Colombia - Rural Transport Sector Project

Do_m of The World Bank FOR OMCIAL USE ONLY , 2 &^ 2COg - CD3 Report No. P-4211-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$62-0 MILLION TO FO-NDO NACIONAL DE CAMINOS VECINALES (FNCV) WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE RURAL TRANSPORT SECTOR PROJECT February 27, 1986 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Colombian Peso (Col$) ColSi = 100 centavos (ctv) Col$168.32 = US$1 (December 10, 1985) ColSl million = USS5,941(December 10, 1985) AVERAGE EXCHANGE RATES ( ColS/USS) 1980 1981 1982 1983 1984 1985 47.3 54.5 64.1 78.9 100.8 142.3 ABBREVIATIONS CIDA Canadian Interaational Development Agency mNR Colombian National Railways COLPUERTOS Colombian Port Authority DAAC Civil Aeronautic Administrative Department DNP National Planning Department FNCV National Rural Roads Funds FONADE National Fund for Development Projects FVN National Highways Fund IDB Inter-American Development Bank INCORA Colombian Institute of Agrarian Reform M4OPT Ministry of Public Works and Transport SENA National Service of Traineeship USAID United States Agency for International Development Fiscal Year January 1 to December 31  FOR OFFICIAL USE ONLY COLOMBIA RURAL TRANSPORT SECTOR PROJECT PROJECT SUMMARY Borrower: Pondo Nacional de Caiminos Vecinales (FNCV) Guarantor: Republic of Colombia Amount: US$62 million equivalent Terms: 17 years, including four years of grace, at the standard variable interest rate. Project The project objectives are to: (i) support the Government's Description efforts on agricultural development, diversification and and Benefits: export promotion, and to integrate less developed areas into the mainstream economy; (ii) improve efficiency and reduce costs of rural transport; (iii) upgrade FNCV's institutional performance; and (iv) develop, on a pilot basis, more efficient conditions for small-scale water transportation in a selected coastal area. The project consists of a subsector operation supporting FNCV's 1986-1992 Investment and Maintenance Program and comprises construction, deferred and periodic maintenance of rural roads, improvement of minor waterways, equipment procurement and technical assistance for institutional upgrading and preparation of a study on departmental road maintenance. Specific work programs for financing under the loan would be selected annually out of FNCV's program, in accordance with agreed criteria. Major benefits are expected from value added to agricultural produc- tion and lower rural transport costs. Direct beneficiaries would be: (i) small farmers, for whom access to markets would be improved and modernized; and (ii) the isolated communities in the Pacific coastal region, for which small scale water transportation would be made safer :ind cost effective. Risks: The project faces no major technical risks. Other risks are related to FNCV's relative inexperience with construction and rehabilitation of minor waterways, the possibility of slow implementation of measures to improve FNCV's institutional efficiency and timely availability of counterpart funding. Strict monitoring of the waterways and technical assistance components is deemed sufficient to keep these risks at accept- able levels. Consistent availability of counterpart funding, which had been a recurrent problem in the previous project with FNCV, is being dealt with in this loan through specific arrangements to ensure timely release of counterpart funds through a project account mechanism. This document has arestricted distrbution and may be used by recipients only in the performance of I their ofrca duties. Its contents may not otherwise be disdosed withouL World Bank authorization.  - ii - Costs and The total cost of ?NCV's Program is estimted at US$362 million Financing: equivalent with a foreign exchange componet of US$182 millioa equiva- lent. The proposed loan of US$62 million would finance 172 of the total Program and 34X of its foreign exchange compoaent. FNCV's Investment and Maintenance Program 1986-1992 and the Bank Project ic current USS milion equivalent) FNCV 1986-1992 Program Hank Project Total Local Foreigp Total Local Foreign Investments 123.0 63.7 59.3 33.0 15.4 17.6 Maiatenance, of which: 137.5 75.9 61.6 44.1 20.7 Deferred and Periodic 1O09.5 56.2 53.3 44.1 23.4 20.7 Routine 28.0 19.7 8.3 - - - - Equipment 9.6 0.8 8.8 7.1 0.6 6.5 Technical Assistance 1.0 0.5 0.5 1.0 0.6 0.4 Base Cost 271.1 140.9 130.2 85.2 40.0 45.2 Contingencies 90.8 39.2 51.6 27.3 10.5 16.8 Total 361.9 180.1 181.8 112.5 50.5 62.0 Financing Plan: FNCV 223.9 171.7 52.2 50.5 50.5 - IDB Loans 20.4 - 20.4 - - DRI Program 22.4 8.4 14.0 - - IBRD Loan 1966-CO 8.4 - 8.4 - -- Proposed Loan 62.0 - 62.0 62.0 - 62.0 Loans to be Arranged 24.8 - 24.8 - - Total 361.9 180.1 181.8 112.5 50.5 62.0 -_ - - = _ Disbursements 1987 1988 1989 1990 1991 1992 1993 (-- IBRDFY in US$ million) Annual 6.0 10.0 12.5 12.0 10.6 7.6 3.3 Cumulative 6.0 16.0 28.5 40.5 51.1 58.7 62.0 Economic The coastruction and deferred maintenance components of the annual work Evaluation: programs would be evaluated according to agreed economic and technical criteria and yield a minim=m 12% economic rate of return. The periodic maintenance component of the annual work programs would be approved based upon technical evaluation of road conditions, population served and traffic level. The estimated ERR for the road construction, deferred maintenance and canals included in the first year work program is 212.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FONDO NACIONAL DE CAMINOS VECINALES (FNCV) W-Tli THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A RURAL TRANSPORT SECTOR PROJECT 1. I submit the following report and recommendation on a proposed loan to Fondo Nacional de Caminos Vecinales (FNCV) with the guarantee of the Republic of Colombia, for the equivalent of US$62.0 million to help finance a Rural Transport Project. The loan would have a term of 17 years, including four years of grace, with interest at the Bank's standard variable rate. PART I - THE ECONOMY 2. An economic mission visited Colombia in July 1982 and its report (4444-CO) was distributed to the Executive Directors in August 1983. A mission to review the external sector and agriculture visited Colombia during April/May i1983, and its report (4981-CO) was distributed to the Executive Directors in April 1984. Macroeconomic policies were also reviewed in the President's Report (P4055-CO) for the Trade Policy and Export Diversification Loan of May 2, 1985. Country data sheets are presented in Annex I. A. Background 3. The Colombian economy has made considerable progress since the early 1950s, evolving from a largely agricultural and rural base, integrated and industrialized, into one that is more open. The growing economic activity, rapid rural-urban migration, increased participation of women in the labor force, and expanded public services have contributed to reductions in poverty and improvements in income distribution. Financial and capital markets have evolved pari passu with the growing needs of the economy, and the country has become an active participant in international capital markets. The state enterprises are few, follow adequate pricing policies, and many have some form of private sector participation. The country's energy balance has been changing in recent years and the country is expected to become a net petroleum exporter in 1986 and, increasingly, an exporter of thermal coal. 4. Export promotion has been a concern of the Colombian authorities for some time. Beginning in 1967 authorities adopted an outward-looking development strategy, expanding and diversifying exports. Export promotion policies, including frequent small devaluations of the peso, export tax rebates and other incentives were introduced and the authorities began lower- ing tariffs somewhat and relaxing capital market controls as a means of raising efficiency and increasing the profitability and competitiveness of Colombian goods in external markets. These measures were successful in relieving the foreign exchange constraint and stimulating growth and employment.  'R. Economic Performance During the 1970s 5. In the mid 1970's, the economy was subjected to strong inflationary pressures from a sharp increase in world coffee prices. The increased receipts from coffee exports, together with some official surrender of foreign exchange from illegal exports, caused a turnaround in-the balance of payments. Iacomes rose rapidly stimulating aggregate demand, and inflation accelerated. Economic growth also rose, and unemployment fell substantially in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 1% of GDP during 1976-73 and, by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to about 12 months imports of goods and non-factor services. 6. While beneficial in many respects, the foreign exchange boom had some negative effects. The rate of currency devaluation was slowed and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with adverse effects on non-coffee exports. The Government also sought to check inflation by maintaining high reserve requirements and expanding controls over credit thereby reducing, in real terms, the financing available to the private sector through the official capital market. 