Colombia - Rio Grande Multipurpose Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14663 PROJECT COMPLETION REPORT COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) JUNE 26, 1995 Infrastructure Operations Division Country Department III Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Colombian Peso (Col$) US$1.00 Col$ 101.3 (1984 average) US$1.00 Col$ 502.2 (1990 average) US$1.00 Col$ 863.7 (1993 average) WEIGHTS AND MEASURES meter (m) 3.28 feet kilometer (km) 0.62 miles square kilometer (sqkm) 0.39 square miles cubic meter (cum) 35.3 cubic feet cubic meter per second (cumecs) = 35.3 cubic feet per second kilovolt (kV) 1,000 volts (V) kilowatt (kWh) = 1,000 watts (W) Megawatt (MW) 1,000 kilowatts kilowatt-hour 1,000 watt-hours (Wh) Gigawatt-hour (GWh) 1,000,000 kilowatt-hour Megavolt-ampere (MVA) 1,000 volt-ampere (VA) GLOSSARY OF ABBREVIATIONS AND ACRONYMS EPM = Empresas Públicas de Medellín ISA = Interconexión Eléctrica S.A. EEEB = Empresa de Energía Eléctrica de Bogotá CORELCA = Corporación Eléctrica de la Costa Atlántica CONPES = Consejo Nacional de Política Económica y Social CRE Comisión de Regulación Energética DNP Departamento Nacional de Planeación IADB = Inter-American Development Bank CVC = Corporación Autónoma Regional del Valle del Río Cauca ICEL = Instituto Colombiano de Energía Eléctrica MME = Ministry of Mines and Energy MOF = Ministry of Finances JNT = Junta Nacional de Tarifas INCOMEX Instituto de Comercio Exterior FONADE Fondo Nacional de Proyectos de Desarrollo FEN = Financiera Energética Nacional FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 26, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on the Colombia Rio Grande Multipurpose Project (Loan 2449-CO) Attached is the Project Completion Report (PCR) on the Colombia: Rio Grande Multipurpose project (Loan 2449-CO, approved in FY84) prepared by the Latin America and the Caribbean Regional Office, with Part II provided by the Borrower. Empresas Piblicas de Medellin (EPM), the municipally-owned autonomous utility providing electricity, telephone, water supply, and sewerage services to the Medellin Metropolitan area, was the Borrower. The project aimed at increasing EPM's power and water supply capability by implementing combined facilities, adding 325 MW to the electrical system and 4.5 m' per second to the available raw water flow for water supply. Despite adverse political and economic circumstances, EPM's performance was satisfactory as it completed the project under budget. The four-year delay with respect to the appraisal timetable was essentially due to a dispute with Government over the import licenses for the powerhouse equipment. The tariffs conceded to EPM led to returns which (especially in the water supply department) repeatedly fell short of covenanted levels. However, in most recent years the situation improved. Project outcome is rated as satisfactory and the sustainability of project benefits as likely. The operation addressed institutional development only marginally, objectives were achieved but the impact was modest. The PCR is satisfactory. No audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. PREFACE .............................................................................................. i EVALUATION SUMMARY . ................................................................................. n PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE .................1 A . P ro je c t Id e n tity ....................................................................................................... 1 B . B a c k g ro u n d ............................................................................................................ 1 C . Identification, Preparation and Appraisal............................................................. 8 D . P roject Im plem entation ..................................................................................... . . 13 E . P ro je c t R e su lts ........................................................................................................ 16 F . P roject Su stainability ........................................................................................... . 16 G . B ank 's P erfo rm ance ............................................................................................. . 16 H . B orrow er's P erform ance...................................................................................... 17 I. P erform ance of C onsultants................................................................................... 18 J. Perform ance of Contractor and Suppliers ............................................................. 19 K . P roject R elationship ........................................................................................... . . 19 L . Project D ocum entation and D ata .......................................................................... 19 M . Conclusions and Lessons Learned........................................................................ 19 PART H: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE..........21 A. Project Objectives ......... 21 B. Project Implementation .......................................... 21 C. Implementation Program ............................................ 22 D. Financial Analysis.............................................. 22 E. Financial Performance .............................................. 23 F. Empresa de Energia (energy service) tariff adjustments ........... 24 G. Analysis of the Internal Financial Rate of Return for the Rio Grande Multipurpose Project II........................... 26 H. Project Impact and Sustainability........................... ........ 27 I. Bank Performance ..................... .................. 27 J. EPM'S Performance ........................................ ..... 28 K. Institutional Aspects.............................................. 28 L . L esso n s L earn ed .................................................................................................. . 2 9 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PART III: RELATED STATISTICAL INFORMATION ........................31 1. Related Bank Loans.................3........... ..............31 2 . P roje ct T im etable ................................................................................................ . 3 1 3. Loan Disbursements . ............................................ 32 4. Allocation of Loan Proceeds (in US$) ................................ 33 5. P roject Im p lem entatio n ........................................................................................... 34 6. P roject C osts and F inancing ................................................................................. ..35 7 . P roje ct R e su lts ................................................................................................... . . 3 5 8. U se of B ank R esources....................................................................................... . 36 9. Status of Legal Covenants .................. ................ 37 COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Rio Grande Multipurpose - Water Supply and Hydroelectricity - Project in Colombia. The water supply component and its associated 21 MW Niquia Power Station were commissioned in 1993. The main 303 MW Tasajera Hydropower Plant was commissioned in May 1994. Since its commissioning the Project has operated normally. The Project was partially financed with Loan 2449-CO for US$ 164.5 million (approved June 21, 1984). The Borrower is the Empresas Publicas de Medellin (EPM) a municipal corporation of the city of Medellin. The closing date of the loan is June 30, 1994, about two and a half years later than originally foreseen US$ 7,70 million of the loan proceeds were canceled as a result of project cost savings. The balance of the loan proceeds have been disbursed. The last disbursement was on June 30, 1994. The draft of this report was discussed with the Borrower and its comments are set forth in Part 1I of the PCR. The Infrastructure Operations Division, Country Department III, prepared Parts I and III of the PCR based, among other sources, on the Issues/Decisions Paper, the Staff Appraisal Report, the Loan and Guarantee Agreements, records of the World Bank and the Borrower, and interviews with Borrower's staff in Medellin and at the project site.  - 11 - COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) PROJECT COMPLETION REPORT EVALUATION SUMMARY Objectives i. The loan for the Rio Grande Multipurpose Project was the seventh loan to EPM, the thirteenth loan since 1970 to Colombia's Power Sector and the ninth to its Water and Sewerage Sector. It helped finance a project consisting of (i) a 4.5 cubic meters per second raw water supply scheme for the City of Medellin; and (ii) a 324 MW hydroelectric power development scheme, on the Rio Grande a tributary of the Porce River in Colombia's Antioquia Province. Implementation Experience ii. The Project was estimated at appraisal to cost the equivalent of US$418.1 million, including financial charges during construction. Final cost of the Project -- US$394.9 million -- was about 6 percent below project cost estimated in the SAR. World Bank financing for the Project amounted to US$164.5 million, the proceeds of which were fully disbursed, except for US$7.7 million of savings which were canceled. EPM contribution from its own resources was US$157.7 million or 40 percent of the capital outlay in the Project. The balance was financed through suppliers' credits, EXIMBANK of Japan, and FEN. iii. Albeit with almost four years delay, caused mainly by difficulties in obtaining import licenses for the main powerhouse equipment and the lengthy and cumbersome contract processing procedure to which EPM is subjected by Colombia's and Antioquia's contract legislation, the Rio Grande Project was successfully commissioned in October 1993 for the water supply scheme and in May 1994 for it power component. The delay in