Document of The World Bank Report No. 13738-CO STAFF APPRAISAL REPORT COLOMBIA SANTAFE I WATER SUPPLY AND SEWERAGE REIABILITATION PROJECT OCTOBER 20, 1995 Environmnet & Urban Development Division Country Department III Latin America and the Caribbean Region CURRENCY EQUIVALENTS Currency Unit = peso US$1 = 831 pesos (December, 1994) all figures in dollars unless otherwise noted WEIGHTS AND MEASURES Metric ABBREVIATIONS AND ACRONYMS BOT - Build-Operate-Transfer type of contract BRC - Bogota River Committee Capital District - The city of Bogota CAR - Corporacion Autonoma Regional CONFIS - Consejo Fiscal del Distrito Capital CRAS - Comision Reguladora de Agua y Saneamiento DAMA - Departamento Administrativo del Medio Ambiente DAPS - Direccion de Agua Potable y Saneamiento DNP - Departamento Nacional de Planeacion DTF - Passive Annual Interest Rate in Colombia EAAB - Empresa de Acueducto y Alcantarillado de Bogota EEB - Empresa de Energia de Bogota FINDETER - Financiera de Desarrollo Territorial GIS - EAAB Geographical Information System IDB - Interamerican Development Bank INDERENA - Former National Environmental Agency JAL - Juntas de Administracion Local LIBOR - London Inter-Bank Offering Rate ME - Ministry of Environment MIS - EAAB Management Information System NGO - Non Governmental Association PP - Performance Plan SINA - National Environment System SSPD - Superintendencia de Servicios Publicos Domiciliarios FISCAL YEAR January I - December 31 Colombia Santafe I Water Supply And Sewerage Rehabilitation Project Staff Appraisal Report CONTENTS LOAN AND PROJECT SUMMARY ............................................................................. ; L WATER AND SANITATION SECTOR OVERVIEW ............................................................................. 1 A. ECONOMIC BACKGROUND ............................................................................................................. I B. INSTITUTIONAL AND LEGAL FRAmwoRK ......................................1....................................................................... I C. CU RRENT SECTOR ISSUES ............................................................................................, 2 1. Countrywide Issues ........................................................................................... 2 2. Bogota-Specific Issues ........................................................................................... 4 D. LESSONS FROM BANK EXPERIENCE ........................................................................................... 6 IL EMPRESA DE ACUEDUCTO Y ALCANTARILLADO DE BOGOTA ESP (EAAB) .................................................. 7 A. GENERAL ............................................................................................. 7 B. RECENT FINANCiAL PERFORMANCE ........................................................................................... 7 C. INSTITUTIONAL CHANGES ......................................... 9 D. PERFORMANCEPLAN. , ,. ,.10 E. PRIVATE SECTOR PARTICIPATION ....................................... 10 THE PROJECT ............................ 11 A. BACKGROUND ........................................1 B. PROJECT OBJIECTIVES AND RATIONALE ....................................... 1 C. PROJECT DESCRIPTIO... 12 D. PROJECT COST ............... 14 E. ECONOMIC EVALUATION ................................................................. 15 1. Project Justification and Benefits ................................................................ 15 F. FINANCIALANALYSIS ................................................................ 16 1. Project Financing Plan ................................................ 16 2. Projected Financial Results ............................................... 18 3. Tariff Structure and Main Financial Covenants ............................................... 20 4. Pension Fund ........................................20 5. Asset Revaluation and Financial Rate of Return ............................................... 21 6. Financial Risks and Sensitivity Analysis .............................................. .. 22 7. Other Financial Matters ............................................... 22 8. Accounts and Audit ............................................... 23 G. ENVRON MENTAL IMPACT ............................................... 23 H. SOCIOECONOMIC IMPACT ............................................... 25 1. PROJECT RisKs AND SAFEGUARDS ................................................ 25 IV. PROJECT IMPLEMENTATION ARRANGEMENTS .............................................. 26 A. STATUS OF PROJECT PREPARATION .............................................. 26 B. ORGANIZATIONAL ASPECTS ............................................... 26 C. PROCUREMENT .............................................. 28 D. DISBURSEMENT .............................................. 29 E. MONITORING AND IMPACT INDICATORS ............................................... 30 F. SUPERVISION .................................................. 31 V. AGREEMENTS REACHED AND RECOMMENDATION .............................................. 31 This report is based on the findings of an appraisal mission that visited Colombia from November 29 to December 15, 1993. Updating missions visited BogotA in May 1994, and following the change of government, in September, 1994, and again in February 1995, after the new Mayor took office, in order to complete the appraisal. The missions comprised, inter alia, Messrs/Mlmes. P. Hari Prasad (Task Manager until May 1994), R. Venkateswaran (Task Manager since May 1994), M. Libhaber, S. Contreras, 0. Alvarado, F. Feld, T. Serra, (all of LA31N and/or LA3EU), G. Yepes (TWUWS), M. Mejia, D. Graham (LATEN). Ms. C. van den Berg (LA3EU) prepared the economic analysis of the project. Messrs. P. Ludwig (LA3IN) and E. McCarthy (LA3EU) were the responsible Division Chiefs during the appraisal period. Messrs. G. Yepes and V. Gouarne acted as peer reviewers. The Projects Advisor and Department Director are Messrs. R. Crown and P. Isenman ( Mr. Yoshiaki Abe was Director until October 1, 1995). ANNEXES Annex I Population Growth, Water Demand And Supply Balance In BogotA Metropolitan Area 34 Annex 2 Water Supply, Sanitation And Pollution In The BogotA Metropolitan Area 40 Annex 3 Environmental Issues 53 Annex 4 Past Bank Experience In The Water & Sanitation Sector In Colombia 58 Annex 5 EAAB Institutional Assessment And Performance Plan 61 Annex 6 Private Sector Participation Program 72 Annex 7 Detailed Project Description 75 Annex 8 Cost Estimates 81 Annex 9 Economic Analysis: Methodology And Results 86 Annex 10 Financial Evaluation: Assumptions & Results 100 Annex 11 Water & Sewerage Tariff Structure And Issues 115 Annex 12 Responsibilities For Project Implementation 119 Annex 13 Project Implementation Schedule 122 Annex 14 Monitoring And Impact Indicators 133 Annex 15 Limits On Types Of Procurement And Prior Review Thresholds 138 Annex 16 Bidding Packages Agreed During Appraisal 139 Annex 17 Allocation Of Loan Proceeds 143 Annex 18 Disbursement Schedule 144 MAPS IBRD 26608 General Layout and Vulnerability Control Component Works IBRD 25737 Proposed Primary Sewerage Network IBRD 25738 Proposed Stornwater Drainage System IBRD 25739 Proposed Primary Water Distribution Network IBRD 25740 Proposed Secondary Water and Sewerage Networks IBRD 25741 Proposed Sewerage Rehabilitation Works IBRD 25742 Proposed Water Supply Rehabilitation Works IBRD 25743 Poverty Indicators in the Areas of Proposed Secondary Water Supply and Sewerage Networks Colombia Santafe I Water Supply And Sewerage Rehabilitation Project Staff Appraisal Report Loan And Project Summary Borrower: Empresa de Acueducto y Alcantarillado de Bogota (EAAB, Bogota Water Supply and Sewerage Company) Guarantor: Republic of Colombia Terms: (i) a first loan for US$87 million (60% of total) on Fixed Rate Terms for Single Currency Loan for up to 15 years. Each semester's aggregate disbursements (Disbursed Amount) would have a grace period of 3 years and a final maturity of 9 years, both beginning from the rate fixing date for such Disbursed Amount; (ii) a second loan for US$58 million (40%'o of total) on Libor-based terms for Single Currency Loan involving 17 years repayment, including a grace period of 5 years. Interest Payment Dates and Rate Fixing Dates: May 15 and November 15 Commitment Charge: 0.75% on undisbursed balances, beginning 60 days after signing, less any waiver. Financing Plan: Phase 1 % of Source Local Foreign Total (incl Total Cost Taxes) World Bank 0.0 145.0 145.0 (35.0) EAAB 77.9 2.6 120.3 (29.0) Transfers from District 118.9 0.0 118.9 (28.7) Private Sector 0.0 30.0 30.0 (7.2) Total 196.8 177.6 414.2 (100.0) Project Costs (in US$ milion): PHASE 1 PHASE 2 TOTAL SANTAFE 1 PROJECT LOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL % FOREIGN A. Vulnerability Component 20.3 30.5 50.9 5.9 8.9 14.8 26.3 39.4 65.7 60.0 B. PrimarySewerage & Drainage 41.1 31.7 72.8 14.8 24.8 39.6 56.0 56.5 112.6 60.2 C. Primary water Distribution 7.0 16.8 22.9 11.3 33.5 44.8 18.3 49.3 67.6 72.9 D. Expansion of Secondary Networks 30.0 20.0 49.9 36.0 24.0 59.9 65.9 43.9 109.9 40.0 E. Rehabilitation of Secondary Networks 6.5 6.5 13.0 5.8 6.8 11.6 12.3 12.3 24.6 50.0 F. Institutional Strengthening 12.0 24.8 36.8 0.0 0.0 0.0 12.0 24.8 36.8 67.4 G. Technical Assistance 17.3 17.3 34.6 13.0 13.0 26.1 30.3 30.3 60.7 50.0 H. Environmental Component 3.1 4.7 7.9 0.0 0.0 0.0 3.1 4.7 7.9 60.0 BASE COST (June 1993 Prices) 137.4 151.3 238.7 86.9 110.0 196.9 224.3 261.3 485.6 53.8 Physical Contingencies 13.7 15.1 28.9 8.7 11.0 19.7 22.4 26.1 48.6 53.8 Price Contingencies 45.6 11.2 56.8 42.2 17.9 60.1 87.8 29.1 116.9 24.9 TOTAL PROJECT COST 196.8 177.6 374.4 137.8 138.9 276.6 334.5 316.5 651.1 48.6 Import Duties & VAT 39.8 0.0 39.8 27.1 0.0 27.1 66.9 0.0 66.9 0.0 TOTAL INVESTMENT COST 236.5 177.6 414.2 164.9 138.9 303.8 401.4 316.5 717.9 44.1 Disbursements (in US$ million):' IBRD Fiseal Year 1996 1997 1998 1999 2000 2001 2002 Annual 19.8 29.9 44.4 34.9 13.6 1.7 0.7 Cmulative 19.8 49.7 94.1 129.0 142.6 144.3 145.0 % Cunulative 13.7 34.3 64.9 89.0 98.4 99.5 100.0 Totals may not add due to rounding Estimated Economic Rate of Return: 17% Staff Appraisal Report: 13738 CO MAPS LBRD 26608, LBRD 25737, IBRD 25738, IBRD 25739, IBRD 25740, IBRD 25741, IBRD 25742, IBRD 25743 1 Loan Effectiveness in December 1995. I. Water and Sanitation Sector Overview 1. Colombia, with a population of about 35 million, 70% of which is urban, has made impressive strides in expanding its water and sanitation sector in the past decade. Over 76% of the population now has access to drinking water, while sanitary sewerage covers over 64% of households in the country. The coverage levels in the four biggest urban centers of Bogota, Medellin, Cali and Barranquilla, which together account for 30% of the population, is substantially higher, at 88% for water and 85% for sewerage. Nevertheless, major institutional problems persist, having their origin in highly politicized utility companies and a lack of accountability for performance. A. Economic Background 2. The administration of President Sanper, who took office in July 1994, is continuing the basic policy of liberalization of the economy, that was the cornerstone of the economic reform process started by the previous administration of President Gaviria, but with a renewed focus on expanding and improving the provision of basic infrastructure and services to the majority of the population. 3. Consistent with this objective, the priorities are now to consolidate prudent macroeconomic management through restraint of the fiscal deficit and inflation, further reforms in key structural areas (trade, finance, labor legislation), privatization of major public institutions and activities (ports, railways, banks), and a sharper focus on improving the coverage and quality of services such as health, education, and sanitation, through a public expenditures program concentrated in the social sectors and infrastructure, and policies to encourage the private provision of public services (e.g. through bidding out port and railway operations and electric power generation). The Government's strategy also aims at promoting the establishment of a more responsive system of governance based on decentralization and community participation, through continued restructuring of state agencies and development of more adequate regulatory structures and mechanisms. 4. The Bank's 1993 CSP endorsed the previous Government's priorities and approach. In recent discussions with the incoming Government the Bank has emphasized continued support in addressing infrastructure and human resource development needs and greater emphasis upon improved targeting mechanisms for the poor. Improving project implementation will continue to be a major priority, and among the critical conclusions is the importance of ensuring quality at entry through addressing major institutional and systemic issues before going ahead with lending operations. B. Institutional and Legal Framework 5. A new regulatory framework conducive to efficiency improvements, expanded private sector participation in the delivery of public services, greater accountability, and a more arm's length relationship between the utilities and local politicians was legislated by the Government as Public Services Law (Law 142) and approved by the outgoing legislature in July 1994 (see para 32.). Through various modemization decrees issued in December 1992, the National Government also introduced several modifications in sector policies, institutions, operations, and finances, aimed at promoting sector reforms. The most important reform took place in the Ministry of Development, with the creation of the Vice-Ministry of Water, Housing and Urban Development, which took over responsibility for the sector, previously under the Ministry of Public Works. Two new institutions were also created in the Ministry of Development: the Potable Water and Sanitation Directorate, "Direccion de Agua Potable y Saneamiento" (DAPS), and the Water Regulatory Commission, "Comision Reguladora de Agua y Saneamiento" (CRAS). At the same time, the environmental functions in the Ministry of Health were transferred to the newly created Ministry of the Environment (ME). In addition, under the Public Services Law, the Government has also established the Superintendency of Domestic Public Services, "Superintendencia de Servicios Publicos Domiciliares" (SSPD). The SSPD is expected to be a powerful entity with responsibilities for general administration and control of policies, including establishing uniform accounting systems, supervising proper administration of subsidies and enforcing regulations. In view of the importance of public disclosure of the operating performance of public services, SSPD has an important role in disseminating information on a comparative basis of relevant statistics and operational performance indicators. As indicated in the following paragraph, the Bank's contuining sector dialogue will monitor SSPD'd overall development and assist it in fulfilling its important functions. 6. The CRAS includes the Minister of Development who also serves as chairman, the Minister of Health, the Director of DNP and three full time experts. It oversees waste water, sewerage and sanitation services, with tasks including the definition of efficiency criteria and quality standards, promoting competition for management of services, curtailing monopolistic and restrictive practices, resolving conflicts among public enterprises, setting tariffs for regulated public services, establishing general formulas and criteria for pricing and deciding the degree of autonomy for tariff adjustments among sector companies. The other sector institution DAPS has several functions oriented at supporting service activities of nation-wide scope, such as preparing, in coordination with DNP, the sector development plan, providing technical assistance to local and regional sector institutions, promoting and coordinating sector research, preparing and coordinating a national training program and promoting national programs and plans, especially for rural areas. The Government has expressed interest in Bank assistance in strengthening these newly established institutions and enabling them to fulfill their respective roles. C. Current Sector Issues 1. Countrywide Issues 7. Main Sector Problems. The water sector in Colombia is comprised of just over 1,000 separate urban water and sanitation companies ranging in size from about 900,000 to about 1,000 households served. These companies reflect a wide variety of ownership, efficiency and operational patterns and mnany of them have additional functions (e.g., services covering solid waste, markets, slaughterhouses, etc.). As outlined in the 1990- 1994 Social and Economic Development Plan, until the end of the last decade, this sector suffered from a wide array of problems including: a highly centamlized system; institutional instability; low national coverage; poor service quality; inefficiencies at various administrative and operational levels; lack of qualified personnel; inequitable coverage and exclusion of many of the poorest households and marginal areas. After six extensive reorganizations in the system over the past five decades, and with about US$4.5 billion invested over the past three decades, coverage increased significantly; however, investment targets in terms of access to established and reliable water and sewerage service was still limited not only to the wealthier groups in urban areas but also in terms of urban-rural coverage. While detailed records on quality, reliability of service, etc., are not available; sample data indicate that although most of the large systems provide close to 24 hours of service, many neighborhoods served by such systemns may not have service for days or they may have frequent interruptions. Also, there are several companies where the entire system suffers sustained significant down-time for a variety of institutional, technical, financial and other reasons. At the national level, only about 50% of the water companies have treatment plants and of these, only about 50% (primarily the larger ones), provide treated drinking water on a regular and consistent basis. 8. Environmental Degradation. Many of Colombia's waterways suffer major environmental damage from pollution due to domestic sewage, industrial effluents, solid waste, pesticides, or oil pipeline leaks. Government estimates indicate that in 1991, almost all of the industries in and around the main urban centers in Colombia were discharging effluents in rivers and coastal waters, of which about 40% went in the watershed of the River Magdalena (excluding the Bogota River) and 35% in the Bogota River. Additionally, increased sedimentation is caused by watershed degradation and toxic contamination from mining operations. Wastewater treatment facilities are almost totally absent; currently, only about 2% of the effluent of the sewerage system nationwide receives any treatment before disposal. The continued rapid growth of urban populations at rates much higher than the national average adds to the pollution problem of these urban centers and highlights the urgent need for sewage treatment facilities. 9. While Colombia's pollution-control laws are quite comprehensive, enforcement is generally weak and penalties, even when they are imposed, are less than the cost of compliance. Institutional weaknesses, poor inter-agency coordination and overlapping mandates have also contributed to the present situation. As a result, and because of such additional factors as cost-benefit externalities, multiple pollution sources, non- compliance with cost-recovery mechanisms and a short-term focus to date, it has been almost impossible to reach consensus among the various interest groups. 10. Solid waste collection is available to about 60% of the urban population and non-existent in rural areas. System inadequacies contribute to several environmental and health hazards and this is also a significant source of water pollution. Recent efforts to privatize the BogotA solid waste collection system have resulted in substantial improvement, although deficiencies have recently become apparent in the part of the city not so far covered by private operators (for which emergency remedial measures have been taken). 11. Health Impact. Diseases associated with unsafe water and inadequate sanitation are endemic in Colombia; diarrheal diseases and enteritis are among the five most important primary causes of deaths in all age groups up to fourteen years. Among infants in their first year, they are the second leading cause of death and for those below five years, they are the leading cause. Although substantial progress has been made in the past two decades in reducing mortality and morbidity in the country, the provision of safe water and adequate sanitation is required to complement other efforts by the Govenmment in the public health field in order to reduce such incidence from water and sanitation related diseases to intemationally acceptable levels. 12. Government's Role in the Sector. During the early 1900s, the task of providing water to various communities was one assumed by individuals, private water companies or municipalities, with some Central Government assistance. As urbanization made this task more complex and unfulfilled needs grew, the Central Government began to assume a greater role in designing, contracting and even managing sector works. This marked the beginning of "growing centralism" which was formalized in 1936 with the creation of a special water division in the Ministry of Public Works with tasks which included the design and supervision of infrastructure works. As the need for a more specialized finance sector entity became apparent, the Government established the Fondo de Fomento Municipal in 1940 to finance water works, supervise construction and approve sector studies, plans and budgets. 13. The Instituto de Fomento Municipal (INSFOPAL) was later created with responsibilities for designing, financing and contracting sector works in several urban areas. INSFOPAL opened offices in each Departmental capital and became the main sector entity during this penod. With growing concern that the water needs of rural areas were not being attended, in 1968 the Government established the Instituto Nacional para Prograrnas Especiales de Salud (INPES) im the Ministry of Health to attend to such needs. The Government thus consolidated its position as the principal actor im the sector throughout the country 14. Attempts to provide greater autonomy for sector entities were initiated in 1975 after a new government canie into office. The regional offices of INSFOPAL were renamed Empresas de Obras Sanitanas (EMPOS) and the central unit of INSFOPAL was then supposed to relinquish its direct intervention in the sector and become a national coordinating and general assistance entity However, the weak state of many local EMPOS resulted in INSFOPAL continuing with its administrative, executing, control and financing role. By the early 1980s the system was in a deep financial crisis and in 1987 the Government decided to abolish INSFOPAL and transfer the assets of the EMPOS to the local authorities. Financing for sector entities followed a similar changing path where, between 1976 and 1987 there were four different ministries with financing responsibility for sector activities. 15. As outlined in the 1991-1994 Development Plan, the Government's main sector goals were: (a) restructuring of existing institutions to promote further decentralization; (b) increasing national household coverage for water and sewerage services; (c) improving the quality of treated drinking water from public systems; and, (d) formulating and initiating implementation of a wastewater treatment strategy for the largest cities. 16. Estimates of financial needs for the plan period were put at about US$930 million (not including pollution control and sanitation activities in the five largest cities, which were to be studied and financed separately). Of the US$930 million, about US$440 million were to be either credit or own resources of the four largest metropolitan areas; about US$150 million were to be from the Bank's ongoing water supply and sewerage sector loan (2961-CO); US$80 million were expected from central government subsidies to areas which made special efforts to capture counterpart resources; and the rest was to be from local counterpart sources, grants from the Integrated Rural Development Fund (DRI), credits from the Caja Agraria for rural works and to a lesser degree from the Regional Development Corporations (CORPES), Departmental Governments, the Ministry of Health, and UNDP assistance. As of the end of 1993, approximately, 65% of the above forecast of investments had been executed by the authorities. By the end of 1994, approximately 80% of the planned investments were expected to be completed. 17. Despite the increasing levels of investment flows into the sector, continuing administrative weaknesses and inefficiencies are adding to the overall cost of delivery and contributing to premature and costly additions to capacity. In particular, continuing high levels of Unaccounted-for-Water (UFW) in the major municipal systems are leading to high operating costs, low revenues and increasing vulnerability of service due to capacity and distribution constraints. The high levels of UFW are attributed to a large extent to inefficient and fraudulent commercial practices, as well as to system deficiencies caused by inadequate maintenance. The new Public Services Law has been designed to arrest these tendencies by forcing municipal governments to create financially and administratively autonomous public utilities, by accelerating the introduction of the private sector in the provision of public services and by instilling financial and managerial accountability and responsibility. The proposed project directly responds to these above general concerns, which have been most acutely felt in the Bogota Capital District. 2. Bogota-Specific Issues 18. Demand: The major issue facing the Capital District of Santafe de Bogota (Bogota) is the rapid growth in water demand that will require major investments in developing new and more costly water sources to avoid rationing in the near future. In 1994, BogotA (including the surrounding municipalities) had a population of 6.5 million, growing at a rate of 2.7 percent p.a. The urban population is projected to reach 8.0 million by the end of the century and lose to 10 million by the year 2010. A detailed analysis of population and demand projections is presented in Annex 1. According to official statistics, there are some one million urban poor in the Capital District. It is also estimated that some 100,000 lack access to adequate water supply services and about 750,000 to adequate sanitary toilet facilities. In addition, an estimated 500,000 live close to highly polluted water courses, the Bogota River and its tributaries that run through the city, or in low areas prone to frequent flooding. Recent studies commissioned by EAAB show that, under the present rate of growth of demand, existing water sources can at best serve the needs of the Capital district and the surrounding municipalities through the year 2014 (assuming continued decline in the UFW, (see para. below)). Although better demand management would slow the pace of growth of demand, the sheer increase in population and income levels will continue to put pressure on the authorities to develop new water sources. 19. Water Supply: Service coverage in the capital area (for details see Annex 2) is high by national standards. According to the 1993 census, 88% of the urban population of Bogota had access to water supply services by house connection. The main issue facing the EAAB is the rapid increase in unaccounted for water (UFW) from 22% in the early 1970's to about 42% in 1990; UFW was about 40% at the beginning of 1994. EAAB, under a study financed under the Bogota IV project (Loan 2512- CO), assessed the causes of this high UFW. The main cause, which accounts for about 65% of the UFW, is related to problems in the commercial system i.e., illegal connections, inaccurate consumer records, software tampering and faulty meters. The rest (35%) is mostly caused by leaks in the distribution system and house connections and problems with macrometering. Based on these findings, EAAB has developed a comprehensive plan to reduce UFW to about 25% by the year 2000. Implementation of this plan has begun as an integral part of the Santafe I Project. 20. Given the relative size and strength of EAAB and the large economies of scale in water production, it is likely that its sphere of influence in the savanna of Bogota region will grow over time (see Annex 2). Water production capacity is limited to about 65% of the nominal capacity (836 million m3/year) because of constraints in the Tibito system. About 66% of the nominal capacity was utilized in 1992. The quality of water of the supply sources ranges from excellent as in the case of the Chingaza system that provides 55% of the system's capacity and comes from a highly protected and thinly populated area, to the Tibito system that provides 42% of nominal capacity, located in a relatively unprotected area subject to moderate levels of urban and industrial pollution. All water supplies are treated and chlorinated to meet or exceed WHO drinking water quality guidelines and there is a water testing and monitoring program to ensure that water provided to consumers meets these standards. In addition, there is a pollution abatement program under execution in the upper basin of the Bogota River that will improve the raw water quality at Tibito. The main issue in this regard is the vulnerability of the primary water distribution system from the two main sources (i.e., Tibito and Wiesner treatment plants)2 to potential breakdowns with consequent disastrous effects on EAAB's ability to meet the average daily demand without resorting to water rationing for prolonged periods (Annex 2). The project addresses this particular issue with special emphasis on reducing system vulnerability. 2 The 75 km Tibito pipeline has well-documented structural deficiencies that remain highly vulnerable. Th epipeline shows a staedy increase in ruptires even at the present opearting flows which are less than 40% of the design flow due to the inability of the Tibito plant to deliver its rated capacity. The Usaquen tunnel is vulnerable due to the lack of a back-up facility in case of failure. The present Usaquen tunnel provides the only outlet for nearly 70% of the water delivered into the EAAB system from the Wiesner plant. - 6 - 21. Sewerage and Drainage. Coverage of the sewerage systems, also high by national standards, reaches 85% of the population (see Annex 2). The drainage system covers about 70% of the population. However, low lying areas of the city are subject to periodic flooding, exacerbated in part by control structures on the Bogota River needed to satisfy irrigation and hydroelectric power generation requirements. The sewerage and drainage systems are combined in the old sections of the city. In other areas, sewerage and drainage are separated. In practice, due to lax enforcement, many illicit or unauthorized connections have been made to the two systems and therefore they operate, to some extent, as a combined system. The problem created by these illicit connections will be studied in detail as part of the proposed studies to reduce pollution in the Bogota River, as they are a determining factor in the definition of specific remedial actions. A detailed discussion of water-related environmental issues in the Bogota Metropolitan area is found in Annex 3. 22. The domestic and some of the industrial waste water generated in the Bogota area is finally collected by interceptors parallel to existing natural water courses that discharge their waters, without treatment, directly back to these courses below populated areas. As the city has expanded, some of these discharges are now being made in densely populated areas, thus preventing an orderly urban growth. In addition, overflows of the combined sewerage system are also often discharged, under all weather conditions, to the drainage canals in densely populated areas. These conditions are detrimental to a pleasant urban environment, and they also pose high health risks to the population. D. Lessons from Bank Experience 23. Since 1968, the Bank has made 13 loans totaling about US$555 million for water supply and sewerage development in Colombia. About 60% of total Bank loan funds (US$337.8 million) were granted to five municipal water companies (in Bogota, Cali, Barranquilla, Cucuta and Palnira) through nine separate operations. By far, the largest borrower has been the Bogota Water and Sewerage Company (EAAB) to which the Bank has lent US$261 million in four lending operations. 24. At present, the Bank is supporting sector investments through projects with the Empresas Municipales de Cucuta in Cucuta (Loan 2470-CO), as well as a multi-city lending operation through the new national financial intermediary for municipal development, FINDETER (Loan 296 1-CO) for the financing of about 300 sub-projects in medium and small communities. 25. Lessons learned from implementation of previous and ongoing projects (see Annex 4) were applied in the preparation of the Santafe I, where greater care was given to estimating water demand and consumption levels, to undertaking more detailed surveys for complex works prior to bidding, and to adopting a more realistic implementation schedule than in the past projects. A comprehensive set of systemic solutions and structural changes have been agreed and are now being implemented. 26. Overall, the main lesson from previous Bank projects with EAAB, and particularly Bogota IV, is that institutional and financial issues must be addressed up-front, with the evolution of a strategic consensus between key actors and the initiation of substantive actions, which can then be consolidated and developed in a phased manner. This lesson is being applied in the proposed project, with the focus on structural and systemic reforms. At the same time, the proposed project reinforces the focus on structural reforms through a time-bound Action Plan, with a set of monitoring indicators (see paras 78. and 88, and Annex 14) that will follow the progress of the reform process, leading to the ultimate structural and corporate transformation of EAAB. The decision to phase the Bank's financing for the entire Santafe I project reflects lessons learned from past Bank experience as well. The second phase of Bank financing would be linked to progress made by EAAB in achieving its Action Plan targets early on during project implementation and to a comprehensive review of progress (expected to be carried out after September 30, 1997) in both physical implementation of the Santafe I project as well as in the implementation of organizational and operational reforms. H. Empresa de Acueducto y Alcantarillado de Bogoti ESP (EAAB) A. General 27. The Borrower and implementing agency would be the Empresa de Acueducto y Alcantarillado de Bogot,a, ESP (EAAB). EAAB was, until recently (see para. 32.), an autonomous municipal agency owned by the Bogota Capital District. It has now been reconstituted as a Public Service Company of an Industrial and Commercial character as defined by the new Public Services Law and by the Organic Statutes of the Bogota Capital District. A full description of EAAB and an assessment of its institutional capabilities is presented in Annex 5. 28. From the early 1970's, EAAB grew rapidly and extended service coverage from an estimated 60% of the population in 1970 to over 85% by 1993, thanks in part to the implementation of the first four Bank- financed projects (see Annex 4). Water quality reached intemational standards and sewerage was extended to nearly 80% of the population. Nevertheless, during the course of execution of the Bogota IV project, political interference increased, and, despite new investments in the water and sewerage system, EAAB's operations began to suffer greater inefficiencies, staff levels ballooned, maintenance was neglected as operating revenues failed to keep pace with rising costs (see para. 29 below). B. Recent Financial Performance 29. EAAB's financial situation steadily deteriorated during the period 1988-92, mainly as a result of cost overruns in its construction program, which were financed with short-term debt, maturing long-term debt, and high and increasing labor costs. Thus, in 1990 debt service was twice the level it had been in 1989 and doubled again in 1991; by 1992, labor costs had increased to 67% of working expenses from about 55% in 1989. Net income continued to fall during this period and cash generation was increasingly insufficient to cover EAAB's heavy capital expenditure program and increasing debt service obligations. Table 1 below summarizes EAAB's financial performance over the past 5 years. - 8 - Table 1: EAAB: Audited Financial Results (1989-1994) (in current Col$ million) 1989 1990 1991 1992 1993 1994 Average Exchange Rate (ColSIUSS) 383 502 633 680 787 818 Water Sold (Million m3) 301 306 321 328 338 340 Average Tariff/m3 (incl. Bulk Sales) 111 156 209 266 320 416 Revenue from Water Sales 33,468 47,917 67,318 87,431 108,113 141,800 Total Operating Revenues 37,844 52,956 70,847 89,510 113,221 152,280 Working Expenses (incl. Pensions) 19,133 24,719 35,865 38,319 50,057 66,277 of which Personnel (incl. Pensions) 10,556 14,455 23,836 25,677 33,308 39,855 Net Operating Income bef. Interest Charges 17,683 (2,001) (37,095) (7,390) (23,368) (2,001) Net Income (after Monetary Corrections) 10,469 8,194 5,881 144,211 (109,992) (25,720) Internal Sources 19,295 29,947 34,982 51,191 63,165 120,904 Equity/Contributions/Transfers 2,252 2,142 5,778 9,991 28,977 6,312 Borrowings 20,744 22,788 28,868 42,188 46,027 39,818 of which Treasury Refinancing 0 0 0 0 14,095 26,576 Total Sources 54,679 61,071 70,575 105,199 136,940 178,070 Investments (incl. Santafe 1) 41,826 45,183 33,782 46,026 29,593 65,693 Debt Service 9,792 18,068 36,424 37,584 55,737 57,710 Changes in Working capital 3,061 (2,180) 369 21,589 16,056 6,421 Total Applications 54,679 61,071 70,575 105,199 101,386 129,824 Net Inc.(Dec.) in Surplus Cash 0 (0) 0 0 35,554 48,246 Cumulative Cash Surplus 0 (0) (0) (0) 35,554 83,799 Revalued Net Fixed assets in Use 462,372 700,898 886,257 1,065,241 1,042,260 1,089,178 Current Assets 16,551 28,332 41,332 66,807 118,962 190,068 of which Quick Assets 5,947 11,486 16,266 28,060 66,276 122,041 less: Current Liabilities 38,509 58,118 66,865 78,394 74,829 101,142 Total Assets 446,683 674,992 870,048 1,065,549 1,099,268 1,220,955 Equity & Reserves 330,647 498,616 670,721 824,923 793,470 815,907 Net Long Term Debt 90,959 136,636 144,422 155,230 181,352 201,572 Other Long Term Liabilities (Net) 25,078 39,740 54,905 85,395 124,445 203,476 Total Equity & Liabilities 446,684 674,992 870,048 1,065,548 1,099,267 1,220,955 Quick Ratio 0.1 0.2 0.2 0.3 0.8 1.2 Working Ratio (%) 55 58 66 67 67 44 Return on Average Net Fixed Assets(%) 0.0 0.0 3.1 1.9 2.2 (0.2) Labor Cost as % of Working Expenses 55 58 66 67 67 60 Self Financing Ratio (%) 23 26 (4) 30 25 96 30. For several years, under the Bogota IV project, the Bank signaled the urgency of corrective actions, and attempted to secure compliance with covenanted conditionality regarding financial performance. In 1991, EAAB started a financial restructuring exercise which was part of a broad Action Plan. Water rates were increased in real terms in 1991 and in 1992, and EAAB decreased its labor costs and its operating expenses, and obtained a long-term credit on concessional terms to complete the Bogota IV project. However, these measures were insufficient to arrest the deterioration of its financial situation. The internal deficit widened in 1992 and by end 1992, EAAB had accumulated arrears to suppliers and contractors estimated at about Col.$ 22,000 million (about US$ 30 million). It was also unable to fund its construction - 9 - programn, and experienced difficulties in meeting its debt service obligations. Throughout this period, EAAB operated with poor liquidity margins as evidenced by a Quick Ratio 3 far below 1. 