Colombia - Village Electrification Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-3053-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTRRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CORPORACION ELECTRICA DE LA COSTA ATLANTICA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A VILLAGE ELECTRIFICATION PROJECT May 5, 1981 This document has a restricted distribution and may be used by recipients only in the performance of their offiVial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Average Calendar 1979 Average Calendar 1980 Currency Unit = Peso - Col$ US$1 = Col$42.550 US$1 = Col$47.280 Col$1 = US$0.02350 Col$1 = US$0.02115 Exchange Rate Effective April 1, 1981 US$1 = Col$52.49 Col$1 = US$0.01905 WEIGHTS AND MEASURES 1 meter (m) 2 = 3.281 feet (ft) 1 square kilometyr (km = 0.386 square mile (mi3) 1 cubic meter (m) = 35.315 cubic feet (ft ) is = 264.2 gallons (gal) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t. metric;1,000 kg) = 1.100 short ton5 (sh. togs) 1 kilowatt (kW) = 1,000 Watts (10 kW = 10 W) 1 kilowatt-hour (kWh) = 830.3 kilocalories (kgal) 1 Megawatt (MW) = 1,000 kW (106 kW = 109 W) 1 Gigawatt (GW) = 1,000 MW (10 kW 6 10 W) 1 Gigawatt-hour (GWh) - 1,000,000 kWh (10 kWh) 1 kilovolt (kV) = 1,000 Volts (V) GLOSSARY OF ABBREVIATIONS CORELCA - Corporacion Electrica de la Costa Atlantica CVC a Corporacion Autonoma Regional del Valle del Rio Cauca DNP - Departmento Nacional de Planeacion EEEB - Empresa de Energia Electrica de Bogota EPM - Empresas Publicas de Medellin ICEL - Instituto Colombiano de Energia Electrica IDB - Inter-American Development Bank ISA - Interconexion Electrica, S.A. JNT Junta Nacional de Tarifas de Servicios Publicos PIN - Plan de Integracion Nacional FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY COLOMBIA VILLAGE ELECTRIFICATION PROJECT LOAN AND PROJECT SUMMARY Borrower: Corporacion Electrica de la Costa Atlantica (CORELCA) Guarantor: Republic of Colombia Amount: US$36 million equivalent Terms: Repayment in seventeen years, including four years of grace at 9.6% interest per annum. Project Description: The proposed project would support Government efforts to integrate the country's poorest and most backward region, the North Atlantic, into the modern national life. The project comprises the first stage (1981-85) of Corporacion Electrica de la Costa Atlantica's (CORELCA) 15-year Rural Electrification Program to expand and improve electricity supply in the main villages throughout the Region. Thousands of new electricity subscribers - rural families, as well as numerous commercial and agro-industrial enter- prises - would benefit from this project which, overall, is expected to facilitate growth of economic activity, contribute to employment generation and enhance the rural standard of living. In addition, the project would assist CORELCA in strengthening its financial and operational capability, as well as that of the eight departmental companies (Electrificadoras) under its aegis. The project consists of: (a) provision of electricity supply to about 120 rural villages; (b) rehabilitation of old, deteriorated distribution networks in six villages; (c) interconnection with the CORELCA system of twenty-five villages now dependent upon unreliable and costly local diesel generation; (d) a training program to strengthen the technical skills of CORELCA and the Electrificadoras' staff; and (e) a study to help minimize heavy power losses in the Electrificadoras' distribution systems. The project is not subject to unusual risks, and all appropriate provisions have been made to minimize the environmental impact of the facilities. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: Local Foreign Total (US$ million equivalent) Transmission 5.7 7.2 12.9 Subtransmission 5.5 9.9 15.4 Distribution 6.0 6.8 12.8 Training 1.0 1.3 2.3 Construction Supervision, Administration and Study 5.2 - 5.2 Total Base Cost 23.4 25.2 48.6 Contingencies Physical 3.5 3.7 7.2 Price 5.8 7.1 12.9 Total Project Cost 1/ 32.7 36.0 68.7 Project Financing Plan: (US$ million equivalent) CORELCA 3.5 Government 13.7 Electrificadoras 3.5 Beneficiaries 12.0 IBRD 36.0 68.7 1/ CORELCA is exempt from customs duties and taxes. Note: During the period 1980-86, CORELCA will carry out other investments with an estimated cost of USS1,250 million equivalent (including US$101 million of interest during construction). It will also require an increase in working capital estimated at US$92 million equivalent and will invest approximately US$254 million equivalent in Interconexion Electrica, S.A. (ISA), in which it is a shareholder. Financing Plan for CORELCA's 1980-86 Investment Program: (US$ million equivalent) % Net Internal Cash Generation 95.0 6 Contributions from Government and Users 570.0 34 Proposed IBRD Loan 36.0 2 Other Borrowings 964.0 58 Total 1,665.0 100  - iii - Estimated Disbursements: FY82 FY83 FY84 FY85 --(Uss Million equivalentY- Annual 2.0 10.5 14.1 9.4 Cumulative 2.0 12.5 26.6 36.0 Rate of Return: 13% Appraisal Report: Report No. 3395b-CO, dated May 6, 1981  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CORPORACION ELECTRICA DE LA COSTA ATLANTICA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A VILLAGE ELECTRIFICATION PROJECT 1. I submit the following report and recommendation on a proposed loan to Corporacion Electrica de la Costa Atlantica with the guarantee of the Republic of Colombia, for the equivalent of US$36 million to help finance a Village Electrification Project. The loan would have a term of 17 years, including four years of grace, with interest at 9.6% per annum. PART I - THE ECONOMY 1/ 2. An Economic Report on Colombia (3222-CO) was distributed to the Executive Directors in March 1981. This section on the economy reflects the major findings of this report. Country data sheets are presented in Annex I. Background 3. The Colombian economy made considerable progress over the past quarter century. From a largely rural and agricultural base in the 1950s-, it evolved to a more integrated urban-industrial and services orientation. The productive structure of the economy was broadened appreciably and output in both the agricultural and industrial sectors became more diversified. Public sector investment and output came to play a greater role in the economy, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, greater reliance on foreign trade allowed the external sector of the economy to grow, with non-coffee exports, particularly exports of manufactured goods, expanding rapidly and the range of products sold abroad widening considerably. The growing urban-industrial coloration of economic activity and a rapid expansion of surplus labor in rural areas gave rise to rapid rural-urban migration as rural labor sought to take advantage of higher productivity and better paying jobs in the major metropolitan areas. Financial and capital markets evolved pari-passu with the growing financial needs of the industrial and services sectors of the economy, and Colombia has become an active participant in international capital markets. The foreign exchange shortage, from which the country suffered for many years because of sharp fluctuations in coffee prices, has moderated and the economy has grown more resilient to external shocks as a result of the structural changes that have occurred. 4. Real GDP per capita rose by 2.4% p.a. on average during the 1950-79 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, combined with more rapid GDP growth. Population growth, which had remained in the 3.0% to 1/ Substantially unchanged from report for the First Irrigation Rehabilitation Project (No. P-3007-CO, April 29, 1981).  3.5% range during the 1950s and early 1960s, declined dramatically after 1965 as a consequence of a sharp fall in the fertility rate. Greater economic and educational opportunities for women, rapid rural/urban migration, rising per capita income and increased effectiveness of family planning programs contributed to the decline in fertility. Colombia's population is currently growing at an annual rate of 2.1%. As a result of the high proportion of women now entering childbearing years, this rate of population growth is expected to continue until the early 1990s. 5. The combination of rising per capita income and expanded public services over the past quarter century brought about a substantial improvement in the welfare of the poorest income groups in Colombia, in both absolute and relative terms. As a result of improved diets and better health care, the crude death rate fell by about 50% and life expectancy rose from 50 years to 62 years. The child mortality rate declined from 17 per thousand in the early 1960s to 9 per thousand in the mid 1970s. Infant mortality, one of the best indicators of welfare, fell to 98 per thousand in the mid-1970s, from about 124 per thousand in the early 1950s. School enrollment ratios have increased substantially at all grade levels since 1960, and by the late 1970s, 91% of urban children aged 7 to 14 were enrolled in school. The poorest income gioups, including those in rural areas, have experienced the greatest increases in electricity and water services in recent years and have benefited more than the average of the population from services of the national health system. In spite of this progress, Colombia remains largely underdeveloped, with a relatively small modern sector superimposed on a broad, traditional and economically poor base. Development has been concentrated in relatively few areas of the country, public services are not available to a large proportion of the rural and urban populations, unemployment and underemployment are relatively high, and income and wealth distributions are skewed. The coverage of health care is still deficient and adequate housing is not available to a substantial proportion of the population. Rapid migration to the three major metropolitan areas has created urban development problems, with attendant social difficulties. Moreover, in spite of the steady increase in per capita income over the past quarter century, about one-third of the population enjoys today only a minimum subsistance standard of living. 