issuing the import licenses resulted in not having Rio Grande electric energy production available during the stiff electric power rationing that affected Colombia in 1992 and 1993. During that power curtailment period, Rio Grande could have supplied about 23 percent of the electric energy shortage. This caused a negative impact to the National Economy of Colombia estimated at not less than US$700 million. Project Results iv. In spite of the import licenses dispute, the Project successfully achieved the objectives established at project appraisal. The recomputed rate of return -- 9 % -- although lower than the 18% - Ill - calculated at project appraisal, is still close to the opportunity cost of capital in Colombia, estimated at 10-12% per annum. v. EPM's performance during project implementation has been satisfactory, both financially and operationally. In fact EPM stands probably as the best managed electric power utility in Colombia's Power Sector. As in some of the other previous EPM's project financed by the Bank, the Rio Grande Project has had a good project management and institutional impact, reinforcing the organization and financial soundness of the water and power services provided by EPM, and enhancing the technical, administrative and managerial skills of its personnel. Sustainability vi. The main results of the Project -- that is the physical facilities implemented and the institutional strengthening of EPM -- have provided, and will continue to provide, tangible direct benefits to EPM and its customers, and also to Colombia at large. However, it should be pointed out that the sustainability of these benefits depends greatly on maintaining an adequate level of tariffs in order to avoid inefficient use of water and electricity. Another factor of uncertainty is the structural and financial crisis affecting the Colombian Power Sector, although the Government is moving in the right direction by proposing new legislation for a comprehensive reform of the Sector, it should be recognized that approval of the required legislation and implementation of the proposed changes will take time. Lessons Learned vii. The following lessons stem from implementation of the Rio Grande Project: (a) Before agreeing in funding a project as complex as Rio Grande, the Bank should satisfy itself that the project has been adequately prepared. Particularly, it should insist that the project design should be reviewed by a panel of independent specialists in the main technical disciplines involved as was done for Rio Grande. (b) The Bank should insist as a condition of loan negotiations on a specific guarantee that import licenses would not be required for all imports required by the project under consideration, or that, as a condition of loan effectiveness, a blanket import license be issued covering all such imports. (c) The Bank should always require that a Project Management Unit (PMU), properly staffed, be set up to manage a project like Rio Grande, so as to ensure its success. A case in point is the action taken by EPM to organize opportunely the Rio Grande's PMU, to which is owed largely the success of this Project. - iv - (d) Last but not least, it is important to emphasize that a complex project will in general face considerable problems during implementation; even in cases where the implementing agency is a very efficient institution.  COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Project Identity Project Name Rio Grande Multipurpose Project Loan Number 2449-CO RVP Unit Latin America and the Caribbean Region, Country Department III Country Colombia Sectors Electric Power & Water Supply Loan Amount US$164.5 million Amount Disbursed US$156.8 million Amount Canceled US$7.7 million Year of Approval Fiscal Year 1984 Borrower Empresas Piblicas de Medellin B. Background 1. Bank Lending to the Sector Since 1970, the Bank has supported the development of Colombia's power sector with 13 loans for over US$1.9 billion', and that of the water supply and sewerage sector with 9 loans for over US$500 million. The thirteenth Bank loan to the power sector since 1970 (and ninth to the water supply and sewerage sector), Loan 2449-CO 1 The Inter-American Development Bank (IADB), the other multilateral source of foreign financing for the power sector, contributed another similar amount in 22 loans. -2- (June 21, 1984; US$164.5 million) to Empresas Piblicas de Medellin (EPM), helped finance the Rio Grande Multipurpose Project - electric power and water supply -, which is the subject of this Project Completion Report . 2. Electric Power Sector Organization and Recent Developments Formulation of the national policy for power generation, transmission and distribution has been the responsibility of the Ministry of Mines and Energy (MME). Regarding investment priorities, it has shared responsibilities with the National Planning Department (Departamento Nacional de Planeaci6n - DNP), the Ministry of Finance (MOF) and Interconexi6n E16ctrica S.A. (ISA), a generating and transmission utility, which owns and operates the National Interconnected Transmission System, and of which the shareholders are the main Government-owned electric power utilities3 and the two largest municipal utilities.4 ISA is in charge of defining the generation and bulk transmission program; although lately this has taken the form of an indicative program rather than a committed program. After approval by the National Economic and Social Policy Council (CONPES), this indicative program becomes the tentative National Power Expansion Program. Formerly ISA's task was skewed by the tendency of its shareholders to introduce their project's preferences at an early stage in the planning process. This caused some difficulties in the proper assessment of the cost to the economy of the shareholders' preferences and in the transparent choice of the most advantageous solution. However, currently ISA has largely been freed from these influences and the planning process appears to be generally adequately balanced. 3. Late in 1990 the oceanic phenomena known as "El Niflo" appeared in the Pacific Ocean. The appearance of this phenomena generally gives way to major climatic disturbances along the West Coast of South America and heralds periods of drought in Colombia. The unusual intensity of this phenomenon, coupled with the non-optimal use of the water stored in the hydro power plants' reservoirs' and thermal plants availability problems caused by inadequate maintenance, became critical towards the end of 1991. Early in 1992, when the 2 Up to 1984 the Bank had made 6 loans, totaling US$345 million, to EPM for electric power generation (250- CO in 1959, 282-CO in 1961, 369-CO in 1964, 874-CO in 1973, 1868-CO in 1980 and 1953-CO in 1981). In 1984 the Bank made another loan to EPM for US$164.5 million for the Rio Grande Multipurpose Project. In addition, in 1980, it made a loan (Loan 1825-CO; US$ 44 million) to EPM for its telecommunication expansion and improvement program. Instituto Colombiano de Energia El6ctrica (ICEL), Corporaci6n Aut6noma Regional del Valle del Cauca (CVC), and Corporaci6n Elctrica de la Costa AtlAntica (CORELCA). Empresa de Energia Eldctrica de BogotA (EEEB) and Empresas Nblicas de Medellin (EPM). The cost of power rationing used in running the interconnected system's power operation dispatch program was taken at only Col$28 per kWh (about US$0.05/kWh) of unserved energy. Later on, when it became apparent that the power system was on its way to very serious problems, it was raised to Col$300 per kWh (US$0.50/kWh), a tenfold increase. -3- water stored at the power plants' reservoir hit a low of 17% of their composite capacity, it became apparent the power rationing was required. Faced with a potential total failure of the power system the Government imposed in early March 1992 drastic power rationing of up to eight hours per day. The power rationing was to last 13 months until May 1993. Contributory to the power system failings was some optimistic overestimation of the Colombian power system actual generating capability.6 4. By 1992 the Colombian power sector had reached a critical stage with serious operational, financial and managerial problems. The extensive power rationing early in the year provided the juncture the Government needed to push forward measures aiming at restructuring the power sector. Besides introducing to Congress a law7 setting forth this restructuring, meanwhile, (failing Congressional approval by June 30, 1994, the Government is empowered under the Constitution to issue the law by decree) the Government proceeded to enact measurese that in fact started the restructuring process, including private sector participation in electricity generation, transmission and distribution. Paradoxically, the dismal financial situation of most of the power sector enterprises gave the Government the opportunity to acquire full control of these organizations by swapping shares for debt. This opened the way for the privatization of facilities nowadays fully controlled by the Government. 5. In essence, the restructuring policy would separate in the power sector the functions of generation, transmission and distribution. Concerning generation, the aim is to de-concentrate ownership and operation of power plants in order to introduce an element of competition. This implies mainly private ownership of generating facilities. Steps are being taken in this direction by the sale of the 510 MW Betania Hydroelectric Power Plant and the Cartagena Thermal Power Station, as well as the introduction of BOOM (Build, Own, Operate and Maintain) schemes at Barranquilla (150 MW Gas-fired Combined Cycle Power Station) at Paipa (150 MW Coal-fired Fourth Steam Power Unit) and at Cali (150 MW Gas-fired Combined Cycle Power Station). In addition, project preparation is underway for two BOOM schemes; a 300 MW coal-fired steam power station in northern Colombia and a 150 MW gas-fired combined cycle power station in central Colombia. 