7. The 1977-79 economic program was partially successful in restrain- ing aggregate demand growth, but relatively high inflation persisted. In response to increasing restraint on aggregate demand, troublesome financial market distortions, and disincentives to non-coffee exports from the exchange rate appreciation the authorities began in late 1979 to adjust the program. The rate of peso devaluation was advanced somewhat, and in early 1980 credit restraints were relaxed. At the same time, interest rates on certificates of deposit-and on lending therefrom--were freed from controls. To offset the inflationary effects of these measures, the authorities further liberalized import payments and adopted the policy of not expanding the subsidized selective credit operations of the Central Bank in excess of the resources captured from private savings for this purpose. Real GDP growth decelerated to 4% in 1980 from an average of almost 6% since 1960, unemployment started to creep up, and inflationary pressures continued. C. Recent Economic Developments 8. During 1981-83 the economic situation took a turn for the worse in part on account of external factors, with real GDP growth slowing down to 2.3% in 1981 and about 1% on average in 1982-83. Agricultural output was hard-hit as a result of low international prices, reduced input use from declining profitability and adverse weather. Industrial activity deteriorated on account of depressed aggregate demand, and unutilized capacity continued to increase, particularly in manufacturing. Unemployment reached almost 14% of the labor force at the end of the year, up from about 7% at the end of 1981. Inflation, however, slowed down in 1983 to a 20% average for the year, down from 28% in 1981 and 25% in 1982. 9. After experiencing a surplus for six years, a deficit of about US$1.4 billion emerged in the resource balance in 1981 and increased to average about US$1.8 billion in 1982-83. These deficits resulted mainly from a drop in exports in real terms: in addition to domestic factors, major reasons were the slowdown in world demand, major devaluations and import  restrictions in neighboring countries, and the reduction in Colombia's coffee exports from their previous high levels. Net foreign exchange reserves declined by about US$1.8 billion in 1983 to about US$3.1 billion, equivalent to about six months of that year's imports of goods and non-factor services. On the fiscal side, a slowdown in revenue growth, together with increased current expenditures resulting from a system of automatic transfers to departments and municipalities and large infrastructure investments in energy and transport led to growing deficits: the overall Central Govertment cash deficit grew from 2.1Z of GDP in 1980 to 4.1X in 1983, while that of the consolidated public sector rose from 3.6% to 7.0X. 10. In 1983 the Government introduced policies to stimulate aggregate demand, and expand non-coffee exports. The rate of peso devaluation was accelerated; the housing construction industry was provided with incentives to mobilize more resources; and selective credit to the productive sectors was expanded. Temporary import restrictions were introduced for balance of payments stabilization in addition to measures to reduce the fiscal deficit and ease distortions in the financial system. These efforts were insufficient to reverse the deteriorating trends particularly in light of the tight international capital market. Colombia, unlike other Latin American countries, has not had a debt problem because of the high share of official debt in total debt outstanding and the term ctructure of such debt. Nevertheless, the Latin American debt problem produced a reduction in the credit lines available to Colombia and difficulties in obtaining medium-term loans needed to complete ongoing projects, which contributed in turn to further declines in foreign exchange reserves and to strains in the financial system. 11. During 1984-85 Government policy began to focus increasingly on: additional revenue and expenditure measures to contain the fiscal deficit and monetary expansion; acceleration of the exchange rate devaluations, further increased incentives to exports; measures to improve the profitability of the commercial banking and to resolve the external debt problems of the private sector. The policy reforms began to take hold during the second half of 1984. Real GDP growth increased to 3.1Z, the unemployment rate fell to 13% of the labor force at year's end while inflation was brought down to 16.4X on average in 1984. Merchandise exports grew at about 12%; the current account deficit in the balance of payments was reduced by about US$l billion to over 5% of GDP, and reserves remained at about US$1.f billion at year end (four months of 1984's imports of goods and n.f.s.). The policies were deepened in 1985 producing a sharp and sustained adjustment thus far. The current account in the balance of payments registered a significant improvement in 1985 declining to a deficit of nearly 4.0% of GDP. Inflation remained under control at less than 23%, while economic growth continued at a modest rate below 3%, although the unemployment rate remains higher than in recent years. In contrast to a US$1.3 billion fall in 1984 and a projected fall of US$50 million in 1985, net reserves increased by US$267 million in 198S. D. Growth and Balance of Payments 12. With further policy improvements during 1986-87, Colombia's growth prospects for the rest of the decade would be good. At this stage, projections are made difficult by the recently emerging international coffee situation which could mean a foreign exchange boom for Colombia in 1986, depending on the severity of production shortfall of coffee in Brazil. Although the following forecasts do not take into account these  possibilities, preliminary calculations suggest that the medium-term scenarios would not be affected substantially: 1986--and possibly 1987-how- ever, would witness a greater reserve accumulation and increased debt repay- ments than envisaged below. The current account deficit of the balance of payments was projected to average about US$1.3 billion per year during 1985-86 (equivalent to less than 4% of GDP). The deficit was projected to be financed by increasing disbursements of existing and new public and private sector loans and by direct foreign investment. By the end of this period, net official international reserves would have been maintained at a level of about four and a half months of 1986 imports of goods and non-factor services. Total investment would have to be maintained at over 18.5% of GDP to complete energy and mining projects; and to avoid too large an increase in foreign indebtedness, gross domestic savings would need to average about 18% of GDP compared to 16.4% during 1981-84, with the public sector generating a significant part of the additional savings. Beyond 19B6, real GDP growth should resume at near historical rates, over 4.5% per year on average. The current account deficit should also improve rapidly fro,m 1987 on as a result of increasing export proceeds from new non-traditional exports (particularly crude petroleum and coal), declining to some 1.6% of GDP by 1990. 13. Total gross external medium- and long-term capital requirements (including the private sector) are projected to total about USS5.6 billion for the 1985-86 period. Net foreign investment is expected to account for US$750 million during 1985-86, most of which would be to complete existing energy projects. About US$3.9 billion is expected from multilateral, bilate- ral and other sources, while about US$1 billion will be the new money needed from commercial banks mainly to complete petroleum and coal projects for export. At the end of 1984, Colombia's public and publicly guaranteed medium- and long-term external debt, disbursed and outstanding, amounted to US$8.0 billion (22% of GDP). The Bank/IDA share of this external debt i.e. excluding non-guaranteed private was 22.8% which is expected to reach less than 25% by 1986. The public debt service ratio in 1984 was 23.5% and is expected to peak at about 30% in 1987 and then decline gradually to below 30% in 1990. The World Bank's share in M&LT public debt service (excluding non- guaranteed private) is expected to be less than 24% during 1985-86. With sound economic and financial management and the development of new export activities, Colombia is expected to maintain its creditworthiness through and beyond the 1985-90 period. PART II - BANK GROUP OPERATIONS IN COLOMBIA 14. The proposed loan, the 117th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$5,091.2 million (net of can- cellations). Of this amount the Bank held, as of September 30, 1985, US$3,758.3 million; IDA made one credit of USS19.5 million for highways in 1961. Disbursements have been completed on 72 loans and the IDA credit. Before 1979, disbursements averaged US$86 million equivalent per year, but had increased to US$286 million in FY84 and to US$591 million in FY85, reflecting in part the higher level of commitments in the late 1970s and efforts to build the pipeline. While disbursements in Colombia have been slower than those recorded in the Latin American Region for similar projects, concentrated efforts to overcome problems to initiate project execution have resulted in a significant increase in disbursements during FY84 and FY85. Improving performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures and  -5- the effects of the recently-introduced fiscal reforms, which should improve counterpart funding, all point to a higher level of disbursements in the future. IFC has made investments and underwriting commitments of US$144.2 million in 29 enterprises and as of September 30, 1985, it held US$67.3 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of September 30, 1985. 