Colombia - Second and Third Bogota Water Supply, Sewerage and Drainage Projects

Document of The World Bank FOR OFFICIAL USE ONLY Rqort No. 13220 PERFORMANCE AUDIT REPORT COLOMBIA SECOND BOGOTA WATER SUPPLY PROJECT (LOAN 741-CO) AND THIRD BOGOTA WATER SUPPLY, SEWERAGE AND DRAINAGE PROJECT (LOAN 1697-CO) JUNE 27, 1994 Operations Evaluation Department 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. COUNTRY EXCHANGE RATES Colombian Peso (Col$/US$) Second Project Appraisal Estimate (1970) $1.00 = 18.443 Col$ Actual: Average 1971 = 19.932 Average 1972 = 21.866 Average 1973 = 23.637 Average 1974 = 26.064 Average 1975 = 30.929 Average 1976 = 34.694 Average 1977 = 36.775 Average 1978 = 39.095 Average 1979 = 42.550 Average 1980 = 47.280 Average 1981 = 54.491 Third Project Appraisal Estimate (1978) $1.00 = 39.000 Col$ Actual: Average 1979 = 42.550 Average 1980 = 47.280 Average 1981 = 54.491 Average 1982 = 64.085 Average 1983 = 78.854 Average 1984 = 100.817 Average 1985 = 142.312 Average 1986 = 194.261 ACRONYMS AND ABBREVIATIONS CAR - Corporacion Autonomia Regional de la Sabana de Bogota y los Valles de Ubate y Chiquinquira Regional Bogota Plains Development Corporation) DNP - Departamento Nacional de Planeacion (National Planning Department) EAAB - Empresa de Acueducto y Alcantarillado de Bogota (Bogota Water Supply and Sewerage Company) EEEB - Empresa de Energia Electrica de Bogota (Bogota Power Company) Government - Government of Colombia JNT - National Tariff Board PAR - Performance Audit Report PCR - Project Completion Report SAR - Staff Appraisal Report US$ - US Dollar FISCAL YEAR Government: January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 27, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Colombia Second Bogota Water Supply Project (Loan 741-CO) and Third Bogota Water Supply, Seweraye and Drainage Project (Loan 1697-CO) Attached is the "Performance Audit Report on Colombia - Second Bogota Water Supply Project (Loan 741-CO) and Third Bogota Water Supply, Sewerage and Drainage Project (Loan 1697- CO)". The audited projects helped the water company expand its network, both water and sewerage in particular to the low-income areas of Bogota. The Audit concludes that a more flexible Bank posture regarding cost overrun financing would have been justified. The outcome of both projects is rated as satisfactory, their sustainability as likely, and their institutional impact as negligible. Robert Picciotto by H. Eberhard K6pp Attachment 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.  PERFORMANCE AUDIT REPORT FOR OFFICIAL USE ONLY COLOMBIA SECOND BOGOTA WATER SUPPLY PROJECT (LOAN 741-CO) AND THIRD BOGOTA WATER SUPPLY, SEWERAGE AND DRAINAGE PROJECT (LOAN 1697-CO) TABLE OF CONTENTS Page No. PREFACE .................................................. BASIC DATA SHEETS ..........................................ii EVALUATION SUMMARY ........................................ vii I. BACKGROUND .............................................. 1 II. IMPLEMENTATION AND PROJECT OBJECTIVES ................. 1 Project Scope and Implementation.............................2 Disbursements..............................................3 Procurement..............................................3 Project Costs ...... .......................................... . 3 Rio Bogota Study ...........................................4 Low-Income Focus.........................................4 Unaccounted-for-Water.......................................5 EEEB's Contribution to the Chingaza Tunnel..................... 5 III. INSTITUTIONAL BUILDING AND FINANCES..........................6 EAAB's Financial Situation........................................6 Accounts Receivable.............................................6 Profitability Indicators.............................................7 Debt-Equity Ratio ...............................................7 Financial Covenants..............................................7 Tariff Increases.................................................7 Bank Loans' Terms..............................................8 Exchange Risk..................................................8 Accounting and External Audit......................................8 Environment....................................................8 Sustainability...................................................9 IV. CONCLUSIONS AND LESSONS.....................................9 Project Rating.....................................3.....9 Borrower Performance....................................... 9 Bank Performance.......................................... 9 Annex: Comments from the Borrower ................................. 11 This report was prepared by Mr. Jean-Franqois Landeau, Task Manager, who audited the Project in November 1993. Mrs. Maryvonne Mauprivez provided administrative support. 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.  PERFORMANCE AUDIT REPORT COLOMBIA SECOND BOGOTA WATER SUPPLY PROJECT (LOAN 741-CO) AND THIRD BOGOTA WATER SUPPLY, SEWERAGE AND DRAINAGE PROJECT (LOAN 1697-CO) PREFACE 1. This is a Performance Audit Report (PAR) on both the second and third World Bank loans to the water company serving Santa Fe de Bogota, the capital of Colombia. The Second Loan for US$88.0 million equivalent was approved on May 25, 1971. The loan was entirely used after three one-year extensions of the closing date. The Third Loan for US$30.0 million equivalent was approved on May 15, 1979. After two one-year extensions, US$2.13 million were canceled. 2. The PAR is based on the Project Completion Report (PCR) prepared by the Latin America and the Caribbean regional department and issued on May 2, 1988, the Staff Appraisal Reports, the loan documents, and a study of the project files. An OED mission visited Colombia in December 1993. The excellent cooperation and valuable assistance provided by EAAB in the preparation of this report is gratefully acknowledged. 3. The PCR provides a comprehensive account of the project experience. The PAR elaborates on selected aspects of project implementation, in particular the problems with construction of the Chingaza Tunnel, the delivery of services to the low-income population, the financial losses due to the accounts receivable, and the limitation of having a single financial covenant. 4. Following standard OED procedures, copies of the draft PAR were sent to the Government and to the Borrower. Comments from the Borrower are attached as an Annex.  