6. Concerning transmission, it is foreseen that ISA would own and operate the 230 kV and 500 kV trunk transmission lines and main substations and, that it would shed itself of its generating facilities, which would be privatized. All generating enterprises would have access to the transmission network by paying a wheeling charge. Load dispatch would be undertaken 6 It is interesting to note that this position of the Colombian authorities -- of surplus capability in Colombia's power system -- was shared by the Bank See on this subject the Report No. 8893 from the Operation Evaluation Department "Colombia -- The Power Sector and The World Bank - 1970-1987", dated June 28, 1990. Proyecto de Ley No. 1271/92 "....por el cual se establece el r6gimen para la generaci6n, interconexi6n, transmisi6n y distribuci6n de electricidad en el territorio nacional", Agosto 27, 1992. Decree 2119 (December 29, 1992). "Por el cual se reestructura el Ministerio de Minas y Energia." -4- by a separate organization that would absorb ISA's current load dispatch department. Distribution would be re-organized around existing electric utilities, which would be privatized gradually. 7. The Tariff Commission (Junta Nacional de Tarifas - JNT) was dissolved in 1992, and replaced by separate regulatory commissions for electric energy and gas, water supply and sewerage, and telecommunications. The electric energy and gas regulatory commission (Comisi6n de Regulaci6n Energetica - CRE) is in charge of setting up the tariffs for distribution and for power wheeling. 8. By 1992 the installed capacity in the power sector's generating facilities reached 9660 MW of which 7700 MW in hydroelectric power plants (80%) and 1960 MW in thermal power stations (20%). As indicated in paragraph 203, the actually available capacity was much less, due to the drought and to unavailability of a large part of the thermal units. In 1992, of 32,184 GWh generated by the power sector only 80% ended up as sales to consumers due to transmission and distribution losses. This high level of losses is well above what is experienced in most Latin American countries.9 9. Residential electricity sales represent close to 50% of total power sales. This relatively high percentage is due basically to high use of electricity for cooking, encouraged by low residential tariffs, particularly for low income customers.o The Government is partially tackling this problem by promoting the use of natural gas for cooking through extension of gas lines into low income neighborhoods. In the future there is the intention of limiting or ending cross-subsidies. 10. Between 1970 and 1980 electric energy for the whole of the power sector grew rapidly at an average of 10 percent per year. In the following ten-year period it grew at a much slower rate of 5.7 percent per year on average. It is likely that this sharp slowdown in the growth of electricity demand has been caused by the electric power rational that took place in the years 1980 and 1981, the 1980s' general slowdown in economic growth, and tariff increases exceeding inflation, which might have forced a more rationed use of electric power in the productive activities. The current growth in power demand is around 5 percent, which is expected to extend till the end of the century. In 1980 electric supply reached 45 percent of the Country's population, while by 1993 it attains 72% of the potential customers. Considering 29 countries from Latin America and the Caribbean, only four (Haiti, Dominican Republic, Honduras and Panama) exhibit higher level of power losses than Colombia. In Brazil and M6xico power losses are around 13 percent, while in developed countries, they represent only something like 8 percent of total generation. 10 Currently in Colombia, electricity tariffs for residential customers depend on six categories of relative income level, defined by neighborhoods, in such a way that high-income areas cross-subsidize low-income residential customers. -5- 11. By 1990 the financial situation of the power sector had reached a critical stage. As a whole the sector obtained a net income from operations of just 4.9 percent over net fixed assets in operation, and sustained a net loss of 4.3 percent over net worth." In the same year, against a debt service of US$1,870 million, internal cash generation attained just US$ 700 million leaving a cash deficit of US$1,170 million. Since 1991, there has been a determined effort by the Government to improve the financial situation of the sector's enterprises with the objective of making them worthy subjects for privatization. 12. Development of Water and Sewerage Sector12 The Bank Review of Water and Sewerage Institutions, carried out in close collaboration with the Government (Yellow Cover Review Meeting of February 1, 1993), concludes that the major issues affecting the generally poor performance of water supply utilities in the Country has been institutional, because of politicization and lack of accountability. This poor performance has been reflected in low indicators of efficiency, quality of service and financial soundness of the utilities, and an increase in unserved population despite relatively large investments over the last two decades. Institutional flux at the national level has been accompanied by a general inability to implement policies for effective sector development, although in a few cases (Medellin and Bucaramanga, notably) services have improve markedly, and the problems have not been felt in as acute a form, because of more arm's length relationship between local politicians and utility management, conducive to greater autonomy and stability of the latter, professionalism, and higher efficiency. Conscious of these short comings, the Government has developed a reform program. A new approach to the Sector was evolved and is being supported under the ongoing Water Supply and Sewerage Sector Project financed by the Bank (Loan 296 1-CO, to the municipal development intermediary, FINDETER), and is being given further impetus by the establishment of a regulatory framework conducive to efficiency improvements, expanded sector participation in the delivery of public services, greater accountability, and a more arms length relationship between the utilities and local politicians. These reforms are embodied in the Public Utilities law, which awaits Congressional approval (failing Congressional approval by June 30, 1994, the Government is empowered under the Constitution to issue the law by decree), and will be given more operational shape by the newly established regulatory commission for water supply and sewerage (Comisi6n Reguladora de Agua Potable y Saneamiento), which reports to the Presidency of the Republic, and a new Vice Ministry of Development responsible for formulating sector policies and coordinating their implementation by sub-national agencies under a decentralized framework. A new Superintendency of Public Services (Superintendencia de Servicios Pblicos), also reporting to the Presidency, is charged under the 1991 Constitution Chart with intervening in poorly managed utilities, and with applying sanctions, in order to ensure provision of basic public services on an efficient and equitable basis. These agencies are still at an early stage of evolution and their future 11 Exposici6n de Motivos, Proyecto de Ley Eldctrica, Ministerio de Minas y Energia, August 1992. 12 Ts paragraph is taken largely from the Executive Project Summary for the proposed Santafd (BogotA) Water Supply and Sewerage Rehabilitation and Private Sector Development Project. -6- effectiveness will reflect consolidation of implementation capacity and the Government political will to support their actions. 13. In contrast with environment surrounding previous attempts at sector reform, there is nowadays greater emphasis on the part of the authorities on accountability (relying on expanded private sector involvement and strengthening of consumer voice through consumer representation on local commissions). Major environmental problems in river basin degradation and need for waste-water treatment can only be addressed if the institutional reforms take hold. Although it is recognized that it could take quite some years for the reforms to take hold, and given the difficulties of designing a comprehensive and detailed action-plan which could take fully into account the considerable regional and local variety in institutional capacity and culture for change, specific solutions need to be developed on a case-by-case basis within the global framework. 14. The unsatisfactory achievement of the sector in recent years can be seen by the following figures, which show the slow improvement in service coverage rates and their current low level, despite relatively high investments in the sector, which proved insufficient to offset the high rate of growth of population with the resulting increase in total population lacking the basic services of water and sewerage, while the sector's performance leaves much to be desired. Service Coverage Rates (%) Urban Rural Total Year Water Sewerage Water Sewerage Water Sewerage 1970 77 64 18 8 51 39 1985 82 71 12 2 58 47 1992 87 72 24 8 66 51 Unserved Population (Million Inhabitants) 1970 1978 1985 1990 Total Country 21 26 30 34 Population without 10 10 11 12 water connection Population without 13 15 16 17 connection to sewerage -7- 15. Role of the Bank in the Power Sector In broad terms the role of the Bank in supporting Colombia's power sector went through three phases during the past two decades. In the 1970s, the emphasis was on interconnection and on ISA's role, for which it was envisaged a virtual monopoly of building and operating all major generating capacity additions to the interconnected system. In the 1980s, the Bank's emphasis shifted to distribution and village electrification and to issues associated with individual utilities, with sector issues being dealt with in a somewhat indirect manner. Only lately, towards the end of the 1980, the critical condition of the power sector was recognized and the stage was set with a Power Sector Adjustment Loan (Loan 2889-CO; approved 12/87) for a new phase in the Bank's role, focusing on broad sectoral issues (a thorough analysis of the Bank's role in the Colombian power sector can be found in the OED's report No. 8893 entitle "Colombia - The Power Sector and the World Bank, 1970-1987", June 28, 1990). 