15. Since the initial loan in 1949, Bank lending to Colombia has become quite diversified. Although through the mid-1960s, 882 of the loans made were for power or transport, since then the Bank has broadened its participa- tion in lending for agriculture and industry, and initiated lending for irri- gation and watershed management, education, water supply, telecommunications, urban development, petroleum development, export diversification, nutrition and health. By the late 1970s, 53Z of the loans made to Colombia were for projects other than transport and power. Of the loans made since 1978, 36% were for power and transport, 15% for industry, 17% for agriculture and irri- gation, 10% for water supply, 6% for urban, 4% for telecommunications, 2% each for petroleum development and export diversification and 8% for educa- tion, nutrition, health and multipurpose projects. The diversification was indeed a desirable aim as it helped provide close contact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's role can only be a marginal one and, thus, to enable lending to be focussed upon sectors in which the Bank's presence can have a meaningful impact. 16. The Bank's dialogue with the Government has focused upon the need to mobilize additional domestic resources, to diversify and expand exports, to develop rapidly the country's energy resources, and to free the economy from excessive controls. The discussions involved fiscal, interest rate and pricing policies, as well as incentives for exports and reduction in the level of effective protection. Positive results have been obtained particu- larly in the power sector, where power rates were increased sharply and a least-cost expansion was formulated and launched. Similar results have been achieved in respect of some other public services, including appropriate charges for water for irrigation and domestic use and petroleum prices. 17. The Bank has been supporting the Government's efforts to increase economic growth and exports with financial stability, raise utilization of domestic energy sources, provide key infrastructure, and improve the living conditions of the poor. More recently, in response to Colombia's adjustment process the thrust of the Bank's support has shifted towards loans to finance directly productive activities, such as agriculture and industry, support efforts to raise productivity, income and employment, increase and diversify exports and help develop renewable sources of energy tbrough lending for hydropower and arranging associated cofinancing. Loans recently approved by the Board and in advanced stage of preparation reflect the emphasis on: (i) increasing output rapidly; (ii) reorienting production towards exports and efficient import-competing goods; (iii) supporting quick-yielding infrastruc- ture investments, particularly those that enable the use existing facilities more intensively; and (iv) increasing resource mobilization.  -6- 18. The Bank's lending in FY85 consisted of loans for agricultural diversification, small-scale industry, petroleum. development banking, water supply and sewerage and trade policy and export diversification totalling US$707.5 million. The trade policy project is designed to support the first phase of trade policy adjustments in Colombia. In addition to the loan presented in this report, the current program includes the already approved loans for public health, port rehabilitation, electricity distribution and water supply along with the loan for irrigation rehabilitation, also presented today, and the soon to be presented trade and agriculture policy loan. Work is underway on projects for agricultural technology transfer, energy and power sector development, and financial and public sector management. In infrastructure, the Bank is stressing rehabilitation, modernization and a more intensive use of the existing facilities in ports improvement, water supply and highway maintenance. Finally, several projects in preparation will also support the Government's efforts to help the poorer segments of the population. Proposed lending for further rural development, agricultural credit, and water supply and waste, will help improve the standard of living of the poor, while being designed to make better use of existing capacity and reduce losses. 19. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB and bilateral sources provided about 75% of total external financing to Colombia in the 1961-72 period, their shale has decreased since then to some 49% for the 1975-82 period and is expected to decline further to about 40% of external capital requirements during the eighties. IDB has given increased emphasis to energy-related projects, in addition to those for low-cost housing, urban and rural development, agrarian reform, university education, water supply, rural electrification and land erosion control, which are aimed at improving living standards of the lower- income population. In the future, it proposes to assist Colombia in develop- ing sources of domestic energy and in expanding productive sector activities to help generate increased employment. USAID has supported programs in education, rural development and small farm development, but is phasing out its program in Colombia. The Government of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for basic needs and regional integration projects. PART III - THE TRANSPORT SECTOR Characteristics 20. Colombia's advantage of having coast lines on both the Pacific Ocean and the Caribbean Sea is largely offset by the difficulty of movement between the coasts and the interior. The three massive ranges of the Andean Mountains running the length of two-thirds of the country present formidable obstacles to communication among its main population centers, which, until recently, developed as separate and somewhat isolated regions. The Magdalena River, until che mid-century, provided the only overland route between the Central region and the Caribbean coast and, even so, with serious navigation- al problems during the dry season. In the 1950s, however, under a drive toward integration and modernization, the transport system began to evolve into a national network. The development of the country's railways, trunk highways and civil aviation has greatly improved inter-regional communication and national integration.  -7- 21. The effort to establish the basic transport infrastructure absorbed a considerable proportion of the country's public investment. Transport rep- resented about half of the Central Government's investment in the late 1950s. More recently, with the basic infrastructure in place, transport's share has declined, and, since the late 1970s, it has been around 13%. In 1984, the transport sector accounted for some 8% of the GDP, compared to about 52 in 1950. In the same year, the country's domestic surface transport system moved 25.4 billion ton-km of freight, of which 88% by road, 5% by inland navigation, 4% by Loastal shipping and 3% by railways. Roads and aviation dominate passenger traffic, accounting respectively for 71% and 27% of total demand, estimated at 17,250 million passenger/km in 1984. Infrastructure 22. Colombia has a road network of about 100,000 km (10,500 km paved), of which 25,100 km comprise the national highway system, 48,500 km are departmental roads and 24,400 km are rural roads. Nearly 2,000 km are private roads used mainly for timber and mining operations. The planning, construction and maintenance of the national roads network are performed under the Ministry of Public Works and Transport (HOPT) through its National Highway Fund (FVN) and National Rural Roads Fund (FNCV), in charge, respec- tively, of the national highways and the rural roads. The Departments con- struct and maintain their own roads through their Secretariats of Public Works. In practice, however, departmental road maintenance is generally poor and varies considerably from department to department. 23. The railways system consists of 3,403 km (2,822 km currently in service) of single track narrow gauge (0.914 meters) lines administered by the Colombian National Railways, a semi-autonomous state-owned agency. The trunk line between the Caribbean port of Santa Marta and Medellin-Bogota in the central highlands is 1,287 km long and carries over 70% of the total railway traffic. The Pacific line (187 km) serves only the Department of Valle, connecting the port of Buenaventura to the city of Cali. 24. The Magdalena and Cauca rivers, together with the man-made Canal del Dique (connecting the Caribbean port of Cartagena with the Magdalena river), constitute a major transport system totaling 1,366 km of navigable waterways, which account for almost all inland hipping. The traditional importance of inland waterway shipping, however, has decreased with the development of road and rail transport; the remaining river traffic is mainly hydrocarbons and other bulk commodities, such as cement and fertilizers, which originates at, or is destined for, the ports of Cartagena and Barranquilla. River transport moved about 2 million tons of freight in 1984, roughly the same volume as 30 years ago. Administration and maintenance of inland waterways are under the jurisdiction of MOPT. Freight services are privately operated. 25. Aviation in Colombia developed early in the 1920s, induced by the adverse topography and the inherent difficulties of surface transport. Air traffic is now a major passenger transport mode for both international and domestic traveling. There are presently in the Colombian territory 70 airports whose standards vary widely. Seven of the airports in mainland Colombia and one on the Caribbean Island of San Andres are equipped for irternational flights. Aviation is governed by the Administrative  - 8- Department of Civil Aeronautics (DAAC), which is directly responsible to the President of the Republic. DAMC is financed by the National Aeronautics Fund (FAN), whose revenues originate mainly from user charges. 