ii PERFORMANCE AUDIT REPORT COLOMBIA SECOND BOGOTA WATER SUPPLY PROJECT (LOAN 741-CO) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual Actual as % Item Estimates of Appraisal (US$ million) Estimates Total Project Cost 103.7 181.7 175.2 Loan Amount 88.0 88.0 same Physical Components Completed 12/76 6/83 Financial Rate of Return (%) 14 8 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) As of December 31 FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 Appraisal 7.4 16.6 30.1 51.3 74.1 87.2 88.0 Actual 4.3 7.3 13.7 30.6 40.9 59.1 65.0 82.4 86.3 88.0 Appraisal as % of Actual 58 44 45 60 55 68 74 - - - Date of final Disbursement: 4/24/81 PROJECT DATES Original Plan Actual First Mention in Files - 2/69 Appraisal n.a. Negotiations 3/71 3/29/71 Board Approval 5/71 5/25/71 Loan Agreement Date - 5/28/71 Effectiveness Date - 8/16/71 Loan Completion - n.a. Closing Date 12/77 12/31/80 iii STAFF INPUTS (Staff-Weeks) MISSION DATA No. of Month/Year Persons Man-weeks Identification 10/69 2 4 Preparation I 1/70 1 .5 Preparation II 3/70 2 2 Preappraisal 1000 2 4 Appraisal 12/70 3 6 Supervision I 5/71 1 1 Supervision II 10/71 2 2 Supervision III 3/72 2 2 Supervision IV 4/72 1 2 Supervision V 5/72 1 1 Supervision VI 2/73 2 2 Supervision VII 3/73 2 2 Supervision VIII 5/73 3 3 Supervision IX 7/73 3 6 Supervision X 9/73 1 .5 Supervision XI 10/73 1 1 Supervision XII 12/73 1 1 Supervision XIII 3/74 2 2 Supervision XIV 7/74 1 .5 Supervision XV 2/75 2 2 Supervision XVI 3/75 2 1 Supervision XVII 5/75 1 .5 Supervision XVIII 9/75 2 1 Supervision XIX 10/75 1 1 Supervision XX 5/76 1 1 Supervision XXI 9/76 1 1 Supervision XXII 2/77 2 1 Supervision XXIII 5177 2 1 Supervision XXIV 6/77 1 1 Supervision XXV 7/77 1 1 Supervision XXVI 11/77 1 .5 Supervision XXVII 2/78 2 2 Supervision XXVIII 5/78 1 .5 Supervision XXIX 7/78 3 3 Supervision XXX 1/79 2 1 Supervision XXXI 5/79 2 1 Supervision XXXII 11/79 3 1.5 Supervision XXXIII 2/80 1 .5 Supervision XXXIV 5/80 2 2 Supervision XXXV 10/80 2 2 Supervision XXXVI 6/82 2 2 iv OTHER PROJECT DATA Borrower: Empresa de Acueducto y Acantarillado de Bogota Executing Agency: Empresa de Acueducto y Acantarillado de Bogota Follow-up Project: Third Bogota Water Supply, Sewerage and Drainage Project (Loan 1697-CO) V PERFORMANCE AUDIT REPORT COLOMBIA THIRD BOGOTA WATER SUPPLY, SEWERAGE AND DRAINAGE PROJECT (LOAN 1697-CO) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual Actual as % Item Expectations Estimates of Appraisal Estimates Total Project Cost 62.65 58.90 94.0 Loan Amount 30.0 27.87 92.9 Physical Components Completed 12/82 6/85 Financial Rate of Return (%) 37 36 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) FY ended December 31 FY80 FY81 FY82 FY83 FY84 FY85 FY86 Appraisal 9.5 19.5 27.0 30.0 Actual .5 1.5 9.0 20.3 24.0 25.4 27.9 Actual as % of Appraisal 5.3 7.7 33.3 67.7 - -- Date of Final Disbursement: 2/26/1986 PROJECT DATES Original Plan Actual First Mention in Files 2/77 Appraisal n.a. Negotiations 4/79 4/02/79 Board Approval - 5/15/79 Loan Agreement Date - 11/30/79 Effectiveness Date - 4/22/80 Loan Completion 12/82 6/85 Closing Date 6/83 6/85 vi STAFF INPUTS (Staff-Weeks) MISSION DATA No. of Month/Year Persons Man-weeks Identification 2/78 3 6 Preappraisal 7/78 3 4.5 Appraisal 9/78 3 6 Supervision I 5f71 2 1 Supervision II 11/79 2 1 Supervision III 5/80 2 2 Supervision IV 10/80 2 2 Supervision V 5/81 2 2 Supervision VI 5/82 1 1 Supervision VII 6/82 2 2 Supervision VIII 10/82 2 1 Supervision IX 2/83 2 2 Supervision X 7/83 1 .5 Supervision XI 10/83 2 2 Supervision XII 4/84 2 4 Supervision XIII 5/85 2 3 Supervision XIV 2/86 1 1 OTHER PROJECT DATA Borrower: Empresa de Acueducto y Acantarillado de Bogota Executing Agency: Empresa de Acueducto y Acantarillado de Bogota Follow-up Project: Fourth Bogota Water Supply, Sewerage and Drainage Project (Loan 2512-CO)  vii PERFORMANCE AUDIT REPORT COLOMBIA SECOND BOGOTA WATER SUPPLY PROJECT (LOAN 741-CO) AND THIRD BOGOTA WATER SUPPLY, SEWERAGE AND DRAINAGE PROJECT (LOAN 1697-CO) EVALUATION SUMMARY Foreword 1. This Audit covers two projects whose physical components of the Second Project implementation periods were in the 1970s and comprised mainly the first stage of the the first half of the 1980s, respectively. While Chingaza scheme (a dam, a 33 km tunnel- all lessons have likely been drawn and fed back pipeline, a treatment plant). The physical into the follow-up projects, it is worthwhile to components of the Third Project comprised highlight recurring project implementation various components of water and sewerage issues. networks. Both projects were designed to assist"the Government in improving health and Introduction living conditions of Bogota's residents through an expansion of water supply, sewerage and 2. The two audited projects illustrate the drainage facilities (PAP paras. 3-5). two extremes of water infrastructure capital investments required to improve service levels Project Implementation and Cost in a city urbanizing at a rapid pace. The Second Project (Loan 741-CO) was a heavy, 4. The project scope was changed to offset lumpy, one-time investment aiming at bringing the cost overruns on the Chingaza tunnel in water from some distance through a long the Second Project and to reflect a change in tunnel dug in mountains. The Third Project EAAB's priorities in the case of the Third (Loan 1697-CO) was a traditional urban water Project (PA, para. 6). project with a number a relatively small components aimed at raising the level of 5. The main implementation problem of service in various part of the city. Both the Second Project was the delay occasioned projects were carried out by the water by the Chingaza tunnel construction. The company operating in Bogota, Empresa de progress made by the original contractor were Acueducto y Acantarillado de Bogota slow. By mid 1973, 2.5 km had been dug (EAAB), essentially managed by the city of instead of the 11 km targeted. Then EAAB Bogota as a tool to implement its took time to take the decision of changing infrastructure program. contractor. The lack of cooperation by the original contractor, but more than ten months Project Objectives and Components after the issue had been raised by the Bank. The new contract was awarded promptly, but 3. The projects were essentially two a dispute developed with the original consecutive slices of the long-range master contractor about compensations eventually plan for supplying drinking water to the city settled for US$1.95 million. The initial delay and metropolitan area of Bogota. The was never offset and the component ended up viii costing considerably more than anticipated 10. It took several years to resolve the (PAR, para. 7). dispute between EAAB and the power utility of Bogota about a US$25 million contribution to the Chingaza tunnel construction. 6. Actual disbursements considerably Although both Bank borrowers, the Bank did lagged projections for both projects. Problems not use its leverage to arrive at a rapid with the Chingaza tunnel, which represented compromise (PAR, para. 18). 