31. This difficult financial situation was confronted by the National Govermnent in 1993, when it decided to rescue EAAB and refinanced almost the entire foreign debt service becoming due in the second half of 1993, and in the years 1994 to 1997 as part of a broader agreement for restructuring EAAB to achieve greater efficiency and accountability through a legally binding Performance Plan. In 1993, as a consequence of this arrangement with the National Government, which effectively covered over 25% of the total debt service in that year, EAAB was able to generate net internal funds after debt service equivalent to about 73% of its investments4. At year-end 1994, EAAB showed a substantial level of surplus liquidity, available for initiating a significant investment program. Other elements contributing to EAAB's financial recovery during 1993 and continuing into 1994, have been the payment to EAAB by the National and Capital District Governments of arrears on water sales, a drive to increase collections from customers and eliminate illegal connections, all parts of the Performance Plan. C. Institutional Changes 32. The National Government and the Mayor of Bogota also took positive steps towards the resolution of the underlying structural, institutional and financial, issues which led to EAAB's financial crisis in 1989-92. In July 1993, the Government enacted the Decree-Law (Decreto-Ley 1421, July 21, 1993) that redefined the organization and by laws of the Capital District and its public service companies. A salient point of this decreto-ley is that accountability of the Mayor and the General Managers of the city's service companies has been sharply increased. The newly enacted Public Services Law has further strengthened EAAB's autonomy in these crucial aspects, and which mandates that all public utility companies be organized as either municipal commercial and industrial enterprises or be transformed into shareholding companies with significant inputs of private capital. As a consequence, although the Mayor approves EAAB's budget (through the Capital District's social and economic council -CONFIS-) and appoints the General Manager and members of the Board, the General Manager of EAAB now has, for the first time, full responsibility for managing the utility under policies formulated by its Board of Directors, representing not only the interests of the City Council as owner, but the general public as users as well. 33. EAAB's recent institutional restructuring will help restore the basic viability of a major public utility in the capital, strengthen its ability to respond adequately to unmet needs for rehabilitation and modest expansion of the water distribution and sewerage network, as well as, to the complex demands over the medium-term for pollution control and treatment. Moreover, by improving efficiency (especially, through reducing unaccounted for water, and effectively anticipating and meeting longer-term liquidity concems), it will also build up the institutional and financial capability to undertake the needed capacity expansion investments in the longer-term. However, management turnover is still a major problem facing EAAB. The last four General Managers and their core teams have spent an average of 18 months or less in their positions. The Public Services Law will not remedy this situation except insofar as Municipal authorities reconstitute utility entities into shareholding corporations. The proposed study for institutional altematives for EAAB will examine ways in which the institutional structure and govemance of EAAB can be stabilized for the longer-term in order to enable the utility to meet its major challenges in the years 3 for a definition of the Quick Ratio see footnote in para 54. 4 The self financing ratio in 1993 is calculated on the same basis as in prior years, ie. (Gross Internal Cash Generation-Debt Service)/Investments, thereby not taking into account the financing support from thenational government. - 10 - ahead, in particular, the need to undertake large-scale investments going well into the next decade and to raise long term capital. As the detailed provisions of the new Public Services Law are implemented, EAAB's working practices in a number of key operating and strategic areas will need to be modified, either through internal reorganization, or more likely through unbundling of many of the functions that are carried out by itself. A start towards this unbundling and towards introduction of the private sector into the operations is being made under the Santafe I project. (see para. 35. and below). D. Performance Plan 34. The National Government, the Mayor and EAAB have entered into a Performance Plan (PP) (Plan de Desempefio), that sets stringent objectives for EAAB over the next seven years. This plan, discussed with the Bank, sets the obligations of EAAB and, by extension, of the Mayor to improve the overall performance of EAAB. The main features of the PP are explicit performance indicators in key areas, provision for independent monitoring and follow-up at a high level, and sanctions in the case of non- compliance. Users' pressure for quality service and efficiency and expanded accountability will be promoted through the mandatory disclosure of key data on EAAB performance (financial situation, labor agreements and costs, time to attend to customers' complaints, service coverage, UFW, etc.). As detailed in para. 78. a set of monitoring indicators for the performance of EAAB in key institutional and financial aspects and specific indicators related to the implementation of the Santaf6 I project has been set forth. These indicators are consistent with the targets set in the PP. E. Private Sector Participation 35. An important dimension of the restructuring process of EAAB is to give a more significant role to the private sector in the traditional operating areas of EAAB. As initially conceived, this process would involve letting out private concessions for selected aspects of EAAB's operations. EAAB has now begun studies to determine the most suitable areas for potential concessions (in particular, the rehabilitation of the Tibito treatment plant and the Usaquen tunnel were identified in the early stages of project preparation as potentially attractive candidates), while at the same time the study of institutional adjustment alternatives will be used to examine the issue of private sector participation in a broader context. As individual proposals are put forward, the implications on the financing plan for the project will be reviewed with the Bank on a case by case basis and adjustments made in the allocation of the Bank loan proceeds in the event specific elements of the Santafe I project should be more attractive to private sector concessions. In the meantime, EAAB has already begun to examine the scope for sub-contracting with the private sector many activities now being carried out by its own workforce. Some of these activities have recently been contracted to the private sector with considerable gains in efficiency and a decline in the number of complaints. EAAB has presented a plan, acceptable to the Bank, to increase private sector participation through concessions and service contracts in many areas (see Annex 6). 36. In spite of the high degree of autonomy already achieved, the National Government, the Capital District, EAAB and the Bank have agreed that further consolidation of structural reforms and autonomy and efficiency gains in EAAB would best be achieved through transformation of the enterprise into a share- holding company with substantial divestment of the Capital District's ownership. The precise form of this corporate identity will need to be studied keeping in mind the possible privatization options being tested in various Colombian and Latin American cities with respect to public utility companies and recognizing that EAAB's major problems lie in the inefficiencies of its management structures and its erstwhile lack of autonomy and insulation from political interference, rather than technical incompetence or insufficient coverage. These issues would be addressed by a detailed and comprehensive study of EAAB's institutional - 11 - adjustment which is proposed under the Technical Assistance component of the project. Additional information regarding EAAB's institutional adjustment is presented in Annex 6. 37. The objective of the study will be to propose a new institutional framework under which enhanced autonomy and efficiency levels would be attained, as well as to help implement the recommended alternative after the relevant decisions are taken. The study will examine the longer-term urban growth prospects for the Bogota metropolitan area and determine the optimal investment strategies in respect of water and sanitation infrastructure within known developmental and technological constraints, and recommend the likely long-term institutional structures that will best serve the needs of the population at acceptable cost. It will take into consideration the financing needs for future expansion of service and propose financial and institutional schemes to make the financial sources viable. The study will recommend the medium and long-term structural changes that will best prepare EAAB and the Bogota metropolitan area to meet the challenges of the next century. This study will take advantage of all new possibilities provided under the Law 142 and will consider all major institutional alternatives for EAAB, from not changing the company's current status, to different formns and levels of private sector participation including widening the company's ownership through public stock issue. It will also consider separating the production from the distribution function. The study will outline an action plan for implementing the recommended structural adjustment of EAAB. Activities towards implementation of the plan would initiate if the recommendations of the study and the proposed action plan would be acceptable to the Colombian and Capital District authorities and to the Bank. During negotiations, agreements were reached on the following: (i) a schedule for the study; (ii) the establishment of an independent Steering Committee comprising prominent citizens of Bogota drawn from the public and private sectors and including technical and institutional experts who can provide advice and direction for the conduct of the study, and for its guidance through the political decision-making process; and (iii) the commitment of the Colombian authorities to implement the study's recommendations, if found acceptable. m. The Project A. Background 38. The proposed project would be the fifth operation with EAAB financed by the Bank. The project builds particularly on the last two operations where preparatory work was done in the formulation of the water distribution network and sewerage master plans as well as on the identification of the causes of unaccounted for water (UFW). B. Project Objectives and Rationale 39. The key objective of the project is to support and consolidate the transition of EAAB from a technically capable but operationally inefficient public service agency to a commercially-run public utility company, sensitive to the demands of the market, and with a corporate culture based on professional responsibility and accountability. The project would build on the important steps recently taken by the Government through the new Public Services Law to enhance operational efficiency, provide broader mnanagerial autonomy and responsibility, reduce political interference, and increase public accountability of municipal utilities such as EAAB. The transition to a corporate culture would prepare the way for a longer-term structural transfornation of the company, including, inter alia, participation of private sector - 12 - capital in the future provision and operation of the Capital's water and sewerage services. A key incentive for this transition has already been put in place by the national Government in 1993, with the signing of the Performance Plan (see paras. 31 & 34.) . Compliance with the operational targets in the Performance Plan is being monitored on a quarterly basis by independent external auditors commissioned by the National Government. As a follow up to the above institutional transition, the project is also supporting EAAB in defining the longer-term framework of institutional changes and economic tariff structures that would be needed to adequately finance and implement major new investments in water supply, sewerage and especially wastewater treatment in the Capital District and its surrounding municipalities over the next 20-30 years, when the current population of over 6.5 million is expected to nearly double in size. In addition to this key institutional objective, the project has a number of specific objectives which include, (a) expanding distribution services to the urban poor, in particular, targeting more effectively the lowest income groups in the metropolitan area; (b) addressing major environmental concerns of the heavily polluted Bogota River; (c) reducing the vulnerability of the Bogota water supply system; and, (d) supporting a revamped economic and its tariff framework which enables EAAB to reflect the full cost of providing its services. Progress towards meeting these objectives will be monitored within the framework of the Action Plan discussed in paragraph 88. The project objectives are thus fully consistent with the country assistance strategy for Colombia and the choice of the project fits well within the context of the Regional Infrastructure initiative. 40. In line with the above objectives, the project would specifically focus on the following actions: * Inmprove water, sewerage and storm water drainage services in Bogota, with special emphasis on sub-normal service zones inhabited by population of low income, through optimization of the operation of the existing water supply system and expansion and rehabilitation of the sewerage and storm water drainage networks; * Improve the reliability of the Bogota water supply system and reduce n'sks of water rationing; * Support EAAB in the institutional and financial restructuring and strengthening program, thereby increasing efficiency in operations and achieving and consolidating financial viability; * Strengthen wetlands management and environmental protection and enhance EAAB sensitivity to enviromental concerns; * Provide technical assistance and consulting services to support project implementation and prepare future investment programs * Support EAAB in carrying out a comprehensive study to explore promising institutional alternatives for the company aimed at enhancing its autonomy and efficiency; C. Project Description 41. The proposed project, which would be carried out during a seven year period, between mid 1995 and 2002, includes eight main components in which all major works correspond to the minimum cost solution. The following is a description of the items included in the project, including indication of their implementation phase (a more detailed description of the project is presented in Annex 7). A. Vulnerability Control comprising, in Phase 1, i) Rehabilitation of a 31 km section the Tibito-Casablanca pipeline which conveys treated water from the Tibito plant to the city; ii) Rehabilitation of the Tibito water treatment plant, and, in Phase 2, Construction of the Usaquen backup tunnel for conveying the treated water of the Wiesner plant to the city - 13 - B. Primary Sanitary and Storm water Drainage and Pollution Control comprising, in Phase 1, construction of: i) about 35 km of sewage interceptors, trunk sewers and storm water drainage systems, as well as about 17 km of drainage canals in the Torca, Salitre, Jaboque, Fucha, Tintal and Tunjuelo drainage basins; ii) 2 main sewage pumping stations and expansion of 2 smaller sewage pumping stations in the Tintal and Salitre drainage basins; iii) a storm water peak attenuation lagoon at Fontibon; and iv) rehabilitation of dikes on the left bank of the Bogota River, in front of Bogota City at Fontibon and Tintal, with a total length of about 11 km and an average height of 1 m; and, in Phase 2, Construction of: i) the first section of the Bogota River Interceptor, the Torca-Salitre stretch of about 12.5 km; ii) about 27 km of sewage interceptors, trunk sewers and stomn water drainage systems, as well as about 12 km of drainage canals in the Torca, Salitre, Jaboque, Fucha, Tintal and Tunjuelo drainage basins; nii) 1 main sewage pumping station; and iv) a storm water peak attenuation lagoon at Tintal. C. Primary Water Distribution System comprising, in Phase 1, i) installation of about 54 km of prinary distribution mains; ii) construction of 4 storage tanks in the southwestem sector of the city with a combined capacity of 10,800 in3; and iii) construction of 2 pumping stations in the southeastern and southwestem sectors of the city; and, in Phase 2, i) installation of about 56 km of primary distribution mains; ii) construction of 3 main storage and compensation reservoirs with a combined capacity of 94,000 m3 , as well as rehabilitating and increasing the volume of 6 storage tanks in the northeastem sector of the city with a combined capacity of 3400 m3; iii) expansion of 3 pumping stations in the nortwestem sector of the city. D. Secondary Water, Sewerage and Drainage Networks and Service Connections comprising, in Phase 1, construction of i) about 125 km of secondary and minor water distribution mains; ii) about 265 km of secondary sewage collectors; iii) about 225 km of storm water drains; and, iv) installation of about 70,000 water service connections and of about 100,000 sewerage service connections, all in low-income neighborhoods; and, in Phase 2, Construction of i) about 225 km of secondary and minor water distribution mains; ii)about 270 km of secondary sewage collectors; iii) about 545 km of storm water drains; and, iv) installation of about 1 1O,000 water and 100,000 sewage additional service connections all in low-income neighborhoods. E. Rehabilitation Works comprising, in Phase 1, on the Sewerage System: replacement or repair of about 19 km of sewage collectors, construction of alleviation sewers and rehabilitation of sewer appurtenances, as well as identification and repair of erroneous connections between sewage and storm water collectors; and on the Water Supply System: replacement or rehabilitation of about 150 km of older pipes in the distribution network; and in Phase 2, on the Sewerage System: replacement or repair of about 28 km of sewage collectors, construction of alleviation sewers and rehabilitation of sewer appurtenances as well as identification and repair of erroneous connections between sewage and storm water collectors; and on the Water Supply System: replacement or rehabilitation of about 150 km of older pipes in the distribution network. F. Institutional Strengthening of EAAB comprising, all in Phase 1, i) implementation of the UFW reduction program, including, among other activities, purchase and installation of bulk meters on all the water production sources and of about 780,000 domestic meters in low-income neighborhoods; ii) development of a water conservation program aimed at investigating options and formulating guidelines for water demand management, and initiating actions for reducing the water demand in Bogota; iii) development and implementation of a staff training program; iv) purchase of - 14 - laboratory and radio communication equipment; v) formulation of a strategy, satisfactory to the Bank, for development of management information systems and redesign of the financial information systern, and purchase of related computer hardware and software systems for data processing in a fashion consistent with the strategy formulated; and vi) establishment and maintenance of an environmental protection committee of EAAB and development of the company's institutional capacity to perform environmental analyses. G. Technical Assistance and Consulting Services for Engineering, Design and Supervision of Works comprising, in Phase 1, i) completion of all the detailed engineering designs of parts A, B, C, D, E and HI of the project within a time schedule corresponding to the implementation phases of the works; ii) supervision of all works included in parts A, B, C, D, E and HI of the project within a time schedule corresponding to the implementation phases of the works; iii) retaining of consulting services to carry out studies of institutional alternatives for EAAB as well as studies needed to design the chosen alternative and help in itsimplementation, and retaining of consulting and advisory services to carry out studies required for implementation of the Santafe I project, as well as additional studies and designs required for implementation of future works; and in Phase 2, i) completion of all the detailed engineering designs of parts A, B, C, D, E and Hl ofthe project within a time schedule corresponding to the implementation phases of the works; ii) supervision of all works included in parts A, B, C, D, E and HI of the project within a time schedule corresponding to the implementation phases of the works; and iii) retaining of consulting and advisory services to carryout additional studies and designs required for implementation of future works. H. Environmental Component comprising, all in Phase 1, i) implementation of the mitigation measures recommended as part of the environmental impact assessment of the project; ii) implementation of a program for resettement of about 311 persons to be displaced by the project works; and iii) execution of a program of activities aimed at wetland protection in the Bogota area. D. Project Cost 42. The total project cost is estimated at US$ 717.9 million equivalent, including physical and price contingencies, and duties and taxes, estimated at US$ 66.9 million equivalent. The proposed two Bank loans totaling US$ 145.0 million will finance the first phase of the Santafe I investment program (1995-98) equivalent to 38.7% of project cost net of duties and taxes and excluding interest on the Bank loans. A summary of project costs is presented in Table 2, and a detailed estimate is given in Annex 8. 43. Project costs for all construction and equipment purchase components are based on detailed designs that cover about 45% of the works and on unit costs of similar project components in the project area. Base prices are based on current prices of June 1993. Physical contingencies amounting to an average of 10% of base cost were added to all project components. Price contingencies were calculated for a project execution period of seven years, at a local inflation rate of 21% in 1993, 22% in 1994, 18% in 1995, 16% in 1996, 14% in 1997, and 12% in the other years, and projected intemational inflation rates as shown in Annex 10. - 15 - Table 2. Estimates Project Costs (US$ million) PHASE 1 PHASE 2 TOTAL SANTAFE 1 PROJECT LOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL % FOREIGN A. Vulnerability Component 20.3 30.5 50.9 5.9 8.9 14.8 26.3 39.4 65.7 60.0 B. PrimarySewerage & Drainage 41.1 31.7 72.8 14.8 24.8 39.6 56.0 56.5 112.5 50.2 C. Primary water Distribution 7.0 15.8 22.9 11.3 33.5 44.8 18.3 49.3 67.6 72.9 D. Expansion of Secondary Networks 30.0 20.0 49.9 36.0 24.0 59.9 65.9 43.9 109.9 40.0 E. Rehabilitation of Secondary Networks 6.5 6.5 13.0 5.8 5.8 11.6 12.3 12.3 24.6 50.0 F. Institutional Strengthening 12.0 24.8 36.8 0.0 0.0 0.0 12.0 24.8 36.8 67.4 G. Technical Assistance 17.3 17.3 34.6 13.0 13.0 26.1 30.3 30.3 60.7 50.0 H. Environmental Component 3.1 4.7 7.9 0.0 0.0 0.0 3.1 4.7 7.9 60.0 BASE COST (June 1993 Prices) 137.4 151.3 288.7 86.9 110.0 196.9 224.3 261.3 485.6 53.8 Physical Contingencies 13.7 15.1 28.9 8.7 11.0 19.7 22.4 26.1 48.6 53.8 Price Contingencies 45.6 11.2 56.8 42.2 17.9 60.1 87.8 29.1 116.9 24.9 TOTAL PROJECT COST 196.8 177.6 374.4 137.8 138.9 276.6 334.5 316.5 651.1 48.6 Import Duties & VAT 39.8 0.0 39.8 27.1 0.0 27.1 66.9 0.0 66.9 0.0 TOTAL INVESTMENT COST 236.5 177.6 414.2 164.9 138.9 303.8 401.4 316.5 717.9 44.1 Note: Totals may not add up because of rounding E. Economic Evaluation 1. Project Justification and Benefits 44. The economic justification for the project is based on the benefits it would generate in the form of higher water sales and cost savings ftom investments that promote efficiency in water supply and sewerage. These benefits will mainly stem from the rehabilitation of the water supply and sewerage network] and the implementation of the water loss reduction program, that will result in an increase of the available water supply. The project would also foster a number of non-quantifiable benefits. The lack of reliable data have precluded a quantitative estimation of these benefits. These benefits include health benefits, environmental benefits (including reduction of the contamination of the main water courses and the reduction of environmental damage to fragile wetlands ecosystems), cost savings from postponed investment, increased property values in flood prone areas, and benefits associated with the institutional strengthening of the capacity of EAAB to plan and manage its resources. 45. The main assumptions underlying the analysis is the definition of the 'with' and 'without project' situation. The incremental revenues from the sale of future water and sewerage services have been used as a proxy for direct-use benefits. To ensure financial viability, the average tariff has to be gradually increased to US$0.48 per cubic meter in 1998. The investment costs have been discussed in more detail in paragraphs 42 and 43, and in Annex 8. It should be noted that the proposed investment program is the least-cost option to expand the production capacity. The calculation of the fixed operation and maintenance costs is based upon the assumption that an increase in effective production capacity will not require any additional staff and thus can be limited to 1.5 percent of the accumulated investment costs. The variable - 16 - operational and maintenance costs will increase due to the higher energy and chemical costs that are required in the Tibito plant. 46. To reflect true costs and benefits, financial prices have been transformed into economic prices. The major difference between financial and economic prices involves the impact of taxes and subsidies. A discount rate of 10 percent is used to calculate the net present value. Based upon these assumptions, the net present value of the project is US$ 209 million, the internal economic rate of return is 17 percent, and the benefit-cost ratio is 1.49. The impact of changes in a number of key variables have been analyzed, and are presented in the table below. This sensitivity analysis shows that the results of the cost-benefit analysis are rather solid. Table 3: Results of the Sensitivity Analysis Impact Net Present Value Internal Rate Benefit- (US$ million) of Return cost ratio Base Case Scenario 209 17% 1.49 Cost overrun of 25% 113 13% 1.22 Project delay of 2 years 183 16% 1.43 No tariff increases 162 16% 1.38 UFW remains at 40% 27 11% 1.06 Collection efficiency remains at 25 11% 1.06 80% Price elasticity of demand at -0.30 192 16% 1.46 47. Marginal cost pricing has been increasingly promulgated as a basis for tariff setting. The long-run average incremental cost of the project has been estimated at US$0.55 per cubic meter consumed. This is higher than the current water and sewerage rate, which currently stands at US$0.44 per cubic meter consumed. In order to promote an efficient allocation of resources, average water and sewerage rates need therefore to be increased during the project implementation period. When the production capacity generated under this program is insufficient to satisfy future demand, EAAB would have to resort to very expansive investment altematives, such as the Chingaza or the Sumapaz Alto Muna expansion. The long-run average incremental cost of these expansion programs could result in a quadrupling of the average tariffs. The high costs of such new investment projects could have major implications and should be considered in future sector strategies. F. Financial Analysis 1. Project Financing Plan 48. The financing plan of the first phase of the Santafe I Investment Program is presented in Table 4. The proposed Bank loans totaling US$ 145 million represents 38.7% of these first phase project cost, net of taxes, and would help finance the first phase of project implementation (1995-98). The Bank has indicated to the Government that it would consider a request for further loan(s) to help finance the remaining period of the project. The private sector is expected to finance US$ 30 million of this first phase project cost. An additional amount of US$ 119 million will be allocated by the Capital District from the recently mandated transfers from the National Government under Law 60. The timing of these transfers has been formally agreed between the National government, the Capital District and EAAB. - 17 - During negotiations confirmation of the amount and schedule of transfers from the Capital District was obtained and referenced in the Loan Agreements and in the Sponsor Agreements with the Capital District. The balance of US$120.3 million (about 29 % of total project cost, including duties and taxes) will be provided by EAAB's internal cash generation, which is expected to be sufficient. The two Bank loans and portions of EAAB's and the private sector's financing will cover the foreign exchange component of the project. Table 4. Financing Plan (In US$ Million): Project Cost of Phase 1 % of % of Source Local Foreign Toti VAT & Total (cil Project Total Taxes Taxes) Cost Cost World Bank 0.0 145.0 145.0 145.0 38.7 35.0 EAAB 77.9 2.6 80.5 39.8 120.3 21.5 29.0 Transfers from District 118.9 0.0 118.9 118.9 31.8 28.7 Private Sector 0.0 30.0 30.0 30.0 8.0 7.2 Total 198.8 177.6 374.4 39.8 414.2 100.0 100.0 49. Out of the proposed loans, a maximum amount of US$ 14.5 million (10% of the total loans) would be available for retroactive financing of urgent works of water supply, sewage collection and flood control, and for completion of designs of work to be implemented under the project. Eligibility for retroactive financing would apply to all works, goods and consulting services that are procured under procurement procedures acceptable to the Bank, before signature of the Loan Agreements, but not earlier than the later of September 1, 1994 or 12 months before the corresponding loans' signing date. 50. EAAB has appointed consultants to prepare the bidding documents for a concession for rehabilitation and operation of the Tibito water treatment plant, with an estimated investment of US$ 25 million in rehabilitation works. EAAB is also considering a concession for construction and operation of hydroelectric power plant linked to the alternate Usaquen tunnel, which includes an estimated investment of US$ 15 million for construction of the tunnel, of which an estimated amount of US$ 10 million can be recovered through power generation. A final decision in regard to the Usaquen concession will be taken on the basis of results of a pre-feasibility study which is currently being prepared. It is possible that should these concessions materialize, private sector participation in the financing of the Santafe I project could increase beyond the amount currently indicated (U$ 30 million). Private sector financing is also possible through supplier/buyer financing arrangements that might be offered for some of the equipment and material supplies. In addition to the above possibilities which are under study, the private sector is also expected to participate in project financing through a service contract for supply, installation and maintenance of domestic water meters, with an estimated investment of US$ 15 million in supply of the meters. - 18 - 2. Projected Financial Results 51. The projection of EAAB's financial performance in the coming decade with the implementation of the Santafe I project and under the conditions imposed by the Action Plan targets is shown in Annex 10, together with the detailed assumptions relating thereto. Key financial data for the next five years is summarized in Table 5 below: Table 5: Selected Financial Data (Years ending December 31) (in current Col$ million) 1995 1996 1997 1998 1999 2000 Average Exchange Rate (Col$/USS) 888 1,002 1,114 1,220 1,312 1,390 Water Sold (Million m3) 357 365 372 377 394 414 Average Tariff/m3 (incl. Bulk Sales) 499 597 700 806 891 972 Revenue from Water Sales 178,134 217,956 260,077 304,166 351,402 402,198 Total Operating Revenues 188,662 230,199 274,071 319,880 368,733 421,121 Working Expenses (incl. Pensions) 83,764 104,108 117,474 126,812 143,863 165,239 of which Personnel (incl. Pensions) 56,642 72,720 83,022 88,913 101,743 116,375 Net Operating Income bef. Interest (37,095) (7,390) (23,368) 36,500 58,256 77,997 Net Income (after Monetary Corrections) (9,993) 27,535 12,001 83,580 109,434 130,433 Internal Sources 114,137 134,945 132,212 221,193 263,871 302,745 Equity/Contributions/Transfers 7,957 12,839 17,593 24,196 32,590 40,513 Borrowings 79,599 77,883 114,936 114,673 130,485 140,904 of which Treasury Refinancing 29,990 30,804 31,994 0 0 0 Total Sources 203,679 229,395 268,154 364,465 431,902 490,165 Investments (incl. Santafe 1) 100,122 142,222 170,818 163,421 216,508 288,192 Debt Service 59,163 63,470 72,720 94,388 120,209 123,075 Changes in Working capital 29,816 28,450 578 1,821 (8,529) (8,689) Total Applications 198,339 252,059 264,427 278,255 352,658 434,911 Net Inc.(Dec.) in Surplus Cash 5,339 (22,665) 3,728 86,210 79,245 55,254 Cumulative Cash Surplus 89,138 66,474 70,202 156,412 235,656 290,910 Revalued Net Fixed assets in Use 1,262,275 1,503,005 1,777,972 2,050,768 2,370,378 2,765,804 Current Assets 222,387 239,150 253,324 346,057 417,071 474,144 of which Quick Assets 137,576 124,020 133,172 220,549 297,282 352,407 less: Current Liabilities 98,359 113,247 138,842 168,885 158,388 184,042 Total Assets 1,442,571 1,687,045 1,956,217 2,293,459 2,698,108 3,129,601 Equity & Reserves 840,522 912,347 979,975 1,133,236 1,326,885 1,555,212 Net Long Term Debt 280,295 359,114 465,563 548,554 655,397 757,597 Other Long Term Liabilities 321,752 415,581 510,678 611,667 715,825 816,790 Total Equity & Liabilities 1,442,569 1,687,043 1,956,216 2,293,458 2,698,107 3,129,600 Quick Ratio 1.4 1.1 1.0 1.3 1.9 1.9 Working Ratio (%) 44 45 43 40 39 39 Return on Average Net Fixed Assets(%) (4.1) (0.7) (1.8) 2.4 3.3 3.7 Labor Cost as % of Working Expenses 68 70 71 70 71 70 Self Financing Ratio (%) 55 52 38 88 66 62 - 19 - 52. The results of the financial analysis confirm the viability of implementing the proposed project of US$ 717.9 million, for which the envisaged funding mix will be adequate, with indebtedness remaining at extremely prudent limits, as shown in Annex 10. Salient features of EAAB's forecast financial performance are as follows:5 * Operating revenues are expected to grow at a faster pace than in recent years, reflecting higher population growth, implementation of the UFW reduction program, and the aggressive commercial action by EAAB to regularize the nearly 200,000 illegal connections and update the customer database over the next seven years; * Operating costs are expected to grow more modestly, as the impact of lower personnel levels, shift of newer personnel into non-unionized contracts and greater operating efficiency are felt; labor costs as a percent of working expenses rises modestly reflecting the legally mandated treatment of pensions (see para. 55. below), from 67% in 1993 (para 29), to 70% in 1995, and hovers at that level throughout the projection period; however, with improved efficiencies in billing and collections, labor productivity is expected to grow rapidly in the forecast period (see Annex 10, Table 5 for relevant statistics and indicators of productivity and performance); * In addition to the Santafe I Project investments, EAAB is expected to begin investments in developing new water sources starting in 1997, and to complete ongoing investment projects through 1998. These programs will impose additional cash burdens on EAAB. However, due to the infusion of funds from the National Government to cover EAAB's estimated debt service payments on the existing foreign debt through 1997 ( para 31 ), EAAB's cash flow is expected to be sufficient to cover these needs during the critical period from 1995-1998. * The forecasts show that increases in water and sewerage tariffs in real terms of about 3% in 1996 and 2.5% each year in 1997 and 1998 will be required in order to enable EAAB to meet its investment obligations and maintain sound liquidity. However, further tariff increases in real terms and tariff structure adjustments will be needed beyond that period if EAAB is to reduce existing distortions in the tariff structure and meet the minimal requirements of full cost coverage as stipulated in Public Services Law. As detailed in Annex 11, an analysis of EAAB's tariff structure reveals distortions that will need to be corrected in the near future in order to comply with the Public Services Law that stipulates the levels of cross-subsidization permitted in tariffs and rates of public utility providers. The impact of tariff structure changes is expected to provide EAAB with higher levels of operating revenues as more than 50% of EAAB customers are in the lowest tariff classes for whom the cross-subsidies will need to be eliminated by at least half, and the remaining subsidies covered by explicit transfers from the municipality out of the oil royalty allocations. The potential increases in tariffs in real terms could be effected by a combination of absolute increases across all classes of customers and by judicious adjustments in the structure itself. 5 Net Income is shown prior to monetary corrections and inflation adjustments in order to ensure comparability with prior period data. However, the rate of return is calculated on the basis of adjusted figures and revalued (inflation adjusted) net fixed assets in use. See Annex 10 for details. See also Footnote in para. 29 regarding the self financing ratio. - 20 - * Provided EAAB is able to effect the needed tariff adjustments in real terms, the main financial ratios are expected to remain within satisfactory ranges throughout the forecast period. 3. Tariff Structure and Main Financial Covenants 53. Annex 11 describes EAAB's current structure of water and sewerage tariffs. After several years of inadequate tariff levels, EAAB was able to obtain average tariff increases of 5% in real terms in each of 1992 and 1993. In 1994, tariffs on bulk sales to neighboring municipalities were increased by an average of 5% in real terms, while tariffs on retail sales in Bogota were adjusted at the inflation rate. Serious structural deficiencies still remain. EAAB will carry out a study of the tariff structure as part of the proposed project and the results will be incorporated into a revised tariff structure in 1996. Agreement was reached during negotiations that EAAB will complete the tariff study not later than January 1, 1996, and will begin to implement the recommendations of the study not later than March 31, 1996, with the first revisions of the tariff structure occurring in 1996. However, given the extent of the distortions, and the political sensitivity of making large adjustments affecting over 50% of the population with the lowest incomes in the metropolitan area, EAAB and the District government expect that tariff adjustments will require several years to be completed. EAAB has appointed consultants under terms of reference that were reviewed and approved by the Bank. The study commenced in January 1995. 54. Agreement was also reached at negotiations, that, EAAB will take, and the Capital District and National Governments will cause EAAB to take, such actions as are needed to meet the annual Working Ratio6 Target incorporated as financial covenant in both Loan Agreements (Section 5.02 of the Loan Agreements). In the event that the forecast of operating income for the following fiscal year shows insufficiency in meeting the working ratio targets, EAAB will have to seek regulatory approval for appropriate tariff adjustments. The National and Capital District Governments are obligated to take all measures needed to enable EAAB to meet the corresponding targets. EAAB may however resort to short- term borrowings to meet temporary liquidity problems, provided that the ratio of liquid current assets to short-term liabilities (i.e., the Quick ratio) 7does not fall below 1.0 in 1996 and 1997 and not below 1.1 in any year thereafter (incorporated as a covenant in Section 5.03 in both Loan Agreements). 4. Pension Fund 55. As part of the Performance Plan agreement with the National Government, EAAB established an Employee Pension Fund in 1994. During 1995, EAAB will make other mandated changes in its treatment of future pensioners to comply with the recently enacted Colombian law on Social Security ( Law 100 of 1993). EAAB will continue to service pensions to its existing pool of pensioners (approximately 1250) directly out of its annual operating revenues and use the revenues accruing in its Employee Pension Fund to 6 Working Ratio defined as Ratio of working expenses, prior to depreciation and interest charges, and including annual payments to existing pensioners, payments into the EAAB Pension Fund, and annual transfers to external pension funds under Law 100 to operating revenues prior to subsidy transfers and extra-ordinary income (including income from excess liquidity balances). 