6. In large part, the achievements of the past twenty five years were the result of Government efforts to stimulate the productive sectors, provide the required economic and social infrastructure and establish an effective institutional base in the economy. In the 1950s and early 1960s development policy favored import substitution supported by high tariff protection and the provision of economic infrastructure by the public sector. It was during this period that the country's major communication and trans- portation networks were completed and the transformation to semi-industrial economic structure began in earnest. By the mid-1960s the prospects for further import substitution were substantially diminished and the country was in the midst of a period of great economic uncertainty, with economic activity and the balance of payments heavily influenced by developments in the world coffee market. In 1967 the authorities adopted an outward- looking development strategy. Export promotion policies, including periodic exchange rate devaluations and export tax rebates, were introduced and the  - 3 - authorities began lowering tariffs and freeing capital markets from controls as means of raising efficiency and increasing the competitiveness of Colombian goods in external markets. These measures were highly successful in relieving the foreign exchange constraint and stimulating growth. However, by the mid-1970s the economy was once again experiencing difficulties caused primarily by the world recession and by excessive Central Bank financing of domestic budget deficits. Recent Economic Developments 7. In late 1974, the Government introduced a wide range of fiscal and monetary pol'cies designed to -orrect the structural and policy weaknesses pre- vai'] -i in the economy at that time. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures arising from a sharp increase in world coffee prices. The increased receipts from coffee exports, together with some official surrender of foreign exchange from illegal exports, caused a turnabout in the balance of payments. Incomes rose rapidly and stimu- lated aggregated demand; inflation accelerated. Economic growth also accele- rated and unemployment fell substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated surpluses averaging about 5.8% of GDP during the 1976-79 period, and by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to nearly 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreign exchange boom has had a somewhat negative impact on the evolution of the Colombian economy, largely as a consequence of the need for measures to stabilize the economy. Public investment was curbed, thereby delaying some badly needed additions to economic and social infrastructure. The rate of currency devaluation was lowered and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with some adverse effects on export expansion and diversification. Also, the Government was compelled to maintain high reserve requirements and expand controls over credit (including interest rate ceilings, directed credit, portfolio requirements, etc.), thereby reducing the financing available to the private sector via the official capital market. These controls encouraged the development of a flourishing extrabank market in which credit was available albeit at high interest rates and for short maturities. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 and were moderately successful in restraining aggregate demand growth; thus relatively high inflation persisted. In 1979, consumer prices rose by nearly 30%. Nevertheless, real GDP growth remained strong, rising by about 5% for the year, led by a good performance in services, manu- facturing and agriculture. However, construction and mining activities declined. In response to the increasing stabilizing effects on aggregate demand and the troublesome financial market distortions caused by inflation and the extended period of monetary restraint, the authorities began in late 1979 to adjust the stabilization program. The rate of peso devaluation was advanced to increase export incentives and reduce borrowing abroad, and in early 1980, credit restraints were relaxed by lowering reserve requirements. At the same time, interest rates on time deposits captured by commercial banks and development finance companies - and on the lending therefrom - were  - 4 - freed from controls. To offset the inflationary effects of these measures the authorities further liberalized import payments and adopted the policy, supported by a new issue of short-term certificates, of not expanding the subsidized selective credit operations of the Central Bank in excess of the resources captured from private savings for their financing. The authorities also increased the surveillance and control of the illegal export trade. 10. The effects of the above measures were not immediately noticeable. Industrial sector growth slowed during 1980, non-coffee exports weakened and construction activity, which had fallen sharply in 1979, continued to slacken. Agricultural output was affected by drought, high incidence of disease and rising fertilizer costs. Real GDP growth declined to 4% in 1980 and unemploy- ment started to creep up. With world coffee prices at relatively high levels for most of the year, in addition to rising domestic gold production and short-term capital inflows because of high domestic interest rates, Colombia's balance of payments in 1980 is estimated to have registered an over-all surplus in the US$1,100 million range. This would maintain net official reserves at about 12 months imports of goods and non-factor services. Inflation continued to be a problem in 1980, however, despite the slowdown in economic activity, with consumer prices increasing by about 26% for the year. The major challenge facing the Colombian authorities over the next few years will be to bring about a reduction in the inflation rate, while at the same time raising invest- ment to the level required for private sector expansion. Development Strategy 11. Achievement in this decade of the Government's objectives of increased productivity and maximum economic growth, increased employment, improved distribution of income and greater welfare for all Colombians will require a major effort to remove from the economy the constraints of inadequate economic and social infrastructure and insufficient demand. Infrastructure needs are most pressing in the energy and transportation sectors. 12. The Government's strategy for accomplishing its development objec- tives are set forth in the recently promulgated Plan de Integracion Nacional (PIN). This strategy continues the previous emphasis on export promotion as a means of supplementing domestic demand and assuring balance of payments stability, and on policy measures, including further import liberalization, designed to increase economic efficiency and raise institutional capacity. It proposes a large increase in public investment, giving high priority to energy projects and to the provision of transport infrastructure. Economic decentralization, regional automomy and the uniting of regional growth centers through improved transport, communication and financial links are directed towards creating an integrated national market, a strategic goal of the PIN. The Plan also places emphasis on the promotion of both small scale and commercial agriculture as a means of diversifying and increasing exports, assuring adequate domestic food supplies, holding down inflation and contribut- ing to the Government's nutrition and welfare goals. Industrial policy  objectives are to provide an environment of certainty, along with adequate credit and infrastructure, so that entrepreneurs are encouraged to invest and expand output. Because of its benefits in opening foreign markets, creating employment and bringing in new technology, private foreign investment is to be encouraged. The Government's approach to helping the poor takes on a new orientation in the PIN. Its efforts are focussed upon improving efficiency in the use of resources and strengthening the social service institutions. Programs in the health and education sectors are to be better focussed and integrated, and selected low income and economically disadvantaged groups, such as workers in the informal sector, children and unemployed youth, are singled out for special attention. Combined with extensions of the Integrated Rural Development (DRI) and National Nutrition (PAN) projects, the new direc- tions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 13. While the PIN provides a good analysis of the development issues facing the country and sets forth the general guidelines for policies and programs to resolve these issues, there are two important aspects of bringing off the development strategy that are expected to receive increasing attention from the authorities in coming months. The first involves a required deepening of the sector analyses in order to improve coordination in planning and executing sector strategies, and the second has to do with matters related to financing the PIN. Given the large investment required to carry out the PIN strategy, inadequate planning and coordination among sectors or insufficient domestic resource mobilization would be likely to result in substantial resource mis- allocation and to delay execution of the strategy. It is essential that this be avoided. The two most important sectors where additional work is urgently required are energy and transportation. 