32% of total project costs, were the main cause of delay. An "unofficial" suspension of 11. The financial situation of EAAB during disbursements in 1974 to pressure tariff the period 1971-1985 has been characterized increases halted further a slow start. The by a long phase of depressed results. Part of Third Project was affected by delays (3 years) the problem is that of perspective 5% rate of and a cancellation of 7% of the loan amount. return on revalued fixed assets is a *ood result In both cases, repayments to the Bank started given the fast pace of inflation built into the well before the last disbursements (32 and 28 assets base. Self-financing of investments months, respectively) (PAR, para. 9). between 1971 and 1985 has been high when measured after debt-servicing, averaging a 7. The Second Project had a cost overrun commendable 31.1% of investments (PAR, in US dollars of 75% whereas the Third para. 19). Project has savings of 6% of the appraisal estimate. The difference in complexity is the 12. Although rarely mentioned in project main reason for the different outcome. The files, in 11 years out of 14 (1972-85), accounts additional costs of completing the Chingaza receivable increased by factors ranging from tunnel created a problem of financing for 7% (1972) to 54.1% (1974) of EAAB's cash EAAB as the Bank did not finance the cost flows and averaged 23.3%. This almost overrun (PAR, paras. 11-12). constant increase of a capitalized loss (which uncollected bills amount to) meant that an 8. The cleaning of the highly polluted average of 2.8 months of cash flows was Bogota River has been a perennial objective of actually unavailable to finance investment and the Bank but supported by ineffective actions. debt service. There was no financial covenant This reflected in large part the ambivalence of in either loan agreements to help protect the Colombian authorities about spending EAAB against the impact of non-payments by considerable amounts on resurrecting a river official agencies such as Bogota City (PAR, that experts acknowledged to be "already para. 20). dead". On and off a project has been in the planning, but it never went beyond repetitious 13. The only financial covenant was the studies (PAR, para. 14). need to meet a set rate of return which varied depending on the period: 9% in 1971-73, 10% 9. Bank assistance to EAAB had a in 1974-78,7% in 1979-80,5% in 1981-82, and marked focus on the low-income population of 6% in 1983-on. These were high targets given Bogota. As early as 1972 EAAB developed a that the fixed assets were revalued. EAAB program for bringing water distribution and was able to meet the covenant 10 out of 15 sewer to the sections called "barrios". After years of the project period. This overstates some uncertainty when Bank financing of the the true profitability of EAAB given the program was victim of the threat to suspend irrecoverable losses incurred because of the disbursements, the investments were carried accumulating accounts receivables (Pg para. out almost on schedule (PAR, para. 15). The 23). level of unaccounted-for-water was a recurrent supervision issue with losses having a tendency 14. The pressure applied by the Bank to to stay above 30%. No special effort was have tariff increases enacted was unusually made to reduce this major source of lost firm as it included a threat of suspension of revenues (P, para. 17). disbursements and a short period of "unofficial" suspension in 1974. Continuing ix large investment programs to keep up with the urbanization pace of Bogota as well as the 19. The Second Project raises the issue of relatively high inflation rate explain the need the scope of eligible expenses. The Bank was for high tariff increase figures. Cost cutting not forthcoming when the need arose to fund measures such as reducing accounts receivable the predictable cost overrun on the Chingaza and unaccounted-for-water were absent, tunnel. It is not necessarily consistent to however (PAR, para. 24). finance the interest-during-construction while not considering additional investment 15. The external auditors qualified EAAB's expenditures necessary to complete the project accounts 2 years in a row (1979 and 1980) component. The issue deserves flexible although the Bank declared the auditing handling, especially when the cost overrun is covenant fully met (PA, para. 27). no fault of the executing agency which has followed all ICB procedures. The financing of 16. The projects' benefits are expected to risky expenditures such as long tunnels in at be sustainable given the cost recovery system best uncertain geological terrains should either in place (R4AR, para. 29). be generous in contingencies or include a cost overrun financing option to avoid putting the Conclusions and Lessons Bank borrower in a difficult financial position. A combination of both would be preferable. Borrower Performance The "unallocated" component of the loan could accommodate this option with the 17. If the difficulties with the Chingaza proper legal language to reserve its use tunnel construction are discounted, the two exclusively for cost overrun financing which is projects were successful in meeting their determined as not being the result of physical targets. The cost overruns on the mismanagement. tunnel were only partly the responsibility of EAAB (time to take the decision to change 20. When the tax, accounting, and financial contractor). The focus on providing more context does not allow the automatic services to the poor sections (barrios) of revaluation of fixed assets like in Colombia Bogota was appropriate. The inability to raise during the project period, financial results tariffs to meet the rate of return covenant was should be presented also in historical terms. largely outside its control as increases have to At the minimum, the revaluation reserve be approved by the government's National should be showed separate from the other Tariff Board. The unfavorable financial equity sources to facilitate the computing of situation reported in the 1970s was relative historical indicators. since EAAB was able to maintain a reasonable self-financing ratio (above 30% after debt- 21. The attention paid in the 1970s about servicing). political interference in the running of industrial or utility concerns is noteworthy. It Bank Performance is regrettable that this interest has faded since the problem has not disappeared. Whenever 18. The Bank assistance through the two there is direct interference with the audited projects provided the needed funds to management of a concern, an assessment finance the complex water and sewerage should be made by the supervision team of infrastructure required by the urbanization of how much is acceptable with regard to the Bogota. cost-effective and timely implementation of the Bank project.  