Basis for the formulation of a Colombian energy policy

Joint UNDP/World Bank Energy Sector Management Assistance Program BASIS FOR THE FORMULATION OF A COLOMBIAN ENERGY POLICY A REPORT BY CONSULTANTS BOGOTA, COLOMBIA DECEMBER 1986 Energy Strategy and Preinvestment T)ivision I Energy Department The World Bank Washington, D.C. 20433  I  BASIS FOR THE FORMULATION OF A COLOMBIAN ENERGY POLICY A REPORT BY CONSULTANTS Bogot& - Colombia DECEMBER, 1986 This report has been prepared by a consultant team comprisirng: Fernando Isaza (Coordinator), Guillermo Ferry, Diego Otero, Fernando Lecaros, Alberto Brugman, Feter Eglington and Gerald Adams. Funding for this work was provided by Canadian International Development (CIDA) through the UNDF/World Bank Energy Sector Management As- sistance Frogram (ESMAP). Supervision was carried out by a team from the Colombian Government and the World Bank. This report has a restrictive distribLtion and its con- tents do not necessarily reflect the views of either the Gover-nment of Colombia, the World Bank or UNDP. 1  CONTENTS FOREWORD AND ACK;:NOWLEDGEMENTS SYSTEM OF UNITS SPECIAL DEFINITIONS AND CURRENCY EXCHANGE RATES ABREVIATIONS AND ACRONYMS EXECUTIVE SUMMARY 1. INTRODUCTION .................................... 1 1.1 THE ECONOMY ..................................... 1 1.2 ENERGY RESOURCES, DEMAND AND SUPPLY ... .......... -, 1.3 THE BASE CASE FORECAST .......................... 5 1.4 FORECAST OF ENERGY DEMAND ................ 7 1.4.1 Primary Energy .......................... 7 1.4.2 Secondary Energy ........................ 8 1.4.3 Rural Sector. 9 1.5 FORECAST OF ENERGY BALANCES ..................... 10 2. MACROECONOMIC CONSIDERATIONS AND PROSPECTS ...1... l 2.1 INTRODUCTION .................................... 11 2.2 MACROECONOMIC OBJECTIVES AND CONSTRAINTS ........ 11 2.2.1 Objectives ................... 11 2.2.2 The Time and Uncertainty Dimensions ...... 12 2.2.3 Constraints . 12 2.3 ENERGY SECTORS AND MACROECONOMIC PERFORMANCE .... 13- 2.3.1 Direct Linkages .......................... 13 2.3.2 Indirect or Macroeconomic Linkages .15 2.3.3 Policy Linkages .......... ................ 16 2.4 CHALLENGES TO GROWTH IN THE 1985-20:00:: PERIOD .... 17 2.4.1 Comparative Advantage ...... .............. 18 2.4.2 Growth Linkages ......... ................. 19 2.4.3 Balanced Growth .19 2.5 ECONOMIC PERFORMANCE 1980-1985 . .2 2.5.1 External Sector . 2.. 2.5.2 Public Finances, Aggregate Demand .21 . Agriculture and Industry . 2.5.4 Employment ............................... 23 2.6 ENERGY SECTOR 1960-1985. 23 2.6.1 Output of the Energy Sector .2: 2-  2.6.2 Energy Sector's Contribution to the Economy ...... ............................ 24 2.6.3 Public Investment in the Energy Sector ... 25 2.6.4 Financing of Energy Investment and the Fiscal Deficit ........................... 26 2.6.5 Petroleum Balance of Trade . ............. 28 2.6.6 Balance of Payments of the Energy Sector 29 2.6.7 Fiscal Income from the Energy Sector ..... 30 2.6.8 Petroleum Taxes .......................... 30 2.6.9 Energy Sector Employment ............ a .... 31 2.6.10 Energy Pricing ........................... 31 2.6.11 The Effects of Energy Prices on General Price Levels ................. ............ 32 2.7 MACROECONOMIC BASE CASE FORECAST ............. .... 33 2.7.1 Base Case Assumptions .................... 33 2.7.2 Economic Growth ........... .............. a 33 2.7.3 Components of Final Demand ............. .. 34 2.7.4 Energy Sector Production ................ . 35 2.7.5 Energy Sector and the Public Sector ...... 36 2.7.6 Balance of Payments ...................... 39 2.7.7 Balance of Trade ..... .................... 40 2.7.8 External Debt ........................... 41 2.7.9 Energy Sector Balance of Payments ........ 42 2.7.10 National Savings and Government Savings .. 43 2.7.11 Energy Sector Savings .......... ........... 43 2.7.12 Employment .............................. 44 2.8 CONCLUSIONS AND STRATEGIC OPTIONS ....... ........ 44 2.8.1 Introduction ............................. 44 2.8.2 Balance of Payments and External Debt .... 49 2.8.3 Issue of Economic Growth ................. 53 2.8.4 Energy Sector Savings and Non-Energy Investments .............................. 55 3. ELECTRICITY SECTOR .............................. 59 3.1 INTRODUCTION .................................... 59 3.1.1 Power Sector Issues ...................... 59 3.1.2 Institutional Backgroutnd .............. ... 61 3.2 ELECTRICITY DEMAND ....................... 63 3.2.1 Background ................. 63 3.2.2 Demand Projections ....................... 63 3.2.3 Demand Projections and the Substitution by other Fuels ........................... 64 3.2.4 Electricity Exports ...... ................ 65 3.3 ELECTRICITY SUF'PLY .............................. 67 3.3.1 Current Situation ........................ 67 3.3.2 Minimum Cost Plan ........................ 67 3  3..3.. The Decision-Making Process in the Sector ................................... 69 3.3.4 Electrification in Rural Areas ... ........ 71 .3.4 ELECTRICITY COSTS AND TARIFFS ................... 73 3.4.1 Background ............................... 73 3.4.2 Tariff Evolution ......................... 73 3.4.3 Costs .................................... 74 -.4.4 Present Industrial Tariffs .... ........... 75 3.4.5 Residential Tariffs ...................... 76 3.4.6 Commercial Tariffs ....................... 78 3.4.7 Bulk Tariffs ............................. 78 3.4.6 Tariff Adiustment Considerations ... ...... 6C0 .5 SECTOR FINANCeS . 82 3.5.1 Background . 83 3.5.2 1980-85 Financial Performance .85 3.5.3 CuCrrent ISA Projections (1986-196) .86 3.5.4 Indebtedness ............................. 87 3.5.5 Bulk Tariff Financial Problems. 9C 3.6 STRATEGIC OPTIONS . ............. 9C 3.6.1 Marketing: Demand and Tariffs.90 3.6.2 Planning .. 94 -.6.3 Management .... ............... 96 3.6.4 Financial Alternatives . . .98 4. OIL SECTOR ...................................... 4.1 INTRODUCTION AND ISSUES ............10............. (C 4.1.1 Oil Product Prices and Oil Demand ... ..... 1C() 4.1.2 Oil Supply ............................... 100 4.1.3 Oil Exports .............................. 1C)2 4.1.4 New Refinery ............................. 102 4.1.5 Integrated Fetroleum Policy ... ........... 102) 4.2 OIL DEMAND AND CONSUMER PRICES . ...... 4.2.1 Consumption Backgrounds 1975 - 1985.102 4.2.2 Oil Product Price Background 1975 - 1985 .............................. 104 4.2.3 Forecast of Oil Product Prices. 1986 - 2000 .............................. 105 4.2.4 Forecast of Oil Product Demandq 1986 -20 ............................... 106 4.3 OIL SUPPLY ..107 4.3.1 Ultimate Recoverable Reserves.107 4.3.2 Depletion of Reserves .................... 108 4. .3 Remaining Recoverable Reserves. 1B)8 4.3.4 Fotential Discoveries ...... ............... t()9 4  4.3.5 Exploration and Development Drilling, 1979 - 1985 ............... i .............. 11(0 4.3.6 Forecast of Exploration Drilling .118 4.3.7 Forecast of Discoveries .... .............. 119 4.3.8 Forecast of Production Capacity ... ....... 119 4.3.9 Oil Supply Costs. 120 4.4 OIL SECTOR BALANCES ........... .. ................ 122 4.4.1 Oil Exports and Imports .................. 122 4.4.2 Foreign Exchange Balance of Petroleum Sector ................................... 123 4.4.3 Fiscal Balance of Petroleum Sector ... .... 124 4.5 PROBLEMS IN OIL PRODUCT PRICING ....... .......... 124 4.5.1 Background and Issues .................... 124 4.5.2 Prices and Subsidies ..................... 126 4.5.: LPG Pricing .............................. 129 4.6 OIL EXPLORATION ALTERNATIVES .................. .. 130 4.6.1 Background and IssLeS ....... . . . . . . . . . . . . 130 4.6.2 High Exploration Case ..... ............... 131 4.7 OIL-EXPORT ALTERNATIVES ...... ................... 134 4.7.1 Background and Issues .... .... ......... 13 4 4.7.2 Net Economic Benefits of Deferred Oil Exports .............................. 136 4.7.3 Macroeconomic Benefits of Deferred Oil Exports .............................. 138 4.7.4 Financial Impact on ECOPETROL of Deferred Exports ..................... I8 4.8 REFINERY ALTERNATIVES .......... .. ............... 139 4.8.1 Refinery Capacity and Domestic Oil Product Demand ....................... 139 4.8.2 Provision of Gasoline Imports ... ......... 139 4.8.3 Preliminary Evaluation of New Refinery ... 141 4.9 STRATEGIC OPTIONS ............ .. ................. 143 4.9.1 Oil Product Pricing ...................... 143 4.9.2 Oil Supply Policy and Exploration ... ..... 144 4.9.3 Oil Exports .............................. 148 4.9.4 Refinery .............................. 149 5. NATURAL GAS SECTOR . .............................. 150 5.1 INTRODUCTION .................................... 150) 5.1.1 Natural Gas Issues ....................... 150 5.1.2 Institutional Background .... ............. 152 5.2 NATURAL GAS SUPPLY .............. ................ 152 5.2.1 Reserves and Production .... .............. 152 5  5.2.2 Commercial Supply Conditions ............. 154 5.3 THE DEMAND FOR NATURAL GAS ................. ..... 154 5.3.1 Current Market Structure..... 155 5.3.2 Future Demand for Natural Gas ............ 155 5.4 THE DEVELOFMENT OF GAS PIPELINES .............. .. 160 5.5 NATURAL GAS PRICING ...... ....................... 162 5.5.1 Current Prices ..... ...................... 162 5.5.2 Fricing of Natural Gas ........... ........ 162 5.6 STRATEGIC OPTIONS .................... 163 6. COAL SECTOR ........................... 165 6.1 INTRODUCTION . .......................... 165 6.1.1 Coal Sector Issues ................ ....... 165 6.1.2 BackgroUlnd ..... .......................... 167 6.2 THE SUPPLY OF COLOMBIAN COAL .......... .......... 169 6. 2.1 Reserves ..... ........................ .... 169 6.2.2 Potential Coal Supplies ........ .......... 170 6.2.3 Supply Costs ..... ........................ 170 6.3 INTERNAL MARK::ET ANALYSIS ............ ............ 172 6.3.1 Domestic Demand ..... 172 6.3.2 Internal Market Coal Production and F-rice .................................... 174 6.3.3 Employment in the Coal Industry .......... 177 6.4 THE INTERNATIONAL MARKET ........................ 178 6.4.1 The International Price of Thermal Coal .................................... . 179 6.4.2 The International Demand for Thermal Coal ............................. 181 6.4.3 The Market for Colombian Coal .... 183 6.4.4 Froduction Expansion for Export .......... 185 6.5 SECTOR FINANCES ...... ................... ........ 186 6.5.1 CAREOCOL Finances .... .................. 187 6.5.2 Balance of Payments Consequences ....... 18G 6.5.37 Fiscal Effects: Taxes and Royalties of Cerrej6n ..... ......................... 189 6.6. THE NATIONAL COAL FUND ..... ..................... 190 6.7 STRATEGIC OPTIONS ..... .......................... 191 6.7.1 Domestic Market Policy ................ ... 191 6.7.2 External Market Policy ............. ...... 193 6  7. ENERGY SUBSTITUTION IN INDUSTRIAL AND RESIDENTIAL MARKETS ......................................... 195 7.1 INTRODUCTION .................................... 195 7.2 OBJECTIVES ...................................... 196 7.3 METHOD OF APPROACH ............ .. ................ 196 7.3.1 Introduction ............................. 196 7.3.2 Uncertainties ............................ 196 7.3.3 Difficult-to-Measure Factors .197 7.3.4 Time Perspective and Dynamics .... ........ 198 7.3.5 Regional Differences ..... ................ 198 7.3.6 Energy Use Patter . 199 7.4 INDUSTRIAL MARKET ................. ... ........... 199 7.4.1 Issues in Industrial Energy Pricing ...... 199 7.4.2 Market Prices and Opportunity Values of Industrial Energy Inputs ............ ..... 200 7.4.3 Substitutible Uses of Energy in Industry ................................. 201 7.4.4 Conclusions .............................. 203 7.5 RESIDENTIAL MARKET .............................. 203 7.5.1 Background .............................. 203 7.5.2 Issues ................................... 204 7.5.3 Short Term Analysis (1966-1992) ... ....... 204 7.5.4 Results-Short Term .......... ............. 205 7.5.5 Long Term Analysis . . 2o8 7.6 STRATEGIC OPTIONS ............................... 209 7  TABLES 2.1 Energy Balance of Payments .211 2.2 Hydrocarbon Balance .212 2.3 Electricity Balance .212 2.4 Coal Balance .213 2.5 Balance of Payments .214 2.6 Energy Balance .216 2.7 Electricity Balance .216 2.8 Hydrocarbon Balance .217 2.9 Coal Balance .217 3.1 Summary of Basic Power Sector Data .218 3.2 Forecast of Electricity Sales .219 3. Energy and Peak Demand Balances . .220 3.4 Financial Forecast 1986 - 1996 .221 3.5 Source and Use of Funds: Sources. 222 3.6 Source and Use of Funds: Uses . .223 3.7 Proforma Balance Sheet: Assets 224 3.8 Proforma Balance Sheet: Liabilities and Equity 225 5.1 Proved Recoverable Reserves of Natural Gas ......226 5.2 Natural Gas Production. 226 5.3 Gas Supply Capacity .2 27 5.4 Forecast of Natural Gas Demand 227 5.5 Supply Cost of Natural Gas and Substitutes ...... 228 5.6 Supply Cost of Natural Gas and Substitutes .228 5.7 Prices of Natural Gas. 229 6.1 Coal Reserves .230 6.2 Reserves, Ouality and Possible New Coal Supplies . 230 6.3 Regional Production and Consumption of Coal .231 6.4 Evolution of Coal Prices (1980 - 1985) .2-1 6.5 Coal Price Forecast. 3 6.6 Thermal Coal Imports Demand. 23 6.7 Production Distribution According to Market Areas .234 6.8 Definition of Terms Used to Describe the State of Affairs .2 274 8  FIGURES 1. Chart of Net Borrowing of Energy Sector, 1974-1984 .........2 236 2. Chart of Gross Savings of Energy Sector, 1974-1984 ........ . 237 3. Map of Regional Coverage of Electricity Utilities .238 4. Map of Planned Electricity System, 1986-1997 . 2 39 5. Diagram of Planned Electricity Interconnection, 1986-1997. . 40 6. Map of Coal Development . 241 7. Map of Oil and Gas Pipelines, and Fields. . 42 8. Map of Roads and Railways . 243 9  FOREWORD AND ACKNOWLEDGEMENTS In June 1985, a workshop was held among key officials and interested parties in the electricity sector in Colombia to consider how to improve the institutional relationships in that sector. While most of the objectives centered on the electricity sector itself, one of the key findings was the electricity sector's lack of integration with other subsectors in energy and with macroeconomic policies. This led to the recommendation that a Technical Energy Board be established with representation from all the in- terested parites --Ministerio de Hacienda y Cr6dito Pcblico, Departamento Nacional de Planeaci6n, Ministerio de Minas y Energia and the subsector institutions, CAR- BOCOL, ECOPETROL and ISA-- to carry out the analysis of the energy sector as a whole. The Ministry of Mines and Energy reqLtested assistance from the UNDF/World Banlk Energy Sector Management Assistance program (ESMAP) to carry out a study of the energy sector in Colombia. ESMAP in turn arranged financing for the study through the Canadian International Development Agency (CIDA), with the World Bank as executing agent. Within the World Bank, an energy sector working group was established, comprised of staff dealing with macro- economic, energy sector and subsector issues on Colombia. This group, together with their Colombian counterparts, formulated the objectives of the study and drew up the terms of reference. The consultant team, comprised of five Colombian nationals and two international experts, was selected by mutual agreement. The consultants began work in April 1986 and completed the draft report in August 1986. The ensuing report deals with the macroeconomic implica- tions of the energy sector in the Colombian economy, analyzes in depth each of the subsectors --electricity, oil, natural gas and coal-- and finally, draws the energy sector implications of past policies and suggest a basis upon which a strategy for the energy sector can be formu- lated. The contribution of a great number of Colombian and inter- national experts has made this work possible. The dif- ferent perspectives that have emerged are all necessary in order to make a product of high quality as well as a means to developing a commitment to carry through the formula- tion of an energy policy and consequent implementation by all parties --Central government with respect to policies affecting macroeconomic considerations; the Ministry of 1 C)  Mines and Energy with respect to policies that cut across the different subsectors; and the subsector organization of areas that fall within their area of responsibility. In this way, the report will form part of an organization process that will yield the desired results. 11  SYSTEM OF UNITS Composite Units Basic Units CF = Cubic foot F = Foot MCF = Million cubic feet m = Meter GCF = Billion cubic feet gal = IJS gallon k m = kilometer lt = Liter Cm = Cubic meter B = Barrel kB = Thousand barrels t = Metric ton k:BOE Thousand barrels lb = Pound weight of oil equivalent g = Gram tOE = Ton of oil equivalent W = Watt Mt Million tons V = Volt kt = Thousand tons cal = Calorie kV .= filovolt BTU = British Thermal kg = Kilogram Unit kW = Kilowatt s = Second MW = Megawatt h = Hour k:Wh = kilowatt--hour d = Day GWh = Gigawatt-hour yr = Year k!cal = Kilocalories MBTU = Million BTU xx:/d = Units per day x/yr = Units per year Equivalences Multiples 1 m = 3.28 F Prefix Symbol Value 1 gal = 3.78 lt T Tera 1'12 1 B = 42 gal G Billion 1C) 1 kg = 2.2 lb M Million 10l 1 kWh 860 kcal k Kilo 1f 1 BTU = 252 cal 1 tOE = IC)- kcal 1 tOE = 7.33 BOE Typical Calorific Contents (Not) Oil (Equivalent) 1364 Mcal/B = 5.41 MBTU/B Oil (Colombian) 1480 Mcal/B = 5.87 MBTU/B Fuel Oil 148( Mcal/B = 5.87 MBTU/B Motor Gasoline 1220 Mcal/B = 4.84 MBTU/B Diesel 1380 Mcal/B = 5.48 MBTU/B Kerosene 1330 Mcal/B = 5.28 MBTU/B Castilla Crude 1480 Mcal/B = 5.28 MBTU/B Liquid Petroleum Gas (LPG) 950 Mcal/B = 3.77 MBTU/B Natural Gas 234 Mcal/kCF = 0.97, MBTU/kCF Thermal Coal 650C0 kcal/ kg = 25.79 METU/t Electricity 860 kcal/kWh = 3.41 MBTIJ/MWh 12  SPECIAL DEFINITIONS AND CURRENCY EXCHANGE RATES 1. Generally: Costs refer to the supply side. Frice refers to the demand side. Value refers to estimations of value as a result of sub- stitution etc. such as in "opportunity values". 2. Social Supply Cost: (Often also called the real resource cost and sometimes simply the "economic" cost) is the basic measure of the cost to the economy to supply goods or services. It includes the costs of labor, capi- tal and time (cost of money) used by the economy in sup- plying goods or services. Note that the social Supply Costs are not differentiated according to ownership of the labor, capital or money in- volved. The social Supply Cost measures the real resources used up by the economy to furnish supply. 3. Private Supply Cost: Is defined as the Social Supply cost plus (or minus) taxes, royalties (subsidies) etc. ! incurred by the supplier company or the industry. Note that ECOFETROL, as a company, has a "private" supply cost. 4. Financial (costs) Prices are the direct payments made by a buyer (such as ECOPETROL) in a given transac- tion, which may be higher or lower than either the social supply cost or the Private Supply cost. 5. Opportunity Value is the value attributed to a resource, such as natural gas, as a result of its sLtb- stitution or replacement possibilities. 6. Currency exchange rates: 18.81 1975 pesos = 1975 US$ 1 147 1985 pesos = 1985 US$ 1 190 1986 pesos = 1986 US$ 1 4.':)95 1981 Col$ = 1975 Col$ 1 6.918 1984 Col$ = 1975 ColS 1 1:.  ABREVIATIONS AND ACRONYMS CARBOCOL Carbones de Colombia S.A. Colombian Coal Company CHEC Central Hidroel*ctrica de Caldas Caldas Hydroelectric Power Plant CID (DIC) Coeplejo Industrial de Barrancabermeja Barrancabermeja Industrial Complex CIDA Canadian International Development Agency COLBAS Compa ia Colombiana de Gas Colombian Gas Utility CONPES Consejo de Politica Econbmica y Social Council on Economic and Social Policy CORELCA Corporaci6n El6ctrica de la Costa Atlhntica Atlantic Coast Electricity Coepany CYC Corporacibn Autdnoma Regional del Valle del Cauca Valle del Cauca Autonomous Regional Corporation DNP Departamento Nacional de Planeaci6n National Planning Department DRI Desarrollo Rural Integrado Integrated Rural Development ECOPETROL Empresa Coloebiana de Petr6leos Colombian Petroleum Company EEED Empresa de Energia Eltctrica de Baooti Bogot& Electricity Utility EFE Estudio Financiero del Sector Elictrico Financial Study of the Electricity Sector ENCALI Empresas Municipales de Cali Municipal Utilities of Cali ENE (NES) Estudio Nacional de Energia National Energy Study EPH Empresas Publicas de Medellin Medellin Public Utilities 14  FEN Financiera Elictrica Nacional National Electricity FNC Fondo Nacional de Carbdn National Coal Fund FVN (NRF) Fondo Vial Nacional National Road Fund FODEX Fondo de Moneda Extranjera Foreign Currency Fund IBRD (BIRF) International Bank for Reconstruction and Development ICEL Instituto Colombiano de Energia Elictrica Colombian Electricity Institute IDB (BID) Interamerican Development Bank IDC International Development Corporation INTERCOR International Colombia Resources Corporation INTERCOL International Petroleum (Colombia) ISA Interconexi6n Elictrica S.A. Electricity Interconnection JNT Junta Nacional de Tarifas de Servicios P4blicos National Tariffs Board KFW Kreditanstalt fur Wiederaufbau Credit Agency for Reconstruction ;1NE Ministerio de Minas y Energia Ministry of Mines and Energy PAN Programa Nacional de Alimentos National Food Program PERCAS (ACRPRE) Programa Regional de Electrificaci6n Rural de la Costa Atlantica! San Andris y Providencia Atlantic Coast, San Andris, and Providencia Regional Program for Rural Electrification PIN Plan de Integracidn Nacional Plan for National Integration PNER (NPRE) Plan Nacional de Electrificacidn Rural National Program for Rural Electrification 15  PROMIGAS Promotora de la Interconexi6n de las 6asoductos de la Costa Atlantica Atlantic Coast 6as Pipeline Interconnection Company UNDP (PNUD) United Nations Development Program TERPEL Terminales de Distribuci6n de Derivados del Petrdleo Petroleum Product Distribution Terminals (ECOPETROL's seven distribution companies) 16  EXECUTIVE SUMMARY 1. THE SETTING Growing economy of 27 million people Colombia is an economy of some 27 million population and an average income per capita (GDP per capita) of about US$1260. Some 65% of the population lives in urban areas. The 4 largest cities are BogotA (4 M), Medellin (1.6 M), Cali (1.4 M), and Barranquilla (1.0 M). For more than 50 years the economy has grown at an average rate of about 5% per year, but since 1980 economic growth has only been 2.3%. Recent public investment concentrated in energy sector In 1986, both agriculture and industry represent about 20% each of GDP, and the mining and petroleum industry repre- sents some 2% of GDP. However, since 1980 public invest- ment has been concentrated in oil and coal export projects, and also in generation developments in the electricity sector. In fact, public investment in the energy sector reached 50% of all public investment in 1985. Oil and coal exports will increase Coffee has traditionally been the main export, for example comprising 49% of exports in 1984. However oil and coal exports are forecast to overtake coffee by 1990 when coffee is expected to be 31%, and oil and coal to increase to 47% of exports, at 185 kB/d and 15 Mt/yr respectively. Energy sector in fairly well developed Each of the energy subsectors has a long history in the country, with the exception of large scale development of non associated natural gas which began only about 5 years ago. Oil exploration began in the early years of the cen- tury. Small scale coal developments have been part of the history of the country, and the first electricity utility was established at the turn of the century but only in the 1970s was the national grid fully interconnected. Energy resources abundant Energy resources are abundant and diversified, but the supply costs are about average by world standards. At present the country is self sufficient in all the primary 1  energy sources. Coal, crude oil, fuel oil and some middle distillates are exported, but about 20 kB/d of gasoline is imported. No electricity exports take place, but several possibilities have received preliminary study. Energy demand reasonably diversified The country's demand for primary energy represents some 40% oil products, about 14% for each of natural gas and coal, 10% for hydro energy, and some 22% for traditional fuels (fuelwood etc). The rates of growth of demand for total primary energy in the past have not been extraor- dinarily high, generally in the same order of magnitude as economic growth. This study's Base Case forecast of growth in Modern energy consumption is about 3.2% per year during the next decade. Electricity demand concentrated in residential market In terms of secondary Modern energy, i.e. Modern fuels at the point of consumption, electricity provides close to 50% of the energy needs of the urban residential and com- mercial markets; the industrial market is fairly diver- sified but coal is most important at 35%; and oil products provide virtually 100% of the transportation market. Energy sector could do more for economy Overall, the country has an enviable energy sector which in most respects can be considered a success. However, there is little doubt that more could be achieved, par- ticular in so far as the energy sector's contribution to the economy as a whole, is concerned. 2. THE ISSUES Energy issues are pro-active In many countries the predominant issue of energy policy is defensive; how best to provide low cost energy to the economy. While this is one issue in Colombia, it is not the overriding concern because the country is well endowed with a full range of energy resources. The central con- cern in Colombia is pro-active; how best the energy sector can contribute to rapid and sustained economic development and growth. Consequently, the key issues centre around export strategies, public investment strategies and financial requirements, and domestic energy pricing to meet these needs and ultimately to foster economic growth.  Short terms financial problems In the short term (1986-1990) the energy sector's finan- cial condition is precarious because the sector's gross savings will not suffice, in the period until 1989, to cover committed investment spending, not to speak of the need for repayment of external debt. As a result, short term issues are dominated by financial problems arising out of the over extensions of public investment in the various sectors. Notably, there is an urgent need for im- provement of the financial health of the electricity sec- tor by some combination of refinancing and tariff reform. The export coal sector faces substantial financial requirements between 1987 and the early 1990s. Invest- ments in oil projects, such as Cano Lim6n, have also stretched the finances of ECOPETROL to the limit. Long terms benefits from energy investments In the longer term, during the 1990s, the issues focus on how best to reap the benefits from the recent high level of public energy investments, and how to maintain a more balanced approach to the energy sector. Naturally, the short term and long term issues overlap, and indeed many of the issues are closely interrelated; two prime examples being (i) domestic pricing policy for oil products, and the financial condition of ECOPETROL and its ability to enter oil exploration programs with a view to maintaining oil self sufficiency, and (ii) domestic electricity tariffs and the financial condition of the electricity sector. In addition, the issues, taken together, raise various critical problems of a regulatory, legislative and institutional nature. Comprehensive energy policy is needed A viable comprehensive energy policy will have to resolve short term issues in a manner consistent with longer term objectives. Indeed, advantage should be taken of the present financial condition of the sector to achieve solu- tions which constitute steps toward a better energy policy in the future. 3. THE OBJECTIVES The objective of energy policy can be broadly defined as balancing social, political and economic concerns, in such a way that the energy sector best serves the goals of economic development and growth. The policy should be  comprehensive in covering each of the energy subsectors! and not just a mixture of specific project analyses. and it should integrate domestic and external concerns. Areas for policy action A possible basis for a comprehensive Colombian energy policy are the following areas for action; (i) Financial Consolidation of Public Companies (ii) Institution Building (iii) Domestic Services Expansion (iv) Energy Export Stimulation (v) Private Investment Encouragement (vi) Public Investment Diversification (vii) Efficient Use of Energy However, before pulling the strands of policy together in this way, the conclusions and strategic options pertaining to the macroeconomic analysis, and each of the energy sub- sectors are summarized. 4. MACROECONOMIC CONSIDERATIONS Objective is sustained economic growth The key macroeconomic issue is how best the energy sector can contribute to sustained economic growth. At the same time other social, political and economic objectives such as equilibrium in the balance of payments, a reasonably balanced government budget, price stability and high employment must be addressed. Oil and coal; exports, private investment, financial savings It is concluded that the main ingredients for economic growth that can be provided by the energy sector are oil and coal exports, the attraction of private sector invest- ment, the creation of financial savings within the sector, and the redeployment of those savings by the government to other sectors of the economy. These factors also serve the goals of balance of payments equilibrium and balancing the government budget. Electricity and natural gas in domestic markets The widespread provision of electricity to all the sectors of the economy is also vital for economic development and growth, provided that the economic drag of excessive ex- ternal financing does not offset the benefits. Natural 4  gas also plays a role, which hopefully could be increased, in reducing internal energy costs and the provision of feedstocks for petrochemicals. Low cost energy, but employment impact small The supply in 1966 of electricity, natural gas at 330 MCF/d, and low cost coal at 4.4 Mt/yr to the domestic market, along with oil self sufficiency, contribute to the goal of domestic price stability. However, the energy sector's direct contribution to employment is small. Its impact on employment is mostly indirect. Comparative advantage in oil and coal is average The return from oil and coal exports takes several years to materialize and its level is related to the country's comparative advantage as a supplier of these resources. This, in turn, depends on world oil and coal prices and the supply costs in Colombia of these fuels. It is concluded that Colombia is probably an average-cost producer of oil and coal, by world standards, with oil supply costs in the range of US$12/B to US$15/B and coal costs in the range of US$35/ton to US$40/ton. This means that, at present and forecast levels of world oil and coal prices, the country's comparative advantage is positive but only modest. In addition, the uncertainty of future oil prices, and the consequent impact on coal prices, must be figured into the assessment. Energy exports beneficial but public investment should be diversified The diagnosis is that, while oil and coal exports can be engines of growth, the required investments are risky and cumbersome and the gestation periods are long, par- ticularly in the case of large scale coal developments. Therefore the conclusion is that public investments in these areas should not be exaggerated, and that generally public investments should be diversified in the economy. To put this conlusion in other words, the macroeconomic perspective suggests that a target of oil self sufficiency or somewhat better is desirable, but a target of being the world's largest coal e:-porter, through the use of pubilc funds, would not be in the best interests of the economy. In fact, it can be argued that public investment in export coal projects should be reduced. Energy investment and savings, for economic growth After exports, diversified investment is seen as a prime 5  driving force of economic growth. Direct energy invest- ment by the private sector can be attracted in the petroleum industry through changes in regulations and fis- cal terms, and indirect private investment could be in- creased by programs to encourage the domestic manufacture of substitutes for capital goods imports associated with such investment, or for example with investments in the electricity sector. The assets from the splurge of public investment in the energy sector over the past 5 years are now in place, or, as in the electricity sector in stages of completion, and although the yields an the export projects may not prove to be as high as previously hoped, they are expected to be positive. Therefore, the main contribution of the sector to public investment during the next decade is seen as coming indirectly through financial selfsufficiency in subsectors such as electricity i.e. being able to repay debt obligations and build up some equity, and through financial savings from the other subsectors, beginning in the late 1980s in the case of petroleum and in the early 1990s in the case of coal. Such savings should then be a source of funds to be reinvested elsewhere in the economy. Fiscal transf-r mechanisms and other institutional change needed This transfer of fiscal revenues will require improvements in domestic pricing policies and in the mechanisms of transfer. To begin, potential financial savings must not be dissipated within the subsectorsp for example through artificially low gasoline prices or low average electricity tariffs which cannot provide for coverage of the revenue requirement of the utilities. Fiscal transfer mechanisms in the petroleum sector will require a complete overhaul of existing arrangements visavis ECOPETROL; and lastly for this strategy to attain success the government must have in place effective means of reinvesting these funds. To meet such macroeconomic objectives will require sig- nificant changes in regulations, legislation and institu- tions. A comprehensive energy program, which would take several years to accomplish, is needed. Energy policy actions. synopsis In any event the first steps in this direction should be taken immediately. Partial refinancing of the electricity utilities. and additional financing for ECOPETROL and CAR- BOCOL are needed. In addition, the fiscal situation of the subsectors should be monitored. Electricity tariffs 6  should be restructured in order to increase average revenues to the utilities while promoting demand in selected markets such as off-peak industrial use and in rural electrification. Oil product prices should be main- tained in real terms and increased over a period of 2 or 3 years. New investments in coal projects should be put on hold for re-examination after the Cerrej6n Norte marketing objectives have been realized. Changes should be intro- duced in Association and concession arrangement in the petroleum sector to attract private sector risk capital. A study of potential natural gas reserves, pipeline costs and markets should be initiated. 5. ELECTRICITY SECTOR Lack of full integration The national interconnected network was established in the 1970s and the sector is still in the process of adapting to the needs of sectorwide planning and coordination in some areas of sector activity. Existing coordinating and regulatory institutions appear to be either inadequately structured for the task, such as ISA, or have been slow in taking effective action such as the National Tariff Board (JNT). However, it should be noted that these difficulties are equally as reminiscent of those encountered in most countries and regions of the industrialized world over the past 50 years, as electricity utilities have been expanded and integrated. The political intensity of these issues is not unique to Colombia. The debates were just as prolonged and fiery in the otherwise staid Provinces of Canada, as each Province in turn has had to deal with the integration of its former local utilities. Eight out of the ten Provinces now have a Provincial public utility. Short terms exc-ss generation capacity In the short term, the sector's problems begin with the excess generation capacity which is forecast to be some 3000 MW by the end of 1987, i.e. an excess capacity in the order of 60% over the projected 5000 MW load. Con- sequently, on the basis of present electricity demand forecasts of 5.8% per year growth, additional plants would not be needed until 1996. The immediate outcome of such overcapacity is the sector's present financial crisis. 