16. Role of the Bank in the Water Supply and Sewerage Sectorl3 Given the immense investment requirements of the water supply and sewerage sector and the Government's increased emphasis on improving service coverage in its quest for alleviating poverty, the Bank planned in the context of the Water and Sewerage Sector Project (Loan 2961-CO; approved in 1988), to continue its role as primary external supplier of finance for sector investments. However, continued lending for the sector was made contingent on the Government's commitment to sectoral institutional and policy reforms which would allow more efficient and sustainable sector growth within the context and constraints of overall macro-economic development and public sector investment. Thus, a Sector Reform Program (SRP), designed with the assistance of the Bank is geared to bring about the reforms required to address the sector's many problems and constraints and is supported by the Bank through the provision of financing for sector investment and continued advice. The sector investment loan, covering external resources needs of all sector segments, was thought to be the most appropriate tool for assisting the Government in improving and expanding service and in implementing the reforms being introduced under the SRP. The sector approach was to be continued in the future as a mean of Bank support to sustain and deepen the adjustment process then being undertaken by the Government. To complement the sector loan approach, the Bank was also to continue the provision of finance for major investment projects for the Country's largest municipal utilities (Bogota, Cali, Medellin) through separate operations. 17. EPM's Service Area, Facilities and Market EPM's service area comprises essentially the metropolitan area of Medellin (population: 2.5 million). The Medellin area is the second largest nucleus of industrial and commercial activity in Colombia. Most of the electric power supply to the provinces of Antioquia and Choc6 is provided by EPM through block sales to distribution utilities (Empresa Antioquefia de Energia and Electrificadora del Choc6). EPM also supplies electric power to the interconnected system by way of ISA. EPM is an autonomous corporation of the Municipality of Medellin, organized in 1955. It presently 13 This paragraph in taken largely from the White Cover Review of Water and Sewerage Sector Institutions - Colombia - June 1992. -8- provides electricity, telephone and water and sewerage services. These three wings of EPM are operated as financially independent departments with separate accounts. EPM's installed electric power generating capacity at the time of the Rio Grande Project initiation was 979 MW. Additionally by investing in ISA plants (Chivor, San Carlos, Jaguas) EPM had obtained rights to a portion of their generating capabilities and capacities (1983: 480 GWh and 80 MW). Peak demand in 1983 in EPMs system was 972 MW; in 1988 it reached 1,226 MW, while in the SAR peak demand was forecast to reach in that year 1,342 MW (by 1993 it has reached 1357 MW). Energy demand was forecast at appraisal to grow at an average 7.3 percent per year. In fact it grew up more slowly at an average of only 5.8 percent per year reaching 6,698 GWh in 1988. By 1993 energy demand had only reached 7,167 GWh, at an annual average rate of growth in the past five years ofjust over 4.0 percent per year. With the addition of Playas (200 MW) and Rio Grande (324 MW), EPM's power system reached a generating capacity of 1,500 MW by May 1994. 18. The metropolitan area of Medellin takes its water from a variety of sources, a number of which are small rivers and streams or within the urbanized area. By 1993 the water supply sources had 9.5 cumecs capacity. However, certain local sources have been taken out of service because of high levels of contamination and encroaching. Moreover, the reliable combined capacity of the remaining sources for a 97.5 percent reliability is considered to be 7.5 cumecs; to which should be added the initial capacity of the Rio Grande source, of 5 cumecs, giving a total 12.5 cumecs raw water capability. Between 1976 and 1983 water demand increased at the rate of 2.4 percent per year reaching 226 million cubic meter (including unaccounted-for) or 7.2 cumecs. At the time the Rio Grande Project was under consideration it was forecast that water demand would grow at the rate of 6 percent reaching 360 million cubic meter by 1991 (Production required: 11.4 cumecs); in fact water demand grew much more slowly reaching only 283 million cubic meters, with a rate of growth of 2.8 percent per year. C. Identification, Preparation and Appraisal 19. Background The Rio Grande is a river that traverses the high plateau of Northern Antioquia and empties itself into the Porce River after a precipitous descend of some thousand meters. Development for hydropower of the hydraulic head available between the upper reaches of the river and its confluence with the Porce, had been studied since 1940 and various schemes were proposed. However, in 1971 a study recommended tapping the Rio Grande for augmenting the water supply of the City of Medellin.14 Subsequently, EPM employed the Colombian engineering firm INTEGRAL to study the feasibility of a multipurpose (water supply and power) development of the river. A report on this subject was submitted to EPM in April 1982 and communicated to the Bank in September 1982 which confirmed the technical and economic viability of such multipurpose development. Nevertheless, the Bank hired in 14 "Aprovechaniento Midtiple del Rio Grande" EPM 1979. -9- December 1982 a geologist who after a visit to the project site and analysis of available documentation concluded that, geologically, the proposed project would not present undue problems. 20. Issues and Decisions Appraisal of the Rio Grande Project was carried out in October- November 1983. Prior to appraisal two major issues were raised concerning justification of the Project's power component and of Bank's participation in the Project. These issues were resolved in the following manner: Additional raw water supply was expected to be needed by 1988 to meet Medellin's potable water requirements. The use of the Rio Grande waters was determined to be the only feasible solution, and that it would be economically justified to complete the water component of the Project by 1988, irrespective of whether or not the power component was required. However, the national least-cost power expansion program indicated that the power component of Rio Grande would not be needed until 1991, by which time the Project should be fully completed. On this basis the cost of the power facilities was about US$600 per installed kW (March 1982 prices), i.e. by far the lowest cost power plant in the future system. It was considered that the power component of the Project would assist EPM in meeting incremental power requirements in the Department of Antioquia. In addition, it was to make available to the National Interconnected System any excess energy, which was particularly needed in the light of already expected delays in completing larger plants elsewhere in the system as well as the provision of hydro-based energy to the North Atlantic Coast to decrease costly thermal generation. It was thought moreover, that this project component would also further the Bank-supported objectives at the time in the power sector by sustaining the excellent working relationship with EPM, one of the two largest, and the most efficient and well-managed regional power utility (with commensurate influence in the Sector). This was particularly relevant in view of the unusual complexity of the power sector and its entrenched history of responsiveness to regional political concerns. These interests had regularly threatened to undermine the incipient alliance of the regional power utilities to create an integrated national power network, and an integrated set of sector entities and national policies which would permit rational and soundly-financed growth. The Government has had to rely upon the Bank as the only existing non-political force that could insist upon objective measures in the national interest. Bank strategy, therefore, was to fulfill this function while fostering the development of Colombia's capacity to take it over gradually. Indeed, Bank lending for the Project was proposed by Government and EPM, in recognition of the Bank's ongoing contribution to the strengthening of EPM s power division. Furthermore, EPM had been particularly interested in having the Bank involved in its water division to provide support for needed tariff increases, an area that had probably been neglected to some extent in the past. 21. Finally, it was considered that the Latin American debt crisis at that time would make probably not possible for EPM to obtain the necessary external financing without assistance from the Bank. Indeed it was thought that unless the Bank had a significant financial presence in the Sector and obtain tariffs and institutional commitments similar to those that had been worked out in the more recent operations, it would be unrealistic to expect the Sector as a whole to obtain external funding from private sources on the required scale even if the - 10 - international capital market prospects was to recover its previous, favorable levels.15 Through a proposed cofinancing scheme, the Bank would seek to build upon efforts initiated under a proposed Power Development Finance Project to draw commercial lenders back to the Power Sector, and to the more viable water supply utilities. 