PERFORMANCE AUDIT REPORT COLOMBIA SECOND BOGOTA WATER SUPPLY PROJECT (LOAN 741-CO) AND THIRD BOGOTA WATER SUPPLY, SEWERAGE AND DRAINAGE PROJECT (LOAN 1697-CO) I. BACKGROUND 1. Urbanization puts pressures on infrastructures and forces a rapid pace of investments by city utilities. Bogota as the largest city in Colombia is another case in point. The two audited projects illustrate the two extremes of water infrastructure capital investments required to improve service levels. The Second Project (Loan 741-CO) was a heavy, lumpy, one-time investment aiming at bringing water from some distance through a long tunnel dug in mountains. The Third Project (Loan 1697-CO) was a traditional urban water project with a number of relatively small components aimed at raising the level of service in various part of the city. 2. Both projects were carried out by the water company operating in Bogota, Empresa de Acueducto y Acantarillado de Bogota (EAAB). EAAB was established in 1955 by a Municipal Decree and has the status of an autonomous public enterprise owned by the Municipality of the Special District of Bogota. It has responsibility for planning, constructing and operating all water supply, sewerage and drainage facilities in the area. De facto it is managed by the city of Bogota as a tool to implement its infrastructure building goals. The Government plays a role through the National Tariff Board which must approve the proposed increases. II. IMPLEMENTATION AND PROJECT OBJECTIVES 3. The projects were essentially two consecutive slices of the long-range master plan for supplying drinking water to the city and metropolitan area of Bogota. The targets had some degree of flexibility, however. In 1972, the Second Projectv was supposed to satisfy demand through 1982 when the population was estimated to be 5 million. In 1973 the same target was set for 1986 and the population 6.5 million. Two years later, actual demand for water was found lagging projections (the revisions being as low as 65% of appraisal estimates by 1980). Nonetheless the Third Project still followed a master plan prepared in 1967 at the Bank request'. Both projects were designed to assist the Government "in improving health and living conditions of Bogota's residents through an expansion of water supply, sewerage and drainage facilities." (PCR, para. 2.03) 4. The physical components of the Second Project comprised: (i) the first stage of the Chingaza scheme (a dam, a 33 km tunnel-pipeline, a treatment plant); (ii) additional expansion and rehabilitation of the Bogota water distribution system; and Project Brief for the Third Project (April 7, 1978). 2 (iii) provision of equipment and of engineering services. 5. The physical components of the Third Project comprised: (i) about 27 km of water transmission mains and about 80 km of secondary distribution mains; (ii) about 17 km of interceptors and about 150 km of sewerage networks; (iii) about 10 km of canalization along the four river systems; construction of 3 retention basins for flood control; and (iv) provision of equipment and of engineering services. Project Scope and Implementation 6. Some revisions in scope took place as reported in the PCR (para. 3.03). They had different reasons. In the case of the Second Project, some works were deleted to offset the cost overruns on the Chingaza tunnel (PAR, para. 12). They reflected a change in EAAB's priorities in the case of the Third Project, still with the aim of remaining within the budget. 7. The main implementation problem of the Second Project was the delay occasioned by the Chingaza tunnel construction. Two different reasons compounded the delay. First, the progress made by the original contractor were slow; then EAAB took time to take the decision of changing contractor. The third supervision report, less than 14 months after loan effectiveness, raised the issue of "very slow" progress explained by adverse soil conditions, extensively shattered rock, and unusually heavy rains. The following report (March 2, 1973) raised the operational issue of whether to continue with the same contractor. By mid 1973, 2.5 km had been dug instead of the 11 km targeted. The Bank then recommended that the foreign contractor hire a construction management consultant experienced in tunnel construction as a condition of continuation of his contract'. Despite Bank pressure for a rapid resolution of the issue, it would take EAAB ten months to decide to readvertise the rest of the tunnel. In the meantime, the Bank was concerned with the water shortage that the minimum 2-year delay would create in Bogota. The lack of cooperation by the original contractor (who declined full responsibility for the "lag" and requested an extension of the construction period and reimbursement of the additional expenditures) led EAAB to launch an ICB for another contractor. The original contractor did not abandon the tunnel construction until three months later with progress then only 23% of the contracted length instead of the 53% scheduled. The new contract was awarded promptly, but a dispute developed with the original contractor about compensations. Eventually, they were settled for US$1.95 million or 7% of the original contract. The new contractor claimed losing money on the construction and relations with EAAB soured after extra work claims were submitted. The initial delay was never offset and the component ended up costing considerably more than anticipated (PAR, para. 12). 8. The PCR (para. 3.05) claims that the delay on the Chingaza tunnel affected the implementation of the Third Project because EAAB management had been preoccupied with solving the issues related to the change of contractors. Actually the new contract was awarded in October 1974 whereas the Third Project became effective in April 1980, hardly an overlap justifying additional delays in other investments. 2 Letter to EAAB (June 27, 1973). 