7  Financial deficits The sector's internally generated funds are insufficient to cover contracted debt repayments and there is little equity in the sector. A deficit of some US$800 million occurred in 1986, and cumulative deficits of at least US$700 million are forecast in the period to 1991. Thus, the critical short term issue is who should pay, in what manner, and when. The solution should consist of some refinancing and various tariff reforms. Residential tariffs need restructuring A contributing cause to the present financial crisis has been the level of subsidization accorded by all the utilities to the residential market. In addition, nominal residential tariffs have been allowed to increase less than industrial and commercial tariffs over the past decade, inspite of the fact that close to 50%. of electricity demand is concentrated in the residential sec- tor. Commercial and industrial tariffs are generally close to cost-of-service levels, or even higher in some cases. An inescapable conclusion is that residential tariff reform is urgently needed. Although it needs further detailed study, a strategy could be along the following lines. An energy policy for the residential market could be established which, while deal- ing with the issue of electricity tariffs, could meet other objectives, and be acceptable to the general public. In such a strategy the electricity tariffs for middle and upper income urban households would be increased over a period of 2 or 3 years. Simultaneously, a program of providing LPG is small cylinders (20 lbs) would be intro- duced along with provision of two-burner LPG cookers. This program would also aim at reducing and eventually eliminating the use of cocinol for cooking. Industrial off-peak power promotion Industrial and commercial tariffs appear generally to be about in line with costs of service and sometimes too high. In some cases, costs which should have been borne by the residential sector, appear to have been shifted to the industrial sector, presumably with the result of slow- ing down industrial growth and employment. Particularly at present, with high unemployment levels and the prospect of excess generation capacity for some 6 to 7 years, off- peak electrical energy should be marketed at low tariffs to industry, under 5 to 6 year contracts. 3  Sector planning. more national equity and advisory board Two options for better planning in the sector should be considered. Over the longer term, the national government should increase its equity in the utilities. In the short term, consideration should be given to establishing a Power Sector Advisory Board, which would have the mandate of approval for the sector's expansion plans. Management improvement, and control of losses Two issues of immediate concern are the (i) control of losses, which have reached the very high levels of 207. to 25% in some utilities, and (ii) the continuity of manage- ment in the utilities. Concerning the latter, the Chief Executive Officer of each utility should be designated by the Board of Directors. Short term: focus on transmission and distribution While obviously restrained by financial accessibility, a relevant focus of expansion and improvement is the area of transmission and distribution. This should also address the problem of losses. More systematic subsidization for ICEL and CORELCA These national holding companies bear the brunt of expand- ing power to low income areas and rural electrification programs, and as a result they properly require financial assistance. At present, they depend on national budget support, but cross-subsidization within the sector could be more effective and in the longer term could assist in the coordination and integration of the national network. 6. OIL SECTOR Gasoline pricing a central concern From the perspective of energy policy, gasoline pricing emerges as a central concern because it affects so many other aspects in the energy sector and in the economy. With respect to an oil exploration program, it is con- cluded that adequate domestic oil product price levels are essential to provide ECOPETROL with a solid financial base. It would indeed be pointless for the government and ECOPETROL to invest substantial amounts in exploration, if consumers are simultaneously squandering petroleum resources due to uneconomically low prices. 9  In considering export policy, it is concluded that oil ex- ports should be undertaken, within reasonable limits to safeguard the country's oil production capacity and it is pointed out that a barrel of oil consumed domestically either detracts from exports or induces an additional bar- rel of imports. Therefore domestic oil conservation is important. It is also underlined that world oil prices are extremely unstable, and this uncertainty suggests that, although oil prices have dropped from their heights of the early 1980s it still makes sense to pursue policies of oil substitu- tion by other fuels; particularly those fuels which are available at reasonable and more stable costs, in the domestic economy. In considering a new refinery, it is concluded that more efficient relative oil product pricing, between gasoline and diesel, could probably improve the match between Colombia's refinery yields and the mix of products in domestic demand. Oil product taxes should be used for several purposes The main tax on oil products is the Road Tax, (Fondo Vial) at about 25% of the retail price, and the average overall tax rate on all products is about 16%. By way of com- parison, average taxes on gasoline in March 1986 in the 6 largest European countries were some 80% of the retail price. They were over 50% in Japan, and for example about 45% in Thailand. Every country has its particular reasons for its tax level, but the evidence from these rapidly growing economies points to the conclusion that high taxes on transportation fuels are relatively efficient taxes. For a beginning, these taxes are almost unique in being essentially 100% collectible; secondly oil product taxes simultaneously serve a number of key objectives of energy policy,, i.e. oil conservation, improvement in efficiency of vehicles, more financial savings either for transporta- tion infrastructure or to be used elsewhere, and other ob- jectives suich as shifting the oil product demand mix, to better meet the country's refinery capabilities. To summarize, the objective is to devise an oil product pricing policy that accommodates several issues; (i) a sufficient tax component to provide financial savings directly to the government for road infrastructure and for other purposes, (ii) a sufficient after tax price level to provide for the financial integrity of ECOPETROL --a guideline for this level is simply the international op- portLunity value of oil products, ex the refinery, (iii) a sufficient consumer price level, to induce efficient use 10  of oil products, with appropriate choices of vehicles. and (iv) effective relative prices in the context of economic development, for example on the demand side to assist agricultural or industrial intercity transportation, rely- ing on heavy diesel vehicles, as opposed to inefficiently used gasoline passenger vehicles in congested urban areas, and on the supply side to assure that the supply of any particular product is forthcoming; e.g. LPG. Raise gasoline prices but maintain real diesel prices To meet these objectives, there is little doubt that the gasoline price should be increased --both through somewhat higher taxes and through providing an adequate net revenue to ECOPETROL, in line with the opportunity value of the product, ex-refinery. A target could be set, to be met over a period of 2 or 3 years, for the desirable tax level and the relationship with the international price oppor- tunity value. This strategy would be one component of a comprehensive energy policy, which should make it more un- derstandable to the public, and eventually more successful in achieving economic development objectives. There also appears to be a case for not raising the diesel price as much as the gasoline price, in order to make a differential between the prices, thus tending to encourage substitution of diesel for gasoline. Furthermore, the proposed LPG residential market program would likely require increases in the net price of LPG for ECOPETROL, to give adequate incentive for additional supplies. Maintain a consistent level of oil exploration For a number of reasons it appears desirable to maintain a level of oil exploration drilling close to the average of 57 wells per year, experienced in the past 5 years. In particular, the macroeconomic analysis concludes that maintenance of an adequate level of oil exploration and production should get top priority from a macroeconomic perspective. The outlook for exploration is quite pessimistic, includ- ing a total of only 29 wildcat wells per year, as a result of the poor investment climate that prevails in the private sector because of low prices and various internal problems: of the 1986 decrees, the Concession price regulations, the reversion of Concessions, and certain rigidities in the arrangements of the Association con- tracts. 11  Package of oil supply policy improvements is needed This pessimism is understandable because oil exploration is always uncertain, with high geological and economic risks, and utnless government actions are taken to improve the exploration investment climate in the country, the drilling rate is not likely to recover for several years. It is unlikely that a single action or policy change would have much influence on the total level of activity. On the other hand, a combination of policy improvements to encourage the private sector, plus the directing of a modest amount of public funds towards exploration, could make the difference. The objective is to improve upon the existing petroleum fiscal terms and regulations, and the operation of ECOPETROL, so that a relatively high level of exploration is maintained, and is ultimately profitable to the private sector and the country. This implies maintaining recent rates of drilling in the more-explored basins and under- taking additional exploration in "new" basins. A start in improvements to investment conditions for the private sector should be taken through interpretation and clarification of the 1986 Decrees; effective operation of the Cano Lim6n pipeline, and oil production and export regulations should be clarified. A sliding-scale pricing scheme, related to international oil prices, should be considered for concession oil. Means should be considered to ease the costs to the State of the transition of expir- ing concessions. Flexible royalties should be considered for new Association Contracts. Improve the association contracts Other modifications of new Association Contracts that could stimulate the level of exploration and development investment should also be considered. Under the existing Association Contracts ECOPETROL's share of exploration risk is nil, implying of course that all the exploration risk is borne by the private sector. To encourage ex- ploration by somewhat reducing the private sector risk, adaptations could be considered to provide some sharing of risk by ECOPETROL. As one example, ECOPETROL could par- ticipate in exploration investment, i.e. in an Association Contract including exploration, and be compensated by up- ward adjustments to the royalties subsequently payable on a discovery. Another useful adaptation of the Association Contracts could be allowing ECOPETROL to opt for less than 50% par- ticipation in the development of a field. This would 12  provide more security to the associate company in the event that ECOPETROL could not finance a 50% level of participation, and would allow ECOPETROL more flexibility in deploying its funds. Encourage exploration of new basins To encourage investment generally and in particular in some of the relatively unexplored basins of the country, measures such as temporary royalty or tax holidays should be considered. For example, a temporary relief of royalties for a 1 or 2 year period of initial production, from discoveries in new basins with high geological risk, could be introduced into Association Contracts for such basins. In any event, ECOPETROL should continue its seismic and geological exploration in these areas, ultimately to en- courage private sector exploration in new basins. Increase ECOPETROL's participation in exploration A possible high level exploration program includes an average of 13 exploration wells per year by ECOPETROL, as opposed to about 6 per year in the Base Case. A feasible strategy would be to sustain a level of at least 6 wholly- owned wells per year and to aim at involving ECOFETROL in the equivalent of another 6 or 7 wells per year through association arrangements. Whatever the exact combination of direct or shared wells, such an exploration program calls for between US$ 45 and US$ 90 million per year of exploration drilling budget. In addition, for effective planning and execution of such a program ECOPETROL must have a reliable access to inter- nally generation funds, or equity capital. In other words, funds would have to be earmarked for exploration out of net revenues. In fact, ECOPETROL's revenues depend largely on the level of domestic oil product prices, again emphasizing the need for maintaining a consistent domestic oil pricing policy. Activate the exploration fund Another way of securing funds for ECOPETROL's exploration could be through assigning a part of oil export revenues to the Exploration Fund. The Fund, in turn could finance a fixed percentage of ECOPETROL's drilling, the remaining funds coming from the company's normal revenues. This would be like a "closed matching grant", financed from oil 13  exports, which themselves are a measure of success of the exploration. Such a use of the Exploration Fund could (i) make sufficient financial resources available, provided that domestic oil product prices are maintained or in- creased in real terms, (ii) reduce ECOPETROL's risk because in effect the state as a whole would share some risk, and (iii) provide incentives for efficiency because ECOPETROL would have to match funds from the Fund, by its own financial resources. Ai common thread in these solutions to ECOPETROL's finan- cial requirements is that domestic oil product prices should be set on the basis of international oil prices, i.e. by an objective standard of the real value of the fuels rather than on criteria such as whether ECOPETROL could afford to subsidize consumers. Oil exports should not be deferred in the hope of higher oil prices It can be argued that it would be profitable to defer oil exports in the short term in order to export more at a later time when oil prices are forecast to be higher. There are three key considerations in evaluating this possibility; (i) the uncertainty of the trend in future oil prices makes this a very risky strategy because future prices could as likely be lower as higher due to events in the world market completely beyond the control of Colom- bia, (ii) the availability of financial resources from ex- ports at the earliest possible time can lead to increased investments in the economy, yielding a rate of return that would not otherwise occur until later (discount rate issue), and (iii) the shutting-in of oil production is not similar to stockpiling coffee for future sale at a better price, because, whereas a coffee inventory could be liqui- dated in a matter of weeks or months, deferred oil produc- tion is stored in the form of oil reserves in the ground which can only be produced slowly over a 20 year time horizon. Consequently, delaying oil production for future use is generally an inefficient process. The macroeconomic argument is that better synchronization of oil exports with declines in other exports, such as coffee, could assist management of the balance of payments and ultimately the domestic money supply, and reinvest- ments in the economy. It is concluded, however, that pos- sible benefits are ambiguous. Global oil export control through R/P ratio should be con- sidered Other reasons for smoothing the export level of oil 14  include the objective of stabilizing aspects of the petroleum industry, so that investments can be made, for example in domestic facilities, with greater certainty of future production and export levels. It is concluded that export controls along the following lines should be considered; crude oil exports could be permitted, by ECOPETROL or other companies, only if the country's proved remaining reserves to production ratio R/P were higher than a cut off level. This kind of indirect control serves a double purpose; it provides protection to the public through maintaining domestic oil production capacity, and it encourages the industry to explore and prove up additional oil reserves in order to raise the R/P. In addition, as a global measure, controlling equally all companies including ECOPETROL, it could have important benefits in raising business confidence and thus induce more private investment in the petroleum industry. New refinery not economic While the analysis of a new refinery is preliminary, not having been supported by an extensive prefeasibility study, the conclusion is believed to be robust, and is directionally clear; a new refinery in the early 1990s would be more costly than a strategy of continuing to im- port gasoline, even in a situation of crude selfsuf- ficiency. 7. NATURAL GAS SECTOR Reserves and markets out of balance The natural gas sector faces a geographical imbalance: in the large Guajira fields the Reserves to Froduction (R/P) ratio is arournd 34 years and new markets should be developed, whereas in the Central area the R/P ratio is too low (around 11 years) and new supplies must be found to satisfy future demands in the Barrancabermeja In- dustrial Complex (CIB). Reserves of associated gas in the Central region are dwin- dling due to a lack of exploration activity in present oil concessions. The problem can be traced to an absence of price incentives for private concessionaires as well as lack of investment caused by the proximity of expiration dates for oil concessions. Studies of gas reserves, pipelines and markets are needed The regional imbalance of reserves and production vis a vis demand also raises the issue of whether to develop 15  additional gas pipelines. The first such possible project consists of interconnecting the large Guaiira fields with the Barranca demand area; this project has been studied at the prefeasibility level. Other projects that have not been analyzed in detail but which should be studied, are possible pipeline systems to supply the major urban cen- ters of BogotA, Medellin and Cali with natural gas. With respect to the recent discoveries of associated gas in the Llanos and Huila regions. a development policy is required to establish the best use of the resource; the Llanos reserves, in particular, should be studied as a possible source of supply for BogotA. In this sector: reserves are uncertain, markets are uncertain and pipeline feasibility studies are either out- dated or nonexistent. In particular, unofficial estimates of ultimate reserves are on the order of 7.5 TCF as com- pared to present proven levels of 3.8 TCF. Neither es- timate appears to be very reliable. A national natural gas policy shoLtld be initiated by in- depth studies to clarify the potential benefits stemming from a wider resource availability, by better estimates of the magnitude of gas reserves both in the Central and Guajira fields as well as in smaller fields that lie nearer urban centers in the interior of the country, and by getting up to date estimates of the costs of pipelines. This would constitute a Gas Availability and Utilization Study that could serve as a blueprint for future develop- ments. Natural gas pricing needs reappraisal In regard to pricing, two issues must be resolved: (i) On the Atlantic Coast, prices to the power sector, which accounts for 50% or more of that region's total demand, should be readjusted, ultimately in order to create incentives for further exploration and develop- ment. The greatest readjustment would necessarily be in the short term, from the current level of US$0.35/MSTU to around US$0.66/MBTU in order for ECOFETROL to break even in these sales. Advantage should be taken of the current capacity surplus in the power sector for this purpose: although it represents a substantial price in- crease, the relatively low level of demand for thermal power in the near future is such that it woutld not im- pact too adversely on the power sector's finances or its tariffs. In the longer term. a gradual rise that should take into account the opportunity value of the resource shouldJ be institLtted. 16  (ii) In the Central region, a readjustment of the pur- chase price for concessionaires, to an estimated US$1.1O/MBTU should provide a sufficient incentive for longer term development of adequate supply for CIB. B. COAL SECTOR The coal markets in Colombia are considered in terms of (i) an internal marketp essentially supplied by the private sector and (ii) an export market where substantial public funds have been committed. The focus is on thermal coal, rather than on coking coal, due to the former's direct relation to energy issues. The role of government in the internal market, given its private industry character, is mainly one of fostering an economic use of coal through the administration of the Na- tional Coal Fund that collects taxes and royalties derived from coal production, and indirectly through pricing policies of substitutes for coal. In the export market, the role of government, through CARBOCOL's participation in Association Contracts, con- sists of developing and sharing the costs of operating large scale mines devoted to supplying the international demand for thermal coal, marketing a substantial share of their production, and regulating the operation of foreign entrepreneurs insofar as taxes and royalties are con- cerned. Internal coal market; mines tend to be small but prospects for larger developments exist In the internal market, there is no doubt that reserves are ample to supply domestic demand for centuries. On the demand side, the issue is whether coal, being such an abundant resource, is economically utilized. (i) Industrial uses for coal consist mainly of heat generation for the production of steam or the operation of kiln furnaces. Close substitutes are fuel oil, Cas- tilla crude, LPG and, in some regions, natural gas. The price for coal is determined within a supply/demand framework, whereas substitutes are priced according to government policies. Therefore the pricing of sub- stitutes should not uneconomically undercut the market price of coal. (ii) Despite its predominantly hydroelectric charac- ter, the power sector is a major consumer of coal in 17  Colombia. As such, it should plan its thermal plant developments in accordance with the cost and availability of coal and inter-sectoral coordination should take place so that possible coal-fired plants are considered within the power sector's expansion plan. (iii) Traditional uses of coal can be complemented by new uses,through research and development of innova- tions to improve the economics of using coal such as in the areas of pulverized coal, coal slurries, central steam generation stations and possibly coal gasifica- tion. Such R&D would not normally be undertaken by the private sector and government-sponsored support is a policy option. (iv) The choice of location for new mines, together with major sources of demand such as power plants should consider both the advantages of low cost coal, such as in the interior departments of Cundinamarca and BoyacA, and the risk of periods of demand depression for lack of alternative markets, such as those expected until 1991. (v) The promotion of exports of coking coal that is produced in the interior and can command a higher price on the international market than steam coal, should be considered. Prospects for large scale mines for pow-r sector The main concerns of future large scale uses of coal are in the power sector; these refer to the planning, location and size of new thermal plants. Installing new coal-fired power plants depends upon the power sector using the cor- rect opportunity value for coal, which may vary from one project to another depending on its location (lower prices in the interior and higher prices on the Coast, for moderate sized plants). However, the analysis shows that cost is not the only consideration to be taken into account: other issues of location and sizing are also im- portant. (i) smaller plants, i.e. around 150 MW could be in- stalled in the interior (BoyacA, Cundinamarca, Antioquia) where 'a combination of cottage miners and the more mechanized producers could provide a reliable supply to the plant. Larger plants would call for new mining investments at higher unit coal costs and there would be the risk of slack demand periods that could force an uneconomical operation. 18  (ii) larger mine-mouth plants on the Atlantic Coast (e.g. the San Jorge project) would have higher cost coal than small plants in the interior, but the mines would not be subject to potential demand depressions if they also served an export market. An alternative market would also be of benefit from the point of view of inventory management as the same stockpile could be shared between the power plant (where stockpiling is a significant cost item in large 500 to 600 MW facilities) and the mine. National coal fund should sharpen its focus The tax on coal production that capitalizes the National Coal Fund is another issue where government policy is relevant: the analysis suggests that CARBOCOL faces a con- flict of interest as the Fund's administrator insofar as it tends to favour its own interests as a coal producer: the result is that the internal coal industry may end up by plugging the Cerrej6n financial gap which is not the Fund's objective. Generally, investments in specific mines do not seem to be a good use of the fund. The following policy actions appear to be feasible: (i) If the Fund's intention is to provide R&D support and mining credits these should be budgeted first and a reassessment of the current tax should take place: 5X. of sales is a large amount that could probably be lowered if a clear objective were established for its use. (ii) CARBOCOL should not continue in the double role of Fund administrator and Fund user: this would require that the funds be controlled by another agency such as the Ministry of Mines itself. A prior requirement for such a change, however, would be a strengthening of the Ministry. Under such a scheme, vis a vis the Fund, CARBOCOL would become either a user or a contractor that would perform R&D functions (e.g. for new coal uses). (iii) If a reassessment is performed for the Fund's budget, the option of eliminating it altogether should be considered seriously if its benefits do not justify the cost of running it. Coal exports are uncertain as to price and quantity Major public investments in the order of US$ 1.4 billion have already been made in the Cerrejon Norte project, but 19  prices have not lived up to prior expectations. Con- sequently, the issues revolve around: (i) The uncertainty of thermal coal prices and the sector's and CARBOCOL's financial positions. (ii) The future international market for Colombian coal and CARBOCOL's marketing strategy. (iii) Dealing with CARBOCOL's projected financial deficits. (iv) Evaluating the economic feasibility of developing new coal exports, either by increasing Cerrej6n Norte's capacity, reopening the Cerrejdn Central mine or start- ing a new mine at La Loma. Thermal coal prices have been under downward pressure from low fuel oil prices and most of the Cerrejon contracts are fairly short term. Therefore considerable uncertainties exist in the likely profitability of this project. Con- sequently, an emphasis on marketing in order to assure at least the operation at capacity, of 15 Mt/yr, of Cerrej6n Norte should be the top priority for the project's as- soc i ates. Measures to reinforce the market for Colombian coal should also be taken; (i) coordinating INTERCOR and CARBOCOL actions in or-- der to avoid damaging price competition: and con- sideration of a national Coal Export Board for the coordination of all Colombian coal exports. (ii) despite its marketing success, CARBOCOL cannot reach all potential customers and further contracting for sales with agents in foreign countries should be studied. (iii) studying the feasibility of developing special- ized coal markets, e.g. washed coal, that could provide a small but profitable demand. CARBOCOL financial deficits will have to be covered CARBOCOL's financial difficulties are the most pressing short and medium term obstacle that the sector faces. Funds needed in the period 1987 to 1993 are estimated at US$ 655 million. Apart from further market promotion, two 20  possibilities suggest themselves in order to reduce the dimension of the problem: (i) Contracting for future sales at an appropriate discount. There has been interest in this alternative on the part of potential buyers and it should be ex- plored more fully. Although this would do nothing to actually reduce losses, it could smooth them out, and it would have similar effects as debt refinancing. (ii) Modest, low cost, capacity expansions in order of 2 to 3 Mt/year of Cerrej6n Norte should be planned for in the 1990s, assuming that other marketing reaches its target of 15 Mt, and providing the investments are fully justified economically. Consolidation of investments and finances is nedud Major new projects such as the possible 10 to 20 Mt expan- sions of Cerrej6n Norte, developing Cerrej6n Central at 5 Mt/year or La Loma at 6 Mt/year do not appear to be jus- tified in the short term. Generally, the time appears ap- propriate for consolidation in the areas of investment, financial positions and mine developments, rather than ex- pansion. A focus on marketing of present capacity, along with financial retrenchment is essential. 9. AREAS FOR POLICY ACTION 9.1 FINANCIAL CONSOLIDATION OF PUBLIC COMPANIES ELECTRICITY Refinancing debt Infuse national equity in long term Restructure residential tariffs Promote off-peak industrial power Expand distribution and reduce losses Establish cross-subsidization mechanisms for ICEL and CORELCA ECOPETROL / Rationalize oil product pricing -'Establish fiscal transfer mechanisms 21  f Export oil, consistent with R/P ratios Participate in additional exploration, if risks are adequately shared with private sector CARBOCOL Focus on marketing in international market Put expansion projects on hold Take steps to find additional financing 9.2 INSTITUTION BUILDING Improve management in utilities, by CEO's being elected by Board of Directors Establish Electricity Advisory Board Infuse national equity in electricity utilities, in long term Strengthen Ministry of Mines and Energy to administer coal fund to collect oil royalties to administer oil export control to adequately develop and implement an energy policy .X Establish institutional and regulatory mechanism for effective fiscal transfer system in petroleum sector. / Strengthen internal management of ECOPETROL, through specific training and giving company more reliable revenues through domestic oil pricing policies Establish Coal Export Board, to coordinate all Colombian coal marketing 9.3 DOMESTIC SERVICES EXPANSION Continue rural electrification Promote off-peak industrial power " Expand urban distribution V Implement a residential energy program using small LPG cylinders for cooking, with 2 burner cookers to 22  replace cocinol or electricity. L'Shift transportation fuel demand towards diesel, away from gasoline, through lower taxes on diesel. t Undertake studies of gas reserves, possible pipeline costs etc., for expansion of gas consumption. 9.4 ENERGY EXPORT STIMULATION /Aim to maintain country in an oil exporter position, i.e. self sufficiency as a minimium. / Foster oil exploration and development by improvements in regLtlations. fiscal terms, concession pricing and Association Contracts and royalties, plus more participation by ECOPETROL in exploration. Focus CARBOCOL on marketing coal in international markets. Delay expansions for reconsideration in 1990s. 9.5. PRIVATE INVESTMENT ENCOURAGEMENT , Develop a comprehensive petroleum policy to encourage risk investment, as above, and royalty holidays for new oil basins. ,Encourage natural gas development Reconsider taking additional private investment in Cerrej6n Norte. 9.6 PUBLIC INVESTMENT DIVERSIFICATION v Establish means of transferring energy sector financial savings to government. Balance public energy investments with other invest- ments, through effective planning control. 9.7 EFFICIENT USE OF ENERGY ,-Oil product pricing strategy i Natural gas pricing for efficient use by the utilities / Residential energy program 23   1. INTRODUCTION 1.1 THE ECONOMY For more than 50 vears up to 1980 the Colombian economy has grown at an average rate of about 5% per year. However since that year economic growth has only been 2.37.. The period from 1980 to 1985 was accompanied by substantial public and private investments in the energy sector. and the coincidence of record slow economic growth with such extensive investments raises serious questions about the effectiveness of an energy sector based develop- ment strategy. In the following analysis, it emerges that a desirable strategy for growth, while using the energy sector, should not be unduly focussed on that sector; in- vestments should be diversified in the economy. The structure of the economy has never been extremely de- pendent on one sector, but like many others countries a major shift over the past 50 years has been from agricul- ture to industry and services. The share of agriculture in gross national product (GNP) has dropped from about 60% in the 1930s to some 20% in 1986. The share of industry, which has been fairly stable over the past decades is also some 20%, at present, as shown below. CUPOITIU OF W BY ECTURS IN CULMIIIA 1950 1940 1994 Aricultur 54.4 33.0 22.2 Imdstry 3.5 17.9 21.4 NiHi, ad Petroluu 4.5 3.9 1.4 Cstrnctiu 3.2 3.0 3.1 hnvint 8.0 4.7 3.4 Otkers _JM _= AU 100.0 100.0 100.0 The share of the mining sector, including petroleum, is only about 2% of the economy and had declined for many years up until 1981, but since then it has increased slightly, and is expected to increase further, as in the Base Case forecast which is described later. The trend in aggregate demand in the economy over the period since 1950 has shown a decline in the relative importance of exports, accompanied by increases in 1- :  government consumption and fixed investment, along with a stable proportion of private consumption, as shown below. W0IFUNTION OF FINN.D IN CEPIDIA Private Csuuptio 41.4 41.4 Sowrnt Cousutio 4.8 9.5 Invotunts 15.5 17.2 Exports 15.S 11.9 Other _- - 100.0 100.0 The majority (about 56%) of the country's imports come from the United States and Europe, but there has been a trend towards more import trade with other Latin American countries. Petroleum imports also became significant in the past decade, and gasoline will continue to be im- ported. On the export side, coffee has played a dominant role, but the promotion of other exports such as a variety of agricultural products and industrial goods since the 1970s has somewhat diversified the export composition. Petroleum has played a small but significant role. CUIPUITIN O EIPORT9 IN COLIWA 1970 1 Coffe 43.5 4Db Petrolm 9.7 11.1 Others J& 1 -M 100.0 100.0 Particularly since 1974, successive governments have at- tempted to stimulate petroleum exploration and develop- ment, and the development of the country's extensive coal resources for the export market. These efforts are partly responsible for the upsurge in public investment in the energy sector since 1980, and they will yield benefits during the coming decade. In fact, two significant outcomes of government policies have been the discovery and development of the 1 billion barrel Cano Limdn oil field which recently has begun ex- porting crude oil, and the development with INTERCOR, the EXXON coal subsidiary, of the export coal project at Cerrej6n Norte with a capacity of 1S million tons per year. Both projects are now exporting to world energy markets. However, the recent low world oil prices, and their effect on coal prices has naturally given cause to consider consolidation in these areas, rather than rapid  further expansion. Up until the late 1960s Colombia was subject to various foreign exchange crises, but thereafter the government established a number of regulations and controls that generally have succeeded in stabilizing the balance of payments, even if not harnessing positive balances to economic growth. The energy export projects should im- prove the country's balance of payments outlook. The country's external debt is not excessive, at a total of US$ 12 billion, and is carried some 40% by external private banks with most of the remainder in the hands of international agencies and other governments. Another factor of importance in the economy is the reduc- tion in the rate of growth of the population, from 3.1% in the 1950s to about 2% in the past decade. Meanwhile, the process of migration to urban areas has continued so that some 657. of the population now reside in cities. Among other problems, this has aggravated the country's serious unemployment situation, and the published unemployment rate in 1986 is some 15%. 