section 5.04 of the draft Shareholders' Agreement, and Section 3.02(a) of the draft Guarantee Agreement). Procurement, Implementation Schedule and Disbursements 66. Procurement under the proposed loan would be in accordance with international competitive bidding consistent with the Bank's Guidelines for Procurement. Colombian manufacturers would receive a preference of 15% or applicable duties, whichever is less, for bid evaluation purposes. The cost estimate assumes that local manufacturers would supply conductors, towers and certain miscellaneous electromechanical equipment, with an estimated cost of about US$10-12 million. Project works would begin in 1979 and be completed by June 30, 1984. 67. Disbursements would be made against (a) 100% of the foreign expendi- ture for imported equipment, materials and ancillary works and services; (b) 100% of the foreign expenditure for the Calderas civil works and equipment; (c) 100% of foreign expenditures for foreign consultant services, and 50% of  - 21 - the total cost of local consultants; (d) 50% of the total cost of surveys and drilling (e) 94% of the ex-factory cost of locally produced materials and equip- ment; and (f) 50% of the cost of training in Colombia and 100% of the foreign cost of training abroad. Retroactive financing of up to US$1.0 million equivalent is proposed for engineering services paid after October 1, 1978. The loan is expected to be fully disbursed by June 30, 1985. Benefits and Risks 68. The proposed project, which is the least-cost development in the national power expansion program, would support the Government's objective of developing domestic sources of energy. Together with the Jaguas hydrostation (170 MW), which is being financed by IDB, and other diversion works which are under construction, San Carlos would add 6,910 GWh to the system. In the absence of the project, power rationing would be required; despite San Carlos, there would be energy shortfalls during possible dry spells over 1982-85. Therefore, emergency works have already been started (additional thermal plant and river diversions) and further ones would have to be decided upon by 1981. 69. A return on investment was calculated for the San Carlos II Project by relating the combined costs (capital and operating/maintenance cost including related distribution) of San Carlos I, II, Calderas and Jaguas since they are being constructed concurrently, to the estimated 1978 average revenue for the Central and Atlantic regions of about USd2/kWh. On this basis, the discount rate at which the present value of project costs would equal benefits would be 14%, i.e., 3 percentage points above the oppor- tunity cost of capital. The results of the sensitivity analysis indicate that, even assuming that costs would increase by 10% or projected revenues would decrease by the same proportion, the rate of return would not fall below 12%. 70. The project is subject to risks normally associated with large civil works in difficult terrain. There is also a risk that the project may not be implemented in the time proposed if ISA, because of shareholder inaction to maintain appropriate power rates, would be delayed in mobilizing the required local currency. Given the rate increases approved and enacted, the assurances obtained and, more importantly, the general acceptance by all political sectors of the need for ISA and the shareholders to maintain sound finances, it is to be expected that the project will be carried out as scheduled. Ecology 71. An ecological study carried out by a specialized consultant (Cesar Perez Figueroa, Colombia) for Integral indicates that the project area is unsuitable for farming or stockraising because of extremely hilly topography, poor soils and heavy rainfall. Since conditions appear favorable to the development of water hyacinth (Eichhornia crassipes) in the reservoir area, ISA took measures to control it under