3 Disbursements 9. As shown in the statistical introduction to this report, actual disbursements considerably lagged projections for both projects. The Second Project was about one year late until 4 years into implementation, but the gap increased and the last disbursement occurred 3 years later than originally planned. Problems with the Chingaza tunnel (PAR, para. 7), which represented 32% of total project costs, were the main cause of delay. An "unofficial" suspension of disbursements in 1974 halted a slow start further. The PCR does not comment on this episode. The Third Project was affected by delays (3 years) and a cancellation of 7% of the loan amount. In both cases, repayments to the Bank started well before the last disbursements: over 26% and 33% of the loan amount remaining to be disbursed, respectively. These negative transfer situations (32 and 28 months, respectively) increased the cost of external financing of the Bank-assisted projects. The PCR does not comment on these undesirable outcomes. Procurement 10. The project files recorded a complaint against the procurement procedure used to award the largest item in the project, the Chingaza tunnel. The Bank upheld the ICB decision on the ground that the losing bidder had been disqualified for lack of adequate tunneling experience despite being the lowest bid. In retrospect, this is ironic because the selected firm proved to be plagued with the same inexperience and this caused costly delays in the project implementation. A later (1974) internal review by the Bank showed that none of the bidders had been prequalified, but that the selected one "would probably have passed any prequalification test"'. Procurement of major investment items has since been strengthened to ensure that the selected bidder has the capacity to handle the task. This case should, however, be a reminder that additional precautions taken ex ante have a substantial payoff in avoided cost overruns and time delays. Project Costs 11. Project costs are summarized in pages 6 and 8 of the statistical introduction to the PAR. The Second Project had a cost overrun in US dollars of 75% whereas the Third Project has savings of 6% of the appraisal estimate. The difference in complexity is the main reason for the contrast in performance. The difficulties with the Chingaza tunnel contractors were the source of delays and additional costs. The chronology of the estimate is summarized below: % change from US$ million Previous Estimate Original cost: 103.7 June 1976: 140.0 35.0 April 1977 133.6 -4.6 November 1977: 168.0 25.8 July 1978: 188.6 12.2 final cost: 181.75 -3.6 12. When the tunnel completion was handed over to another company early 1975, there was a 19% increase in price over the original contract which was completed at 18%, thus implying an effective 45% increase in 3 years. The new contractor thus extracted a premium of 17.6% in unit cost termss while the one settled its dispute with EAAB for US$1.95 million. These additional costs 3 Supervision Report (April 19, 1972). Internal memorandum (July 26, 1974). 19 over 100 - 18 - 45% increase, which after deduction of inflation, implies 17.6% in real terms. 4 created a problem of financing for EAAB. In 1976, the Bank acknowledged that the remaining funds on Loan 741-CO amounted to US$34.3 million compared to US$66.75 million needed to complete the project, thus indirectly highlighting the Bank's inability to finance cost overruns. Indeed, a supervision report two years later estimated the foreign exchange cost overrun at US$20 million for the period 1978-80 and stated that its funding "should come from additional tariff increases or international commercial banks"". It took another 20 months for EAAB to negotiate the US$20 million needed to complete the much delayed tunnel construction works. 13. The much simpler design of the Third Project yielded the additional benefit of being completed below projected costs (at least in terms of US dollars). The PCR does not provide final cost tables in local currency, thus, preventing definitive comments on the cost overruns in pesos. The rapid inflation and the concomitant devaluation (PAR, p. 1), however, implies substantial cost overruns in Colombian pesos for both projects. Rio Bogota Study 14. The cleaning of the highly polluted Bogota River has been a perennial objective of the Bank but supported by ineffective actions. This reflected in large part the ambivalence of the Colombian authorities about spending considerable amounts on resurrecting a river that experts acknowledged in layman terms to be "already dead"'. A 1972 supervision report raised the level of expectation about the planned "Bogota River Regulation and Pollution Control Study" to be "expected to become a model of comprehensive environmental and water resources planning"'. The aim was to make investment decisions on the basis of the feasibility analysis of the "optimal schemes" for both flood reduction, pollution control, land reclamation and water resources management. Actually the project files were silent for three years until progress of the study were called "slow"". Without further progress to report, a 1977 memorandum mentioned a Rio Bogota Regulation Project in the planningo. Another year later, the study's main recommendation was at last spelled out: "All Bogota sewage should be collected by a major interceptor paralleling the river with several pumping stations to transport sewage to one large treatment plant"' . The water company objected correctly that the massive investment required could not be financed through tariffs or external financing. The conclusion was the need for further studies when in fact the project should have been postponed indefinitely as too costly to be substantially financed by the beneficiaries. Thirteen years later, a project to clean the Rio Bogota is still entertained. Low-Income Focus 15. Bank assistance to EAAB had a marked focus on the low-income population of Bogota. As the Second Project aimed at covering the second stage (1972-76) of the city's long-range master plan, the demand from the expanding low-income areas ("barrios") was factored in. As early as 1972 EAAB developed a program for bringing water distribution and sewer to those sections of Bogota. Designed as an exceptional program required by Bogota city government, it had to be funded by additional sources. The Bogota Urban Development Institute (Fondo Financiero de Desarollo Urbano, or FFDU) was mentioned in June 1972, but three months later EAAB submitted a request to the Bank for earmarking US$35 million to finance these expenditures. The Bank answered 6 Supervision Report (April 11, 1978). Back-to-office Report for the appraisal of the Third Project (August 2, 1978, p. 15). 8 Supervision Report (April 3,1972). Supervision Report (March 20, 1975). Internal Memorandum (July 29, 1977). Back-to-office Report on the preappraisal of the Third Project (August 2, 1978). 