1. 2 ENERGY RESOURCES, DEMAND AND SUPPLY Resources Colombia has abundant energy resources including all the natural primary energies; hydro power, crude oil and natural gas, coal, fuelwood, and other agricultural residues. Traditional primary energy, by which is meant fuelwood, bagasse and related agricultural residues, is still the dominant energy in rural areas, and 90% of the energy used for cooking in rural households is fuelwood. The other primary fuels, which are referred to as Modern energy, have been increasing in importance, as would be expected. Hydro Power Potential hydro power has been estimated at 93,000 MW, and some 4,500 MW are presently developed. Crude Oil Ultimate Recoverable Reserves are estimated at 6.4 billion barrels, of which some 3.9 billion have already been dis- covered, about 2.5 billion have been previously produced, leaving a proved Remaining Recoverable Reserve of about 1.4 billion barrels in 1986. 3  Natural Gas Ultimate Recoverable Reserves are unofficially estimated at 7.5 TCF, and in 1986 proved Remaining Recoverable Reserves are estimated at 3.8 TCF, most of which are non associated dry gas reserves in the Guajira region. Coal Potential coal reserves are estimated to be very large, in the order of 18 billion tons. Within this total, demonstrated reserves of thermal coal are some 4.7 billion tons, and metallurgical coal are some 220 million tons. About 8C)% of the demonstrated thermal coal reserves are in the Guajira region (Cerrej6n Norte project). The inferred and potential reserves, of about 13.4 billion tons, are concentrated in the Cundinamarca/BoyacA region. Energy Supply Costs Generally, as discussed in later chapters, although energy resources are abundant, the supply costs are about average by world standards. With the possible exception of very small scale "cottage mining" of coal, where costs are com- parable to the costs of gathering fuelwood from a woodlot, none of the energy resources can be supplied at commercial scales of operation at very low costs. for example Such as the cost for oil or gas from the Middle East. Overall, we conclude later that the country's comparative advantage in energy is modest. Energy Demand The composition of primary energy demand over the past decade has shifted away from oil and traditional fuels. Hydro, natural gas and coal have each increased in share of demand, as shown below. CfItITlflN I PRIM" mm JII N IA lNam DM ThUITIUIL EMY katual H"ro a oil Coal TOTAL I IM 4.1 9.6 45.5 11.5 27.3 100.0 IM 9.0 14.6 39.4 13.5 23.5 100.0 In fact, excepting for the oil requirements of transporta- tion, the demand pattern is fairly diversified. In recent years natural gas demand has grown the fastest, with 4  primary electricity close behind. The upswing in the share of coal since 1975 denotes a reversal of previous long term trends. The growth rate of total Modern energy was 4.5% per year in this period, while Traditional energy increased only 1.9% per year. Primary Energy Supply The main difference between domestic demand and supply has been the swing in the net trade position of petroleum, and the increase in exports of coal, as below. C0A EIPORTI AS NET PETRILEM TRE IN CULDUA (Exports-Imports) Pstrolim Coa kI/d kt/yr 197 21.2 1.7 1M -27.9 5.4 195 15.1 3534.0 Coal exports have increased fairly consistently, rising to a level of between 100 kt/year and 200 kt/year, until Cerrei6n exports commenced en 1983. Since then sig- nificant increases have occurred. 1.3 THE BASE CASE FORECAST To establish a reference case for the macroeconomic forecast and all the other analyses in this document, a Base case was developed, underlying which are various critical assumptions, as summarized below. External inflation is assumed to stabilize at 4% per year in 1988 and thereafter. The world oil price strengthens to the range of US$ 16/B to US$ 17/B in 1987, and is in the range of US$ 20/B to US$ 25/B through the 1990s. The international thermal coal price declines to US$ 33/t in 1987 but recovers to a level of US$ 37.40/t by 1990 and increases further to the range of US$ 45/t to US$ 50/t by 1995. C.  Internal inflation continues around 20% per year and a policy of real peso devaluation is assumed to commence in 1968 and continue through the forecast, at some 1.7% per year. This assumption reflects a presumed attempt by government to stimulate exports after the end of the present coffee bonanza. Gross Domestic Product (GDP) increases at 4.4% per year over the period to 2000, and GDP per capita averages a growth of 2.6% per year. ANITIOE FOR MUK CAE FUECAST _ KEY K TI CLUII 196-200 IS IW AM -!m All AM 20 External lnflatim 1/yr 3.0 3.5 4.0 4.0 4.0 4.0 4.0 Oil Prices 1W UN/I 13.5 16.4 18.1 18.1 13.9 21.9 24.3 Coal Price 196 UMA/t 35.4 33.0 34.4 35.9 37.4 49.9 Internal Inflatin 1/yr 24.0 24.0 22.0 20.0 13.0 18.0 18.0 Peso devaluatim 1/yr 24.0 19.3 17.3 17.7 15.7 15.7 15.7 Exchange rate Col$/U 190 230 m 320 374 771 1600 aIowlinl price 1986 CeI/gal 107 105 103 103 103 117 132 Av. Elect. tariff 196 Col/ilkb 7.2 7.2 7.2 7.2 7.2 7.2 7.2 lt. Bas Price 1916 Col$/ITU 173 170 166 1" 16" I8 212 Coal Priem 1916 ColI/t 2500 2500 2500 2500 2550 2750 2750 Poapulltion illing 27.0 27.5 26.0 28.5 29.0 31.2 33.6 SIP Rnelts IP 16 UN billin 34.0 35.7 37.6 39.3 40.9 50.4 61. IP/capitA 193 LO 1260 1300 1345 1360 1410 1465 I1 Generally, the assumed evolution of domestic energy prices, particularly in the short term, is roughly stable in real terms, reflecting past policies and the forecast of international oil prices. After 1990 oil product and natural gas prices increase at some 2.5% per year in parallel with international oil prices. Average domestic coal prices are assumed to firm up slightly in the early 1990s but then remain about level in real terms. The average level of electricity tariffs is assumed to remain constant in real terms, at some Col. $7.2/kWh. 6  1.4 FORECAST OF ENERGY DEMAND 1.4.1 Primary Energy While the growth rate of Modern energy was 4.5% per year in the decade to 1985, it was only some 2.7% per year in the 5 year recession period of 1981-1985. In the Base Case, Modern energy is forecast to increase at a slightly _higher rate, of 3.2% to 1995, as shown below. PRINARY ENERGY DEMOI - BASE CASE klOE/d NODERN EERGY Natural TRADITIOMAL TOTAL fra Ba Ptroleum CoUl ot e_ NEAE I16 40.4 65.4 176.2 60.6 342.2 105.0 447.6 19o 50.0 66.4 201.8 64.2 382.4 108.7 491.1 19s 68.4 71.4 243.4 86.9 470.0 112.8 52.8 2000 93.4 64.7 287.4 98.9 544.4 116.7 641.1 Nodern Enuru Pwrcntaam Total Deund Purcentaa L 2 1995 11.8 19.1 51.4 17.7 100.0 23.4 100.0 1"0 13.1 17.4 52.7 16.8 100.0 22.1 100.0 195 14.6 15.2 51.9 18.4 100.0 19.4 100.0 2000 17.2 11.9 52.8 18.2 100.0 17.7 100.0 These relatively low growth rates are explained partly by an assumed slow down in the use of natural gas, compared to the past decade. Electricity demand grows the fastest, and oil demand increases at 3.3%. After 1995. the growth in total Modern energy slows down slightly, reflecting in part the forecast slowing of the economy in the mid-1990s. The share of hydro continues to increase; coal is about stable; natural gas loses share; and oil maintains a share of some 52%. These shares, of course, reflect the assump- tion of the Base Case, and should be viewed as reference values rather than recommendations for the future. Traditional energy continues to increase slowly, but by 1995 its share of total energy drops below the 20% mark, i.e. more than 80% of the country's primary energy demand would then be Modern energy, about half of which would be oil. 7  1.4.2 Secondary Energy Turning now to energy demand at the point of consumption; for example oil products such as gasoline rather than crude oil, or electricity at the point of use rather than hydro energy; the Base Case forecast of secondary energy may be summarized as follows. FINAL EW O ECOI_t EIIEII - KE CAK BKtvral Histribhtiu md Wor Fbwly Rcn Electric Pitrulum Natural Traitional Total Nctoral Products fa WL b$oveos bTi boa Istribution 1x) (O) (X) (X} (Z} 1X} QWNI/d) (X) 193 Rnidutial 16.2 16.4 0.6 3.6 63.2 100.0 102.1 30.1 Co_rcial 74.1 25.2 0.0 0.0 0.0 100.0 9.1 2.7 Imkutrial 13.1 20.3 15.3 35.3 15.5 100.0 92.2 27.2 Trusport 0.0 100.0 0.0 0.0 0.0 100.0 105.4 31.1 Others 1.5 42.2 0.0 0.0 56.3 100.0 30.1 6.9 Total 10.5 4S.3 4.3 10.7 38.2 100.0 331.9 100.0 l"S Reidetial 26.1 13.9 1.1 3.3 55.6 100.0 126.9 26.4 Cuurcial 79.4 20.6 0.0 0.0 0.0 100.0 16.4 3.7 Indastrial 18.9 15.6 17.3 35.3 12.4 100.0 114.1 25.6 Transort 0.0 ".4 1.6 0.0 0.0 100.0 152.2 34.0 Others 2.0 36.3 0.0 0.0 61.7 100.0 34.9 9.3 Total 15.3 45.2 5.4 10.0 24.1 10.0 446.5 100.0 A notable shift is the increase in the use of electricity in the Residential sector and the decrease in Traditional fuels; electricity increases from 16.2% of residential requirements in 1985 to 26.1% in 1995 while Traditional fuels decline from 63.2% to 55.6%. This reflects both rural electrification and urbanization of the population. Petroleum product use declines slightly in total share, and decreases particularly in the Commercial and In- dustrial sectors. 8  1.4.3 Rural Sector Recent surveys of energy use in rural areas, excluding transportation demand, confirm the importance of fuelwood in the rural economy. IIALANCE OF IM. ENEMY IN COLNIIAI (1"o - I19D Final Causutim of BKcdarv Eneray (kiE/d) Tralitimial EIIraw hWion Eunray SWKector FPuilod Dsse and Col Petroleum Eletricity Others TOTAL Rnidus Products Rsidential - Coolin 62.3 - 3.3 2.7 0.6 - 68.9 - Othrs - - - 2.4 1.1 0.9 4.4 Aqriculture - - - 3.2 0.0 - 3.2 Agroindustry 8.9 12.5 3.4 1.9 0.1 1.1 27.9 TOTAL kNE/d 71.2 12.5 6.7 10.2 1.1 2.0 104.4 x 68.2 12.0 6.4 9.1 1.7 1.9 100.0 Sovct ElN, encluding Territorios Ncionale. The energy used for cooking dominates rural household energy demand; some 90W. is fuelwood, about 5% is coal, and the remainder is petroleum products or electricity. The coal used for cooking is mostly in coal producing areas, and the majority of rural households that do use electricity for cooking also employ other fuels such as fuelwood (53%), kerosene (14.), and coal. The bagasse provides considerable amounts of energy, some 12.5 kBOE/d, mainly at its source in the sugar agro- industry. Industrial use of fuelwood is for brick-making, pottery and the like. 9  1.5 FORECAST OF ENERGY BALANCES A global preview of the energy balances, consistent with the Base Case, is shown below. FEUC T PRIMY OM? .UM UE CAK kNEId _ EE hemstic Prui.tiam FkaiiuTram Nu Traditioul Ntural (Import-Euprt) Ewgy Eergy TOTA. Wm1 J& 0k _Wi I" 111 CuL hkm hlms Jc 1IM 0.4 6.4 191.3 107.3 404.4 - 15.1 - 46.7 342.2 105.0 447.2 190 30.0 66.4 484.1 212.4 2.9 -M2.3 -218.6 332.4 10.7 491.1 1M 6.4 71.4 463.1 305.4 90.3 -219.7 -213.6 470.0 112.3 562.9 2000 93.4 64.7 363.3 307.1 321.5 - 7S.9 -206.2 544.4 116.7 661.1 Metes 1) Primy oyn ecmptirl petrolmu prudct in the oil blmn of foreign tra and etallurgical coal in the coul balance of fwrip trade (deomstic prodction iluden invetory chag ad n-nergy productio) 2) Tradiltimal eery include firewood, baasse, nd agricultural rnidum domstic prductim is Ia to dmad. 31 Th blce. of mders erwgy indicate the dom for priry wrgy. The TOTAL indicate total demad for primry enery is the ecom. 4) It my be meted that the OE of Colombian oil is _mo 1.51 higer tha the actul barrelsg iho in Chapte 4. The short term increases in net oil and coal exports are quite dramatic. By 1990 their combined exports are forecast to be equivalent to 500 kBOE/d. It is hoped that such improvements in energy trade balances can assist the country in sustaining a high rate of economic growth in the coming decade. We now turn to consider those chal- lenges to growth presented by the energy sector and macro- economic performance in the period to the year 2000. 1 0  2. MACROECONOMIC CONSIDERATIONS AND PROSPECTS 2.1 INTRODUCTION The energy sectors have impacts on economic development in Colombia which extend far beyond the energy sectors them- selves and which affect many dimensions of macroeconomic and sectoral economic performance. The cost benefit analyses which lie behind decisions to invest in new energy development, to impose regimes of pricing and taxa- tion, to allocate the earnings of the energy sectors, etc. should take into account the implications of these deci- sions on the other parts of the economy, for example, on economic growth, inflation, debt, employment, economic structure, etc. Energy policies should be developed within an integrated macro economy-energy sector frameworkc, recognizing at an early point in the decision process,the pervasive implications of energy sector deci- sions on the broader economy. In this chapter we examine linkages between the energy sectors and macroeconomic performance. Then we will ex- amine a projection for the Colombian economy over the next 15 years, emphasizing the special challenges which the patterns of expansion in hydro electricity, oil, and coal pose for rapid and balanced growth. Then we examine the implications for the macro economy of some of the prin- cipal possibilities for energy sector management. 2.2 MACROECONOMIC OBJECTIVES AND CONSTRAINTS 2.2.1 Objectives The objectives of policies for development of the energy sectors should be consistent with goals of national development policy. The primary aim of development is clearly to increase real income. From that perspective, economy growth of 2.3 per- cent over the 1980-1985 period has been far from satisfac- tory. Policies at the macroeconomic level, in the in- dividual sectors, and in the government sector seek to place the total economy on a rapid and balanced growth path; one which will over time maximize per capita real purchasing power. While this is doubtless a primary con- sideration, in practice the aims of public policy are mul- tidimensional. They recognize that other objectives like balance of payments equilibrium, the domestic budget balance, price stability and employment are also impor- tant. Microeconomic questions such as income distribution, regional disparities. and questions of industrial and 1 1  sectoral structure should also be taken into account. The performance of the economy in many of these directions is affected by sectoral policy, particularly with respect to energy. The achievement of the economy's development ob- jectives should be mutually consistent with sectoral deci- sions and sectoral considerations, such as profits and losses at the sector level, which will play an important role in decisions. It is the purpose of this chapter to evaluate the implications of sectoral decisions related to energy on the various dimensions of economic performance. The key macroeconomic issue in relation to the energy sec- tor is how the sector can contribute in the most effective way to economic growth during the next 15 years. Com- plementary issues are the impact of the sector on the balance of payments, on the domestic government budget, on price stability and on employment. 2.2.2 The Time and Uncertainty Dimensions Timing and uncertainty are dimensions of economic perfor- mance which cannot be ignored at the macro level any more than in micro economic computations. Future output and consumption are not equivalent to output and consumption today. Time discounts should be applied. This is an im- portant factor in evaluating alternative development strategies since a diversion of resources into investments with a long payout period, as in energy, represents a deferral of results from the present to the futUre. Similarly the risks of alternative strategies must be taken into account. This is a difficult challenge to the forecaster since objective appraisals of risks are dif- ficLlt, particularly at the macro level. Nevertheless, discounts for the riskiness of development programs must be allowed for, if a fair evaluation of alternatives is to be made. In the case of energy investments. this calls for evaluating the implications of alternative price paths, in addition to the base price assumption. The risk associated with coal and oil prices in an energy- based development scenario on the balance of payments and on other dimensions of macroeconomic performance is likely to be large. 2.2.3 Constraints As the record of the first half of the 1980 s shows, resource and financial constraints limited the economy s ability to achieve its targets. Total resouIrces which can be mobilized for development are limited by domestic 12  saving and by the available foreign credits and foreign investment. Development policies in one sector may as a consequence limit the investment possible elsewhere, as, for example, in Colombia heavy investment in the energy sectors may have"crowded out" development in industry and agricultLure. 2.3 ENERGY SECTORS AND MACROECONOMIC PERFORMANCE The macro economic outcomes of alternative strategies for energy development depend on complex interactions between these sectors and the macro economy, within the macro- economy itself, and between the macro economy and other public policy decisions. The complexity of the Colombian economy, which we treat below in terms of a greatly simplified econometric model, includes interactions which we try to sLummarize in the following classification: (i) Direct Linkages --these are relationships directly from the energy sectors to other parts of the economy, for example, energy sector labor or capital inputs. (ii) Indirect or Macroeconomic Linkages. These are indirect linkages through the economy. For example, impacts on income and consumption or effects on availablity of saving for non energy investments. (iii) Policy Linkages --these are linkages which operate through macro policy responses; for example. changes in monetary policy and credit to offset balance of payments disequilibrium created as a result of energy sector actions. In each case we discuss various subcategories including: - Demand side effects - Supply side effects - Financial considerations - Government budget considerations - Balance of payments and debt impacts. 2.3.1 Direct Linkages The direct linkages from the energy sectors to other parts of the economy are frequently disproportionate to the relatively small size, even today, of the energy sector to the other elements of the Colombian economy. While total value added in the energy sector only represents 2 percent of the Colombian economy, the energy sector has drawn a 13  much larger share of government credits and of total investment. On the demand side investment requirements of the energy sector dominate. On the other hand demand for labor in the energy sector is quite small in aggregate and on a per unit of output basis. For example, in the electricity, gas and water sector the number of persons required for one million pesos of value added of 1975 was 3.43 as compared to 14.82 for agriculture, 12.72 for government services and 14.7 for construction. The high capital requirements of the energy sectors also translate directly into large import needs, so that a major fraction of Colombian capital goods imports in recent years have been for hydroelectricity, oil and coal development. This disproportionality of the input requirements of the energy sectors as compared to other parts of the economy which call for more labor and less capital is an important fac- tor in the broader implications of the allocation of resources among the sectors. but input requirements alone surely should not be the determinant of where to allocate limited resources. On the supply side the impact of the shift from energy de- pendence to energy selfsufficiency should not be underes- timated in view of Colombian needs for foreign exchange. On the other hand the availability of energy from domestic sources is not in itself generally an advantage (or stimulus) to other domestic activities unless electricity or other fuels are available at low cost and exceedingly advantageous price terms, making energy intensive in- dustries cost competitive. In terms of backward and for- ward linkages, the energy sector offers few general pos- sibilities, i.e. it calls for few inputs which make pos- sible the development of "backward linkage" industries and it offers only a few possibilities for downstream linkages, e.g. to petrochemicals or aluminum smelting. The linkages of a financial nature of the energy sectors to the government fiscal position are direct and con- siderable. Tax receipts depend directly on the energy sec- tors and significant parts of government investment expen- ditures have been directed into the energy sectors. During the expansion phase of investment in hydroelectricty, petroleum, and coal, these sectors have borrowed heavily in domestic and international financial markets, relying on the credit guarantees associated with their status as national enterprises. Borrowing require- ments drawing on public investment directly and on finan- cial markets continLte as these sectors remain in a deficit status. This is a major issue which is considered in most chapters of this report. From the revenue side, the energy sectors have the potential, it is to be hoped, ul- timately to supply significant revenue flow out of their 14  profits into the public sector. From the perspective of the balance of payments, the direct impacts of the energy sectors have had need for foreign exchange to finance im- ports of capital goods --though part of these requirements are met through the foreign investment inflows from for- eign associated companies. It may be noted that the specifics of concession or royalty agreements may affect the balance of payments. Royalty arrangements have very different implications, for example, than equity par- ticipation, perhaps financed by foreign loans. Ultimately as the coal exports grow, the balance of pay- ments benefits should improve, although these are offset in part by debt service and through profit remittances of the associated companies. The international price of coal and crude oil and the quantities which can be sold on in- ternational markets critically determine the potential im- pact of these sectors on balance of payments. 2.3.2 Indirect or Macroeconomic Linkagem The indirect linkages reflect the full complexity of the interrelations between the elements of the macro economy. Demand side feedbacks operate through the impact of income flows on consumption and private investment and drive the production activity of the manufacturing, construction, and service sectors. The slowing of growth in Colombia during the early 1980s occurred despite significant demand stimulus from public investment in hydroelectric invest- ments (perhaps because so much of the demand generated was of necessity oriented toward imports of capital goods). Indirect supply side effects also exist but are less clearly apparent. The contributions of public investment to the growth potential of agriculture or industry doubt- lessly exist. But such supply side considerations make themselves felt only in the long run and may be quantita- tively small when measured on a year to year basis. Indirect effects of energy policies operate with respect to the government sector and the financial sectors mainly through the impact of energy sector results on public credit requirements, on the money supply, and on the availablity of finance for private non-energy sector ac- tivities. External financial constraints also apply since a large part of Colombia s external borrowing capacity was used to finance the hydroelectric projects. Indirect balance of payments effects are apparent through the effect of energy sector foreign exchange needs on the availability of foreign exchange reserves for imports (of non- energy goods) and of the potential linkages from the 15  balance of payments situation to the exchange rate and to the competitiveness of "minor" product exports. The issue of exchange rate overvaluation, a phenonmen typical of major energy exporters, could be a threat in Colombia, if the foreign exchange balance of the energy sector were to become significantly positive. 2.3.3 Policy Linkages The question of policy linkages calls for a brief discus- sion of the role of fiscal, monetary, and microeconomic policies in the economy. As Colombian development il- lustrates, there are numerous channels through which the public sector can influence the development of the economy. Our concern here is with policies as a mechanism for transmission of effects (or for offsetting impacts) originating in the energy sectors. Thus policy may be "passive" allowing the impacts of the energy sectors to flow through to the rest of the economy, or "active" seek- ing to offset the broader effects, i.e. to neutralize them. On the demand side, the government may allow expan- sion of income and private demand resulting from an energy sector stimulus to feed through and provide a multiplier effect in the non-energy economy ! a passive policy; or it may use monetary or tax policy to offset the growth of disposable income, to constrain private demands, as in 1984. The question of active versus passive public policy is particularly apparent from the perspective of the balance of payments and the public deficit. The financing of the public sector deficit and the accumulation of foreign ex- change reserves have the potential for increasing monetary reserves and the money supply unless there is an active policy of neutralization. The reality of the Colom- bian policy setting probably calls for a more or less ac- tive policy position, though not one which will fully off- set the impact of sectoral occurrences. A detailed view of the channels of interaction between the energy sectors and other parts of the model lies be- hind the macro model structure, which hopefully captures quantititvely the most important feedback channels. On the other hand the need for discussing these channels in some detail should not obscure the broader issue of the role of the energy sectors in the development process for Colombia. The central issue is whether energy expansion serves as an engine of growth or does it represent an inefficient com- petitor with other sectors for scarce development 16  resources? 2.4 CHALLENGES TO GROWTH IN THE 1985-2000 PERIOD Economic prospects in the short run 1985-1990 period are dominated by forces which are already under way, the coffee bonanza, the development of coal exports and the current expansion of oil production. Looking toward the 1990s the Colombian economy stands at a cross-roads. The decisions with respect to further development of the energy sector and allocation of the financial resources of this sector are critical ingredients in the total develop- ment policy picture and have, as we have noted, implica- tions which reach beyond the energy sector to many dimen- sions of Colombian economic performance. In this section we consider the principal challenges to growth policy for the 1985 to 2000 period. In recent years the reduced growth performance of the Colombian economy has been accompanied by unbalanced development with massive financial resources taken from government, from foreign borrowing, and from associated companies going into the energy sector. This investment is reaching fruition in the second half of the 1980 which, along with the coffee bonanza, eases the external debt burden and improves the balance of payments. Other sectors of the economy have sufferred during the 1980 to 1985 period, in part as a result of diversion of public investment, in part because of overvaluation of the ex- change rate and because of tightness of credit. This pat- tern of resource availablities is shifting somewhat during the current period and may shift further as the resource requirement of the energy sector eases. The critical questions which arise are then --What is the role of energy in Colombian economic development beyond 1990? Should plans be made to hold back oil production, given the limited production potentials as presently seen, and should coal investments be limited to provide for the presently planned 15 million tons per year? Alternatively can energy development be seen as a stimulus which must continue to expand to provide resources and demand for other parts of the economy? From the perspective of the other sectors, agriculture and manufacturing specifically, can incentives and resources be provided to achieve a rapid and balanced expansion of the economy? Is the prospective slowing of the needs for capital in the energy sector, and its prospective earn- ings, an opportunity to put more resources into other sectors? If so. then what nature of incentives are needed? What is implied for public policies with respect 17  to energy and with respect to agriculture and industry? The critical policy questions in this regard are not only sectoral, for example energy investment or pricing. The questions are also of a more general nature, the distribu- tion of tax burdens between sectors of the economy, the availablity of financial credits, and the exchange rate policy for example. A number of issues are central to the role of the energy sector and/or of other sectors in the process of Colom- bian economic development. They can be summarized into: - Comparative Advantage - Linkages - The need for balance 2.4.1 Comparative Advantage The role of energy sectors in development is linked closely to the question of whether Colombian energy resources have comparative advantage vis-a-vis energy producers in other countries and visavis other sectors in the domestic economy. The first of these issues deter- mines whether it is economic to market Colombian coal or oil on world markets; the second whether it pays to divert capital resources from other sectors toward energy development. The microeconomic computations which un- derlie development of Cano Lim6n and el Cerrej6n would suggest that these advantages apply, or at least that the long term outcome will be economic. On the other hand the surpluses of hydroelectric energy would suggest at least that the calculations were excessively optimistic at the time that these projects were undertaken. The issue of comparative advantage hangs greatly on the market price prevailing in the world economy. Will prices justify economic production recognizing in this cCmputa- tion the long run social supply cost of drawing on the available resource base? At present the prospects for energy prices are particuarly insecure, and this makes decision-making particuarly difficult. Assuming present prices, or even a decline of oil and coal prices, the financial and engineering calculations may well cast doubt on the justification for a development policy which relies heavily on further energy development. But this is a question of forecasts,and engineering and financial economics calculations. From the perspective of the rest of the economy, the energy sectors should be evaluated without providing 16  special subsidies or preferential credits so as not to divert capital from alternative uses in industry or agriculture. But given that the evaluations are done fairly, the critical issue is to fully appraise the prospects for economic exploitation of energy resources in the light of realistic estimates of future energy prices and supply costs, and inlight of the risks involved. 2.4.2 Growth Linkages The question of linkages is central in regard to develop- ment of natural resource or energy industries. If a primary sector is to be an engine of growth one must ask by what channels is this growth potential transmitted to the remainder of the economy? We have noted in section 2.3 that the channels of linkage may be through government revenue receipts and the balance of payments for example, or through direct ties to needs for labor creating employment, through requirements for input materials which may cause the creation of supplier industires, and through the development of downstream processing. We have also noted above that the direct linkages associated with development of coal or oil are relatively limited. The development of coal mining in- stallations calls for much capital, which is generally im- ported in large proportion. Labor input requirements per unit of output in modern installations are small rela- tive to other sectors of the economy and they are local- ized to the area where oil or coal is being developed. Downstream processing potentials for coal are limited and for petroleum involve petrochemical and refining installa- tions which are capital intensive, requiring technology in which comparative advantages for Colombia are likely to be negligible. Thus the issue for energy development, as a linkage sec- tor, is not so much a question of direct linkages as one of indirect linkages. As a result a critical issue is whether revenues generated by the energy sector can be harnessed to provide growth and development elsewhere in the economy. 2.4.3 Balanced Growth The question of whether growth should be balanced is closely linked to the discussion above. While it cannot be prejudged whether balanced or Ltnbalanced growth repre- sents a preferred development path, the broader considera- tions for evaluating economic performance are clearly 19  affected by whether growth is carried on primarily with emphasis on the energy sectors or whether it occurs broadly in agriculture, industry, and services as well. From the perspective of balance one is likely to question continued growth of the energy sector at rates in excess of 10 percent per year for the next ten to fifteen years. Balance has implications for employment, urban-rural settlement, the distribution of income, the burden of taxation! etc. which need to be considered in evaluating a development plan. This is not to say that growth focusing on one sector, in this case energy products like coal and petroleum, is undesirable. But it is important to evaluate the impacts in the aggregate and in terms of these other social and economic considerations of such un- balanced growth, against what could be achieved with a broader allocation of the economy s resources. The challenge of planning for the 1990s is to evaluate the potentials in various directions. Further movement along the energy development path clearly entails some gains and some costs, some of which we are already seeing. These benefits and costs are macroeconomic as well as sectoral. To make a preliminary assessment of macroeconomic develop- ment choices we now review economic performance in the period 198o-1985 and then turn to our reference macro- economic projection. 2.5 ECONOMIC PERFORMANCE 1980 - 1985 2.5.1 External Sector During 1980-1985 the country's gross domestic product grew at an annual 2.3%; the lowest rate since 1925. The down turn in 1980 - 81 was closely related to the drop in in- ternational coffee prices which set in during the last three months of 1960 and to the impact of international recession as of that year. Despite the drop in export proceeds and in Colombia's pur- chasing power, import levels grew rapidly until 1982. This resulted from the joint effect of an increasing currency overvaluation, the absence of import restrictions, and a growth in government machinery and equipment purchases brought about by the public investment plan of the ad- ministration in office at that time. The 1976-1979 period had been characterized by a trade surplus, which, in only two years, became a deficit, amounting to US$1.3 billion in 1961 and US$1.8 billion in 1982. At the beginning of 1963, Colombia's foreign trade was 20  struck by the closure of neighboring markets (Venezuela and Ecuador) and by the currency devaluation in those countries. Consequently, the volume of minor exports con- tinued to decline, in spite of increases in the rate of devaluation in Colombia in November 1982 and March 1963. These circumstances, along with the closing of interna- tional banking credit, after Mexico's economic crisis in October 1982, compelled the government to take measures regarding import restrictions as of April 1983, and par- ticularly in March 1984; measures, which were Lundoubtedly overdue. These restrictions, the cumulative effect of recession, the reduction of public investments, and the increase in petroleum production enabled a curtailment of import levels by more than US$700 million in 1983 and by nearly US$500 million in 1984. Export proceeds rose once again in 1984 as a consequence of a slight improvement in the coffee markets of the Northamerican economic recovery, and of new coal exports. Thus, the trade deficit was reduced to US$1.317 billion in 1983 and US$332 million in 1984, and balanced evenly during the last three-month period of the latter year. A small surplus was registered in 1985. Nevertheless, service and capital accounts registered sharp declines in 1983 and 1984, which resulted in gross foreign exchange reserve losses amounting to US$1.72 bil- lion in 1983 and US$1.28 billion in 1984. Controls on foreign exchange were tightened during the second half of 1984, reducing the strain on the financial services account. More effective measures were: the requirement of minimum financing terms for imports, the increase in control of foreign exchange accounts belonging to the National Coffee Fund and the Coffee Growers' Federation, and the restriction of debts incurred by state enterprises, sLuch as ECOPETROL. These measures, supported by the government's negotiations with international financing agencies, brought about an improvement in the country's capital account in 1985. 