14. Colombia became a net oil importer in 1976 and by 1986 petroleum imports are projected to absorb over 30% of total merchandise exports. In the absence of rapid energy development, energy shortages will become a major constraint on growth later in this decade. Resolution of the energy problem depends on the country's success in developing its abundant domestic energy resources -- hydroelectricity, coal and natural gas -- and also upon increasing petroleum exploration and development. The strategy for doing this will require energy pricing policies that rationalize consumption with energy resource availabilities, a least cost program of investments, sufficient domestic and external financing for these investments, strengthened sector institutions, improved program execution capability and rapid carrying out of investments. Although planning and policymaking have improved substantially in many energy sector institutions in recent years, overall planning and coordination in the sector are still weak. A study initiated in 1980 by the National Planning Department is expected to provide the basis for improvements in sector-wide planning and policy-making, and recent pricing decisions have gone a considerable way towards providing the correct signals for regulating consumption and encouraging production. The prices paid to producers (primarily foreign companies) for "incremental" and "new" crude have been raised to levels which should provide adequate production incentives, and the retail prices of petroleum products, while still below international levels, have been increased substantially in excess of world oil price rises. The Govern- ment has committed itself to raise energy prices to equivalent international  levels as rapidly as politically and economically possible, and a least cost energy investment program is being prepared. Between October 1978 and October 1980, the price of regular gasoline (less than 80 octane) was raised by 125%, from US$0.40 to US$0.90 per gallon. 15. Colombia's high transportation costs and inadequate service could become a constraint on economic growth, particularly that resulting from development of the country's vast coal reserves and from agriculture. The State Railway is in poor condition and the road network needs maintenance, rehabilitation. The authorities have begun to take steps to improve the country's infrastructure and PIN assigns an important share of future invest- ments to the sector. There is, however, a need for more efficient planning to ensure that only least cost investments are carried out and that a sound policy framework for the sector is established to deal effectively with the problems of intermodal coordination and energy conservation in line with the Government's energy objectives. Investment and Its Financing 16. A substantial increase and redirection of public sector investment will be required in the next several years to carry out the development strategy outlined in the PIN. Over the 1980-85 period, such investment is expected to increase by about 12% p.a. in real terms. The energy, transpor- tation and industrial (including mining) sectors are expected to account for the bulk (60%) of this investment; however, sizeable real increases in invest- ment are also expected in the nutrition and health, small scale agriculture and industry, water and sewerage, and education sectors. Overall, public fixed investment is projected to average 9.2% of GDP during the 1980-85 period, and is expected to total Col$1,716 billion (US$22,260 million). Private investment will have to increase also during this period to provide the goods and services required by the expanding economy. 17. This increase in investment will demand a major resource mobilization effort on the part of Colombia's public sector. The buoyancy of the tax system (excluding coffee tax revenues and receipts from earnings on foreign exchange holdings), which has declined in recent years, will have to be increased through new taxes and better tax administration and the charges levied for public services will have to be raised substantially in real terms. Since this effort is expected to coincide with increased private sector demand for investment resources, the importance of measures to expand domestic savings cannot be over-stressed. The recent capital market liberalization should encourage savings. A significant increase in voluntary private savings is not likely, however, as long as inflation remains high. Consequently, stabilization remains a sine qua non for the country's future growth and development. Growth and Balance of Payments Prospects 18. Given the country's strong resource base and sound economic manage- ment, Colombia's growth prospects for this decade are good and significant advances in economic welfare are anticipated. The urgent need to relieve the pressure on aggregate demand arising from the recent growth of foreign exchange earnings and the necessity to increase rapidly imports to develop the country's resource potential and restore higher economic growth requires a turnaround in the balance of payments from a current account surplus of US$596 million  -7- (2.2% of GDP) registered in 1979 to a current account deficit projected to average US$1,170 million, over the 1980-85 period, equivalent to 2.8% of GDP. By the end of this period, net official international reserves would have fallen to a level of about five months imports of goods and services (a level which is adequate for Colombia) without prejudice to the country's credit- worthiness. This should be sufficient to support an average growth of real GDP of 5.5% during this period. Beyond 1985, the current account deficit should improve as a result of increasing export proceeds (particularly coal) and a levelling-off of imports. The current account deficit would fall to 2% of GDP in 1987 and to 1% by 1990. It is expected, therefore, that the economy will be able to achieve real GDP growth averaging about 5.5% per annum during the 1980-85 period. To reach this level of growth, gross domestic investment will have to expand to about 24% of GDP, up from 18% in the early 1970s and 21% in recent years, and to avoid too large an increase in foreign indebted- ness, gross national savings would need to average about 21% of GDP. This is about the same level of savings achieved in 1978-79, when the terms-of-trade gains from the coffee boom raised the savings coefficient, but above the level achieved in the early 1970s. 19. Gross external capital requirements (net of reserve drawdown) are projected to total US$10.0 billion in current prices for the 1980-85 period, for an annual average requirement of US$1,670 million. About 31% of this amount will be required annually for debt amortization and the rest to cover current account deficits. Multilateral and bilateral agencies are expected to provide 40% of these requirements, 48% is expected to come from foreign suppliers and financial institutions and the balance should come from private foreign investment. At the end of 1979, Colombia's public and publicly guaranteed external debt disbursed and outstanding amounted to US$3.4 billion, equivalent to 12% of GDP. The Bank/IDA share of this external debt was 25%. Reflecting the recently increased lending by the Bank and the decline by bilateral sources, this share is expected to increase to about 30% in 1983, before falling to about 25% in 1987. The debt service ratio at end of 1979 was 12% and is expected to climb to 17% by 1985, peak at about 18% in the early 1990s and then decline gradually. The World Bank's share in public debt service is expected to rise to about 24% in 1985 from about 13% in 1979. With continued sound economic and financial management, Colombia is expected to maintain its creditworthiness through and beyond the 1980-1990 period. PART II: BANK GROUP OPERATIONS IN COLOMBIA 20. The proposed loan, the 92nd to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$2,896.8 million (net of cancella- tions). Of this amount the Bank held, as of December 31, 1980, US$2,184.4 million; IDA made one credit of US$19.5 million for highways in 1961. Dis- bursements have been completed on 54 loans and the IDA credit. During 1972-77 disbursements averaged US$86 million equivalent per year, then declined slightly to US$82 million in 1978 but increased sharply to US$138 million in 1979 and to US$215 million in 1980. The improved performance of social  - 8 - sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures which should allow relaxation of fiscal restraint and the recent Bank lending for infrastructure projects, all point to higher levels of disbursements in the future. IFC has made investments and underwriting commitments of US$63.1 million in 25 enterprises and, as of December 31, 1980, it held US$17.6 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of December 31, 1980. The Annex also contains summaries on the execution of the 34 ongoing projects. 