7 Quick Ratio defined as the ratio of liquid assets (cash and bank balances and short-term investments readily convertible to cash in three months and not more than 30% of accounts receivable) to current liabilities due and payable within one year, including loan amortizations due and payable. The value of 30%/o of accounts receivable is appropriate because of the current billing cycles that EAAB operates. Billings are sent out every two months and at anytime, the uncollected amounts represent roughly 30% of the total accounts receivable outstanding from all customer accounts. In this calculation of the quick ratio, all receivables due over 90 days are excluded. - 21 - partially offset use of its cash flow for this purpose. EAAB will need to continue its present practice of using its annual cash flow to cover the pension payment obligations. At the same time, if there are excess cash reserves due to improved bill collection, favorable investment returns on excess cash balances and other extraordinary events, EAAB will continue to increase the corpus of the Employee Pension Fund in order to provide an additional source of supplementary cash flow to cover its pension payment obligations in particular years. EAAB will begin to contribute its share of social security and medical fund contributions to the State Social Security scheme (or to alternative private pension funds that are authorized to receive such contributions on the basis of individual employee elections under provisions of the Social Security Law). EAAB will also become liable to transfer the entire actuarial liability balances including accrued interest charges to the State Social Security Scheme or to authorized alternatives when employees retire after December 31, 1995. As these liabilities are currently unfunded (and only partially provisioned), EAAB will need to use its cash flow to effect these transfers. The forecast financial statements reflect the provisions as outlined above, and take into account the increased cash outflows that will be required. EAAB's pension liability will be fully provisioned within seven years as required by new Colombian accounting rules. The cash flow arising from the annual provisioning will more than amply cover EAAB's cash requirements to meet the present and future pension payment obligations. As EAAB's pension liabilities remain largely unfunded, it is essential that water and sewerage rates cover the annual cash flow requirements in this regard. The definition of the working ratio therefore includes this requirement to ensure that tariff increases provide the adequate cash flow to EAAB to meet these essential needs. The balance in the Pension Reserves is net of annual amortizations of accrued pension liabilities due to pensioners leaving EAAB's pension plan, additions and reductions in numbers of pensioners and estimated actuarial liabilities outstanding at each year end. The working ratio covenant (see para 54. ) will cover this requirement. Agreement on the definition of the working ratio, incorporating the above cash needs to meet EAAB's pension obligations was obtained during negotiations. 5. Asset Revaluation and Financial Rate of Return 56. Under the Bogota IV project, the Bank required EAAB to carry out annual fixed asset reevaluations and incorporate the results in the balance sheet. However, as Colombian accounting regulations did not recognize such reevaluations in the case of public entities, EAAB continued to show the revaluation amounts separately. Annual audits confirmed the practice but did not express an opinion. Colombian accounting regulations were changed in 1992 to require all revenue-earning entities to adjust their asset values by an inflation index and to adopt corrections in monetary items on the balance sheet as well. The 1993 audit has now effected prior-period adjustments to rectify errors in EAAB practice. EAAB will continue to show the earlier asset reevaluations (ie. prior to 1992), as a separate unchanging line item. Future year asset values will continue to be adjusted for inflation in accordance with the new regulations. A rate of return covenant is not proposed at this time. Given the large investment programs that need to be funded by EAAB cash generation, and the stringent Performance Plan targets on liquidity, collection efficiency and UFW reduction, the working ratio and quick ratio covenants as stipulated in para. 54. above are more meaningful. The financial projections show that under the assumptions and forecasts of improvement in EAAB performance, the rate of return on revalued (inflation-adjusted) net fixed assets in use rises from a negative 0.2% in 1994 to over 6 % in 2002. This is satisfactory, and reflects the improvements in EAAB tariff structure and the impact of the project on efficiency and reliability of the water system and of EAAB itself. - 22 - 6. Financial Risks and Sensitivity Analysis 57. In order to minimize the financial risk and to ensure that EAAB's financial recovery continues on the path set out in the agreement with the Government to finance the external debt service obligations over 1993-1997, it is essential that the Performance Plan targets are met each year by EAAB. In addition to the monitoring of the physical performance targets set forth for the project (see para. 89), the Bank would also monitor the financial targets stipulated in the Action Plan and discussed in the preceding paragraphs. These should ensure that EAAB's financial condition will improve steadily over the project implementation period. Under the strict regimen of the proposed financial covenants and efficiency improvement targets, the level of financial risk inherent in the project is acceptable. Finally, the phasing of the Bank's financing of the Santafe I project provides a concrete instrument to monitor and limit the risk of non-compliance. 58. Nevertheless, some concerns remain, in particular, that a serious breakdown in the vulnerable sections of the system prior to the completion of the proposed rehabilitation investmnents, could lead to substantial loss of revenues and extraordinary expenses for urgent repairs and for use of costly alternatives in order to ensure water supply for the city. In order to mitigate against this risk, it was agreed during negotiations, that in the unlikely event of their occurrence, the Capital District of Santafe de Bogota would take such measures as are needed to ensure that the company continues to meet its obligations under the Loan Agreement, particularly its financial covenants to have access to funds for carrying out emergency repairs and other extraordinary measures as may be necessary under the project. In view of the vulnerable elements of the water system and the potential for a catastrophic occurrence, however slim the probability, the above covenant was incorporated in the Guarantee and Sponsor Agreements as measure to mitigate against the worst possible outcome. 59. A number of sensitivity tests were performed to analyze the impact of less than favorable events on EAAB's financial soundness. These are described in Annex 10 and shown as Table 6 in that Annex. The results show that even under a worst case scenario of all such events occurring at the same time, EAAB's present financial position is sufficiently robust to ensure satisfactory completion of the Santafe I project. However, under a number of scenarios of non-compliance with the Action Plan targets, EAAB's ability to meet the stringent financial covenants becomes limited. As a result, it is also likely that the Bank would not go ahead with a second phase financing as proposed. This possibility is also reflected in the relevant sensitivity scenarios as discussed in Annex 11. Should EAAB find itself in any of the scenarios of continued non-compliance and consequent erosion of its cashflows, both the District and the National Governments can be expected to take swift corrective action under terms of the PP agreed betweeen themselves and EAAB, and through the monitoring structure put in place by the Public Services Law. 7. Other Financial Matters 60. The level of accounts receivable at the end of December 31, 1993, was over 180 days. The Action Plan requires that this be reduced to an acceptable 75-90 days by 1998. This corresponds to a ratio of collection/billing of 92%. In the financial analysis, a slower rate of achievement is forecast in order to ensure that EAAB's financial viability remains robust under less than optimal operating performance. The Action Plan includes a specific target for the reduction of the billing/collection ratio. 61. EAAB's accounting systems are being converted to computerized operations. However, EAAB has experienced substantial delays in the process of the conversion due to software problems that are now being resolved. A cost accounting system is also being implemented. However, the customer data base is not up to date and results in substantial billing deficiencies. These are being addressed in the PP that is being - 23 - implemented now. During negotiations, agreement was reached that EAAB will submit semi-annual reports on March 31 and September 30 of each year, detailing achievements against targets and indicators set forth in the attachment to the Supplement Letter (see Section 3.01(b) of the Loan Agreement). In the framework of the semi-annual reports, EAAB will report on progress in moving to computerized financial accounting systems and management accounting and financial information systems and to employ consultants on terms of reference satisfactory to the Bank in the implementation of modem financial and management accounting systems and in setting up computerized billing systems. 8. Accounts and Audit 62. EAAB's accounting practices are satisfactory and follow generally acceptable accounting principles applicable to a water and sewerage utility. The financial statements have been regularly audited by independent extemal auditors. The audits have been satisfactory and generally without qualifications recently, after a major effort in 1992-93 to remedy deficiencies, particularly with respect to correction of errors in accounting treatment of fixed asset reevaluations. Audits cover Special Accounts established under earlier projects. This practice would continue under the proposed project. During negotiations, agreement was obtained on the provision by EAAB of independent audits, carried out in accordance with generally accepted auditing standards within 120 days of the close of each financial year ending December 31, 1998 and thereafter, and not later than 180 days for the precedent financial years 8and on the inclusion of an audit of the Special Account. G. Environmental Impact 63. The project will generate both positive and negative impacts but the major environmental assessment study of the project indicated the net benefit to be overwhelmingly positive. The assessment built on studies of the previous two years, supported by the Bank (for the canceled BogotA V Project), and benefited from extensive consultation between the consultants who carried out the assessment, EAAB, the World Bank, the public and other interested organizations. The following text presents the positive and negative impacts. 64. The Bogota River Interceptor. With the construction of the first section of the Bogota River interceptor, which forms part of the project, the wastewater of the northem part of the city will be discharged to the BogotA River near the outfall of the Salitre tributary, thus greatly improving the quality of the BogotA river in the 35 km long section between the Guaymaral Canal and the confluence with the Salitre river. The main benefit of the pollution abatement in this river section is the improvement in the quality of water used for irrigation of crops in the La Ramada agricultural district. Contaminated vegetables from this area are currently considered to be a major cause of water-borne diseases in Bogota. Water quality of the BogotA River downstream of the Salitre confluence will not change as a result of the project works, since the sewage loads discharged to the river downstream will remain essentially the same. 65. Bogota River Tributaries and Canals. The water quality in sections of the tributaries of the BogotA River within the city limits (the Rivers Salitre, Fucha and Tunjuelo as well as other smaller streams) will significantly improve as a result of construction of the sewage interceptors of the Santafe I program and better separation of sewage and stormwater. This will result in decrease of public health risks 8 EAAB proposed, and the Bank accepted, that due to the difficulties inherent in the changes of accounting systems and incorporation of new computerized systems, an additonal 60 days be provided to ensure compliance with the Bank's auditing requirements at least through the first three years of project implementation. - 24 - for the population residing along these water-courses. Many of the city's storm water drainage canals will also benefit in the same manner. 66. Reduced Flooding. Construction of the canals and pipes of the drainage component of the project will also reduce the risk of flooding in some low-lying parts of the city (Torca, Salitre, Fucha and Tintal) which, currently are periodically exposed to flooding by contaminated river water. The drainage rehabilitation and construction under the project will, therefore, improve quality of life both by mitigating floods, as well as by reducing danger to public health arising from direct contact of the population with contaminated flood water. 67. Protection of Wetlands. The quality of water in the wetlands located within the limits of the Capital District will significantly improve as a result of the project works, since the Santafe I program includes diversion of all raw wastewater that currently flow into these wetlands. This will be most notably the case with the Los Cementerios, Juan Amarillo, Jaboque, El Burro and La Vaca wetlands. The improvement of the wetlands' water quality will result in a better environment for the native fauna and flora in these wetlands and will reduce public health risks originating from the pathogenic contamination associated with the current discharge of raw wastewater. In addition, construction plans will require tree planting and revegetation of many existing waterways and wetlands with resulting aesthetic and ecological benefits. Furthermore, an adequate annual amount of funds will be allocated for financing a wetlands protection program over the seven years of project implementation. In order to ensure the best use of these funds, a study will be financed by the project to develop wetland protection and management plans for each of the wetlands within the Capital District limits. Additional information regarding wetlands protection is presented in Annex 4. 68. The environmental assessment study indicated major negative impact in four areas: disposal of dredgates and other excavation materials, local and temporary impacts associated with construction activities, negative impacts on wetland viability and involuntary resettlement. Mitigation measures for all significant negative impacts will be implemented under the project, in accordance with an Environmental Management Plan proposed in the environmental assessment study. Some residual negative impacts will however remain (for example, the inconvenience resulting from passage of about half a million dump truck loads). A newly created Environmental Committee within EAAB will be responsible for implementation of the Environmental Management Plan. 69. Construction of the project will entail the displacement of 65 low-income fanmilies (311 persons). EAAB anticipates no major problem managing the negotiated compensation for displacement of these families, an event of common occurrence in the construction of similar works and one with which EAAB is familiar. EAAB has presented a comprehensive plan, acceptable to the Bank and under Colombian law, for the resettlement of these families. The Castilla and part of the Cundinamarca sewage interceptors and drainage canals, located in the Tintal area, have been excluded from the project, pending further analysis, since they require complementary works to be carried out by private developers and for which an acceptable resettlement program has not yet been developed. EAAB has indicated its intention to ensure that a detailed resettlement program, acceptable to the Bank, will be implemented also in the areas to be developed by the private sector. Once such a program is presented to the Bank and found satisfactory, the construction of the Castilla and Cundinanarca interceptors and drainage canals may be considered under the project, utilizing unallocated funds to finance them, without increasing the overall project cost. - 25 - H. Socioeconomic Impact 70. During the construction period, the project will provide a significant amount of local employment. The project will result in an annual increase of about 26,000 water house connections and about 28,000 sewerage connections in the Capital District, most of them in poor neighborhoods. The improvements in the water supply service included in the project, such as creating uniform water pressure, increasing the storage capacity, and strengthening parts of the distribution system, will diminish de facto discrimination in service quality and benefit mostly the urban poor, whose water supply service level is generally lower. The improvement and extension of water supply and sewerage services will increase land values and will contribute to a more orderly process of urban development. 1. Project Risks and Safeguards 71. The main risks of the project are associated with the institutional reforms that are being implemented. As discussed in the earlier chapters, these risks principally encompass back-sliding on the reforms pertaining to autonomy of EAAB and its managerial and financial independence from political interference. The principal safeguard against these risks has been in the sensitization of the public over the last two years to the major issues, the demand for more effective, efficient and responsive services, and the provisions agreed and reflected in the Development Plan for disclosure of key information to all clients every two months, along with user representation on the restructured Board of EAAB. These risks are also mitigated by ensuring that more of the operations will be let out to private sector participation in the form of long-term concessions and service contracts that will provide a measure of reliability and insulation from political interference. Adequate financial safeguards are being proposed under the project covenants that would reduce the financial risks and ensure commitment by the government at the national and capital district levels to sound financial structure for EAAB and for delivery of the basic water and sewerage services to the city. The proposed mid-term review of project performance would also allow the government and the Bank to adjust the targets set under the Action Plan. The monitoring indicators would provide sufficient feedback on performance in a timely manner to effect needed mid-course corrections if that becomes necessary. Nonetheless, it must be recognized that the provision of water and sanitary sewerage for a city the size of Bogota is part of a political process that cannot be ignored by the institutions carrying out the task. The safeguards that are being implemented to ensure that EAAB remains relatively free of day-to-day interference and that EAAB is able to maintain a level of integrity in its basic operations and commercial processes are the best insurance against risk of failure and a return to institutional disorder that preceded the reform program now underway. - 26 - IV. PROJECT IMPLEMENTATION ARRANGEMENTS A. Status of Project Preparation 72. The technical preparation of the project has been underway since early 1993 and project preparation is well advanced. Detailed engineering designs and technical specifications are available for about 45 % of the works. These include 80% of the primary sewerage and drainage systems, 50% of the primary water distribution networks, 100% of the rehabilitation works and 20% of the secondary water and sewerage networks. Designs for the rest of the works are under preparation and will be completed according to the project implementation schedule. B. Organizational Aspects 73. EAAB will be the Borrower and sole beneficiary of the Bank loans. EAAB will coordinate with DAMA in the implementation of the environmental component relating to the protection of wetlands. EAAB has recently undergone a major organizational restructuring (Annex 5) to be able to carry out project implementation in an appropriate strategic context. Since the project objectives and activities will represent practically all of EAAB's functional areas of activity, effective project implementation and oversight will be primarily dependent on effective management practices at all levels. The General Manager of EAAB will have a crucial role in this regard. Moreover, in order to enhance institutional and strategic sustainability, EAAB is now taking steps to enter into contractual arrangements by November 1995, with a modem and efficient water utility in an industrialized country, for support with advice, transfer of executive know-how and trouble shooting over the long-term. 74. The essence of the renewed emphasis on effective implementation will be in the close coordination between all functional areas (Vice Presidencies and departments) of EAAB, with ownership by all of them for a project and a corporate vision in whose formulation they have actively participated. A senior manager of EAAB's staff, highly experienced in management of large scale projects, will be nominated as the Santafe I project Coordinator, reporting directly to the General Manager. He will be assisted by a project coordination unit staffed by extemal consultants who have already been hired. This unit is composed of a group of experts who will provide independent monitoring of each activity of the project components and oversight of project implementation. The project coordination unit will also develop, maintain and support management information systems which will facilitate compliance of the Santafe I program objectives. Responsibilities for overall project coordination and for implementation of the distinct components of the project according to the new organizational structure of EAAB are described in and presented diagrammatically in Annex 12. The implementation schedule of each of the main project components is presented in Annex 13. 75. The program of UFW reduction will be managed by a special coordinator directly to the General Manager. This position has been established not only to implement the proposed actions to reduce UFW, but as a permanent feature of EAAB's organization to ensure that UFW reduction goals are reached and remain under control. The coordinator will coordinate the activities of the Operations, Commercial, Technical and Planning Vice Presidencies that will be involved in implementing the UFW reduction program, and will have responsibilities for the day to day control and coordination of all actions required to accomplish UFW reduction goals and to develop monitoring indicators to assess progress made by the different divisions in charge of distinct components of this program. The goal set in the Development Plan is to reduce UFW from the current level of about 40% to below 20% by the year 2000. During negotiations agreement was obtained that EAAB will maintain a specialized unit to implement all needed actions to - 27 - reduce UFW to the target levels and will staff the unit with suitably qualified and experienced personnel at all times. 76. To implement the environmental components of the project, EAAB will establish an Environmental Committee by January 1, 1996. This Committee will have the important task of overseeing the implementation of the Environmental component of the Santafe I project. In the longer term, this unit is expected to considerably improve the capacity of EAAB to analyze and incorporate environmental concerns into all aspects of its work. During negotiations, EAAB submitted plans for the creation of this Committee, TORs and contracts for the external environmental consultant required for its effective performance as well as a detailed work plan. The detailed implementation of environmental strengthening through this mechanism could be modified or improved in the future, through mutual agreement between the EAAB and the Bank, if the institutional goals could be reached more efficiently by any other mechanism. Additional information regarding the environmental institutional strengthening of EAAB is presented in Annex 3. 77. The institutional adjustment study, which would determine the institutional adjustment process of EAAB, and its following implementation actions will be managed by a steering committee integrated by the Capital District, EAAB's General Manager and some high level officials. A technical group will support study supervision and will be strengthened to help carry out all implementation issues. The initial goal is to begin the study by February 1996, and have a decision on the approved alternative before June 1996. Detailed designs and implementation would then proceed in the subsequent two years. In the framework of the project EAAB will formulate s strategy for development of a management information system and redesign the financial information system. The related computer hardware and software systems for data processing would be purchase at the opportune time in a fashion consistent with the formulated strategy. 78. A set of operational, monitoring, impact, financial and project execution targets and indicators has been established to monitor performance of the project and performance of the Borrower (Annex 14). During negotiations, agreement was obtained that EAAB will take all actions necessary to meet such performance indicators, all to be calculated in a manner satisfactory to the Bank. EAAB, with the help of an independent consulting firm, which has already been hired to monitor the PP, will report on EAAB compliance with these indicators by September 30 of every year as well as prepare projections for the following three years. These projections will be submitted to the Bank for review. The Government has set up a project oversight committee with representatives of the Ministries of Finance and Development, DNP, FINDETER and EAAB, which will evaluate the reports on progress and compliance with the physical and institutional objectives of the Santafe I project. These reports will be prepared by the independent firm hired to monitor the PP. In order to ensure that EAAB continues to meet its institutional, financial and operating performance targets, Bank financing of the second phase of implementation will be subject to a satisfactory review to be carried out after September 30, 1997, when EAAB will submit a comprehesive mid-term report. The timing of reporting by EAAB on project implementation progress and on compliance with the Action Plan has been set out in a Supplemental Letter to the Loan Agreements. Quarterly reports of project progress and semi-annual reports of compliance with the Action Plan will be submitted by EAAB. The annual report of compliance prepared by the independent firm mentioned above will supplement EAAB reports. 79. EAAB needs to acquire some 350 ha of land to accommodate the construction of the main canals and interceptors, water mains, water storage tanks, peak-flow attenuation lagoons and pumping stations. Most of this land has already been legalized, i.e., landowners are not allowed to build in these areas and EAAB has up to six years to reach a compensated settlement with the owners. A small part of the land has already - 28 - been purchased by EAAB. In addition, EAAB will present to the Bank, before inviting bids for construction of any of the applicable interceptors and canals, satisfactory evidence that: * a satisfactory resettlement of the current occupants of the land has been agreed with them; * environmental mitigatory measures, recommended in the detailed enginenering studies have been incorporated in the construction plans. 80. All this evidence would be submitted to the Bank as a condition of inviting bids for construction for each of these works. C. Procurement 81. Procurement of goods and services under the proposed project will be in accordance with the Bank Guidelines for Procurement of Goods and Works (January 1995) and Bank Guidelines for the Use of Consultants (August 1981). EAAB has agreed that the Standard Bidding Documents (SBD) issued by the Bank will be used for procurement of goods and works for International Competitive Bidding (ICB) and the sample form of contract for consultants services will be used for consultants' contracts. Standard bidding documents, satisfactory to the Bank, will be prepared by EAAB and used in procurement of goods and works under National Competitive Bidding (NCB) procedures. EAAB has agreed that for large consulting contracts, estimated to cost in excess of US$ 500,000 equivalent, as well as for all consultant contracts for institutional and financial/economic studies, the selection of consultants will be made on the basis of technical quality only and the price negotiated with the highest scoring firm. A formula combining quality and price, the latter with no more than 30% weight, may be used for all other consulting contracts. Provisions of paragraphs 2.5.4 and 2.5.5 of the Guidelines and Appendix 2 thereto should apply to goods manufactured in Colombia 82. A breakdown of civil works, goods and services for the project to be procured by ICB, NCB, and other methods is presented in Table 6. Table 6. Project Cost By Procurement Method (Bank Financing shown for Phase 1 only) (in US$ million) Other Non-Bank Total Cost ICB NCB Financed Civil Works 192.0 90.0 282.0 (37.4) (22.3) (59.7) Equipment 91.8 90.0 15.0 40.0 236.8 (31.5) (22.3) (4.3) (58.1) Consulting Services and 78.6 78.6 Training (27.2) (27.2) Land Acquisition 33.4 33.4 (0.0) TOTAL 283.8 180.0 103.7 73.4 651.0 (68.9) (44.6) (31.5) (145.0) Note: Figures in brackets are the amounts to be financed by the Bank. - 29 - 83. Contracts for civil works estimated to cost more than US$ 4.0 million, and goods purchases of more than US$ 250,000 would be awarded through ICB. Contracts for civil works estimated to cost US$ 4.0 million or less, and goods purchases estimated to cost between more than US$ 50,000 and more than US$ 250,000 would be awarded on the basis of NCB procedures, subject to an aggregate amount of US$ 90 million for works and goods (for the two loans). Prequalification of bidders would be required for all civil works contracts estimated to cost US$ 10.0 million equivalent or more. Contracts for US$ 50,000 or less for goods would be awarded on the basis of intemational or national shopping procedures as detemiined by the Bank in consultation with the Borrower, subject to an aggregate limit of US$ 15 million (for the two loans. The threshold established for ICB would ensure that contracts procured under International Competitive Bidding would account for about 43% of the estimated project cost. The limits of contract values by type of procurement are shown in Annex 15. 84. The Bank's prior review of procurement documentation will cover all major procurement steps (bidding documents, evaluation report, award recommendation and contract) and would apply to: * all contracts procured under ICB; * the first two contracts procured under NCB each year; and * all consulting services contracts provided by firms and estimated to cost US$ 100,000 equivalent or more, and all consulting services contracts provided by individual consultants and estimated to cost US$ 50,000 or more. 9 85. It has been agreed with EAAB that, wherever feasible, works and goods will be combined into larger bidding packages to simplify Bank review procedures and accelerate execution. The tentative procurement schedule for all project works has been reviewed during appraisal, and discussed in detail for the first year of the Project's implementation. A list of the bidding packages of the main works, agreed upon during appraisal, is presented in Annex 16. The total amount of all contracts subject to prior review is estimated to be about US$ 360 million, or about 62% of the amount of contracts under the proposed Bank financing. In light of the Bank's extensive prior experience with EAAB's procurement capacity, this is acceptable. D. Disbursement 86. The proceeds of the proposed loans are expected to be disbursed in accordance with the allocation of categories shown in Annex 17, over a period of 7 years, which is the average for the country profile for Colombia and the water sector profile for Latin America. The disbursement period was determined after taking into account the status of project designs, EAAB's execution capacity and cash generation capacity. The proposed loans will be disbursed against: * Expenditures for civil works: 40 % of eligible local and foreign costs; * Expenditures for equipment and materials: 40% of eligible local and foreign costs; and, 9 It is estimated that the aggregate amount of contracts subject to prior review will total US$ 55 million for services to be provided by firms and US$ 3 million for services to be provided by individuals. Of the remaining estimated US$ 20.6 million of consultant services and training contracts, US$ 18 milion are expected to be awarded to firms, and the remainder to individuals, and would be below the above prior review limits. Thus, in the aggregate, 74% of consultant contracts would be subject to prior review. Terms of reference for all contracts below the prior review limit would be approved by the Bank prior to the selection of consultants by EAAB. - 30 - Expenditures for consulting services, technical assistance, training and supervision of works: 52% of eligible local and foreign costs 87. For civil works contracts valued at less than US$ 4,000,000 equivalent, goods valued at less than US$ 250,000 equivalent, consultant services contracts valued at less US$ 100,000 equivalent for firms and less than US$ 50,000 for individuals, disbursements would be made against statement of expenditures (SOEs). Non-contract expenditures such as training would also be made against SOEs. Documentation for these expenditures would not be submitted to the Bank, but would be retained by EAAB for periodic inspection by the Bank staff and for audit. All other disbursements would be made against full documentation. To expedite disbursements, two Special Accounts (one for each loan) would be opened in a commercial bank at EAAB's discretion, with initial deposits of US$ 2.0 and US$ 3.0 million, until disbursements from the loans account have reached the equivalent of US$ 20.0 and US$ 30.0 million, at which point, the deposit in the Special Accounts would be raised to the equivalent of US$ 4.0 and US$ 6.0 million to cover four months of expected average disbursements thereafter. The Closing Date will be June 30, 2003 , i.e., six months after the estimated completion of the project (December 31, 2002). The forecast loans disbursement schedule (on a consolidated basis for the two loans) is shown in Annex 17. E. Monitoring and Impact Indicators 88. The Project's main objectives and achievements will be followed up by a set of monitoring and impact indicators. Monitoring indicators include: a) milestones for action plans agreed for: installation of commercial, financial and management information systems, tariff restructuring and institutional improvements (including strategy development and implementation of the adjustment process); b) annual physical performance targets proposed for Santafe I, including lengths of water and sewerage pipe installed and rehabilitated, number of water meters connected, and UFW reduction activities performed; and c) operational, financial and commercial indicators. During negotiations agreement was obtained that EAAB will take all measures needed to ensure its compliance with the monitoring indicators which have been incorporated as an Action Plan in a Supplemental Letter to the Loan Agreements. 89. The proposed Impact Indicators will help evaluate the project's impact regarding five key objectives: a) Poverty alleviation, through water and sewerage connections in poor neighborhoods; b) Drainage and flood control, through tracking additional areas with access to drainage; c) Environmental protection, through area of wetlands preserved; d) vulnerability reduction through the completion of key identified works and; e) efficiency and effectiveness, related to UFW reduction, control of personnel costs and of pipe-bursts which interrupt service. Through this exercise, actual results will be analyzed in terms of the real impact achieved, in comparison with the status (baseline) in these areas estimated at appraisal. 90. The details regarding the agreed monitoring and impact indicators are presented in Annex 14. Data for both types of these indicators will be presented in the annual reports. Monitoring indicators will be compared with the estimates at appraisal, as recorded in the minutes of the negotiations. Impact indicators will be assessed in terms of progress in reaching the agreed objectives. Both will be discussed in detail during supervision and all substantial differences, if found, will be analyzed, and followed-up by formulated corrective action. EAAB is upgrading its information systems to allow adequate recording, reporting, and implementation of corrective actions resulting from the analysis of recorded data. - 31 - F. Supervision 91. For the implementation of the project, EAAB has designed an organizational structure, fully integrated within its reformed structure, based on a project Coordinator, assisted by an external project coordination unit, which would coordinate and monitor all project activities carried out by the various departments and Vice Presidencies of EAAB. This project focuses on strengthening EAAB's implementation capacity, in order to reach the planned level of investments and to enter into a new, more efficient pattern, through adequate attention to strategic issues of better customer service, poverty alleviation, and environmental protection. 92. An analysis of EAAB's capacity, in terms of procedures, organization and resources, to achieve its corporate as well as the project's objectives on a timely basis has been carried out. This has included an examination of procedures and time-frame for contract award and execution and the contracting plan under the project. The close follow-up of monitoring and impact indicators, financial and project reports will take place in the framework of monitoring of EAAB's corporate strategy and achievements under the performance plan. 93. The Bank's supervision will include a combination of: a) supervision by HQ staff including support from specialized consultants as required (for institutional adjustment and private sector incorporation as well as for addressing environmental issues); and b) continuous follow-up by a long-term, higher-level consultant based in the Colombia Resident Mission. This supervision will be based on the Borrower's demonstrated ownership and internal monitoring, with a restructured and more effective organization. Supervision resources are estimated at an annual average of 16 staff-weeks, including HQ staff and consultants' contribution. This estimate includes 4 staff-weeks for a Colombian consultant during missions. The Colombia resident mission will provide about 8 staff-weeks annually for an overall follow-up of Santafe I and EAAB's performance with general support and advice on implementation issues to EAAB, review of the institutional performance of EAAB, and inputs and support to the task manager and other supervision specialists. The time and level of delegated responsibility given to the Resident Mission will gradually increase during project implementation. 