22. Project Objectives The Project originated as a water supply project, to which at very low cost a power component could be added. For this reason, the primary objective of the Project was to provide the additional raw water supply required by 1988 as a necessary input for the production of potable water. The main objective (but secondary in the framework of the whole project) of the power component, although small in comparison to the power capacities being installed at the time in the Country, was to assist alleviating the consequences of the delays (due to financial, technical and organization causes) in large hydroplants completion elsewhere in the National Interconnected System. 23. Project Description The Project (Phase I of the Rio Grande Schemes) consists of (i) The Tasajera Hydroplant facilities comprising an earthen catchment dam 65 meters high, impounding a reservoir with a useful volume of 110 million cubic meters, an intake tower with a 7.2 km long power tunnel, a surge shaft, a 334 meters deep pressure shaft and a 600 meters penstock in an inclined gallery leading into a two-cavern powerhouse with three 101 MW turbine-generator units, that would produce an average of 1600 GWh per year, and two-km long tailrace tunnel; (ii) The Niquia water and power facilities, which includes an intake shared with the power intake, a 15.9 km long tunnel, a surge shaft, a 160 meters deep pressure shaft and a steel lined 300 meters long gallery leading into an above ground powerhouse with a 22 MW turbine- generator unit, that would produce initially about 105 GWh per year at raw water throughput of 4.5 cubic meters per second and some 165 GWh per year at a maximum water use of 6.4 cubic meters per second, a 5.5 km long steel conduit (inverted siphon) conducts the raw water from the powerhouse to a treatment plant constructed separately from the Project, and; (iii) Transmission facilities consisting of a surface substation at Tasajera with 230 kV transmission line to Barbosa Substation, and a surface substation at Niquia and a transmission line to Bello. 24. Project Components The following project components were foreseen in the SAR and established in the Loan Agreement: 15 "Estudio de Factibilidad del Aprovechamiento Mfiltiple del Rio Grande" INTEGRAL, April, 1982. - 11 - (i) Tasajera Hydroelectric Station Construction and equipping of the Tasajera hydroelectric facilities, including roads and bridges; river diversion works; dam and spillway; intake tower; underground works for power including pressure tunnel, surge tank, penstock tunnel and penstock, ancillary tunnels, caverns, tailrace tunnel and tailrace canal; a substation, ancillary works and general accessory services. (ii) Raw Water Supply Facilities Construction and equipping of the Niquia raw water supply facilities, including roads and bridges; intake tower; underground works including pressure tunnel and penstock tunnel; pressure reducing facilities; raw water tank; conduit to treatment plant; a substation; ancillary works and general accessory services. (iii) Niquia Hydroelectric Station Construction and equipping of the Niquia hydroelectric station, comprising the power station building and related structures and works; a substation; ancillary works and general accessory services. (iv) Transmission Facilities Construction and equipping of the 220-ky transmission line between the Tasajera and the existing Barbosa substation and of the 44-ky transmission line between the Niquia substation and the existing Bello substation, including the necessary changes in and additions to the existing substations, ancillary works and general accessory services. (v) Training A program for the training of the Borrower's staff. (vi) Data Processing Network Acquisition, erection and utilization of equipment for the second phase of a computerized data processing network among the Borrower's various offices. 25. Status of Project Design At appraisal the project studies had progressed to the stage of bid designs. Final designs for construction were foreseen to be completed by end of 1984. Field investigations had been completed at the time of appraisal and these were comprehensive and permitted the location of all underground works in sound and competent rock. 26. Project Cost Estimate, Funding and Implementation Schedule The Project's cost was estimated at appraisal at the equivalent of US$321.1 million in mid- 1984 prices including physical contingencies of US$37.2 million (13% over base-line cost of US$783.9 million). Adding price escalation estimated at US$40.9 million (13%), and interest during construction amounting to US$56.1 million the project funding requirements reached - 12 - US$418.1 million. The total foreign cost was estimated at US$252.9 million (62%) while local cost was figured up at the equivalent of US$165.2 million (38%). 27. Financing of the project cost, including interest during construction, was foreseen as follows: Sources of Funds US$ million % IBRD Loan 164.5 39.2 Cofinancing B-Loan 65.5 15.7 Suppliers (turbines, generators) 22.9 5.5 FONADE and Government 13.6 3.3 EPM 151.6 36.3 Total Project Funding 418.1 100.0 28. The Bank loan was geared to cover foreign cost of contracts for civil works and some of the electrical equipment. Suppliers credit were to be sought for the turbines and generators. 29. With respect to possible procurement and other problems posed by the provisions of the State Contracting Act (Decree No. 222 of February 1983) the Legal Department of the Bank advised that Bank loans in Colombia are not subject to said legislation, and that this was confirmed by a legal opinion, dated December 6, 1983, furnished to the Bank on behalf of the Republic of Colombia as guarantor for Loan No. 2303-CO (Agricultural Research and Extension Project), signed September 19, 1983. All this is an interesting commentary on the vagueries of legal opinions, since as will be seen further along in this report, the project was seriously affected by procurement problems stemming from different interpretations of the above legal opinion. 30. It was foreseen at appraisal time that project implementation would require 82 months (six years and ten months) from the time of issuance of the bid documents for the intake and main tunnel (August 1983). The project was therefore expected to be completed in mid-1990. Overall the implementation schedule was rather optimistic. It is interesting to note that in judging the risk of not meeting the targets for project commissioning of the Niquia hydropower station and raw water supply (end-1988) and of the Tasajera hydropower plant (mid-1990), the SAR did not expected any problems with the underground works since these would be located in the well known Antioquian Batholith (similar to Guatape, San Carlos, Jaguas, Guadalupe IV and Playas hydropower project). In view of the difficulties experienced in Playas, this optimism seems rather farfetched. Curiously, the SAR stated that the procurement schedule was reasonable and that no unusual delays were expected, while procurement problems were to be the main source of delays in completing the Project. - 13 - 31. Environmental and Resettlement Issues Environmental impact was deemed to originate principally from the reservoir, the tailrace facilities, the surface Niquia power station and raw water tank, the conduit to the water treatment plant and the substations and transmission lines. The area thus affected was estimated at 5,700 ha, of which 1,100 ha pertained to the reservoir. The area was marginally suitable for agriculture and had been largely owned by absentee landlords. At appraisal time EPM had already acquired 90% of this land. About 100 persons affected by the project's works had already been moved. 32. EPM had a comprehensive program for creating recreation areas within a new forested area that would cover most of the affected land. The reforestation work was to be initiated in 1985 under an annual budgetary allocation, arising from the legal requirement that 2% of the revenue (computed at the block tariff rates) originating in hydropower facilities had to be allocated to measures to protect the river banks devastating the environment by flushing earth for finding gold. This was the largest source of silt in the river. It was therefore thought that construction of the Rio Grande Project would balance in favor of the environment due to: (a) the large area to be reforested; (b) the long-term effects on the river basin of EPM's planning for improvement; and (c) the fact that an average of 40 cubic meters per second was to be diverted towards the heavily polluted Medellin River, to double its flow and dilute the sewage pollution. Downstream uses of water supply for humans and animals were taken from streams flowing into the Rio Grande and therefore were not to be affected by the Project. 33. Project Loan Documents In May 1984, representatives of the Bank, the Government, and EPM completed negotiations for the Rio Grande Project. On June 21, 1984 the Executive Directors approved Loan 2449-CO for US$164.5 million to help finance the Project. The Rio Grande Project Loan Agreement and the Guarantee Agreement were signed 3 months later on September 21, 1984. The agreements reached during negotiations, which were incorporated in the Loan Agreement, superseded in large measure those incorporated in the Playas Hydropower Project Loan Agreement (Loan 1953-CO, US$85 million). In Part III of this report are listed the pertinent covenants with their status of compliance. The Rio Grande Loan was to be repaid in 17 years, including 4 years of grace, with interest at the Bank's standard variable rate D. Project Implementation 34. Effectiveness and Closing Date Loan signing was only delayed 3 months. Date of Loan effectiveness was December 20, 1984. By itself, this delayed effectiveness did not adversely affect commencement of the procurement process for the Project, since bid documents for the major civil works contracts were already available. The Loan's original closing date was December 31, 1991. This date was extended three times during project implementation. The final closing date was June 30, 1994. 