21. In response to the priority objectives established by successive Governments (self-sustained economic growth, increased employment and improved income distribution), since 1966, Bank lending to Colombia has become increas- ingly diversified and has been concentrated on production-oriented programs and activities which emphasized social as well as economic benefits. All three loans for education have been made during this period, and so have twelve of the fourteen loans for industry, eleven of the thirteen agricultural loans, one loan for a nutrition project, two loans for urban development projects and all nine loans for water supply and sewerage. During the same period, seventeen loans were made in the power and transport sectors, while before 1966, twenty-two out of a total of twenty-five loans were made to these sectors. 22. Bank lending to Colombia in FY80 consisted of two loans for power generation and distribution projects, and one each for a nickel project, telecommunications, and credit to small-scale industry and to development finance companies for medium- and large-scale industry, totalling US$518.0 million equivalent. In addition to the loan proposed in this report, the FY81 program includes already approved loans for hydro power development, rural roads and irrigation rehabilitation, and proposed loans for further hydro power development and railways. Work is also under way on projects for petroleum development and mining, land settlement, rural development, ports, highways, oil refining, electric power, agro-industries, fertilizers, water supply and sewerage, urban development, rural education and environmental improvement, for possible consideration by the Executive Directors during the next two years. 23. The proposed Bank lending conforms closely with the Government's development strategy as outlined in the PIN (paragraphs 12 through 15). To help Colombia develop domestic sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank intends to assist the development of coal mines which hold potential in helping Colombia meet part of its energy requirements and in diversifying exports. In support of the Government's objective to increase the supply and the recovery of domestic petroleum, the Bank proposes to finance further petroleum projects and, for the first time, become involved in projects which promote the efficient processing of hydrocarbons. Bank financing in the energy sector would also assist in strengthening major institutions and in mobilizing external  - 9 - finance as some of the projects would require co-financing. Other future loans would finance agriculture and industry to support the Government in its efforts to raise overall productivity, income and employment, and to increase and diversify exports. Closely related to these objectives would be the proposed Bank lending for transport infrastructure. In this context, the Bank is assisting the Government in preparing a highway paving and rehabilita- tion program in support of the increasing interregional flow of goods and services. Other loans under preparation for 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, several loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. Lending for urban development and slum improvement, rural electrification, rural development, land settlement, water supply and sewerage, irrigation, rural education, and environmental improvement projects is principally designed to improve the standard of the poor. 24. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB, and bilateral sources provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approximately 50% for the 1976-79 period and it is expected that during the period 1980-85 will decline further to about 35% of external capital requirements. 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, rural electrification and land erosion control. In the future, it proposes to assist Colombia to develop sources of domestic energy and to expand the activity of the productive sectors to help generate increased employment. USAID has supported programs in education, urban development and small farm development, but is phasing out its aid program in Colombia. The Governments of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for basic needs and regional integration projects. PART III - THE ENERGY SECTOR AND POWER REQUIREMENTS Energy Resources and Requirements 25. Colombia is endowed with substantial primary energy resources (hydropower, natural gas, petroleum and coal). Low-cost hydropower, with a potential estimated at 93 GW, has been developed on a limited basis to date (4 GW). Coal resources are believed to be considerable, with reserves ranging from 10-40 billion metric tons of both thermal and coking coal, but explora- tion has been insufficient. The coal deposits identified are reported to be of very good quality, characterized by high caloric and low ash and sulfur content. A relatively 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 4 trillion cubic feet. However, known reserves of crude oil have been falling for several years and are estimated to last less than 12 years at present extraction rates. Of the country's 13 sedimentary basins, few have been systematically  - 10 - explored; thus, there is potential for new oil discoveries. To arrest the declining self-sufficiency in energy (paragraph 14), the Government has declared as a national priority the carrying out of necessary investments to develop hydroelectric and coal resources, as well as intensifying petroleum exploration and development. With assistance from the Bank, IDB, suppliers and commercial banks, large energy undertakings are being, or are about to be carried out that should increase the supply of domestically-based energy in coming years, including the export of a portion of it. The Power Market, Service Levels and Institutional Framework 26. Electric power is the fastest-growing form of energy use in Colombia. Its share of total energy consumption has risen from 6.5% in 1970 to 8.9% in 1978. Colombia's installed capacity at the end of 1980 was about 4,300 MW, including captive plant (about 243 MW); hydro stations account for 68% of total power generated. Since 1972, production of electricity has been growing at an annual rate of 9.6%, i.e., one and a half times as fast as the growth rate of GDP. Power sales have also been rising rapidly (9.3% per annum since 1972). Annual per capita electricity generation in 1979 was about 735 kWh, which is below the average for Latin America. Households (40% of the total), industry (31%) and commerce (12%) are the major electricity users. 27. About 54% of Colombia's 26.7 million population has electric power, compared to 26% in 1950 and 45% in 1970. The urban population, comprising about 68% of the population, has greater access to electricity. In 1976, for example, 90% of households in large cities (population of 50,000 or more) had electrical service while in rural towns (population between 500-2,500) the corresponding figure was 36%; in other rural areas, 13% (paragraph 35). 28. The Ministry of Mines and Energy is charged with formulating national policy for power generation, transmission and distribution. In defining investment priorities, it shares responsibility with the National Planning Department (DNP) and Interconexion Electrica, S.A. (ISA), a generating and transmission company, of which the shareholders are the largest municipal power companies and the Government-owned national power companies. 1/ ISA defines the generation and transmission expansion program for the intercon- nected system; after approval by DNP, this becomes the National Power Expansion Program. Public utility tariffs are regulated by the Junta Nacional de Tarifas de Servicios Publicos (JNT) in 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. 1/ Empresas Publicas de Medellin (EPM), Empresa de Energia Electrica de Bogota (EEEB), Corporacion Electrica de la Costa Atlantica (CORELCA), Corporacion Autonoma Regional del Valle del Rio Cauca (CVC), and Instituto Colombiano de Energia Electrica (ICEL).  - 11 - Power Development and Its Financing 29. To meet rapidly increasing demand, the Colombian power sector has developed steadily. Between 1950-1978 installed generating capacity was raised by 3,700 MW or about sixteenfold, providing electricity service to a further 11.4 million people. The task of interconnecting the country's regional systems to form an integrated national network is nearing completion (paragraph 42). A substantial 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. In the past, the Bank and IDB were the main sources of foreign financing for the power sector. In recent years, however, suppliers' credits and external commercial borrowings have provided well over half of external financing requirements. 30. During 1971-74, power rate adjustments lagged behind cost increases and, consequently, the companies' finances deteriorated, construction of needed works was delayed and the operating efficiency of the companies suffered. However, investment outlays have picked up sharply since 1977, when a program of tariff increases was initiated to generate funds needed to support planned expansion, but not rapidly enough to prevent the heavy power rationing being experienced at the present time (paragraph 31). With encouragement from the Government, the power companies are adjusting tariffs as necessary to generate sufficient resources for investment. Increases on the order of 40% (an estimated 20% in real terms) are being effected in most of the sector companies for this year. To complement this effort, and in view of the high priority attached by the Government to power investments as part of the effort to develop a domestically-based energy balance, a financing facility, to help provide part of local currency requirements for these investments, is being established. Power Requirements, Proposed Investments and Long-Term Planning 31. As stated, the effects of underinvestment during the 1970s are being felt sharply. In the Central Interconnected System (EEEB, CVC, EPM, and ICEL), electricity is being rationed an average of 4 hours a day. The total 1981 shortfall is projected at 1,200 GWh, with varying degrees of serious shortages expected to persist until San Carlos I (Loan 1582-CO) begins to generate in 1983. The Colombian authorities are well aware of the impact of power rationing on economic activity, employment and welfare. To catch up with rising power requirements and to substitute electricity for more costly forms of energy, effective generating capacity is to be increased by 175%, to about 10,500 MW, by 1988. Of this total, about 3,700 MW are under construction. 