5 formally only 19 months later. In the meantime, it requested that EAAB prepare a financing plan for all additional works required by the city because, being undertaken without identified funding, they worsened EAAB's overall financial problems2. Total cost of the distribution network in the barrios was estimated at 90 million pesos (US$3.8 million at the 1973 exchange rate). Despite the obvious poverty alleviation character of the program (62,000 new connections to benefit 600,000 inhabitants), it took another 6 months for a consensus to emerge on the financing plan: 40% by local funds (FFDU) and 60% by Loan 741-COu. A Bank mission recommended then to finance half of the barrios expenditures. However, because of a growing dispute on actions to be taken to improve EAAB's financial situation (PAR, para. 24), the Bank reversed its support to the barrios program" Four months later, it reversed itself again and increased its assistance to 100% of the cost then estimated at 110 million pesos. Despite these incidents, new consumers got water in October 1975, three months behind schedule. 16. The Third Project aimed at building upon this successful experiment by setting as "fundamental objective to upgrade health and living conditions in areas where large segments of the urban poor reside". The target was to service an additional 500,000 inhabitants classified as poor (i.e., with income below one third of the national per capita income). The PCR does not give adequate credit for the poverty focus of the two projects. The only mention (para. 7.01) is dealing with the affordability of tariffs. The flexibility albeit slow of the Bank in accepting to finance a program to assist the urban poor deserves special mention. Unaccounted-for-Water 17. The level of unaccounted-for-water was a recurrent supervision issue. Table 1 shows that it fluctuated between 22% and 38% with a tendency to stay above 30%, which is high. It was suspected that main breaks were responsible for 25 percentage points of this total6. The files reveals, however, no attempt to remedy this major source of lost revenues which is questionable given the constant pressure on tariffs increases (PAR, para. 24). Table 1: Unaccounted-for-Water FY72 FY73 FY76 FY80 FY81 FY82 FY83 In % 26 30 22 34 30 34 38 EEEB's Contribution to the Chingaza Tunnel 18. Beside transporting water for consumption to Bogota, an electricity production use for the Chingaza tunnel was found by the power company of Bogota (EEEB). While the principle of sharing 12 Internal memorandum (June 22, 1973). Supervision Report (April 2, 1974). '4 "The Bank cannot at the present time approve contracts to refinance barrios works" (Letter to EAAB, July 17, 1974). Issues Paper (October 24, 1978). 16 Supervision Report (May 11, 1984). 6 in the investment cost was accepted by EEEB early on, a time-consuming dispute arose on the amount of the contribution. The Bank recommended US$25 million in 1976". Two years later the dispute had not been resolved, but the preappraisal of the Third Project deemed it "not to be an issue for the proposed project"". Another three years later, the issue was still not resolved and this prompted the Mayor of Bogota to intervene and to order the two utilities to find a compromise before the end of 1981". Two years later, there was an agreement on the contribution to investment, but not on the maintenance cost. This protracted dispute between two major Bank borrowers in Colombia is difficult to justify. A prompt solution would have helped EAAB offset the disappointment over the cost overruns on the tunnel. The project files do not mention any Bank intervention. III. INSTITUTION BUILDING AND FINANCES EAAB's Financial Situation 19. The financial situation of EAAB during the period 1971-1984 (the last year effectively covered by the project files) has been characterized by a long phase of depressed results. From "very good" in 1972, the situation as reported in supervision reports became "precarious" in 1973 and deteriorating in the following years. This Audit is not commenting on detailed financial results dealing with the 1970s given their limited relevance now. It is worth noting, however, the contradiction between the repeated statement of the failure of EAAB to meet the only financial covenant (rate of return on fixed assets) and the achievement of generating enough cash flows after debt-servicing to cover 90.8% of investments in 1977. Part of the problem is that of perspective: 5% rate of return on revalued fixed assets is a good result given the fast pace of inflation built into the assets base. Self-financing of investments between 1971 and 1985 has been high when measured after debt-servicing. It averaged a commendable 31.1% with ratios as high as 59.4% in 1983. After correcting for the unfavorable accounts receivable (PAR, para. 20), the self-financing record is less impressive, but this is unfortunately not an indicator widely followed. Accounts Receivable 20. The issue is mentioned only twice in thirteen years of project files reviewed for this Audit. This is a major oversight because it has been documented that the inability to collect overdue bills is one of the main sources of financial distress among utilities. There was no financial covenant in either loan agreements to help protect EAAB against the impact of non-payments by official agencies such as Bogota City. The Borrower regretted the Bank's lack of intervention to make another Bank borrower (EEEB) pay its debts to EAAB (Annex 1). Table 2 shows the cash flows losses (or gains) due to the increase (decrease) of accounts receivable between 1971 and 1985. In 11 years out of 14 (1972-85), accounts receivable increased by factors ranging from 7% (1972) to 54.1% (1974) of EAAB's cash flows and averaging 23.3%. This almost constant increase of a capitalized loss (which uncollected bills amount to) meant that an average of 2.8 months of cash flows was actually unavailable to finance investment and debt service. 17 Back-to-Office Report (September 30, 1976). is Back-to-Office Report of Preappraisal mission (August 2, 1978). 19 Supervision Report (October 14, 1981). 