the San Carlos I loan. In consultation  - 22 - with the Bank, ISA is expected to formulate before December 31, 1980, a satis- factory medium-range program for rational use of the project basins, including reforestation, and organize a unit with adequate funding and administrative capacity to carry it out, not later than December 31, 1981 (Section 5.05 of the draft Loan Agreement). PART V: LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Bank and ISA, the draft Share- holders Agreement between the Bank and ISA's shareholders and the draft Guarantee Agreement between the Republic of Colombia and the Bank, and the report of the Committee provided for in Article III, Section 4 (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 73. Special conditions of the loan are listed in Section III of Annex III. Additional conditions of effectiveness would be that ISA has made satisfactory arrangements for the financing of the Jaguas Project and has made satisfactory arrangements for the balance of project financing (paragraph 59). 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 75. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 30. 1979  - 23 - A_-EFX Ir Page 1 of 5 COlO!1BIA - SOCIAI INDICA'rnRS DATA SHEET REFIR,ENCF GROUPS (ADJUSTED AVULAGES COLOMBIA LAND AREA (THOUSAND SQ. K1l.) -_N UTTIPCENT ES'IIMATE) TOTAt 1138.9 SANI SAME NFXT HICHER AGRICULTURAL 224.8 MOST RECENE GEOCRAPl:IC IN(COME INCOME 1060 lb 1970 lb ESTIMATE /b REGION /, GROUP /d GRO!'P GNP PER CAPITA (USS) 220.0 370.0 710.0 1066.7 867.2 1796.4 ENERGY CONSUMPTION P'ER lAPITA (KIlOGRAMS OF COAI. EQUIVALENT) 491.0 606.0 671.0 911.1 578.3 1525.D POPULATION AND VIlAl STATISTICS TOTAI. POPlJLATl1)S, MID-YEAR (MILLIONS) 15.4 20.6 25.0 URBAN POPUIATION (PERCENT OF TOTAL) 53.0 /f 60.3 64.3 57.9 46.2 52.2 POPULATION DENSITY PER SQ. EM. 14.0 18.0 22.0 25.6 50.8 27.6 PER SQ. KM. AGRICULTURAL LAND 71.0 93.0 111.0 77.6 93.3 116.4 POPUIlATION AGE STRUCTURE (PERCENT) 0-14 YRS. 46.6 46.6 44.1 42.0 42.9 34.8 15-64 YRS. 50.4 50.4 52.7 52.2 53.5 56.0 65 YRS. AND ABOVE 3.0 3.0 3.2 3.7 3.5 5.7 POPULATION GROWTH RATE (PERCENT) TOTAL 2.9 2.9 2.8 2.17 2.5 1.6 URBAN 6.0 / 5.5 /h 4.5 4.3 4.7 3.4 CRUDE BIRTH BATE (PER THOUSAND) 46.1 /i 44.3 /i 40.6 /i 35.8 37.8 27.0 CRUDE DEATH RATE (PER THOUSAND) 14.7 11.0 8.8 9.1 10.8 9.9 GROSS REPRODUCTION RATE 3.2 3.2 3.1 2.6 2.5 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115.4 177.3 USERS (PERCENT OF MARRIED WOMEN) .. .. 31.0 15.1 20.0 19.3 FOOD AND NUTRITION INDEX OP FOOD PRODUCTION PER CAPITA (1970-100) 98.0 100.0 109.1 102.1 107.3 103.8 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 94.0 92.0 94.0 103.9 105.3 110.4 PROTEINS (GRAMS PER DAY) 50.0 51.0 47.0 60.3 63.0 77.7 OF WHICH ANIMAL AND PULSE 28.0 29.0 24.0 26.7 21.7 22.2 CHILD (AGES 1-4) MORTALITY RATE 16.3 .. 12.1 8.7 8.0 I.9 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 54.7 58.5 60.9 62.6 57.2 63.0 INFANT MORTALITY RATE (PER THOUSAND) 100.0 /j 70.0 97.1 56.9 53.9 38.i ACCESS TO SAFE WATER (PERCENT OF POPULAT ION) TOTAL .. 63.0 64.0 60.7 56.8 67.7 URBAN .. 88.0 86.0 78.0 79.0 83.5 RURAL .. 28.0 33.0 34.9 31.8 41.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 47.0 48.0 61.1 30.9 70.3 URBAN .. 75.0 73.0 80.3 45.4 90.7 RURAL .. 8.0 13.0 25.4 16.1 38.3 POPULATION PER PHYSICIAN 2400.0 2170.0 2180.0 1899.3 2706.8 1310.8 POPULATION PER NURSING PERSON 3740.0 2040.0 1920.0 1220.1 1462.0 849.2 POPULATION PER HOSPITAL BED TOTAL 580.0 510.0 530.0 422.3 493.9 275.4 URBAN .. .. 320.0 258.2 229.6 129.9 RURAL .. .. 9670.0 2281.6 2947.9 965.9 ADMISSIONS PER HOSPITAL BED .. 23.0 25.0 25.6 22.1 18.9 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 6.0 5.9 5.2 5.2 3.9 URBAN .. .. .. .. 5.0 RURAL .. .. .. .. 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. .. 2.0 2.0 0.9 URBAN .. .. .. 2.1 1.5 0.8 RURAI. .. .. .. 2.7 2.7 1.0 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAI. 47.0 If .. .. 