32. In line with the above, investments in generation, transmission and distribution through 1990 are expected to amount to about US$16 billion in current prices, of which some 60% would be foreign exchange. Thus, external financing on the order of about US$900 million equivalent on average per annum, in nominal terms, would be required, a major share of which is expected to come from foreign capital markets.  - 12 - 33. In anticipation of the immense task ahead, ISA and its shareholders have completed a Master Plan for generation and transmission facilities through the year 2000, which is being supplemented by a Master Plan for distribution covering the same period. This combined effort will not only contribute to improved investment planning but also to better system design, operation and maintenance in light of modern techniques, with a view toward enhancing the quality and reliability of service to consumers at a reasonable cost. Overall, the consolidated Master Plan is expected to provide a valuable framework for long-range decisions on sector expansion, including rural electrification, financing and pricing. The proposed project is based upon the rural electrification portion of the Master Plan for distribution expansion in the North Atlantic power system. Rural Development and Electrification 34. To achieve national integration, sustain growth and improve social welfare, the PIN earmarks considerable resources for agroindustrial-based regions, many of which are not yet well developed. It gives priority to the extension of rural road networks, irrigation, farm inputs (including credit, fertilizers, pesticides and extension services) and farm-product collection, marketing and storage facilities. In the case of small towns and rural villages, the priority is expansion of telecommunications and feeder road links, water supply and sanitation, health, education and supply of electricity. In support of this objective, there are 13 ongoing projects with Bank financing (totalling US$386.2 million) providing agricultural and small-scale industrial credit, extension services, land settlement, flood control, marketing, reforesta- tion, water supply and sewerage, rural roads, electricity, health, nutrition, education and telecommunications. Other Bank-financed projects also contribute in one way or another. A portion of these programs are benefiting the North Atlantic Region (paragraphs 36-38), such as the Cartagena Industrial Export Processing Zone (Loan 1593-CO) and the Cartegena Urban Development Project (Loan 1694-CO) which are expected to assist in increasing production among small-scale producers and generate employment opportunities both in Cartagena and outlying areas in the Department of Bolivar. 35. With respect to rural electrification, the Government's objective is to expand the coverage of this service from 13% to 27% of the rural population by the mid-1980s. The PIN, therefore, allocates over US$500 million for this purpose: (a) the rural electrification subproject of the Integrated Rural Development Program, supported by the IDB, CIDA and the Bank (1352-CO), which will ultimately provide 40,000 rural families with electricity connections of which 12,000 have already been connected, (b) the ongoing ICEL project, partly financed by IDB, to bring service to 140,000 rural households in 13 departments, (c) a further ICEL project to expand transmission, subtransmission and distribu- tion services in the underdeveloped national territories, (d) an electrification program in the Department of Choco to provide facilities to 12 towns, (e) the expansion of service to 9,000 rural families in the Department of Cundinamarca, and (f) the proposed project. In addition, EEEB and EPM are extending subtransmission and distribution facilities to rural areas in proximity to their own markets. Finally, the Colombian Coffee Federation is financing several rural electrification works in coffee-growing areas.  - 13 - The North Atlantic Region 36. Comprising seven departments and two island dependencies, the Region contains about 12% of the national territory and an estimated 20% of the country's population. It is bordered on the north and west by the Caribbean Sea and on the south and east by Andean Mountain ranges. The Region exhibits diverse features including semi-arid plains, savannahs, marshy lowlands, mountains, valleys and forests. Weather patterns are also varied, although tropical temperatures predominate. Colombia's main inland waterway, the Magdalena River, flows northward through the Region, roughly dividing it in half, and empties into the Caribbean at the port of Barranquilla. About 68% of the estimated 5.3 million population lives in cities and large towns. 37. Although economic growth in the North Atlantic Region has accelerated over the last two decades at a rate faster than the national average (6.2% compared with the national average of 5.5%, in real terms), the area remains underdeveloped with high levels of poverty, underemployment and unemployment. In 1975, the Region accounted for about 19% of national GDP, compared to the Department of Antioquia, which contributed 14%, and the city of Bogota, 21%. The ports of Barranquilla, Cartagena and Santa Marta are the nuclei of the Region's industrial activity and employment opportunities and, consequently, one-fourth of the total population resides there. However, the main economic activity in the Region is agriculture which consists of large farms and ranches as well as many thousands of small-holdings; the principal cash crops are cotton, rice, African palm, sugar cane, fruit, corn and sorghum. In addition, 35% of Colombia's livestock-raising is concentrated here, including the production of an estimated one-fourth of the country's milk, and associated products. However, the lack of adequate processing facilities (cotton and milk) and refrigeration (milk and products) results in costly transport to a few urban plants and tends to keep profitability low for most producers. The potential of increasing substantially agricultural activity and productivity is evidenced by the favorable soil conditions, climate and proximity to major transfer points for domestic and external trade; moreover, less than 13% of the Region's total estimated cultivable area is under production. 38. Outside the departmental capital cities, economic and social infra- structure is meager or non-existent. Electricity and telecommunications reach only 6% of rural households. While data on water supply and sewerage, and health facilities are not available, coverage is generally acknowledged to be low. The rural population in this Region tends to live in small towns and villages, travelling back and forth to the lands they work. Their farming methods are usually the traditional ones handed down from generation to generation of coastal families. In a typical rural center (population under 10,000), a family consists of six persons, three under age 15, with one and one-half employed. Average household income is US$140 per month, including agricultural self-production for family use. 1/ Cooking is done with firewood and illumination provided by kerosene. Ice, for food preservation, is trans- ported by truck to the village and is considered a necessary, regular purchase 1/ On the basis of a family of six people, a US$140 monthly income would be equal to an annual per capita income of US$280.  - 14 - by the villagers. Four percent of the families here own a motor vehicle. The village has 20 commercial establishments and three agroindustrial concerns, as well as five socially-oriented facilities (schools, church, etc.). There are no telephones, no electricity services. The profile of this village is characteristic of the 120 targeted to receive electricity supply under the proposed project (paragraph 48). The Borrower, CORELCA 39. When CORELCA (a decentralized corporation under jurisdiction of the Ministry of Mines and Energy) began operations in 1972, power generation, transmission and distribution was supplied by eight local utilities correspond- ing to the seven Departments of the Region (Electrificadoras of Atlantico, Bolivar, Cesar, Cordoba, Guajira, Magdalena and Sucre) and the island dependen- cies of San Andres and Providencia (Electrificadora of San Andres). At that time, the North Atlantic Region was plagued by chronic shortages and unreliable supply of electric energy provided by the local companies. These companies were generally highly politicized and poorly run. Facilities constructed were usually not maintained and, thus, in an advanced state of deterioration. Power losses experienced by these companies ranged up to 57% of sales. During its short period of operations, CORELCA has made remarkable inroads towards overcoming the power problems of this Region, which depends entirely upon thermal-based generating plants. Responsibility for regional generation and transmission expansion was shifted from the Electrificadoras to CORELCA and, in 1975, CORELCA acquired majority ownership of them. Based upon this, CORELCA has been exerting increasing influence over the Electrificadoras, which has improved their operating efficiency and administration, and CORELCA proposes to help strengthen further their operations in future (Sections 3.02) and 4.01 of the draft Loan Agreement). In addition to providing incremental electricity supply, in line with the National Power Expansion Program, CORELCA has interconnected the systems of almost all its Electrificadoras and, to achieve a less costly use of non-renewable fuels, it has prepared a program whereby its subsidiaries would gradually replace generation from their old and fuel-inefficient oil-fired plants with energy generated from CORELCA's more economic, well-maintained facilities (Section 3.02 of the draft Loan Agreement and Section 3.04 of the draft Guarantee Agreement). (CORELCA converted from oil to natural gas in 1977-78, and in 1983 will begin substituting coal.) By 1983 CORELCA will be integrated into the national power grid by means of a 500 kV transmission line (Loan 1583-CO) which will enable substitution of non-renewable generation fuels by hydro-based power from the Central System, as well as provide thermal back-up to the predominantly hydro facilities in that System. 