94. The first three years of execution of the project will be intensively supervised since the implementation schedule shows that about 40% of investments will be carried out during these years. The calendar years 1996, 1997 includes many important activities in all the components of Santafe I and emphasis will be placed on supervision during these years. During the mid-term review of the project, an assessment of the supervision plan and strategy will be carried out, and corrective actions, as needed, will be designed and introduced for the rest of the implementation period. V. AGREEMENTS REACHED AND RECOMMENDATION 95. During negotiations, the following agreements were obtained: (a) From the Capital District of Bogota (under both Sponsor Agreements): (i) Confirmation of the amounts and schedule of mandated transfers under Ley 60 (para. 48.); (Section 2.01). - 32 - (ii) Provision of funds as may be needed by EAAB to meet its commitrnents under the project (Section 3.01). (iii) Provision of funds as may be needed by EAAB in the event of catastrophic breakdown of its water systems (para. 58); (Section 3.01 ). (iv) Commitment to enable EAAB to comply with all its obligations under the Loan Agreements, including the obligation to carry out its decisions based on the recommendations of its institutional alternatives study (para. 37); (Section 3.01). (v) Commitment to ensure that EAAB remains in compliance with the Action Plan targets and to take corrective action as needed (para. 54. ); (Section 3.01 ). (b) From EAAB (covenants in both Single Currency Loan Agreements): (i) Implement the agreed actions under the Action Plan, including completing the tariff structure study not later than December 31, 1995, and beginning to implement its recommendations after review bythe Bank not laterthan March 31, 1996 (paras 53 and 88); Section 3.01(b), and Supplemental Letter No. 1. (ii) Maintain a ratio of liquid assets to current liabilities of not less than 1.0 in 1996 and 1997, and 1998 notlessthan 1.1 thereafterandaworkingratioofnotmorethan45%in 1995, 1996, 1997, 1998, and 1999, and not more than 40% thereafter; (para. 54. ); (Section 5.02, 5.03) supplemertal letter No. 3. EAAB should take appropriate actions as may be needed, including, but not limited to, tariff increases, cost reductions and other measures to increase operating income (paras. 54. and 88); (Sections 5.02 & 5.03). (iii) Provide annual financial audits not later than 180 days following the close of the financial year for the financial years ending December 31, 1995, 1996 and 1997, and not later 120 days for each financial year thereafter (para 62); (Section 5.01 (a)). (iv) Provide by September 30 of each year, annual reports of comphance with the targets and indicators in the Action Plan attached to Supplemental Letter No.2, provide by September 30, 1997, a first report on progress achieved in project implementation, (para. 78.); (Section 9.07 of the General Conditions and Supplemental Letter No. 2). (v) Prior to inviting bids for construction of any of the applicable civil works under the project, furnish evidence satisfactory to the Bank that EAAB has clear title to the lands and rights thereon needed for the construction, has completed satisfactory resettlement of current occupiers of the land(s), and that the recommendations of the detailed engineering studies have been incorporated in the construction plans; (para 79); (Section 3.05), and in respect to resettlement Supplemental Letter No. 4. (vi) Carry out procurement in accordance with the Bank's guidelines and Loan Agreement provisions (para 81.); (Schedule 4 and Section 3.02, and Section 2.02 of the Sponsor Agreement). - 33 - (vii) Open and maintain two Special Accounts (one for each loan) on terms and conditions satisfactory to the Bank; and use SOE procedures for disbursements less than US$ 250,000 for goods and US$ 4,000,000 for civil works. (para 87); (Schedule 1, Schedule 5 and Section 2.02(b)). (viii) Show evidence of the establishment of an Environmental Committee not later than January 1, 1996, and maintain such Committee with adequate technical staff support to help in implementing the environmental management plan of the project (para 76); (Sections 3.06 and 4.04, and Part F.6 of Schedule 2). (ix) Maintain the UFW reduction unit fully staffed at all times, to coordinate, monitor and fine tune the UFW reduction program during the entire penod of project implementation (para 75); (Section 4.04). (x) Provide quarterly reports of progress of project implementation, and semi-annual reports of compliance with the Action Plan targets (para. 78. ) (Supplemental Letter No. 2). 96. On the basis of the agreemnents reached, two Bank loans are recommended totaling the amount of US$ 145 million, of which 60%, or US$ 87 million, as a fixed rate single currency loan, on terms of 9 years, including 3 years of grace on each applicable sub-loan at the Bank's standard interest rate on fixed rate single currency loans as at each interest fixing date, and 40%/O, or US$ 58 million, as a floating rate single currency loan on termns of 17 years including 5 years grace at the Bank's standard variable interest rate applicable to floating rate single currency loans, all in US$. - 34- ANNEX I Colombia Santafe I Water Supply And Sewerage Rehabilitation Project Annex 1 Population Growth, Water Demand and Supply Balance in Bogota Metropolitan Area A. Population Growth: 1. Bogota's population was growing at a phenomenal rate (close to 7% p.a.) in the fifties and sixties when it almost doubled every ten years. Since then population growth has abated to about 2.6% p.a. during the eighties. It is apparently continuing to grow at that level or somewhat lower in the current decade, and is expected to decline to about 1.7% by the turn of the century. The population in the surrounding municipalities served, or to be served, by EAAB, is characterized mostly by low and middle income groups. Population in these urban centers, however, is expected to triple over the next twenty years as the number of municipalities to be served is also expected to increase. 2. Contrary to earlier forecasts of expected population levels, the XVI National Population Census of 1993 estimated that the population in the Capital District alone (including the rural areas) reached 6.3 million. Together with the populations of the surrounding municipalities of Soacha, Sopo, La Calera, Cajica, Chia, Tocancipa and Gachancipa, the total population in EAAB's service area rises to over 6.4 million. This new estimate of the population of the Metropolitan area is over 12% higher than previous estimates, which had placed the population level at around 5.7 million, and which had been the basis for EAAB's planning of water and sewerage infrastructure to be implemented over the next decade. 3. EAAB's population projections adjusted for the results of the 1993 census data are shown in Table 1. At the present rate of growth, the population in the area serviced by EAAB would reach 8.3 million by 2000, and reach 10 million in 2010. The implications of this growth are two-fold: first, there are likely greater numbers of low income residents in the newly urbanizing districts than had been previously suspected, attributable primarily to continued high levels of in-migration that probably exceeds 13% p.a.; the number of illegal connections are also estimated now at over 200,000; at the same time, with the relatively greater certainty in the amount of water produced and billed, there is now reason to believe that, given the existing evidence of larger household sizes at the lower income strata, the present levels of water use in Bogota imply a lower per capita consumption than had been calculated using previous population data. - 35 - ANNEX 1 Table 1: Population Projections Year Total Population Population Served (Millions) (Millions)/ Percentase Bogota Municip. Total Bo2ota Municip Total 1990 4.83 0.54 5.37 4.01 83 0.29 54 4.30 80 1995 6.45 0.84 7.29 5.68 88 0.72 86 6.40 88 2000 7.30 1.00 8.30 6.57 90 0.89 89 7.46 90 2005 8.02 1.21 9.23 7.38 92 1.11 92 8.49 92 2010 8.73 1.32 10.05 8.21 94 1.23 93 9.44 j9 Source: EAAB and Bank Estimates B. Water Consumption: 4. Average domestic water consumption, on a water connection and per capita basis, has steadily declined for the past fifteen years. Two main variables help to explain most of this decline. First, from 1975 to the present more low income population gained access to these services as water service coverage increased from less than 75% to 88% in Bogota. At the same time the number of persons per house connection decreased from 7.5 in the early seventies to about 6.5 at present. Both trends decrease average consumption on a connection basis, while the first also affects average consumption on a per capita basis. Second, services rates have steadily increased in real terms (about 30 % during the eighties). A regression of price and number of connections (number of connections and persons per connection) versus residential consumption indicates elasticities of -0.28 and -0.27 respectively. This regression shows a high correlation (r2 = 0.98) and therefore helps to explain rather well the decline in average domestic consumption on a connection basis. Estimates on a per capita basis are somewhat less reliable as data on the number of persons per connection are only available for census years (the last in 1993), and EAAB has not yet fully analyzed the numbers from the latest census. Nevertheless, as EAAB provides water services to nearby municipalities, mostly on a bulk basis, demand has been calculated for projection purposes, on a per capita basis, as the number of connections in these areas is not well known or controlled by EAAB. 5. Per capita water consumption is derived from the recorded flows in the system and the estimated population figures, as well as the level of transmission line losses. EAAB estimated the per capita consumption (both residential and non-residential) in 1973 at 205 liters/day; in 1990, this figure had declined to 170 liters/day. It is estimated that the per capita residential consumption would remain at a level of 128 liters/day, while the overal consumption would be around 177 lieters/day in 2000. For the metropolitan area as a whole, the consumption figures tend to be lower reflecting the insufficiency of data at the household level for the surrounding municipalities. In terms of water demand however, the level of system losses needs to be factored in order to determine the real level of production required to satisfy the consumption. - 36 - ANNEX 1 Table 2: Historical Consumption (Including Residential and non-residential consumption) Year Average Consumption Average Service UFW Per Capita Level (%) m3/connection/month served (%) Bogota (liters/day) Metro Area 1975 51.0 204 80 22 1980 42.9 181 85 33 1985 36.0 170 88 39 1990 32.5 170 88 42 1993 [32.4 165 ] 88 39 Source: EAAB Commercial Department 6. Total water consumption statistics for Bogota show a steady rising trend over the past decade. Based on water flow recorded at the outputs of the water treatment plants, EAAB statistics show an increase from a flow of 12.67m3/sec in 1985 to an estimated 17.66 m3/sec during 1994, implying a growth of 0.5 m3/sec annually. The demand growth varies between 0.4 m3/ sec to 0.65 m3/sec per year. At the present average annual rates of growth, water demand in the metropolitan area would reach 25 m3/sec by the year 2014. As discussed in the section below, EAAB's maximum deliverable supply is at 25 m3/sec, provided the Tibito plant is fully rehabilitated, and the vulnerability of the Usaquen tunnel and the Tibito pipelines are also substantially reduced or even eliminated. Table 3: Historical Consumption By Major Users Year Average Consumption Total m3/month/connection Million m3/year Percent of Total Consumption ( ) Res. Indust. Commercial Official Other a/ Consumpt. Product. 1986 27.9 524 74 702 257 (66) (7) (10) (5) (12) 1 1987 27.2 570 73 719 279 474 (65) (7) (9) (5) (14) 1988 25.9 543 69 660 280 499 (66) (9 (7) (7) (11) 1989 24.9 542 62 668 309 515 (61) (7) (8) (6) (19) 1990 24.8 528 59 641 311 537 (65) (7) (8) ( (15) 1993 24.5 414 59 1051 338 556 (69) (6) (9) (6) (10) a/ Includes block sales - 37- ANNEX I 7. The expected increase in rate levels will be offset to some extent by the increase in living standards. On the other hand, water consumption in the surrounding municipalities reports on a per capita basis is about 70% that of BogotA. Population served in these municipalities account for 10 % of the total in 1990 and 17% by the turn of the century. Information of industrial water consumption per unit of production output is not available. Therefore, for projection purposes the overall consumption trend, on a per capita basis, has been adopted. C. Demand Projections 8. Water consumption and production projections over the next 20 years are presented, based on the above mentioned assumptions and plan to reduce UFW (see below): Table 4: Demand Proiections Year Popul. Per Capita Total Demand UFW Production Served Use i/ m3/year (%) m3/year l________ (million) liters/day (million) (mill) 1995 6.46 179 422 39 692 l 2000 7.52 175 474 31 687 2005 8.49 176 522 24 687 2010 9.44 175 567 _ 24 746 1/ Includes both residential and non-residential water use D. Unaccounted For Water 9. Unaccounted for water was on the rise for many years. As part of the BogotA IV Project, EAAB undertook with the help of consultants a detailed analysis of this problem. The main causes of UFW were: i) illegal uses; ii) errors of micro-metering at the retail end; iii) physical leaks in the system; and iv) errors of bulk metering at the treatment plants. The level of total UFW was estimated at over 40% in 1990 and had only declined marginally to under 40% in 1993. Taking into account the level of UFW, the apparent levels of water consumption lead to substantially higher levels of demand at the output of the treatment plants. Commercial factors, namely, illegal connections, unmetered connections and faulty meters accounted for over 55% of the UFW in 1993, technical factors, mainly, leaks in the distribution system and in the house connections accounted for another 23%, while, problems of macrometering accounted for the remaining 22%. 10. EAAB initiated, in mid 199 1, an ambitious program to reduce UFW. As part of this initiative, overall responsibility and coordination of all actions to reduce UFW has been assigned to a special unit reporting to the general manager. The program started by the identification of illegal connections and by February of 1992 some 80,000 illegal connections had been located and are now officially registered in the commercial system. The proposed project will provide funds to improve meter maintenance, better pressure sectoring in the distribution system, replacement of old pipes and detection and correction of illegal connections. Based on this detailed program, UFW is expected to decline to about 30% by the turn of the century. 11. The effect of the reduction of commercial and physical losses is substantial. A parallel reduction of commercial and physical losses is assumed, as the UFW reduction program is directed at reducing both. - 38- ANNEX 1 The reduction of commercial loses will help the finances of EAAB as more water will be billed. The reduction of leaks will save on production costs (chemicals and pumping). Both will have an effect on water conservation and therefore total production will decrease in relative terms. However, given the latest estimates of total demand in the Bogota metropolitan area, it is unlikely that the need for additional capacity can be postponed much beyond the early part of the next century. Nevertheless, with the UFW program in place, expected savings in additional production areas is substantial as shown in Table 5 below: Table 5: Potential Reduction in Production Year Total Demand UFW (%) Savings in Production mill m3/yr. Without With mill m3/yr. 1995 420 42 39 36 1996 431 42 37 59 1997 442 42 36 71 1998 452 42 34 94 1999 462 42 32 117 2000 474 42 31 130 2001 484 42 29 153 2002 494 42 28 166 Total 826 E. Supply Constraints 12. EAAB has three major sources of water supply; first is the Chingaza system which provides a reliable system capacity flow of 14 m3/sec, based on previous hydrologic records and the estimated reliability of the system parameters; second is the Tibito system fed from the upper reaches of the Rio Bogota, which can provide a maximum flow of I Om3/sec; third is the much smaller Tunjuelo system that accounts for about I m3/sec of available flow. At present, the Tibito system is in need of major rehabilitation and is only providing about 60% of its capacity flow (see Annex 2). As the production costs are also higher at the Tibito plant, due to the need for extensive pumping and substantially higher costs of treatment, EAAB is mainly relying upon the Chingaza system to satisfy about 60% of the total current water demand. This adds to the vulnerability of the main transmission tunnel from the Chingaza supply. 13. EAAB estimates that with these three sources of supply, subject to satisfactory completion of the proposed rehabilitation and vulnerability control investments in the Tibito and Chingaza systems, a maximum flow of 25 m3/ sec would be available. EAAB's consultants have now estimated that based on the possible growth of demand, this supply level will need to be augmented as early as 2003, and no later than 2014. The earlier scenario is reached if demand grows faster than has so far been taken into EAAB's planning estimates. The main reasons for assuming a higher rate of growth of demand are two fold: first, it is likely that EAAB's efforts at reducing UFW levels will be only moderately successful, given the continued migration into the Bogota metropolitan area and to the urban perimeter; second, as more house connections are made, it is also likely that water consumption per connection will grow modestly even as per capita consumption declines marginally over the next several years. - 39- ANNEX 1 14. EAAB's consultants now estimate that given the uncertainties surrounding the real demand for water in the Bogota metropolitan area, and the paucity of detailed studies, EAAB must plan for the potential maximum growth of demand and start the process of investing in new water sources as early as 1997. Further studies are needed to examine the detailed cost of the proposed alternatives and to choose the optimal investment path. - 40 - ANNEX 2 Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Annex 2 Water Supply, Sanitation and Pollution in the Bogota Metropolitan Area 1. General. The Capital District and surrounding municipalities account for a population estimated at around 6.4 million in 1993, which is projected to reach 9.5 million by the year 2010. Of the present population, over I million represent the urban poor, many of whom live in unsanitary conditions on the banks of the highly polluted Bogota River, or in zones of illegal development with relatively poor access to water and sanitation services. The Capital District is not only the most populous urban concentration in the country, but also the most industrialized, with about 30% of the nation's industries located in the Bogota River watershed, and most of the commercial activity of Colombia taking place in this river basin. 2. Water Supply. The Bogota Water Supply and Sewerage Company (EAAB) is responsible for water supply, sewerage and storm drainage services in the Capital area; it also provides bulk and retail water supply services to surrounding municipalities, of which the most important and rapidly growing is Soacha. Given the relative institutional weakness of these municipalities and the large economies of scale in water production, it is likely that EAAB's influence in the Savanna of Bogota will grow over time. Service coverage in the Capital area is high by national standards. The total population to be served by house connections in the metropolitan area is expected to grow from about 91 % in 1990 to about 94% by the year 2010, assuming a stable and enabling institutional environment, the adoption and implementation of a coherent strategy supported by all the major stakeholders, and the strengthening of EAAB's financial solidity. Meanwhile, the major concern of the Capital District authorities, EAAB's current Administration, and the national Government is to reduce the vulnerability of the system, which will only partially be relieved by the completion of the San Rafael system for reserve capacity in late 1995. The most urgent priority in water supply in the Capital area is therefore to carry out rehabilitation and long-neglected maintenance works to enable the two main systems (Chingaza and Tibitoc) to operate at full capacity, and to adopt a least-cost approach of optimization of use of installed production capacity through improvements in the production, water treatment, and transmission/distribution portions of the existing systems. Such an approach should help meet water supply needs until the year 2014 and relieve fears of rationing and public discontent caused by service interruptions and lack of distribution network in the "barrios subnormales". Intractable corrosion problems in the Tibitoc system and frequent break-downs of tunnels in the Chingaza system have led to existing plant being used only at two-thirds of capacity, and water supply being shut off in parts of the city for days together. Despite some emergency maintenance in the last year, there is considerable scope for a more systematic approach. In any case, the installation of new production capacity, along with the related water treatment and distribution network, other than the optimization type approach mentioned, would not only be much more expensive, but would probably require at least 12 years for the investments to come on stream. The population of the metropolitan area is expected to continue growing and is expected to reach 13 million inhabitants by the year 2025. Consequently, the urgent need to start studies, planning, and design process for this later investment has been recognized. The first stage in that direction has been taken by DNP and EAAB through hiring of the Colombian consulting firm INGETEC which is preparing a pre-feasibility study for development of the future water sources of Bogoti. (see Annex 1) 3. All water supplied is treated and chlorinated to meet or exceed WHO water quality guidelines. All water connections and production sources are metered. Unaccounted for water (UFW) increased steadily from - 41 - ANNEX 2 22% in the early 70's to an estimated 42% by 1990. The main cause, accounting for about 65% of the UFW, lay in problems in the commercial system, of illegal connections and faulty meters, as well as internal corruption. The other 35% of UFW was caused by leaks in the distribution system and house connections, and problems in macrometering. Under the Bank-financed Bogota IV project, the issues were studied and a comprehensive plan developed to reduce UFW gradually. Initiation of implementation was, however, delayed, and even with a renewed emphasis under a more vigorous management, only limited progress has been achieved in the last year in reducing UFW (regarding macrometering in particular). UFW is currently estimated at around 39.7%. Initial efforts have been directed to improve the commercial system and the security to access its software, as well as to identify areas of the city where massive illegal connections are a problem and leaky pipes need to be replaced. Also, the commercial department has been restructured and restaffed, with the dismissal of about 150 staff of EAAB in March, 1993, assistance on a continuing basis from a special in-house team from the Office of the Procurator-General to weed out corruption and carry out arrests has been established, and an approach to sub- contract auditing of the commercial department's activities to an independent agency is being carried out. EAAB has sharpened accountability for the UFW reduction program by the creation of a unit, reporting directly to the General Manager, with the mandate to coordinate the actions of different administrative units of EAAB assigns to specific tasks to make this reduction program a reality and maintain the gains accrued over time. Agreements will be reached during negotiation that EAAB will maintain the UFW reduction unit fully staffed at all times, to monitor, fine tune and coordinate the UFW reduction program. 4. Average water consumption per connection is about 32m3,'month, of which about 69% represents residential consumption, and about 15% industrial and commercial use, with the rest accounted for by the official and "mixed" sectors and by consumption of nearby municipalities. Water consumption does not vary by more than 15% on a month by month basis. As discussed in Annex 1, since 1975, average unit water consumption has been steadily declining on account of the increase in service levels and corresponding lower water consumption by low income groups and increase in service rates. Fears of impending water rationing because of low water levels in reservoirs led to the introduction, in the period of electricity rationing, of a water savings campaign in the second half of 1992, with only limited and temporary results. However, at the same time, water tariffs were raised, and adjusted upwards again in the first semester of 1993. These adjustments would have an impact on average consumption and EAAB's revenues. The feasibility of implementing demand management policies would be considered in the framework of the Santafe I project. 5. The Vulnerability of the BogotA Water Supply System. The Colombian authorities (both National and those of the Bogota Capital District) have been concerned by possible scenarios of water rationing in Bogota. To address this concern, a vulnerability control component was incorporated in the Santafe I project, with a specific goal of ensuring reliable water supply to the city from its two main treatment plants: Wiesner and Tibito. 6. Analysis of the Bogota water supply system demonstrates that at present both main water supply sources are exposed to significant levels of risks which may result in severe interruptions in supply, although the probability of such an occurrence, while increasing, is considered still to be small. 7. The entire production of the Wiesner plant (14 m3/s) is conveyed to the city through the 2.7 km long, 3.5 m diameter Usaquen tunnel. This tunnel was built at the same time and used the same construction technology as the El Faro tunnel which supplies raw water to the Wiesner plant. The El Faro tunnel has suffered several failures in recent years as a consequence of collapse of sections of its unlined walls, with the effect of water rationing in Bogota during the repair periods. The vulnerability of the El Faro tunnel was partially addressed in the Bogota IV project through construction of the San Rafael reservoir for reserve capacity. However, since the - 42 - ANNEX 2 latter is only expected to be operational by late 1996, because of delays incurred, the technical issues of the El Faro tunnel can only be analyzed and solved after San Rafael comes on stream. Since similar risks could affect the safe operation of Usaquen tunnel, the adoption of measures for risk control of that tunnel are of highest priority. 8. The Tibito treatment plant, with a nominal capacity of 11 m3/s, has not been refurbished for the last 26 years. Under normal operating conditions it supplies about 4 m3/s. Higher flows if required, can be assured only for limited periods of time. The full capacity of the plant needs to be restored in order to ensure reasonable water supply in cases of maintenance or emergencies at the Wiesner plant. 9. The treated Tibito water is conveyed to the city through two water mains. The larger one, a 2 m diameter 55 km prestressed concrete cylinder pipe (PCCP) suffers from corrosion problems which have caused eleven failures during the period 1978-1989. At present it is operated at less than half of the design pressure and consequently conveys lower flows. Even with present low operations, the risk of bursts still exists, exposing the population to flood risks and to unreliable supply in cases of emergency. 10. To address the problems mentioned above, a vulnerability control component consisting of three operations was included in the project: (i) Rehabilitation of a Section of 31 km of the 2m diameter PCCP Tibito treated water transmission pipeline; (ii) Rehabilitation of the Tibito water treatment plant so as to restore its capacity to treat the nominal flow of 11 (iii) Construction of a backup Usaquen tunnel which will ensure that the treated water of the Wiesner plant will reach the city at all times. 11. Sewerage and Drainage. About 83% of the population of the capital area was estimated to have access, by house connections, to sewerage services by 1990. About 70% of the city is served by a storm drainage system. All sewage generated in the city is discharged without treatment into the Bogota River. Service levels in sanitation are expected to grow to about 90% for Bogota and 88% for the metropolitan area by the year 2010. The sewerage and drainage systems are combined in the old sections of the city. In other areas, sewerage and drainage are separated. In practice, many illicit or unauthorized connections have been made to the two systems, and therefore they operate, to some extent, as a combined system. The problem created by these illicit connections must be studied in detail as they are a determining factor in the definition of specific actions. The sewerage and drainage systems included some 4,580 km. of pipes, 81 km of canals and 707,000 sewerage connections by 1990. 12. The domestic and some of the industrial waste water generated in the Bogoti area is collected by interceptors parallel to existing natural water courses that were built to discharge their waters directly back to these courses below populated areas. As the city has expanded, some of these discharges are now being made in densely populated areas, thus preventing orderly urban growth. In addition, overflows of the combined sewerage system are also often discharged, under all weather conditions, to the drainage canals (often with reduced capacity because of neglect of maintenance) in densely populated areas. These conditions pose high health risks to the population. To remedy these problems, existing interceptors need to be extended, and new ones built to discharge wastewater farther downstream from populated areas. The natural water courses and drainage canals receive the water mn-off which is fmnally discharged into the Bogota River. Levees have been - 43 - ANNEX 2 built on both sides of the river to protect the city from extensive flooding. In the lower reaches of these water courses, peak flow attenuation lagoons need to be built to accommodate storm flows before discharging into the Bogota River. Pumping stations (in Torca and Tintal) are needed to discharge the storm and waste waters during periods of high stage in the Bogota River. 13. Feasibility studies and final designs carried out with financing under the Bogota IV Bank operation identified and analyzed alternative solutions for improving and expanding the sewage and drainage collection and disposal system of the area and recommended the most attractive solution from a technical and economic point of view, with a scheme corresponding to the least-cost solution 14. Bogota River Pollution. As the most intensively used river in Colombia, the Bogota River is also the most polluted. Its principal uses are water supply for human consumption, irrigation, industry, electric power generation, and some recreation in the upper basin. The main pollution sources of the Bogota River are domestic wastewater, industrial wastes consisting of liquid wastes and sludge, including toxic and hazardous wastes, municipal solid wastes, and agricultural run-off. The city of Santafe de Bogoti, located along the middle section of the river, is by far the major polluter. The discharges, either direct into the river, or into the three main tributaries that cross the city (the Salitre, Fucha and Tunjuelo) include both the wastes of some six million inhabitants, and of about 10,000 industries. The estimated total organic load currently discharged to the river from the city is about 350 ton/day BOD, out of which about 30% is contributed by industrial wastes. The domestic wastes contain large amounts of oxygen-depleting organic matter, and extremely high levels of pathogenic organisms. Of the total industries in the metropolitan area, about 3,800 are of a considerable size, and about 85% of the industrial discharges are into the Fucha basin (the rest is about equally discharged into the Tunjuelo and Salitre basins); the discharges are either direct, or through the sewerage system. In addition to their high organic loads, the industrial wastes contain toxic material such as heavy metals. The industrial wastes present a special problem in the case of Bogota, requiring specific attention. Unfortunately, the various treatment options presented by vendors so far would not help address this problem, and the on-going IDB funded project with the area's environmental protection agency (CAR) only deals inter alia, with reducing pollution at source from some industries up-river of the city. Approaches to institute a subsidized line of credit to encourage pollution-abatement by industries have not so far materialized, and enforcement capacity is negligible. Although in the past, disposal of municipal solid wastes in the Bogota River and its tributaries was a major source of pollution, since the privatization of collection services in 1988, there have been major improvements, and about 95% of the city's solid wastes are properly collected and disposed of in the municipal sanitary land fill. In marginal zones which are not accessible to collection vehicles, solid wastes are still dumped in the river. In general, solid waste disposal does not represent a major source of water pollution, provided that standards of collection and disposal remain at least at present levels. 15. Since heavy pollution loads are discharged from Bogota to a river of relatively small flow, water quality data amply demonstrate that downstream from the first point of discharge of the Bogota wastewater, water quality deteriorates drastically. In general, the water downstream of the city and all the way to the confluence of the river with the Magdalena River is of very poor quality: practically raw sewage. 16. The most severe threat to public health is the potential effect of water with an extremely high content of pathogenic organisms flowing in natural, uncovered waterways which cross highly populated residential areas of Bogota. Chronic flooding in the metropolitan area (resulting from the topography, and from water brought from neighboring watersheds ending up as wastewater discharged to water courses of limited capacity) causes direct contact of the population with the contaminated water. In addition, the use of the river water for irrigation in the middle and local sections of the Bogota River exposes the population consuming these irrigated food products to - 44 - ANNEX 2 health hazards, as well as the farm workers and population residing in the vicinity of these irrigated fields. Most of the irrigated crops are sold in the Capital District. The high incidence of gastro-intestinal diseases, particularly diarrhea, in Santafd de Bogota and neighboring towns is amply documented. The impacts of contamination include difficulties in operating the hydroelectric plants, the costs of water treatment, particularly at the Tibito in-take, and the unacceptability of use of the river as the water supply source for the small town of Agua de Dios in the lower basin. 17. The ecological effects of water pollution have been high. Over the last 20 years, many of the species of the local fauna and flora have been lost or are severely threatened, and no vertebrates (fish or migratory birds) survive in the Bogota River downstream of Bogoti. In addition, given the loss and degradation of habitat in the Sabana de Bogota, the once extensive Bogota wetlands have almost disappeared due to land-filling and pollution, and with them several unique bird species. Pollution load discharges to the Magdalena River have also had an adverse impact on areas outside the Bogota River watershed, although greatly mitigated by the dilution factor of 50 to 1 between the two rivers, and the natural aeration effects of the topography. 18. CAR defined, in 1987, water quality criteria (see Appendix 1) for different reaches of the Bogota River, with the permanent criteria to be achieved from 1998 onwards, thus permitting application of intermediate strategies in the preceding period. Quality parameters for 1998 along the middle section of the river, i.e. the Capital District, (between the confluence points with the Salitre and Tunjuelo streams) can be achieved by a very high level of treatment (probably tertiary treatment) within the city limits, or by collection and conveyance of the wastewater of Bogota to a point downstream of the Tunjuelo confluence, and its treatment at this point to a lower level (probably secondary treatment followed by disinfection). The results of various pollution control studies which have been carried out indicate that the investments required to achieve the quality goals are extremely high, estimated at around $1.5 billion, and beyond the current financial capacities of any of the relevant agencies. The adoption of pre-defined water quality criteria has meant that these studies, in general, have not analyzed the environmental impact of the proposed projects and of the resulting water quality, leading to strictly technical approaches which have not incorporated environmental and institutional considerations. In preparing the Bogoti V Pollution Abatement Project, the Bank attempted, during the period 1990-92, to contribute to a staged, strategic approach, which would have meant in the first phase, construction of an interceptor along the Bogota River, carrying out a cost-benefit analysis of different treatment options, a study of the specific problems of industrial pollution with recommendations for solutions consolidating the institutional and financial capacity to deal with the intrinsic externalities and cost-recovery issues, as well as for wetlands management and ecological conservation. With Bank cooperation, the Bogota River Committee (BRC) was established, and a simple charter was signed by the then Mayor of Bogota, the heads of the National Planning Department (DNP), CAR, EAAB, the Capital District's environmental agency (DAMA); and the Governor of Cundinamarca, with the President of the Republic as a witness to the event. Since the BRC was only a technical, advisory committee, rather than a policy-making body, it was limited in scope, and could not surmount the intransigent position of some agencies down-playing any need for an extensive cost-benefit analysis, and insisting on a definition of the problem as only one of EAAB going ahead urgently with waste water treatment. - 45 - ANNEX 2 Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Appendix 1: Water Quality Criteria Adopted by CAR 1. CAR, the regulatory agency responsible for the administrative management and control of the renewable natural resources in the Bogota river basin, formulated in the Agreement No. 58 of 1987 (Chapter IV, Article 28) the water quality criteria of the rivers in the area of its jurisdiction, classifying water quality in the water courses into one of the four following classes, according to their actual and potential use: Class A: Human and domestic use after conventional treatment, flora and fauna preservation and use for watering cattle and for agriculture. Class B: Flora and fauna preservation, use for agriculture and cattle. Class C: Agriculture and cattle use. Class D. Energy generation and restricted agricultural and industrial uses. The limits of the related parameters for the different classes are: CLASS A B C D BOD (mg/l) < or = 5 10 30 100 DO (mg/l) > or = 6 5 2 - pH 6.5-9 6.5-9 4.5-9 4.5-9 T-Coli MPN/100ml < or = 5.000 5.000 10.000 - F-Coli MPN/lOOml < or = 1.000 1.000 - - 2. Limits of additional parameters for each class are presented in Article 26, Chapter III of Agreement 58. Based on the above classification and considering the actual and potential uses of water, the following water quality objectives are established in Article 28, Chapter IV for mean hydrological conditions: 3. Bogota River watershed - Sisga/Tibito sector (#14): It is located along the Bogota river, from the confluence of the Sisga river to the confluence of the Susagua-Barandi-Ilas River near Tibito, it is assigned to be Class A. 4. Bogota River Watershed-Tibito/Tequendama Falls (#15): It is located along Bogota River and its tributaries, from the confluence of Susagua-Barrandillas River to the Tequendama Falls, except the Tuesaca, Sapo, Frio, Negro, Tunjuelo, Soacha, Muna and Balasillas Rivers and tributaries. - 46 - ANNEX 2 5. More specifically in accordance with #15.2 the water quality in the Bogota-Salto watershed, formed by the Bogota River and its tributaries, with the aforementioned exceptions, from the confluence of the Juan Amarillo (Salitre River) to the Salto del Tequendama will be: From Juan Amarillo Class D Class B Class B (Salitre) to Fucha From Fucha to Tunjuelo Class D Class D Class B From Tunjuelo to Salto Class D Class D Class C 6. Bogota River Watershed, Tequendama Falls-Apulo sector (#18): It is formed by the Bogota River and its tributaries, from Tequendama Falls to the confluence of the Calandaima River: (a) Water flows other than Bogota River will be Class A. (b) Bogota River between the mentioned limits will be Class B. (c) Bogota River from Calandaima River confluence to Apulo River confluence will be Class C. 7. Bogota River lower watershed, Apulo-Magdalena Sector (#19): It is formed by Bogota River and its tributaries from the Confluence of the Apulo River to its confluence with the Magdalena River: (a) Water flows other than Bogota River correspond to Class A. (b) Bogota River between the above mentioned limits corresponds to Class C with the exception that the water can not be used for irrigation of fruits consumed non peeled. - 47 - ANNEX 2 Table I Monthly Distribution of Water Consumption During 1993 in Bogota and the Neighboring Towns Serviced by EAAB (m3) MONTHS BO(;GOTA C1lA CAJICA SOPO TOCANCIPA CALERA GACHANCIPA TOTAL December92 28,066,694 420,547 232,985 58,857 19,986 71,672 19,300 23,508,126 January93 23,996,487 361,374 220,153 52,443 31,259 53,058 18,213 24,755,073 February 27,895,524 372,151 228,143 62,913 39,223 59,710 16,755 28,698,153 March 33,205,528 410,173 227,716 58,202 46,015 71,357 18,495 34,068,972 April 20,532,924 425,512 231,040 59,989 48,616 71,022 16,696 21,412,180 May 27,651,201 407,205 204,365 46,960 39,258 66,606 13,230 28,453,994 June 28,601,204 398,939 220,955 57,124 35,338 71,612 14,850 29,427,698 July 25,661,205 497,809 221,367 57,224 49,978 71,419 17,382 25,507,135 August 26,495,812 418,767 216,990 30,878 42,991 69,259 14,713 27,337,745 September 28,131,534 390,070 299,380 55,420 47,161 67,031 8,864 29,035,922 October 31,628,721 410,353 251,861 60,715 61,374 74,411 8,897 32,521,557 November 33,261,614 341,990 225,228 55,453 45,966 64,996 8,904 34,635,172 Dcrember 18,602,901 449,209 258,321 61,114 65,565 77,000 9,583 19,645,040 ITOTAL .325,664,655 4,323,552 2,805,519 653,435 .552,744 817,481 166,5S2 335,49S,646 Source: EAAB Informaticn Systmes Department and Ccntral Billing Department Table 2 Water Production by Treatment Plants (For 1993) .REA .,METrPLANTS v:-. almo son alo LN LgVR. El Delirb MbIt2 - CUM . TOTAL nnh M 9nh aW3/i M3Wmtk m3h M31Maaliu m3hs M&UoI A% M3liM ml's 04Matbh m1 MSa3onhi .3s day Dsecember/92 2.682 0 262 0 723 0 63 1 9,332 0 33.a16 1.07 4s8.79 12t JanuwY93 2,2s8 0os 334 012 6n7 0.23 240 0.09 3,396 5.00 28.057 104| 44.992 1.4s1 Februry 2.137 0.23 264 0.11 621 0.26 191 0.08 3,363 3.54 39.325 12.95 45.101 1.539 March 2.413 0.90 393 0.12 714 0.27 97 0.04 9,797 3.66 33,365 12.46 46,7s2 1.507 April 2.343 090 259 0.20 666 0.25 139 0.05 9.351 2.61 33,113 12.7a 45.065 1.529 May 2.660 0.99 333 0.12 701 0.26 61 0.02 9.245 3.45 34.203 12.77 47.283 1.523 )une 2.a06 1.03 105 0.04 651 0.25 0.06 t623 0.33 3.283 12.69 45.067 1.302 July 2.906 1.91 317 0.12 657 0.25 0.00 9.215 3.44 33,409 22.47 46.303 1.560 Augst8 2.799 1.05 334 0.12 650 0 24 0.00 16,236 6.06 22,396 10.75 48.325 1.373 Sqatanber 2.619 1.01 315 0.2 64s 0.25 0.00 0.239 6.41 33.6a7 12.97 46.040 1,335 Odabar 2.424 0.91 202 0.11 662 0.25 0.00 9.164 3.42 35.604 13.26 4l.032 1.549 Narubar 2.443 0.94 252 0.20 667 0.25 0.00 866 3.35 32.605 12.6 45663 1,522 Da9b71 322312 0.26 269 0.10 694 0.24 0.00 9.04 3.33 34.994 13.0 47763 12641 TOT;A17 30,150 3,463 7998 72 1.2 376,432 557,416 AwtrsC 3,769 1.43 424 0.16 999 0.39 92 .04 22,07 s.73 49,111 2S.76 46,313 1,62 Source: EAAB Information Systems Department - 48 - ANNEX 2 Table 3 BIMONTHLY WATER BILLING FOR JANUARY - DECEMBER 1993 (BIMONTHLY AVERAGES) 11mw N-un-.