7 Table 2: Impact of Accounts Receivable on Cash Flows Loss (gain) in % of Cash Flows FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 7.8 7.7 54.1 25.4 28.5 28.9 16.4 (13.6) 0.1 20.7 (21.1) 36.4 19.3 12.4 Profitability Indicators 21. The PCR does not isolate the "revaluation surplus"' component of either equity or fixed assets as to unable computing financial ratios on historical basis. Even after correcting for the increasing accounts receivable, the profitability on historical assets was high, and certainly higher than given credit in various supervision reports2". This Audit believes that this reflects the focus given to tariffs increase as the solution to many financial problems (PAR, para. 24). Debt-Equity Ratio 22. Based on revalued fixed assets, EAAB has been very conservative as far as indebtedness is concerned. The PCR reports the debt-equity ratio rising to no more than .39:1. This, however, translates into a substantial debt-equity ratio with assets in historical terms, which was the only accepted presentation in Colombia in the 1970s and 1980s. This discrepancy is not commented upon in the PCR. Financial Covenants 23. The only financial covenant was the need to meet a set rate of return which varied depending on the period: 9% in 1971-73, 10% in 1974-78, 7% in 1979-80, 5% in 1981-82, and 6% in 1983-on. These are high target given that the fixed assets are revalued. The PCR notes that EAAB was able to meet the covenant 10 out of 15 years of the project period (Annex 1). Again this overstates the true profitability of EAAB given the irrecoverable losses incurred because of the accumulating accounts receivable (PAR, para. 20). Furthermore, the high target imposed by the rate of return on revalued fixed assets, in turn, put excessive focus on the need for tariff increases (PAR, para. 24). The Borrower suggested that the definition and application of a financial and institutional monitoring system should be a condition of loan approval (Annex 1). Tariff Increases 24. The project files show the tariff increases being the most frequent issue raised. The pressure applied by the Bank was unusually firm as it included a threat of suspension of disbursements and a short period of "unofficial" suspension in 1974 (PAR, para. 9). Continuing large investment programs to keep up with the urbanization pace of Bogota as well as the relatively high inflation rate (over 20%) explain the need for high tariff increase figures ("need for 414% increase in 4 years"'). Cost cutting measures such as reducing accounts receivable and unaccounted-for-water were conspicuously absent, however. Revaluation surplus is the difference between the replacement cost and the historical cost of fixed assets. 21 Example: financial performance is poor with a revaluation FRR of 7.7% (Supervision Report of April 2, 1974). Internal memorandum (May 15, 1978). 8 Bank Loans' Terms 25. The Second Bank Loan was granted directly to EAAB for 29 years and 8 months of maturity, including 7 years and 4 months of grace. The Third Loan was granted for 16 years and 5 months of maturity, including 3 years and 11 months of grace. The shortening of Bank loan terms affected adversely the effective availability of funds. One indicator is the significant negative transfer between EAAB and the Bank. First repayments started over two years before the loans were fully disbursed (PAR, para. 9). Exchange Risk 26. As of November 30, 1993, the exchange risk on the two Bank loans was substantial (33.7% and 43.5% of the outstanding principal, respectively). To a large extent it was predictable given the rapid pace of local inflation in the 1980s. It is nonetheless worth noting that the Bank reversed its exchange risk forecasts when EAAB protested them for being "an unrealistically high rate of devaluation assumption". Table 3 shows that the Bank's original assumption, while missing the trend, was correct on a compounded basis. The revision made to accommodate EAAB was unwarranted. The operational conclusion is that exchange forecasts should be made and should be revised on the basis of professional judgments. Table 3: Assumptions for Exchange Risk FY78 FY79 FY80 FY81 FY82 Compounded Original 15.0 15.0 12.0 12.0 10.0 82.5 Revised 15.0 8.0 8.0 8.0 8.0 56.5 Actual 8.0 7.3 15.7 16.0 19.0 85.2 Accounting and External Audit 27. The project files covering 14 years mention only 4 times the issue of external auditing of EAAB's accounts. Early on during implementation of the Second Project, the practice to delay the transfer of investments from "works in progress" to "fixed assets in operation" was criticized because it had an adverse effect on the tariff base as well as on EAAB's depreciation capability. Seven years later another issue was raised when it was discovered that EAAB did not revalue the "works in progress" and thus overstated the rate of return'. The absence of additional mentions implies that the issues were resolved satisfactorily. Although the PCR review of covenants stated that "audited statements were satisfactory" (PCR, Annex 1), with the debtors' external auditors were unable to express opinion two years in a row (1979 and 1980). They claimed that the reasonableness of net fixed assets could not be verified; the provision for legal claims against EAAB was inadequate; there was no satisfactory results in tests with the debtors of accounts receivable". There was no documented follow-up on this case of qualified accounts, which is difficult to comprehend. The Borrower suggested that updated accounting and consistence of audits and financial statements be made loan conditions (Annex 1). Environment 28. Environment was a prominent issue in the two projects through the recurring focus on cleaning the Bogota River although no project ever came out of the studies. The provision of safe water and of sewerage was a real contribution to improved environment. Letter to EAAB (December 19, 1979). 24 Letter to EAAB (April 9, 1982). 9 Sustainability 29. Water infrastructure projects are by nature income-generating projects and sustainability of their benefits is ensured by the cost recovery effected by billing consumers for their use of water. The rates of return generated by EAAB show that the sustainability of project benefits is not in doubt. Although the levels of unaccounted-for-water and accounts receivable are causes for concern, it can be assumed that positive results will be obtained when these two issues are addressed. IV. CONCLUSIONS AND LESSONS Project Rating 30. The Audit rates the overall performance of the project as satisfactory and its institutional development a substantial. The sustainability of the benefits of the various subloans is likely. These ratings agree with that proposed by the PCR. Borrower Performance 31. If the difficulties with the Chingaza tunnel construction are discounted, the two projects were successful in meeting their physical targets. The cost overruns on the tunnel were only partly the responsibility of EAAB (time to take the decision to change contractor). The focus on providing more services to the poor sections (barrios) of Bogota was appropriate. The inability to raise tariffs to meet the rate of return covenant was largely outside its control as increases have to be approved by the government's National Tariff Board. The unfavorable financial situation reported in the 1970s was relative since EAAB was able to maintain a reasonable self-financing ratio (above 30% after debt-servicing). Bank Performance 32. The Bank assistance through the two audited projects provided the needed funds to finance the complex water and sewerage infrastructure required by the urbanization of Bogota. 