40. Energy sales in the CORELCA system are expected to increase from 2,115 GWh in 1979 to 4,065 GWh in 1983 (including new industrial and mining requirements of 693 GWh in 1983), 1/ an average annual growth rate of about 17.7%. In order to meet requirements up to year 1982, CORELCA commissioned in 1980 213 MW of additional thermal units at Barranquilla and Cartagena, is 1/ Without these industrial loads comprising the mining operations of Cerro Matoso (nickel) and El Cerrejon (coal), and petrochemical instal- lations, average annual growth would be about 12%, which is considered reasonable in light of the experience during 1972-80.  - 15 - currently installing a 157 MW thermal station (coal-fired) at El Cerrejon, and is planning to increase the El Cerrejon power station by a further 157 MW in the near future. In addition, CORELCA is participating in ISA's hydroelectric projects (San Carlos I and II, and Jaguas). In parallel with its generation expansion, CORELCA plans to extend its existing transmission network and to assist its subsidiaries in expanding their subtransmission and distribution systems. 41. CORELCA's management staff is highly dedicated and capable. In less than nine years, the company has constructed 500 MW of thermal generating plant, about 500 km of transmission lines and several substations. Of the total 373,000 electricity subscribers in the Region, 39% have received connec- tions as a result of the increased capacity installed by CORELCA. These new consumers represent 130,000 households, and 500 industrial and commercial enterprises. Approximately 67% of this expansion has been concentrated in the large urban areas, principally the Departments' capital cities. In total, 74% of the Regional population in urban centers has electricity services. However, as mentioned previously, the coverage in rural areas is only about 6%. Under the proposed project, the first phase of the 15-year village electrification program, CORELCA would provide reliable electricity services to 43,000 new subscribers and consumers with existing but extremely precarious supply, representing in total 258,000 direct beneficiaries, or 15% of the Region's rural population. Bank Participation in the Power Sector 42. Since 1950, the Bank has supported Colombia's power sector with loans totalling US$979 million which have assisted the expansion of generating capacity, and transmission and distribution facilities in the systems serving Bogota, Medellin, Cali, Cartagena, Bucaramanga and Manizales, including expan- sion of electricity distribution to low income areas (874-CO, 1973; 1807-CO, 1980; and 1868-CO, 1980). The Bogota Power Distribution Project (1807-CO; US$87 million) is the first Bank loan to Colombia to support exclusively distribution expansion and, in addition to other beneficiaries, would directly benefit about 340,000 lower income consumers. 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 (1583-CO, 1978) and, for hydro power generation, San Carlos I and II (Loans 1582-CO, 1978; 1725-CO, 1979), Mesitas (1628-CO, 1979), Guadalupe IV (1868-CO, 1980) and Playas (1953-CO, 1981), which would, respectively, complete the task of interconnecting the country's regional power systems begun under 575-CO (1968), and add 2,253 MW of capacity to the national interconnected system. Taken together, the abovementioned projects reflect the Bank's participation in all phases of power development in Colombia, from the planning stage through financing and construction of generation and transmission facilities, to delivery of service to the final consumer. 43. Past Bank lending to Colombia's power sector has been found gen- erally successful in several OED reports. For instance, the most recent report, "Power Interconnection (Loan 575-CO) and Chivor Hydroelectric Projects (Loan 681-CO)" (Report No. 2720, October 29, 1979), commented upon the Bank's  - 16 - participation in Colombia's successful effort to evolve a stronger and more efficient power sector organization. Through the creation of ISA in conjunc- tion with these projects, and the steps taken to overcome financial and institutional difficulties, real progress was made toward more coordinated sector development. Despite implementation delays and increased costs, both projects were successfully implemented. Also, the report entitled "Bank Operations in Colombia, an Evaluation" (Report No. Z-18) of May 25, 1972, concluded that Bank financing was successful in assisting the power companies to develop hydroelectric plants at lower unit cost than they otherwise would have been able to do. In turn, this permitted greater urban coverage as well as cheaper and more reliable electricity supply to industry. The report commended Bank efforts in the establishment of JNT and the central intercon- nected 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, distribu- tion programs and energy losses. These points have been addressed under the aforementioned recent loans, which were the first Bank operations in the power sector after late 1972 (paragraph 30). Complementary measures are provided for under the proposed project. PART IV - THE PROJECT Background and Objectives 44. The project was prepared by CORELCA, with the assistance of consultants. It was appraised by a Bank mission which visited Colombia in November/December 1980. Negotiations were held in Washington, D.C. during the week of April 13, 1981, with a Colombian delegation led by Dr. Armando Olarte, Chief of External Debt Division, Ministry of Finance, and Dr. Jacobo Acosta, General Manager of CORELCA. The Staff Appraisal Report (No. 3395b-CO of May 6, 1981) is being distributed separately to the Executive Directors. 45. The project, representing the first Bank loan to CORELCA, would support Government efforts to integrate the North Atlantic rural population into the modern economy by provision of basic infrastructure. Access to electricity services would be expanded and the reliability and efficiency of electricity supply would be improved. Concommitant with this, the project would assist in replacing intermittant and costly diesel-based generation, in strengthening further CORELCA's operations, and those of its subsidiary Electrificadoras. Gradual improvements in the financial capability of the North Atlantic power system is also provided for in the project which, in turn, is expected to enable the bringing of electric service to a higher proportion of the system's population at reasonable cost. CORELCA's Village Electrification Program and the Project 46. CORELCA has identified considerable scope for expanding electricity services to rural areas since rural dwellers in this part of Colombia tend to live in villages instead of being dispersed throughout the countryside. Based upon this, the company has prepared a 15-year Village Electrification Program  - 17 - (1981-99) that would ultimately bring electricity to agroindustrial and rural commercial enterprises, and about 215,000 households (representing 1.4 million people) by installing distribution networks in villages for the first time, and linking these networks with CORELCA's transmission system; rehabilitating deteriorated networks and, where justified, connecting them to the interconnected Regional system; and installing of local generation units and distribution systems in villages too distant from transmission lines to justify interconnection. 47. CORELCA's 1981-85 schedule of rural works consists of the subprojects with the highest return on investment, based upon the assumption that each Department should be represented in the project for institution-building purposes and that absorptive capacity will have to be created in the system before a wider and larger rural electrification program can be undertaken. The subprojects, together with the training and study described below, comprise the proposed project. 