- .b -: .- t. ~m . .p,m - .r . Ay!ng" ) . -: A p j u::: M3: Redden"l Categcy I 29,902 1.530,948 51.20 151,442,217 30,398,944 181,841,181 98.92 19.86 118.78 Categcy2 228,734 11,486,574 50.22 1,446,833,S72 475,798,959 1,922,632,832 125.96 41.42 167.38 Cateqcay3 296,753 14,649.803 49.37 2,744,812,969 1,193,952,224 3,938,765,193 17.36 81.50 268.86 Categ-ry4 124,738 5,433,972 43.56 1,519,136,325 671,710,409 2,190,S46,734 279.56 123.61 403.18 Categeys 53,393 2,575,826 48.24 1,045,959,420 482.516,920 1,528,476,340 406.07 17.33 593.39 Categcry6 22,582 1,327,5S7 58.79 635,660,729 298,253,007 931,913,735 478.81 223.15 701.98 Subftl 756,102 37,004,710 4L94 7,543,S45,532 3,152,630,463 10,64,47C,115 203.26 3514 2n9.0e Mind Cdegayl 674 45,420 67.37 7,736,860 2,524,010 10,260,870 170.34 55.57 225.91 Categay2 12,744 901,403 70.73 176,084,285 70,766,620 246,850,905 195.34 78.51 273.85 Caftcry3 36,028 2,643,S56 73.38 620,513,658 298,955,759 919.469,416 234.72 113.08 347.80 Cdegoy4 6,018 539,612 89.67 15S,938,844 77,082,848 236,021,692 294.54 142.85 437.39 C*g-y5 901 120,600 133.93 45,708,750 21,292,857 67,001,607 379.01 176.56 555.57 Cdmegcry6 151 17,012 112.91 7,689,556 3,80,494 11,570,051 452.02 228.11 680.12 Sub_tl 5,516 4.7903 7151 1,016,671,953 474,502,538 1,491,174,541 23.22 111.13 349.41 Ccamiol 42,629 5.085,529 118.83 1,912,810,931 1,209,158,429 3,121,969,359 377.61 236.70 616.32 Idusrial 4,019 3,327,961 828.09 1,116,362,343 821,869,064 1,938,232,007 335.45 246.96 582.41 Spedal 683 1,443,645 2,113.17 139,935,081 72,621,566 212,556,646 96.93 50.30 147.24 Oficial 1,506 3,167,S97 2,103.05 S56,323,968 474,544,142 1,330,868,110 270.31 149.80 420.11 S3b1ol 43,337 23,025,032 266.30 4,025,432,323 2,578,193,201 6,603,626,122 310 196 50S TOTAL 361,455 54,297,645 63.01 12,55,S4S,S0S 6,205,326,252 13,789,276,673 232 114 346 Source: EAAB Daily reports of the Information Systems Department (I)Ihidngfixad d- - 49 - ANNEX 2 Table 4 Length of Water Pipes in the Bogota Network Distributed Accofding to Pipe Diameter (1992) 12n 8.20 0.14% 3/4- 9.00 0.15% 1. 44.90 0.77r I 1/12 77.30 1.32% 2' 276.70 4.72% 2 1/2' 26.50 0.45% 3 2,399.10 40.81% 4- 1,063.60 1.14% 6" 813.20 1387%! S. 339.30 5.79"!. 9" 2.40 0.04% 10" 17.10 0.28% 12' 381.50 6.51% 14' 10.30 0.18% 16' 47.00 0.80"/* 1i8 1.40 0.02% 20' 23.70 0.40"!. 22' 8.10 0.14'% 24" 78.10 1.34% 27' 0.70 0.01% 28' 1.00 0.02% 30" 16.40 0.28% 34' 18.90 0.32% 36" 16.60 0.28% 39- 0.50 0.01% 42' 33.30 0.57% 48' 1.40 0.02% 60' 46.80 0.80%/ 78" 54.00 0.92% > 78- 46.20 0.79% TOTAL..: :.:64M .-O0.:. Lenth ofWater Pipes In the Bogota Network Distributed according to material type (1992) Steel 613.5 10.48% CoutIron 194 3.31% Asbestos cement 3029.5 51.75% Concrete 334.4 5.71% P.V.C. 1682.8 28.75% TOTAL ..... ..... .. . . . : 100.00% Source: EAAB Engineering Department - 50 - ANNEX 2 Table 5 Number of Water Pipe Bursts During the Year 1992 in the Bogota Water Supply Network Distributed According to Pipe Diameter Pipe Number of Percentage of Diameter Bursts total burst %. c 3 440 4.01% t3 5,542 50.45% "14 3,071 27.95% '16 1,111 10.11% "3 620 5.64% "10 21 0.19% "112 140 1.27% > "112 41 0.37% 10986. 0. 0 Number of Water Pipe Bursts During the Year 1992 in the Bogota Water Supply Network Distributed According to Material of Pipe Material N mber of Percentage of S ; T yl0;t pe t; :i0- 0 - :Burstsllg :0i;ili;;0 total bUrstsf %J4: .;t Asbestos cement 9,003 81.95% P.V.C. 1,322 12.03% Others 661 6.02% TOTAL 10,986 ::0.00% Source: EAAB Engineering Department - 51 - ANNEX 2 Table 6 Volume of Storage Tanks in the Bogota Water Supply System Percentage of Total Storage Tank Name Tank Volume (M3) Storage Volume % CASABLANCA 143,000 31.70% PARQUE NACIONAL 51,200 11.40% VITELMA 36,000 8.00% SAN DIEGO 33,000 7.30% SANTA ANA 30,000 6.70% EL SILENCIO 30,000 6.70% SANTA LUCIA 28,000 6.20% CIUDAD BOLIVAR 20,400 4.50% CAZUCA 10,300 2.30% CHICO 7,000 1.60% MONTEBLANCO - EL UVAL 9,000 2.00% JALISCO - CASTILLO - VOLADOR 3,400 0.80% SAN DIONISIO 6,300 1.40% SAN VICENTE 7,800 1.70% LOS ALPES 3,700 0.80% LOURDES 2,400 0.50% LAS COLUMNAS 1,300 0.30% JUAN REY 4,300 1.00% LOS PINOS 1,600 0.40% SUBA MEDIO Y ALTO 6,000 1.30% NORORIENTALES 4,600 1.10% LA CAPILLA 1,300 0.30% VIEJA - P. RUBIO - PARAISO - CHAP. 3,000 0.70% EGIPTO 1,900 0.40% EL QUINDIO 4,700 1.00% TOTAL- 450,600 100.00% Source: EAAB Engineering Department - 52 - ANNEX 2 Table 7 Number of EAAB Employees per Vlcepresidency and Number ofRetired Employees A064t:t eVepres. Soerv*8. VIe:y k.. fr_: chia Adml-ldys Tar dg l-I C _: :: 8 TeeM 18.*.4 M~b Deprar6zta? MA%naganiOaf: PUsas,fng CawieaI opuastlwqia V"Ivsp,r vkeptra;.~ vkce"iea. Vkqirm.: EAi*k~. E.b,qay60 Domber 3i/91 105 16 46 35 1,476 227 496 335 178 2,914 2,083 J.nuary31/92 W05 18 46 36 1.482 228 487 335 173 2,910 2,096 Feuary23 107 18 47 36 1,493 229 488 334 174 2.926 2,098 March31 109 17 47 37 1,506 227 487 334 177 2,941 2,093 Apil 30 108 20 44 36 1,501 230 480 330 183 2,932 2.104 May31 107 20 43 36 1.487 220 473 321 215 2,922 2,105 June30 108 21 43 36 1,482 216 474 321 214 2,915 2.108 July31 10[ 22 44 34 1.478 215 467 344 133 2,900 2,110 ALigust31 109 20 44 35 1.463 213 453 343 183 2,865 2.150 Seplembe 30 L09 21 44 35 1,453 211 444 346 174 2,337 2,173 Octder31 [la 19 44 34 1,441 209 441 342 173 2,813 2,190 Nwvnber30 l1o 182 32 51 1,245 163 404 311 289 2,792 2.214 Dembe 31/92 110 180 32 52 1,226 164 399 308 287 2,753 2,256 Ch9 irintD39U33 : 4 - 4 (2) . H (13) 14) (41): 3 5 (4ji Percentchamp 4 25 (4) (1) (6) (1) 2 3 (2) 3 Source: EAAB Information Systems Department - 53 - ANNEX 3 Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Annex 3 Environmental Issues A. Institutions with Responsibilities for Pollution Abatement and Environmental Protection in the Project Area (i) Regional Autonomous Development Corporation (CAR) 1 The Corporacion Autonoma Regional de la Sabana de Bogota y de los Valles de Ubate y Chiquinquira (CAR) is a public entity whose governance under the new law 99, was recently shifted from the National Planning Department (DNP) to the Ministry of the Environment. Within the Bogota River watershed, it has ascribed to it many of the environmental management functions (such as protection of natural resources, parks and wetlands) of the weak national environmental agency, INDERENA. CAR also establishes and implements rural and municipal development policy in the Bogota River watershed and regulates land and water use, mineral extraction and power generation (delegated to EEB). CAR manages sewerage and waste water treatment in the BogotA valley municipalities outside of the Capital District. Within the Capital District these functions are delegated to EAAB. CAR is currently implementing a US $ 70 million IDB loan to extend the supply of water for irrigation and construct waste water treatment plants in some 23 towns located in the upper and lower BogotA River drainage. Under the new Law 99, CAR along with the other Corporaciones Aut6nomas Regionales, will assume the primary responsibility for environmental management in the country, each one in its corresponding area of jurisdiction. In this respect CAR would be responsible for the environmental management in the entire basin of the BogotA river, excluding the area of the District of BogotA which falls under the responsibility of DAMA. Surprisingly, CAR has always been reluctant to become involved in the BogotA river cleanup effort beyond setting up standards for water quality in the river and acting as a regulating and policy making agency, even though it assumed the function of implementing agency for cleanup works in the upper basin of the Bogota river. (ii) Empresa de Acueducto y Alcantarillado de BogotA (EAAB) 2. EAAB, the Borrower and executing agency of the Santafe I project, is responsible for supplying water and providing adequate sewerage and storm drainage to the city of Bogota. According to its previous and new statutes it is also responsible for treatment of wastewater, but except for having conducted studies, it never materialized its responsibility regarding treatment and it has never constructed, owned or operated wastewater treatment installations. It monitors the quality of industrial wastes discharged to the municipal sewerage network, mainly for the purpose of establishing discharge rates. During the administration of the current Mayor, whose term of office ends in December 94, the administrative responsibility for treatment of the wastewater of Bogota was transferred from EAAB to DAMA. - 54- ANNEX 3 (iii) Departamento Tecnico Administrativo del Medio Ambiente (DAMA) 3. The Bogota District Environmental Agency (DAMA) was established in 1990 by the Bogota District Council. It is responsible for the city's enviromnental policy, planning and programming and the preparation of BogotA's Environmental Management Plan, including regulation and control of urban pollution (i.e., contamination of air, water, and land resources) and conservation of the natural environment. It is made up of technical and operations sub-directorates, headed by a director who reports to the mayor. DAMA is new and inexperienced, and, similarly to other District agencies, has suffered since its establishment (and will most probably continue to suffer) from political intervention and frequent changes of its Director and senior staff. DAMA's continuity is at risk at every mayoral election, when its senior staff are replaced and its charter and functions could be revoked. Its task has been, until now, to increase environmental awareness among the industries and general citizenry of BogotA, not to execute projects, but it seems that its role is shifting to executing tasks. DAMA was evaluated by the Bank in connection with the planning of the Bogota Urban Transport project, within which the Bank has designated some US$ 200,000 to technical assistance for DAMA. The District government has recently approved legislation adapting DAMA's objectives and structure to meet the requirements of Ley 99. Building the capacity to take on responsibilities which previously fell to the Corporaci6n Aut6noma Regional (CAR) will be a major challenge for DAMA in the near future. The agency expects to increase fourfold its current staff of around 30 professionals and will require training for new and existing staff. 4. Recently, the administrative responsibility for treatment of the wastewater of Bogota was transferred from EAAB to DAMA, who has been, for over a year, the District's arm for managing and implementing the adopted strategy for the BogotA river pollution abatement. DAMA handled the bidding process for selection of a private operator which would build, under a BOT contract, a primary wastewater treatment plant at Salitre. The Salitre contract has been recently signed with the French firm Degremont. DAMA does not have, at present, the capacity to handle a project of the size of BogotA wastewater treatment project and it is doubtful that it is the best qualified and appropriate agency to be in charge of implementing this project, for reasons of incompatible mandates of an environmental regulator and an implementing agency. 5. DAMA has been the interlocutor of the wetlands protection component of the Santafe I project. It participated in producing the terms of reference for the Bogota wetlands studies and signed an agreement with the Universidad Javeriana according it the role of wetlands management for the next 15 years. (iv) Empresa Distrital de Servicios (EDIS) 6. The city's solid waste department (EDIS) formerly manage three separate garbage collection services and operated Bogota's only sanitary land fill site and was responsible for controlling waste dumping into creeks and wetlands. EDIS continue to fulfill its functions until end 1994, by which date these services were fully privatized. (v) Empresa de Energia Electrica de Bogota (EEB) 7. The BogotA Electric Energy Company (EEB) is a public service utility providing thermal and hydro-electrical power to municipalities within the BogotA River drainage. The company has effectively - 55 - ANNEX 3 sequestered a considerable portion of the Bogota River below the capital by controlling water levels with a dam and storage reservoir at Alicachin. Below the BogotA Savanna the river is piped through three successive electrical power generating plants before being returned to its natural bed. As an interested party and one of the primary users of the river, coordination between EEB and other stakeholders is important in order to forestall and resolve potential inter-institutional conflicts over competing water uses and approaches to resolving technical issues. (vi) The Ministry of the Environment 8. As part of the National Development Plan for 1991-94, the Government outlined a strategy to reinforce the strategic coherence of attempts to resolve environmental issues and the institutional framework. Following on this strategy, the new Ministry of the Environment (ME), the National Council of the Environment and Natural Resources and the National Environmental System (SINA) were created by Law 99 in December, 1993. The role of the ME includes definition of policies and regulations for management of the environment and use of renewable natural resources, preparation, in coordination with DNP of environmental programs and plans, and coordination of sector research. The ME is also responsible for the National Environmental Fund and supervises the work of five scientific institutions. The ME took over several environmental-related functions and activities previously scattered in various institution such as: the Ministries of Agriculture, Health, Mining and Energy, INDERENA and DNP. Under Law 99 the "Corporaciones Autonomas Regionales" (CARs) would strengthen their current role of policy implementation and increase in number from 18 to 30, to cover the whole national territory. Existing CARs have also been transformed into decentralized autonomous entities, independent of the central Government, reporting to the Departments, municipalities and other territorial entities under their jurisdiction. B. Protection of The Wetlands of the Capital District 9. The wetlands of the Sabana de Bogota are of special ecological importance. Much of the Sabana was originally covered by wetlands and since there are no other comparable wetland areas in the high Andes north of Peru, the Sabana was the focus of the evolution of a number of endemic (occurring nowhere else in the world) wetland species. For example, with at least 12 endemic species or sub-species of wetland birds, the Sabana de BogotA is the most important center of avian endemicity in the Northem Andes. Unfortunately, the Sabana de Bogota has been one of the most intensely developed areas of Colombia and more than 94% of these valuable wetlands have been drained and filled in. Several of the endemic birds are already extinct and the others are all threatened. 10. In addition to their importance for biodiversity, these wetlands have a critically important hydrological role of flood protection and aquifer replenishment, and have a tremendous recreational potential. The most important remaining wetlands are found outside of the Capital District, but some 15 wetlands exist within the District. 11. The District wetlands are of particular importance to the integrity of the water supply and wastewater disposal functions of the EAAB. Because of links between the stormwater and wastewater disposal systems, many of the wetlands must absolutely be protected within BogotA. Recognizing their importance, EAAB and the Bank have agreed that under the Santafe I Project, EAAB will provide significant support to the protection of the - 56- ANNEX 3 wetlands of the Capital District. This support will be mi the form of guaranteed provision of US$ 400,000 per year during the duration of the Santafe I Project. 12. Within the Capital District, environmental issues are the responsibility of the Departamento Administrativo del Medio Ambiente (DAMA). DAMA is not responsible for executing projects but has a coordinating flmction. By a recently approved Capital District resolution, all municipal entities must invest, under the coordination of DAMA, 1.5% of their operating budgets in environmental programs. In the case of EAAB, this percentage represents an amount several times as high as the amount to be provided for wetlands. As such, it does not therefore represent the investment of new funds, but the explicit eannarking of this portion for wetlands management remains significant as there would not otherwise be a secure and continuous source of finds in the near future for protection of the wetlands of Bogoti. 13. Recognizing its limited capacity, DAMA has recently signed a number of agreements with local universities and NGOs with the objective of assigning the responsibility for various environmental analyses and protection plans to these organizations. In the case of responsibility for wetlands, DAMA has signed an agreement with the Universidad Javeriana according it the role of wetlands nanagement for the next 15 years. The Universidad Javeriana, through its Institute for Sustainable Development, will thus be responsible for coordinating with other organizations all wetland protection efforts. 14. In order to ensure that the annual allocated funds for wetlands protection are spent in the most effective and efficient manner, the Santafe I Project includes a study to formulate wetlands management plans and to determine funding priorities. Because ofthe Universidad Javeriana's pivotal role in this area, it will carry out this study. In addition to help in better defining funding priorities, the study will represent an important training exercise for the University, requming mobilization of wetlands experts and extensive cooperation with DAMA, CAR, EAAB and with NGOs. 15. The cost of this study is estimated at about US$ 200,000 and its funding will be provided by EAAB under the Santafe I Project. Preparation of a work plan acceptable to the EAAB and to the Bank will be a prerequisite for funding the study. The study is expected to be carried out in 14 months and will allow adequate time for the University to develop this expertise and links with other organizations. Provision has been made for facilitating emergency investments and actions that are required in the course of the study. C. Environmental Institutional Strengthening of EAAB 16. EAAB has had up until this time no formal unit or administrative entity specifically concerned with environrnental issues. The initiative to foster the creation of an environmental unit under the Santafe I Project would constitute an important step towards institutional strengthening of EAAB in order to incorporate environmental considerations into performance of its duties. 17. An agreement was reached with EAAB during project preparation that an Enviromnental Committee would be created within the company. This was deemed more appropriate by representatives of the EAAB than the creation of another bureaucratic appendage when efforts are underway to streamline the company. 18. The Environmental Committee is to report directly to the Vice President for Planning and is to be composed of two permanent; full-time members and a number of temporary members as required. The two - 57 - ANNEX 3 permanent members, who would both dedicate 100% of their time to environmental issues, are to be: i) an environmental engineer from the Planning Vice Presidency (Secretary of the Conmiittee) and ii) an environmental consultant. EAAB has indicated that the environmental consultant is to be hired as a part of the external audit team. 19. Temporary members of the Committee would include representatives of other areas of the company such as Real Estate, Natural Resources, Community Development, etc. External members would include a representative from DAMA. In addition and as required, the Committee would engage specialized consultants counting on logistic and financial support from the Planning Division. 20. One of the most unportant and immediate tasks of the Committee under the Santafe I Project would be to ensure the effective implementation of the Environmental Management Plan proposed in the project's EIA. Other activities for which the Committee would be responsible will include: - Fornulating an environmentl policy for EAAB; - Environmental training; - Coordination with other environmental agencies and NGOs; - Coordination of the wetlands protection component; - Public consultation. - 58 - ANNEX 4 Colombia Santafe I Water Supply And Sewerage Rehabilitation Project Annex 4 Past Bank Experience in the Water & Sanitation Sector in Colombia A. Record of Bank Supported Projects 1. Project completion reports have been prepared for six projects, and four others have had Performance Audits. " The audit reports and the supervision of on-going projects show that, in large measure, projects have been successful in achieving their physical objectives and, thus, have contributed importantly to the development of the water supply and sewerage sector. Most beneficiaries of past Bank loans, however, did not attain the institutional and financial performance targets envisioned at appraisal. Other deficiencies detected in past experience have been the chronic overestimation of demand for water and the frequent implementation delays, which, in an inflationary environment, resulted in cost overruns for most of the projects. 2. The operations with EAAB were more successful than with the other companies receiving Bank financing. The Bank contributed substantially to the development of EAAB into a relatively efficient institution. However, mainly because of inadequate tariff increases, lower than expected sales, and project cost overruns, EAAB's financial performance declined during a major part of the second and third project implementation period - particularly during 1971-75 and 1980-82. To address this problem, an institutional strengthening program was included in the Fourth Bogota Water Supply and Sewerage Project (Loan 2512-CO). The Action Plan supported under this project was not carried out in important areas related to efficiency and EAAB entered a major financial and institutional crisis in 1989-92 because of weak management and controls, and a short-term focus created by the governance framework and lack of accountability. Intensive Bank supervision contributed to major remedial actions to address crucial accounting deficiencies, control costs, and renew a focus on efficiency. In 1993, the Organic Law for BogotA was enacted to correct flaws deriving from the governance framework. By mutual agreement, im spite of delays in construction of the San Rafael dam financed by Ln.2512-CO, the closing date of Ln.2512-CO was not extended beyond June 30, 1993. Instead, alternative financing was secured, and disbursements from the loan for goods and services supplied by the closing date were permitted until December 31, 1993. 3. At present, the Bank is supporting sector investments through projects with the Empresas Municipales de Cucuta (Loan 2470-CO), as well as a multi-city lending operation through the new / Loan 738-CO, Palmira Water Supply Project: Report No.4589, June 1983; Loan 1523-CO, Second Cali Water Supply and Sewerage Project: Report No. 5389, December 1984; Loan 536-CO, Bogota Water Supply Project: Report No. 2003, March 1978; Loan PU-30-CO, Cali Water Supply Project: Report No. 2638, August 1979; Loans 860-CO and 1072-CO, Medium-size Cities and Second Multi-City Water Supply and Sewerage Projects: Report No. 6594, January 1987; Loans 741-Co and 1697-CO, Second Bogota Water Supply and Third Bogota Water Supply, Sewerage and Drainage project: Report No. 7231, May 1988; Loan 2637-CO, Baranquilla Water Supply and Sewerage Project: Report No. 12326, September 1993, Loan 2512-CO, Bogota IV Water Supply Project, June 1994. - 59- ANNEX 4 national financial intermediary for municipal development, FINDETER (Loan 2961-CO) for the financing of about 300 sub-projects in medium and small communities. FINDETER is responsible for the identification, appraisal and supervision of these sub-projects. The experience to date on this project is positive both in terms of the quality of the sub-projects and in terms of the institution-building benefits that have been recorded. Project implementation is on schedule and FINDETER has been effective in reaching about 500 municipalities with technical assistance and investment loans aimed at attaining efficient and self-sustaining operations 4. The Cucuta project has been problematic, mainly because of the politicization and weak management of the project entity, leading to serious implementation problems and suspension of the loan in 1991. Since then, intensive efforts have led to some remedial actions by the Cucuta authorities. In Barranquilla, the project with the EPM (Ln. 2637-CO) encountered the same types of problems, leading to transfer of the responsibility for water supply, sewerage and solid waste management to a new entity with minority private shareholding, and the cancellation of the Bank's loan because of massive non compliance with loan conditions. B. General National-Level Experience to Date 5. The main problems in the water and sewerage sector as gleaned from the record of the Bank- supported project portfolio can be summarized as follows: * political interference in management of water and sewerage services; * institutional weakness and instability are common among the more than 1,000 utility entities that provide urban water and sewerage services; * administrative and operational inefficiencies, including lack of trained personnel are also widely prevalent; * service quality is poor in a wide range of institutions and municipalities; * tariff adjustments have come mainly in the face of cash flow difficulties; there is also official ambivalence about the role of tariffs in the provision of efficient services to all income strata. as a consequence, the sector is characterized by vicious cycles of low cost recovery, low investments, poor service, and poor maintenance that have sent many of the utilities into a downward financial spiral. 6. The major sectoral problems have had a detrimental effect on health and living conditions for substantial numbers of urban residents, particularly the urban poor. The recently completed Poverty Assessment Report (Report No. 126730-CO) of June 1994, has concluded the following from its review of the major issues confronting the water and sanitation sector in Colombia: * Lack of access to water and sewerage is mostly a problem for the urban poor. At least 70% of the new water and sewerage connections needed to ensure the coverage enjoyed by the highest quintile of the population is required by the poorest 40% of Colombian households; - 60 - ANNEX 4 * This lack of coverage does not reflect unwillingness to pay. In the main cities, urban households in the lowest decile spend up to 9% of their income on water and sewerage, while the population at large spends only between I to 2 percent; * Illegal connections average 7% nationwide; in the lowest decile, they represent 10%; however, these mask a wide range of variations with some cities showing a level of illegal connections as high as 18%, with 43% of services to the lowest income decile being illegal in nature; * Subsidies are better targeted in the water and sanitation sector than in the case of electricity services; nevertheless, targeting is far from adequate; although water and sewerage service coverage is lower and more regressive than in the case of energy, the better design of the tariff structure compensates for some of this regressive structure. 7. The Poverty Assessment Report has made a number of recommendations with regard to future Bank operations in the sector, including: * need to improve information about the household stratification and their geographical distribution in order to design better targeted programs to expand service coverage in the sector; * need to set relative goals for targeting in rural and urban areas, taking into account costs and benefits of expanding coverage in urban areas that are nearing universal coverage, and instead concentrating on reducing UFW and improving quality in such areas. * with regard to tariff structure, an urgent priority is the need to design and restructure tariff systems that provide incentives to improved public awareness of the true cost of water and sewerage services and to targeting social subsidies in such a manner that they reach the poor; - the current neglect of wastewater treatment raises serious environmental concerns, and points to the need for concerted action at all levels to deal with the health and economic welfare of all residents, especially the poor, who live in marginal settlements along polluted waterways; * greater use of community participation in the delivery of water and sewerage services is need to enhance sector efficiency and to better target those sections of the population that most require better service coverage and improved service quality; greater use of the private sector in the provision of services through subcontracting arrangements and through equity participation is to be actively encouraged . - 61 - ANNEX 5 Colombia Santafe I Water Supply And Sewerage Rehabilitation Project Annex 5 EAAB Institutional Assessment And Performance Plan A. General 1. EAAB is an autonomous municipal enterprise responsible for delivering drinking water, sewerage and drainage services for the Capital Distnct of santa Fe de Bogota. Through various contractual arrangements, EAAB also serves six nearby satellite municipalities. Water service in Bogota originated 106 years ago as a municipal dependency. EAAB was formally created in 1955 as a municipal decentralized company. Today, EAAB serves almost a million connections, which covers more than 90% of Bogota's population. Despite flaws, EAAB has, overall, a good reputation among its clients. 2. During the last decade, a steady deterioration led to an institutional and financial crisis, the result of lack of institutional autonomy and continuous weak management controls. In the past two years, however, EAAB mianaged to turn this tendency around by achieving significant improvements in its performance and in its institutional and financial capacity. This trend still continues supported by a new more favorable external institutional context with greater autonomy, by a qualified management team with strategic vision and, also, by the support of the National Government which has agreed to refinance EAAB's external debt in exchange for structural reforms. This positive trend, however, requires continued support and further improvements are needed to consolidate systemic change and secure EAAB from rtning to past patterns. Also, there is room for efficiency gains and to provide better and more effective service to users. 3. During 1993 the administration of EAAB formulated, in collaboration with the National Government, a strategic development plan which focuses on the company's financial recovery, efficiency gains, modernization, and the introduction of a new managerial culture. The concrete objectives and institutional targets, are specified in a legally binding contract signed between EAAB and the National Government. The Santafe I project, through its technical assistance and institutional strengthening components, aims at supporting EAAB's key programs in its development strategy, including: Unaccounted for Water (UFW) reduction and the development of Management Information Systems (MIS). An assessment of the company is provided below. B. Description of Organization, and Institutional Arrangements 1 . Type of Institution 4. EAAB is an Industrial and Commercial enterprise of the Capital District of Bogota. In response to a constitutional mandate, EAAB's legal status was recently defined by Decree/Law 1421, of July 21, 1993, issued by the National Government and known as the Organic Statute for santa Fe de Bogota. Through this new legal status EAAB acquired administrative, budgetary and contracting autonomy.2 2 Law 142/1994 better known as the Law of Public Services, further underscores this status by limiting the possible status of all water companies to either stock societies or Industrial and Commercial enterprises. - 62 - ANNEX 5 2. Institutional Context 5. Several institutions at the National and municipal level, as well as from the pnrvate sector are stakeholders in the current institutional context of EAAB. At the National level key institutions are the Ministry Of Finance, the National Planning Department (DNP), and the Ministry of Development through both the Regulatory Commission for Water and Sanitation, and the Water and Sanitation Directorate. The Ministry of Finance and DNP approve EAAB's external borrowing programs. Also, the newly created Ministry of Environment, acting directly and indirectly through CAR, the river basin authority, has responsibility for oversight on environmental issues. In the near future EAAB, like other public service utilities, will also be subject to the oversight of a Superintendency for Public Services which is to be created in response to a constitutional mandate. 6. At the municipal level, key institutions include: the City Council, the Mayor's office, CONFIS, a fiscal and budgetary policy municipal institution, the District Planning Office, and DAMA, the environmental coordination authority for Bogota. The Mayor of santa F6 de BogotA is elected for three-year periods; reelection for the subsequent period is not penmitted. The Mayor, as the head of the District, appoints EAAB's General Manager, chairs the company's board and appoints four of its six members (see paragraph 7.). The City Council, which has now only limited interaction with EAAB, approves major structural reforms, such as a change of EAAB's legal status, and also its overall borrowing ceiling. Relationships with other Non Governmental institutions include the company's Union, and the "Juntas de Administracion Local" (JALs), decentralized community organizations for local development and grass-roots representation. External control agencies comprise a number of institutions including: the office of the District Comptroller for fiscal matters, and several other control offices such as the "Personeria Distrital", and the "Procuraduria", "Fiscalia", "Defensoria" and "Veeduria" at the National level. 3. Board of Directors 7. A seven-member Board of Directors governs EAAB. Its members include: the city Mayor, who acts as the chairman, four representatives from the Capital District, all appointed by the Mayor, a delegate of the social organizations3, (currently represented by the Director of ACODAL, the leading water sector association) and a delegate of residential customers of EAAB. Currently, EAAB's Board consists of well reputed and qualified members. The Board's functions concentrate on policy issues and strategic deliberations, and approval of EAAB's global budget and borrowing 4. Management 8. EAAB's General Manager acts as the legal representative of EAAB. According to the Organic Statute for BogotA, such position is fully responsible for the overall management of the company, including the appointment of all of EAAB's employees, and for all of its contracting. In contrast with the previous co- administration scheme, this arrangement has given EAAB a high degree of autonomy. The current General 3 This member will be a representative of one of the following: Chamber of commerce of Bogota, Federation of Metallurgical Industries (Fedemetal), Association of the water sector (ACODAL), Association of cooperatives (ASCOOP) and federation of community associations of Bogota. - 63 - ANNEX 5 Manager is a reputed professional. Second-level officials are also high qualified professionals. The level of professionalism is high. 5. Organizational structure 9. In August, 1993 EAAB's General Manager adopted a new organizational structure. This reorganization was designed intemally, in the context of the broader modemization and development strategy for the company. The current organizational structure is client-oriented, seeks functional specialization among areas and favors modem strategic managerial functions. Major shifts from the previous organizational structure include: (i) strengthening of the Intemal Control and Information areas, (which now respond directly to the General Manager); (ii) the creation of new staff areas such as the Community Response Office and an Applied Studies Center; and (iii) redistribution of functions, with better defined responsibilities and better coordination of previously dispersed procedures. This reorganization of EAAB also led to down-sizing from a previously heavy bureaucratic structure by eliminating one managerial level (93 departments) and eliminating 26 third level units. 