33. The Second Project raises the issue of the scope of eligible expenses. While taking correctly credit in 1978 for having "been EAAB's principal external financing source during the past ten years"', the Bank was not there when the need arose to fund the predictable cost overrun on the Chingaza tunnel (PAR, para. 12). It is not necessarily consistent to finance the interest-during- construction (which is merely a temporarily capitalized financial expense) while not considering additional investment expenditures necessary to complete the project component. The issue deserves flexible handling, especially when the cost overrun is no fault of the executing agency which has followed all ICB procedures. The financing of risky expenditures such as long tunnels in at best uncertain geological terrains should either be generous in contingencies or include a cost overrun financing option to avoid putting the Bank borrower in a difficult financial position. A combination of both would be preferable. The "unallocated" component of the loan could accommodate this option with the proper legal language to reserve its use exclusively for financing cost overruns which are determined as not being the result of mismanagement. Project Brief for the Third Project (September 18, 1978). 10 34. When the tax, accounting, and financial context does not allows the automatic revaluation of fixed assets like in Colombia during the project period, financial results should be presented also in historical terms. At the minimum, the revaluation reserve should be showed separate from other equity sources to facilitate the computing of historical indicators. 35. The attention paid in the 1970s about political interferences in the running of industrial or utility concerns is noteworthy. It is regrettable that this interest has faded since the problem has not disappeared. The Borrower called for a study of political influences on companies' management (Annex 1). 11 Annex 1 Page 1 of 2 COMMENTS FROM THE BORROWER REPUBLIC OF COLOMBIA NATIONAL PLANNING DEPARTMENT UPRU - DIVISEP 393 Santaf6 de BogotA, D.C., June 2, 1994 Mr. YVES ALBOUY Chief, Infrastructure and Energy Division Operations and Evaluation Department World Bank Washington, D.C. Dear Mr. Albouy: In reference to your kind request for comments on the Project Performance Audit Report on the Bogota II (Loan 741-CO) and Bogota III (Loan 1697-CO), I wish to express our satisfaction on the report which highlights the most relevant aspects of the execution of these projects. However, I wish to note some aspects that I consider should have an impact on the evaluation and follow up methodologies of Bank approved operations: 1. We consider that the definition and application of financial and institutional indicators, besides measuring the management of borrowing agencies, should constitute a condition for the approval or permanence of loans. 2. In fact, the existence of an updated accounting and compliance of auditing presented by audits to financial statements, should be conditions for the approval and maintenance of loans. 3. Compliance with these indicators -such as monitoring not accounted for water and the rate of collection and the decrease of personnel and operational costs- may avoid actions such as rate increases, that although necessary to ensure the financing of companies, transfer the corporate management inefficiency to the user. The Bank's lack of intervention in the requirement of exploring financing alternatives for the companies is apparent in the occurrence of non-compliance by the Bogota Power Corporation to make its payments to the Water Corporation for the Chingaza Project. This is even more critical when taking into account the fact that both corporations were World Bank clients. 4. The design and evaluation of these indicators by the Bank should consider aspects such as assessment, evolution, implications of their non-compliance and procedures to enforce penalties. 5. In its design, the Bank should review the corporations' management performance and assess the limits presented by these indicators under critical and optimal management situations of several corporations, with different degrees of management. 12 Annex 1 Page 2 of 2 6. We consider that the dimensioning of these indicators, besides getting closer to the measurement of the risk of loan operations, facilitates the Bank's follow-up work. 7. A precise knowledge of "warning signals" may ensure an appropriate orientation of resources toward areas requiring strengthening in the public utility, or provide elements to postpone loan operations until the levels indicated by the indicators are reached by the companies. 8. Besides, having a clear picture of the behavior that should be observed by Bank "clients", not only ensures successful projects, but also a steady demand for the services provided by the Bank, by these "clients". 9. An element which we consider requires a detailed study, corresponds to the aspect mentioned in paragraph 35 of the evaluation, regarding political influences on the companies' management. 10. The incidence of agents alien to the company, with interests other than those of providing efficient services, requires a detailed analysis of the manner on which the Bank approaches this issue. 11. We agree with the observation made in the evaluation of the need to search alternative schemes allowing the Bank to modify the conditions of operations -amount, terms- when situations arise that alter the conditions on which the credit was approved, not attributable to poor management by the Borrower -such as market changes, works contingencies. 12. We consider that an aspect of great consequence in the Bogota II Project (Loan 741-CO) which is not mentioned in the evaluation corresponds to the importance of these works in the decreased vulnerability of the Bogota water supply system. 13. Lastly, in our opinion, paragraph 14 is out of context and we do not agree with the importance given to the issue, in view of the priority for the company to invest in the sectors covered by the two projects evaluated and the lack of a river recovery plan that would provide economic and institutional aspects on the responsibility of the different agents involved in the river management. The relevance of this issue for the Bank and the steps taken since the 1970s, are indicated in paragraph 28 "Environment", of the evaluation of these two projects. I will be happy to receive any comments from you and I will expand the scope of the issues covered in this letter. Best regards, Is/LUZ ANGELA MONDRAGON RESTREPO Chief, Urban and Regional Planning Unit cc: Dr. Beatriz Arbelgez, Public Credit Director, Ministry of the Treasury Dr. Alberto Nassar, General Manager, EAAB