26. Shipping supports most of Colombia's foreign trade. Empresa Puertos de Colombia (COLPUERTOS), the national port authority responsible to MOPT, controls all the public ports, namely Buenaventura and Tumaco on the Pacific coast, Cartagena, Barranquilla and Santa Marta on the Caribbean Coast and Leticia on the Amazonas River. Total traffic at the public ports amounted to 9.7 million tons in 1984. Most of Colombia's seaborne trade is, and will likely remain, with the U.S., the industrialized European countries and Japan. Transport Planning, Coordination and Investment 27. MOPT is responsible for sector planning, including the preparation of the National Transport Plan, which defines the role of individual trans- port modes based upon demand projections in each subsector. The National Transport Plan also outlines investment programs and the corresponding financing sources for each subsector. The objectives of the Plan are formu- lated and updated periodically in accordance with the broader goals estab- lished by the National Planning Department (DNP) in the National Development Plan. DNP also coordinates with MOPT and the subsector agencies the program- ming and budgeting processes for investments in all transport modes, except pipelines, which are the responsibility of ECOPETROL (the national petroleum company). 28. The current sector policies, largely shaped to accommodate the transport investment needs with the constraints arising from the reduced inflow of external resources, the tight fiscal situation and the macro- economic priorities being addressed in the country's economic adjustment pro- gram, emphasize rehabilitation and maintenance of existing infrastructure and equipment, motor fuel substitution, transport safety and intermodal coordina- tion to reduce transport costs and improve efficiency. They also call for investment policies consistent with supporting productive and external trade oriented activities and cost-based pricing policies to mobilize resources through recovery of investments. 29. The overall sector financing has showed in recent years a somewhat stable combination of (a) operating revenues (38%); (b) earmarked taxes on oil products (35%); (c) budgetary contributions (13%); (d) domestic and external credit (7%); and (e) other sources (7%). Overall, sector funding policy emphasizes financial self-sufficiency for each subsector. In prac- tice, however, its implementation has been weakened, particularly in the case of the railways (which have had to resort to budgetary contributions to finance operating deficits caused by declining and operational efficiency) and the existing cross-subsidies between freight and passenger tariffs in the railways, user charges on light and heavy vehicles in the highways and import and export tariffs in the ports. These issues are in the core of the ongoing sector dialogue and are being addressed at the operational level in the con- text of the Bank loans for Railways Rehabilitation (2090-CO), Highway Sector (2121-CO) and Ports Rehabilitation (2635-CO). As to user charges in highways, a comprehensive study is being finalized (mid-86) under the ongoing Highway sector loan. An action plan to implemlent the recommendations of the study will be developed upon its conclusion.  -9- Fuel Pricing 30. Colombia has maintained in recent years a policy of annual in- creases in fuel prices to reflect corresponding opportunity costs. At the end of 1984, domestic prices of oil products were in line with the relevant international levels. However, the accelerated devaluation during 1985 (51X, compared to d 22.4% domestic inflation in the period) created a gap that will require more frequent price adjustments during 1986 to realign local prices to international levels. Following a 20.1% increase on January 1, 1986, regular gasoline and diesel are now priced at US$0.61 (equivalent) per gallon, thus about 132 and 20%, respectively, below equivalent international levels. If this difference is not offset by the current downward trend in international oil prices, a further increase should be expected in the course of this year. Fuel price developments in Colombia are being monitored through specific provisions in a Bank loan (2476-CO) to ECOPETROL. Rural Transport 31. The expansion of rural transport programs to isolated regions is a central theme of the Government's efforts to extend public services and to integrate less developed areas into the mainstream economy, increase agricul- tural productivity and raise income levels of small farmers. Over one third of th.i 27 million Colombian population lives in rural areas and depends upon agricuitural activities. Agriculture provides about a quarter of all the employment and accounts for 20% of the GDP and about 67% of the country's total exports. The activities of the several public agencies involved in making agriculture support accessible to rural communities are coordinated by DNP at the planning level and by the Ministries of Agriculture and Public Works and Transport at the implementation level. Fondo Nacional de Caminos Vecinales (FNCV) is the public agency responsible for the rural transport infrastructure. 32. Because the large transport programs to expand and modernize the road infrastructure during the last 30 years gave priority to developing the trunk highway system, rural transport in Colombia still remains relatively underdeveloped. Only in the mid-1970s FNCV started systematic implementation of rural road programs and since then transport access in rural areas has increased notably at an annual rate above 10%. Notwithstanding the almost trifold expansion of the rural roads network during the last decade, the importance of agriculture to the Colombian economy requires substantial addi- tional efforts to maintain and improve farm-to-market accesses. Fondo Nacional de Caminos Vecinales (FNCV) (i) Organization 33. FNCV was created in 1960 and until the early 1970s it functioned as a secondary entity in MOPT's structure. In 1972, FNCV was reorganized as an autonomous organization under MOPT, and charged with planning, construction, and rehabilitation of rural roads. It is directed by a seven-member Board in which the Ministries of Agriculture and Interior and the Federation of Coffee Growers are represented under the chairmanship of the Minister of Public Works and Transport. FNCV is managed by a Director General appointed by the President of the Republic. FNCV's staff of 2,230 includes 100 engineers,  - 10 - several economists and other specialized professionals. The institution enjoys a reputation for efficiency and sound management, which is confirmed by the good performance of the ongoing Rural Roads Project (1966-CO). FNCV has its main office in Bogota and 25 regional offices, located in each of Colombia's Department. FNCV's operational and fiscal audits are performed by the Controller General of the Republic. 34. Most cf the existing r(tral road system has been constructed either totally or partially by FNCV. The typical road is about 9 km in length, built to all-weather gravel standard with a riding surface 4.5 m wide. Civil works are usually contracted to small, local firms, which in general perform satisfactorily, and the quality of road construction works has been good. Only a minor portion of rural roads are built by force account using FNCV's relatively old equipment fleet (para. 36). Despite FNCV's overall good performance, insufficient planning and inconsistent availability of counter- part funds have occasioned interruptions and delays to the construction schedules in the recent past. FNCV's planning and programming capacity would be strengthened under the proposed project (para. 56(g)). 35. FNCV's Sub-Directorate of Engineering is responsible for the programing and execution of construction and maintenance activities (para. 38). It is composed of three divisions: Projects, Procurements and Contracts, and Construction and Supervision, which directly supervises works executed by the 25 regional directorates. The Sub-Directorate of Administration and Finance is responsible for administrative (personnel policies, training, staff assistance, purchase and supplies) and financial matters (formulation and implementation of budget, financial management, general accounting). It is composed of three divisions: Finance, Industrial Relations and Administrative Services. Among the supporting offices, the most important is the Planning Office, which is responsible for preparing FNCV's operational plans, coordinating the budget preparation process, evaluating implementation of plans and conducting special studies. FNCV has recently created an Organization and Systems Office to lend support to, and improve the performance of, the Planning Office and the Engineering Department. 