10. The current major organizational divisions reporting to the General Manager include: commercial, financial, planning, technical (responsible for construction), operations, and administrative. Staff areas directly responding to the General Manager include the Secretary General (responsible for procurement and legal issues), Intemal Audit (internal control), Unaccounted For Water, Community Affairs and a technical research center. Attachment 1 presents the organic structure of EAAB up to its third level. C. EAAB's Performance Assessment 11. Overall, the assessment indicates that most of EAAB 's structural and performance problems have been addressed or are currently under improvement. These refer mainly to autonomy, accountability and efficiency of the company. Apart from the strong commitment to resolve these issues shown by EAAB during the preparation of Santafe I (through its strategic plan and following actions), these objectives have been strongly endorsed and underpinned by both the National Govenmment through the PP and by the Bank through Santafe I project. In short, the new Superintendency of Public Services will also help control EAAB's performance. and achievements Despite these improvements two issues are worth highlighting: EAAB's autonomy status, and as a direct consequence the recent high management turnover. A more detailed discussion of these two issues follow: 1. Autonomy 12. As mentioned, the Organic Law of the Capital District provided EAAB with autonomy in budgeting, contracting and staffing, thus setting the baseline for the National Govenmment to enter into the performance agreement and for the Bank to consider the processing of Santafe I. EAAB's autonomy was further enhanced by the Law 142, by: (i) stating that general managers can only be removed because of not compliance with their functions, (ii) permitting all utilities to establish their own contractual procedures, and (iii) establishing a regulatory and control system, based on negotiated performance plans and, including external audits as inputs. However, there's room for further improvement in the company's autonomy. As an example, table I below compares some autonomy-related aspects between the current company and that of a mixed capital utility, which is the type of institution envisaged in Law 142. - 64 - ANNEX 5 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ . . .... . ;: .; .sR .* : .*..... .......... ISSUE EA" MIXED CAPITAL COMPANY Personnel Public and official employees Private Regime. General manager Appointed by Mayor Appointed by the Board Board Mostly appointed by the Mayor According to company's statutes (four of six members) Institutional Transformation Competence of City Council Competence of EAAB's board Debt authorization Competence of City Council Competence of EAAB's board Control Mechanisms Oversight responsibility of Oversight responsibility of municipal Municipal Comptroller Comptroller only for use of public funds 2. Management Turnover 13. High turnover of EAAB's General Manager, and the negative consequences on the company's performance, is still a pending problem. During the previous mayor's mandate (a 2V/2 years transition period to 3 years for the present and following mayors) he appointed three managers for EAAB. All of these General Managers, in turn, filled most of the company's second-level positions with new-comers and, sometimes, inexperienced managers. While Law 142 states that managers in utilities can only be removed for unsatisfactory performance, it doesn't fully prevent the above mentioned tendency to continue. 14. To overcome these and other autonomy and efficiency related issues The National Government, EAAB and the Bank share the appreciation that EAAB has to explore new institutional options for providing the water and sewerage services. These options would include the participation of the private sector in various possible ways and scopes. For this, Santafe I project supports the elaboration of a comprehensive study of institutional alternatives for EAAB and provides funds to apply the results of such study after the necessary consensus on the way to go are reached (see para. ). 15. Table 2, below, describes EAAB's performance including: i) key issues or past and current problems; ii) current achievements by EAAB at appraisal; and iii) the expected improvements with the support of the SantafE I project. TABLE 2 EAAB INSTITUTIONAL ASSESSMENT AND PROJECT RELEVANT SUPPORT General lack of accountability explained by weak A new corporate culture oriented at accountability Starting with the financial and commercial units as mianagemeni control, processes and responsibilities not is being introduced. All procedures are being priority areas, EAAB will finish and formalize by clearly defined, inadequate informnation systemis, lack of reviewed and responsibilities better internal decree all procedures and job ACCOUNTABILITY intemal control. defined/established. Intemal control unit already responsibilities. Internal Control Unit will control established. effectiveness of procedures. SANTAFE I will EAAB has initiated the review of all processes. provide assistance to upgrade all EAAB information First results are promising: a new transparent systems. process for EAAB's contracting and water service connection time reduced fromn 60 to 5 days. CORPORATE STRATEGY Lack of a corporate strategic plan. EAAB's managerial team has already elaborated a This process is at early stage. SANTAFE I includes a strategic vision for the company. Its role includes substantial action program to support consolidation water and sewerage distribution, while water of strategic vision. This program includes the 0 production and treatment could be alternatively establishment of a twinning or technical assistance managed by EAAB or a new mixed capital arrangement, with a developed company reputed for company. EAAB's vision also includes a new excellence.. more managerial corporate culture, emphasis on . . total quality, in processes and in human resources. (review i Bogota: Revisions to this strategy are Informatics and technology modernization is also expected in lieu of i) data from 1993 census imposes being developed and implemented. new corporate goas and strategies and ii) EAAB has being deveoped and iplemented.proposed the creation of a miixed capital company to deal with new production expansions and managing supply contracts with neighbor municipalities) MIS AND CONTROLS Information Systems Current Management No major improvements in MIS have been made. Santafe I will provide support for the development of fnfonation Systems(IS oudtd w aHowever, a strategic design for the role of MIS in a coherent and comnprehensive Management infonnation systems, (comumercial and financial) EAAB's development process is now well defined. Information System. It will also support a G.I.S. outdated, incomplete, inconsistent and output gets short package for long-term planning, investment analysis and not used to support managerial decisions. mrogrtoring. and operational and commeraal m tn MIS AND CONTROLS (CONT.) System Support & Informatucs Informaties is now a second-level division which Santafe I will provide support to upgrade and responds to the General Manager. EAAB intends consolidate inforiatics systems and processes. the to rapidly upgrade the informatics area by action plan includes the provision of. (i) an integrated Infornation processing, software and hardware lag providing it with modern tools and more computer network; (ii) a standardized software behind present information developments and EAAB's automated processes. A set of nearly 500 platform (Windows); iii) specialized software needs, and represent a burden on EAAB's modernization microcomputers and related hardware has already (project management, legal database, statistical plans. been acquired by EAAB to replace existing quality control and others); (iv) new hardware equipment. equipment; (v) provision of internal electronic mail and; (vi) process systematization. Under SANTAFE I a medium-tern systemns study will be carried out within the context of EAABs integrated strategic approach noted earlier. MIS AND CONTROLS InenlC nrlLc faeut nai Created recently in EAAB, the Unit for Intemnal The consolidation of this area is expected soon. In (CONT.) Internal Control L ck of adequate internal Control is ins consolidation process. It is actively addition to its internal firnancial auditing of EAAB, . control. Lack of adequate auditing procedures for participating in the adjustment of EAAB's its functions are envisaged in an integrated control systems. processes which it will soon begin to control. This context, including objectives, processes and unit reports directly to the General Manager of performance follow-up. By end 1994 it is expected EAAB. that EAAB will contract systems audit (Note: and 0O ICU strengthening) with an external fum i TOTAL QUALITY Absenee of corporate culture in EAAB. EAAB has established a Total Quality Program SANTAFE I will support the Total Quality action PROGRAM with oversight at an advisory level reporting to the plan for the next five years. This program aims at a General Manager. Some first steps have been further shift in the organizational culture of EAAB taken in helping define EAAB's corporate strategy towards accountability. A re-engineering of all and a sensitization and education program for EAAB's processes is currently underway and will be EAABs personnel. finished by end-1994. Heavy bureaucratic organic structure (5 managerial Short term consolidation of new structure. levels) with dispersed procedures and responsibilities. Assignment of precise functions to all areas. ORGANIC STRUCTURAL Strategic areas such as informatics located as third level SANTAFE I will foster strengthening of the planning REFORM dependencies: Inadequate focus on economie, area to incorporate economic, financial and environmental, community and longer-term financial environmental analysis. issues. . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I, PLANNING Planning focus on physical (system expansions) aspects EAAB recently created a Corporate Planning area, Under SANTAFE 1, the Planning Area would be rather than integral approach. Institutional, financial and responsible for integrating financial and further reinforced by incorporating specialists in economic weaknesses in planning exercise. institutional aspects. This area has also the environmental, economic and financial analysis. mandate of implementing and supporting EAAB's strategic plan activities and to follow up progress of corporate indicators for managerial decisions. PERSONNEL & Strffing: Staff appointment processes hampered by non- EAABs General Manager, now autonomous for EAAB plans to continue with this process to decrease PERSONNEL MtANAGEMENT technical external factors. Staffing tendency to increase the appointment of personnel, formally declared a total staff number to 2700 by June 1994 and keep it permanently. Iiigh personnel costs, as compared with hiring freeze and established a transparent process constant thereafter. Labor costs should also decline similar private sector companies, especially because of of competitive selection, encouraging systematic because of the increase in subcontracting with the non-wage benefits (300% of basic salary). Chart I matching of internal personnel to staff vacancies. private sector. figure 2 shows personne/operating cost as compared Current ratio of employees per 1000 water Personnel/M3 costs are expected to drop from 60 in with other cities. connections now borders a low 3. 1993 to 43 by year 2000. Training: A long-time established routine, which New organizational culture being introduced In coherence with the objectives for institutional focused on the basic-level personnel of EAAB. No real promotes training as a key success factor. Training strengthening of EAAB, SANTAFE I will provide coordination between training and the overall strategic strategy now focuses on in-job training, updating financial support to a training program, which a managerial vision and performance plan. personnel knowledge and abilities in accordance includes the upgrading of EAAB's capacity to with EAAB's modernization trends and upgrading provide an in-house staff training. managerial and staff training within the Total Quality program. SUBCONTRACTING Limited to few functions including the reading of Current policy in EAAB emphasizes the expansion Some other activities follow in the list for sub- OPERATIONS meters, maintenance and cutting off connections/re- of this practice. New areas subcontracted include contracting with the private sector, including connections vehicle maintenance and repair and provision of inventory control and provision of office supplies and spare parts. the billing process for large consumers. Under SANTAFE I two concession processes, the rehabilitation and operation of Tibito water treatment plant and the construction of Usaquen tunnel will be followed-up, and long-term pipeline installation and maintenance contracts will be given out. UNACCOUNTED High UFW (40% in 1993) as result of steady increase EAAB is placing big emphasis on UFW reduction. SANTAFE I sets a target of the UFW index of 19% FOR from a level of 25% in 1975. Comprehensive study and Major actions include: a) the creation of a for 1999. An action plan, including metering, pipe WAT ER plan prepared under Bogota IV not implemented. permanent unit responding to the general manager; replacement, clandestine detection etc. in all 33 b) the issue of a comprehensive action plan based defined zones should take place. SANTAFE I on the Bogota IV project study and; c) pilot supports thoroughly this program. (see Chart 1, actions in four (out of 33) sections in Bogota. figures 2 and 3). Estimates for the end of 1993 indicate that the upward tendency has been reversed. RELATIONSHIPS WITH Inadequate relationships between EAAB and low EAAB established a unit and developed a new EAABs Community Relations Unit will consolidate COMMUNITIES & CLIENTS income communities (initiatives of communities with monitoring system to address all low-income and develop instruments and procedures before 1995. problems rather than incorporation with EAAB), result community affairs. This Unit is to play an active Santafe I will provide funds to carry out a of political interference and weak management by the role promoting commnunity organization, sanitary comprehensive study and develop a strategy for company. education, environmental care, all within the community relations and the corresponding Lack of information to clients on EAABs goals and context of a client-oriented culture. instruments. EAAB will provide periodic reports to performance. clients on all key aspects of its performiance. SERVICES TO EAAB serves six nearby municipalities. Relationships EAAB began an aggressive collection of due bills In a short time three more municipalities will receive OTHER MUNICIPALITIES governed so far by ad-hoc contracts which involve which reduced accrues dramatically. Tariffs were services from EAAB. The company is establishing a as subsidies and ur.covered risks of non-payment. High also raised to better reflect supply costs. A new coordinated policy (temis of service, tariffs) for 00 receivables from most municipalities. coordinated strategy for service has been designed. serving neighbor municipalities including mechanism a to cover from risks. The proposed mixed-capital company noted earlier would welcome all neighbor municipalities as stockholder. OPERATIONS & Existing facilities well operated by competent staff. Under an on-going loan roin the Japanese The project will contribute to overcome current MAINTENANCE Service operated 24 hours a day with rare interruptions. government EAAB is replacing its old operating maintenance lag and promote a more lasting strategy Operating devices outdated and manual. devices by automated control systems and remote by: a) inclusion in the program of several Fair maintenance in treatment plants and pumps. sensing. rehabilitation works and, b) ensuring that adequate Emphasis on corrective maintenance, rather than a funding for maintenance will be provided in EAAB's preventive strategy in both water and sewerage Some actions related to rehabilitation and a budget. networks. Low expenditure on maintenance. Pipe program for local network recovery is currently breakage/KM/year high as compared with other underway. The UFW program also emphasizes countries. (see Chart I figure 1). pipe rehabilitation. ..~~~~~~~~~~~~~~~~~~~~~~~~~~~' COMMERCIAL Conunercial Information System (CIS) Initially EAAB has placed strong emphasis on upgrading EAAB plans to modemize its commercial area and in OPERATIONS designed and established under Bogota IV, but already the commercial information system. A revision particular the Commercial Information System. In inadequate because of weak maintenance. Lack of and updating process for the customer file is addition to its effolrts in updating the customer file, proper system safeguards. Customer.file outdated. underway, correcting inconsistencies and new computer equipment, the systematization of all Clandestine connections estimated at more than 10% of incorporating 40000 new connections in 1993. coinmercial processes, the creation ofsafeguards and total connections. (note: check in Bogota) integration within the MIS. SANTAFE I supports Billing and collections Highly vulnerable systems A comprehensive action plan to remedy mentioned Santafe I to support the action plan to upgrade billing because of inadequate hardware and inefficient flaws in place. first step actions taken include and collection. lhis includes review of current processes. Inadequate collections (70 % of billing in special billing to large consumers (monthly), processes, hardware, systems development, meter 1993). Long collections period (120? days) exceeds autoniatic audit for billing, and provision of reading by portable terminals, bar-code reading equipment. devices, training. COMMERCIAL Customer attention Claims/billing ratio, (over 3%), New client-oriented attitude in place. Creation of Claim/Billing ratio to fall gradually to less thani 1% OPERATIONS compares unfavorably with well managed utilities. Division to serve large consumers (including by 1997. Response to claims in less than 15 days by (CONT.) Claims attention takes from 1-6 months. No special neighboring and municipalities and private end 1994. Santafe I supports proposed actions to treatment for large consumers in place. developers). Half of 15000 claims due in June consolidate client attention including equipment, 1993 have been anended, and rest will be atended training and launching studies to serve large by end 1994. consumers. A customer oriented action plan has been agreed upon with the advice of the Colombian National Attorney Office. Financial Informnation System Financial Information EAAB has worked on defining conceptual design Santafe I will support the development of the System outdated and used only for producing financial of an integrated Financial Information System, Financial Information System, as an integral FINANCIAL statements. No linkage between accounting, budgeting within the context ofthe MIS. component of MIS. MANAGEMENT and treasury. No linkage with commercial information system. Non- standardized data input. No aggregate analysis performed. tI Accounting Oriented to production of financial Continuous depuration of accounting undergone EAAB to: consolidate cost accounting system statements and not as an analytical tool. Extemal audits in the past two years has reduced extemal audits (planned to be operational by mid 1994), update the noted inadequacies. No cost accounting system. observations dramatically (from in to in). A first value of its assets and automatize accounting fully. version of a cost accounting system now in place. Accounting will be used as base for financial projections and Financial Information System. EAAB will establish a pension fund. (NOTE explain further). O Budgeting Central budgeting exercise with few Program budgeting now in place since 1993 Expected improvements in budgeting techniques such connections with operating areas. Financial projections exercise. Budget control system now operational. as direct involvement of all managerial areas and full based on budget numbers. automatization of preparation of budget and its control. Clear linkage between treasury, budget, and accounting. . 2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~iI COLOMBIA SANTAFE I WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT EAAB - EMPRESA DE ACUEDUCTO Y ALCANTARILLADO DE BOGOTA EAAB ORGANIZATIONAL CHART Board of Directors Gra Manager Public Relations Information Systems Manager Assistant Internal Audit Research Center Community Unaccounted for g Office # # Department Affairs Unit Water Reducting Unit | Procurement Departinent r I | 1 ~~~~~~Secretary General | Lgal Departinent Planning Financial Administrative Technical Vicepresidency of Commercial Viceprcsidency Vicepresidency Vicepresidency Vicepresidency Operations Vicepresidency Water & Sewerage Treasury - Organizaional | Projets programing Automation and Control Planing Development Coordination Unit untBligUt 4 Corporate planning | _ | Accounting l H General Services U Development Unit Water Treatment Unit Customer Service Unit Economic Operations Real Estate Acquisition Construction WatpDistribution Special Customers Unit [ and Administration Supervision Unit Supply Human Resources San Rafael Dam Electomechanical Division Construction Uniti Maiiienance Medical Servics |Water Distribution Maintenance Sewerage Maintenance - 72 - ANNEX 6 [Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Annex 6 Private Sector Participation Program A. Background 1. As part of its modernization program Colombia has involved private sector participation in many of its public-owned enterprises. Ports, roads and railways are the most important recent examples. In regard to the water sector, in the recent past some examples in midsize cities have taken place with different forms of private sector participation. These cases range from intensive use of subcontracting to sharing ownership of utilities with the private sector (mixed-capital shareholding companies). The newly approved Law of Public Services (Law 142) strongly underpins this option by promoting the share holding form of administration for water utilities and by introducing better regulatory framework and removing barriers for private sector participation. 2. Private sector participation in EAAB is not a new idea. Since the 1970's EAAB began subcontracting some of its operations, including meter reading, all major expansion studies and some maintenance. Today, after a recent expanding of this practice, EAAB has extended its subcontracting to encompass also cafeteria and restaurant services, new connections, transport service and bill distribution, to name a few. Currently, EAAB decided to contract out to a private firm the commercial operations (meter reading, billing and collection) of all large customers ( with consumption of over 350 m3/month). 3. These subcontracting practices have proven valuable in terms of being efficient and low cost, compared with EAAB's high internal cost, explained mainly by high personnel non-wage benefits and, in certain areas, low productivity. This practice has also given EAAB experience on how to regulate and administer contracts with private firms. Despite these efforts, EAAB still remains by and large a public utility with all its assets owned by the Capital District and the vast majority of its operational cost (88%) administered in-house. As part of its corporate plan, EAAB has coincided with the Capital District and the National Government in the need to further increase and develop new ways of private sector participation. B. Reasons for Increasing Private Sector Participation 4. The need to expand private sector involvement in EAAB stems from three main reasons: (i) despite recent achievements through enacting new statutes for EAAB and the Law of public services, and consequent limits on political interference in day-to-day operations, the scope for management effectiveness is still restricted compared to what would prevail in the private sector. In particular, the degree of management autonomy in such matters as personnel decisions, procurement and contracting, long-term financial planning and corporate strategy, are limited by the inherent nature of the public entity. In the medium term, transition to a corporate form with equity participation of the private sector will be the only way of ensuring sufficient autonomy of management action and accountability to ensure enhanced efficiency and effectiveness. - 73 - ANNEX 6 (ii) significant capital investments will be needed in the near future for the development of new water supply sources and for wastewater treatment, estimated at US$ 1 billion and US$ 1.5 billion respectively. Funds for such investments could be raised only with some form of private sector participation; and (iii) there is room for efficiency improvement in EAAB which may be achieved by tackling the problems of overstaffing, unduly high non-wage benefits and low productivity. C. Private sector participation program 5. The increase in private sector participation will be achieved in several stages: In the inmiediate- tenn, the efforts would focus on extending the contracting-out practice. This would comprise further contracting out of operational functions, including a contract for providing new domestic meters and maintaining all of Bogota's meters. Other contracts will include extensive maintenance of water and sewerage pipes (both preventive and corrective), maintenance of canals, vehicle maintenance and repair, separation of the network into operating sectors, and repairs in water treatment plants. All of these subcontracts will become operational before the end of 1995. In addition, EAAB plans to assess the feasibility of entering into a concession agreement with the private sector which would carry out the refurbishment and subsequently the operation (similar to BOT but with rehabilitation instead of building) of the Tibito water treatment plant, and the feasibility of a concession for the construction and operation of the Usaquen backup tunnel and power generating facility. 6. In the long term, the strategy focuses on considering alternatives for EAAB's corporate restructuring including substantial divesting of the capital District's ownership, aimed at ensuring managerial autonomy and accountability, reducing political intervention and interference and enhancing operational efficiency in delivery of services by allowing greater participation of the private sector in the management and operation of EAAB and in provision of the water and sewerage in Bogota, and addressing the requirements for large investments in development of new water supply sources for Bogota and in providing wastewater treatment, within a broader urban development strategy. BOT contracts seem to be a promising method for attracting private sector investments to developing of new water supply sources for Bogota and for expanding the existing ones, as well as for financing Bogota's wastewater treatment facilities. If the BOT option would be adopted, unbundling of the company's functions of water production, water distribution and wastewater treatment might take place and the separation of EAAB into two or three different companies would have to be considered. 7. In order to explore the opportunities for private sector participation and prepare the adjustment process, EAAB will embark upon a study which would analyze different alternatives and recommend the most adequate avenue, which would be implemented in the framework of Santafe I project, if approved by all the stakeholders. 8. A steering committee, including EAAB, the Capital District and representatives of the National Government will administer the restructuring process. The proposed institutional adjustment and private sector participation study would be carried out in two phases. The first one will lay out and analyze all meaningful alternatives. This analysis would be done vis-a-vis the objectives set out for the privatization process, aimed at ensuring autonomy, capital needs, efficiency gains and public acceptance. The results of - 74 - ANNEX 6 this analysis would be presented to the steering committee which would select the most adequate alternative for EAAB's transformation. The study would outline an action plan for implementing the structural adjustment. If the recommendations of the study would be acceptable to the Colombian and Capital District authorities and to the Bank, the second phase would then be carried out, focusing on the detailed design of the transformation process and on formulating a detailed action plan for its implementation, including preparation of bidding operations, if warranted, followed by implementation of the transformation process. 9. The deadline for initiating the study is January 1996. The selection of EAAB's institutional restructuring alternative should be taken by January 1997. If decided to proceed with the process, the detailed designs and transformation would depend on the alternative chosen and on the need to prepare and implement bidding operations as part of it. 10. The Santafe I project will support EAAB's enhancement of private sector participation. Most of the measures mentioned would be supported by Bank funds, along with close follow-up and advise, if needed. The progress in EAAB's privatization process would be monitored continuously. During the mid- term review, decisions would be taken in regard to required continuing technical assistance or change of strategy, if warranted. - 75 - ANNEX 7 Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Annex 7 Detailed Project Description 1. The proposed project, which would be carried out during an eight year period, between mid-1994 and mid-2002, includes eight main components. The following is a description of the items included in the project: A. Vulnerability Control 1 . Rehabilitation of a section of 31 kIn, between km 4 (counted from the Tibito treatment plant) and Street No. 80, of the 2 m diameter Tibito-Casablanca pipeline which is one of the two pipes that conveys treated water from the Tibito treatment plant to the city (Phase 1); 2. Rehabilitation of the Tibito water treatment plant, which presently treats, on a continuous basis, a flow of only 3.5 m3/s, so as to restore its capacity to treat the nominal flow of 11 m3/s (Phase 1); 3 . Construction of the alternate Usaquen tunnel of about 2.7 km length and 3.5 m diameter, which will serve as a backup system to convey the treated water of the Wiesner treatment plant to the Santa Ana Reservoir, in case of filure of the main Usaquen tunnel (Phase 2). B. Primary Sanitary and Storm Drainage Sewerage and Pollution Control 1. Construction of the first stage of the Bogota River Interceptor, the Torca-Salitre stretch of about 12.5 km length, constructed of pipes with diameters varying between 1.8 m and 2.15 m, a stretch of Box Culvert with a cross section of 2.5mX3.Om and a section of a tunnel, 375 m long, with a 3 m diameter (Phase 1); 2a. Construction of about 35 km of sewage interceptors, trunk sewers and storrn water drainage systems, constructed of pipes with diameters varying between 0.3 m and 2 m and of Box Culverts with cross sections varying between 1.8mX2.6m and 1.8mX4.0m, as well as about 17 km of drainage canals in the Salitre, Jaboque, Tintal and Tunjuelo drainage basins, in Phase 1; 2b. Construction of about 27 km of sewage interceptors, trunk sewers and storm water drainage systems, constructed of pipes with diameters varying between 0.3 m and 2 m and of Box Culverts with cross sections varying between 1.8mX2.6m and 1.8mX4.0m, as well as about 12 km of drainage canals in the Torca, Fucha and Tintal drainage basins, in Phase 2; 3a. Construction of 2 main sewage pumping stations (Gibraltar and Salitre) and expansion of 2 smaller sewage pumping stations (Vila Gladis and Fontibon) in the Tintal and Salitre drainage basins, in Phase 1; - 76 - ANNEX 7 3b. Construction of 1 main sewage pumping station (Torca) in the Torca drainage basin, in Phase 2; 4a. Construction of 1 storm water peak attenuation lagoon (Canal Tintal of 3 million in3), in Phase 1 ; 4b. Construction of 1 storm water peak attenuation lagoon (Fontibon lagoon of 0.73 million in3), in Phase 2; 5. Rehabilitation of dikes on the left bank of the Bogota River, in front of Bogota City at Fontibon and Tintal, with a total length of about 1 I km and an average height of I m, in Phase 1. C. Primary Water Distribution System la. Installation of about 54 km of primary distribution mains (of diameters varying between 300 and 1500 nmm), in Phase 1; lb. Installation of about 56 km of primary distribution mains (of diameters varying between 300 and 1500 mm), im Phase 2; 2a. Construction of 4 storage tanks in the southwestem sector of the city (Jalisco, Volador, Casillo and Quiba) with a combined capacity of 10,800 i3, all in Phase 1; 2b. Construction of 3 storage and compensation reservoirs: Suba (90,000 m3), Suba Medio Sur (2,000 m3) and Suba Medio Norte (2,000 m3), as well as rehabilitating and increasing the volume of 6 storage tanks in the northeastern sector of the city (Santana Nuevo, Paniuelito, Bosque Medina, Bosque de Pinos, Soratama and Santa Cecilia Cerro Norte) with a combined capacity of 3,400 m3, all in Phase 2; 3a. Construction of 2 pumping stations in the southeastem and southwestem sectors of the city (Volador and Monteblanco Uval), in Phase 1; 3b. Expansion of 3 pumping stations (Bombeos Nororientales) in the northwestem sector of Bogota, in Phase 2. D. Secondary Water, Sewerage and Drainage Networks and Service Connections la. Construction of about 125 km of secondary and minor water distribution mains, of diameters between 75 mm and 300 mm, in low-income neighborhoods, in Phase 1; lb. Construction of about 225 km of secondary and minor water distribution mains, of diameters between 75 mm and 300 mm, in low-income neighborhoods, in Phase 2; 2a. Construction of about 265 km of secondary sewage collectors, of diameters between 200 mm and 400 mm, in low-income neighborhoods, in Phase 1; - 77 - ANNEX 7 2b. Construction of about 270 km of secondary sewage collectors, of diameters between 200 mm and 400 mm, in low-income neighborhoods, in Phase 2; 3a. Construction of about 225 km of storm water drains, of diameters between 250 mm and 1500 mm, in low income neighborhoods, in Phase 1; 3b. Construction of about 545 km of storm water drains, of diameters between 250 mm and 1500 mm, in low income neighborhoods, in Phase 2; 4a. Installation of about 70,000 water service connections and of about 100,000 sewerage service connections in low-income neighborhoods, in Phase I 4b. Installation of about 110,000 water service connections and of about 100,000 sewerage service connections in low-income neighborhoods, in Phase 2. E. Rehabilitation Works la. Sewerage System: replacement or repair of about 19 km of sewage collectors, construction of alleviation sewers, structural rehabilitation of canals, interceptors, flow equalization reservoirs and other sewer appurtenances as well as identification and repair of erroneous connections between sewage and storm water collectors, in Phase 1; lb. Sewerage System: replacement or repair of about 28 km of sewage collectors, construction of alleviation sewers, structural rehabilitation of canals, interceptors, flow equalization reservoirs and other sewer appurtenances as well as identification and repair of erroneous connections between sewage and storm water collectors, in Phase 2; 2a. Water Supply System: replacement or rehabilitation of about 150 km of older distribution pipes, of diameters between 75 mm and 150 mm, in Phase 1; 2b. Water Supply System: replacement or rehabilitation of about 150 km of older distribution pipes, of diameters between 75 mm and 150 mm, in Phase 2. F. Institutional Strengthening of EAAB 1. Implementation of the Unaccounted For Water (UFW) reduction program including: (a) reduction of technical losses in bulk and domestic meters; (b) legalization or disconnection of illicit connections; (c) reduction of physical losses through leak detection and repair and through rehabilitation and replacement of old pipes; (d) implementation of a program for dividing the water network into sectors; (e) evaluation and verification of consumption of great consumers; (f) installation of bulk meters in apartment buildings; and (g) purchase and installation of about 780,000 domestic meters in low-income neighborhoods, all in Phase 1; - 78 - ANNEX 7 2. Development and execution of a water conservation program aimed at formulating guidelines for water demand management as follows: (a) execution of pilot projects, under terms of reference satisfactory to the Bank, with a demonstration purpose designed to realize the water- saving potential of the activities and measures included in the mentioned pilot projects, which would include the analysis of industrial water consumption and measures geared to increase efficiency of domestic and industrial water use; (b) assessment of the findings and recommendations resulting from the pilot project's execution and deternination by agreement, between the Bank and the Borrower, of future testing and research activities required, if any, and measures for demand reduction, if warranted; (c) carrying out, if so deternined, of the mentioned future activities under terms of reference satisfactory to the Bank, and (d) formulation and publication of the aforementioned guidelines, all in Phase 1; Development and implementation of a training program aimed at improving the performance level of EAAB employees, strengthening of training capacity within the company and implementation of the Total Quality Management (TQM) program, in Phase 1; 4. Purchase of laboratory equipment for water quality control, hydrology and flow measurement instruments and radio communication equipment, in Phase 1; 5. Formulation of a strategy for development of management information systems and redesign of financial information systems, and Purchase of computer hardware and software systems for data processing in a fashion consistent with the strategy formulated, in Phase 1; 6. Establishment and maintenance of the Environmental Protection Committee of EAAB, composed of two permanent full time members, an environmental engineer and a consultant, and a number of temporary members as required, responsible for coordinating the implementation of the environmental component of the project and for development of EAAB's capacity to perform environmental analyses, in Phase 1. G. Technical Assistance and Consulting Services for Engineering, Design and Supervision of Works la. Completion of all detailed engineering, including preparation of final designs and of bidding documents for all civil works included in parts Al, A2, B2a, B3a, B4a, B5, C I a, C2a, C3a, Dla, D2a, D3a, D4a, Ela, E2a of the project and mitigation measures under part Hl of the project, all in Phase 1; lb. Completion of all detailed engineering, including preparation of final designs and of bidding documents for all civil works included in parts A3, Bi, B2b, B3b, B4b, CIb, C2b, C3b, DIb, D2b, D3b, D4b, Elb, E2b of the project, all in Phase 2; 2a. Supervision of all works referred to in part Gla of the project, all in Phase 1; 2b. Supervision of all works included in parts Glb of the project, all in Phase 2; 3. Execution of the following studies, through utilization of consulting and advisory services: - 79 - ANNEX 7 (a) (i) analysis of alternatives available to the Borrower for its institutional restructuring aimed at ensuring managerial autonomy and accountability, reducing political interference and enhancing operational efficiency in delivery of services, including possible adjustment of its corporate structure and or changes in its ownership, so as to allow greater participation of the private sector in the management and operation of EAAB and in the provision of water and sewerage services; and address the requirements for large investments in development of new water supply sources for Bogota and in providing wastewater treatment, within a broader urban development strategy; and (ii) development of a plan of action based on the findings and recommendations of (i) above, in Phase 1; (b) preparation of a plan for: (i) alternatives for viable participation of the private sector in the rehabilitation of the Tibito water treatment plant and the Alternative Usaquen Tunnel (parts A2 and A3 of the project), including preparation of bidding documents, draft contracts and other instruments required to achieve such participation; and (ii) development of EAAB's capacity to regulate and monitor the private sector's aforementioned participation, if and when it materializes, in Phase 1; (c) development of (i) a Management Information System (MIS) with emphasis on the financial, commercial and operational areas; (ii) a commercial plan aimed at safeguarding cash flow and improving service; and (iii) a strategic planning capacity and an adequate strategic program, all by utilizing the advisory services of a high performing foreign water utility under a twinning contract satisfactory to the Bank, in Phase 1; (d) analysis of rate structures and levels related to cost of performing the services and, on the basis of the finding and recommendations of the study, development of a new tariff structure, in Phase 1; (e) development of adequate schemes for community participation in water and sanitation investmnents in a cost effective form, in Phase 1; (f) development of the Geographical Information System (GIS) , in Phase 1; (g) update of the existing master plan for development of the priniary water distribution network, in Phase 1; (h) preparation of a water resources master plan study aimed at defining a program for development of the water supply sources and production capacity required to satisfy the demand in the short and long terms, and the design of the first stage works, in Phase 1; (i) preparation of designs for rehabilitation works of the existing sewerage system, other than those to be carried out under the project, in Phase 1; (j) preparation of the master plan for the sanitary sewerage system in the Borrower's jurisdiction, in Phase 2; - 80 - ANNEX 7 (k) Preparation of complementary engineering, environmental, institutional and cost recovery analysis of the project for hydraulic rehabilitatioroftb-BogotA river and its tributaries within the Capital District limits, aimed at improving flood protection in the Bogota area, in Phase 2; and (1) design of flood control management systems in the Tunjuelo basin, in Phase I. H. Environmental Component 1. Implementation of mitigation measures aimed at mmunuzing adverse environmental impact during the execution of the different works and other activities related to the carrying out of parts A through E of the project, as recommended in the Environmental Assessment report of the Santafe I project, all in Phase l; 2. Implernentation of a program for resettlement of 3 11 persons, each to be displaced as a result of canying out of the project and to be provided with a new home or adequate compensation or both, consisting of 3 subprograms, as follows: (a) resettlement of 7 persons in the intersection of canal Salitre and Carrera 91, under part B2 of the project; (b) resettlement of 184 persons in the Jalisco water tank site, under part C2 of the project; and (c) resettlement of 120 persons in the Volador water tank site, under part C2 of the project, all in Phase 1; 3. Carrying out of a prograrn of activities aimed at wetlands protection in the Bogota area, divided in several discrete annual programs, as follows: (a) execution of the first annual program; (b) execution of a study which will enable DAMA to elaborate and refine its priorities on wetland protection and to complete the design ofthe annual activities to be carried out under each subsequent armual subprogram, and (c) carrying out of each subsequent annual subprogram, all in Phase 1. - 81 - ANNEX 8 Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Annex 8 Cost Estimates 1. The project cost estimates by component are presented in the attached Tables. Table 1 shows the project costs by component in both Col$ and US$. Table 2 shows the annual breakdown in US$ equivalent. Project Costs were estimated in June 1993 prices and the inflation and exchange rate parameters detailed in Annex 10 were applied to estimate the price contingencies in current Col$ and US$. Detailed breakdowns by each component are in the Project File. Project costs are shown for each of the two phases of project execution, Phase 1 and Phace 2. 