48. Subprojects. These are: (a) extension of existing transmission and subtransmission facilities to 120 villages presently without service, and construction of distribution networks; (b) rehabilitation of seriously deficient and deteriorating distribution networks in six small towns and villages; and (c) interconnection with the regional power system of 25 small towns that have poor service from costly, local diesel units (totalling 45 MW) by extending existing transmission lines. These works would extend and improve service to 43,000 households (plus enable 14,000 future connections) and to an agro-industrial load of about 33 MW. The subprojects would cover all seven Departments and San Andres Island. Upon completion of the subtransmission and distribution facilities, they would be transferred to each of the Electrificadoras concerned (50% as an equity contribution from CORELCA and 50% as a long-term loan). Provision for these transfers, as well as for the Electrificadoras participation in the project (paragraph 57) and measures to strengthen their operations and finances would be made in Subsidiary Agreements to be finalized between CORELCA and each of the Electrificadoras prior to loan effectiveness (Section 3.02 and 8.01(b) of the draft Loan Agreement). 49. Training Center. A training center would be established for the technical personnel of CORELCA and its Electrificadoras, and would provide courses for about 1,500 existing and new staff, who would receive an estimated 1,800 man-months of training per year. The project would provide teaching and laboratory equipment, training specialists and scholarships. 50. Study. A study would be carried out, by October 30, 1982, to identify the causes of distribution losses in the Electrificadoras' distribution systems (technical losses, billing deficiencies and thefts), and recommend a program, to be carried out under CORELCA's guidance, to reduce losses.  - 18 - Cost and Financing 51. Total project cost is estimated at US$68.7 million, of which US$36 million, or 52%, correspond to the foreign exchange component. Project costs are based upon estimates prepared by CORELCA and include physical contingencies amounting to approximately 15% and price contingencies amounting to about 26% of base cost (Loan and Project Summary). Consultant services for supervision of construction are estimated at an average of US$2,100 per man-month for senior staff and US$700 per man-month for support staff. (These averages include overheads, benefits and fee). All such services would be provided by consultants whose qualifications, experience, and terms and conditions of employment would be satisfactory to CORELCA and the Bank (Section 3.03 of the draft Loan Agreement). 52. The proposed loan of US$36 million represents 52% of total project cost and would finance 100% of the total foreign component of the project. The Government's contribution of US$13.7 million would finance 20% of project cost, reflecting the priority it attaches to this project. The balance of the financing would be provided by CORELCA (US$3.5 million, or 5% of total cost), the Electrificadoras (US$3.5 million, or 5%) and the beneficiaries (US$12.0 million, or 18%). CORELCA's contribution would cover mainly project administration and training. In line with the results of an income study carried out during project preparation, the individual beneficiaries' contri- butions would be based upon ability to pay, ranging from 10% of the cost of connection for the lowest income group to more than 100% for agroindustrial consumers. Payment would be in the form of a 30% downpayment, with the remainder billed over a 7-year period. (At the lowest end of the scale, this would amount to a monthly payment of about US$0.80, with monthly charges for electricity consumption estimated at US$1.14, exclusive of savings from kerosene and ice purchases.) The Electrificadoras' financial projections indicate that, with the approved schedule of tariff adjustments (paragraph 57), their portions of project cost would be generated from operations, as would the bridge financing needed to cover the installment payments of the beneficiaries. Finances 53. Because CORELCA's system depends entirely on thermal generation, its operating costs are substantially higher than other suppliers in Colombia, who generate almost 85% of their power in hydroelectric plants. While CORELCA's tariffs have been generally the highest in the country, they have been insuffi- cient to cover fully its operating costs. Additionally, CORELCA has a heavy debt service burden, resulting from its large investment program over the past 8 years, the foreign cost of which has been financed mainly by suppliers. This has called for financial assistance from the Government in the form of price subsidies for fuel CORELCA buys and budgetary transfers for investment and debt service. It is the objective of the Government to phase out gradually this type of support and to make CORELCA financially self-sufficient.  19 - 54. The company's 1980-86 investment program amounts to US$1,665 million, of which US$1,309 million pertain to the following: proposed project (4% of total investments), generation expansion (51O), the second phase of the Village Electrification Program (3%), studies (1%), transmission facilities (12%) and interest during construction (6%). The US$356 million balance represents mainly CORELCA's investments in ISA (15%) and increased working capital requirements (6%). The proposed loan represents 2% of total investment requirements over the period, with the remainder coming from mainly commercial sources (58%), the national budget and user contributions (34%) and internal cash generation (6%). The influence of the increasing natural gas price in its operating costs would become less important starting from the end of 1982 as a result of the commissioning of the coal-based Cerrejon plant and the planned conversion of its other plants to coal-fired. Furthermore, when the interconnection is completed in 1983, CORELCA will buy cheaper hydro electri- city from the Central Power System. 55. Based on the above, and tariff adjustments already enacted for 1981 as well as those planned for 1982-83, CORELCA's finances show a gradually improving situation. For 1981 and 1982, the yearly average tariff increase would be in excess of 40%, i.e., more than 20% in real terms. On this basis, CORELCA would achieve rates of return on fully revalued assets of 3.5% in 1981, 7.5% in 1982 and 11% in 1983 and annually thereafter (Section 5.06 of the draft Loan Agreement and Section 3.06 of the draft Guarantee Agreement), compared to the agreed San Carlos targets (1725-CO) of 6% in 1981, 7% in 1982 and 9% in 1983 and thereafter. 1/ Because of uncertainty about the assumed value of its assets, and those of the Electrificadoras, an asset revaluation study would be carried out by June 30, 1982, and, if advisable, the rates of return revised in agreement with the Bank (Section 5.07 of the draft Loan Agreement). CORELCA would attain a debt service coverage of not less than 1.1 in 1982 and 1.3 in 1983 and thereafter (Section 5.05 of the draft Loan Agreement). Nevertheless, CORELCA would continue to require financial support from the Government during the project execution period (1980-85) because it would be able to generate only a modest portion of its investment requirements (including increases in working capital). The Government, therefore, has undertaken to ensure that the required funds would be made available to CORELCA in a timely manner (Sections 2.02 and 3.03 of the draft Guarantee Agreement). Prior to loan effectiveness, CORELCA would make satisfactory arrangements for the financing it would require during 1981 and 1982 (Section 8.01(a) of the draft Loan Agreement). Lastly, to ensure adherence to the financing plan as well as to the national least-cost power expansion program, until project completion, CORELCA has agreed not to undertake, without prior concurrence of the Bank, investments in any one year not related to its power operations nor those that would exceed in aggregate 1% of the value of its net fixed assets in operation other than for: (a) the proposed project, (b) generation expansion included in the national expansion program, provided that adequate financing would be available; and (c) the balance of items included in its agreed 1981-85 program of investments (Section 5.04 of the draft Loan Agreement). 1/ The rates of return achieved in 1978 and 1979 were consistent with the prior agreements. However, in 1980 CORELCA achieved only 2.2% instead of the 5% covenanted, principally because the Electrificadoras tariffs were not increased in line with CORELCA's authorized increase; measures are being taken to avoid recurrence of this problem in future (paragraph 39).  - 20 - 56. CORELCA's accounts receivable from energy sales have been growing continuously. As of December 31, 1979, they amounted to Col$434 million equivalent to about four months' billings, and totalling about Col$617 million by mid-November 1980. This is a direct result of the Electrificadoras' increas- ing accounts receivable from final consumers (mainly Government and municipal dependencies) whose outstanding balance on December 31, 1979, amounted to Col$ 864 million, increasing to Col$1.158 million (US$23.2 million) by September 1980. Corrective actions have been discussed with the Government, which has agreed to take measures to overcome the problem in accordance with a program CORELCA would prepare, by August 31, 1981, for this purpose (Section 5.09 of the draft Loan Agreement and Section 3.05 of the draft Guarantee Agreement). Also, CORELCA will engage the services of independent auditors acceptable to the Bank to audit annually its accounts and those of the Electrificadoras (Sections 3.02 and 5.02 of the draft Loan Agreement). 