2.5.2 Public Finances, Aggregate Demand The sharp decline in export proceeds and the deterioration of the balance on current account, lie that registered in 1981, inevitably affected the level of economic activity. The external sector's expansive trend, rapidly turned around to become restrictive. In 1981 and 1982 the fiscal deficit grew rapidly on ac- count of the r-eal decline in income levels resulting from 21  the external sector's deterioration and the recession which were concomitant to a rise in public consumption and investment expenditure. ThUS, a decrease in demand was induced, which sunk an al- ready weak economy into a recession. The gross domestic product growth rate dropped to 2.3% in 1981, 0.9% in 1982 and barely reached the 0.5% mark in 1983. The consequence was a generalized subutilization of the installed capacity, unmistakably attributable to low demand. The recession reached a trough in mid-1983 because the new government applied a restrictive policy to government ex- penditure and investments during the period between August 1982 and July 1983. in order to reduce the inflation rate. From July 1983 to July 1984 the government reversed this policy; public spending and investments rose on the basis of newly issued public bonds and credit, and subsequently, with the proceeds from the two tax reforms adopted during the second half of 1983. The joint effect of the expan- sive fiscal policy with greater trade protection, of the slight improvement of external sector activities, and of the inflation rate decline (thanks to a slowdown in the rhythm of price increases for food and housing) led to a substantial reactivation of economic activity, par- ticUlarly in the industrial sector. During this short period the gross domestic product (GDP) rose by 5/.. As of July 1984, however, as a result of negotiations with international financial organizations an accelerated reduction of the fiscal deficit was given absolute pr-iority. The government attributed the deterioration of the external sector to excessive domestic demand and once again reversed its economic policy. Public spending and investments were reduced, in real terms, while taxes were raised and subsidies eliminated. As a consequence, al- though GDP rose by the end of the year, the growth rate merely amounted to 3%. During the first half of 1985, the government raised the rate of devaluation to the equivalent of nearly 70% per annum. Throughout the year the fiscal deficit narrowed more rapidly than the external deficit on current account, and the decline in public spending and investments was not compensated for by exports. Thus demand was depressed and economic activity continued to follow the 1984 growth pat- tern. 22  2.5.3 Agriculture and Industry During the same period, agricultural activity stagnated, in contrast with the dynamic behavior observed between 1970 and 1980. This phenomenon seemed to be linked to problems of demand as well as supply. Commercial agricul- ture was simultaneously affected by recession on foreign markets, by cumulative currency overvaluation, by low domestic demand, and by the increase in prices for im- ported commodities associated to the 1979 oil price in- crease. Although, agricultural product prices rose more rapidly than the general price index, during most of the period, this rise was slower than that of production costs. The ensuing absence of profitability discouraged production and investment. Traditional farming, in turn, suffered supply limitations; due to the slow expansion of the agricultural frontier, to safety problems in recently colonized areas, and to slow technical development. Likewise, during the recession following 196O, there was a lack of industrial investment. In addition, at the same time, public investment in the social sectors diminished. The investment area that registered the most rapid growth and absorbed a good share of new external credit was the energy sector. 2.5.4 Employment One of the most serious consequences of the recession was a pronounced deterioration of urban labor markets and in- come, which was evidenced by a growth in official unemployment rates in large cities. Since 1970, these rates had followed a downward trend, reaching 8.3% in 1981. From then on, they rapidly grew to 12.4% in March 1985 and 14% at the beginning of 1986. Furthermore, oc- cupation levels and real income of urban workers have regressed. 2.6 ENERGY SECTOR 1980-19e5 2.6.1 Output of the Energy Sector The energy sector's value added rose 7.5% per year between 1980 and 1985, recovering from the low growth during 1975- 198o, which merely amounted to 0.4% on account of the 1975-1979 decline in oil production. The growth rates registered in 1983 and 1985 were par- ticularly high, at 8.8% and 12.-7%, respectively, as a resLtlt of coal and petroleum production increases. In 29-.  fact, since 1983, coal production has risen at more than 15% per year; comparable increases in oil production were registered in 1984 and 1985. Thus, the energy sector's share in GDP dropped from 1.7% in 1975 to 1.3% in 1980, but by 1965 it had regained the 1975 level. Since 1980, the energy sector's direct contribution to the growth rate of GDP has been positive but small, amounting to less than 8%, as shown below. 19W 1" I 1 19193 1914 1916 1.%9 2.21 8.91 9.11 3.4X 7.01 Between 1975 and 1984, the share of petroleum in the energy sector's value added registered a sharp decline, going from 39.4% to 17.4%, whereas the electricity subsector's share rose from 39.3% to 52.9% during the same period. Likewise, the shares of coal and gas increased, but in a smaller proportion, as shown below. WILLE ADED O ENERSY SECTOR (llIU2ER EJY} X Natural CL1 Oil ,EKtricity Bi JM 17 6.4 39.4 39.3 9.3 5.6 19W 9.3 16.2 57.7 11.4 5.4 199 10.4 17.4 52.9 12. 6.4 2.6.2 Energy Sector's Contribution to the Economy During the first half of the 1980s, the energy sector was attributed greater importance than it would normally be given in view of its share in the national GDP, which was below 2%. From several standpoints --fiscal, investments, external and internal debt, balance of payments-- the energy sector captured resources from the Colombian economy and from foreign credit, which restricted pos- sibilities in other sectors. Furthermore, its contribution to economic growth, at least in the short run, does not seem to have been significant. The facts suggest that the large investments, given their high imports component., did not have the desirable multi- plier effect. In addition, investments in the electricity sector have created an excess of installed capacity which  has been estimated at 20%-25/ for the coming years, imply- ing a US$500 million investment which could have been postponed for at least three years. 2.6.3 Public Investment in th- Energy Sector During the 1980-1985 period, public investment in the sec- tor increased at an annual 13.9%, whereas total government investment merely grew at a 3.7% rate. Consequently, the energy investment share in total public investments rose from 35.7% in 1980 to 50% in 1985. A similar trend can be seen in its share of total national investment; as of 1983, an average 31.5% of investments was in the energy sector. These figures show that, in retrospect, the development strategy adopted by Colombia was based on the energy sec- tor. In fact, one of the objectives of the 1978-1982 administration's National Integration Plan - PIN - was the development of the energy and mining sector. But, it was actually in 1974 that the government planned the execution of several energy projects, such as Cerrej6n, as well as an investment increase in the oil subsector for explora- tion,, development, transport and refining. The electricity sector's rationing measures in 1977, 1979, 1981 and 1982 led to the implementation of a generation expansion program which, in the end, was too big. An ex- cessive concern for the security of electricity supply, along with the real increase in tariffs and the economic recession, brought about a sharp decline in electricity demand, going from 10% per year before 1978 to 5.8% at present. The priority was perceived at the time as satis- fying demand rather than implementing a demand management policy, although the result was to severely curtail demand. These factors, added to the more recent lack of decision making on the part of the authorities, in regard to the deferral of generation projects, led to the prevailing installed capacity surplus. Since 1980, the foregoing initiatives brought about a sub- stantial increase in coal, oil and electricity investments within a five-year period, as shown below. Investments in coal projects, which were minimal up to 1980, rose to a 24% share of public investment in 1984, while oil invest- ments maintained the 1980 level (14.5%), and investments 25  in electricity dropped from 65.1% in 1980 to 61.5% in 1984. INWIENTH S IN THE ENY HECTOR 1910-194 11975 31111 P,on) YwU Total Ectricity OiI/kg Coal 193 12.533 10.63 1.U9 .001 1911 13.406 100 2.30 1.037 1932 19.679 1L5" 4.021 3.147 193 23.01 14.446 4.101 5.054 193 23.041 14.13 3.337 5.521 Noets 11.31 1975 p*19 a IMU3 During the same period, however, the government's revenue came to a standstill as a result of the recession, of tax evasion and of the 1980 tax reform, all of which resteicted domestic funds available for growth in public investment. Meanwhile energy investment, relying heavily on external funds, was increasing. 2.6.4 Financing of Energy Investment and the Fiscal Deficit In regard to the financing of its investment, the energy sector did not produce the necessary gross savings, thus affecting other public finances, monetary policy, as well as the levels of internal and external debt. The energy sector's gross savings during the 1980-1984 period, excluding capital transfers, were much lower than investment, which led to continuous increases in its debt level. As shown below, a high share of the consolidated public sector's net borrowing was accounted for by the energy sector's net borrowing. FIMNMCI OF CAITAL AICCUAUTION OF D SEamhE 3illi currant pmas) Irm Ukvinus 22.5 64.3 Capital trausfrm 9.3 7.0 TOTAL 31.3 71.8 llt barroa JI IA Iavstaatu 54.9 159.4 Nt bhrrin as I of Snv't borrowing 28.51 42.92 26  The situation has been markedly different in each energy subsector. Up to 1979, the pressure for resources was similar both in the electricity and in the oil subsector. As of 1980e the oil subsector's financial situation im- proved in such a manner that its flow of funds was posi- tive in 1981, 1983 and 1984. In other words, it provided resources for the economy (Figure 1 and 2). The electricity sector's deficit increased rapidly; the net borrowing trebled between 1979 and 1980. Lastly, CARBOCOL'S investments, with a negative gross savings level which is explained by the fact that the Cerrej6n project was in its construction stage, created a need for an increasing debt as of 1981. Though the sector's gross savings grew rapidly, the in- vestments made increased even faster, adding to the government's consolidated fiscal deficit which increased from 1.3% of GDP in 1980 to 5.3% of GDP in 1984. Put another way, if the sector had been financially self- sufficient, a modest fiscal surplus would have been real- ized in 1980, and Colombia's deficit would have dropped to 3.0% of GDP in 1984. The electricity sector alone has accounted for the greatest share of the energy sector's external debt. In 1981, before the Cerrej6n project began, the electricity sector's debt accounted for 95% of the total. Subsequent investments in coal and in ECOPETROL projects increased the share of external financial resources assigned to those sectors and therefore reduced the share of electricity to an average 65%, as shown below. 8LIA'3 EITERN. DEIT, PUILC WEIT ID ENEMPY ECTOR'S KIT (USS billion) External Debt Enewgy Sector's atimonal Public Energy Shae of Debt Total Sector Setor National Public Total Sctor 1979 5.222 3.456 .746 14.31 21.61 1980 6.300 4.179 1.660 26.31 39.71 1982 9.410 5.722 2.565 27.51 45.21 195 12.291 9.116 4.673 38.1X 51.31 Sourcot National Planning Departet Likewise, energy sector interest payments, which accounted for 86. of total interest paid by the private and public sectors in 19860 rose to 277% in 1985. Most of the inter- est payments were those of the electricity sector. 27  On the other hand, the effect of imports on the balance of payments was compensated for by capital flows in the form of direct foreign investments and external credit. Par- ticularly in the case of coal, the construction period of the Cerrej6n Norte project had a positive net impact on the balance of payments, because both the associate's capital investment and CARBOCOL's external debt exceeded the levels of hard currency required for imported machinery, equipment and services for the project. The oil sector's experience was similar. An even higher share of the electricity sector's imports were financed through external debt. , Thus, the energy sector absorbed a sig- nificant and increasing share of the country's external credit, at a time of global debt restrictions in Colombia. The large share of investments in the electricity sector, which acount for most of the country's investment and debt, led to a significant capacity surplus in the sector. In addition, the debt incurred ruled out other possibili- ties which might have produced a more favorable short-term effect on economic growth, because investments in this sector yield profits in the long run, rather than having short- or medium-term effects. In other words, during the past few years, sizeable investments in the sector ab- sorbed a considerable share of national savings (domestic savings, and particularly, external savings) which could have been utilized in other sectors, possibly producing more positive effects on economic growth, at least in the short run, and definitely reducing unemployment levels. given the capital-intensive nature of the energy sector's investments and production. These considerations apply especially to the electricity sector because, unlike the oil and coal sectors, it can not be expected to generate hard currency through exports or import substitutions. 2.6.5 Petroleum Balance of Trade Up to 1975, the downward trend of crude export volumes and the increase in petroleum product imports did not show up as a deterioration of the petroleum balance of trade. Nevertheless, it was already obvious that as soon as the balance became a deficit, as was the case in 1977, it could drastically expand. This pressure, in view of the restrictions on foreign credit, led to crucial decisions in oil and coal policy between 1974 and 1976. in order to prevent the energy sector from becoming a bottleneck in the process of growth in the Colombian economy. 26  In practice, the deterioration of the petroleum balance of trade between 1975 and 1981 did not have major short-term consequences on the national economy because of the sig- nificant trade surplus in other products and the availability of considerable foreign exchange reserves during that period. The medium-term outcome, however, was a deterioration of the country's balance of foreign ex- change, which implied a need for adjustments. The net im- ports of petroleum during the 1977-1983 period amounted to US$1.2 billion (1983 dollars), approximately 12.7% of Colombia's external debt at the end of that year, and 39.8% of the country's international reserves. As of 198., however, the reduction of the internal govern- ment deficit assisted in the required external sector ad- justment in the years to follow. 2.6.6 Balance of Payments of the Energy Sector The energy sector's contribution to the balance of pay- ments was negative during the 1980-1985 period. It registered a deficit ranging between US$612 million and US$983 million, as a result of increasing deficit levels in the balance of trade and the balance of services. This deficit was not compensated by the positive balance registered on the capital account, in spite of the direct investment increases in coal and petroleum, and of the net external debt (Table 2.1). The biggest drain of foreign exchange was from the petroleum balance, because of crude oil and petroleum product imports during the period of high world oil prices. The electricity sector's balance was also nega- tive, but it was lower than the petroleum balance, in spite of electricity's high net external debt. Although the Cerrej6n project was in its development stage, except in 1985, the balance in the coal sector was positive, be- cause external borrowing compensated for goods and serv- ices imports (Tables 2.2, 2.3, and 2.4). The coal and petroleum sectors also affected the balance of payments through direct investments, and the so-called oil transactions, in which 75% of the oil and gas produced in Colombia by foreign companies, which is used by ECOFETROL, is purchased in dollars. Oil transactions showed a rather high negative balance on account of such payments for oil and gas, even though these hydrocarbons were used in domestic markets. The direct investment component in the energy sector ac- counted for more than 507% of the total direct investment 29  registered at the Banco de la Repciblica (Central Bank) during the 1980-1985 period. This inflow of funds, in turn, was higher than the profit remittances recorded during the same period. 2.6.7 Fiscal Income from the Energy Sector The petroleum subsector, including oil and gas yielded 95% of the government's revenue from the energy sector. The remaining 5% came from the coal sector as a result of the National Coal Fund, established in 1980, which col- lects royalties from state-owned coal projects, and a 5% tax on the value of coal production. More than 80% of the government proceeds from the oil sec- tor come from the National Road Fund, followed by taxes on sales and profits earned by oil companies, and by royalty payments. In other words, the main transfer of funds from this sector to activities other than energy-related projects is in the form of gasoline and diesel taxes, which are assigned to the National Road Fund. The revenue from ECOPETROL's income tax has been nil, because the com- pany was exempted from this tax before 1980. In 1985, however, this liability was re-established. A high share of the revenue from taxation and royalty pay- ments derived from coal activities is absorbed by the sec- tor itself. The share of fiscal revenues contributed by the energy sector to the nation's, departments', and municipalities' income rose from 4% during the 1970-1980 period to 5.1% in 1981 and 5.9% in 1985. These transfers, however, did not compensate for the resources taken from the economy by the energy sector. 2.6.8 Petroleum Taxes Most of the revenue from these taxes has actually been transferred from ECOPETROL to the National Road Fund and the nation's budget. In fact, the price to the consumer for regular gasoline did not exceed CIF price levels until 1983 and 1984. The marginal cost of gasoline supply in Colombia is determined by adding the CIF price to internal transport and dis- tribution costs. Before 1983, taxes on transportation fuels did not fall upon consumers at all. Furthermore, since the tax assigned to the National Road Fund is basi- cally a users-tax, i.e, the "price" the State charges road 3-c)  users for road construction and maintenance, transporta- tion fuel consumers, rather than contributing to the public treasury, have been globally subsidized by it, even when gasoline prices have been equal to or slightly higher than the CIF price. The major part of these subsidies has not been at the expense of the national budget, but rather out of ECOPETROL's finances, as discussed further in Chap- ter 4. In recent years, the petroleum sector's contribution to national fiscal revenues has been about 4%. A greater in- put, however, is expected from direct taxation, in the form of income taxes and royalties. The coal sector is also expected to contribute considerably to the generation of royalties, but not greatly to indirect tax revenue. The foregoing considerations suggest the need to monitor the potential effect of taxation incentives, for example in the regulations covering the accounting for the capital of foreign subsidiaries, as equity or debt of the mother company, and the consequent impact on the valuation of as- sets and depreciation. Permanent tax incentives of the like in the oil sector, which are being requested by operating companies, and which will mainly benefit invest- ments made already, should be avoided. 2.6.9 Energy Sector Employment Energy sector activities in Colombia generate very little direct employment. In 1982, jobs in the sector amounted to 54,000, i.e., 1% of the country's labor force, dis- tributed as follows: CW Sctor a 14,000 ElKtricity Sctor 2l,000 Oil Sect 19,000 Indirect employment in this sector is higher, on account of its domestic goods requirements and its construction needs. In fact, as a consequence of investments in coal, electricity and oil projects, an estimated 70,OOC) con- struction jobs were created, and approximately 19,000 per- sons were employed in related industrial jobs. In other words, indirect effects should be used to measure the role of the energy sector's employment impact. 2.6.10 Energy Pricing Analysis of recent pricing policy can best consider two periods; 1980-1982 and 1983-1985; each characterized by 31  different international circumstances, as well as internal policies. The increase in international oil prices during the first half of the 1970s influenced price levels in the Colombian economy by affecting prices of imported goods dependent upon petroleum. Subsequently, the overdue adjustment of domestic prices for petroleum products, also contributed moderately to inflationary pressures during the 1976-1982 period. Tariff increases in the electricity sector as of 1976 had a similar effect. In regard to electricity tariffs, the attempt to catch LUp with the financial cost levels of the utilities in recent years brought aboLtt a very rapid growth of tariffs in some cities and regions, increasing the share of these costs in household expenses during years of recession. This resulted in social unease and public protests. 2.6.11 The Effects of Energy Prices on General Price Levels The role of energy prices in the economy was analyzed by determining their economic impact on general price levels (GDF deflator), as well as other variables such as monetary supply, prices for agricultural products and im- ported goods, and minimum wage levels. According to the results, monetary supply is the variable that best explains changes in the GDP deflator, but it is not, however, the only factor. The prices of agricultural products and imports are also significant. The prices for energy have a lesser impact and the effect of minimum wage levels appears to be scant. The impact of electricity prices has been similar to that of oil product prices, as shown below. EfFET OF PEIIE PCT, ELECTMICITY, l, Nl MT ic INCE UI N TME M TIC PJUCT EFIITO Incre.n in Incre.. 1i EffKct on lncre.. in Effect an up olctricity, the HP oil product the sop DflIator gasu uuatur deflatr deflatnr deflator deflator (pointsu Ipointsu 1"3 231 55 3.6 411 3.4 1m 21 40 3.3 416 1.6 93 201 29 2.7 121 1.7 1934 21m 241 2.4 201 1.X 372  2.7 MACROECONOMIC BASE CASE FORECAST 2.7.1 Base Case Assumptions For a better comprehension of the relationship between the energy sector and the rest of the economy, an economic energy model was conceived, on the basis of which a base case for the 1986-200) period was simulated. In regard to the energy sector, this base case takes into account no new major coal projects and considers Cerrej6n production at 15 Mt/year. The electricity sector's con- sumption growth rate is estimated at 5.6%, and, other than those in construction, no new projects are foreseen before 1990; excluded from the construction phase are: the UrrA, Calima III, and Miel I hydro plants. As far as the oil sector is concerned, production declines after 1992, and as of 1987 an exploration program is undertaken in order to keep production from dropping below the 335 kE/d mark. No taxation changes concerning the coal and oil sectors are incorporated. With respect to the economic variables, no fundamental changes are made. Public investment grows at 5% per year, in real terms; the exchange rate fluctuates at an annual rate that takes into account internal and external infla- tion, in order to maintain it at a competitive level; and after the 1986 and 1987 coffee boom, coffee export revenues grow at an annutal rate of 2% to 3%. 2.7.2 Economic Growth According to the base case results, within the next fif- teen years, the Colombian economy will once again attain GDP growth rates that exceed 4%. On average, a 4.4% rate can be expected, lower than the 57. long-term trend pre- viously followed by the economy, and not high enough to significantly reduce unemployment. According to the recently concluded study by the Employment Mission, a min- imum 6% growth rate is necessary in order to reduce the unemployment rate to 8%. However, considering that the expected population growth rate for the rest of the cen- tury is lower than 2%, per capita income will increase by at least 2.6%, a significant growth in itself. The highest rate of growth is expected between 1985 and 1990). at an average 5%; between 1990 and the end of the century the rate drops to 4.2%, as shown below. The 33,  highest rates would be registered in 1986 and 1987. at 5.9% and 5.3r. respectively. AWIJAL zDRTH RATES OF YALUE DED BY SECTS BASE CASE 1985-1lO 19:l"S IMY-200 6 5.0 4.2 4.2 Agriculture 3.8 3.8 3.9 Industry 5.0 4.0 4.0 Construction 4.6 4.2 4.3 Enrgy 11.8 3.0 2.1 Hining 10.0 7.8 7.0 Water 5.0 6.0 6.0 Bovernint Services 4.3 4.3 4.2 Other ervicn 5.4 4.5 4.4 lopart Taxes 3.9 3.9 4.7 The most dynamic sectors during the 1985-1990 period are the energy, mining (nickel, gold, metals, precious stones), industrial and service sectors. Economic recovery during this period is also boosted by the im- proved performance of the agricultural sector. as a result of the 1986 and 1987 coffee boom. The lower economic growth rate after 1990 is explained by the slow increase in minor exports and coffee exports. the stabilization of coal exports5 and the reduction of petroleum prodLuction and exports after 1995. The sectoral distribution of the gross domestic product does not reveal major variations in the longer run. The 1975-1985 trends still prevail, i.e., a slowdown in agricLtltLure and industry, and growth in mining and energy. Agriculture is expected to drop from 22.9% of GDP in 1985 to 20.9% by the year 2000; industry, from 20.3% to 19.98%; services (public and private) rise from 46.7% to 48.5%; mining, from 1.2% to 2.16%; and the energy sector, from 1.7% to 1.9%. 2.7.3 Components of Final Demand From the point of view of final demand, the most dynamic areas from 1985 to 1990 are exports and government con- sUmption. After 1990- the for-ces that keep the economy in motion are public investments, and government as well as private consumption. The recent low growth of private investment recuperates; its annual r-ate of 0.95% during the 1980-1995 per-iod5 rises to 5.-% between 1985 and 1990C and in the 1990s, it _4  exceeds 3.7%. In regard to public investment, the base case includes a 5/. growth rate, which is lower than the 1975-1985 figure, but somewhat higher than the rate prevailing between 1?80 and 1985. In other words, unlike the experience during the 1980-1985 period, the results indicate that an increase in public investment (apart from possible monetary effects which were not taken into account in the simulation) will not bring about a decrease in private investment. Exports increase at 12.1% from 1985 to 1990, far exceeding the 1980-1985 rate of growth of 1.7%. If, however, energy and ininor exports were not increased, as of 199:), total export growth will drop below 1%, becoming a restricitive factor. MM 1Ma RATES OF INWME AiM CrmnM OF F IRL DENAIl UK UK I "191-I IM"O-99 1"O-M9 IM-2"00 tiupoblel em 3.2 S.1 4.3 4.3 Private Cuqtiom 2.9 5.0 4.3 4.3 ovrmnt Cauptti. 2.3 5.9 4.7 4.5 Public lnnutut 4.4 4.9 5.0 5.0 Private Inystt 1.0 5.3 3.7 4.0 Expots 1.7 12.1 .9 -.2 Imports 1.2 3.4 3.4 4.3 2.7.4 Energy Sector Production Between 1986 and 1990, the energy sector's production ac- celerates, compared with growth in the 1970s, attaining an 11.8% rate, whereas the 1975-1980 period registered 0.4%, and the 1980-1985 figure was 7.5%. Although the sector registers a positive contribution to GDP during the 1986- 1990 period, it merely accounts for an average 0.23 points of the growth rate, i.e., a 4.6% share of the total rate. AlUL. 0NH MTE OF E AD ED Of THE ENEM SECT T:MM jf 9 -9S 2000 Coal 3.02 19.09 25.61 1.97 0.83 oil -13.93 3.56 19.23 -0.N -4.74 ElKctricity 3.42 4.16 6.31 5." 9.64 Ntural i 4.44 9.14 -1.24 1.50 -1.94 LPI AZ 2. -L2 1- 2-LK Total 0.40 7.48 11.77 2.96 2.06 -5  According to this forecast the share of the energy sector's value added in Colombia's GDP would rise from 1.7% in 1985 to 2.3% in 1990, an increase that would enable the energy sector to regain, and even exceed, its 1975 level. Coal and oil are the subsectors that impel this recovery in the period to 1990C registering annual growth rates of value added which amount to 25.6% and 18.3%. respectively. The electricity sector grows at a 6.3% rate. The rapid growth of coal production enables this sector to surpass the oil sector in value added, occupying the second position after electricity, which remains at the top. The coal sector's value added rises from 15.5-. of the energy sector in 1985 to 27.7% in 1990, whereas oil registers an increase from 17% to 23.5% during the same period. The electricity sector' share drops from 49.4% to 38.4%; gas plus LPG subsectors also reveal a decline, from 18.2% to 10).3%. WIUE ADKD BY EER9V SUIECTORS NODE COS I UD JMn o 2000 Cxl &.42 15.46 27.70 24.4 oil 39.37 17.01 23.54 13.79 Elitricity 39.33 49.37 38.42 52.79 Natural 6la 9.25 12.30 6.62 5.05 Total 100.00 100.00 100.00 100.00 Unlike the evolution of the 1980s, the energy sector's growth in the 1990s drops to annual rates that are below 3%, thus reducing the sector's share in the national value added, and registering lower figures than the rates prevailing in 1970-1975. This behavior is explained by the decline in petroleum production and the assumed stabi- lization of coal development beginning in the 199os. Likewise, gas production begins to drop after 1997. As a result, the growth rate of the coal sector's value added drops to an annual 1.4% during the 1990-2000 period; oil and gas decline at rates of 3.0% and 0.2%, respectively. Hence, the total sector's growth is sustained by the electricity subsector, which grows at an annual 5.8%. 2.7.5 Energy Sector and the Public Sector In regard to the relation of the energy sector and the public sector, the following three aspects should be considered: revenues coming from the energy sectors public investment in the energy sector, and government 36  consumption expenditure. Energy Revenues Up to 1979. the sector's fiscal contribution to government revenues came only from the oil sector, mostly from taxes on gasoline which were assigned to the National Road Fund. As of 1980, coal began to yield an income, as a result of the 1979 law, that established a 5% tax on production, but until 1985 the revenue amounted to less than 4% of the energy sector's revenue contribution to government. The sector's share of total government revenue rose from 4.1% in 1970 to 6.0% in 1985. GOEREENT FISCAL REVEUS BASE CASE (N Peei 1975) Petralem Coal Non-nrgy Total AN I AN I AN 1975 95904 2306 2.7 0 0.0 93596 97.3 1990 129470 5449 4.2 9 .0 124013 95.1 l995 152538 921 5.9 104 0.1 143504 94.1 199O 204292 15479 7.6 2073 1.0 IB540 91.4 1995 261644 17565 6.7 7591 2.9 234446 90.4 2000 327442 19302 5.9 11002 3.4 297338 90.9 Energy fiscal revenues are expected to increase, account- ing for 8.6X. of the government's revenue in 1990, 9.6% in 1993. and 9.3% by the year 2000. These figures imply growth rates of 14.5% between 1985 and 1990. of 7.27% from 1990 to 1995, and of 3.8% during the 1995-20:o0 period. ANNAL 6BRTH RATES F OOENOT REVENUES, INKSTENTS AND INTS BASE ME % 191W-l05 1985-1990 19"10-"5 lW52000 ovenenot Consuition 2.74 5.90 4.71 4.47 Total khvt Remuen 3.17 4.24 4. 90 4.58 Rcvuun froe Energy Sctor 10.61 14.47 7.24 3.79 All Public Investmnt 4.37 4.87 5 00 5.00 Energy Sctor Public lanvestmnt 13.90 -14.96 9.07 3.17 Non-Enery Public Inmstment -1.76 15.92 4.05 5.47 Iovernet Iports 12.70 1.15 2.71 S 00 Furthermore, the composition of transfers from the energy sector to the government is expected to change, because the revenue from taxes on coal production, on CARBOCOL's and INTERCOR's profit, and from coal royalties will ac- count for 11.6% of the total in 1990 and for 36.6% in the year 2(00. ;7  Public Investment Public investment in the energy sector will change radi- cally from the levels of 1975-1980. and, even more so from the levels of the 1980-1985 period. The share of public investments in energy. in proportion to total public investment, reveals a substantial decline, going from 39.7% in 1966 to 17.5% in 1990. After 1991 it begins to rise slightly, reaching a 23.7% high in 1993; when it drops again to levels in the neighborhood of 20%. i.e., to figures similar to those prevailing prior to 1975. MLIC 1NVIEIENT IN OM A11 NUHEU SECTr IN P1n 17) Engery IN-Ewgy Total ADS I X 1975 21933 75 35.3 14131 64.7 1980 3375 12533 32.3 223 6.7 l965 4000 24000 50.0 24000 50.0 1M 69 10672 17.5 50225 92.5 15 7M22 16470 21.2 61252 73.8 2000 "195 195 19.4 7944 10.6 A main reason for this trend in investment is the decline in electricity sector investment by more than 50% as of 1987, going from Col.$17.781 billion in 1985 (1975 con- stant pesos) to Col.$10).030 billion in 1990, and rising to Col.$16.056 billion in 1995, not, however, regaining the levels prevailing during the first half of the 198C0s. Likewise, the base case takes into account a sharp drop in investments in the coal sector, resulting from the conclu- sion of the Cerrej6n project. Only the oil sector reveals investment increases, particularly in 1986 and after 1989, caused by an increase in exploration and development. TOTAL IWESTIENT BY OEME SCTMS IN Pn. 1975) Total EIctricity Oil and kg Coal us I AN I AN 1 1975 7752 5234 67.5 2516 32.5 0 0.0 1"O 12532 10663 65.1 1644 14.9 1 .0 15 17731 14869 03.7 2692 16.3 6219 35.0 1990 10030 6659 66.4 3371 33.6 642 6.4 1 16 10535 65.6 5521 34.4 414 2.6 2000 18447 10694 56.0 775 42.0 304 4.4 Consequently, public investment will be reoriented toward sectors other than energy; a move opposite to the 1975- 1985 investment trend. Even if only the 1985 total public 3.8  investment levels were maintained, the investment in other sectors would increase, enabling the focus to shift to other areas, such as the social. industrial and agricul- tural sectors. The drop in public investments allotted to energy implies also a decline in the public sector's imports of capital goods. Government Consumption The government's consumption expenditures reach a peak an- nual growth of 5.9X. during the 1986-1990 period. Sub- sequently, between 1991 and 1995 they drop to 4.7%, and to 4.5% during the following five-year period. As mentioned above, the growth of fiscal revenues from the energy sector are expected to be highest in the period to 1990. which together with coffee exports, will improve the government's financial sitLuation; and be in line with the forecast consumption expenditures. 2.7.6 Balance of Payments On the basis of information provided by the National F'lan- ning Department, a substantial improvement of the balance of payments can be expected in 1986 and 1987. However, in the base case, the improvement begins to lose momentum in 1988, and as of 1991 foreign exchange reserves follow a downward trend (Table 2.5). The energy sector has played a key role in the achievement of better results in the country's balance on current accoLunt; its deficit on current account has dropped from US$1.737 billion in 1985 to an estimated US$992 million in 19866 and will go to US$626 million in 1967 (Table 2.6). The country's expected deficit on current account for 1986 amoLunts to US$169.5 million, and drops to US$24.8 million in 19876 whereas the 1981-1985 period registered annual deficits exceeding US$1.:3 billion. However, between 1988 and 1990, the deficit on current account is forecast to regress again to levels ranging from US$1.1 billion to US$1.4 billion, somewhat less than those prevailing during the 1981-1984 period, during which there was a rapid decline in foreign exchange reserves. Considering that the expected annual inflows on the capi- tal account amount to more than US$1.3 billion during the 1986-1996 period, foreign exchange reserves increase by US$1.