36. FNCV's equipment fleet of 711 units is used for force account operations to complement the capacity of the construction industry, particu- larly in remote regions. It is characterized by the old age of most units (average 7.5 years) and by the variety of makes and types. Notwithstanding, FNCV's system of assigning to operators responsibility for basic maintenance of the equipment they use, and contracting external services for major repairs has proved efficient and its fleet is generally well kept. (ii) Rural Roads Activities a) Construction 37. Since the early 1970s FNCV has undertaken ten road construction programs that have added, to date, about 19,000 km to the rural roads network. Five of these programs constituted the major part of FNCV's activities in the period: (a) the Ordinary Program financed entirely with local resources, is the largest of FNCV's programs and consists of its regular and continuous activities of expansion and rehabilitation of the rural network. It has been gradually loosing its relative importance in  - 11 - favor of other programs with external technical assistance and financing, and was down to about one-third of FNCV's total investment program in 1984; (b) the IDB Program executed during 1970-1978, in which fifty secondary roads were successfully completed; (c) the Pico y Pala labor intensive program initiated in 1972 (1st phase), partly financed by the US Agency for International Development, which was extended in 1981 (2nd ongoing phase) with support from IDB; (d) the road component of the ongoing D-.I Program (Integrated Rural Development frogram I and II) with joint financing of IDB, the Canadian International Development Agency (CIDA) and the Bank (Loans 1352-CO and 2174-CO), which is expected to have completed about 900 km of rural roads by 1988; and (e) the ongoing Rural Roads Project (Loan 1966-CO), which will have constructed about 840 km and rehabilitated about 780 km by its expected completion in mid-1986. b) Maintenance 38. According to its statutes, FNCV's mandate had been to maintain thLe roads it constructed only until the time that the roads could be transferred to Departmental jurisdiction, and, accordingly, FNCV's focus and budget were oriented mostly to construction. However, because of the additional burden that rural road maintenance would bring to their limited resources, most Departments have been reluctant to take jurisdiction over the roads. FNCV has, there:ore, been compelled to assume greater responsibility for maintenance, but previous budgetary commitments have prevented a faster deployment of adequate amounts and physical resources to this task. FNCV estimates that resources made available in 1985 will permit proper routine maintenance of about 2,500 km of the network (10Z of the total) during the year, and further reorientation of priorities in the context of the loan proposed hereby will enable them to catch up in a few more years (paras. 52, 53). (iii) Financing and Budgeting 39. FNCV's activities are funded through a combination of (a) transfers from the National budget on account of earmarked taxes on oil products (53.1% of FNCV's 1985 budget), and special budgetary appropriations (14.8% in 1985); (b) own resources derived from contracts to build roads on behalf of Departments or other entities (2.7% in 1985), portion of the tax on beer consumption (1% in 1985) and nominal levies o- land improvements brought about by rural roads (0.2% in 1985); and (c) multilateral credits and bilateral aid (28.2% in 1985). 40. Although the major portion of the transfers from the national budget :" FNCV are binding through earmarking, the actual release of resources by Lb" Treasury has been in recent years inconsistent with the corresponding budget appropriations, which disturbed the programing of FNCV's investments, particularly the ongoing Rural Roads Project. The recurrent delays in releasing budgeted funds, largely due to the tight fiscal situation of the last three years, has hampered significantly FNCV's ability to comply with execution schedules. The project presented in the next chapter contemplates disbursement mechanisms for both local and loan funds (Project and Special Accounts) to minimize the risks of insufficient or untimely project funding (para. 68).  - 12 - Bank Involvement in the Sector (i) Background 41. The Bank has played an important role in the development of Colombia's transport sector. Its involvement dates back to 1949, when a transport sector mission reported the transport system to be in an exceptionally bad condition. Since 1950, the Bank Groupl / has invested about US$755 million in 26 operations in the sector. These investments supported the construction of an integrated highway network and, more recently, have contributed to the rehabilitation and maintenance of the national network and to the development of improved highway and rural roads organizations. They have also contributed to the construction of over 670 km of the main railroad line, as well as to the rehabilitation of other lines. A domestic aviation project helped to improve basic aviation infrastructure and subsector efficiency and planning. A ports rehabilitation project is helping to ensure adequate productivity and services of existing port infrastructure. The proposed project would be the second Bank intervention in rural roads transport. (ii) Sector Strategy 42. The Bank strategy for the transport sector emphasizes policy reform and institution-building objectives, including: (a) policies targeted at achieving a more balanced use of existing transport alternatives, through adequate price signals to consumers and improvements in marketing and distribution arrangements for key commodities; (b) equitable treatment of the transport modes, by pursuing cost-based pricing policies; (c) reduction of total transport costs, by improving modal interfaces and the efficiency of operations within each mode; (d) funding and expenditure mechanisms to reflect the costs of use of existing infrastructure and facilities; Ce) investment planning to give adequate priority to export development, agricultural diversification, and energy conservation and substitution, with emphasis on maintenance and rehabilitation programs; (f) further integration of the public planning, budgeting and programing processes and strengthening of the financial and personnel management practices of sector agencies; and (g) institutional and human resources development, through comprehensive training programs at the upper and middle management and operating levels. (iii) Sector Lending 43. At the project level, the sector strategy is being implemented through: (a) the Rural Roads Project (Loan 1966-CO0 1981, US$33.0 million) for construction, rehabilitation and maintenance of rural roads; project's institutional objectives include the strengthening of FNCV's technical and economic capability for identifying, programing and implementing rural roads subprojects; a 1/ One IDA credit for US$23.5 million in 1961. One IFC pipeline investment for US$15 million in 1976.  - 13 - (b) the Seventh Railway Project (Loan 2090-CD, 1982, US$77.0 million) for rehabilitation and modernization of the railways; the project supports the implementation of the Colombian National Railways' (CNR) 1983-1987 investment program and the improvement of its financial and operational management; (c) the Highway Sector Project (Loan 2121-CO, 1982, US$152.3 million) for rehabilitation, paving and maintenance of the primary roads network; the project pursues sectorwide opera- tional improvement, including the development of a balanced pluriannual highway expenditure program, the systematic use of economic appraisal methodologies, the implementation of a pavement management system, training at the managerial and operational levels and a comprehensive study of road user charges; and (d) the Ports Rehabilitation Project (Loan 2635-CO, 1985, US$42.8 million) for reconstruction, repair and reequipping of port facilities, and substantial institutional and operational strengthening components; the project includes major reforms to rationalize financial and personnel management at the Port Authority. (iv) Experience with Past Lending 44. The performance of these projects so far has been mixed. While the results with the Rural Roads and Highways Projects have been positive and the respective loans have contributed significantly to sector management improve- ments such as building up of investment appraisal capabilities and more efficient institutional performance, as well as physical expansion and better maintenance of the transport networks, the activities involving the Railways subsector have fallen short of expectation. The capacity of the Railways Authority (CNR) to overcome institutional and operational deficiencies and thus, to recuperate credibility with users of cargo services has not yet materialized. The main factors constraining the rehabilitation of the rail- ways have derived from the lack of firm commitment to the necessary institu- tional reforms, compounded by CNR's poor operational planning and insuffi- cient Government counterpart funding for critical capital investments. The tight fiscal situation of the last three years has prevented the Government from making a significant financial contribution to project investments and has caused the Government to limit its financial support to covering CNR's mounting pension payments, which are not backed by any funding provision. A restructuring or cancellation of the Railways loan is presently being dis- cussed with the Government. The Ports Rehabilitation Project is in its initial phase of execution. IV. FNCV'S 1986-1992 PROGRAM AND THE PROJECT Project Origin 45. The proposed project follows up and builds upon the results achieved under the ongoing Rural Roads Project (Loan 1966-CO). It was prepared by FNCV with Bank assistance, and was appraised in July 1985.  - 14 - The detailed programing for the road construction, deferred and periodic maintenance components for the first year of FNCV's program is completed. The waterways component is substantially prepared. Negotiations were held in Washington on February 10-11, 1986. The Colombian delegation was headed by Dr. E. Urrea, Director General of FNCV. Project Objectives and Description 46. The project objectives are to: (a) support the Government's efforts on agricultural development, diversification and export promotion, and to integrate less developed areas into the mainstream economy through rehabili- tation and expansion of rural roads; (b) improve efficiency and reduce costs of rural transport through adequate maintenance of the rural roads network; (c) upgrade sub-sector management through improving the institutional performance of FNCV; and (d) develop, on a pilot basis, more efficient and safer conditions for small scale cabotage navigation in the Pacific coastal region through rehabilitation and construction of minor canals linking rivers and estuaries in the area. 47. The project consists of a sub-sector operation to support FNCV's 1986-1992 Investment and Maintenance Program. It would finance a slice of FNCV's overall program comprising construction, deferred and periodic main- tenance of rural roads, improvement of minor waterways, procurement of equip- ment, and technical assistance for management improvements, training and preparation of a study on departmental road maintenance (para. 56). 48. Based on the experience under the ongoing Rural Roads Prolect, the technical assistance contemplated under the proposed project would, inter alia, assist FNCV in streamlining the administrative and contracting procedures for routine maintenance. FNCV would be expected to contract the technical assistance and provide appropriate counterpart staff in accordance with an agreed timetable (para. 75). 49. Since 1982 FNCV has been updating at irregular intervals, the inventory of roads under its responsibility. Under the proposed project, the inventory would be updated regularly and a rural road maintenance management system would be developed to control the deferred maintenance backlog and to institute a regular cycle of periodic maintenance (para. 52). 50. The project also provides for a study to define a plan of action to resolve the serious problem of Departmental roads maintenance. A preliminary analysis, prepared by a Bank consultant based upon a sample of three representative departments, identified key deficiencies as follows: (a) lack of trained personnel to administer the operations of the departmental road systems; (b) insufficient funding and inefficient use of available resources; (c) frequent turnover of key personnel; and (d) inadequate financial and technical control over the operations of the Departmental roads. The study will be comissioned to, and financed by, the National Fund for Development Projects. Execution of the study would be carried out under direct supervision of the national Planning Department by consultants selected in accordance with Bank guidelines, under terms of reference and timetable agreed upon with the Bank (para. 61).  - 15 - Rationale for Bank Involvement 51. The Bank's involvement in rural transport in Colombia has focussed on institutional building and upgrading sub-sector management. The proposed operation would consolidate the institutional and operational improvements initiated under the-ongoing Rural Roads Project, now in its completion stage (mid-1986), develop further FNCV's investment planning, programing and imple- mentation capacity, and deepen FNCV's policy focus on enhancing productivity of existing infrastructure through adequate maintenance of rural transport infrastructure and preservation of past investments. FNCV's Rural Roads Investment and Maintenance Program (1986-1992) 52. Analysis of FNCV's expenditures from 1981 through 1984 (in constant 1984 prices), indicates that road investments increased by 80% from Col$ 2.77 billion to Col$ 5.09 billion, while recurrent expenditures on routine mainte- nance rose fourteen times from Col$ 11 million to Col$ 162 million. Considering that the size of the network increased from 18,177 km to 22,892 km during the same period, maintenance expenditures per km rose eight times from about Col$ 610 to Col$ 7,081 (equivalent to about US$70 per km). Past expenditures on routine maintenance were clearly below requirements. Mainly to compensate for the results of inadequate routine maintenance, an estimated 30% of the 1981-1984 investments were oriented to rehabilitation. Under FNCV's 1986-1992 program, routine maintenance would be strengthened, and regular cycles of periodic maintenance would be implemented to control premature and excessive road degradation. Outlays for maintenance would improve under the program with maintenance expenditures per km increasing from the current US$70.00 to about US$200 by 1992. While the shift to greater emphasis upon routine maintenance corresponds to sectoral priorities, FNCV would ensure that the funds for programed routine maintenance are appropriated to execute the agreed physical targets. Overall implementation of FNCV's program would be monitored through comprehensive semi-annual reviews, which would assess progress on its various components and review budgetary and funding arrangements for the subsequent semester. In order to facilitate monitoring of the physical targets, FNCV would adopt, by December 1986, an adequate system for measuring progress of civil works, and to update annually the inventory of rural roads accordingly starting in 1987. 53. FNCV's 1986-1992 Program includes exp-nditures for administration and debt service, representing, respectively, 13% and 16% of the total. This reflects a significant reduction in overhead cost as compared with the 1970s, when administrative expenditures amounted to around 40% of the annual budgets. Out of about US$271 million programed for construction and mainte- nance, about 45% goes to construction of rural roads and waterways, (includ- ing engineering and supervision); about 51% for deferred, periodic and routine maintenance; about 4% for equipment procurement and 0.35% for con- sulting services. The amounts programed for rural roads construction would decrease progressively from 45% in 1986 to 41% in 1992. During this period, expenditures for periodic and routine maintenance would more than double in real terms, while expenditures for deferred maintenance would decrease sligh- tly as the existing backlog is brought under control. 54. FNCV's 1986-1992 Program foresees, on average, about US$51.7 million equivalent in annual outlays as compared to an average of US$47.7 million during the last three years. While the higher average volume of  - 16 - arnual investments does not represent a large increase, the different composition of the program-less emphasis on relatively more capital intensive new construction and a substantial increase in deferred and periodic maintenance works--will demand significantly more planning, management and monitoring capacity on the part of FNCV. Conversely, based on the experience of the ongoing Rural Roads project, FNCV's overall institutional capacity has proven satisfactory and demonstrated a sound basis upon which to develop further its executing capabilities. The project's institutional upgrading component (para 56(g)) has been designed and timed to permit FNCV to develop in the early years of execution of the Program sufficient capacity to carry it through completion. Costs and Financing 55. The total cost of the program is estimated at US$362 million, with a foreign exchange component of US$182 million. The proposed loan of US$62 million would represent 17% of the total cost of FNCV's 1986-1992 program and 34% of its foreign costs. The balance of the program's foreign cost would be met by the ongoing Bank Loans 1966-CO and 2174-CO (DRI program), and the IDB Pico y Pala (2nd Phase) loan. A small remaining portion (14%) would be met by additional external credits to be secured in due course along the program's implementation period. The loan provides for retroactive financing up to US$0.9 million to expedite contracting of urgent reconstruction works on two roads destroyed in the eruption of the Nevado del Ruiz volcano, in November 1985. 56. The main compdnents of the proposed project would be as follows: (a) rural roads construction comprising engineering, execution and supervision of about 25% of FNCV's program to provide access to isolated agricultural areas; (b) deferred maintenance comprising engineering, execution and supervision of about 24% of FNCV's program to restore neglected roads to normal maintenance standards; (c) periodic maintenance comprising engineering, execution and supervision of about 61% of FNCV's programs to bring up the road maintenance backlog to satisfactory standards; (d) waterways improvement comprising engineering, execution and supervision of works, to improve efficiency and safety of small scale cabotage operations in the Pacific coastal region in two phases: In Phase I, construction of about 26 km of minor canals in a selected coast area of the Department of Cauca; and depending upon its results, another 34 km in Phase II to complete a rudimentary network in protected waterways in the region; (e) equipment comprising about 74% of FNCV's equipment procurement program, mainly consisting of: (i) equipment units and spare parts to complete and rationalize the maintenance equipment fleet; (ii) a helicopter for supervision of works and surveys in areas of difficult access; and (iii) units to equip the Planning Office and to implement the maintenance and management systems in the Engineering Department;  -17 - (f) Departmental Roads Maintenance study, to be commissioned to and financed by FONADE, would evaluate the road maintenance needs in selected departments and propose a plan of action for organizing the delivery of maintenance services, together with the quantity and quality controls, financial and appropriate funding mechanisms; and (g) institutional upgrading comprising technical assistance to (i) develop technical capacity in the Planning Office, (ii) implement a rural roads maintenance system in the Engineering Department for planning, scheduling, executing and costing maintenance operations, and strengthen contract administration and work supervision; (iii) improve the equipment management system; and (iv) develop on-the-job training and fellowship programs for FNCV's staff. 