35. Procurement Although the procurement process for contracts involving funding by the Bank went up generally with few problems, procurement for the major equipment items was fraught with setbacks caused by difficulties with the import licenses issuance by the Import - 14 - Licensing Authority (INCOMEX). The delays in issuing the import licenses were such that they were the main cause for not having available the Project's electric energy production during the stiff power rationing in Colombia in 1992 and 1993. Between March 1992 and April 1993 it was estimated that the power shortage nationally was 6,200 GWh and that Rio Grande could have produced, if available, 1,422 GWh or 23% of the total power shortage. In terms of average bulk energy pricing the lack of Rio Grande energy production represented foregone revenues of the equivalent of US$70 million (at US$0.05 per kWh) for EPM. The non-availability of Rio Grande caused a negative impact to the National Economy of Colombia that can be estimated at US$700 million (at US$0.50 per non-delivered kWh). 36. Arrangements for Construction and Procurement Construction of the Project was organized into five main civil works contracts for: (a) intake, river diversion tunnel and power tunnel to Tasajera; (b) dam and spillway; (c) Tasajera and Niquia powerhouse; (d) steel linings; (e) Niquia-Manantiales siphon; and (f) control building and Tasajera substation. Main supply contracts covered: powerhouse equipment, step up transformers, 230 kV cables, and substation. In addition a number of smaller contracts were awarded for various civil works and equipment supplies and erection of transmission lines. 37. Project Management and Engineering The Project's implementation was managed by a Project Management Unit (PMU), which carried out efficiently all aspects of project management, including the difficult task of dealing with the Government's bureaucracy in the matter of import licenses for the main powerhouse equipment. 38. All construction design work was performed by INTEGRAL, which had been in charge of preparing the bid-level designs for the Project. During construction of the multipurpose scheme these consultants also produced the designs for the modifications that the project required. Construction supervision was also entrusted to INTEGRAL. Additionally, INTEGRAL at completion of the Project prepared the as-built drawings and a detailed report on the Project's implementation. - 15 - 39. Throughout the Project's construction the PMU was assisted by a Board of Consultants (BOC) made up of internationally-known experts" in the main technical disciplines required by the Project. This assistance was conducted by means of 8 visits to the Project site between 1987 and 1992. The BOC prepared in each case an analytical report covering each portion of the works examined and their recommendations on the more important design and construction aspects of the Project. 40. Project Implementation Timetable, Cost and Funding Overall implementation of the Rio Grande Project took 10 years and nine months (129 months) from August 1983 to May 1994, compared to six years and ten months (82 months) expected in the SAR to be required. Therefore, carrying out the Project took about 4 years more than anticipated at appraisal. The basic reason for the considerable time overrun was the lengthy dispute with INCOMEX on the import license for the main powerhouse equipment. In addition, there was the lengthy and cumbersome contract processing procedures to which EPM is subjected by Colombia's and Antioquia's contracting legislation. Whichever were the problems that arose during project implementation, it is quite clear that the implementation timetable estimated at appraisal was somewhat optimistic. The project objectives were accomplished and exceeded compared to the estimates contained in the SAR. In terms of the physical scope of the project, particularly where the energy subproject was concerned, the transmission and substation subcomponents were augmented significantly by the inclusion of the western substation and the control equipment not included in the original scope of the project. Due to the delays in project implementation, the closing date of the project was extended three times, for a total of three years. 41. The final cost of the Project was the equivalent of US$394.9 million, including US$56.10 million in financial charges, compared to US$418.1 million estimated at appraisal, or an underrun of US$23.2 million. In Part III of this report is shown a summary comparison of the original project cost estimate as per the SAR with the actual project expenditures in the Rio Grande Project. 42. Due to the savings achieved in project cost funding for the Project changed significantly during project implementation with the net result that EPM canceled US$7.70 million from the Bank loan. In Part III of this report appears a tabulation of sources of funds for the Project, as foreseen in the SAR and as actually made available. 16 Mr. Chun Y. Li (USA), expert in design and construction of earth dams, who has advised EPM on several of its projects; Mr. Alfred J. Hendron Jr. (USA) expert in rock mechanics and underground works; Mr. Gabriel G. Fern6ndez (USA) expert in soil mechanics and earth dams; and Mr. Cistian Kilian De Fries (Netherlands) expert in instrumentation for dams. - 16 - E. Project Results 43. The Project achieved its main objective, which was to increase the raw water supply to meet the demand for potable water in the metropolitan area of Medellin. It also achieved, although belatedly, its secondary objective, which was to meet incremental electric energy demand in the Medellin area and in the provinces of Antioquia and Choc6. It is unfortunate that the delays in completing the Project did not permitted to count with its power output when the Country was in the grip of the worst power shortage ever experienced. 44. The recomputed internal economic rate of return using the SAR's methodology is nine percent, compared to 18 percent in the SAR. The IERR was computed, as done in the SAR, for the entire EPM's water supply and power expansion programs up to 1994, which includes the Rio Grande Project. Revenues from water and power sales were taken as proxy for benefits. The calculation of operating expenses and revenues was extended for 40 years, reflecting thus, the probable useful life of the investments. Because of unquantified consumers' surplus and economic and social benefits, use of revenues as proxy for benefits substantially understates the benefits. F. Project Sustainability 45. The major benefit realized from the Rio Grande Project is the badly needed additional raw water supply to meet potable water demand in the Medellin metropolitan area. The secondary benefit was of augmenting the power supply to EPMs power market and to Colombia's National Interconnected System. The added power supply came unfortunately too late to have helped in assuaging the power rationing during 1992-1993. Nevertheless, both the added water and power supply at least are helping to maintain the standard of living of the urban population in the second largest metropolitan area in Colombia and in Antioquia's rural areas, as well as the industrial base of Medellin. These benefits will endure for all the useful life of the Project. 46. The revenues accrued to EPM from sale of potable water and electricity originated in Rio Grande are another benefit to be credited to the Project. These benefits, of course, depend on maintaining adequate level and structure of tariffs during the life of the Project. Given EPM's excellent track record in this area it is likely that the benefits will be maintained without undue difficulties. G. Bank's Performance 47. Bank participation in the Project was in general satisfactory. It is worth mentioning that the excellent track record of EPM in dealing with projects financed by the Bank contributed to the decision to support the Project. The Staff Appraisal Report provided suitable information for project supervision. - 17 - 48. During the period of project implementation security problems arose in Colombia in general and in Medellin in particular. These problems affected the level of project supervision. Nevertheless Bank role in the Project was facilitated by EPM's management and technical personnel. The Project Management Unit (PMU) was always supportive and gave full cooperation to the Bank's teams during project preparation and supervision. The Bank played a constructive role in assisting EPM to carry out the Project to its completion. H. Borrower's Performance 49. At project's appraisal EPM had fully prepared the Project which facilitated the task of the Bank. Learning from the experience with the Playas Project, EPM organized opportunely the PMU for the Rio Grande Project. It is a credit to PM Us personnel to have shepherded the Project through all the complex construction activities, without running into cost overruns and to have handled the dispute with INCOMEX in a judicious manner. 50. During project implementation and up to 1993 the financial performance of EPM's power department has been generally satisfactory. This is reflected in the following financial indices: Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Return of Net 8.8 11.3 11.1 13.8 9.3 7.2 7.9 10.0 13.0 9.0 Fixed Assets Self-Financing 25.0 30.0 22.0 40.0 47.0 N. A. N.A. 37.0 79.0 84.0 Ratio I Debt Service 1.2 1.3 1.2 1.5 1.1 0.9 1.0 1.3 2.0 2.0 Coverage I_I_I Debt/Debt & 35.0 48.0 55.0 56.0 47.0 52.0 44.0 39.0 30.0 24.0 Equity Ratio Operating 59.0 52.0 56.0 50.0 56.0 62.0 68.0 64.0 66.0 69.0 Ratio I I I Current Ratio 1.7 2.1 1.4 2.2 1.6 1.1 0.2 0.5 0.7 0.9 Account 80.0 37.0 33.0 32.0 25.0 21.0 21.0 24.0 22.0 23.0 Receivable (days) The evident progress in reducing the accounts receivable is noticeable. 