(-)51 billion in 1986, by US$1.545 billion in 1987. by 39  US$242.8 million in 1988, by US$104 million in 1989; and are about in balance in 1990, but decline from 1991 until the year 2OoO. Thus, net foreign exchange reserves rise from US$2.067 billion in 1985, reaching a peak at US$5.019 billion in 199(X, the equivalent of nearly eleven months of imports. These results, however, are uncertain, on account of the variability of coffee and oil prices. Generally spealking, the more recent trend seems to indicate a lesser increase in foreign exchange reserves during 1986 and 1987, due to lower coffee prices than initially predicted. According to a preliminary reserves estimate made in mid 1986, they could be some lJS$850 million less than expected, showing a total US$3.815 billion at the end of 1987. It is important for policy purposes to note that if the foreign debt increases by between US$1.0 billion and US$2.0 billion per year after 1990, the balance of pay- ments will deteriorate to such an extent, that, during the 1990s foreign exchange reserves would decline by US$1.385 billion in 1995 and by US$4.692 billion in the year 2000. Obviously, this could not be allowed to occur. because the reserves WoLtld be negative as of 1996. This proves the following: net foreign borrowing and exports must increase in step, and even if this shoLuld happen, it may also be necessary to control imports. 2.7.7 Balance of Trade The balance of trade on current account increases to an annual surplus exceeding US$1.0 billion between 1986 and 1990, by far higher than the figures registered during the first half of the 1980s. Although the energy trade surplus merely accounts for 6.3% of the global 1986 surplus, it amounts to 423% in 1987, and to more than 100.% of the total from 1988 on. In fact, the balance of trade improves from 1986 to 1992. during which year a downward trend sets in, revealing a negative balance as of 1997. Thus, while the medium term prospects are favourable, the outlook during the century's last five-year period appears rather negative. In regard to exports, a substantial change is expected to take place during the next fifteen years. The economy will depend to a greater extent upon energy resource ex- ports. With respect to the country's total exports, the share of energy exports, such as oil and coal.. increases from 16.64% in 1985 to 47.31% in 1990), but drops to 40.5% 40  in 1995, and to 28.8% in the year 2000. This constitutes a significant change in proportions, for it implies the replacement of coffee as the country's first export product until 1995, and a less important role for years there#fter. As far as commodity imports are concerned, they increase by more than 3% per year as of 1985. During the 1995-2000 period, they increase mainly as a result of the higher rate of petroleum product imports. The import level of capital goods reveals a cyclical behavior induced by changes in energy investments, which also influence the public sector's imports. The mix of imports, according to types of products, indi- cates an increase in consumer goods and intermediate products, and a drop in capital goods and oil imports, ex- cept during the 1995-2000 period when the latter register an increase,as shown below. -PRT DY TYP ltbrsiate goods/lrvicn 62.39 U.M d1.37 72.14 Capital 30.30 27.21 23.27 21.77 Petrolm 7.31 3." 2.3 4. 10 2.7.8 External Debt On the basis of the National Planning Department's es- timates of external debt in 1985, the base case forecasts Colombia's total foreign debt to rise from US$12.291 bil- lion in 1985 to US$17.089 billion in 1990. The debt- export ratio improves, going from 3.04 in 1985 to 2.46 in 1990. Likewise, the interest payment-export ratio drops from 0.3.1 to 0.24 during the same period. The base case results indicate that the use of external resources by the energy sector will be less significant in the country's debt in the future. Although the level of foreign debt used by the sector is expected to increase from US$4.678 billion in 1985, to a maximum US$6.010 bil- lion in 1988, and then drop to US$5.165 billion by 1990, this implies a decline in the energy sector's debt as a percentage of national debt, going from 38.1% in 1985, to 3o.2% in 1990. 41  2.7.9 Energy Sector Balance of Payments The prospects of the energy sector balance do not seem op- timistic, at first sight, because the total balance is only positive in 1987, in spite of the future increases in oil and coal exports. But, compared to the 1980-1985 period, there is a remarkable improvement. An analysis of the subsectors indicates that this apparent paradox is basically due to the size of the electricity sector's ex- ternal deficit (Table 2.7). The oil subsector's balance shows positive results until 1998, ranging between US$124.5 million in 1986 and a maxi- mum US$602.6 million in 1994; in 1998 it drops to US$2.3 million. At the turn of the century, the balance is nega- tive as a result of the stabilization of exports and the increase in imports of petroleum products, goods and serv- ices. In any case, the situation always appears more favorable than it did before 1985 (Table 2.8). The balance of the coal sLtbsector reveals the opposite be- havior, i.e., better results during the late 1990s than in the earlier period. Nevertheless, this subsector's balance is only negative in 1989 (Table 2.9). The energy sector's imports of goods and services, however, still constitute a heavy burden. They account for at least 30% to 80% of the electricity sector's deficit. The volume of imported goods and services in the oil sector is similar to that in the electricity sector. The coal sector reveals lower import levels, because a high share of Cerrej6n's investments were made prior to 1986. Nevertheless, although the sector's imports account for 21.3% of the country's total imports in 1986, for 18.2% in 1990, and for 26.3% in the year 2000, its exports more than make up for the imports. The energy sector's most negative result is in its balance of financial services. A negative balance is also ex- pected on the capital account from 1989 to 1993, due to a reduction in direct investments and to net external bor- rowing. If the situation were reversed, for example as a result of greater direct foreign investment, both the country's capital account and the net foreign exchange reserve level would improve significantly. 42  2.7.10 National Savings and Gov-rnmunt Savings The level of national savings, as a share of GDP, has dropped from 17.18% in 1975 to 14.91% in 1986. Stable levels, at 14.5% to 15%, are expected until the turn of the century. I The level of government savings, as a proportion of GDP, rose from 4.85% in 1970 to 5.61% in 1980, and dropped to 3.82% in 1985. An upward trend is expected to set in as of 1986, in order to attain 5.56% by the end of the cen- tury. The consolidated public sector's deficit which rose from 1.3% in 1980 to 5.2% in 1985, is expected to decline to 3.8% by 1995, and increase slightly until the year 2000, although remaining below the 4.5% mark. In other words, public finances do not show a deteriora- tion, even though the base case departs from the basis of public investment and consumption increasing at the same rate as the economy. 2.7.11 Energy Sector Savings The energy sector's gross savings, (after tax profits, plus depreciation) are less than planned expenditure on investments up to 1988. Thus, between 1986 and 1988 the situation is precarious because the funds available in the oil, coal, and electricity subsectors are insufficient to cover the programmed investments, not to speak of the ex- ternal debt amortization. In 1986 the energy sector's deficit is expected to amount to nearly Col$ 290 billion (current pesos), and decline to Col$ 173 billion in 1988. The electricity sector's deficit is particularly perturbing because it is so high; at Col* 107 billion in 1986, it rises to Col$ 175 billion in 1988. Thereafter this deficit declines. The coal sec- tor is also in a tight position in 1986 and 1987, with a deficit amounting to Col$ 74 billion and Col$ 34 billion (in current pesos). However, after 1988 the subsector's savings exceed the investment level, but are not high enough to entirely cover the debt amortization. Prelimi- nary estimates for the oil sector (not taking any refinery projects into account) are as troubling as those for the electricity sector in 1986, but the prospects improve in 1987, and appear much better for the rest of the 1980s be- cause savings derived mainly from oil exports are forecast to increase, and more than adequately cover future invest- ments and the amortization of debt. 43  The chances are that, until 1988, the energy sector will hardly accumulate enough resorces to make scheduled in- vestments, let alone amortize its debt. Subsequently the outlook improves. 2.7.12 Employment The impact on employment may be analyzed on the basis of average labor intensity. Faradoxically, in 1980, the mining sector revealed the highest labor intensity level. This is because artisanal mining and medium-mechanized mines prevailed in the sector before the initiation of large projects. In 1983, for ex- ample, the coal sector had 14,000 employees, an average 17 workers per Col.$1.0 million of the subsector's value added. However, when operations began at Cerrej6n, only 2,000 permanent jobs were created, thus reducing the sector's labor intensity level to 6. After this adjustment, the situation today is that the most labor-intensive sectors are agriculture, construc- tion, and services; the least intensive are electricity, gas and water, and the industrial sector. In this frame of reference, the energy sector's greatest impact is on indirect employment, through the effect of its production on other activities. For example. higher fiscal revenues from oil and coal allow the government to increase expenditure on consumption and investments. This, in turn, through interrelationships with other sec- tors, such as industry and construction, stimulates the economy, and consequently creates jobs. 2.8 CONCLUSIONS AND STRATEBIC OPTIONS 2.8.1 Introduction The first objective of economic development, as discussed at the outset of this chapter, is to increase real income. The key macroeconomic issue in relation to the energy sec- tor is therefore how best the sector can contribute to sustained economic growth, over a horizon of some 15 years or so. At the same time other social and economic goals such as equilibrium in the balance of payments, a reasonably balanced government budget, price stability and high employment should be met. 44  Most investments in energy supply facilities only yield benefits over a fairly long period of time, typically of the order of 20 years, and because these investments are capital intensive and also require substantial amounts of imported capital goods the short term spin-offs to the economy are small, or even depressive. Therefore, it should not be surprising that the major energy investments of the 1980-1985 period did not stimulate economic growth, and in fact probably tended to stifle growth in the short term as resources were taken from other sectors. In the longer term the financial return from energy export projects is closely tied to Colombia's comparative advan- tage as a supplier of oil and coal. This, in turn, is a matter of international oil and coal prices and the supply costs in Colombia for delivering these fuels to the world market. Comparative advantage in energy is average In Chapter 4 it is concluded that Colombia is probably an average-cost oil producer, by world standards, with full- cycle oil supply costs in the range of US$ 12/B to US$ 15/B. and as discussed in Chapter 6, while coal resources in the country are abundant, export coal costs are probably in the range of US$ 35 to US$ 40/ton, again around an average cost by world standards. As a consequence, at present levels of international oil and coal prices, the heavy investments of the 1980 - 1985 period appear to have positive but only modest potentials for profitability in the fututre. In other words, Colombia's comparative advantage in these areas is itself positive but only modest. In addition, the uncertainty of future oil prices --and the consequent impact on coal prices-- should be figured into the assessment. The instability of oil prices has become notorious since 1973, not because the world is run- ning out of oil supplies but because world oil supplies are potentially subject at any time to OPEC supply restraints, or indeed the opposite; the flooding of the oil market with supplies. Substitution for oil should continue in domestic markets This instability of oil prices, which has led some analysts to bluntly state that oil prices are unpredict- able, has important policy consequences. Firstly, for in- ternal price stability and economic performance it makes 45  sense to substitute other energies for oil products, along with supplying as much of internal oil demand through domestic sLtpplies as feasible, given that domestic supply costs are in the range of international prices. Secondly, the implementation of oil export policies which would at- tempt to take advantage of probable higher prices in the future by shutting in production today, could turn out to be financially disastrous, for example if the oil price were to collapse again in the future to the $8/B level, as could easily happen. Profitability of oil and coal exports will remain uncertain Coal prices are loosely linked to oil prices in an ex- tremely competitive international coal market of a limited size and coal prices will fluctuate, after some lags, with oil prices. Therefore, prospects for profits and savings from large coal projects should not be exaggerated. The two important indirect contributions to the economy of oil and coal exports are expected to be through an im- provement in the balance of trade and through the provi- sion of surplus revenues for redeployment by the govern- ment to other sectors of the economy. Both of these areas are subject to the price and market uncertainties, described above. Electricity sector financial uncertainties are controllable The electricity sector is subject to different and perhaps lesser uncertainties, mainly of a financial nature related to the financing costs of bulky generation facilities and difficulties in forecasting accurately the demand for such facilities. However, given reasonable management of facility investments and their operation there should not be any insurmountable economic risks because domestic tariff structures and levels should easily be manageable to cover all but the most extreme mismanagement. The economic advantages from electrification of the economy --urban and rural-- provided it is at a reasonable cost, are often difficult to quantify, but they include benefits such as electricity's convenience, cleanliness, effectiveness for motive power in stationary equipment and also in rural areas, rural development and national unification. The electrification of rural villages has three major 46  effects: it extends the day for working and relaxing; it enables villagers to be part of the wider community and gives them more access to information and knowledge; and, it enables villagers to use a wide variety of labor savings and productivity increasing devices. Strategy should include energy demand management The subsectors, oil, natural gas, coal, electricity and traditional energies (fuelwood.! etc) have unique charac- teristics and problems calling for different policies, and indeed for different levels of government involvement. However, there are probably as many unifying or shared features between the sectors as different ones. To a degree, most energy forms are substitutable in use al- though a notable exception is the minimum possibility for electricity substitution for oil prodLicts in transporta- tion, given existing technologies. However, the primary energies --crude oil, natural gas, coal, hydro (and tradi- tional fuels)-- are all potentially substitutable in the generation of electricity. The macroeconomic analysis has concentrated on the problems and prospects of the supply side of the energy sector, i.e. on energy investment, its financing, the savings of energy supplier instituitions and so forth. The energy demand side is also of significance in macro- economic policy formulation. In particular it should be stressed that every barrel of domestic oil product demand either induces an additional barrel of imports, for ex- ample of gasoline, or detracts from an additional barrel of exports, for example of fuel oil or more generally of crude oil equivalent. This is one reason for domestic oil product prices to closely match international oil prices. Strategy must balance concerns In the end, a macroeconomic and energy sector strategy should balance the foregoing concerns; the country's com- parative advantage as an oil and coal exporter; the uncer- tainties and risks; the long lead times before benefits are realized from major energy projects, the benefit of country wide electrification given efficient organiza- tions, and the management of energy demand particularly in the areas of oil and electricity. In terms of an energy sector strategy for macroeconomic growth, we have posed the question whether energy invest- ments should be further expanded, or whether consolidation is required along with redeployment of general investment 47  funds and energy sector revenues to elsewhere in the economy. Macroeconomic investment strategy should be diversified One conclusion in this context is straight forward; the microeconomic prospects (expected profitability) for oil and coal export projects must be excellent before deci- sions are made to put more public funds into these projects, otherwise they are not likely to bear fruit in the long term nor would they contribute to economic growth. In fact, Colombia appears to be an average-cost supplier of these resources and the uncertainties and risks in world markets for oil and coal cannot be entirely avoided. Therefore, a starting point in macroeconomic and energy sector policy would appear to be a balanced invest- ment strategy, diversified between the energy sector and other sectors. Base case synopsis as a reference for examining these policy issues the Base Case macroeconomic forecast was developed. It excludes further major coal export projects and no new electricity projects are included before 1990. However, an oil ex- ploration program, estimated to keep oil production from dropping below 335 kB/d in the year 2000, is included. The Base Case shows the economy growing at some 5% per year in the late 1980s and 4.5% in the 1990s, with sig- nificant annual growth of per capita income, at about 2.6%. The historical long term trends of the economy, in particular of a gradual decline in the share of agricul- ture and industry in GDP, are continued. Although the energy sector will remain in a very tight financial position, with savings somewhat less than planned investments, until 1986, the forecast shows the fruition of the energy investments of the past five years in the form of increases in oil and coal production and exports. Oil and coal exports increase from some 17% of total exports in 1985 to over 40% in the 1990s, and energy even surpasses coffee exports to become the country's num- ber one export. In the past, energy sector fiscal revenues have been dominated by the Road Fund, in effect paid by financial transfers through ECOPETROL, and related to the consump- tion of transportation fuels. The Base Case forecasts an increase of supply-related oil and coal royalties and 48  income taxes to some 12% of fiscal revenues by 1990. At the same time, public investment in the energy sector declines from close to 40% of public investment in 1986 to some 207. in the 1990s. Therefore, more revenues are forecast to be available to government from the sector and simultaneously a greater part of government funds are shifted to sectors other than energy. As a reference case in which, for the most part, e:.isting trends and policy directions are kept intact, the Base Case illustrates the likely benefits of past policies. The yields from past energy investments begin to be real- ized. It is also assumed that public energy investment is slowed down, particularly in the electricity sector, which improves the financial picture of the sector. 2.8.2 Balance of Payments and External Debt Need for Oil Exploration An important assumption in the oil sector is that oil ex- ploration is maintained so that oil production is s5Us- tained above the 335 kB/d mark. This assumption is also prescriptive for policy, because at minimum exploration levels, oil production drops from a high of 424 kB/d in 1988 to 109 kB/d by the year 2000, necessitating crude oil imports beginning in 1993. Without an exploration program the results are the same up to 1968, as in the Base Case. However, after that year the balance of payments, government revenue, and the energy sector's value added would be subject to adverse effects, which would make restricitive measures necessary in fiscal, foreign exchange and monetary domains. Under these circumstances, the rate of growth of GDP would be below 4% in the 1990s. Crude exports would cease in 1991 and crude imports would recommence as of 1993. The oil sector's balance of trade in dollars would still be positive in 1990 (US$ 1.22 bil- lion vs. US$ 1.54 billion according to the Base Case), but would show a deficit in 1995 and in the year 2000, amount- ing to US$ 845 million and US$ 3.54 billion vs. the US$ 1.62 billion and US$ 470 million surplus registered in the Base Case. The effect on the country's balance of payments would be traumatic. As of 1990, Colombia's foreign exchange reserves would begin to decrease with such momentum that 49  by 1992 the situation would be unsustainable. Likewise, the government's revenues would decline as a result of ECOPETROL's and other oil companies' lower tax- able income, thus affecting the role of the public sector in the economy. The consequences for the economy of a lack of exploration, and subsequent production and exports, are estimated to be so negative that a policy of exploration investments to maintain the countrys self-sufficiency in crude oil should get top priority from a macroecomomic perspective. Little or no advantage from deferral of oil exports The experience of the past coffee bonanza has led some ex- perts to believe that oil production should be partially deferred over the next two or three years. The argument is also made that Colombia had to import crude during a period of high international oil prices, and now, instead of waiting (and hoping) for more favorable international circumstances, the country exports its oil at low prices, despite the absence of urgency for the country to increase its foreign exchange reserves. As an example of deferring oil exports we consider the consequences of deferring the export of the 1987 and 1988 oil production surplusses of ECOPETROL of 88.5 kB/d and 109.1 kEB/d, equivalent to some US$ 525 million and US$ 766 per year. The net effects of this strategy are equally ambiguous at the microeconomic and macroeconomic levels. The microeconomic calculation of the present value of deferred exports will depend mainly on future oil price trends, and is clouded by their unpredictability. The macroeconomic impacts would depend on policy responses to the present and possible foreign exchange reserve levels and related uncertain factors. The impact through the balance of payments would be a reduction in foreign exchange reserves, by at least US$ 1.3 billion by the end of 1988, at a time when the country could afford it,because of reserves from the coffee bonanza and coal exports. It is conceivable that this could help diminish the pressures on monetary supply and help prevent a revaluation of the peso. In addition, more foreign exchange reserves would become available over the years following the present coffee boom. The main victim of such an export deferral strategy would 5c)  be ECOPETROL. Its financial situation, already stretched, would worsen considerably. This would induce a series of necessary offsetting policy measures such as increasing domestic gasoline prices, assisting ECOPETROL to raise more debt in international financial markets, or assigning resources from the national budget. It has been estimated that gasoline prices would have to increase by 38% per year in 1967 and 1968, and that ECOPETROL would need new debt of nearly US$ 800 million. In view of the country's precarious fiscal situation transfers from the budget, particulary additional investment in the energy sector, appear impossible in 1957 and 1988. All of these options at the scale required to support ECOPETROL's financial position, appear counterproductive. On balance, these does not appear to be justification for recommending the deferral of oil exports on the basis of macroeconomic considerations. Additional coal exports advantageous, if profitable As discussed in Chapter 6, there are several options for the expansion of coal exports. The Cerrej6n Norte prodUc- tion could be increased to 20 Mt/year, with a minimal in- vestment, and even to 30 Mt/year with investments in in- frastructure and port facilities. Cerrej6n Central could produce approximately 3.5 Mt/yr - 5 Mt/yr. The La Loma development could yield up to 6 Mt/year of coal for ex- ports. Consequently, if international coal market conditions and prices justify an expansion of exportable supplies, Colom- bia could increase coal exports to 26 Mt/year after 1990, in comparison with the 15 Mt/year assumed in the Base Case. Additional coal exports would have an impact at a time when the balance of payments approaches a difficult stage, i.e., after 1990, when the foreign exchange reserves are forecast to drop. For example, if coal exports were increased by 6 Mt/year, according to the Base Case coal price forecast, Colombia's balance of payments would increase by US$ 85.7 million in 1990, by US$ 449.2 million in 1995, and by US$ 647 million in the year 2000. Such an increase in coal exports would yield considerable government revenues from the mid 1990s on; 3%. of the total share of the energy sector's contribu- tion in 1995, and 10.5% in the year 2000. Other positive effects on Colombia's economy concern the 51  demand for capital goods, -even though not all of it leads to the purchase of Colombian goods- for intermediate products, and for labor, during the project's construction period and operational stage. Again we repeat that if the coal market conditions would support an even greater increment in exports, say to the level of an additional 10 to 11 Mt/year, the country would have few difficulties in the external sector at least un- til 1995, and the rate of growth of GDP could exceed 5%. From a macroeconomic view point, profitable coal export projects are beneficial. The risks in these investments concern the international market, its price conditions and the size of the market. High and low coal prices have profound effect on export benefits The impact of international coal prices, other than those foreseen in the Base Case, has a profound effect on the balance of payments and on government revenues. Considering the Cerrej6n project that accounts for more than 90% of coal exports in the Base Case and consider- ing the high and low coal price projections in Chapter 6, the balance of payments would evolve as follows: Chanmu is the Dalmic of Paya.ts from the kmn Can. _-t_h f ___ Nigh Pricn 0 44.7 93.1 125.7 Loa Pricm 0 -56.7 -NI.2 -135.1 In regard to government revenues, different levels would be obtained from INTERCOR's royalties, CARBOCOL's and INTERCOR's income taxes, and from taxes on profit. (Nillim UN UK io im 200 High Price 0 23.1 49.1 65.0 Low Priem 0 -14.5 -50.2 -107.0 The sensitivity of these macroeconomic effects to the evolution of prices illustrates the risks inherent in the coal export projects. 52  No additional generation projects before 1990 As mentioned, the Base Case does not include any new electricity project until after 1990. From a macroeconomic perspective this is desirable, and should the generation plan, that was approved in 1983, be undertaken, it would seriously compromise the sector and the nation's financial position. The electricity sector's expected deficit for the 1987- 1990 period accounts for a large part of the consolidated public sector-'s deficit, as shown below: 19" 31.41 1"7 43.31 191 38.01 1939 21.31 190 11.31 The execution of new projects, such as Urra, Miel I, and Calima III, which can not be justified on the basis of demand forecasts (Chap. 3), would seriously affect the electricity sector's and the country's finances. The present situation indicates a need for curtailing and deferring investment on the one hand, and for a sound policy regarding revenue increases, on the other hand. 2.8.3 Issue of Economic Growth The need to overcome the high level of unemployment (15% in June 1986) and the urgency to Sat least partially, satisfy the Colombian people's expectations of a better standard of living, require an economic growth rate ex- ceeding 6% per annum (according to the Employment Mission). Nevertheless, this study's base case reveals an annual 5% growth rate of GDP between 1986 and 1990, and an average 4.37. as of 1991. The analysis points out the two driving forces of the economy which can lead to the achievement of rates above the 5% mark; exports and both public and private invest- ment. The energy sector, could play a major role in the future, because it could promote more direct private investment and indirect public investment through the transfer of energy sector savings for investment in other sectors, and because it enables exports and import substitution in the case of crude oil and coal. 53  Availability of energy supplies assists growth From the point of view of supply, the role of the energy sector is a positive one. In fact, the efforts made in the energy sector enabled the elimination of energy supply limitations, as well as the increase in oil production. In the case of electricity, rationing in the past led to social and economic problems. According to recent ISA estimates, every rationed kilowatt-hour costs the industrial sector Col.$150. Likewise, the oil policy, encouraging exploration through association contracts and incremental pricing for conces- sion contracts, reversed the oil balance of trade's nega- tive trend, and in 1985 the balance was almost nil. Energy sector contribution to balance of paymwnts will improve The energy sector's contribution to the balance of pay- ments is expected to increase, particularly in 1986 and 1987. not, however, at the rate foreseen when the decision to foster coal production for exports was made. Actually the sector's role is subject to the evolution of interna- tional prices. According to the circumstances on the in- ternational market, the profitability level on the Cerrej6n project will range between 8% and 10%, in real terms, whereas the 1980 forecasts led to expect a minimum 20% level. The case of the oil sector is similar. The experience of past bonanzas in international trade suggests handling this area carefully and points out the importance of taking preventative actions in view of the macroeconomic impact of oil and coal exports. The current coffee bonanza, like the previoLs one, will probably help to sustain a trade surplus, the accumulation of significant foreign exchange reserves, and help to limit the level of external debt. Under these cir- cumstances, large energy resource exports will facilitate the accumulation of even higher levels of foreign exchange reserves, or the repayment of a larger share of the exter- nal debt. A reduction of the level of foreign indebtedness might not be strategic, in view of the uncertainty regarding the fu- ture development of international capital markets. On the other hand, once the effects of the coffee bonanza are gone and a period of low foreign exchange accumulation 54  sets in, energy exports become much more significant, be- cause they enable this restraint on economic growth to be released. In fact, balance of payments forecasts indicate that Colombia's annual deficit on current account will once again amount to approximately US$1.2 billion. If this deficit were financed with net borrowing, the debt/exports ratio would rise to 2.25-2.50. This situation could become critical at the beginning of the 1990s, when petroleum net exports begin to drop. His- torically each aftermath of the coffee bonanza has been accompanied by traumatic adjustments, and by low growth rates. This time the adjustment effects may be dampened for some time by petroleum exports. Energy sector investment has excessive import component The sector's high import component prevents the investment multiplier from attaining maximum performance levels. As in the past, an increase is expected in the energy sector's imports of goods and services. This deserves special attention in order that investments in the sector might encourage industrial development, particularly of the capital goods subsector. 2.8.4 Energy Sector Savings and Non-Energy Investments According to the simulations of the Employment Mission, in order to reduce unemployment to levels prevailing at the beginning of the 1980s (approximately 8%), investment levels must be increased during the coming years. This is necessary from the standpoint of aggregate demand -- during the 3 or 4 years following the coffee bonanza-- and from that of production capacity --once normal levels of utilization of the installed capacity are regained at the end of the 1985s--. This, in turn, creates the need to maintain a minimum level of hard cur- rency savings, and to increase domestic savings; other- wise, foreign debt financing would absorb a large share of available savings, not enabling the required investments to be financed. Domestic savings can and should be increased, preferably, in exporting sectors (coffee, crude, coal) and in the public sector. Such an increase in savings in the "booming" export sector (for reasons of price or quantity) is crucial in order to prevent a rise in domestic consump- tion, which exceeds the levels permanently allowed by the "boom". Furthermore. it is the only way to avoid the 55  difficulties of controlling excess money supply without the need for compensatory policies which could reduce economic growth. The fact that the energy sector's gross savings will not suffice. in the short run, to cover investment spending and debt financing costs is perturbing. This of course is related to the levels of sector spending and domestic pricing policies. On the spending side new investments should be avoided, unless their profitability can be proven. At least as far as the electricity sector is con- cerned, investment rationalization constitutes the main priority. These factors also emphasize the crucial importance of. a policy regarding petroleum pricing that induces domestic savings through stable or rising real prices, and the im- portance of effective petroleum and mining fiscal measures, which enable the generation of the required savings (and a larger contribution to the balance of payments), and the efficient transfer of funds to govern- ment to permit the financing of investments in other sec- tors. Consequently, as part of macroeconomic policy, the sector's fiscal activity should be monitored, a real drop in gasoline prices should be prevented, and ways should be found to efficiently transfer the resulting savings to othe economic sectors that can generate the macroeconomic aggregate demand not produced by oil and coal exports, and increase the economy's capacity for higher production levels in the years to come. Need to improve fiscal transfer mechanisms from energy sector The energy sector has absorbed significant levels of resources from the economy. Once the gestation period of the projects is concluded, the establishment of mechanisms for the transfer of resources from the energy sector to other areas becomes a priority. Otherwise, the financial resources generated during the projects' operations will be absorbed by the sector itself, without the desirable multiplier effects or impacts on the economy. Reorientation of public investment Ways should be sought to reduce the electricity sector's investment level in the short run, in view of its in- stalled capacity surplus, and even in the medium and long 56  rLun, by means of conservation and substitution programs that become effective when the current capacity level en- ters into a stage of saturation. Careful examination of new investments in coal export projects is imperative in view of the international market prospects for this resource, as well as of the potential effect on foreign currency savings and foreign indebted- ness, given the alternatives for investment in other sec- tors. A change in the composition of national investment (particularly in public investment), by reducing the energy sector's recent high share, and increasing invest- ment in sectors, such as agriculture, industry, health, water and sewage, could lead, in the short run, to an overall increase in investment levels (by enabling even- tual domestic savings or external financing restrictions to be overcome), and to a greater impact on employment and production levels, through the reduction of imports and of the marginal capital-output ratio. Such a change in investment composition, however, would encounter two difficulties besides those mentioned in regard to the required increase in domestic savings. The first is the need to finance the energy sector's cash deficits, in view of its high indebtedness and of the electricity subsector's capacity surplus. The second is the possible difficulty in obtaining multilateral external credit in the energy sector, in circumstances of limited sector growth. A solution to both problems could be the partial "refinancing" or restructuring of CARBOCOL's and the electricity subsector's foreign debt, for example through the World Bank and IDB credit program. A supplementary solution would be to enter into new soft-loan agreements for investment programs in other sectors (agriculture, health, water and sewage, and industrial). Energy pricing The pricing policy has two dimensions; external and inter-- nal. In regard to the first, the drop in coal and oil prices creates difficulties for investments, such as those in Cerrej6n, and reduces ECOPETROL's and the country's expectations from export sales, when oil fields are dis- covered. This calls for careful reflection when decid- ing to undertake new projects, for example in the coal sector, that would imply competition for Cerrej6n. 57  As far as internal pricing policy is concerned, the neces- sary internal generation of funds for the electricity sector and for ECOPETROL implies the need for readjustments in electricity tariffs and in petroleum product prices, as well as the need to eliminate subsidies which lack sense as means of income redistribution and/or prevent a more appropriate use of energy resources. The macroeconomic perspectives suggest a policy of main- taining, or increasing, the real price of gasoline and other oil products, despite the recent drop in prices on the international market. Domestic oil product prices had lagged behind interna- tional levels in the 1970s, and since 1980 have declined in real terms by some 2% per year. At present, gasoline and diesel prices are somewhat lower than they should be on the basis of international oil prices. While the present level of subsidization is far less than in 1985 and in previous years, it is counterproductive in terms of efficient investments in transportation vehicles and in- frastructure. On a number of occasions in reviewing the energy sector- macroeconomic linkages it has been stressed that higher real gasoline prices are required to provide the financial savings needed by the petroleum sector itself, and the economy generally. The inflationary effects of gasoline price increases have been estimated to be small, and the impact on economic growth is probably positive. rhe price of gasoline has, indeed, acquired a macro- economic importance comparable to that of the purchasing price paid to coffee growers. A very low gasoline price has similar effects to those of a very high coffee price: they lead to low levels of savings in the respective sec- tor and in the economy as a whole; the first stimulates "excessive consumption" and the second, "excessive production" in the long run. In either case, it is not of benefit to the economy to fully transmit international price fluctuations to the domestic economy. But, exces- sively low pricing of gasoline can lead to serious long- term effects which do not show Ltp in the case of coffee: it can bring about low oil exploration levels and an inap- propriate transport system. Decisions regarding gasoline pricing constitute a basic macroeconomic factor. 