57. The estimated cost of the Bank project is about US$112.5 million equivalent, with the local and foreign cost decomposed into broad categories as follows: Foreign Cost Z of Z Foreign Cost Total Local Loan Total of 1986-1992 Cost Cost Amount Cost Program (USS million at constant January 1986 prices) 1. Investment 33.0 15.4 17.6 53 30 Rural Roads Construction 29.0 13.3 15.7 54 28 Waterways Improvements 1.7 1.0 0.7 44 100 Engineering and Supervision2/ 2.3 1 1 1.2 50 39 2. Maintenance 44.1 23.4 20.7 47 34 Deferred Maintenance 14.4 6.9 7.5 52 24 Periodic Maintenance 28.6 16.0 12.6 44 69 Engineering and Supervision 2' 1.1 0.5 0.6 50 100 3, Equipment 7.1 0.6 6.5 92 74 4. Technical Assistance 1.0 0.6 0.4 50 100 Institutional Efficiency Impr. 0.7 0.3 0.4 50 100 Depart. Roads Maint. Study 0.3 0.3 0.0 50 100 5. Base Cost 85.2 40.0 45.2 53 35 Physical Contingencies 7.7 3.9 3.8 50 31 Price Contingencies 19.6 6.6 13.0 66 33 6. Total 112.5 50.5 62.0 55 34 2I Engineering 2.5% and supervision 5% of rural roads construction, waterways improvement and deferred maintenance.  - 18 - 58. The foreign exchange component of civil works was estimated consi- dering the cost of the imported equipment, fuel and materials required for the execution of each type of operation. Because of the upward adjustment in the real exchange rate during the last two years, the foreign cost in this project is slightly higher than the one observed in the previous rural roads loan. The estimated cost of foreign goods to be procured under the project reflects the exemption of custom duties granted to FNCV and the real costs of custom clearance for Government institutions. The foreign cost of consulting services was estimated at 50x, taking into account that the income and remit- tal taxes on foreign consultants fees (to be paid by FNCV) amount roughly to 50% of the gross fees. 59. Physical contingencies of 10% have been considered for all civil works, engineering, execution and supervision costs of both the FNCV's Program and the project. Price contingencies based upon projections of international and local inflation and exchange rate variations in the projec- tion execution period, were calculated on the basis of December 1985 prices. 60. The cost estimates for civil works wete prepared by FNCV based upon current costs for such operations by force account and by contract. Cost estimates for equipment and vehicles have been prepared on the basis of FNCV-supplied manufacturer's quotations and port clearance costs to be paid by FNCV. The cost for consulting services has been estimated on the basis of 78 man/months and 32 man/months of local and foreign consultants, respec- tively. Execution and Procurement 61. Execution of the project would be under direct responsibility of FNCV except for the Departmental Roads Maintenance Study, which would be exe- cuted by FONADE, as referred to in para. 50. The agreed timetable for execu- tion of the departmental study calls for its starting by November 1986 and completion by June 1987. 62. Procurement arrangements for items to be financed under the pro- posed loan are expected to follow the distribution below: Procurement Method 3/ (US$ million) ICB LCB Other Total Cost Civil Works - 87.7 11.4 99.1 - (47.4) (5.0) (52.4) Equipment 7.4 0.5 - 7.9 (6.7) (0.4) - (7.1) Tech. Assistance and Consultant Services (Engineering and Superv.) - - 5.5 5.5 _ - (2.5) (2.5) Total 7.4 88.2 16.9 112.5 (6.7) (47.8) (7.5) (62.0) 3/ Amounts in parenthesis show the allocations from the proceeds of the loan.  - 19 - 63. Civil works for road construction and deferred maintenance and for construction and rehabilitation of waterways, totaling US$61 million (including contingencies), would be carried out through about 160 contracts with an average individual cost of less than US$400,000, none of them exceeding US$1 million. Because of the small size and limited scope of these contracts and their-distribution in space and time (unlikely to attract foreign bidders), they are expected to be procured through compecitive bidding procedures locally advertised, on terms satisfactory to the Bank, in accordance with the arrangements in use for the ongoing project with FNCV. About 70% of periodic maintenance, representing some US$26.7 million would be executed through some 400 contracts averaging US$70,000, none of them exceeding US$150,000. These contracts would be awarded through competitive local bidding (without advertising) satisfactory to the Bank, on the basis of evaluation and comparison of bids invited from a list of at least three qualified contractors. FNCV would ensure a wide distribution of bidding opportunities. About 30% of periodic maintenance, representing some US$11.4 million (including contingencies) would be executed by force account, comprising small works scattered in isolated regions for which studies have indicated that force account is more economical than contracting. These force account works would represent about 10% of the project cost. During project implementat-on, FNCV would improve its contracting procedures for periodic maintenance, and force account operations would not increase in the future. The efficiency of force account in periodic maintenance operations would be monitored closely during project supervision. 64. Equipment amounting to about US$7.4 million (including contingen- cies) would be procured through international competitive bidding in accord- ance with Bank guidelines for procurement, subject to prior Bank approval of all contracts exceeding US$50,000. Contracts for laboratory and office sup- port equipment, and parts with an estimated cost below US$50,000 up to an aggregate amount of US$500,000, would be procured through competitive bidding procedures locally advertised, on terms satisfactory to the Bank. 65. Procurement of components financed exclusively by FNCV would be as follows: about 15% of new construction and 25% of deferred maintenance correspond to small works scattered in remote areas with difficult access and are therefore difficult co contract. FNCV would continue executing these works by force account according to procedures wb ch, under these conditions, have proven to be more cost-effective than contrz:ting. Routine maintenance would be executed 33% by force account and 67% by contract roadmen and micro- enterprises under procedures with which have been proved effective under the ongoing project. These procedures would be improved further and expanded under the proposed project and force account routine maintenance would diminish from 40 to 30% during project implementation. Some of the replacement equipment units and minor equipment and spare parts would be procured in many dispersed purchases spread over seven years under local competitive procedures satisfactory to the Bank. Disbursements and Auditing 66. The proposed loan is expected to be fully disbursed by December 1992, with a disbursement schedule of seven years (about 18 months faster  - 20 - than the regional disbursement profiles for highways projects). It is, however, possible that efficient project implementation with adequate counterpart financing could reduce the implementation period of the project from six-and-a-half to four-and-a-half years, resulting in lower contingencies and in a reduction of the project's cost from US$112 million to US$106 million. In this event, the loan amount required would decrease to US$58 million and the required annual provision of local funds would be US$11.9 million higher, corresponding to US$1.7, 3.5, 3.6, and 3.1 million (equivalent) for each year 1986 through 1989, respectively. 67. Project execution would require disbursements against a large number of small contracts and against some periodic maintenance works carried out by force account. Considering FNCV's satisfactory contracting and dis- bursement procedures under the ongoing loan, simple and quick disbursement procedures would be adopted. Withdrawals would be made on the basis of periodic statements of expenditures. The statements would comprise expend- itures for works executed by contract and for periodic maintenance executed by force account, as well as expenditures for equipment procurement. Expend- itures on force account works would be determined by multiplying the actual physical production by the unit costs for each operation, being the unit costs updated from time to time. The periodic statements of expenditures and the monitoring of force account works would be carried out by FNCV's Engineering Department with consultant assistance provided under the loan. Supporting documentation would be retained by FNCV and made available for review during the project supervision process and audits. 