2. Project costs are shown net of taxes and VAT. Estimated taxes and duties, as well as VAT, are shown as a separate line item. Colonnbia Santaft I Water Supply and Sewerage Rehabilitation Project Table 1: Summary Project Cost Table Page I of 2 Col.S Alillion USS Million % %Base Col.S Million USS Million % % Base Project Components Local Foreign Total I Local Fore4n Total |Foreiga Cost Local Foreign Total Local ForMcig Total ForeiF n Cost PHASE I PIIASE 2 A - Vulnerability Control 9,830 14,744 24,574 20.3 30.5 50.9 60.0 17.6 4,661 6,992 11,653 5.9 8.9 14.8 60.0 7.5 1. Rehabilitation of time 2 Tbibto Piplines 6,225 9,338 15,563 11.5 17.2 28.6 60.0 9 9 0 0 0 0.0 0.0 0.0 hN/A 0.0 2 Rekabilitation of Tibito Treatneme Plant 3,604 5,406 9,011 89 133 22.2 60.0 7.7 00 0 00 00 0.0 hN/A 0.0 3. Construction of .tternate Usaquen Tunnel 0 0 0 0.0 00 0.0 8N/A 0.0 4,661 6,992 11,653 5.9 8.9 148 600 7 5 B .PrlmnarySewerage&Drainage System 32,103 23.811 55,914 41.1 31.7 72.8 43.5 25.2 11,679 19,480 31,158 14.8 24.S 39.6 62.5 20.1 1. Bogota River intcrceptor Torca-Satitre 0 0 0 0.0 00 0.0 MN/A 0.0 4,342 6,513 10,855 55 83 138 60.0 7.0 2. Construction ofMainS ASCoLlectorsd Canals 13,992 20,989 34,981 17.8 267 445 600 15.4 6,671 10,006 16,677 8.5 12.7 21.2 600 10.8 3. Construction of Pumping Stations 634 2,822 3,457 1.1 5.0 6.2 81 6 2 1 666 2,960 3,626 0.8 3.8 4.6 81.6 2.3 4.Land Acquisition 17,476 0 17,476 22.2 00 22.2 0.0 7.7 0 0 0 0.0 0 0 0.0 hN/A 0.0 C - Primary Water Distribution System 5,526 12,456 17,982 7.0 15.8 22.9 69.3 7.9 8,858 26,291 35,149 11.3 33.5 44.8 74.8 22.7 1. Primary Distribution Mains 3,086 10,106 13,193 3.9 12.8 16.8 76.6 58 5,792 18.967 24,759 74 24.1 31.5 76.6 16.0 2 StorageReservoirs 596 1,418 2,013 08 1.8 2.6 704 0.9 3,054 7,265 10,319 39 92 13 1 704 6.7 3. Pumping Stations 192 932 1,125 0.2 1.2 1.4 82.9 05 12 59 71 0.0 0.1 0.1 82.9 0.0 4.Land Acquisition 1,652 0 1,652 2.1 00 2.1 00 0.7 0 0 0 0.0 01 0.1 82.9 0.0 D- Secondary Water & Sewerage Networks 23,557 15,705 39,262 30.0 20.0 49.9 40.0 17.3 28,286 18,857 47,143 36.0 24.0 59.9 40.0 30.4 I. Secondary A Local Water Networks 3,001 2,001 5,002 3.8 2.5 6.4 40.0 2.2 3,822 2,548 6,371 4.9 3.2 81 40.0 4.1 2. Local Sewerage Networks 10,580 7,053 17,633 13.5 9.0 224 400 7.8 14,553 9,702 24,256 18.5 12.3 308 40.0 15.7 3 Secondary Sewerage Networks 7,569 5,046 12,615 96 6.4 160 400 56 7,173 4,782 11,955 9.1 6.1 15.2 40.0 7.7 4. Domestic WdlS Connections 2,407 1,604 4,011 3.1 2 0 5.1 40 0 I .8 2,737 1,825 4,562 3.5 2 3 5 8 40 0 2 9 00 E - Rehabilitation Works 5,112 5,112 10,225 6.5 6.5 13.0 50.0 4.5 4,577 4,577 9,155 S.8 5.8 11.6 50.0 5.9 l. Rehabilitation of Waler System 3,107 3,101 6,213 4.0 40 7.9 50.0 2.7 2,470 2,470 4,939 31 31 63 50.0 3.2 2 Rehabilitation ofSec'erage NetworAs 2,006 2,006 4.011 2.6 2.6 5.1 50 0 1 8 2,108 2,108 4,216 2.7 2.7 5.4 50.0 2.7 F-Institutional Strengthening 9,445 19,490 28,936 12.0 24.8 36.8 67.4 12.7 0 0 0 0.0 0.0 0.0 hN/A 0.0 -tUFWPrograns 5,623 12,159 17,782 7.1 155 226 68.4 7.8 0 0 0 0.0 0.0 0.0 MN/A 00 2- Water Consvation Program 1,021 1,532 2,553 1.3 1.9 3.2 60 0 11 0 0 0 0.0 0.0 0.0 MN/A 0.0 3- Training Program 553 553 1,106 0.7 0.7 1.4 50.0 0.5 0 0 0 0.0 00 00 MN/A 00 4-O&hU, LobA Comsunications Equipment 1,254 2,927 4,182 1 6 3.7 53 70.0 1.8 0 0 0 0.0 0.0 0.0 hN/A 0.0 S-Data Processing Equipment& SW 994 2,320 3,314 1 3 2.9 4.2 70.0 1 5 0 0 0 0.0 0.0 0.0 MN/A 0.0 G- TA & Consulting Services 13,598 13,598 27,197 17.3 17.3 34.6 50.0 12.0 10,261 10,261 20,521 13.0 13.0 26.1 50.0 13.3 1-Designs A TA 4,017 4,017 8,035 5.1 5.1 102 50.0 35 2,502 2,502 5,004 3.2 3.2 6.4 50.0 3.2 2-Su,peaision 6,466 6,466 12,932 8.2 8.2 16.4 50.0 5.7 6,484 6,484 12,968 82 82 165 500 8.4 3-AdAitional Studies 3,115 3,115 6,230 4.0 4.0 7 9 50.0 2.7 1,275 1,275 2,549 1.6 1.6 3.2 50.0 1.6 H- Environmental Component 2,442 3,663 6,106 3.1 4.7 7.9 60.0 2.7 0 0 0 0.0 0.0 0.0 hNlA 0.0 I-WdtlandsProtectionAManagement 55 83 138 0.1 0.1 0.2 60.0 0.1 0 0 0 0.0 0.0 0.0 NN/A 0.0 2- Wedands tanagement 773 1,159 1,932 1.0 1 5 2.5 60.0 0.9 0 0 0 0.0 0.0 0.0 MN/A 0.0 3-Mitigation Plan 345 517 862 04 0.7 1.1 60.0 04 0 0 0 0.0 0.0 0.0 #N/A 0.0 4- Voluntary Resettlenmt 1,104 1,656 2,760 1.4 21 3.5 60.0 1.2 0 0 0 00 0.0 00 MN/A 0 0 5-Advisory to EAAB s Environmental Committee 166 248 414 0.2 0.4 06 600 0.2 0 0 0 00 0.0 00 hN/A 0.0 TotalBaseCost 101,614 108,581 210,195 137.4 151.3 288.7 52.4 100.0 68,321 86,457 154,779 86.9 110.0 196.9 55.9 100.0 Physical Contingency 10,161 10,858 21,019 13.7 15.1 28.9 52.4 10.0 6,832 8,646 15,478 8.7 11.0 19.7 55.9 10.0 Price Contingencies 98,548 11,220 109,768 45.6 11.2 56.8 19.7 19.7 91,309 i6,160 107,469 42.2 17.9 60.1 29.8 30.5 Total Project Cost 210,324 130,659 340,983 196.8 177.6 374.4 47.4 129.7 166,463 111,263 277,726 137.8 138.9 276.6 50.2 140.5 Estimated Duties & Taxes 43,655 43,655 39.8 39.8 0.0 13.8 21,317 21,317 27.1 27.1 0.0 13.8 Total Investment 253,979 130,659 384,638 236.5 177.6 414.2 42.9 143.5 187,780 111,263 299,043 164.9 138.9 303.8 45.7 154.3 X 00 - 83 - ANNEX 8 Colombia Santaf. I Water Supply and Sewerage Rehabilitation Project Table 1: Summary Project Cost Table Page 2 of 2 Col.S .illion USS Million % % Baa. Project Components Local Fordgn Total I Local Forei n Total Forein Cost GRAND TOTAL SANTAFE I PROJECT A - Vulnerability Control 14,491 21,736 36.226 26.27 39.41 65.6S 60.0 13.5 1. Rehabilitateio of the 2 TibitoPipdinet 6,225 9,338 1S,563 11.45 17.18 28.63 60.0 5.9 2. RehabiLitiaon of Tibito TreieAt Plant 3,604 5,406 9,011 8.89 13.34 22.24 60.0 4.6 3. Construcion ofAlternate Usequen Tunsei 4,661 6,992 11,653 5.93 8.89 14.82 60.0 3.1 B - Primary Sewerage & Drainage System 43,782 43,291 87,072 55.99 56.48 112.46 50.2 23.2 1. Bogota RiverInterceptor rorca-saitre 4,342 6,513 10,855 S.52 8.28 13.80 60.0 2.8 Z Construction ofMain S AS Colctors & CanaLs 20,663 30,995 51,658 26.27 39.41 65.68 60.0 13.5 3. Constrction ofPwnping Stations 1,300 5,782 7,082 1.97 8.79 10.76 81 6 2.2 4LandAcquisition 17,476 0 17,476 22.22 0.00 22.22 00 4 6 C- Primary Water Distribution System 14,384 38.747 53,131 18.30 49.34 67.64 72.9 13.9 1. Primary Distribution Maint 8,879 29,073 37,952 11.29 36.96 48.25 76.6 9.9 Z. StorageReservoirs 3,649 8,683 12,332 4.64 11.04 15.68 70.4 3.2 3. Pumping Stations 204 991 1,195 0.26 1.26 1.52 S2.9 0.3 A Land Acquisition 1,652 0 1,652 2.12 0.07 2.19 34 0.5 D- Secondary Water & Sewerge Networka 51,843 34,562 86,405 65.92 43.94 109.86 40.0 22.6 1. Secondary & Local Wate rNetworks 6,824 4,549 11,373 8.68 5.78 14.46 40 0 3.0 2 Local Sewerage Networks 25,133 16,756 41,889 31.96 21.30 S3.26 40.0 11 0 3. Secondary Sewerage Networks 14,742 9,828 24,S70 18.74 12.50 31.24 40.0 6.4 4 Donuestc W&SConnections 5,144 3,429 8,573 6.54 4.36 10.90 40.0 2.2 E - Rehabilitation Works 9,690 9,690 19,379 12.32 12.32 24.64 50.0 5.1 1. Rehabilitaion of Water Systiu 5,576 S,576 11,153 7.09 7.09 14.18 50.0 2.9 2. Rehabiitahoin of SewerageNetworks 4,113 4,113 8,227 5.23 5.23 10.46 50.0 2.2 F-Institutional Strengthening 9,445 19,490 23,936 12.01 24.71 36.79 67.4 7.6 1- UFW Program S,623 12,159 17,782 7.15 15.46 22.61 68.4 4.7 2- Water Consevation Program 1,021 1,532 2,553 1.30 1.95 3.2S 60.0 0.7 3- Training Program 553 553 1,106 0.70 0.70 1.41 50.0 0.3 4- 0dM, Lab A Commanicadons Equipment 1,254 2.927 4,182 1.60 3.72 5.32 70.0 1.1 5- Data Processing Equipment A SW 994 2,320 3,314 1.26 2.95 4.21 70.0 0.9 G- TA & Consulting Services 23,859 23,859 47,718 30.34 30.34 60.67 50.0 12.5 1-Designs A TA 6,519 6,519 13,039 8.29 8.29 16.58 50.0 3.4 2- Supervision 12,950 12,950 25,900 16.47 16.47 32.93 50.0 6.8 3-Additional Studies 4,390 4,390 8,779 5.58 5.58 11.16 50.0 2.3 H- Environmental Comnponent 2,442 3,663 6,106 3.14 4.71 7.85 60.0 1.6 I-Werlands Protection Management 55 83 138 0.07 0.11 0.18 60.0 0.0 2- Welands Management 773 1,159 1,932 0.98 1.47 2.46 60.0 0.5 3- Mitigation Plan 345 517 862 0.44 0.66 1.10 60.0 0.2 4- Voluntary Reseatlement 1,104 1,656 2,760 1.40 2.11 3.51 60.0 0.7 5-Advisory to EAA.BsErEvironmenrtl Conoaet 166 248 414 0.25 0.37 0.61 60.0 0.1 0 0 0 0.00 0.00 0.00 Total Base Cost 169,936 195,038 364,973 224.29 261.32 485.60 53.8 100.0 Physical Contingency 16,994 19,504 36,497 22.43 26.12 48.55 53.8 10.0 Price Contingencies 189,857 27,380 217,237 87.83 29.07 116.90 24.9 24.1 Total Project Cost 376,787 241,922 618,708 334.5 316.5 651.1 48.6 134.1 Estimated Duties & Taxes 64,973 0 64,973 66.9 0.0 66.9 0.0 13.8 Total Investment 441,759 241,922 6U3.681 401.4 316.5 717.9 44.1 147.8 Colombia Santafi I Water Supply and Sewerage Reb-hiiitation Project Table 2: Estimated Annual Project Cost Page I of 2 In USS Million Equivlent, July 1993 Prices % Bise In USS Million Equivalent, July 1993 Prices % Base Project Components 1994 1995 1996 1997 1998 1999 2000 2001 Total Cost 1998 1999 2000 2001 Total I Cost A- Vulnerability Control PHASE I PHASE 2 1- Rehabilitation of the 2 Tibito Pipelines 0.00 0.00 9.00 10.79 8.84 0.00 0.00 0.00 28.63 9.9 0.00 0.00 0.00 0.00 0.00 0.0 2- Rehabilitation of Tibito Treatment Plant 0.00 0.00 2.77 8.68 10.78 0.00 0.00 0.00 22.24 7.7 0.00 0.00 0.00 0.00 0.00 0.0 3-Construction of Alternate Usaquen Tunnel 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 5.34 9.15 0.32 14.82 7.5 B- Primary Sewerage & Drainage System I-Bogota River Interceptor & Torca Salitre 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 3.45 6.90 3.45 13.80 7.0 2-Constructiou of Main S&S Collectors & Canals 0.00 1.06 4.53 20.34 18.55 0.00 0.00 0.00 44.48 15.4 0.00 6.73 9.13 5.35 21.20 10.8 3-Constructiousof PunpingStation 0.00 0.00 0.00 4.40 1.76 0.00 0.00 0.00 6.15 2.1 0.00 2.59 2.02 0.00 4.61 2.3 4- Land Acquisition 2.40 5.00 12.00 2.82 0.00 0.00 0.00 0.00 22.22 7.7 0.00 0.00 0.00 0.00 0.00 0.0 C-Primary Water Distribution System 1-PrimaryDistribution Mains 0.00 5.63 6.39 4.33 0.42 0.00 0.00 0.00 16.77 5.8 0.00 0.00 12.90 18.58 31.48 16.0 2-Storage Reservoirs 0.00 0.00 0.54 2.02 0.00 0.00 0.00 0.00 2.56 0.9 0.00 5.44 5.60 2.08 13.12 6.7 -PumpIngStations 0.00 0.00 0.23 0.10 1.10 0.00 0.00 0.00 1.43 0.5 0.00 0.00 0.00 0.09 0.09 0.0 4- LandAcquisition 0.90 0.00 0.00 0.40 0.80 0.00 0.00 0.00 2.10 0.7 0.00 0.00 0.00 0.00 0.00 0.0 D- Secondary Water h Sewerage Systems 1-SecondaryhLocal WaterNetworks 0.00 1.60 1.26 1.20 2.30 0.00 0.00 0.00 6.36 2.2 0.00 3.30 3.30 1.50 8.10 4.1 2- Local Sewerage Networks 0.00 1.50 2.92 7.00 11.00 0.00 0.00 0.00 22.42 7.8 0.00 13.00 13.00 4.84 30.84 15.7 3-SecoadarySewerageNetworks 0.00 1.14 1.90 5.00 8.00 0.00 0.00 0.00 16.04 5.6 0.00 7.70 5.80 1.70 15.20 7.7 4- DomesicW&SConsections 0.00 0.00 1.70 1.70 1.70 0.00 0.00 0.00 8.10 1.8 0.00 1.70 1.70 2.40 5.80 2.9 i E-RnbabilitUio Works 1- RehablitationofWaterSystemz 0.00 0.00 4.90 1.50 1.50 0.00 0.00 0.00 7.90 2.7 0.00 1.50 1.50 3.28 6.28 3.2 2-RebablitationofSewerage Networks 0.00 0.00 1.90 1.60 1.60 0.00 0.00 0.00 5.10 1.8 0.00 1.60 1.60 2.16 5.36 2.7 F- laatitutioanl Strengtuening 1-UWF Program 0.00 3.58 6.43 4.91 4.29 3.40 0.00 0.00 22.61 7.8 0.00 0.00 0.00 0.00 0.00 0.0 2-Water Conservation Program 0.00 0.61 0.88 0.88 0.88 0.00 0.00 0.00 3.25 1.1 0.00 0.00 0.00 0.00 0.00 0.0 3-TralinagPrPram 0.00 0.30 0.31 0.28 0.24 0.12 0.12 0.04 1.41 0.5 0.00 0.00 0.00 0.00 0.00 0.0 4- OAM Lab h Communications Equipment 0.00 0.36 1.05 0.94 0.97 1.04 0.63 0.33 5.32 1.8 0.00 0.00 0.00 0.00 0.00 0.0 5-DtlhProcasti*gEqulpment&SW 0.00 1.51 0.55 0.46 0.46 0.41 0.41 0.41 4.21 1.5 0.00 0.00 0.00 0.00 0.00 0.0 G- TA h Consulting Servkes I-Designs & TA 0.00 2.19 3.06 2.72 2.25 0.00 0.00 0.00 10.22 3.5 0.00 2.92 2.38 1.06 6.36 3.2 2-Supervision 0.00 1.13 3.28 6.08 5.95 0.00 0.00 0.00 16.44 5.7 0.00 5.07 7.09 4.33 16.49 8.4 3- Additional Studies 0.00 2.37 2.10 2.53 0.93 0.00 0.00 0.00 7.92 2.7 0.00 1.39 1.36 0.48 3.24 1.6 fl-Eavironseatai Component 1- Wedands Protection Program 0.00 0.18 0.00 0.00 0.00 0.00 0.00 0.00 0.18 0.1 0.00 0.00 0.00 0.00 0.00 0.0 2- Wetland Management 0.00 0.49 0.33 0.33 0.33 0.33 0.33 0.33 2.46 0.9 0.00 0.00 0.00 0.00 0.00 0.0 3- Mitigation Plan 0.00 0.18 0.35 0.35 0.22 0.00 0.00 0.00 1.10 0.4 0.00 0.00 0.00 0.00 0.00 0.0 4- Voluntary Rettlement 0.00 1.32 1.32 0.U8 0.00 0.00 0.00 0.00 3.51 1.2 0.00 0.00 0.00 0.00 0.00 0.0 S-Advisory to EAAB's Environmental Comnmnittee 0.00 0.09 0.09 0.09 0.09 0.09 0.09 0.09 0.61 0.2 0.00 0.00 0.00 0.00 0.00 0.0 TotalBas Cost 3.30 30.25 69.77 92.31 84.94 5.39 1.58 1.20 288.72 100.0 0.00 61.73 83.44 51.63 196.79 100.0 Total Pbysical Contingencies 0.33 3.02 6.98 9.23 8.49 0.54 0.16 0.12 28.87 10.0 0.00 6.17 8.34 5.16 19.68 10.0 Total Price Contingencies 0.39 4.17 12.40 17.81 19.98 1.25 0.43 0.37 56.81 19.7 0.00 17.38 25.52 17.19 60.08 30.5 Total Investment Cost 4.02 37.44 S9.15 119.35 113.41 7.17 2.17 1.69 374.40 129.7 0.00 85.28 117.29 73.98 276.56 140.5 Duties A Taxes 0.45 4.17 9.61 12.71 11.70 0.74 0.22 0.16 .9.76 13.8 0.00 8.50 11.49 7.11 27.10 13.8 X TotalProjectCost(bcl.DutisA Tax*s) 4.48 41.61 98.76 132.07 125.11 7.91 2.39 1.85 414.17 143.5 0.00 93.79 128.79 81.09 303.66 154.3 00 - 85 - ANNEX 8 Colombia Santafe 1 Water Supply and Sewerage Rehabilitation Project Table 2: Estimated Annual Project Cost Page 2 of 2 |______________________ IN USS Millon Equivalent, July 1993 Prices To % Bass Project Compoents 1994 1995 1996 1997 19 1999 2000 2001 Tot Cost A- Vulnerability Control GRAND TOTAL SANTAFE I PROJECT 1- Rehabilitation of the 2 Tibito Pipelines 0.00 0.00 9.00 10.79 8.84 0.00 0.00 0.00 28.63 5.9 2- Rehabilitation of Tibito Treatment Plant 0.00 0.00 2.77 S.68 10.78 0.00 0.00 0.00 22.24 4.6 3-Construction of Aiternate Usaquen Tuned 0.00 0.00 0.00 0.00 0.00 5.34 9.15 0.32 14.82 3.1 i- Primary Sewerage & Drainage System I-Bogota River Interceptor & Torca Saitre 0.00 0.00 0.00 0.00 0.00 3.45 6.90 3.45 13.80 2.8 -Construction of Main S&S Collectors & Canals 0.00 0.42 4.53 20.34 18.55 6.73 9.13 5.35 65.05 1.4 -Construction of Pumping Stations 0.00 0.00 0.00 4.40 1.76 2.59 2.02 0.00 10.76 2.2 4. Land Acquisition 2.40 5.00 12.00 2.82 0.00 0.00 0.00 0.00 22.22 4.6 C-Primary Water Dietribution System 1- Primary Distribution Mains 0.00 1.32 6.39 4.33 0.42 0.00 12.90 18.S8 43.94 9.0 2-Storage Reservoin 0.00 0.00 0.54 2.02 0.00 5.44 S.60 2.08 15.68 3.2 3-Pumping Stations 0.00 0.00 0.23 0.10 1.10 0.00 0.00 0.09 1.52 0.3 4- Land Acquisition 0.90 0.00 0.00 0.40 0.80 0.00 0.00 0.00 2.10 0.4 D- Secondary Water & Sewerage Sytms 1- Secondary & Local Water Networks 0.00 0.96 1.26 1.20 230 3.30 3.30 1.50 13.82 2.8 2- Local Sewerage Networks 0.00 0.90 2.92 7.00 11.00 13.00 13.00 4.84 52.66 10.8 .Secondary Sewerage Networks 0.00 0.68 1.90 5.00 8.00 7.70 S.80 1.70 30.78 6.3 4- Domestic W&S Connecos 0.00 0.00 1.70 1.70 1.70 1.70 1.70 2.40 10.90 2.2 E-Rehabilitation Works 1- RehabilItation of Water Sym 0.00 0.00 4.90 1.50 1.50 I.S 1.80 3.28 14.18 2.9 2- Rehabilitation of Swerage Networks 0.00 0.00 1.90 1.60 1.60 1.60 1.60 2.16 10.46 2.2 F- Institutional Strengtbening l-UWI Program 0.00 3.58 6.43 4.91 4.29 3.40 0.00 0.00 22.61 4.7 2-Water Conservation Propam 0.00 0.61 0.88 0.88 0.88 0.00 0.00 0.00 3.25 0.7 3-Training Progria 0.00 030 0.31 0.28 0.24 0.12 0.12 0.04 1.41 0.3 4- O&M Lab & Communications EquIpmet 0.00 0.36 1.05 0.94 0.97 1.04 0.63 0.33 5.32 1.1 5-Data Processing Equipment & SW 0.00 1.51 0.55 0.46 0.46 0.41 0.41 0.41 4.21 0.9 G- TA & Consulting ServInes 1-Designs & TA 0.00 2.19 3.06 2.72 2.25 2.92 2.38 1.06 16.5S8 3.4 2-Supervision 0.00 1.13 3.28 6.08 S.95 S.07 7.09 4.33 32.93 6.8 3. Additional StudIs 0.00 2.37 2.10 2.53 0.93 1.39 1.36 0.48 11.16 2.3 H-Environmental Component 1- Wetlands Protection Program 0.00 0.11 0.00 0.00 0.00 0.00 0.00 0.00 0.18 0.0 2- Wetland Management 0.00 0.49 0.33 0.33 0.33 0.33 0.33 0.33 2.46 0.5 3-MItigation Plan 0.00 0.18 0.35 0.35 0.22 0.00 0.00 0.00 1.10 0.2 4- Voluntary Resettlement 0.00 1.32 1.32 0.88 0.00 0.00 0.00 0.00 3.51 0.7 S-Advisory to EAAB's Environmental Committe 0.00 0.09 0.09 0.09 0.09 0.09 0.09 0.09 0.61 0.1 Total Base Cost 3.30 30.25 69.77 92.31 84.94 67.12 85.02 S2.82 48S.51 100.0 Total Physical Contingencies 0.33 3.02 6.98 9.23 849 6.71 .50 5.28 48.ss 10.0 Total Price Contingencies 0.39 4.17 12.40 17.81 19.98 18.62 25.95 17.57 116.90 24.1 Total Investment Cost 4.02 37.44 89.1S 119.35 113.41 92.45 119.47 75.67 650.96 134.1 Duties & Taxes 0.45 4.17 9.61 12.71 11.70 9.24 11.71 7.27 66.87 13.8 Total Project Cost (inci.Duties& Taxs) 4.48 41.61 98.76 132.07 125.11 101.70 131.17 82.94 717.83 147.8 - 86 - ANNEX 9 Colombia Santafe I Water Supply and Sewerage Rehabilitation Project Annex 9 Economic Analysis: Methodology and Results A. Cost- Benefit Analysis A. Methodology 1. The economic rate of return was calculated by comparing the costs and benefits of piped water and sewerage services in two scenarios: one in which the project is implemented and one in which the project is not implemented. All costs and benefits are expressed in constant prices. The prices used in the analysis are adjusted for the impact of taxes and subsidies. Shadow exchange rates and prices were not estimated, due to lack of sufficient reliable data. 2. The "with the project" scenario includes investments aimed at reducing the vulnerability of the water system, thus enhancing the reliability of the system substantially. The rehabilitation of the Tibito treatment plant and one of the transmission pipelines that connects the treatment plant with the Bogota Metropolitan Area would result in an effective expansion4 of the production capacity of about 7 m3 per second. The project also includes a number of investments that will increase the efficiency of EAAB's operations aiming at reducing the unaccounted-for water, and improving the collection efficiency. The production capacity expansion and the efficiency improvements, in combination with an expansion of the distribution system, will enable EAAB to accommodate future demand growth. In the year 2000, EAAB will be able to supply its services to more than 1 million new customers. Moreover, the project would aim at reducing the risk of flooding in especially low-income areas. The project also includes an environmental program for the protection and the management of the wetlands of Bogota. In addition, the project will finance technical assistance to strengthen the institutional, financial and environmental capacity of the company to efficiently operate the company. 3. Without the project, it is likely that all these investments will not take place. In the "without project" scenario, rationing will occur continuously, while in the "with project" scenario rationing will no longer be necessary from 1999 onwards. Nevertheless, by the year 2014 rationing will occur as demand will outstrip the available production capacity again. 4. The current nominal production capacity is 25 m3 per second. However, only 17.7 m3 per second can be effectively used. Rehabilitation of the Tibito plant will enable EAAB to use all its nominal production capacity effectively. - 87 - ANNEX 9 B. Calculation Of Project Benefits 4. The economic justification for the project is based on the benefits it would generate in the form of higher water sales and cost savings from investments that promote efficiency in water supply and sewerage. These benefits will mainly stem from the rehabilitation of the water supply and sewerage network, and the implementation of the water loss reduction program. 5. The project would also foster a number of non-quantifiable benefits. The unavailability of reliable data have precluded a quantitative estimation of these benefits. These benefits include health benefits, environmental benefits, cost savings from postponed investment, increased property values in flood prone areas, and benefits associated with the institutional strengthening of the capacity of EAAB to plan and manage its resources. The expansion of the water supply and sewerage network in low-income areas in Bogota will generate health benefits. The incremental consumer surplus could be substantial because an increase in aggregate water consumption and improved service quality will increase the consumer's willingness to pay. However, illegal connections are an important drain on the revenues of the EAAB. It is evident, that the present project that will include a program to legalize illegal connections, will have a negative impact on the consumer surplus of this type of consumer. Rehabilitation will extend the lifetime of the water supply and sewerage network, postponing the need for new investment. An indirect benefit of the expansion of water supply, sewerage and drainage services in the low-income areas will be to increase property values for households that get access to the piped water system. The institutional strengthening program could also have a positive impact on the implementation of the other project investments. 6. The project components aimed at reducing the vulnerability of the present system will result - in combination with an expansion of the distribution system - in an increase of the effective production capacity by 7.3 cubic meters per second from 17.7 m3 per second in 1994 to 25 m3 per second in 2002. Moreover, the available water supply will increase due to the reduction of unaccounted-for water losses. These losses are currently around 40% and will decline to 28% in 2002. 7. The incremental revenues from the sale of future water and sewerage services have been used as a proxy for direct-use benefits. The average water and sewerage tariff is currently US$0.44 per m3 (in July 1993 prices). To ensure financial viability, the average tariff has to be gradually increased to US$0.48 per cubic meter by 1998. This higher rate has been used as a proxy to calculate project benefits. This tariff is higher than the rates domestic consumers will actually pay, since cross-subsidies in the water rate have not been considered in the calculation of project benefits. In addition, the collection efficiency will increase from 80% in 1994 to 92% in 2000 as part of the water loss reduction program. C. Internal Economic Rate Of Return 8. The evaluation of the economic viability of the Santa Fe I Water Supply and Sewerage Rehabilitation Project includes benefits from higher water sales and cost savings described in para. 5, the investment costs, and operation and maintenance costs projected for the period under review. The fixed operation and maintenance costs of the project are only 1.5%, as it has been assumed that the increase in effective production capacity will not require new staff, because the current staff per connection ratio still leaves room for further improvement. The variable operation and maintenance cost will increase - 88 - ANNEX 9 substantially as the energy and chemical cost of the Tibito treatment plant are much higher than those of the Wiesner plant. 9. A discount rate of 10 percent is used to calculate the net present value resulting from the project. To reflect true costs and benefits, financial prices have been transformed into economic prices. The major difference between financial and economic prices involves the impact of taxes and subsidies. In addition, price contingencies are not included in the total investment costs since it has been assumed that the prices of goods and services acquired under the project will rise in line with general inflation. Investment and operation and maintenance costs are adjusted for the impact of subsidies and taxes. The base-case scenario is defined as the scenario in which only the benefits of higher water sales and cost savings are included. The net present value of the project is US$ 209 million, the intemal economic rate of return is 17 percent, and the benefit-cost ratio is 1.49. D. Sensitivity Analysis 10. In the sensitivity analysis the impact of a number of variables has been tested. These variables comprise the impact of cost overruns, higher fixed operation and maintenance cost, changes in water rates, project delays, changes in the decline in the unaccounted-for water, changes in collection efficiency and the impact of the price elasticity of demand. 11. Impact of cost overruns. The project's sensitivity to cost overruns has been tested. The switching value (i.e., value when the project becomes nonviable) for cost overruns of total investment is about 54 percent. If investment (and consequently the fixed operation and maintenance cost) were to increase by more than 54 percent, the project would become economically not viable. 12. Impact of higher fixed operation and maintenance cost. The fixed operation and maintenance cost are set at 1.5 percent of total investment. The low fixed operation and maintenance cost are based on the assumption that there is still ample room for improving the efficiency of the company. If the fixed operation and maintenance cost increases to 7.7 percent of total investment the project will no longer be viable. 13. Impact of project delays. One of the major risks comected to the project are related to institutional weaknesses which could have an important impact on the project implementation. If the project is delayed by two years and the project were to close in 2003 instead of 2001, the net present value would decline to US$183 million, the intemal rate of return would drop to 16%, while the benefit-cost ratio would fall to 1.43. If the project is started one year later than originally envisaged, the net present value would decline to US$ 184 million. 14. Impact of water rate changes. If no rate increases were implemented, the net present value of the project would decline to US$ 162 million, the intemal economic rate of return would be 16 percent, and the benefit-cost ratio 1.38. 15. Impact of higher unaccounted-for water. If it is assumed that the water loss reduction program is unsuccessful and that it will not result in any reduction of the unaccounted-for water in either scenario, the project will still remain profitable. If the unaccounted-for water ratio were to remain at its present level - 89 - ANNEX 9 of 40%, the net present value would decline to US$ 27 million, whereas the internal rate of return would decline to 11% and the benefit-cost ratio would drop to 1.06. However, if EAAB succeeds in reducing the unaccounted-for water to levels that are targeted (i.e., 18 percent in 2000) in the agreements between the national govemment and EAAB, the net present value will increase substantially. 16. Impact of a lower collection efficiency. If it is assumed that the collection efficiency will not increase to 92 percent in 2000, but will remain in either scenario at its level of 80 percent, the net present value will decline to US$ 25 million, whereas the intemal rate of return would decline to 11 percent and the benefit cost ratio would drop to 1.06. 17. Impact of the introduction of price elasticity of demand. In the current demand analysis, no price elasticity mechanism has been introduced. In the current scenario, per capita residential consumption is assumed not to be affected by these price increases. However, studies in other parts of Latin America have shown that residential customers do react to rate increases by reducing their consumption. If it is assumed that the price elasticity of residential demand is -0.305, the net present value of the project declines to US$ 192 million, the internal rate of return would drop to 16 percent, while the benefit-cost ratio wouldfall to 1.46. 18. The combined impact of key variables. A very pessimistic scenario that could occur during project implementation is a reduced tariff increase, the existence of a price elasticity mechanism, limited success in improving the collection efficiency, a limited reduction of the unaccounted-for water and a cost overrun. If it is assumed that water and sewerage rates will only increase by half as is needed to ensure financial viability, price elasticity is -0.30, the collection efficiency will improve only to 85 percent, investment cost will tum out 20% higher than initially anticipated and unaccounted-for water will decline to only 32 percent, the project would no longer be viable, as the net present value would tum negative to US$ -36 million, whereas the internal rate of return would decline to 9% and the benefit-cost ratio to 0.93. B. Marginal Cost Pricing 19. The long-run average incremental costs were calculated separately for EAAB's water supply and sewerage system. The planning horizon covers 30 years and the opportunity cost of capital is set at 10 percent. In the mnarginal cost calculations, all cost components have been transformed from market prices into economic prices by excluding the impact of taxes and subsidies. Shadow prices have not been estimated. 5. The value of a price elasticity of residential demand is based on the results of recent studies in other parts of Latin America. Other studies have also shown that non-residential demand is affected by changes in water tariffs. However, calculating a price elasticity for non-residential demand is more difficult as the value of the price elasticity depends on factors such as the type of industries and their specific water needs, which depend on the quality and quantity of water supply required in the production process. - 90 - ANNEX 9 A. Capacity Expansion Costs 20. Incremental costs in water supply and sewerage systems result from new investment and the operation and maintenance of this additional capacity. Investment or capacity costs for water supply consist of investments for institutional development, water treatment, transmission, distribution, and connections. They also include investments to reduce water losses. Rehabilitation investments are considered equivalent to investments in water intake since they result in increased water supply. For sewerage, capacity costs include investments for project management, sewerage connections, collectors, and interceptors. Incremental fixed operation and maintenance costs are estimated at 1.5 percent of the accumulated capacity investment, assuming further efficiency improvements in the operation of EAAB. Total capacity costs are equal to the sum of capacity investment costs and incremental fixed operation and maintenance costs. The net present value of these costs is calculated using an assumed opportunity cost of 10 percent. B. Incremental Operating Costs 21. The marginal operating costs are calculated as the cost of the last water source used to satisfy demand. In Bogota, the available effective production capacity is currently insufficient to satisfy demand. The marginal operating cost has therefore been estimated assuming that the Tibito treatment plant (including the transmission pipes that connect Tibito with the Bogota Metropolitan Area) is the marginal source. The unit costs of all variable inputs (energy and chemicals) needed to produce an additional cubic meter of water have been determined at US$ 0.04. 22. The main type of variable operation cost in a sewerage system are energy costs. Because the sewerage system in Bogota is - with a few exceptions - gravity-based, variable operation costs are therefore assumed to be zero. C. Long-Run Average Incremental Costs 23. Long-run average incremental costs have been calculated at each stage of the project as the ratio of the sum of the present value of capacity costs, plus incremental operating costs to the sum of present values of the incremental volume of water. In this project, the incremental volume of water results from a reduction of unaccounted-for-water, and a rehabilitation of the supply network. The long-run average incremental cost is computed based on incremental water production. It is thus necessary to adjust for water losses in order to calculate the marginal cost per consumed cubic meter. Based on the current distribution of water losses and the expected change in these losses once the project is implemented, a loss adjustment factor has been calculated (Figure 1). The table on page 98 presents the long-run average incremental costs for different stages of the water production process. The total long-run average incremental cost is US$ 0.33 per cubic meter consumed. 24. Since the sewerage network does not face variable operating costs, long-run average incremental costs are equal to the ratio of the present value of expansion capacity cost to the present value of the incremental volume of water sold. The volume of sewage produced per connection is estimated at 85 percent of the volume of water consumed. Based on these assumptions, the long-run average incremental cost for sewage is US$ 0.22 per cubic meter consumed. - 91 - ANNEX 9 25. The long-run average incremental cost for water supply and sewerage is US$ 0.55, based on the investments required for the Santa Fe I Water Supply and Sewerage Rehabilitation Project. The proposed project will enable EAAB to service customers until 2013. After 2013, the production capacity will be insufficient to satisfy demand, and new investments will be required. These new investments will involve expensive altematives, such as the Chingaza expansion and the development of the Sumapaz Alto Muna. Moreover, wastewater is currently not treated but directly disposed of in the Bogota river. The consequent pollution will increase in the coming years due to the increase in population, which will result in bigger wastewater flows. It is evident that this pollution problem has to be resolved. 26. Based on preliminary data from recent studies, the required water supply investments will be close to US$ 0.9 billion (in constant prices of 1993), whereas the required investment for sewerage treatment will top US$ 1.1 billion (in constant prices of 1993). Based on these data, the long-run average incremental _cost for water supply and sewerage (excluding the proposed investment under Santa Fe I Water Supply and Sewerage Rehabilitation project) will increase sharply to US$ 1.21 for water supply and US$ 1.04 for sewage compared to the US$ 0.33 for water supply and US$ 0.22 for sewage at present. The high cost of new projects will have major implications, and will need to be taken into account in future sector strategies. 27. An estimate of the LRAIC is also calculated on the basis of the assumed investment scenarios for new water source development and for the major investments needed in wastewater treatmnent. The LRAIC has been adjusted for the levels of water losses at each stage of the process. Chart 1 attached to this Annex shows the present water balance in the Bogota metropolitan area. Table 2 shows the details of the calculations. The incremental water production is estimated at the average rate of increase observed over the past decade, and that is the current basis for EAAB's water source planning. 28. The marginal cost pricing shows that the present level of average tariffs covers only a small part of the calculated very long- run LRAIC for water and sewerage and wastewater treatment. As the wastewater treatment plants are completed, it will become necessary to more than double the average tariffs in order to meet the costs for providing these services. No attempt has been made at this juncture to evaluate the potential effects of such hkely increases on the affordability, nor the willingness to pay of the average household in Bogota. It must be stressed that the time horizon of the economic analysis is substantially longer than the financial forecasts. Moreover, in calculating the LRAIC for water, no account has been taken of the potential power benefits that would be recoverable and would offset the costs allocated to water. In the case of the future sources under consideration, these power benefits have been estimated by EAAB's consultants at more than 50% of the investment costs. TABLE 9.1 SANTA FE WATER SUPPLY AND SEWERAE REHABIUTATION PROJECT COST43ENEFIT FLOWS WTH PROJECT SITUATIO BASE CASE SCENARIO tIn Uwsads of US o July 1993) Y; ToW wl CowW Avn -$ii Tot nW# i : - ' '''T;O Om bpji c_ _wuamofi tt W" c c CIM c b____t ___A_ -____O 1994 335.715 80% 0.44 118.172 3.630 54 0 3.654 114,487 1995 340.686 80% 0 44 119.921 33,264 553 66 33.883 86.038 1996 349.495 82% 0 45 129,881 76.769 1.705 671 79.145 50.736 1997 381,950 85% 0 46 150,813 101,563 3,228 2.066 106.858 43.955 1998 416,230 87% 0 48 172.421 93.456 4.630 3.913 101.999 70.422 1999 462.428 90% 0o48 198.164 73,832 5.738 5.156 84.725 113,438 2000 473.153 92% 0.48 207.266 93,51 1 7.140 5,394 106.045 101,220 2001 483.803 92% 048 211,931 57. 178 7.998 5,213 70.389 141.542 2002 494.103 92% 0o48 216.443 7.998 5,416 13,414 203,029 2003 504.014 92% 0.48 220.784 7.998 5.591 13,589 207.195 2004 513.495 92% 0.48 224,938 7.998 5,349 13,347 211.590 2005 522.240 92% 0 48 228,768 7,998 5,454 13.452 215,317 2006 530.978 92% 0 48 232.596 7.998 5,935 13.933 218.663 t 2007 539.858 92% 0 48 236.486 7,998 6,424 14.422 222,064 2008 548.884 92% 0.48 240.440 7.998 6.922 14,920 225,520 2009 558.057 92% 0 48 244,458 7.998 7,427 15.425 229.033 2010 567,379 92% 0 48 248.542 7.998 7,941 15.939 232,603 2011 576.855 92% 0.48 252,692 7.998 8,463 16.461 236.231 2012 586.485 92% 0 48 2568911 7,998 8,994 16.992 239,919 2013 596.272 92% 0 48 261,198 7,998 9,533 17,531 243,667 2014 599,184 92% 0 48 262,474 7.998 9,693 17.691 244,782 2015 599.184 92% 0 48 262.474 7,998 9,693 17.691 244,782 2016 599,184 92% 0 48 262.474 7,998 9,693 17,691 244.782 2017 599,184 92% 0.48 262,474 7.998 9,693 17.691 244.782 2018 599,184 92% 0.48 262,474 7.998 9,693 171.91 244,782 2019 599,184 92% 0 48 262,474 7.998 9,693 17.691 244,782 2020 599.184 92% 0 48 262,474 7.998 9.693 17.891 244.782 2021 599,184 92% 0 48 262,474 7.998 9.693 17,891 244,782 2022 599.184 92% 0.48 262.474 7,998 9,693 17,691 244.782 2023 59. 