58  3. ELECTRICITY SECTOR 3.1 INTRODUCTION After a decade (1971-1980) of strong growth averaging up to 10% per year, the power sector experienced a relatively long period of rationing (1981-82) due to insufficient generating capacity; as a result, metered demand grew at only 5%. Once new capacity was available in 1983, demand was expected to pick up substantially but this never happened: growth rates in 1983-1985 averaged 5.5% and by the end of 1987 the sector will have around 8000 MW in- stalled to serve a 5000 MW load. In energy terms, the 1980 forecast load for 1985 was about 20% (50(0 GWh) in excess of the real figure. As a result, the electricity sector faces a short and medium term problem that consists of generating sufficient financial resources to pay for debt service on assets that are not being fully exploited. In the longer term, the problem consists of devising a strategy that avoids past mistakes and promotes the best projects that will conform to a minimum cost expansion plan. Table 3-1 presents a summary of basic power sector data. 3.1.1 Power Sector Issues The current situation of excess capacity can be ascribed in a large measure to overoptimistic demand estimates that assumed a continuation of historically observed growth rates. Partly to improve demand forecasting, the power sector adopted an econometric approach, rather than rely- ing on the extrapolation of past trends; the resulting forecasts for the 1986-2000 period are therefore driven by a number of exogenous variables such as demographic trends, GNP, value added in several economic subsectors etc. Doubts related to the reliability of these estimates refer principally to the econometric parameters being used, the corresponding evolution of market structure as well as the inevitable uncertainty surrounding the projec- tions of exogenous variables. At present, there is a general consensus that the most probable growth rate for electrical energy will be slightly lower than 6b. per year. However, a closer examination of the equations being used indicates that there should be a continuing effort to refine the parameters (elasticities) that drive the models, together with a revision of demographic trends that exert a strong inflLLence on their results. The generation expansion planning area accounts for the major investments within the power sector; it is also the management area where there are significant economic and 59  financial consequences from decisions, involving specific projects as well as their timing. According to present demand projections, and taking into account plants cur- rently under construction, no new generation will be needed before 1996. Consequently, investments for new power plants would only start around 1990 and the sector has at least 2 years to make decisions and, hopefully, to adopt a least cost expansion program. The problem related to new plants centers around the need for changing cur- rently "approved" developments in favor of lower cost al- ternatives that have been identified during the last 2-3 years. Unfortunately, work on some of the former has been undertaken and regional interests are strongly sponsoring them. In order to make economically rational decisions, a firm position will have to be taken at the central govern- ment level. ISA's planning staff is studying alternative plans that have not been made public as yet, due to pos- sible adverse political repercussions. In order to circum- vent them, a strategy must be devised for preventing com- panies with vested interests from making additional in- vestments that could confront the sector (and the country) with a fait accompli concerning uneconomical developments. Current financial projections for the sector as a whole indicate that it faces a short and medium-term problem of generating sufficient funds to pay for debt service. In- ternally generated funds are less than debt service in 1987-88 and contribute only minimally to investment in 1989-199C0 even with the World Bank Sector Adjustment loan cLurrently Ltnder negotiation. In the post-1990 years, the situation is supposed to get better (with larger sales and a correspondingly fuller utilization of assets) but the next five years confront the sector with the following dilemmas: (i) The feasibility of loan renegotiation in order to roll over current debts. (ii) Generating more internal funds through tariffs, even though short run marginal generation costs are practically nil. (iii) Capitalizing the sector either through internal fund generation or by seeking investments from external sources in order to create an adequate equity cushion that may absorb unforeseen shocks stemming from either low demand or unexpected devaluations. Tariff policy is probably the single most pressing and delicate issue concerning the electrical sector: its im-- pact on the sector's revenues determines directly the feasibility of undertaking expansion plans and the 6(  possibility of adequate financing. However, the issue is clouded by the following problems: (i) Government policy, either implicitly or explicitly, has determined that public service tariffs should ac- complish an income-distribution role, with no well- defined guidelines as to who should subsidize whom, ex- cept for the basic policy direction of helping low- income people, and a directive in the sense that rates should take into account the "payment capacity" of cus- tomers. (ii) Costs are not taken into account for the purpose of tariff setting and the sector doesn't even calculate them on a regular basis. Financial performance is the only benchmark for tariff evaluation. Cost accounting for tariff-setting purposes is lacking in many of the utilities; marginal cost estimates were performed by ISA in 1982 and are only being updated for some of the utilities at present and, therefore, only preliminary cost information is presently available in order to assess tariffs. (iii) The large number (around 30) of electrical utilities concerned implies that there are currently many tariff schedules some of which are similar but not necessarily identical, and that rates present sig- nificant variations between companies. The ICEL and CORELCA groups of companies are strongly de- pendent on national budget allocations in order to finance their investments; whether this situation can be sustained or not depends on government priorities vis-a-vis the sec- tor, as well as whether these companies can be made viable either through tariffs that reflect real service costs or through an institutional reorganization that would merge weak utilities with those that have stronger markets. 3.1.2 Institutional Background The Power Sector is formed by a large number of entities in charge of providing service at the bulk, medium voltage and distribution levels. From an operational perspective, generation is concentrated in ISA (Interconexi6n ElOctrica S.A.), a power pool that is formed by the major generation utilities in the country. These comprise two municipal companies, EEEB, EFM (Empresa de Eriergia Elctrica de BogotA; Empresas Piablicas de Medellin) that serve, respectively, Bogota and Medellin, a regional corporation, CVC (Corporaci6n Aut6noma Regional del Valle del Cauca) that serves the Cali area, and two holding companies, ICEL 61  and CORELCA ( Instituto Colombiano de Energia El1ctrica; Corporaci6n Elctrica de la Costa AtlAntica) that group together 20 Lltilities that serve each political subdivi- sion of the country. ISA and its shareholders generate practically all public service electricity; ISA operates power plants as well as the interconnection grid and sells in bulk to the shareholding companies. Another relevant institution is FEN -Financiera Elctrica Nacional- that acts as financial intermediary for the sector: it channels internal savings towards the utilities through bond issues; FEN also obtains the major portion of its funds from external sources (IBRD in particular) and lends them to the power sector companies. The relative sizes of each distribution market ar-e sum- marized in the following table: EEO E CVC ICEL COELC I BlIh al 2U 22 13 1t 1i Some of the problems of the electricity sector can be traced to its organization: ISA is the major bulk supplier in the system and would be expected to be a shareholder in the companies that purchase and distribute electrical energy; however, in this case, rather than having such a top-down structure, the regional companies exert shareholding control over ISA. As a result, ISA's owners operate in a double role of investors and clients vis-A- vis the former with strong incentives to maintain a sig- nificant degree of regional independence at the generation level. Although ICEL and CORELCA are central government agencies, they act up to a point as representatives of the individual, regional, companies they control. Decision-making within the sector is decentralized at the transmission, subtransmission and distribution levels with each utility planning its expansion individually. The large investments in generation and high voltage intercon- nection lines are planned by ISA and subsequently reviewed and approved by DNP and CONPES. Given the complexity of planning Colombia's predominantly hydro system, ISA has developed highly advanced methodological procedures in or- der to obtain the least cost expansion plan. Nonetheless, as a result of regional pressures, some uneconomical projects are approved by the ISA board of directors where regional interests stand to benefit at the expense of the overall national interest. 62  3.2 ELECTRICITY DEMAND 3.2.1 Background The demand for electricity showed a vigorous rate of growth during the 70's, averaging approximately 10% per year. This led to the formulation of ambitious expansion plans for the 80's that were delayed due to construction problems and bureaucratic impediments. As a result, exten- sive energy rationing took place in 1981 and, to a lesser degree, in 1982. During these years sales decayed due os- tensibly to the latter measure and, possibly, to strong promotional campaigns for energy conservation. However, demand did not rebound as expected in 1983-1985 and has been depressed (by the sector's historical standards) ever since. This depression has been accompanied by a worrisome increase in losses that have reached 25% of sales; one of the major suspected causes is an increase in theft (and industrial theft in particular) that has been attributed in some cases (e.g. BogotA) to tariff increases. As the single most decisive factor in establishing ra- tional investments in the sector, demand forecasts have been the subject of constant debate within the electrical utilities and an important effort has been made to develop econometric models that should provide better estimates for future sales. The resulting forecasts have not always been well accepted: the boards of directors have oc- casionally rejected projected growth rates produced by the planning sector due to their counter-intuitive nature; however, the evidence of the last years has created a general consensus that 10% growth is unrealistic and cur- rent expectations place this rate within the 5-6% range. Present market structure at the national level indicates a predominance of the residential sector (50% of GWh sales) followed by industrial (27%) and commercial consumption (12%). The remaining demand is due to so-called "official" (i.e. government) users, and public lighting. 3.2.2 Demand Projections At present there are three major sources for demand forecasts: the ENE group at DNP, the EFE study conducted for FEN in 1985, that constituted essentially an updating of the ENE model parameters, and ISA. The models are based on sectoral analyses with different econometric parameters. They differ in relation with their geographi- cal coverage: whereas ENE produces estimates based upon specific models for each region, ISA produces a national estimate that is subsequently broken down by major 63  uti ii ties. The consistency of the demand models was analyzed and the principal findings are the following: (i) The models present major discrepancies insofar as a number of fundamental elasticities are concerned. These should be further analyzed in some future phase in or- der to establish an underlying consistency. (ii) Forecasts produced by the models coincide within 5% for national estimates of consumption. However, they differ substantially at the sectoral level: whereas ISA predicts higher growth rates for the industrial sector, the residential sector in the ENE model acquires a greater market share in the long run. (iii) The projections, and in particular those related to domestic consumption, are driven mainly by demographic variables that should be revised with care once data of the 1985 population and dwelling census is available. SubJect to the preceding caveats, the forecasts being used for expansion planning purposes seem reasonable as far as expectations of national electrical energy demand is con- cerned. The current estimates being used by ISA (i.e. a 5.B% growth rate in gross electrical energy demand for 1986-200() are summarized in Table 3-2! and these have been used for purposes of a Base Case. 3.2.3 Demand Projections and the Substitution by other Fuels A significant source of uncertainty relative to electricity demand growth concerns the possibility of sub- stitutions of electrical energy by gas or LPG in the residential sector. An aggressive marketing of these fuels (and a determined policy to provide reliability in their supply) could, naturally, impact present demand projections; substitution has not been taken explicitly into account due to the lack of a basis, i.e. firm policies and/or projects related to gas use. The question is therefore to estimate how robust present electrical demand projections appear when a possibility of substitu- tion appears in major markets (BogotA, Medellin). In order to quantify this problem, the following considerations were made: (i) At present, the term "significant impact" should be interpreted as the possibility of delaying for at 64  least one year the need for new generation plants in the system. (ii) Current expansion plans call for a new plant in 1996 when national demand reaches sales of 37 TWh. Ac- cording to present projections, a one year delay would be achieved if substitution effects reduced this level of demand for 1996 to 35 TWh, the current estimate for 1995. This implies a substitution effect of 2000) GWh; if the fuel concerned is natural gas, such a volume would be equivalent to a residential demand of around 19 MCF/d (0.54 Mm3/day) and would require a relatively large market of between 600,000 and 700,000 customers above the current number of gas users. It is also equivalent to a demand of 4900 B/d of LPG. (iii) In view of these figures, it can be stated that an upper bound on the impact of gas use would be a one-year delay in the next planned project of the electrical sector under the mnost optimistic scenario for gas penetration. Given the absence of well-defined projects for gas utilization, the current projections were retained for sectoral analysis. 3.2.4 Electricity Exports Colombia recently (1982--1986) analyzed the possibility of interconnection with neighboring countries (Ecuador, Venezuela, Panama, Mexico and other Central American countries) with the objective of exporting a share of the hydroelectric energy surplus expected during 1986-1994, or of developing longer-term hydroelectric resources for the same purpose. Interconnection with Venezuela and Ecuador In view of the development of economical local hydroelectric generation resources in these countries, a sustained level of electricity exports from Colombia does not appear to be possible. There are, however, three potential 230 kV interconnections between Colombia and these countries (Cuestecitas - Northwest Venezuela, Ccicuta - Southwest Venezuela, and Pasto - Central Ecuador), which could be iustified by benefits derived from the in- creased mutual peaking power reliability and the temporary exchange of energy blocks. 65  Interconnection with Panama Interconnection with Panama (and Central America) has been studied over the past four years, to establish its techni- cal characteristics and cost (a 550 kV circuit with sub- stations at an investment cost slightly exceeding US$100 million). This project would enable the supply of electricity, in volumes of approximately 1,000 GWh/year, from the Colombian interconnected system to that of Panama and adjoining countries. leading to savings in the Central American systems by means of substitution for oil (fuel oil-fired). Before any decision is made in this regard, the market should be carefully reassessed. A preliminary evaluation of this project (assuming there is a demand for these volumes), however, indicates that it would provide net economic benefits in the event of high fuel oil prices (above the US$20:)/B mark), but not under the present cir- cumstances. Furthermore, the option of installing coal-fired thermal power generation (rather than oil) in the Central American countries, for the same purpose, could also be less costly in total than an interconnection. The situation suggests that it might be profitable to con- sider one of these projects for the 1990s, when an in- crease and subsequent stabilization of international oil prices is expected. Interconnection with Mexico A preliminary study of interconnection possibilities with Mexico has been underway over the past few years (a 3.000) km. 600 kVDC line and substations for a cost amounting to US$1.5 billion). This project would enable the develop- ment of Colombian hydroelectric power for exports to Mexico in the range of 17,500 GWh-year and 3,000 MW (about 3.2. of Colombia's hydroelectric potential). The political and technical difficulties involved in such a project, as well as its size, indicate that it should not be taken into consideration until after the year 2000. A preliminary economic evaluation suggests it could provide net economic benefits if electricity exports were used to substitute for high-cost oil products (e.g. fuel oil at US$25/B). Nevertheless, depending upon the evolu- tion of international prices for coal and of the cost of hydro power in Colombia, it might be better to install 3,)00 MW of coal-fired thermal power in Mexico, for the 66  same purpose. Possibly coal from the Cerrej6n project could be utsed. 3.3 ELECTRICITY SUPPLY 3.3.1 Current Situation Due to overoptimistic sales projections, the sector faces a situation of excess capacity at the generation level at least until the mid-90's. By the end of 1987 there will be around 8000 installed MW to serve a 5000 MW load. Addi- tional generation currently under construction totals 1322 MW (Guavio and Rio Grande II) and will be put in operation around 1990. As a result, using the present demand projec- tions with a 5.8% growth rate in generation, additional plants would only be needed in 1996. Table 3-3 shows an energy and peak demand balance for the sector based upon firm generation values: at least 20% of available gener- ation will be spilled in the next years, and the available MW reserve during peak hours will reach up to 30%. The sector's present official expansion plan was approved in 1983: it contemplated a sequence of new plants starting in 1990 with the Calima III project. Given recent demands for electricity, the plan was changed by keeping the sequence of projects and delaying new plants until 1993. However, such a plan would not be feasible given the present state of the projects and it would also be unnecessary: at present, ISA's planning department regards as realistic a so-called "current adjusted plan" which es- sentially delays the whole sequence until 1996. Under these circumstances, new investments on a substantial scale would only be called for starting 1990. 3.3.2 Minimum Cost Plan The problem with the current adjusted plan is that there are other projects that can form a lower cost expansion program. The excess capacity situation implies that gen- eration expansion decisions concerning specific plants are not on the sector's agenda at present and that there is sufficient time to explore alternative plans and to obtain additional information. As a result, some particular plants may be scrapped altogether from the program and others may be substantially delayed. In this sense, the problems center around the Calima III, Miel I and UrrA projects that are programmed for years 1996 and 1997. In an optimized plan based upon a broader catalog of hydro projects and lower coal prices, Calima III would be postponed indefinitely whereas Miel I and UrrA would only 67  be commissioned after the year 20COC. The development of hydro projects is perceived by the regional companies to be a source of local pride and expertise. For this reason, delaying the plants mentioned above is a difficult task. However, means to accomplish this should be developed. Calima III is a pet project for the CVC utility that serves the southwestern region, including the city of Cali. Relative to the rest of the country, the southwest is not endowed with attractive projects and has depended on ISA in order to supply its load. Moreover, projects developed in this area have not been attractive from an economic viewpoint and this plant seems to be no excep-- tion, i.e. it could be replaced by a combination of ther- mal plants (in other regions) at a lower overall cost. However, CVC's incentive to maintain its status as a major sotrce of generation has led it to promote the project ac- tively and to engage in preliminary constrLuction (access roads) that would eventually become sunk costs and would aid in approval in the future. The UrrA project has been one of the most controversial developments in the power sector in recent years: although attractive from a purely energy-oriented point of view, it presents serious problems and negative externalities re- lated to water contamination as well as the as yet uncer- tain ecological effects of a very large reservoir. UrrA is located in the CORELCA area where electricity has been generated through thermal plants due to the absence of feasible and attractive hydro developments. As a result, Urra is being sponsored by interests in the Atlantic Coast as a means of accessing low-cost energy and, consequently! a sLtbstantial amount of infrastructure has been developed. In particular, electromechanical equipment has been nego- tiated with Soviet suppliers together with its financing. The latter have understandably been disturbed by the suc- cessive delays, and the possibility of a post-2000 commis- sioning would give rise to additional pressure from them (including diplomatic action) for a definite decision at an earlier date. Civil works bids have already been awarded (to the swedish construction firm SKANS6`A) but work has not been undertaken as yet due conditions for either World Bank or IDB financing. Given this state of affairs, additional project delays promise to be exceed- ingly difficLtlt. Finally, the Miel I project is being advanced by ICEL together with CHECS one of the smaller regional companies and a subsidiary of the former, that has had a tradition of serious management and project development and is usually regarded as an exception within the ICEL group. In the last 15 years CHEC has not developed new generation 68  projects and it perceives the project as a means of retaining its "generation company" status together with its technical expertise. As a result, Miel I (that was originally meant to be put into service around 1987) has complete designs and its infrastructure (i.e. access roads, construction camps) is relatively well-advanced. Unfortunately, the project'is not among the most attrac- tive and, in fact, it oniy becomes interesting when coupled to the upstream Miel II development. Commissioning of Miel I and Miel II would be postponed, under an op- timized plan, to the year 2000. These problems become even more involved because the al- ternative attractive projects lie in the Antioquia region where most large hydro developments are to be undertaken anyway: as a result, presenting a different expansion program is a difficult undertaking for ISA as the other utilities tend to perceive it as favoring regional inter- ests. Furthermore, present value costs of alternative ex- pansion plans tend to differ very little in relative terms (i.e. less than 5%); this margin can easily be interpreted as being within the degree of precision implicit within a long-term plan. Furthermore, although adherence to a mini- mum cost plan is desirable, it should be qualified by good engineering iudgment in order to avoid the riskier projects (e.g. exceedingly high dams) or the dependence on large developments (i.e. more than 1000 MW) rather than combinations of smaller plants as long as the latter keep within reasonable cost bounds. However, whatever the argu- ments for deviating from a minimum cost plan, specific projects should be tested individually in order to ascer- tain that they are economically justified: given the mag- nitLude of power sector generation investments, small per- cent errors translate into considerable absolute values. 3.3.3 The Decision-Making Process in the Sector Reaching a minimum cost plan within the Colombian electri- cal sector is not a straightforward process due to the conflicts of interest that create divergent incentives with respect to the development of generation plants. However, transmission and lower voltage level planning is performed efficiently, with minor exceptions, and without difficulty. Given that generation investments usually con- stitute the major expense item for the sector, the poten- tial errors in this area translate into very large sums. The current decision process for large investments in- volves basically (i) ISA staff, (ii) ISA shareholders, (iii) Government agencies (DNP, MME, Finance Ministry and ultimately CONFES). 69  Projects in the power sector, and hydro plants in par- ticular, are usually initiated at the level of one of ISA's shareholdihg utilities that has identified an inter- esting project site and may have financed some preliminary overview studies. If found attractive at this basic level, the project enters the power sector's catalog of can- didates for prefeasibility and possibly feasibility studies. As sources of local pride, possible regional employment, eventual windfall profits from land sales to the utilities and infrastructure (e.g. roads), these projects gradually acquire a lobby that expresses itself through the political medium and seeks to advance the former through different study stages. If the project reaches the feasibility level, it starts to appear as a real development possibility and to compete with other plants that have similar studies. Project selection is the responsibility of ISA's planning staff that has ample expertise to determine least cost plans within the limits of uncertainty in this type of analysis; usually several similar cost, alternative plans reach the Board of Directors where the debate responding to regional interests usually takes place. Given ISA's structure, the people that take part in the expansion plan debate cease momentarily from looking at the national in- terest and become champions of local goals that are more concerned with preserving the power of their individual utilities. Ultimately, plans that emerge from ISA's board are the product of negotiations that tend to reflect a regional balance. Once approved, going forward with a specific project is seen sometimes as a prerogative of the sponsoring company. Having left ISA, an expansion plan and its component projects start a pilgrimage through several government agencies, foremost among which are DNP, MME and CONPES. This raises the question whether these bodies can (i) Identify bad projects (ii) Veto bad project (iii) Propose and/or promote lesser cost plans With respect to DNP and MME, the analytical resources necessary to evaluate a given plan are lacking and the sector's collaboration may be perfunctory at best. Fur- thermore, as bodies that depend on the central government, they are subject to another set of pressures. At best, they may delay a project's- execution but they cannot veto it. However, it must be noted that DNP was the first central government agency to seriously question the adequacy of generation expansion plans proposed by the 70  power sector, to detect the source of some of these problems and to advance proposals for institutional reform. DNP's lack of success on this front can be traced to an absence of strong enough support as well as to the pressures noted above. Finally, CONPES has the authority to change a given plan and it provides the final forum where the national interest can be put above regional pressures. However, given the regional balances inherent to the power sector's plans, its effectiveness for this purpose has been limited; indeed, there have been some, fortunately isolated, instances in the past when plans have emerged distorted in order to "better" reflect pet projects or special interests. 3.3.4 Electrification in Rural Areas In Colombia, the term "rural electrification" has been used when referring to the electrification of small urban towns (e.g. with less than 5,000 dwellings), as well as to rural areas with dispersed housing. In accordance with this definition, two major rural electrification programs have been underway during the 1979-1985 period, which aim at increasing electricity service coverage in rural areas within the interconnected system. These programs are: (i) The National Plan for Rural Electrification (NPRE), which was developed by ICEL in 1979 in order to supply electricity to 130,000 homes, mostly located in rural areas in inland regions. The total cost of the program amounts to US$15C0 million, one third of which con- stitutes an IDB credit, and the remainder comes from national resources. Up to date (1986), about three quarters of the program have been carried out. (ii) The Atlantic Coast Regional FProgram for Rural Electrification (ACRPRE), which was implemented by CORELCA as of 1980 in order to provide electricity to 65,00() households, mainly located in 140 small vil- lages. The program's cost is US$67 million; US$36 mil- lion are financed by the IBRD. Up to present (1966) 65% of the program has been concluded. Despite the relatively high investment cost implied by these projects (an average UJS$1,100/household) and the low financial return, their execution results in significant social benefits becaLuse of the consequent expansion of electricity service to the residential sector and in some 71  cases to agroindustrial production; it also implies savings on account of the reduction of diesel-fired gener- ation and other more costly energy resources (such as kerosene for lighting). The projects' objective is the electrification of selected areas, which in many cases leads to significant improvement of regional economic per- formance (e.g. the economic internal rate of return of the ACRF'RE has been estimated at more than 13%. per annum, in real terms). Once these two programs have been concluded, Colombia's electricity network is expected to have 3.8 million sub- scribers out of a total national 5.7 million potential users. a 67% coverage (rural and urban). In addition, in 1985, the Integrated Rural Development program undertook a minor electrification program. Its cost amounts to US$5 million and it foresees the electrification of 6,600 houses. As far as the rural sector and urban localities with less than 5,000 houses are concerned, 0.7 million subscribers have been connected out of a 1.7 million potential, imply- ing a current average coverage of approximately 40% (35% in inland areas and 45% on the Atlantic coast). In pursuLing rural electrification activities, both ICEL and CORELCA are contemplating a second phase of their programs to be carried out during the rest of the decade (ICEL: US$300 million for 155,00() LLsers; CORELCA: US$70 million for 115,000 users). They aim at expanding rural coverage to 55% (45% in inland areas and 75% on the At- lantic coast). Considering the experience acquired in the execution of electrification programs during the 1980-1985 period, the size of the programs conceived for 1986-2000 seems adequate. Despite the low financial efficiency of such programs, rural electrification is acknowledged as an economic and social priority for Colombia's farmland, which can be fostered now more than ever in order to make maximum LAse of the hydroelectric surplus expected for the 1986-1994 period. Thus, it is up to the executing institutions (ICEL. CORELCA, and electricity companies) to assure that com- plete evaluations of the needs and of potential electrification projects are made, in order to set the proper priorities and the correct economic order for their execution. 72  3.4 ELECTRICITY COSTS AND TARIFFS 3.4.1 Background The tariff-setting process was until recently (1984) a fairly decentralized affair: rates to the consumer were proposed by each utility's board and subsequently analyzed by the Junta Nacional de Tarifas (JNT) of DNP who usually rubber-stamped them. In recent years, JNT has taken a sub- stantially more aggressive position: a national tariff strLtcture has been imposed seeking to rationalize incen- tives and to provide consistent pricing signals. The ac- tual implementation of the structure has not been im- mediate, with some utilities, notably EEEB (Bogota), being behind schedule. 3.4.2 Tariff evolution The following table provides some basic indicators of how tariffs have evolved since 1971, based on ISA calculations where real rates were estimated using an index involving both inflation and devaluation rates. Tariffs in Coestat WMc'4 StkS Ywr unidtial Courcial Indutrial Average 1971 3.34 5.01 3.U4 3.44 1975 2.38 4.02 2.93 2.72 192 3." 7.6 4.06 5.02 196 3.52 9.12 4.35 4." 