51.2 64.1 59.2 URBAN b3.0 /f .. .. 77.3 67.8 78.0 RURAL 8.o If .. .. 12.8 34.1 12.5  - 24 - ANNEX I Page 2 of 5 COLOTBIA - SOCJAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES COLOMBIA la - MOST RECENT ESTIMATE) SAME SANE NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 Lb 1970 /b ESTIMATE Lb REGION /c GROUP /d GROULP e EDUCATION ADJUSTED ENROLIAENT RATIOS PRIMARY: T11TAL 77.0 98.0 105.0 103.5 99.8 97.6 FEMA1E 77.0 J00.0 108.0 102.9 93.3 87.4 SECONDARY: TOTAL 12.0 23.0 36.0 37.2 33.8 47.8 FEMkLE 11.0 22.0 36.0 37.9 29.8 42.6 VOCATIONAI (PERCENT OF SECONDARY) i.O /Ic 21.0 1/.0 14.7 12.8 22.7 PUPIL-TEACHER RATIO PRLMARY 38.0 38.0 33.0 32.8 34.9 25.4 SECONDARY 11.0 17.0 19.0 17.8 22.2 24.9 ADULT LITERACY RATE (PERCENT) 63.0 73.0 81.0 74.9 71.8 96.3 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 7.0 11.0 15.0 26.9 12.4 32.3 RADIO RECEIVERS PFR TIIOUSAND POPULATION 139.0 105.0 117.0 173.5 104.5 201.9 TV RECEIVERS PER THOUSAND POPULATION 11.0 38.0 .. 69.4 28.1 97.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCUIATICN PER THOUSAND POPULATION 56.0 109.0 69.0 72.8 45.2 70.9 CINEMA ANNUAL ATTFNDANCE PER CAPITA .. .. 6.8 4.3 4.6 4.4 EMPLO MfENT TOTAL LABOR FORCE (THOUSANDS) 5100.0 /f 6200.0 6700.0 FEMALE (PERCENT) 18.9 24.6 24.6 21.4 25.7 17.4 AGRICUL.TURE (PERCENT) 47.0 If 39.0 .. 37.8 46.2 38.4 INDUSTRY (PERCENT) 19.2 21.0 .. PARTICIPATION RATE (PERCENT) TOTAL 30.6 29.7 29.7 30.8 33.8 33.7 HALE 49.8 44.9 44.7 47.2 48.1 50.8 FEMALE 11.6 14.6 14.6 13.2 17.3 12.6 ECONOMIC DEPENDENCY RATIO 1.8 1.6 1.6 1.7 1.4 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVELP BY HIGHEST 5 PERCENT OF HOUSEHOLDS 41.2 /f,1 31.9 /1 27.2 28.9 23.6 20.2 HIGHEST 20 PERCENT OF HOUSEHOLDS 67.7 I/.l 60.1 /1 54.4 57.7 52.3 47.9 LOWEST 20 PERCENT OF HOUSEHOLDS 2.1 /f,l 3.5 T5 5.2 3.2 4.3 3.2 LOWEST 40 PERCFNT OF HOUSEHOLDS 6.8 /f,l 10.1 /1 14.3 10.7 13.1 13.7 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) LtRBAN .. .. .. 251.9 191.9 RUtRAL .. .. 145.0 200.6 193.1 157.9 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 154.0 403.1 319.8 448.8 RUJIRAL .. .. 153.0 258.0 197.7 313.1 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 24.0 24.8 19.8 23.2 RURAL .. .. 55.0 65.2 35.1 54.5 Not available Not applicable. NOTES La The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniforms. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and fot Most Recent Estimate, between 1973 and 1977. /c Latin America & Caribbean; /d Intermediate Middle Income (S551-1135 per capita, 1976); /e Upper Middle Incone (S1136-2500 per capita, 1976); /f 1964; /R 1951-64; /h 1964-70; /A Official estimates based on registration data shov crude birth rate for 1960 as 39.0. average 1961-70 as 36.0 and average 1971-76 as 31.0; /I fRistered only; 7k Includes teacher-training at the third level; /1 Economically active population. September, 1978  -25 - ANNEX I DtIT~, FSOCIAL lIflICAlORS Page 3 of 5 fg: 'ie .1lunrd grop avreg-- ittcart oU mcor ae r.p.i-v.uo--.gnou geetori mean, exludinltheextreecvaues oitheindictor nd ti ove poult - crrr In,"i eac group loo"ae-cicrund cer eog thonir oeot scvmiaIIty of dtand is not uniform. Due to lack of data, grou yvo'i for Capita orylust ill k'rtort an ntratraof aorLa toolse crera disp...si, housing, moaos distributio ndpovertyare [AliTASPI thuusod eq hr.. Ppp"suor r hou14s01led-ttal uban, nd roal --opulaiunn(otal otl-Totaloraeae upiso1aiao v u waters, urban&, nd r-Io) divided by their- resco loe noaher,af hosPital hedat ~41oirurui Rout roort estiert ofaunlctucal u,a used texpu-urlp avat.lae inp Iloao rivt :reaPn pratndhsia a e or prsoorly fo coup, fat-tro, -uakot sod kito-er. gorfons or to aiitto rooers op gtI r salihet emnosyaatdb lie failoc. a~~~~~~~~~~~~~t Iust .u. physician istabiafhr-ta Providing principally.. cutodial GNP PERCA~~~~~~~~~~~ITA_~~~~cen reco iclded. Rural hosp,,.Ja. however, Include healthad m.di- - GlIP PkRCAP1T~~~(