68. In order to reduce the interval during which FNCV would finance the Bank's share of project costs with its own resources, a Special Account in US dollars with an authorized allocation of US$4 million (sufficient for about four months of eligible expenditures) would be established in Banco de la Republica. FNCV would be entitled to make periodic withdrawals from the Special Account at the exchange rate applicable on the day the Special Account is debited. The Bank would replenish the Special Account for the amount of withdrawals on account of eligible expenditures at the request of the Borrower. To ensure consistent availability of counterpart funds, a Project Account in pesos would be established in a local commercial bank, which should maintain a revolving balance sufficient for three months of project expenditures. The establishment of the Project Account with an initial deposit equivalent to USS2.5 million would be a condition of loan effectiveness. 69. Withdrawal from the Special Account would be made for: (a) 50% of total expenditures for eligible civil works; (b) 100% of foreign expenditures for the procurement of goods and 90% of locally procured imported goods; and (c) 100% of foreign expenditures for expatriate consultants and training fellowships abroad, and 50% of total expenditures for local consultants and for the training component.  - 21 - 70. FNCV's general accounts and the project's Special and Project Accounts and statement of expenditures would be audited by the Controller General of the Republic. Audit reports would be required annually, within four months of the closing of the audited period. Economic Justification 71. All the subprojects included in the work program for the first year (1986) have been subject to economic evaluation. The overall economic rate of return on the road construction, deferred maintenance of roads and canal works is estimated at 21%. The ERRs on individual road components vary from 12% to over 70X. For the canals, the ERR is 17% based on distance savings. 72. The detailed program for each subsequent year and the specific items for financing under the loan would be defined annually in accordance with agreed upon procedures and criteria which would require for sub-project eligibility an economic return above the estimated 12% opportunity cost of capital. For the portions of the annual work programs to be financed entirely by national resources, at least 85% of the works would be selected also based upon the economic and technical criteria confirmed during negotiations. Of the remaining 15%, works with estimated costs of over US$200,000 or over 5 km in length would also be selected based on the foregoing. 73. Direct beneficiaries would be (a) small farmers, for whom access to markets would be improved and modernized; and (b) the isolated communities in the coastal region of Cauca, for which small scale cabotage navigation would be made safer and cost effective. Project benefits would accrue from: (i) the incremental agriculture value added derived from increases in agricultural production and avoidance of crop losses which could not be marketed for lack of reasonable farm-to-market access; (ii) reduction in transport costs; and (iii) safer small scale cabotage operations. Agricultural production increases would arise from inputs of extension services and additional lands brought under cultivation with the aid of improved farm-to-market access. Reduction in transport costs would derive from: (a) improved road conditions; and (b) shortening of transport distances through the construction and rehabilitation of minor canals to interconnect protected waterways in the Pacific coastal region. The rural transport industry in Colombia is competitive and the reductions in transport costs are expected to be passed along to consumers. Assessment of Risks 74. The project faces no major technical risks Other risks are related to the possibility of slow implementation of measures to improve FNCV's institutional efficiency, FNCV's relative inexperience with construction and rehabilitation of minor waterways, and timely availability of counterpart funds to the project. 75. To minimize delays in implementing institutional efficiency measures, and enhance project sustainability, FNCV would: (a) contract the agreed technical assistance and provide appropriate counterpart staff to strengthen the Planning Office and th2 Engineering Department by November 1986; (b) complete the design phases of the systems for rural road maintenance management, management of the equipment fleet and the module to  - 22 - improve contract management, including administration and supervision of works, by September 1987; and, (c) start implementing the systems in (b) above by March 1988. 76. To facilitate smooth implementation of the pilot waterways component and to ensure use of appropriate construction technology with minimal adverse environmental impact, FNCV has set up an ad hoc office in the Engineering Department for supervision, monitoring and control of progress of works under phase I. An engineer experienced in dredging operations has been appointed to head the office. A part-time marine ecologist will be recruited to assist the engineer, and experienced resident dredge operators would control the onsite field operations. Execution of phase II would be contingent upon (a) satisfactory experience under phase I and (b) the incorporation of the arrangements for the supervision and monitoring of works into the Engineering Department. 77. To ensure timely availability of counterpart funds to the project, which had been a recurrent problem in past years of implementation of the ongoing Rural Roads Project, the following measures would be adopted: (a) FNCV's investment program would be reviewed semi-annually; (b) Bank agreement on the annual investment programs would be contingent upon evidence of sufficient budget appropriation of local funds for expenditures during the year; and (c) sufficient funds to meet three months worth of approved works would be maintained on a continuing basis in the Project Account referred to in para. 69. PART V - RECOMMENDATION 78. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments February 27, 1986 Washington, D.C.  -23- ANNEX I Page 1 of 6 T A I L 3 A 10 I COLE11UI1A - Socw. Im:CSWs ATA 5 COLOfiEA - N GcwS (hIlD AVZRAVS U HOST CMOST Rg013 ESTDLZU) lb 196ab ISCl NEUST MIDDWLiCO MIDDLc ExLz rTo L W& 17 "l- 3fTlkiL'-wb LAT. AIURCA & CAR EUROP AMA Cwie SQ. 010 TUnL 1138.9 1135.9 113.9. ACSZCULTURAL - 350.3 350.3 338.6 cm 1 CAlEA (CUS) .. .. 1MM0.0 1875.9 214.3 (tILOGAXI af OIL ROUXVALEST) 333.0 493.0 690.0 993.8 1319.6 DoPUUTiU.NID-TER (TUOUSAns) 13754.0 21266.0 27513.0 URA POPUATION (L OF TOTAL) 46. 57.2 66.1 67.7 47.5 POPULATION PROJcTONS PUPULATZOS IN TEAR 2000 (MILL) 37.0 STATIOAr IPOPULATION (MILL) 60.0 POPULATION IMEIII 1.8 PO1ULAXON DUSrIT PIR SQ. Km. 13.8 16.7 Z4.2 '6.0 84.7 PUl SQ. IN. AGII. LAND 45.0 60.7 75.6 91.1 166.1 POPULATION AE STRUCTURE (2) 0-14 tRS 46.7 46.1 37.7 38.5 31.2 15-4 YiS 50.2 51.0 58.6 57.1 61.5 65 AND ABOVE 2.9 2.7 3.6 4.2 7.2 POPULATON GROWTH RATE (C TOTAL 3.1 3.0 2.0 2.4 1.6 UcRss 5.7 5.2 2.7 3.6 3.7 CR1 3B1T111 tlATE (PER TrOUS) 47.2 33.3 28.0 30.9 23.4 CRUD SAm BATE (Pl Tlius) 17.4 9.7 7.3 8.0 6.9 CROSS RRPRODUCrlON RATE 3.3 2.6 1.8 2.0 1.5 PArNLY PLAMM ACCEPTORS. ANEW. (T1300) . 115.4 192.8 le USES CZ OF ARRIED nR'a) .. 34.0 55.0 45.3 nEo or Pooo PROD. PER CAnT (1969-71-100) 100.0 99.0 117.0 109.6 109.1 -n CPrN SUPPLY OF CALORIES Of RQUIREMTS) 102.0 89.0 110.0 113.2 131.5 PorINs (GttS PER DT) 54.0 46.0 57.0 69.4 92.4 OF WICII ANMAL AD PULSE 28.0 24.0 25.0 /d 34.2 34.5 CHXLD CAGES 1-4) DAE RATE 9.4 6.6 3.0 4.8 4.7 LIE EXPECT. AT 81323 (YEANS) 53.1 58.9 64.1 64.8 67.2 INFA* MERT. RATE (PER NUS) 93.5 70.5 53.0 59.7 53.3 ACCESS TO SAFE WATE (21PP) TOTAL 30.0 63.0 92.0 Ie 65.3 70.2 533Am1 54.9 68.0 OD.0 77 76.5 89.4 RURAL 6.6 26.0 9.0 77 4.t 57.0 ACCESS TO CETA DISPOSAL (20 OFVOPULATZOS) TOTAL *- 47.0 65.0 7c 56.3 59.6 URBN .. 75.0 t00.0 77 73.4 65.9 RURAL .. 6.0 4.0 7@ 23.5 47.6 POPULATION PER PRSCLIAN 2640.0 2330.0 1710.0 le 1909.7 1070.5 PoP. PER N URS INC PERSON 4220.0 /f 730.0 800.0 7W 808.2 769.5 POP. PER SPITAL BDI TOTAL 360.0 450.0 580.0 /- 362.0 328.3 URBA .. 380.0 90.0 77 422.0 201.9 RUAL .. .. .. 2716.7 4519.7 ASNISSIONS PER ROSPITAL Be D 22.9 29.6 /d 27.5 20.0 AVERAE SIZE OF HOUSEHOLD TOTAL 5.7 . URBN 5 5 a RumA * 5-9 -* AVERSE NO. OF PERSONSIGIM TOTAL URNI .. 1.6 _. MILCENAG oF WVELL1YCS WITH CLEcr. TOTAL 47.0 lb 58.1 k . . UR-AN 83.0 r S 5 RUAL 8.o7 13.2 .  - 24 - ANNEX I Page 2 of 6 T A 8 L IA PACE2 COLOIZA - SOCIAL INDICATORS DATA SH COLOMIA REFERECE GROUS (WEIGTD AVERAGES) MOST (HOST RECRUT ESTIMTC) lb RCCNT 0 /DLC rNCM DNOLE TX-ONE 1S601-b 197n/! EI5AjiTZ/b LAT. AUICA 6 CAR EUROPE 30MCATIOR ADJUSTED ENROLLNT RATIOS PRIMARYt TOTAL 77.0 108.0 130.0 106.7 101.9 KALE 77.0 107.0 129.0 108.5 106.2 FEMALE 77.0 110.0 132.0 104.6 97.5 SECOUAY: TOTAL 12.0 25.0 48.0 44.2 57.5 KALE 13.0 25.0 45.0 42.7 64.9 FEMALE 11.0 24.0 51.0 44.9 50.0 VOCATIONAL (E OF SECOMAITI 30.3 It 20.2 21.6 Id 13.3 21.0 PUPIL-TEACHER RATIO PRIMARY 38.0 38.0 31.0 29.9 25.1 SECO iAY 11.0 17.0 20.0 16.7 19.1 PASSENiER CARS/THOUSAND POP 5.7 11.2 18.6 Id 46.0 54.2 RADIO RECEIVERS/THOUSAND POP 125.1 104.3 131.7 328.3 170.7 TV REEcIVERS/THOUSAID POP 9.5 38.1 86.9 /c 112.4 149.3 NEWSPAPER ('DAILY GUERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 50.0 108.7 41.0 81.1 97.0 CINEM ANNUAL ATrENDANCE/CAPITA .. .. 2.6 2.4 2.7 TOTAL LOtR FORCE (TWOUS) 4727.0 6353.0 9084.0 FEMALE (PERCENT) 19.2 24.8 24.6 23.6 36J3 ASRlCOUIUE (PERCENT) 51.4 37.9 25.8 IC 31.4 40.8 INDSTRLY (PERCUNT) 19.2 21.0 21.27? 24.3 23.3 PARTICIPATIoN RATE (PERCENT) TOTAL 30.0 29.9 33.0 33.5