51. Concerning operation performance, EPM's power department has also been satisfactory, except for energy losses which are still relatively high given the compact nature of EPM's power market. The following indices reflect EPMs operational performance: - 18- Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Energy Losses 22 23 21 15 19 19 N.A. 19 17 21 Customers per 158 155 162 165 176 175 169 174 179 194 Employee GWh sold per 1.90 1.82 1.91 2.00 2.10 2.07 2.01 1.86 1.66 1.87 Employee I I I 1 1 52. The financial performance of EPM's water department in the last few years has also been generally satisfactory, although not as good as that of the Power Department, as shown in the following indices: Year 1989 1990 1991 1992 1993 Return of Net Fixed Assets 2.1 2.7 3.9 5.3 4.5 Self-Financing Ratio 10.0 8.0 39.0 70.0 56.0 Debt Service Coverage 1.2 2.2 2.8 4.0 3.3 Debt/Debt & Equity Ratio 52.0 60.0 54.0 47.0 43.0 Operating Ratio 82.0 89.0 80.0 69.0 72.0 Current Ratio 0.4 1.3 1.4 2.1 1.6 Account Receivable 37.0 36.0 35.0 34.0 31.0 53. EPM's water department also shows a satisfactory operating performance as reflected in the following indices: Year 1989 1990 1991 1992 1993 Water Losses (%) 42 38 37 38 35 Customers per Employee 272 283 278 263 282 Water Sales per Employee 129 124 114 108 109 (1000 cum) I I. Performance of Consultants 54. The performance of INTEGRAL the design consultants for the Rio Grande Project was wholly satisfactory. Likewise, INTEGRAL performed creditably as construction supervision consultant during project implementation. - 19- J. Performance of Contractor and Suppliers 55. The main civil works contractors performed their tasks in a satisfactory manner. As to the suppliers, all the firms performed satisfactorily, except for the supplier of the steel pipe for the Niquia siphon, ROMENERGO (Rumania), which contract had to be canceled for non- fulfillment of delivery according to time-table. This forced EPM to re-bid the contract, which was awarded and performed by the Argentinean firm IMPSA. K. Project Relationship 56. From the Borrower the Bank received very close cooperation during appraisal. This cooperative attitude established early in the project cycle and all through EPM's relations with the Bank, made possible to resolve successfully the many issues that normally occur during implementation of a project as complex as Rio Grande. L. Project Documentation and Data 57. The SAR was generally a comprehensive document, that provided a useful framework for the Bank and for EPM during project implementation and for the preparation of this PCR Supervision reports gave generally reasonably good indications of the project status at any time and of any major incident during project implementation. These reports together with the review of the project files at Bank headquarters and at EPM's offices in Medellin provided the basic information for judging the project's results. M. Conclusions and Lessons Learned 58. Conclusion The Rio Grande Project was a well prepared project that ran into difficulties created by the import licensing authorities. Although it was finally complete below cost estimate, the dispute concerning import licenses for the main powerhouse equipment was the main cause of the almost four year delay in completing the Project. In retrospect, the Bank failed to require adequate guarantees that all imports for the Project would not be subject to prior import licenses. The delay in completing the power component of the Project was particularly vexing since its power output was not available during the prolonged power rationing that hit Colombia in 1992-1993. The loss to the economy from unserved energy that could have been provided by Rio Grande can be gauged at not less than US$700 million. 59. The Project was successful in achieving its main goal of adding raw water supply capacity to EPM's water supply systems, more or less at the time it was needed. It also was successful in adding generating capacity to EPM's power system, albeit with a long delay. 60. Lessons Learned The principal lessons learned from implementation of the Rio Grande Project can be summarized as follows: - 20 - (a) Project Preparation Before undertaking appraisal of a project as complex as Rio Grande, the Bank should satisfy itself that the project has been adequately prepared. The project design should be reviewed by a panel of experts made up of independent specialists in the main technical disciplines involved, before bid documents are issued. (b) Import Licenses The Bank should careffully examine the existing limitations and constraints in country legislations, regulations or bureaucratic procedures which could jeopardize project implementation. One case in point for this project was the requirement of import licenses which contributed to a great extent to the delay in project completion. (c) An important lesson is that the success of a project depends more than any other factor on the ability and the experience of the people and the institution involved in its implementation. A case in point is EPM was, and still is perhaps the best managed water and power utility in Colombia, despite the rather poor performance of these sectors in general. (d) Last but not least, it is important to emphasize that a complex project will in general face considerable problems during implementation; even in cases where the implementing agency is a very efficient institution. - 21 - COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) PROJECT COMPLETION REPORT PART H: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE A. Project Objectives 1. The Rio Grande Project II had two basic objectives: to supply the Aburri Valley with potable water through the year 2020 and to generate a reliable annual supply of electric energy of 1,578 GWh (1,578 million kilowatts per hour), equivalent to 21.2% of EPM'S energy demand and to 4.1% of national demand. 2. The project objectives were accomplished and exceeded compared to the estimates contained in the SAR. In terms of the physical scope of the project, particularly where the energy subproject was concerned, the transmission and substation subcomponents were augmented significantly by the inclusion of the western substation and the control equipment not included in the original scope of the project. B. Project Implementation 3. Signature and Effectiveness of the Loan 4. In terms of steps taken prior to signing loan agreement with the Bank, EPM began negotiating with the Colombian Government in October 1982 and obtained authorizations from CONPES and the National Department of Planning in August 1983. Approval of effectiveness of the loan was obtained from the Ministry of Finance and Public Credit in August 1984. 5. While negotiations and formalities were under way for the loan, EPM obtained partial financing from IDB for the second phase of the water supply and sewerage service subproject (Manantiales water treatment plant and water distribution lines and sewers). External loans were also planned to finance the turbines and generators for the Niquia and Tasajera power plants, along with partial financing from FEN, FONADE, FEN- EXIMBANK and the National Government for the local counterpart funds. - 22 - C. Implementation Program 6. The original implementation schedule contained in the loan application submitted to the Bank established, in general terms, that the project-related activities would start in January 1984 and would end in December 1991. The works included in the potable water subproject came into operation in November 1991 instead of December 1989, as originally scheduled, and it is estimated that the works included in the energy subproject will come into operation in May 1994, in the case of the third generating unit, instead of December 1991, as originally scheduled. These slippages are explained below in conjunction with the main problems encountered in the implementation of some contracts. 7. In the case of the potable water subproject, the contract originally awarded to the Rumanian firm of Romenergo for the design, manufacture and supply of the conveyance pipe between the Niquia hydropower station and the Manantiales water treatment plant was voided in February 1988 for non-performance of delivery according to timetable. This resulted in a delay of approximately 1.5 years in the original implementation schedule, because of the need to start a new international bidding process. 8. In the case of the energy subproject, EPM experienced difficulties with INCOMEX in obtaining approval of the import licenses for the procurement of the turbines and generators and this caused a delay in project start-up of approximately 2.5 years and also resulted in the company losing an extension of the financing offered by the lending agencies, which led to delays in the contracting process and to cost increases. 9. Moreover, the contract for the procurement of transformers for the western substation and the contract for control, protection and communications equipment originally awarded to Rade Koncar, were voided and canceled, respectively, for non- performance of delivery according to timetable, in the case of the first, and for inability to deliver, in the case of the second. D. Financial Analysis 10. Costs The actual cost of the Rio Grande Multipurpose Project II was US$394.9 million, with actual investments, as at December 31, 1993 and based on 1994 estimates, resulting in a total reduction in US dollar cost of 6% compared to the SAR (US$418.1 million). 