184 92% 0 48 262,474 _,996 9,8 17,691 244,782 TABLE .2 SANTA FE WATER SUPPLY AND SEWERAGE REHAPILITATION PROJECT COST- BENEFIT FLOWS WITHOUT PROJECT SITUATION BASE CASE SCENARIO (in liousands d USS a of July 19033 Yr i WO -.ucol -iiw6n -Ar -j"Fxd - Vsra* Td--Y No SWoi t consuwmp oEc Watnr ra _b_w_ _t_t X co OEM 9PM 9_ _ 1994 335,715 80% 0 44 118.172 0 118,172 1995 335.715 80% 0 44 118.172 0 118.172 1996 335.715 80% 0 45 121,717 0 121,717 1997 335.715 80% 0 46 124.760 0 124,760 1998 335.715 80% 0 48 127.879 0 127.879 1999 335.715 80% 0 48 127,879 0 127,879 2000 335,715 80% 0 48 127.879 0 127,879 2001 335,115 80% 0 48 127,879 0 127,879 2002 335.715 80% 0 48 127.879 0 127.879 2003 335.715 80% 0 48 127,879 0 127,879 2004 335.715 80% 0 48 127,879 0 127.879 2005 335,715 80% 0 48 127.879 0 127,879 2006 335,715 80% 0 48 127.879 0 127,879 2001 335.715 80% 0 48 127.879 0 127.879 2008 335.715 80% 0 48 127,879 0 127.879 2009 335.715 80% 0 48 127.879 0 127.879 2010 335,715 80% 0 48 127.879 0 127.879 2011 335.715 80% 0 48 127.879 0 127,879 2012 335.715 80% 0 48 127.879 0 127.879 2013 335.715 80% 0 48 127.879 0 127.879 2014 335.715 80% 0 48 127,879 0 127.879 2016 335.715 80% 0 48 127.879 0 127.879 2016 335.715 80% 0 48 127.879 0 127.879 2017 335.715 80% 0 48 127,879 0 127.879 2018 335.715 80% 0 48 127.879 0 127,879 2019 335.715 80% 0 48 127,879 0 127.879 2020 335.715 80% 0 48 127.879 0 127.879 2021 335.715 80% 0 48 127,879 0 127,879 2022 335.715 80% 0 48 127,879 0 127.879 2023 335,715 80% 0.48 127,879 0 127 87S '0 - 94 - ANNEX 9 TABLE 9.3 SANTA FE WATER SUPPLY AND SEWERAGE REHABIUTATION PROJECT SUMMARY COST BENEFIT ANALYSIS BASE CASE SCENARIO (In thousands of USS as of July 1993) : :-;:Yu Net bendi e bandits - ; ji with wttho. n pro rol bnef 1994 114,487 118,172 (3,684 1995 86,038 118,172 (32,134 1996 50,736 121,717 (70,981 1997 43,955 124,760 (80,804 1998 70,422 127,879 (57,458 1999 113,438 127,879 (14,440 2000 101.220 127,879 (26,658 2001 141,542 127,879 13,663 2002 203,029 127,879 75,150 2003 207,195 127,879 79,317 2004 211,590 127,879 83,712 2005 215,317 127,879 87,438 2006 218,663 127,879 90,784 2007 222.064 127,879 94,185 2008 225,520 127,879 97,641 2009 229,033 127,879 101,154 2010 232,603 127,879 104,724 2011 236,231 127,879 108,353 2012 239,919 127,879 112,040 2013 243,667 127,879 115,789 2014 244,782 127,879 116,904 2015 244,782 127,879 116,904 2016 244,782 127.879 116,904 2017 244,782 127,879 116,904 2018 244,782 127,879 116,904 2019 244.782 127,879 116,904 2020 244,782 127,879 116,904 2021 244,782 127,879 116,904 2022 244,782 127,879 116,904 2023 244,782 127,879 116,904 Net Present Value (r=1 0%) 209,093 Intemal Rate of Return 17.0% Benefit-Cost Ratio 1.49 TABUE DA SNTA FE I WATER SUPPLY AND SEWERAGE REHAUIUTATION PRJECT TOTAL CAPACITY WSTMENT COSTS V kin00 uslidouas of JUIm Is3 -V lIstUt -r Tr!iti5ion Tiso P Coeoo U5S WATe CoJ-tine C diior Untratii ii;iq i w --l5TAi- Developmwnt Inbtae 2_ SUPPLY 3_ bmes o& Dls_KsS Tr _mea_ PROJECT 1994 0 0 990 o0 0 0 99 0 2.640 o 0 0 0 240 3,630 1995 13.255 0 6,193 0 1,760 7.079 0 28.287 7,136 9.570 0 0 0 2.486 19.191 47.478 1996 19.426 0 17.776 3.047 3.256 6.923 0 50.428 6,993 23.485 0 0 0 2.299 32,777 83.205 1997 20,680 0 19.404 9.48 3.190 7.016 0 59,838 7.092 43,516 0 0 0 1.815 52.423 112.260 1998 17.567 0 12.276 1 1.868 4,400 7.164 0 53.265 7.244 43.241 0 0 0 704 51.189 104.454 1999 15.785 5.874 5.964 0 5.500 7.293 0 40.436 7,376 36.817 0 0 0 462 44.655 85.091 2000 13 89 10.065 20.350 0 5,500 7.398 0 56.502 7,487 40.635 0 0 0 462 48.484 104.9M6 2001 7.315 352 22,825 0 3.355 7.343 0 41,190 7,443 16,874 0 0 0 462 24.779 65.968 2002 a 0 0 0 0 7.069 0 7,089 7,206 0 0 0 0 0 7.208 14.297 2003 0 0 0 0 0 6.807 0 6.807 6.944 0 0 a 0 0 6.944 13,751 2004 0 0 0 0 0 6.497 0 6.497 6.653 0 0 0 0 0 6.653 13.150 2005 0 0 0 0 0 5.965 0 5.965 6.148 0 0 0 0 0 6.148 12.113 2006 0 0 0 0 0 5.958 0 5,958 6.149 0 0 a 0 0 6.149 12.107 2007 0 0 0 0 0 6.058 0 6.059 6,253 0 0 0 0 0 6.253 12.313 2008 0 0 0 0 0 6.162 0 6.162 6.360 0 0 0 0 0 6.360 12.522 2009 0 0 0 0 0 6.267 0 6.267 6.468 0 0 0 0 0 6.468 12.735 2010 0 0 0 0 0 6.374 0 6.374 6.578 0 0 0 0 0 6.578 12.961 2011 0 0 0 0 0 6,482 0 6.482 6.689 0 0 a 0 0 6.689 13.171 2012 0 0 0 0 0 6.592 0 6.592 6.803 0 0 0 0 0 6.803 13.395 2013 0 0 0 0 0 6,704 0 6.704 6.919 0 0 0 0 0 6,CM9 13.623 2014 0 0 0 0 0 6,818 0 6.818 7.036 0 0 0 0 0 7.036 13.855 2015 0 0 0 0 0 6,934 0 6.934 7.156 0 0 0 0 0 7.156 14.090 2016 0 0 0 0 0 7.052 0 7,052 7,278 0 0 0 0 0 7.278 14.330 2017 0 0 0 0 0 7.172 0 1.172 7,401 0 0 0 0 0 7.401 14.573 2018 0 0 0 0 0 7,294 0 7.294 7.627 0 0 0 0 0 7.527 14,821 2019 0 0 0 0 0 7.418 0 7.418 7.655 0 0 0 0 0 7,656. 15.073 2020 0 0 0 0 0 7.544 0 7.544 7.785 0 0 0 0 0 7.745 15.329 2021 o 0 0 0 0 7.672 0 7.672 7,918 0 0 0 0 0 7r918 15.590 2022 0 0 0 0 0 7,803 0 7,803 8.052 a 0 0 0 0 8.052 156866 2023 o0 0 o 7 35 8_-189 00 o o o 0 0 0 16 124 i% oi 69,673 . 64.78718 16,174 16,304 58, 739 0 2 0 0 0 1 434.253 a 1 2 1 0." 3399 a ol -0 .121 20,091 44.5 X TAKE 9.6 SANTA FE I WATER SUPPLY AND SEWERAE RITAEITATI PAOJECT TOTAL OPERATION AND ANTENANCE COST In 010 US dol ars Juhof 19 DevekNiment IntAha____ ____ ___ SUPPLY D____'sSi I! TSSO - SEWERAGE PRO=ET ww -I ., , .... w r_W I T . .................... Canc -:- Olw i: 0 yATEa cosf U_4 w ...... ....T .... 199416 0 a o 15 0 40 0 0 0 0 40 54 1995 199 0 106 0 26 106 0 430 107 163 0 o 0 37 327 707 1996 490 0 374 46 75 210 0 1,196 212 535 0 0 0 72 619 2.015 1997 800 0 665 19 123 315 0 2.093 316 1,166 a 0 0 99 1,605 3.6es 19ss 1,064 88 S50 367 189 423 0 2.960 427 1.837 0 0 0 110 2,373 5.354 1999 1.301 239 939 367 272 532 0 3,660 53S 2,389 0 0 0 118 3.043 8,803 200 1.499 244 1.245 367 354 643 0 4,351 650 2.997 0 0 0 123 3.770 6.122 201 1 608 244 1,587 367 404 753 0 4.964 762 3.250 a 0 0 130 4.142 9I106 2002 1.608 0 1.587 367 404 860 0 4.826 870 3,250 a 0 0 130 4.250 0.076 2003 1 608 0 1,587 367 404 962 0 4,928 974 3.250 0 0 0 130 4.354 9.282 2004 1 606 a i.587 367 404 1.05o 0 5,026 1.074 3.250 0 0 0 130 4.454 9.480 200D 1.608 0 1.5s7 367 404 1.149 0 5.115 1.166 3,250 0 0 0 130 4.546 9.661 2006 1 608 0 1.587 367 404 1.238 0 5.204 1.258 3.250 0 0 0 130 4.63S 9,643 2007 1.608 0 1.587 367 404 1,329 0 5,295 1,352 3.250 0 0 0 130 4,732 10.828 2006 1608 0 1.587 367 404 1.421 0 5,388 1,447 3,250 0 0 0 130 4.828 10.216 2009 1 608 0 1.5s7 367 404 1.515 0 5,482 1,544 3.250 a 0 0 130 4.9M2 10.407 2010 1.608 0 1o587 367 404 1.611 0 5s57s 1,643 3.250 a 0 0 130 5.023 10.601 CN 201 1 1.608 0 1.567 367 404 i.706 0 5.675 1.743 3,250 0 0 0 130 5.124 10.796 2012 1,60 0 1,587 367 404 1.,07 0 5.773 t.846 3.250 0 0 0 130 s.226 10.999 2013 1,608 0 1.587 367 404 1.906 0 5,874 1.949 3,250 0 0 0 130 5,330 11.204 2014 1.608 0 1.587 367 404 2,010 0 5.976 2.055 3.250 0 0 0 130 5.435 11.411 2015 1,608 0 1.587 367 404 2.114 0 6.080 2.162 3,250 0 0 0 130 5.543 11.623 2016 i 608 0 1.587 367 404 2.220 0 6.186 2.271 3.250 a 0 0 130 5.652 I 1.638 2017 16108 0 1.587 361 404 2,327 0 6,294 2.362 3.250 0 0 0 130 5,763 12.056 2018 1.608 0 1.567 367 404 2.437 0 6.403 2.495 3.250 0 a 0 130 5.876 12.279 2019 1.608 0 1,587 367 404 2.548 0 6.514 2,610 3.250 0 0 0 130 5.990 12.506 2020 1.608 0 1.587 367 404 2.661 0 6.627 2.727 3.250 0 a 0 130 6.107 12.735 2021 1.608 0 1.587 367 404 2,776 0 6.743 2.846 3.250 0 0 0 130 6.226 12.9s6 2022 1.608 0 1.587 367 404 2.893 0 6,860 2.968 3.250 0 0 0 130 6,347 13.2306 2023 1 60s 0 1567 367 404 0 0 6.,979 3. 1250 0 a 0 130 6470 t3u4 10b% 10.574 429 9.769 1 2.458 1 0 20,244 o o 944 2, 62 TABLE 9.6 SANTA FE I WATER SUrrLY ANID SEWERAag REHAIUTATIM PRCJCT TOTAL COSTS In OS US dolbamn o f Juh 1ttiF 7~~~~~~~~~~~~~~tean* pt _ rouma Can Oitsr glWe dc6w UW"%-Snt_ Tmo t bor TOTAL -Y Oeveoom*ent Ian _ _ . - - _-_. - SUPPLY I t Dr s , T tim 4 . S&EWERAcE PROJECT 1994 1.05 a a 1.00 0 260 0 0 2.680 3,684 1995 13,454 0 6,301 0 1,786 7,185 0 28,726 7.242 9.753 o 0 0 2.523 19.518 48.245 1996 19.916 0 18.150 3.093 3.331 7,133 0 51.623 7.205 24,020 0 0 0 2,371 33.596 85.22D 1997 21.4B0 0 20.069 9S737 3.313 7.331 0 61.931 7,410 44,704 0 0 0 1.914 54.028 115.9SS 1998 18.63f 8a 13.126 12.225 4.589 7.587 0 56.246 7.671 45.076 0 0 0 814 53.562 109.806 1999 17.086 6.113 6.923 367 5.n2 7.825 0 44,085 7,914 39.206 0 0 0 578 47.698 91.784 2000 14.688 1O309 21,595 367 5.864 8.041 0 60,854 8,137 43.532 0 0 0 585 52.255 11I108 2001 8.923 5S6 24.412 367 3.750 8.096 0 46.154 8.204 20.124 0 a a 592 28.921 75.075 2002 1.608 0 15687 367 404 7.949 0 11.915 l .077 3.250 0 0 0 130 11,458 23.373 2003 1.608 0 1.587 367 404 7.768 0 11.735 7,918 3.250 0 0 0 130 11.298 23.033 20U4 1.608 0 1,587 367 404 7.556 0 11.522 7.727 3,250 a 0 0 130 11.107 22.630 2005 1.608 0 1.587 367 404 7.113 0 11,080 7.314 3.250 0 0 0 130 106.94 21,74 2006 1.608 0 1,587 367 404 7.196 0 11,162 7,407 3,250 0 0 0 130 1o.787 21.950 200 t.608 0 1,587 367 404 7.388 0 11.355 7.605 3.250 0 0 0 130 10.986 22.340 2008 1.608 0 s.587 36? 404 7.584 0 1t.550 7.807 3.250 0 0 0 130 11.187 22n737 2009 1 608 0 1.587 367 404 7.782 0 11.749 8,012 3.250 0 0 0 130 11.392 23.141 2010 t.608 0 1.587 367 404 7,985 0 1 1.961 6.221 3.250 0 0 0 130 11.601 23562 2011 i.608 0 1,587 367 404 8.190 0 12.157 8,433 3.250 0 0 0 130 11.813 23.970 2012 1 608 0 1.587 367 404 8.399 0 12.366 8.648 3.250 0 0 0 130 12.029 24.395 2013 1.608 0 1.587 367 404 8.612 0 12.578 8.868 3,250 0 0 0 130 12.248 24.827 2014 1.608 0 1,587 367 404 8,628 0 12,795 9.091 3.250 0 0 0 130 12.472 25.266 2015 1t608 0 1.587 367 404 9,048 0 13,014 9,318 3,250 0 0 0 130 l2.69 25.713 2016 1.608 0 1.587 367 404 9,272 0 13.238 9.549 3.250 0 0 0 130 12.929 26.167 2017 1.608 0 1.587 367 404 9,499 0 13,466 9,784 3.250 0 0 0 130 13.164 26.630 2018 1606 0 1.587 367 404 9, 30 0 13.69? 10,022 3,250 0 0 0 130 13.403 27.1W0 2019 1.608 0 1,587 367 404 9,966 0 13,932 10.265 3.250 0 0 0 130 13.646 . 27,578 2020 1 608 0 1.587 367 404 10.206 0 14.171 10.512 3.250 0 0 0 130 13,893 28.084 2021 1 608 0 1.587 367 404 10,448 0 14.415 1o.763 3.250 0 0 0 130 14.144 26.568 2022 1 608 0 1,587 367 404 10.696 0 14.862 11.019 3.250 0 0 0 130 1i4.39 29,061 2023 i.608 o 1_587 367 404 14.9! 0 4 _ 11278 3,2 0 0 130 2, 573 -0-_ 80.247 9-074 7 4,487 - 1i17o 66,7,4 0 1 .5 4 , 2j204 i o 1 1 0 0 0 , , X o0 - 98 - ANNEX 9 TABLE 9.7 SANTA FE I WATER SUPPLY AND SEWERAGE REHABIUTATION PROJECT AVERAGE INCREMENTAL COSTS OF WATER AND SEWERAGE In USS of July 1993 STAGE LRAIC Lossw: [l Incremental incrmentai Incrmental betbre:oe adJustment capaclty i opeating total ____________ ___________ losset factor: cost coSt c s WATER SUPPLY SYSTEM Water Intake 0.09 1.00 0.09 0.04 0.13 Transmission 0.07 1.01 0.16 0.04 0.20 Treatment 0.02 1.02 0.18 0.04 0.22 Distribution 0.02 1.10 0.20 0.04 0.25 Connections 0.07 1.12 0.28 0.05 0.33 TOTAL SEWERAGE SYSTEM Connections 0.07 0.85 0.06 0.00 0.06 Collectors and Interceptors 0.15 1.00 0.22 0.00 0.22 Disposal of Untreated Sewage 0.00 1.00 0.22 0.00 0.22 Sewage Treatment 0.00 1.00 0.22 0.00 0.22 Final Disposal of Treated Sewage 0.00 1.00 0.22 0.00 0.22 TOTAL AVERAGE INCREMENTAL COSTS WATER AND SEWERAGE 0.55 1/ The Loss Adjustment Factor of 0.85 is applied for the sewerage system, at the connection stage, to allow charging sewerage users based on their consumption of water. - 99 - ANNEX 9 WATER BALANCE IN THE E.A.A.B WATER SUPPLY SYSTEM * SURFACE WATER + RESERVOIRS TREATMENT. WATER TREATMENT PLANTS 2.1% TRANSMISSION LOSSES RESERVOIR LOSSES 1 9 DISTRIBUTION NETWORK LOSSO 10.1% DISTRIBUTION NETWORK l 14.9% 24 6% 60.3@h I I. |/o COUERCAL LOSSES | WATER ILLED TO REENCE8, 11.6% 13% COIMIERCE. NDUSTRY. AND PULIC WATER CONSUMED |NATER CONSUMED ENTTIES. AND NOT BILLED Y ILLEGAL CONNECT - 100- ANNEX 10 Colombia Santafe I Water Supply And Sewerage Rehabilitation Project Annex 10 Financial Evaluation: Assumptions & Results A. General. 1. Base Case Scenario: The financial analysis of EAAB performance over the next decade has been carried out on the assumption that the entire Santafe I project will be financed in two phases, the first phase Bank loan for US$ 145 million as proposed, and the second phase loan for a propsoed US$ 105 million provided EAAB performance meets the targets and finacial indaicators discussed in Annex 14 (Action Plan). The base case scenario under which the present financial analysis has been carried out, assumes that EAAB will be able to effect tariff increase in real terms (both globally and in terms of structure changes) equivalent to 3% in 1996, and 2.5% each in 1996 and 1997. As this is the period of the mandate of the present Mayoral administration, tariff increases and structural changes that will be needed in future years to meet necessary investments and capacity increases in water and sewerage and waste water treatment have not been explicitly assumed for the base case. The base case assumes that EAAB will be able to achieve at least the minimum targets specified for UFW reduction and bill collection efficiency, ie. UFW decreasing from the estimated 39.7% in 1994 to 29.5% by the year 2000. This target has been considered to be more realistic and achievable than the UFW target specified in the PP, which assumes a drop to 20% by the year 2000. At the same time, the bill collection efficiency is assumed to increase from an estimated 80% in 1994 to 92% by 2000, a target that is considered feasible and achievable. The improvements observed during the latter half of 1994, coupled with the introduction of proven commercial and financial accounting systems provide grounds for this assumption. The tariff increases assumed to be effected under the base case scenario are suffiecient to enable EAAB to meet the covenanted working ratio and quick ratio targets. A sensitivity analysis of the robustness of EAAB's present fianncial situation and projected financial performance under varying levels of performance improvements has been carried and is described in para. 25 below. The base case scenario also incorporates the agreed terms of the first phase Bank loan (ie, 60% of the loan as a single currency fixed rate loan, and 40% as a single currency floating rate loan). The second phase loan is also assume to be effected on the same basis as the first. 2. Inflation Rates. The following inflation rates (%/o) were used, based on agreed economic parameters between the Government of Colombia and the World Bank, and consistent with the Bank's guidelines on Expected Price Increases and Interest Rates dated October 1994. 1993 1994 1995 1996 1997 1998 1999 2000/ 2002 on 2001 Local 21.00 22.16 18.00 16.00 14.00 12.00 10.00 9.00 8.00 Foreign -2.30 3.00 1.50 1.80 2.60 2.50 2.50 2.50 2.40 - 101 - ANNEX 10 3. Interest Rates. The following interest rates (%) were used based on the official Government estimates of the Colombian short term interest rate movements and on the Bank's guidelines on expected changes in the 6-month LIBOR rates: j 1993 1994 1995 1996 1997 1998 on US$ 6-month LIBOR 3.8 4.8 5.6 5.8 5.8 5.8 Col$ (DTF) 22.5 24.0 22.0 20.0 18.0 17.0 4. Exchange Rates. Exchange rates assumed are the official Government projections as of October 1994. 1994 1995 1996 1997 1998 1999 2000 2001 Annual average 818 888 1002 1114 1220 1312 1390 1467 Year-end 831 946 1061 1171 1271 1354 1428 1507 B. Income Statements: 5. Water demand has been estimated to grow at a rate of 0.5m3/sec per year from the prevailing level of 17m3/sec. At that rate, EAAB would reach the end of its presently deliverable flow rate of 25m3/sec by the year 2010. The EAAB Action Plan expects to establish 48,000 new connections per year (about 3% of existing customers) . The projections also include EAAB's program of elimination of an estimated 200,000 illegal connections over a seven-year period. Despite the optimism of the PP, the base case financial projections take a more conservative view of reductions in unaccounted-for water (UFW), and only show a decline from about 40% in 1994 to about 30% by 2000, reaching a level of 26% by the end of the project in 2003. This matches the forecast assumptions in the economic analysis. 6. Revenue from water and sewerage services. EAAB has been authorized (Resolution of January 1993) to increase its rates, until December 31, 1993, to its customers by 1.8% per month (23.8% annually) except for municipalities, for which the increase amounts to 2.40% per month (32.92% annually) up to a certain amount of water consumed which differs by municipality, after which the tariffs will be increased to an amount which will cover production costs. EAAB was authorized to increase the sewerage charge for industries (about 3,600 customers) from 50% to 60% of the water bill and for polluting industries (estimated about 1,200 customers) from 50% to 100% effective September 1, 1993. At the end of 1993, EAAB was authorized to effect tariff increases of 1.89/o/month (23.8% annually) from January 1, 1994 on all classes of customers. In 1995, the monthly increase was set at 1.5% (annual inflation rate of 18%). Thereafter, it was assumed that rates would be adjusted by at least the inflation rate. Increases in tariffs in real terms were calculated on the base model to ensure compliance with the objectives of the financial covenants on working ratio and the quick ratio targets. At the same time, the target tariff increases were designed to substantially reduce the negative net cash flows in the two critical years of the project implementation (1997 and 1998) when heavy investment outflows would overly tax EAAB's financial position, and to ensure the maintenance of a quick ratio of at least 1.1 in all the - 102- ANNEX 10 projection years. This analysis gave projected tariff increases of 3% in 1996 and 2.5% in each of the years 1997 and 1998, to meet the working ratio targets of not more than 45% in each of the years 1996, 1997 and 1998, and not more than 40% in each year thereafter and a quick ratio target of at least 1.0 in 1997 and 1998, and of 1. i in each year thereafter. 6Table I shows the projected financial results including the assumption of the tariff increases in real terms. The proposed increases in real terms are considered to be acceptable in view of the improvements in service quality and in the reliability of the water system. The proposed tariff study would determine the manner in which the tariff increases in real terms will be achieved, through a combination of structural adjustments and through absolute increases in the tariff levels themselves. The tariff rates and structure will meet the criteria set forth in the Public Service Law and ensure that the subsidization would be strictly limited to the levels specified ie. 50% for the lowest economic strata, 40 % for the next level and 15% for the next level). In accordance with the provisions of the Public Services Law, such subsidies should be explicitly provided by the Municipality; however, for the purposes of the project analysis, no subsidy transfers were assumed to take place in the base case. This was to ensure that EAAB's financial condition would remain robust under the most conservative assumptions. 7. Other revenue includes sale of unproductive assets estimated at Col$ 3,000 million in 1993 and Col$ 1,500 million in 1994. Beyond that period, a small amount of other revenue based on the figure for 1993 were maintained in constant terms. 8. Fondo Ambiental Charges represent surcharges on polluting industries and businesses that are collected by EAAB and transferred to the CAR annually. They are estimated at US$2.0 million in 1994 terms. As these collections are not part of EAAB's operating revenues, they are shown below the line and flow through the Funds Flow Statement as transfers to CAR. 9. Monetary Corrections are the net value of changes in the non-monetary accounts due to the change in the monetary unit of value, i.e. the Colombian Peso adjusted for the annual certified rate of change in the Index of Domestic Inflation. These changes affect the following accounts: Inventories: The value of the inventories is adjusted for changes in the monetary base at the end of each year. Long Term Debt: The net value of foreign-denominated long term debt is adjusted and the adjustment carried through into the monetary correction. 6 Workine Ratio defined as Ratio of working expenses, prior to depreciation and interest charges, and including annual payments to existing pensioners, payments into the EAAB Pension Fund, and annual transfers to external pension funds under Law 100 to operating revenues prior to subsidy transfers and extraordinary income (including income from excess liquidity balances) Ouick Ratio defined as the ratio of liquid assets (cash and bank balances and short-term investments readily convertible to cash in three months) and 30% of accounts receivable to current liabilities due and payable within one year, including loan amortizations due and payable. - 103- ANNEX 10 10. Connection charges. EAAB charges new customers the cost of the connection at the average rate of Col$ 150,000. The rate was kept constant in real terms. 11. Energy consumption was separated into the three main treatment plant components, i.e., Wiesner, Tibito and other, to account for the different levels of power consumption. From 1994 as through 1997, capacity utilization of the Tibito plant will increase as the increasing water demand will need to be primarily met from the unused capacity at Tibito. There is a possibility that from 1998, Tibito may be operated as a private concession. However, the base model does not take this possibility into account. 12. Chemicals were estimated as a function of production and the unit price of chemicals was escalated at the above inflation rates. 13. Administration expenses for 1994 were taken from the 1994 budget and inflated thereafter. The large escalation of 1994 with respect to 1993 is explained by the expansion of some expenses (e.g., insurance) from depressed to normal levels as a result of the solution of EAAB's financial crisis in 1993 and 1994. 14. Repairs and Maintenance is broken down between civil works (80%) and electromecanical equipment (20%). Civil works will gradually increase the amount ofthis cost item from 0.5% oftotal gross fixed assets in 1994 to 1% in 1998. Electromechanical equipment will increase from 1% of gross fixed assets in 1994 to 3% in 1998. 15. Write Offs represent the value of fixed assets written off as the rehabilitation program is implemented. The residual value of the Tibito plant and the Tibito pipelines are also written off as the corresponding improvements/reconstruction are completed. 16. New investment module as of year 2002. We assume that a second Sante Fe project will start in 2002. It will have exactly the same profile as the Santa Fe I project, which entails: the same amount of capital expenditures (in 1993$) distributed through the years 2002-2005 as the Santa Fe I was distributed through 1994-2001. This project will be financed with intemal cash generation, which will be accumulating in adequate amounts to face this financial burden. In addition to the above, the model incorporates investments in development of proposed new water sources starting in 1997, to enable EAAB to meet the projected demand in the years after 2003. EAAB's consultants have estimated the optimum sequencing of the investments and this has been incorporated in the model. The financing is assumed to come from a mixture of debt and EAAB's own cash generation. The benefits of the potential hydro-power generation implicit in the source development program could provide an additional means of funding the needed investment costs. However, for the purposes of the analysis, such potential benefits and possible financing support was ignored. Other investments include annual renewals at around 5% of the gross fixed asset values. 17. Personnel. In 1994, EAAB reduced staff size to 2500. It is expected that this will decline further to 2400 in 1996 and remain at that level thereafter. Average salaries were inflated at the local inflation rate starting in 1994. - 104- ANNEX 10 C. Flow of Funds & Balance Sheet 18. The 1993 Balance sheet figures were taken from the audited results. The 1994 figures are unaudited. 19. Fixed assets. The Santafe I investment program described in Annex 7 and estimated in Annex 8 was taken as the basis for the projections. Under its new status as a government-owned industrial and commercial entity, EAAB is authorized (Decrees 2077, 2075, 2911 and 29112) to revalue monthly its fixed assets and inventories using the Colombian consumer price index. The 1993 audit has effected corrections in EAAB's revaluation methodology to meet the Colombian regulations in this regard. The 1994 figures show some minor adjustments in this regard. 20. The fixed assets were adjusted for inflation as follows; * fixed assets in operation: the balance at the beginning of the year was revalued according to the full annual local inflation rate and the additions at one-half the annual local inflation rate: * construction in progress was revalued as fixed assets in operation; additions and capitalizations were revalued at one-half the annual local inflation rate; * depreciation: the balance at the beginning of the year was revalued according to the full annual local inflation rate; the annual depreciation charge was calculated at the average depreciation rate of 3% applied to the revalued gross fixed assets in operation at the end of the year; the annual depreciation charge was not revalued. 21. Pension Liabilities and Related Issues: As of December 31, 1994, EAAB had an actuarially estimated unfunded liability on account of its employees' retirement plan amounting to Col$ 360 million (about US$ 420 million). In accordance with its PP, EAAB is obliged to set up a Pension Fund to cover the pension payments to all future retirees who do not opt for coverage under Colombia's new Social Security Law (Law 100), but instead stay on under the existing union agreement. The existing retirees could also be paid out of such a Pension Fund. As part of the Performance Plan agreement with the National Government, EAAB has already established the Employee Pension Fund in 1994. During 1995, EAAB will make other mandated changes in its treatment of future pensioners to comply with the recently enacted Colombian law on Social Security ( Law 100 of 1993). EAAB will continue to service pensions to its existing pool of pensioners (approximately 1250) directly out of its annual operating revenues and use the revenues accruing in its Employee Pension Fund to partially offset use of its cash flow for this purpose. EAAB will need to continue its present practice of using its annual cash flow to cover the pension payment obligations. At the same time, if there are excess cash reserves due to improved bill collection, favorable investment retums on excess cash balances and other extraordinary events, EAAB will continue to increase the corpus of the Employee Pension Fund in order to provide an additional source of supplementary cash flow to cover its pension payment obligations in particular years. EAAB will begin to contribute its share of social security and medical fund contributions to the State Social Security scheme (or to altemative private pension funds that are authorized to receive such contributions on the basis of individual employee elections under provisions of the Social Security Law). EAAB will also become liable to transfer the entire actuarial liability balances including accrued interest charges to the State Social Security Scheme or to - 105- ANNEX 10 authorized alternatives when employees retire after December 31, 1995. As these liabilities are currently unfunded (and only partially provisioned), EAAB will need to use its cash flow to effect these transfers. The forecast financial statements reflect the provisions as outlined above, and take into account the increased cash outflows that will be required. EAAB's pension liability will be fully provisioned within seven years as required by new Colombian accounting rules. The cash flow arising from the annual provisioning will more than amply cover EAAB's cash requirements to meet the present and future pension payment obligations. As EAAB's pension liabilities remain largely unfunded, it is essential that water and sewerage rates cover the annual cash flow requirements in this regard. The definition of the working ratio therefore includes this requirement to ensure that tariff increases provide the adequate cash flow to EAAB to meet these essential needs. The balance in the Pension Reserves is net of annual amortizations of accrued pension liabilities due to pensioners leaving EAAB's pension plan , additions and reductions in numbers of pensioners and estimated actuarial liabilities outstanding at each year end. 22. Other Long Term Assets include the long term, portion of the amounts due from the EEB in respect of its share of the financing of the Chingaza project, the short term portion being included in the value of other receivables (see para 21 below). This rubrique also includes the long term portion of employee loans for housing. 23. Current assets were estimated as follows: * Cash balances were estimated at 15 days each of cash operating expenses and investment expenditures. - Receivables were calculated separately for government (central and District) and non- government. The December 31, 1994 receivables from government and non-government of 77 days of annual billings were adjusted each year to comply with the Action Plan targets. The receivables include the estimated billings for the last two months of each year, which are sent for collection in January of the following year. - Other receivables comprise mainly (approximately 70% of the amount) payments due from the Electric Supply Company of Bogota (EEB) on account of its contribution to the financing of the Chingaza project. The current portion of the long term obligations due from EEB are included under this category. In addition, non-trading receivables from other entities and from employees real estate loan payments due within one year are included. The amount of the other receivables is projected to increase at the inflation rate. * Inventories were calculated at 3 months of consumption of chemical products. Annual adjustments of inventory values in line with inflation were made to comply with the Colombian accounting regulations. * Other current assets comprise the net value of amounts due from or owed to other entities on account of transfers of staff and their corresponding pension benefits, as well as the short term portion of the monetary value of accumulated leave benefits (Cesantias). From 1995, they also include the anticipated payments due from the District Government under Ley 60 transfers for the funding of the Santafe I program. The amounts shown in the financing plan are - 106- ANNEX 10 expected to be paid in installments, and the unpaid installments at the end of each year (estimated at 25% of the total amounts due each year) are included in the figure shown under this rubrique. 24. Current liabilities were estimated as follows: * Suppliers. The estimated balance of Col$ 33,207 million as of December 31, 1994, was separated into its component and projects as follows: * Col$ 15,367 million due on account of payments to EAAB was adjusted for the level of power consumption annually, and maintained at approximately three months of payments due. * Col$ 16,399 million accrued interest was projected at 3 months of annual interest charges. * Col$ 1,441 million due to normal operations were projected at 2 months of cash operating expenses excluding salaries. * Contractors were calculated at 2 months of investment expenditures. * Other payables. The balance at December 31, 1994, was increased by the inflation rate. * Current Portion of L-T Liabilities. These include the current portion of long-tern debt as well as the current portion of EAAB liabilities to Employee benefits, mainly the termination and accrued leave benefits (Cesantias) which are projected to increase in line with inflation and adjusted for the size of the labor pool. 25. Long-term debt: The financing and amortization of debt are calculated in the model in line with amortization tables furnished by EAAB. 26. The Projected Flow of Funds and Balance Sheets are shown as tables 2 and 3 respectively. The Working capital table is shown as Table 4. 27. Table 5 shows a set of indicators and ratios of financial performance including the current and working ratios, debt-service coverage and indicators of personnel expenses, financing mix and revenue parameters. D. Sensitivity Analysis 28. A sensitivity analysis has been carried out under various scenarios of performance improvement and of failure to achieve the forecast levels of operating performance. The primary objective of the sensitivity analysis was to demonstrate the basic robustness of EAAB's financial situation following the financial restructuring and bailout implemented by the National Government in 1993 and following - 107- ANNEX 10 EAAB's organizational transformation carried out in the past year. While, further organizational and managerial improvements are needed to sustain the reform effort, the sensitivity shows that even under unlikely scenarios of failure to achieve even a modicum of improvement in its operational performance and of failure to enact tariff changes, EAAB's financial situation is weakened but nonetheless sufficiently robust for the purposes of implementing the Santafe project as defined. Action of future investments in water source development and on expansion of the system beyond the completion of the Santafe I project may need to be postponed in the event of continuing non-compliance with the forecast levels of performance. However, for the present, EAAB's financial situation is sufficiently robust to withstand a prolonged period of insufficient cash flow from operations. In the worst case scenario, it is also assumed that the proposed second phase Bank loan will not matenralise. EAAB, even under such a scenario will be able to complete the various planned investments under the Santafe I project. The results of the sensitivity test are summarized in Table 6. While tariff increases are critical to achieving the covenanted financial ratios, the sensitivity of EAAB's cash flow and its consequent ability to meet the investmnent requiremnents of the Santafe I project is low, because of EAAB's exceptionally advantageous cash position prior to start of implementation of the Santafe I project. COLOMBIA EMPRESA DE ACUEDUCTO Y ALCANTARILLADO DE BOGOTA ESP SANTAFE I WATER AND SEWERAGE PROJECT Table 1: Income Statements (current ColS million) < ---Audited----- ---------------- --------------- ------ Forecast --- ------------------------ --- ----o-e---t------------------ ----------- - -_ 1993 1994 19 196 1997 1998 1999 2000 2001 2002 2003 2004 2005 REIVENUES From Water Sales - Water 74,598 95,006 119,350 146,030 174,252 203,791 235,440 269,472 305,815 343,667 383,735 428,096 477,189 - Sewerage 33,515 46,794 58,784 71,925 85,826 100,375 115,963 132,725 150,625 169,269 139,004 210,853 235,033 Subtotal 108,113 141,800 173,134 217,956 260,077 304,166 351,402 402,198 456,440 512,936 572,739 638,949 712,222 Connection fees 3,787 7,090 6,527 7,603 8,704 9,789 10,814 11,819 9,307 9,114 9,885 10,722 11,629 Reconnection fees and fines 1,321 3,390 4,000 4,640 5,290 5,925 6,517 7,104 7,743 8,362 9,031 9,754 10,534 TOTAL OPERATINGREVENUES 113,221 152,280 18,662 230,199 274,071 319,880 368,733 421,121 473,489 530,413 591,656 659,425 734,385 OPERA TING EXPENSES Personnel Costs 24,211 27,180 30,462 36,802 42,371 47,926 53,243 58,596 64,470 70,302 76,641 83,551 91,085 Pensions Paid 9,097 12,675 18,833 20,122 22,683 24,904 26,737 28,302 29,326 31,232 32,611 34,040 35,512 Power 5,735 8,272 11,360 13,045 13,741 14,401 15,495 13,247 20,951 23,454 26,194 29,271 32,725 Chemical! 1,401 2,063 2,365 3,275 3,402 3,519 3,744 4,425 5,085 5,685 6,340 7,075 7,W93 Operation and maintenance 3,963 6,422 8,100 9,503 10,965 12,874 15,065 17,673 20,589 23,319 25,874 28,44 31,24 Administrative and other 5,650 9,665 4,797 5,564 6,343 7,105 7,815 8,518 9,285 10,028 10,U30 11,696 12,632 Concession Payments 0 0 0 0 0 0 0 0 TOTAL WORKINGEXPENSES 50,057 66,277 76,418 88,312 99,505 110,729 122,100 135,762 150,206 164,021 178,490 194,080 211,099 1 Income before Depreciation 63,165 86,003 112,244 141,837 174,566 209,151 246,633 285,358 323,284 366,392 413,166 465,345 523,236 _ Less: Provision for Pensions 38,086 73,866 126,183 108,903 113,042 116,674 125,756 130,153 66,802 62,389 50,668 59,538 55,958 O Less: Depreciation Charge 7,395 9,138 23,156 31,312 40,195 50,946 62,621 77,209 94,805 109,459 125,564 142,425 161,249 Write ofTs 0 0 0 9,063 44,697 5,031 0 0 0 14,950 7,286 7,789 0 NET OPERATING INCOME 17,683 -2,001 -37,095 -7,390 -23,368 36,500 58,256 77,997 161,677 179,593 229,648 255,592 306,079 Interest Expense 23,095 28,446 28,486 32,231 37,485 43,463 44,153 58,010 65,362 67,845 65,692 65,587 68,311 Prior Period Adjustments -16,517 17,066 -0 -0 0 0 0 0 -0 -0 -0 0 0 Valorixation Revenues 14,D31 14,531 14,531 14,531 14,531 14,531 14,531 14,531 EAAB Pension Fund Income 0 655 1,370 1,721 2,068 2,350 2,679 3,146 3,434 3,900 4,402 4,944 Net Other Income .2,192 3,142 1,891 1,635 1,671 1,937 2,442 3,035 3,402 3,648 3,745 3,761 3,706 NEI'INCOME bef Moidary Correction -24,121 -10,240 -63,035 -36,617 -57,461 11,573 33,426 40,231 117,393 133,360 186,132 212,700 260,949 Monetary Correction 52,160 18,634 51,149 62,031 67,119 69,466 73,301 37,347 106,531 116,171 130,904 141,716 153,053 Revaluation of Fixed Assets -138,031 -34,114 Fondo Ambiental Charges Collected 0 0 1,893 2,120 2,343 2,542 2,707 2,856 3,013 3,149 3,290 3,438 3,593 NET INCOME -109,92 -25,720 .9,"3 27,535 12,001 83,580 109,434 130,433 226,938 252,679 320,326 357,854 417,595 Working Ratio (%) 44 44 44 45 43 40 39 39 38 37 35 34 32 Opersting Ratio(%) 4 101 120 103 109 89 84 81 66 66 61 61 58 Rate of Return on Average Revalued Net Fixed Assets in Operation (%) 2.2 -0.2 -4.1 -0.7 -1.8 2.4 3.3 3.7 6.7 6.5 7.5 7.7 8.5 20-Oct-9S X COLOMBIA EMPRESA DE ACUEDUCTO Y ALCANTARILLADO DE BOGOTA ESP SANTAFE I WATER AND SEWERAGE PROJECT Table 2: Flow of Funds Statements (current CoIS mndPon) - Audited- Forecast 1993 1994 1995 1996 1997 199S 1999 2000 2001 2002 2003 2004 2005 SOURCES FROM OPERA TIONS Net Operating Income 17,683 -2,001 -37,095 -7,390 -23,368 36,500 5,256 77.997 161,677 179,593 229,648 255,592 306,079 ValorizatIon Revenues 0 0 0 0 0 14,531 14,531 14,531 14,531 14,531 14,531 14,531 14,531 Fondo Ambiental Charges Colected 0 0 1,893 2,120 2,343 2,542 2,707 2,856 3,013 3,149 3,290 3,438 3,593 Non-Cash Charges & Transfers Deprecation 7,395 9,138 23,156 31,312 40,195 50,946 62,621 77,209 94,05 109,459 125,564 142,425 161,249 Transfer to Reserves fo Pension LiablYties 38,086 78,866 126,183 108,903 113,042 116,674 125,756 130,153 66,802 62,389 50,668 59,538 55,95S Othr Non-Cash Adjustnents 34,901 0 0 -0 -0 -0 -0 0 0 0 -0 -0 NETFUNDS FROM OPERA TIONS 63,165 120,904 114,137 134,945 132,212 221,193 263,S71 302,745 340,828 369,122 423,701 475,525 541,410 BORROWINGS Government Refinancing 14,095 26.576 29,990 30,804 31,994 0 0 0 0 0 0 0 0 Sante Fe I Domestic Borrowingp Other Domesic Borrowings 27,664 6,349 2,975 0 0 0 0 0 0 0 0 0 0 world Bnk Sante Fe I Phase I 0 0 10,602 21,029 49,975 53,162 26,943 2,716 1,700 0 0 0 0 . srld .ank Sante Fe I Phase 2 0 0 0 0 0 0 30,255 57,226 47,742 12,663 0 0 0 Sane Fe I Other sernal Borrowings 0 0 2,644 6,695 11,721 11,724 4,366 5,690 4,095 0 0 0 0 Other Eernal Brrs-rIngs 4,268 6,892 33,389 19,355 21,245 49,787 68,921 75,273 85,909 5,179 45,435 113,225 157,463 TOTAL BORROWINGS 46,027 39,818 79,599 77,83 114,936 114,673 130,485 140,904 139,446 17,842 45,435 113,225 157,463 EQUITY TRANSFERS A COATRIBUTIONS Customer Contributlon 28,977 6,312 Subsidy Irrnsftrs from LEY 142 0 0 0 0 0 0 0 0 0 0 0 Transmfrs from LEY 60 0 7,957 12,839 17,593 24,196 32,590 40,513 8,244 0 0 0 0 TOTAL EQLITY TRANSFERS'CONTRIBUTION 28,977 6,312 7,957 12,839 17,593 24,196 32,590 40,513 8,244 0 0 0 00 OTIIER SOURCES \
Groupe de la Banque mondiale · Staff Appraisal Report
Colombia - First Santa Fe Water Supply and Sewerage Rehabilitation Project
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Organisation
Groupe de la Banque mondiale
Type de document
Staff Appraisal Report
Pays
Colombie
Source
Banque mondiale