195 3.11 8.58 4.01 4.79 The corresponding rates of increase (decrease) were: Average Aemual Increase in keal Trm 10) Period unidmntial Comrcial Industriul Average 171-75 -6 -5 -5 -7 19751 7 9.1 10.6 9.2 1"1-64 -0.7 6.9 5.4 2.3 IUM-0 -12 -4 -5 6 1971-65 -0.5 3.7 3.3 1.9 Electricity prices showed net decreases during the early to mid-70's and subsequent gains. However, increases have been irregular by sector as well as by utility: most tariff adiustments have taken place in the commercial and 7:3  industrial sectors, with the latter showing 4-5% real yearly increases. As a result, the EEEB (Bogota) 1984 real industrial rate is 2.5 times greater than the residential rate, as compared to 1.5 times in 1971. It is also 1.8 times the industrial rate in Medellin. At present, all tariffs are being increased at a 2.27. monthly rate; with inflation rates on the order of 20%, real increases are approximately 8% per year. 3.4.3 Costs An analysis of tariffs requires at least in part an adequate assessment of service costs. Unfortunately, this effort has not been undertaken consistently within the sector: as noted above, ISA is currently performing the pertinent analysis. The following data are based on ISA's findings, however, they have a preliminary character due to i) methodological problems at the generation level and ii) lack of reliable data notably in relation to load data. ISA's approach has been to calculate generation and inter- connection costs at a national level (22OkV or higher) and to estimate lower voltage costs by company. Costs were calculated using the incremental approach and are equal to the ratio of future discounted investment to future dis- counted demand, in addition to operating expenses. Some illustrative values that involve generation, transmission and distribution expenditures down to the pertinent volt- age level are as follows (MV= Medium voltage -11.4kV-, LV= Low Voltage): Refrece Electricity Costs in De'95 Col$/kN and O(WN Level Ptak Of f -.ak Interconnctior (23@,SOOk) C.8 (5.2) 4.4 (2.6) Tramionsoi (I1S to 57.5kV) 11.0 (. 5) 4.5 (2.7) Sbtruuissiu (34.5kV) 12.0 (7.11 4.6 (2.7) Primry Distributi, (1114kV) 13.6 (1.0) 4.7 (2.9) SKcodary Distribution (LV) 1.7 (9. 9) 5.2 (3.1) These values translate into the following rough averages: Average Service Costs per deliver d kWh in Dec'95 pews and lust Load Factor Delivery Level .57 .40 .22 .16 .17 Trauaniuiam 7.1 (4.2) 9.2 (4.9) Sutrmuission 7.6 14.5) 9.3 (5.2) Primry (11.4kV) 8,3 (4.9) 9.9 (5.8) 10.2 16.0) Loa Voltage 9.8 (5. ) 12.3 (7.3) 11.9 (7) 13.6 (9) 74  At the low voltage level, the cost of $11.8/kWh cor- responds to consumers who don't use electricity for cook- ing and $13.6/kWh refers to those that use electric stoves with a correspondingly greater contribution to peak loads. ISA's costs reflect an average generation cost during 1986-2000 that is below the long run value, but above the short run value, due to excess capacity in 1986-1993. An analysis of dispatch costs produced the following sequence of average values for the "current adjusted expansion plan": Ywr IW-94 95 Y& 97 2000 n1 02 Wuh& *0.0 2.3 3 3.1 3.4 4.1 3.9 4.1 5.1 In addition, it was found that: (i) There are important seasonal differences with highs in February and lows during April-October. (ii) The difference between generation level peak costs and MV peak costs is around $5/kWh. This represents in- vestments in transmission and sLubtransmission. (iii) The difference between MV and LV peak costs is around $3/kWh; it corresponds to low voltage invest- ments and O&'M. The latter two considerations show that even though generation-level costs are low due to excess capacity ($8.8 and $4.4/kWh peak and off-peak respectively), network investments at the lower levels add a substantial cost component during peak periods of about $8/kWh. (iv) ISA distinguishes between urban and rural service; for the latter, peak costs are up to 80-10.C% higher than the former. 3.4.4 Present Industrial Tariffs Typical Industrial Dec'85 tariffs for the two major utilities show the following structure: FM Tariffs 4/kUf-ooth ltM High ulta"p 572 5.19 Nsdi1 Voltage 62 .64 Low Voltale m90 4.07 75  EEI Taiff S/kih Peak 20.54 Off-pak 12.21 LV up to 2500 k bimonthly 13.U LV wre thin 2500 kb 14.31 To convert tariffs to a common $/kWh basis, some typical bills were calculated as follows (average price per kWh): Nwro/year Lou Voltae Mediuv Voltage Average S/bih Aerage $/kNb Ptak Off-Nak Price coat Price Cost 2000 300 .0 9.8 7.2 8.3 1200 730 11.1 12.3 9.1 10.2 Hour/yrw Los Vultap Meiu Voltage Awrage /kli Avrage $/kbh Ptak Off-Peak Price Cost Price cost SinlelRtire Catoirsi 2000 3000 13.9-14.3 9.8 13.9-14.3 8.3 1200 730 13.9-14.3 12.3 13.9-143 10.2 Double Metere Custoeli 20 300 15.5 9.1 15.5 1.3 1200 730 17.4 12.3 17.4 10.2 Given that costs, as calculated, are indicative of orders of magnitude, a comparison with present tariffs shows that EPM's rates are approximately in line with ISA's estimated costs, whereas EEEB's tariff levels for industry are con- sistently higher than costs (e.g.$17.4/kWh compared to $10.2/kWh). 3.4.5 Residential Tariffs JNT has established a structutre for residential rates con- sisting of (i) a fixed charge based on social strata and 76  (ii) increasing rates depending on consumption. The Dec'85 structure for EPM illustrates this scheme: Stratu 1 2 3 4 5 4 Fixed Charge o/on.) 26 65 142 325 437 649 US$1/. 0.15 0.38 0.96 1.92 2.U 3.84 Cansetian Ranme (khil/nth) 0-200 201-400 40100 101-1100 1600* Narginal Rate W/k1l) 1.45 3.11 5.19 9.41 18.83 (UlkkS) 0." 1.34 3.07 5.54 11.13 In the case of EEEB, up to the present time,the rate structure has been different and does not include a fixed charge. It applies a single rate according to the consump- tion range (24 ranges). 3Average rates vary between $1.35/kWh (USd0.8/kWh) for less than 200 bimonthly kWh to $25/kWh (USU15/kWh) for more than bOOOkWh. JNT's mandate indicates that tariffs should be set by taking into account users' "payment capacity". The fixed charge indicated above is intended to reflect this criterion. From the cost data indicated beforehand, residential users impose costs on the order of $13/kWh in Dec.'65 terms. Actual bills, and estimated costs, for dif- ferent levels of consumption and different cities are: TnicAl bills fr thl RAin Citis- DKc'S iess- 1 la _kU C al ilil) -WI liunthly k,h 9tratu 2 200 270 2M5 300 520 2400 400 700 7"0 120 1340 5200 Stratu 4 400 700 1310 1340 1370 5200 400 1130 10 2330 3310 7300 800 3040 250 4310 4750 10400 Stratm & 00 3040 3202 490 5330 10400 1000 430 4240 40 7U0 13000 1400 10020 7350 11900 14450 2000 (1) Nith CUhELCA tu This table shows that all utilities are subsidizing their residential customers, with very important differences be- tween BogotA and the rest of the country. In particular, the argument that rates cannot be raised, at least within the middle and upper strata in BogotA and Medellin, be- cause of consumer resistance does not appear to be valid: Barranquilla's consumers are paying 100l. more than 77  BogotA's and it cannot be argued reasonably that they are better able to pay. The latter table was calculated Lusing the Dec'85 actual tariff schedules; however, actual bills can be higher in BogotA for the lower consumption ranges (200, 400 kWh) due to the practice of charging a minimum consumption based upon installed kW. 3.4.6 Commercial Tariffs This sector shows the highest rate levels for all utilities: Lou Voltage EED *19.8/kh EPM 10.7 or UMMkW-. .*7,IkM Calculating specific kWh costs for this group of customers is usually difficult due to the heterogeneous character of their load patterns. However, a rough comparison using the industrial tariff calculations shows that costs are on the order of $8 to $12/kWh vs. EEEB prices of $19.8/kWh. In the case of EPM, the binomial tariff translates into the following average prices: 21000 Hours $12.3 400C) Hours $ 9.9 As in the industrial case, EPM costs are roughly in line with their tariffs, whereas EEEB shows substantially higher prices. Furthermore, in the latter case electricity bills are subject to minimum charges based upon installed kW, such as those in the residential sector. 3.4.7 Bulk Tariffs Present bulk rates that apply to contracted sales/purchases within the ISA power pool are, as of June, 1986 Col.$2.35/kWh plus $7236/kW-year (US91.24/kWh + US$38/kW-year). The long-run incremental cost calculated by ISA at the interconnection (i.e generation + bulk transmission) level is -Dec'85 price levels- Col.$4.42/kWh + $10,C)00/kW-year (USd2.33/kWh + US$53/kW-year). At first glance, there appears to be a substantial cost/price difference; however, bulk tariffs should be judged using a somewhat different perspective from customer rates. On one hand, the bulk tariff level only influences the allocation of resources insofar as (i) it could induce an uneconomi- cal operation (generation dispatch) for the interconnected 78  system and (ii) the distorted price is transmitted as a signal to final consumers; on the other, there have been real cost increases in generation in the sense that new, primarily hydroelectric, projects show higher costs and therefore strict marginal cost pricing would generate excess revenues without pecessarily improving allocative efficiency. Finally! ISA's incremental cost calculations reflect average generation and transmission costs over the 1985-2000) period and implicitly smooth the real marginal cost variations. In this sense, short run conditions under the current excess supply that is expected to last until the early 1990's would indicate the need for a current lower price than the present reference values of $4.42/kWh and $10,c)00/kW-year followed by substantial increases around 1994. The allocative efficiency of bulk tariffs should be judged, as noted, by their effect on system dispatch and price signals to final consumers. Concerning the gener- ation dispatch issue, ISA operates the Colombian intercon- nected grid by using what are probably the most advanced operations planning procedures in the world for hydrother- mal systems, and in this sense bulk tariffs do not induce perverse incentives as long as ISA's directives are fol- lowed. Concerning the price signal issue, bulk tariffs do create pressure on individual utilities to readjust their final customer rates in response to the supply price; however, as the reference costs calcLtlated by ISA are ef- fectively used by, for example, JNT in order to evaluate tariff structures and tariff levels, pricing decisions are not distorted by the actual level of the bullk price. Therefore, it can be argued that the current bulk rate does not currently induce per se any significant misal- location of resources. Between ISA and the final consumer there may be inter- mediate commercial transactions where a wholesale tariff applies to supplies from one company to another. In some cases, distortions occur that have negative consequences: CHEC, an ICEL subsidiary, buys in bulk from ISA to supply part of its own load and also the loads of two municipal utilities that serve the cities of Armenia and Pereira. Because they are not ISA shareholders, the latter com- panies do not negotiate directly with ISA (in which case CHEC would wheel energy to them and levy a charge on it); instead, current agreements are such that CHEC supplies these cities at a price that is lower than the ISA bulk tariff. Aside from the negative financial consequences for CHEC, such practices have detrimental long term impacts as service quality deteriorates because there is no incen- tive for the supplier to maintain a reliable level of in- terconnection capacity with the municipal companies. 79  Although this is an isolated instance where regional politics have been unable to reach the obvious solution of readjusting the tariff, it illustrates the lack of a coherent pricing policy at a national level and the ab- sence of a forum where these problems can be solved. Aside from the strictly economic problem, the bulk rate should also be judged on financial grounds, i.e. its ef- fect on ISA and other utilities' finances and their capacity to expand and maintain the system adeqLuately; this aspect will be studied in the financial analysis sec- tion of this report. 3.4.8 Tariff Adjustment Considerations In the power sector, as seen in the tariffs and costs sec- tion, prices are not uniform either geographically or by market subsectors. Furthermore, pricing as a policy tool has more often than not been underestimated with the argu- ment that elasticities are supposedly either very low or nil; in this sense, it is important to note that actual elasticity estimations are difficult due to econometric problems usually associated with such studies (collinearity, lack of homogeneity in time series sample etc.). Nonetheless, studies in Colombia and many other countries show that responses to price variables exist, often under a variety of forms (e.g. sLtbstitution, out- right reduction of consumption, theft...). From a pricing policy point of view, the only firm guideline, although complex to implement, is marginal cost pricing; price elasticity of demand is also relevant insofar as departures from the latter rule are concerned, i.e. that differences between marginal cost and tariffs should be concentrated ih the low-elasticity markets. However, whatever the merits of marginal cost pricing, it must be recognized that there exist practical impediments to consumer adaptation and that customers cannot be sub- ject to upward price shocks without being given either op- tions or some degree of forewarning; similarly, there will be little or no welfare in the short term from a sudden drop in prices. In an oversupply situation, a first consideration must surely be to increase demand so that the idle excess capacity, which has negligible short run incremental costs, is used. Stimulation of demand would normally be done by changing specific tariffs thereby reducing average prices and perhaps reducing total sector revenues in the short run, maybe for a year or two. Subsequently total net revenues would increase. The demand stimulation BC.)  typically might be focussed on one or two markets such as high energy users in the industrial sector, or specific electricity uses in other sectors. However, the difficulties posed by the present financial deficits of the Colombian electricity sector severely limit the use of the foregoing strategy. Average prices are already too low for short term financial viability. Improvements in the situation must therefore come from ad- justments of tariff structures consistent with increasing average prices. Hopefully demand in certain markets (industrial or agricultural) could also be increased as part of the measures to redistribute the revenue require- ment. Structural changes in tariff schedules can be accomplished through appropriate legislation and can be implemented on a short term basis as long as the new structures are of- fered as options in order to gradually phase out old schedules. In this sense the international experience can prove fruitful: European utilities (France, Spain) intro- duced changes in tariff structures that were easily ac- cepted at the consumer level due to their non-compulsory character and the fact that, at least in the French case, a single' utility covers the whole country. In Brazil, structural changes have been actively promoted at the central government level, but resistance has developed at the utility level due to fears stemming from possible short-term revenue erosion. However, a sustained effort to implement cost-reflecting strLuctLtres, as well as active market promotion at the utility and at the consumer level, have resulted in a definite trend towards the adoption of the new schedules and their long-term savings. The latter observations apply principally to the larger industrial and commercial consumers that are supposed to respond more easily to price signals. In the domestic sec- tor, where political repercussions are stronger, pricing should go together with a comprehensive household energy policy in order to provide the correct signals as well as options for the customer to optimize his consumption. A good example can be found in the Chilean electricity sec- tor where marginal cost structures that reflected the seasonal nature of costs were adopted very rapidly; as a result, there was a substantial switchover from electricity heating to gas heating, the winter peak was reduced and recurring blackouts during this period of the year were averted. A policy of helping the poorest social strata in the provision of goods and services where price discrimination is feasible cannot be seriously questioned in countries 61  with large income disparities; indeed, even developed countries have lifeline rates that seek to reach consumers that are less well off. The question of administration of subsidies centers around (i) choosing the target popula- tion! (ii) how effective they are, i.e. whether they reach the right (and, as far as possible, only the right) people, and (iii) the affordable and/or desirable extent of subsidization. A way of reaching acceptable compromises on this front consists of making subsidies explicit in qualitative as well as quantitative terms. Two Latin American examples serve to illustrate this approach. In Brazil, residential tariffs are established on a uniform country-wide basis within the tariff schedules and subsequently discounts are specified for determined consumption ranges. In Venezuela tariff schedules contain an explicit "social" category for consumption of less than 100 kiWh/month, with an automatic reclassification when this level is exceeded for a number of periods. In Colombia, the fixed charge according to social stratum is potentially an efficient way of assuring a degree of income redistribution without distorting resource alloca- tion. However, distortions appear because of the large number of consumption blocks which do not seem to cor- respond to any pattern of use. At most 3 blocks should be kept, aimed at specific social groups where the fixed charge may not perform adequately as a discriminator (e.g. a very low rate for a 0-100 kWh category, a middle rate for the largest consumption groups and possibly a block that penalizes very large users). 3.5 SECTOR FINANCES Problems in the power sector (as in most pLtblic services) achieve recognition when they impact on its finances. Due to its size, financial problems in the power sector have a strong effect on the country's finances and on its exter- nal sector in particular. Some indicators of the sector's impact are: total power sector investment in 1984 and 1985 was equivalent to 3% of GNR and reached 38% of total public sector investment; its external debt as of Decem- ber, 1985 was in excess of US$3000 M, or about one third of the countr-y's total; by December, 1986 the sector will have an accumulated deficit of funds of around US$750 M that is expected to rise to about US$1600 M in the next four years. 82  3.5.1 Background Financial projections for the power sector as a whole are a relatively recent endeavor: the first exercise of this type was performed by ISA around 1979-1980. The latest available projections were produced by ISA in June, 1986 using increasingly better information methods that, however, have not surmounted some of the basic dif- ficLulties inherent to the problem such as: (i) Limitation of the analysis to major producers! ex- cluding some municipal companies, notably EMCALI, that serves the third largest city in Colombia. (ii) Uncertainty with respect to certain investment projections, notably distribution data, that could have a noticeable impact on total investment. (iii) The difficulty in simulating particular tariff policies given the large number of such schedules (one for each company, or around 35 in total). To put current projections in perspective, it is useful to study the sector's "track record" in the last years with respect to financial estimates: as an example, March 1980 projections produced by ISAiand DNP are used below to com- pare actual versus projected performance: Ylar 190 1981 1992 193 194 IM raoss Demd 1TW Pfojected 1 23 25 27 29 ..Mi 19 20 21 23 25 Sales ICwrent 90) PrOjKted 17 25-26 34-37 44-50 U-64 72-9 RHu 23 32 47 44 82 110 lmmtumt ICurrat 1S) PrOjCte 71 74 95 1OS RHl 32 43 45 96 138 137 Inter eUI ration of Funds (r oss- ncludes debt wvicelt Projected 13 21 32 43 53 U Real 14 21 34 40 52 72 Debt Service (Crrent 60iS Projected 11 12 14 25 32 37 ReIl 12 16 25 41 59 el This data shows that (i) efforts have been made in the sector to maintain a level of internal fund generation that. albeit insufficient, does not become absurdly low, and (ii) the sector is particularly vulnerable to exchange rate fluctuations that impacted on investment and debt 83  service. The following table shows the projected vs. ac- tual exchange rates and inflation values: Year 1980 0191 1982 1M3 1914 19 PUN-N/S6 ProjKted 45-47 48-53 51-59 54-65 57-71 677 Rel mid-yr 51 59 70 a 113 143 2 Devalutiom PrDjKted 7-12 7-12 6-12 6-10 6-9 6-9 Real 16 16 19 26 28 27 Inflatimo Rat" (1)1 Proected 14-25 12-25 12-25 12-20 12-15 12-15 Kual 26 26 24 17 la 23 One of the major factors that emerges is the danger of long-term projections that perpetuate an imbalance in the real exchange rate: accordipg to the 1980 projection, in- flation was expected to be consistently above devaluation thus assuming a constant reduction in the country's com- petitiveness. As shown by the real values, such a situa- tion could not last and the 1984-85 foreign exchange policies followed by the government sought to redress the imbalance caused in previous years through an accelerated rate of devaluation. Market Structure: some of the problems the sector faces are related simultaneously to the evolution of sales by group of consumers and to tariff policy. The following table summarizes the relative participation of different sectors in GWh sales and in revenue generation: Rsidutial Commcial Industrial %s ZR",. S INeV. Mi ZR,. 1971-All itilitin 42 39 13 II 34 35 194 Valuen All Utilitin 46 35 12 20 30 36 EEEIb(ootJI 46 27 14 26 29 37 EPl (Ibdellin) 50 33 10 20 30 40 Cali 42 33 12 17 36 42 ICEL 55 42 11 l1 26 34 CRELCU 41 33 12 11 33 30 From this table it becomes evident that the composition of sales has become increasingly "residential" in character. with GWh consumption in this sector increasing in relative terms whilst revenue generation from residential customers has decreased significantly in relation to commercial and 84  indutstrial sales. Given that these differences are not grounded on a cost basis as system peak costs are deter- mined by the residential market, this imbalance reflects an implicit cross-subsidization policy that has reached extreme valLues and should be corrected in the future. 3.5.2 1980-85 Financial Performance This period was characterized by an intense rhythm of con- strLtction activity as evidenced by the commissioning of 2700 MW between 1981 and 1987. In order to finance these investments the sector has counted upon (i) the internal generation of funds, (ii) government contributions, and (iii) debt. The only sources of equity capital are inter- nal funds and government contributions due to the public structure of the industry; given government priorities in other areas of the economy, national budget funds are not easily devoted to the sector. Although national budget al- locations for power are significant but not extraordinary from the sector's point of view, they are considerable from the government's perspective and they are seen as a forcible drain of resources from other areas that are more in need of government support; indeed, there have been pe- riodical proposals for the sector to become self-reliant from a financial point of view. The problems with the sec- tor have been related to the insufficient internal gener- ation of fLunds with respect to investments; the following table summarizes the percent contribution to investment within the sector after deducting expenses for debt serv- ice (interest + amortization): Year 1976 7 1978 1979 16 196 1M2 1983 19 195 I (0 10 13 6 t 11 13 (0 (0 (0 The sector's current difficulties become apparent with this table: internal funds have not contributed to invest- ment at all for the last three years. As a result, the sector has had to rely primarily on debt financing that accounted for the following investment percentages: Year 1960 191 19 193 194 19 XD&t Financimg 78 97 91 106 103 97 With this financing structure, the sector has understand- ably been constantly strapped for cash, and 1986 is no ex- ception. In March, 1986 ISA presented a forecast deficit of funds of ICol. $147 6 for 1986, equivalent to 85  approximately US$800 M. These included Col. $76 G of cur- rent debt carried over from 1985 and Col. $71 G deficit for 1986. After studying several alternatives, including reductions in investment, government refinancing and con-- tinuing with current debt levels with contractors, DNP and ISA arrived at a figure of Col. $26.5 G for the deficit lacking financing for 1986. The current proposal is to cover this figure with national budget allocations (Col. $7.5 6), additional internal loans with FEN (Col. $4 6) and a loan from the Coffee Growers Federation (Col. $15 G). However, whatever the solution, and except for na- tional budget allocations, the sector is continLuing to rely on debt financing with its consequences (continuing financial difficulties caused by the inability to absorb changes in market conditions that may call for government intervention and support). 3.5.3 Current ISA Projections (1986-1996) Tables 3.4 to 3.8 summarize current ISA projections for the sector (June, 1986): income statements, sources and uses of funds, and proforma balance sheets. As noted above, these include most of the major institutions in the sector. The current problems concern the sources and uses o-f funds; the following table summarizes some of the most important figures in the statements. Projected Financial Statements -Current SO- Year IOU 1917 196 1919 190 19"1 1992 Bross Op. Incm 144 215 269 33 423 523 638 1I1 (1) 66 U 113 145 169 220 290 Bross Int. Funds (2)109 147 16 238 26 372 459 Debt Service (3) 106 159 191 219 23 324 296 Investmnt (4) 144 1N 206 187 186 215 263 hficit of funds I5) 39 27 51 64 57 0 (1) Income before internt or awtizatim paymts. (2) Includes othw somrces of funds (deprecitig, wevece rsers). (3) Iterest * Aortization. (4) hAsusing a 5.81 deand growth rate and the adjusted "eration plan. 15) Includes the VI sector adjustment lIon. One of the more striking aspects of forecasts of the deficit is the variability of the actual figures, even for the very short term. This can be explained in good measure by the way the deficit of funds is calculated: it is generally a difference between two large amounts (total available sources and total expected uses) and therefore any relatively small deviation in either component can cause large swings in the calculated deficit. In order to make this more explicit, the following sensitivities 86  (elasticities) were calculated for ISAs projected deficits with respect to two key components: the exchange rate insofar as it impacts on the interest and amortiza- tion of foreign debt and total sales in current pesos. Yer 87 BB 89 90 91 Dficit 9usitivity tea Exchange Rate 2.3 4.3 2.9 3. 3.9 sales -5.1 -9.2 -4.1 -5.9 -6.4 These are quite large values that indicate, for example, that a 1990 estimation error in the exchange rate of 10% would translate roughly into an increase in the projected deficit of that year of 30%. An increase in total sales of only 1% would reduce the deficit by 9% in 1988. The point to be made is that, under these circumstances, deficit es- timations become highly unreliable and the figures may only serve as indicators of orders of magnitude of the problem as well as when it may occur. In ISA's current projections, the problem encompasses the 1986-1991 period and is on the order of Col. $240 B. 3.5.4 Indebtedness In 1985 total long-term sector debt with foreign and domestic creditors, excluding provisions for employee severance, amounted to Col. $584 G of which 90% (around US$3 billion) was due to foreign lending institutions. By 1988 the latter amount will reach US$4.2 billion and will account for 95% of long-term debt. Debt service, i.e. in- terest plus amortization on these loans (excluding IDC) was US$350 million in 1985 and will reach US$940 million in 1991, with substantial increases occurring in 1987 (US$570 M) and 1990 (US$870 M). Debt to Equity (D/E) ratio: a conventional calcLtlation of this indicator shows the following values: Year 13 13 197 193 1m90 191 192 199 199 DI/E 1.2 1.2 1.1 0.9 0.3 0. 0.5 0.4 0.37 0.33 Talken at face value, this ratio shows a favorable evolu- tion starting from a D/E of 1.2. However, the question that arises is how can a sector that has financed more than 70% of its investment in recent years with debt show such low values? The answer lies in the asset revaluation 87  process that is computed as part of equity: in 1985, surplus due to asset revaluation accounted for 75% of total eqLuity. If this amount were not taken into account, the D/E ratio for 1985 would be 6.8. In order to obtain a better measure of leverage, an incremental D/E ratio was compLtted as Increnttal D/Es IDelta in Ddkt/ Delta in Equity tc.lWinr revnluatior) where the increments were calculated using i) the year to year values, and ii) base year 1985: Year 196 1937 191 I? IM9 1Ins 1 1M 3 1994 Yearly Incrmental D/E ratioi 4.5 5.1 3.1 1.6 0.99 0.7 0.3 0.3 0.23 Aerage Incremtal 01E ratio (Dam yer 1985) 4.5 4.8 4.1 3.1 2.4 1.9 1.4 1.1 0.9 From this table it becomes apparent that the sector is using a high D/E ratio in the short term and that, on average, it only reaches an "acceptable" value of around 2 in the early 1990s. Financing Terms. One of the problems that have been men- tioned in relation to the cash flow situation is the im-- balance that exists between financing terms and asset life: with long-lived assets such as those in the power sector, depreciation costs do not generate enough income in order to pay off the loans, particularly when debt is being used very heavily, as in this case. ISA's projec-- tions show the following values: Year 19C 19 19 1917 19 1M99 1M9 192 l13 Depreiatlanl lCrret OS 19 26 39 53 68 33 115 137 160 191 Asortization (Current IS) 30 50 64 92 117 140 197 216 199 202 Ratio .6 .5 .6 .6 .6 .6 .6 .6 .8 .9 When facing this problem, two possible alternatives SUg- gest themselves: (i) Financing investments through a greater proportion of equity that can absorb the greater amortization requirements during the early years. or (ii) Rolling over current loans. Be  With respect to the first alternative, some elementary financial calculations place an upper limit on the D/E ratio; the following table illustrates this limit for an interest rate of 10%: UsDer lisit bn D/E ratio Loan Period (Years) Asut Life 5 8 10 12 15 1. 2.3 4.2 8.6 20 .8 1.7 2.6 4 25 .7 1.4 2.1 3 In the case of the power sector, asset lives are on the order of 20 years and so-called long term loans are around 8-10 years. This places an upper limit on the D/E ratio of about 2.5. This limit is greatly exceeded by the incremen- tal ratios in the short term, and it indicates therefore that the sector will constantly face succeeding crises if no additional equity capital is raised to contribute to investment. Rates of return on assets: the sector's financial projec- tions take into account asset revaluation, and the cor- responding rate of return appears as follows (net operat- ing income! net fixed assets in service): Year 1M6 197 190 19 9"O 109 1M2 193 NROR 7.4 6.0 6.5 6.9 6.2 6.5 7.4 8.3 These rates are low because they are less than the cost of debt financing, and merely reinforce the diagnosis in the sense that the sector's problems are mainly related to cash flows. The rates of return for the sector disguise major inter-company differences: ICEL and CORELCA's sub- sidiaries show, as a whole, negative income before inter- est for certain years, thus pointing out the need for con- tinuing to rely on central government support. Sector capitalization is hindered by the unattractive return to equity shown by the projections: this value fluctuates between a low of 2.56% in 1987 and a high of 7.5. in 1996. These returns would discourage any kind of private participation in the sector, as well as invest- ments by other public agencies. 89  3.5.5 Bulk Tariff Financial Problems Bulk Rates and the Finances of Individual Utilities. ISA's tariffs have a major incidence on those utilities that are primarily distribution- oriented, and in particular on the ICEL group of companies. These are characterized in general terms by residential markets and correspondingly low load factors. For a 0.6 load factor the June'86 ISA rate translates into $3.7/kWh. Within the ICEL group, residential tariffs are as low as $2.6/kWh in the lower consumption categories (LIp to 20)0 kWh/month) and are on the order of $6/kWh for the 200-400 kWh/month group. Given that incremental costs for subtransmission and distribu- tion reach the $6/kWh level during peak hours (and higher in the case of those companies with low load densities), that the residential market is primarily a peak-load con- tributor and that it constitutes 46% of the ICEL market in energy terms (reaching up to 77% for some utilities), it becomes evident that some companies in the ICEL group can- not survive without central government support. The fol- lowing table shows purchases of energy!, that constitute the single most important expense item, as a percent of total expenses for the ICEL group: Y,er 4 U5 96 17 U Purcham n I sofExpue 44 44 55 64 65 Central government support for the ICEL and CORELCA com- panies has been made through investments that are entirely financed by ICEL (whose budget is almost wholly dependent on national budget allocations) and thereafter given to the subsidiaries for them to operate. As noted in the costs and tariffs section, some utilities resell energy purchased from ISA to other companies as in the case of CHEC; if the bulk tariff problem is not solved, this company will continue to unwillingly sub- sidize the municipal utilities at a severe financial cost, as well as at the cost of reducing quality of service. 