57. The Electrificadoras' financial situation varies from one to another but is, in general, poor. (Four of the eight Electrificadoras have operating losses.) The main reasons for this are tariffs which are too low to cover operating costs, high distribution losses (paragraph 39), inade- quate billing systems, increasing accounts receivable from energy sales, and administrative and managerial systems that require further strengthening. To ensure that the operations and finances of the Electrificadoras gradually improve to acceptable levels, the aforementioned Subsidiary Agreements would provide suitable performance targets. A tariff program that would produce a cumulative increase of 40% over the 1980 average rate is already in effect. In addition, CORELCA would continue to assist the Electrificadoras to enhance their institutional capability. A study to be prepared by consultants already selected by CORELCA for this purpose would contribute to this effort (Section 4.02 of the draft Loan Agreement). Procurement, Implementation and Disbursements 58. All the items to be financed by the proposed loan (except consult- ing services) would be procured by international competitive bidding (ICB) under Bank guidelines. Colombian manufacturers would receive a margin of preference of 15% or the applicable import duties, whichever is the lower, for purposes of bid evaluation. The cost estimate assumes that local manufacturers would be able to supply some items required for the project, the cost of which is estimated not to exceed US$4 million equivalent. Project works would begin in June 1981 and be completed by December 31, 1985. 59. Disbursements would be made against: (a) 100% of foreign expenditures for imported materials and equipment and 100% of the ex-factory cost of locally- produced materials (excluding poles) and equipment aggregating up to US$34.1 million; (b) 100% of expenditures for consultants for the losses study; (c) 50% of expenditures for consultants for project supervision; and (d) 100% of foreign expenditures for training equipment and materials, consultants and scholarships. Disbursements for the training component would be contingent upon defining the terms and conditions under which the training center would operate, and appointing a Board of Directors and Managing Director for it (Schedule I, paragraph 4(b) of the draft Loan Agreement).  - 21 - Benefits and Risks 60. The project would have considerable impact on vast rural areas of Colombia's underdeveloped north coastal region. The availability of reliable electric energy would facilitate increased farm activity, agroindustry and commerce, as well as enhance the standard of living of the rural population in the project villages. Moreover, the project is expected to further Govern- ment efforts to strengthen the institutional and financial capability of the power companies serving the Region which would, in turn, improve the quality of services and scope of coverage. 61. Calculation of the economic return of village electrification projects, in which there is an important poverty component, requires strong, often arbitrary assumptions, since it is difficult to assess the value of the benefits derived by the population from the improvements. As a proxy, there- fore, a return on investment was calculated as the discount rate at which incremental revenues and associated costs (capital, and operating and main- tenance costs related to the project) meet. On this basis the ineremental revenues associated with the project calculated at the tariffs prevailing after the 1981 increases, yield a rate of return of 13.3%, which compares favorably with the estimated opportunity cost of capital in Colombia. This calculation omits the effects of reliable electricity supply on nutrition, employment, health, educa- tion and public safety which are particularly difficult to quantify. Moreover, it may further understate the economic benefits of the project because regulated tariffs do not usually reflect in full the consumers' willingness to pay. 62. There are no special risks associated with execution of the project works. Construction delays are not expected since the work schedules have been prepared on the basis of the normal rate of progress attained by CORELCA on similar projects. Ecology 63. CORELCA has carried out previous projects with due regard to environ- mental protection and safety considerations. Under the proposed project, the works will be carried out in a like manner. PART V: LEGAL INSTRUMENTS AND AUTHORITY 64. The draft Loan Agreement between CORELCA and the Bank, the draft Guarantee Agreement between the Republic of Colombia and the Bank and the report of the Committee provided for the Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 65. Special conditions of the loan are listed in Section III of Annex III. Additional conditions of effectiveness would be that satisfactory Subsidiary Agreements with the Electrificadoras would be finalized (paragraph 48), and that arrangements would be made for CORELCA's 1981-82 financing requirements (paragraph 55).  - 22 - 66. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 67. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 5, 1981  AOI I -23- Page 1 of 5 COLE8IA - SOCIAL INDICATORS DATA SHEET COLOMBIA REFERENCE CROUPS (WEIGHTED AVER.ACFS LAND AREA (THOUSAND SQ. XM-) _MST RECENT ESTIMATE) TOTAL 1138.9 AGRICULTURAL 230.6 MOST RECENT MIDDLE INCOlE MIDDLE INCOFF 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA . CARIBBEAN EUROPE CNP PER CAPITA (USS) 250.0 400.0 1010.0 1562.9 2749.5 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 491.0 606.0 700.0 1055.9 1641..4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 15.8 21. 3 25.6 URBAN POPULATION (PERCENT OF TOTAL) 48.2 59.8 68.3 63.4 53.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 39.0 STATIONARY POPULATION (MILLIONS) 57.0 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENS ITY PER SQ. 10. 14.0 19.0 22.0 28. 1 77.2 PER SQ. 1N. AGRICULTURAL LAND 71.0 93.0 111.0 81.7 129.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 47.0 46.8 40.7 41.4 30.6 15-64 YRS. 50.0 50.5 56.3 54.7 61. 1 65 YRS. AND ABOVE 3.0 2.7 3.0 3.9 8.2 POPULATION GROWTH RATE (PERCENT) TOTAL 3.1 3.0 2.3 2. 7 1.6 UNRAN 6. OjC 5. 2 3.9 4. 1 3. 3 CRUDE BIRTH RATE (PER THOUSAND) 46.0 37.0 31.0 34.8 22.8 CRUDE DEATH RATE (PER THOUSAND) 14.0 10.0 8.0 8.9 8.9 GROSS REPRODUCTION RATE 3. 2 3.2 1.8 2.5 1. 5 FANILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115. 4 142. 0 USERS (PERCENT OF MARRIED WOMEN) .. .. 35.9 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 100.0 99.0 120.0 106.9 113.1 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 97.0 88.0 102.0 107.4 125.3 PROTEINS (GRAMS PER DAY) 54.0 48.0 52.0 65.6 91.0 OF WHICH ANIMAL AND PULSE 28.0 24.0 26.0 33.7 39.6 CHILD (AGES 1-4) MORTALITY RATE 17.0 13.0 9.0 8.4 4.3 HEALTH LIFE EXECTANCY AT BIRTH (YEARS) 53.0 58.5 62.0 63.1 67.8 INFANT MORTALITY RATE (PER THOUSAND) .. 98. OJd *. 66. 5 55. 9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 63.0 64.0 65.9 URBAN .. .. 73. 0 80. 4 RURAL .. .. 46.0 44.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TQTAL * 47.0 48.0 62.3 URBAN .. 75.0 73.0 79.4 RURAL S. 8.0 13.0 29.6 POPULATION PER PHYSICIAN 2400.0 2170.0 1970.0 1849.2 1030.1 POPULATION PER NURSING PERSON 3)40.0 2040.0 1250.0 1227. 5 929.4 POPUIATION PER HOSPITAL BED TOTAL 363.0 449.0 620.0 480.3 289.7 URBAN .. .. RURAL .. .. ADNISSIONS PER HOSPITAL BED .. 23.0 25.0 .. 17. 0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .- 5. 7/a URBAN .. 5 5jd RURAL .. 5.9/d AVERACE NUMBER OF PERSONS PER ROOH TOTAL .. 1. 8/d URBAN .. 1. 6 *. RURAL * 2. 4/d .. ACCESS TO ELECTRICITY (PERCENT OF DW1ELLINGS) TOTAL 47.0/e 58. I/d URBAN 83. oZe 87. /d . RURAL 8.O/e 13.2/d .  Annex I -24- Page 2 of 5 ^CLOMBIA - SCCAL .ND;CAT0RS 2ATA 3NEFT COLOMBIA - REFERENCE GROLPS NTrO A'E?AGES - MOST RECENT ESTZ) MOST RECENT MIDDLE :NCOME M'DDLE t7iCCME 1960 'b 1970 /b ESTfLMATE /b LATIN AMERICA a CAR'.IBEAtl EURCPF EDUCATION A.DJSTED ENROL'tE'.T RAT'OS FRDIARY: TOTAL 77. 103.0 .03. 0 99. 7 105.9 YALE i7. 0 i01.0 .00. 0 101.0 109.3 FEMALE 77.0 1O05.0 .05. 0 99.4 103.0 iECONDARY: TOTAL 12.0 24.0 39. 7 34. 64. 0 MALE 13.0 24.0 9.0 33. 5 71. 1 FEMALE 11.0 24. 0 40.0 34.7 * 56. 9 OCA0TIONAL E:NROL. ( OF SECONDARY) 31. 2, 21. 0 17.0 38.2 28.5 PUPIL-TEACHER RAT.O PRDtARY 38.0 38.0 30.0 30. 5 29. SECONDARY 11.0 17. 0 19.0 14.5 26. 1 ADUILT LITERACY RATE !PERCENT) 63. 2 3. 3 91. 2 36.3 :ONSL'7PT:ON ?ASSENGER CARS PER ,.OESAND 3PFULACION 7- 11. 3 17.. .3.0 ? .i RADID RECEI'ERS ?ER -HOUSAND POPULA-ION :_4.0 100.0 :07.7 2.5.3 '2. 2 TV llGEIVERS PER THOUSAND ?OPULATICN 9.0 3 7. o 64. 7 94. 2 . 5. i NEWS?APER X-DA;LY SENERAL :NTER-EST") _IRCULATION PER THOUSAND POPULATION 56. 0 *. 59.0 63. 3 93. n CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 7. 1 .. LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 4726.5 6353. 3 8174.0 FEMALE (PERCENT) 18.9 24.6 25.0 22.2 30.4 AGRICULTIURE (PERCENT) 51.4 37.9 30.0 37.1 37.0 INDUSTRY (PERCENT) 19.2 21.0 23.0 23.5 29.3 PARTICIPATION RATE (PERCENT) TOTAL 30.6 29.7 29.7 31.5 40.9 MALE 49.8 44.9 44.7 48.9 55.9 FEMALE 11.6 14.6 14.6 14. 0 26.2 ECONOMIC DEPENDENCY RATIO 1.6 1. 7 1.4 1.4 1. r I1COME DISTRIBL'TION PERCEN'T OF PRIVATE INCGME RECEIVED 3Y HIGHEST 5 PERCENT SF EOUSEHOLDS 41.2/e.a 31.9 * HIGHEST 20 PERCENT OF HOUSEHOLDS 67. 7/eg, 60. 1 .. LOWEST 20 PERCENT OF HOUSEHOLDS 2. 1/e.B 3. 5 .. LOWEST 40 PERCENT OF EOUSEHOLDS 6. 8/e.g 10. 1/ . POVERTY TARGET GROUPS ESTIMATED ASSOLUTZ NOVUERTY INCOME LEVEL ("SS ?ER CAPITA) O'R3AN .. .. 214. 0 RURAL .. .. 197.0 190.d. ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 267.0 474.0 RURAL .. .. 122.0 332.5 385.8 ESTIMATED POP'JLATION BELOW ABSOLLUTE POVERTY INCOME LEVEL (PERCENT) URBAN ' ' 34.