3.6 STRATEGIC OPTIONS 3.6.1 Marketings Demand and Tariffs Based upon the preceding analysis, a diagnosis of pricing problems can be summarized as follows: (i) Tariff fluctuations have been irregular in the past and have lacked, Lntil relatively recent intervention 90  by JNT, a solid quantitative and qualitative orienta- tion. (ii) The proportion of revenue raised by the residen- tial sector has always been smaller than its energy market share, and the gap has been widening since 1971. (iii) Tariff levels tend to vary considerably from one utility to another, and the Bogota market in particular presents the greatest differentials with respect to the rest of the country. (iv) Tariffs are generally below costs, except for in- dustrial and commercial rates that are either around the same level or, as in the case of BogotA, far above costs. (v) Pricing problems impinge on the sector's finances that show an insufficient internal generation of funds to pay for debt service and contribute to investment, at least in the near future. (vi) ICEL and CORELCA's subsidiaries, that purchase a major proportion of their energy, are generally unable to cover costs and have to resort to government support via their parent companies. These problems show that policy should have the following thrust: (i) Dealing with major geographical and sectoral dis- parities. (ii) Establishing a long-term strategic tariff policy oriented towards creating the correct economic incen- t i ves. (iii) Dealing with domestic electricity supply in a way compatible with social and economic objectives. (iv) Finding a solution to ICEL and CORELCA problems that are due to pricing. Accordingly, a pricing strategy should be based on the following principles and practical considerations. (i) Orienting pricing policy by establishing tariff goals to be met within a well-determined time frame that can be different from one sector to another. In practical terms, this means seeking real increases within 3 to 4 years and decreases through freezing present levels in order for inflation to take care of 91  real reductions. (ii) Making subsidies explicit by choosing the target population and assuring that the means to provide them are efficient. In practice this imposes the need for the sector to engage continuously in the task of cost calcUlations in order to have a permanent economic frame of reference for price evaluation. (iii) Imbedding tariff adjustments within a coherent energy strategy in order to seek a rational utse of electricity, specially in those areas where substitu- tion by less expensive fuels is feasible. Specific pricing options for electricity are the following: Approach to Tariffs Tariff structures by voltage levels according to JNT directives provide a sound economical pricing basis for the larger customers connected at medium or high tension. The exception could be the case of very large, high volt- age, customers that can adapt their consumption to specific conditions; in these relatively few cases tariff structures could provide for the negotiation of individutal contracts (such is the case of ENDESA, the Chilean utility) where time of day as well as seasonal pricing is feasible. Frice levels should be dealt with on a case by case basis: as seen in the preceding sections, industrial/commercial tariff levels vary considerably from one utility to another and JNT has the expertise to provide information in order to reach a degree of uniformity where differences between regions can be properly ascribed to significant cost differentials. In the case of residential tariffs the same observataon applies: except for special cases, uniform price levels throughout the country, unless justified by costs, would provide a measure of geographical equity and could red(ce political tensions derived from these differences. This project was already studied by ISA in 1986 and its feasibility depended on the financial consequences for different utilities. However, a long-term plan for reach- ing this Luniformity should be maintained as a pricing goal. Dealing with subsidies in the household sector could be made explicit by establishing base residential tariffs, possibly for the country as a whole, and differential 92  rebates by utility that could be made uniform gradually. This approach, used for example in Brazil, has the advan- tage of making subsidies explicit as well as setting the political debate surrounding the issue around the real problem: who should subsidize whom and by how much. Tariff Levels (i) Industrial and Large Commercial In quantitative terms, medium voltage supplies should be priced at around $4.50-5.00/kWh and around $17,000 to $20,0:0 per kW-year in order to reflect average incremen- tal costs for the 1986-2000 period. For practical pur- poses, this means keeping present energy charges for many utilities at their present level while raising the demand charge by up to 100%. However, such a rise could be moderated over a considerable number of years as the cur- rent excess capacity would reduce the short-term marginal cost from $18000 to about $8000/kW-year which lies in the range of present tariffs; therefore, an increase in real terms of about 8-10% in the demand charge would mean reaching cost levels roughly in ten years when new gener- ation is needed. Finally, the energy charge, although con- stant for the next few years in real terms would have to start being raised around 1990 in order to reach adequate levels in the mid 90's. An important exception to the lat- ter observation is the case of BogotA where industrial tariffs are far in excess of incremental values. In this case the financial viability of tariff reductions in real terms would have to be studied, coupled with a compensat- ing increase in residential rates. Although electricity is a costly energy source, the excess capacity situtation at the generation level may last for at least the next seven years. This means that off-peak uses of electricity have practically zero costs. During peak hours, costs may be greater due to loads on transmis- sion, subtransmission and distribution elements. Industrial tariffs are near long run costs, with the im- portant exception of BogotA where prices far exceed mar- ginal costs. A general reduction of tariffs to reflect the low short term off-peak cost would call for the in- stallation of time of day meters and would impact nega- tively on the sector's finances. Consequently, a more pr-agmatic approach should be taken, which would consist of marketing off-peak supplies with specific clients through a temporary, 5-6 year contract for incremental energy. This strategy would call for a supporting study in order to determine i) target industrial clients, ii) the economics of such supplies, i.e. checking that additional 93  investments in subtransmission or distribution equipment is justified, and iii) possible volumes to be supplied. The immediate market for such supplies would be the electrically intensive industries (measured by KWh com- sumption per $100 of valLue added): Industry Stni/lron Cbut Chiucals Palr/Primting Blass/Cerauics TIstiln KPh/$100 v.&. 36 30 20 15 14 10 IM Kok 6 640 IO 500 150 650 (ii) Residential In the residential sector the problem is considerably more complex: both the financial and cost analyses point out the need for raising residential tariffs sooner or later. A reference cost for this category of consumers is around $13/kWh. Reaching such a level means raising the price by 100% or more for many categories. In the long run, this rise would have to be even greater if 1996 marginal cost levels are to be reached. Therefore, continuing with the present 2.2% monthly increases is a minimum as long as in- flation remains significantly below this level. Supplying residential loads at a tariff that reflects the service costs, while simultaneously keeping down household energy expenditures, can only be accomplished through an integral strategy that also makes available other fuels such as LPG at reasonable costs, and therefore encourages a degree of substitution of electricity, specially for peak time uses such as cooking. 3.6.2 Planning From the analysis of the decision-making process in the power sector a striking feature that emerges is the lack of an independent body with the sufficient authority to advise and regulate on the adequacy of a given expansion program. A second feature is the excessive pressure ex- erted by regional interests in an area where the national interest should be foremost. One option for institutional reform is to center major in- vestments in generation and transmission within a single company. The most recent recommendation of this kind was in July 1986 by DNP with a sector diagnosis that concluded with the need to "concentrate within a single entity the property and execution of generation and transmission facilities". DNP's proposal did not prosper and, even if 94  it had reached a more advanced stage, it would have had to surmount strong opposition from the regional companies as well as practical difficulties. The means of effecting such an option at present rest on the government's finan- cial leverage. in order to oblige the regional companies to relinquish their control on ISA's board. Another option that suggests itself is to limit government intervention to regulating the decision process in itself, without a direct participation in the sector's equity. This line of approach rests on the assumption that the sector is efficient as far as its role as an executing agency is concerned, i.e. that it manages, operates and develops its projects with reasonable competence. Given the chain of institutions involved in the decision-making process, the solution would be to create a Board or Com- mission which would oversee the sector's investment programs. as they emit from ISA's board and before they are considered by the other government agencies,in order to assure that whatever reaches the latter constitutes a sound expansion policy. Such a Board could be a Power Sec- tor Advisory Board with the mandate to audit the sector's plans and to approve major investments or decisions, in- cluding design or scheduling changes to projects under construction. The essential requisites for such a Board would be (i) that it be endowed with power in the sense that its recommendations not be subject to modifications (i.e. that they may be rejected and returned to the Board but not changed at the upper levels), and (ii) that it may- operate with as much independence as feasible from political pressures. A model in this respect is the Monetary Board (Junta Monetaria) that determines monetary policy and establishes guidelines for public credit. The actual body is composed of several ministers of state together with the heads of major financial institutions (the Central Bank and the Su- perintendencia Bancaria). Its reputation for serious decisions lies in a core of two advisors who are in charge of drafting the Board's decisions. They are highly respected professionals who are supported by Central Bank staff for analytical resources, and they keep a low profile in order to avoid becoming involved in public debates. The Fower Sector Advisory Board could be modelled accord- ing to this organization by employing a small group of ad- visors in charge exclusively of certifying the adequacy of the sector's plans. It would not require a large bureaucracy and they would employ ISA and DNP resources for the necessary analytical work. The strength of the Board would lie in the independence of its advisors and to 95  achieve this, the Board's operating budget should be as far as possible under its own control. The Board itself coLtld be composed of a limited number of members, e.g. representatives from MME, DNP, the Finance Ministry, and ISA. While these two options are separate, a suitable long term objective (1995) for the sector would be to accomplish both; more national equity in the utilities and the in- stallation of a power sector advisory and regulatory board. Both options deserve serious further examination and a step in this direction could be taken by estab- lishing a Power Sector Board. 3.6.3 Management An area where substantial managerial improvements are feasible concerns the control of losses: in 1971 losses were approximately 17% of total generation, whereas in 1984 they reached 23%. The difference represents 15:)0 GWh, or the equivalent of one year's growth in demand in 1985. The increase has been attributed only in part to real losses, and most of them are believed to be due to an in- crease in theft. Historically, the latter are supposed to be illegal connections at the residential level in poorer sections of major cities. However, it seems that a major part of the increase is due to industrial theft through meter tampering or illegal connections in wealthy, high consumption, areas. Specially, in this case, the increase should be controlled through management loss reduction programs, particularly in those companies that have the technical and economic resources to do so, as in the case of EEEB and EPM where loss levels have reached 25`% and 22% of the available energy, respectively. That such a control is possible is shown by comparing utilities, as in the case of two CORELCA subsidiaries with similar markets that serve the adjoining Departments of Bolivar and Atlantico: in the former losses are 13% whereas in the latter they reach 27%. Improvement of Transmission and Distribution At present the utilities are up-dating an inventory of projects and investments required to expand and remodel their transmission, subtransmission and urban distribution systems. Preliminary figures indicate that the cost of projects shceduled for the 1986-1990 period will be be- tween US$1.2 billion and US$1.5 billion. These projects are designed for expansion of electricity coverage, and to reduce losses to more acceptable levels. 96  Various programs are being formulated. such as the expan- sion and remodelling of BogotAs distribution network (for which a US$170 million credit is being negotiated with the IBRD); the VI EEEB Expansion Plan (with KFW financing), the FEN Loss Reduction Frogram (for which a US$300 million credit is being negotiated with the IDB), the Empresas FP6blicas de Medellin programs, etc. Managerial Continuity A policy question that has received scarce attention, but has had substantial impact on the sector concerns the conr- tinuity of Chief Executive Officers (CEOs) in all companies: with few exceptions, top level appointments tend to be political and have a relatively high turnover rate. Consequently, managerial responsibility is diluted and long term decisions are sacrificed for short term gains. One reason for this is that managers in many utilities are not designated by the Board of Directors but by other political appointees; for example, the EEEB General Manager is chosen by the mayor of BogotA and his tenure is limited to that of the latter, i.e. a maximum of four years or less. Given such a limited period, utility CEOs are unwilling to risk their personal prestige in mat- ters that may be crucial to the company's survival but are politically unpopular, such as tariff increases. With longer tenure periods, dodging the difficult issues be- comes impossible and managerial responsibility is rein- forced. A clear example of this lies in Empresas PCublicas de Medellin, widely regarded as the best-managed company in the sector: its General Manager until 1985 held that post for nine years. An improvement towards the goal of managerial respon- sibility could be reached by keeping appointments within the boards of directors and possibly by involving private sector representatives on such boards (e.g. banking as- sociation, industrial organizations). Unfortunately, the trend towards appointing CEOs according to changing political situations has been gathering momentum and head executive positions are rarely held for more than two years. Without effective planning, executive continuity and employee motivation, companies can rarely be efficient; an in-depth analysis of cost-effectiveness within the dif- ferent companies should be undertaken in order to diagnose the source of inefficiencies and to recommend cost-cLutting measures. 97  3.6.4 Financial Alternatives The power sectors financial future hinges on the follow- ing options: (i) Rationalizing future investment plans. (ii) Finding a solution to current short term financing problems with government support. (iii) Establishing policies oriented towards capitaliz- ing the sector. (iv) Adopting a policy vis-a-vis national budget al- locations for ICEL, CORELCA and their subsidiaries. Given the current supply surplus in the sector, a firm policy oriented towards limiting generation investments should be adopted, however embarrassing it may prove (as in the case of the LJrrA contracts). In particular, the sector must establish as soon as possible a minimum cost expansion plan and a policy of investment priorities oriented towards market expansion. This should result, given current demand expectations, in no new generation developments until 1990. Concerning the short term problem, solutions analyzed by the sector together with DNP indicate the need to rely on government support through FODEX, the foreign exchange fund that guarantees foreign loans, and other quasi-public institutions such as the Coffee Growers Association. Capitalizing the sector in order to avoid continuing crises by having an appropriate eqLuity cushion would be desirable, but does not appear to be feasible insofar as external investments are concerned: government willingness to support the sector is limited by the already substan- tial costs imposed by ICEL and CORELCA and the public na- ture of the institutions practically excludes private par- ticipation. Ultimately, the feasibility of generating internal funds for investment, creating an equity cushion, and solving the short term problems depends on the willingness to adopt important tariff reforms which in particular would increase tariffs charged to middle and upper income urban households in the residential sector, wherein lies the major market for electricity. ICEL and CORELCA, together with their subsidiaries, will continue to depend on national budget allocations for more than 50c/. of external sources of funds unless they can be 98  strengthened through an institutional reorganization that has been proposed on several occasions but has not taken place: it would merge weak subsidiaries with stronger utilities in order to obtain a better market structure. Although ICEL and CORELCA have often been cast as the power sector villains due to their dependence on the Na- tional Budget, they also bear the brunt of traditional money-losing investments such as rural electrification programs. Two options that address this problem are: (i) Cross-subsidization within the sector: this means having the strong urban markets subsidize the rural markets, through a financial mechanism such as a Rural Electrification Fund (possibly managed by FEN) that would provide soft loans for this purpose. This option does not appear to be viable in the short run, or at least as long as the larger utilities face serious financial difficulties, as it would probably require an even greater increase in certain residential tariffs. However, the option has merit and it should be con- sidered for the 19905 when the sector will be in better financial condition. (ii) National Budget support for ICEL and CORELCA: this would be a continuation of current policy by which society as a whole subsidizes rural electrification. The essence of an effective allocation of national resources lies in controlling them, making sure that they respond to well-defined priorities, and that funds will be channelled towards projects with a high degree of social benefits. 99  4. OIL SECTOR 4.1 INTRODUCTION AND ISSUES 4.1.1 Oil Product Prices and Oil Demand A central issue in petroleum policy is oil product pric- ing, specially for gasoline and diesel. This is because it impinges in so many ways on the other areas of the energy sector and indeed on macroeconomic growth, as well as being of immediate concern for an efficient transporta- tion network. Gasoline pricing, in particular, is a ley determinant in Colombia of the government's tax receipts from the petroleum sector, through the Road Fund. It is also a main factor in determining ECOPETROL's financial balances, and very large subsidies are being provided to consumers, in effect out of funds from ECOPETROL, as a result of low oil product prices. This in turn affects the company's ability to raise funds for exploration or other development programs, thus eventually affecting the balance of payments and economic growth. Oil product pricing is also important in order to contain the rate of growth of domestic oil demand, especially in view of the uncertainty of world oil prices. A barrel saved of domestic oil demand provides for a barrel less of gasoline imports or a barrel of exports. Thus directly contribuLting to the balance of payments. The objective is to devise an oil product pricing policy that accomodates several issues (i) excise tax levels for financial savings, (ii) after tax revenues to sustain ECOFETROL's finances, (iii) a consumer price level to in- duce efficient transportation, (iv) effective relative prices for the best use of transportation technology, (v) prices-that are sufficient to provide incentives to supply each product, and (vi) all these with the ultimate objec- tive of economic growth and development. 4.1.2 Oil Supply Since oil production started in Colombia in the early years of this century, the Middle Magdalena basin has been the principal source of oil reserves. Between 1921 and 1944 the proved remaining reserves ranged from aboutt 70(' million barrels to 1 billion barrels, and the reserves to production ratio (R/P) was in the order of 30 years. The Catatumbo basin discoveries in 1945 increased reserves to over the 1 billion mark, but the ensuing accelerated production over the 1945 - 1958 period decreased remaining reserves and pushed down the R/P to about 12 in the late 1 0:C)  1950s. In 1970, discoveries in the Putumayo area brought remaining reserves back up to the 1 billion barrel level, but again production was not replaced by new discoveries and by 1970 remaining reserves had declined to a level that the R/P ratio was 10. By the year 1979 remaining reserves were only some 400 million barrels and the R/P was 8 years. However, beginning in 1976 there was an in- crease in exploration drilling, and in particular the 1983 Cano Lim6n discovery in the Llanos basin has contributed to bringing remaining reserves up to some 1.4 billion bar- rels, in 1986; about 1 billion barrels are in the Llanos and about 400 million barrels are in the Magdalena basins. Production in 1986 is estimated at 304 kB/d and therefore the present R/P is some 13 years. In the years up to 1974 almost all of Colombia's oil was produced under a concession system which had been based in legislation introduced in 1905. The concession arrange- ments had been adequate in most respects but they tended to freeze large areas of the country's sedimentary basins in the hands of concessionaires so that these lands could not be regained by the State, for accelerating explora- tion. It was in this context that the Association Contracts were introduced. Existing active concessions were permitted to remain, but all future exploration and development was to be established under Association Contracts between ECOFETROL and the private sector. In fact, 12 concessions are still outstanding, and these begin to revert to the State in 1988. Some 86 Association Contracts are now in force. The country has been a modest crude oil exporter in most years of the history of the petroleum industry in Colom- bia, but in 1976, just at a time of high world oil prices, the country became a crude importer and this was the case utntil 1986. Crude exports in 1986 and 1987 are expected to be about 93 kB/d and 162 kB/d, respectively. The foregoing synopsis of Colombia's fortunes in the area of oil supply and oil exports helps to explain some of the principal supply issues considered in this chapter. The stop-go experience of oil discoveries followed by high production rates, in the light of inadequate policies to replenish reserves through exploration; suggests that the country could do better in the area of petroleum ex- port policy, and in oil exploration and development policy. Improvements could be made in the Association Contracts and various problems such as concession oil pricing could be solved. The role of ECOFETROL in 10 1  exploration and development could be more effective. Financial and other problems should be solved. 4.1.3 Oil Exports With regard to oil exports, the issue is to introduce a balanced oil export policy, which addresses a range of concerns; the possible stabilization of the balance of payments; the profitability, or not, of deferring exports; the need to sustain private sector risk investment, as well as the financial health of ECOPETROL. 4.1.4 New Refinery In 1986, the country will import some 20.6 kB/d of gasoline and export 51.1 kB/d of fuel oil. In addition the Base Case forecast shows both these amounts to be on the increase. This raises the issue whether a new domes- tic refinery should be built for the early 1990s. 4.1.5 Integrated Petroleum Policy All of these issues interrelate and the overall thrust of the strategic options in this chapter is the requirement for an integrated petroleum policy (as part of an energy strategy). In particular, this raises the additional issue of appropriate fiscal revenue transfer mechanisms, that has been discussed in Chapter 2; e.g. how should royalties be collected and to whom should they go -- ECOPETROL or directly to the State? While the com- plexities of fiscal transfer mechanisms are not examined in depth, a brief review of existing and forecast fiscal revenues from the petroleum sector is made, and a more detailed examination of this topic is recommended. 4.2 OIL DEMAND AND CONSUMER PRICES 4.2.1 Consumption Background, 1975-1985 During the past decade the overall demand for oil products has increased at some 2.6b per year, as shown below. This 102  has been considerably lower than the rates of the decade 1965-1975, which were in the 6% per year range. HISTOICAL OIL PDU DEM IN CONLIA IFINAL CUIR KEN PLUS ELECTRICITY SEERATION) 1975-1995 gowth 1975 1965 Rate li/d) (I per yer) Fhie Di1 20.8 3.7 -15.9 Koroumne .9 4.9 - 4.0 awolino S.E 67.9 4.1 Diul 16.7 29.1 4.2 LP 5.2 10.1 4.9 Other 11.A 1J.4 3. TOTAL 123.7 151.0 2.0 Crude Oil buri dirfKtly - 9.3 TOTAL 123.7 160.3 2.6 The slowing down of the growth in the use of oil products has come from increased real consumer prices; policies to reduce the use of fuel oil through substitution by gas in the thermal power plants on the Atlantic coast and by some coal in industrial uses; a decline in the use of kerosene for lighting purposes as a result of electrification programs, and since 1982 by the economic recession. The main transportation fuels, gasoline and diesel, have both increased at slightly more than 4% per year. The predominance of the use of gasoline --accounting for some 65% of transportation fuel demand-- is unusually high for a country with the level of income of Colombia. Since 1980) gasoline and diesel prices have been at the same level making the use of gasoline for lighter vehicles an obvious choice. In addition the large bus systems in BogotA. Medellin and Cali use gasoline rather than diesel. It is argued that gasoline is a more efficient fuel be- cause of the high altitudes at which the majority of transport-miles are driven. The main uses of diesel are by heavy tanker-truck fleets such as those used by the oil industry for hauling crude and by truck fleets for inter- municipal freight transportation. Negligible quantities of LPG are used in transportation and one experimental fleet of 10 buses in Cartagena and Barranquilla is using compressed natural gas (CNG). The high increase in the use of LPG (supplied mostly from the refineries) has been mainly in residential markets, pr-imarily in BogotA and an the Atlantic Coast but also in 1 0:.  Medellin, Manizales and Cali. Lastly it may be noted that the use of cocinol, a low grade gasoline which is heavily subsidized and used mainly as a cooking fuel in the poor districts of Bogota, has remained about level at some 3 kB/d. 4.2.2 Oil Product Price Background 1975-1985 For many years consumer oil product prices have been regu- lated by the government. Prices for each product are set by the Ministry of Mines and Energy, usually as of Decem- ber of each year. ECOPETROL controls and operates the nation's three refineries and is responsible for supplies of all oil products, either ex the refineries or imported, for provision to the distributors. There are four main private sector distributors (ESSO, TEXACO, SHELL, and MOBIL) and ECOPETROL itself distributes products through its five regional subsidiaries of the TERPEL group. Since 1975 there have been two broad periods of price ad- juLstments, responding with some delay to international oil price movements; first, in the period up to 1980 the real price of regular gasoline, which is used by the government as a guideline in setting prices of the other products, was increased some 22% per year on average. However since December 1980 the real pesos price has declined about 2% per year. REULTED OMW PRICES W MIN .TRUE PIKUUCTS (Cols DC U/SA) 1970-1935 Fuel Oil (1) 30.3 60.4 47.0 Reular Bksoline 36.8 9.1 89.1 Siel 3 34.7 9.1 89.1 LPS (20 lbs) 53.1 Cocinal 25.9 22.7 13.0 Custilla Crude (1) - 32.2 32.9 (1) Exclusive of transportation delivery costs Notei CoWl 143/ US$ in While the direction of domestic price changes has followed international oil prices, the delays in adiusting to world price conditions have placed a tremendous and unpredict- able financial burden on ECOPETROL. In 1985, for example, the estinated subsidy on gasoline was about US$ 14/B. These subsidies and those on other oil products were (:)4  implemented, in effect, through financial transfers from ECOPETROL to consumers of oil products. The total sub- sidies of this kind in 1985 amounted to some US$ 690 mil- lion. which was a factor in contributing to ECOPETROL'S financial losses in that year --and therefore accentuating its difficulties in raising international funds. 4.2.3 Forecast of Oil Product Prices, 1986-2000 The level of consumer prices (except for Cocinol) in mid- 1986 is fortuitously close to the desirable level, given the existing taxes and distribution margins --conSLumer prices on average are slightly less than oil product op- portunity values (international prices, plus distribution margins) plus consumer taxes-- and on the average of all products ECOPETROL receives some US$ 13.90/B ex the refinery which is about US$ 1.10/B less than would be in- dicated by the price conditions of present (Aug 1986) in- ternational oil markets. Oil Product Price Structre IColS/lal) 196 Cut&wr listributim Reu to Product P ig M Nin EETL Fuel oi1 52.15 046 0.51 50.99 Keroeme 107.00 1.48 9.00 96.52 Re. 6kuolino 107.00 34.17 7.37 65.46 Dilel 107.00 27.46 9.13 70.41 LPI up to 5.% 4.01 40.36 Othwrs IX) .1J (ilL Il AYERAE (1) (1) (1) 62.78 Equivalit to UM 13.96/3 11) The other catoery covrs soa 151 of salel The LPG ctmer price dseds ou cylinder sie or tunkir load. The average reveuue to ECMOL is wighted by euport sales of fuel oil. Note. Colu 10/ US in 19. The main tax, on the transportation fuels, is the Road Tax (Fondo Vial) which is $ 26.49/gallon on motor gasolines and diesel, equivalent at present to some 25% of the con- sumer retail price. Other taxes, which at most amount to 7% of product price, are small or negligible. Therefore, the full rate of tax on transportation fuels is close to 30%, but the average tax rate on all products is some 167., considerably lower than most other less Developed Countries (LDC), and much lower than in the countries of Europe and Japan, for example. The Base Case oil product price forecast, shown below, provides for a further real price decline of 2% per year 105  in 1986 and 1987, but thereafter domestic oil product prices are assumed to follow international oil prices, as forecast for the Base Case. Consequently, after a small further decline in 1986 and 1987 real prices are assumed to stabilize until 1990 and then increase at 2.5% per year through the 1990s. FOIECMT OF CONIER PRICES WF NAM OIL PROUCT8193-20 m r 12L ln 20 Fuel Oil 52.2 50.2 54.3 44.3 A". ksolit. 107.0 103.0 114.0 132.0 3i.l 107.0 103.0 114.0 132.0 LPB (20 lbk) U5.9 43.4 71.7 31.2 CoKinl 13.0 12.5 14.1 14.0 Castilla Crude 36.7 35.3 39.9 45.2 4.2.4 Forecast of Oil Product Demand, 1986-2000 The Base Case forecast of oil product demand for the next decade has a growth rate of 3.3X. per year, in contrast with the historical growth of some 2.6x. per year in the period 1975 to 1985. The forecast rate of oil product demand is about one percentage point less than the forecast rate of growth of the economy (GDP). FOlECT OIL PROW NWW IN COlIA (FINAI CuN11R KM PUS ETRICITY IERTIO) DEMAND I A OTH RT I E 9 Iva 1990 199 2000 %4- 0 14- S4-2000 liB/0) 1T pr W ar) Fuel Oi1 2.9 0.7 5.7 12.0 -30.0 7.1 10.7 Kerosmue 4.9 5.1 5.4 5.4 1.0 1.0 1.0 Bwling 90.4 107.0 129.0 153.3 4.3 4.0 3.B ie 1 29.1 34.1 41.4 50.3 4.1 4.0 4.0 LPS 10.4 11.7 13.4 15.7 3.0 3.0 3.0 Other 17.7 20.4 23.1 25.2 3.4 3.0 2.4 TOTAL 155.5 179.0 211.2 242.1 3.4 3.8 3.3 CruDi Oil burned directly 11.0 15.0 12.5 9.1 .1 1.4 -1.3 TOTAL 164.5 194.0 230.7 271.2 4.1 3.3 3.6 Gasoline demand grows at 4.0 per year, similar to diesel, in the period to 1995, and both products increase slightly more slowly than in the past decade. 10/:6  Fuel oil for industrial uses continues to decline until 1990 but in the Base Case it is assumed that this trend reverses in the early 1990s because the supply of Castilla crude is limited by a lack of economic incentives due to low oil prices and the terms of association contracts. However, the reserves of this crude, which are about 150 million barrels and the current high reserves to produc- tion ratio of some 30 years, suggest that a better alter- native to the base case projection would be to avoid fuel oil resubstitution through improvements in the economics of Castilla crude supply. Another alternative, discussed in Chapter 6, considers the substitution of coal for either fuel oil or Castilla crude. Generally the picture for the future is one of moderate and fairly balanced growth in domestic oil demand. 4.3 OIL SUPPLY 4.3.1 Ultimate Recoverable Reserves Since oil production started in Colombia in the early year- of this century, the Middle Magdalena basin has been the principal producing oil province of the country. Together with the Upper and Lower Magdalena, the Magdalena basins are still forecast to contain the greatest quan- tities of recoverable oil reserves. In these basins and in the basins of Putumayo, Catatumbo and Llanos, suffi- cient exploration has been undertaken so that reasonable estimates of ultimate recoverable reserves can be made, as shown below. MINATEW IFLTIITE MCOMWE RESS Porvedat Toeh 10K. IMs HiW~ _OT (a) h,d. huins 2240 t10 3300 htuaav 243 133 381 Catatwhe 424 100 524 Llnos AN -IM im TOTL 397 246 63 A total of some 3.9 billion barrels of recoverable oil have been discovered since the beginning of the industry and it is estimated that ultimate recoverable reserves are some 6.4 billion barrels, implying a potential for future discoveries of 2.5 billion barrels. It may be noted that the estimate of proved reserves prob- ably underestimates the real position of known reserves 107  because the reserves under concession contracts only in- clude those reserves that are likely to the produced during the lifetime of the concession. The newness of the Llanos discoveries also adds a measure of uncertainty to the estimates. 4.3.2 Depletion of Reserves The cumulative oil production up to 1986 shows that more than 70% of past production has come from the Magdalena basins and that the Magdalena and the Putumayo basins are estimated to be some 55 to 60% depleted. In contrast, the Llanos basin is virtually unexploited. The overall deple- tion is estimated at some 39% as shown below. ESTINATE OF TE ETEITW OF DEPEION OF NAIN DASII, AS AT DEC. 31, 1M DAE CAS Ultinte Pert Recoverabl Cmlative Buains Jul urnwn Productimn kcltedz (U) (1) Nablua" kilin 3300 1806 54.1 Ptutmyo 381 219 57.5 Catatuabo 524 410 79.2 Llmaoi 121 27 - TOTAL 639 2464 39.5 4.3.3 Remaining Recoverable Reserves The shift in producton capacity, away from the Magdalena basins to the Llanos, is shown by the distribution of proved remaining recoverable reserves; some 67% of the proved reserves, of about 1.4 billion barrels! are now as- signed to the Llanos. ESTIMATE OF PRED M POTENTIAL RES FOR POSSIBLE FUTUIE POD ICTON AS AT DEC. 31, 191 _UME CASE Proved Ruining eurwvt RKoverable to be 1 -i Rnervn DiKovwod -ML hod. Bauins 432 1060 1492 Putouayo 24 133 162 Catatubo 14 100 114 Llinas J1173 1190L IL TOTL 1443 2486 3931 1 08  The country's proved recoverable reserves, while adequate for domestic oil requirements for a number of years, are small in comparison with most oil exporting countries! and are only a fraction of total world proved oil reserves, which are some 700 billion barrels. 4.3.4 Potential Discoveries The estimated potential for future discoveries is 2.5 bil- lion barrels, about equally divided between the Magdalena basins and the Llanos. However, the forecast finding rates, in terms of reserves per well, are much higher in the Llanos than the other basins. The size of discoveries are also expected to be larger in the Llanos suggesting that the development economics for new reserves, given the existence of the Cano Limdn pipeline, should be more favourable in the Llanos than elsewhere. Although there is necessarily a high degree of uncertainty about potential reserves, particularly because of the relatively small number of exploration wells that have ever been drilled in the country, it does seem highly likely that potential reserves are at least as great as 2.5 billion barrels. Those quantities, however, may not be realized exactly as forecast from each basin. There are also new basins to be explored. The cumulative number of wildcat exploration wells that have been drilled in the productive basins is only about 800. In comparison, some 3000 exploration wells have been drilled in each of Venezuela and Brazil, but only some 400 have been drilled in each of Bolivia and Ecuador. The Colombian situation would appear to be a middle case -- explored at an average level for a country of its type. IISTORICAL ERIPMTIUN MILLINE IN MIN WIN. 1P To IC. 31. im Ilicat Aerage Proved Explwratiu Rnurvs Pr I-L . 1@1s Exoloratian 11e1 (No. if 11si (i"asi) Nadalua hsins U5 3.8 PutuNuo 47 3.4 Catatt*o 45 9.4 Llano IO -lL TOTAL ES 4.3 109  New basins which might receive more attention in the fu- ture are the Pacifico and Amazonas which unofficially have been estimated to contain some 800 million barrels of recoverable oil reserves. Those, however, have not been included in the Base Case forecast of discoveries, nor of exploration drilling. 4.3.5 Exploration and Development Drilling, 1979- 1985 Since 1962 there have been two distinct trends in drill- ing. Firstly there has been an upsurge in development drilling associated with improving oil recovery rates in the Magdalena basins, and secondly, since Occidental Petroleum began its exploration program in 1980 that led to the discovery of the Cano Lim6n field in 1983, there has been a high level of exploration drilling in the Llanos, averaging some 21 wells per year in the 5 year period, 1981 - 1985. In 1986, a total of 25 exploration wells have been spudded so far in the Llanos. EIPLMATIN XH RILLIE1. 197f-1916 (Nro. of WI Is) in 190 ~I" 12 1m 1S Ali Part-weI EME 0l la iz EDb atE -a JR if AtE JR At AmE At JR 1qdalna 12 56 25 90 42 10 35 141 20 201 22 216 31 265 5b12 htumyo - - - - 1 2 4 2 - 3 1 5 - 10 - 7 Catatubo I - 3 - 3 - 4 - I - 2 - I - 2 - lams 4 2 4 1 21 - 31 5 10 & 14 9 29 14 25 12 Othes a 1 a 11 I I - - 3 -13 : -.M- _: ': TOTAL 24 4482 73111 79151 34 213 41 230 1 291 32 11 I INUE ECIML, AUIATIN "l CS