11. Although total project cost is lower than the original budget, there were some marked differences in certain project components, such as the potable water subproject, in particular, with a direct cost of US$74.5 million compared to an original estimated cost of US$94 million, this being attributable to the lower contract prices for the infrastructure works and lower contingency costs than originally estimated. - 23 - 12. In the case of the electric energy subproject, the direct cost was US$264 million whereas the original estimate was US$268 million, but, while the cost of the dam and the spillway proved lower than estimated, the cost of the equipment, consultants' services and training categories was actually higher than estimated. It is important to point out, in this connection, that the cost overrun of the electromechanical equipment is attributable, among other things, to: (i) the inclusion of the western substation, which was not originally considered in the scope of the project; (ii) the inclusion of control equipment; and (iii) the higher than expected cost of the turbines and generators. E. Financial Performance 13. EPM's financial performance during project implementation was satisfactory. 14. Lower demand, higher tariffs and increased costs all impacted the financial results achieved and were managed with criteria of austerity and rationalization. 15. Empresa de Acueducto y Alcantarillado (water and sewer services) tariff adjustments: 16. The application of Resolution 080/90 issued by the National Tariff Board resulted in the approval of: * the elimination of tariff brackets for residential users; * one-time real increases and 5% annual average increases in residential user tariffs; * the application of the economic cost to water supply tariffs for industrial and commercial users; * an increase in the sewer tariff of between 30% and 50% of the water bill. 17. The SAR considered some annual real tariff increases of 5.82% for the period 1984-91, while the above-mentioned tariff adjustments meant an average real annual increase of 7.69% during the same period, which resulted in a decline in average user consumption. 18. In accordance with the mandate of the National Constitution of 1991, the State is obliged to guarantee the efficient provision of public services to all citizens. Pursuant to this goal, the Government established the Comisi6n Reguladora de Agua Potable y Saneamiento Basico (Potable Water and Basic Sanitation Regulatory Commission)and the Deputy Ministry of Housing, Urban Development and Potable Water within the Ministry of Development and it will soon be setting up the Superintendencia de Servicios Pziblicos Domiciliarios (Superintendency of Household Public Services). The Potable Water and Basic Sanitation Regulatory Commission was established by Decree No. 2152 of 1992. - 24 - This Commission established the system of regulated freedom for municipalities providing water and sewer services. F. Empresa de Energia (energy service) tariff adjustments 19. The efforts begun in the course of the past decade in the area of tariffs contributed significantly to EPM's solid financial position. Decree No. 2545 of 1984, which created the standardized tariff structure, and Resolution 86 of 1986, which developed it, were issued at a time when electricity tariffs were in a state of complete chaos. These provisions represented a major breakthrough in laying the foundation for tariff management, although the adjustment program set out in Resolution 86 proved insufficient, given the sector's financial requirements. 20. The adjustment program envisioned in Resolution 090 of 1990 issued by the National Tariff Board made it possible to raise the tariffs of industrial and commercial users to reflect the cost of the service (average long-term incremental cost). 21. The difficulties currently being experienced have to do with eliminating the subsidies. This problem cannot be resolved by tariff adjustments alone, since this would mean drastically restricting these users' access to electricity. The present adjustment program introduced by Resolution 70 of 1993 would make it possible to raise residential user tariffs to levels that are consistent with the average long-term incremental cost. 22. The restructuring of the electricity sector is a process that has been going on since 1991, the aim being to tailor the structure of electricity services to the ongoing modernization of the economy. The issue of Decree No. 2119 of 1992 on the modernization of the State resulted in the establishment of the Comisi6n de Regulaci6n Energtica - CRE (Electric Energy and Gas Regulatory Commission), attached to the Ministry of Mines and Energy. The role of this Commission is to formulate new regulations for the electricity sector that will focus on aspects relating to the quality and reliability of the services provided, promoting competition, wherever possible, in the activities of the electricity sector, regulating existing monopolies and preventing practices that are incompatible with competition. It will also take over the job of defining the tariff structure previously handled by the National Tariff Board, which will be done away with once the new decrees for modernizing the State are issued. 23. Application of the Resolutions during the period under review made enabled the tariff to increase in real terms by 5.40% per annum whereas the SAR had envisioned 2.34% per annum. 24. Starting on December 17, 1993, with the issuing of Resolution No. 010 by CRE, the new electricity sector conditions brought about by the restructuring programs began to materialize, in keeping with the framework regulations established by the draft Electricity - 25 - Law and the draft Law on Household Public Services. These conditions include, among others: * promotion of competition in generation and marketing; * separation of the end-user market into regulated and non-regulated. 25. There is also a possibility that energy supply contracts will be signed between distributors and major customers, the latter being classed as industrial and commercial users connected to over I kV, with an average maximum demand exceeding 2 MW over the last six months. Starting in 1995, users with a maximum average demand of more than 1 MW will be included in this market. 26. These changes are shaping a new electricity sector that has greater flexibility and that offers new conditions on which energy supply terms can be negotiated. 27. Costs With respect to cost management policies, some important programs were begun during the decade to cut water and energy losses and keep them under control, in addition to the implementation of programs to promote the efficient use and conservation of energy and potable water resources. 28. In 1992, Empresa de Acueducto y Alcantarillado (Water Supply and Sewer Service) returned to being an autogenerator of energy when it purchased the Ayuri and Piedras Blancas power plants. This is having a positive effect on operating costs, and the Company plans in the medium term to construct micro power plants at the entrance of the treatment plants, and also some distribution tanks, with a view to becoming self-sufficient in terms of energy supply. 29. The Company has stepped up its contracting of third parties in its various operating and administrative processes, placing emphasis on the participation of precooperative groups and community action groups. 30. Administrative costs increased because EPM's Board of Directors approved, by a resolution dated December 11, 1986, the grant of a lifetime retirement pension to all EPM staff, in accordance with national legislation, this decision having affected the amount of the company's actuarial obligations since 1986. 31. With respect to debt servicing during the period under review, the magnitude of amortizations which began during the period under review, in relation not only to the Rio Grande Project II but also to the Guadalupe IV and Playas projects, also under construction, is striking. Also taken into account was the effect of the sharp depreciation of the Colombian peso (and also of the US dollar in certain years, in relation to other currencies owed by EPM) on foreign currency debt service payments. - 26 - G. Analysis of the Internal Financial Rate of Return for the Rio Grande Multipurpose Project H 32. In accordance with the methodology used in the Staff Appraisal Report of June 1, 1984, a figure of 5.2% was obtained for Empresa de Acueductoy Alcantarillado and 11% for the Empresa de Energia, which thus gave a consolidated figure of 9.1% compared to targets of 14% for water supply, 19% for energy and a consolidated figure of 18% estimated by the SAR. This result can be accounted for by the following: 33. Lower growth in demand compared to the SAR. In the case of Empresa de Acueducto y Alcantarillado performance went from 93% in 1984 to 79% in 1991, while in the case of Empresa de Energia it went from 98% in 1984 to 96% in 1991. 34. Actual project expenditures were higher than the SAR figures, which reflected domestic inflation, which was also higher than estimated during the period. 35. Investments showed a higher growth rate than in the SAR. In the case of Empresa de Acueducto, the second phase of the Rio Grande Project II included additional physical targets, such as main and intercepting sewers in the development of the Medellin River Sanitation plan and an expansion in the scope of the water supply control center. Similarly, in the case of Empresa de Energia, there was the inclusion of the western substation and control equipment. Investments were also affected by major macroeconomic factors. 36. Net ISA energy sales/purchases were affected by the larger volume of energy and power sold in accordance with Decree 3298 of November 12, 1984, which established that electricity sector companies were required to purchase 75% of their energy and power rights from ISA, regardless of their actual needs. 37. The Company has been making short and long-term changes in energy and power as part of the new marketing scheme, which is based on the dismantling of obligatory purchasing and the elimination of ISA as the sole commercial agent and the replacement of this by purchase-sale with the various companies in the electricity sector. 38. The methodology used to calculate the internal rate of return for the project is shown in the annex. H. Project Impact and Sustainability 39. The Rio Grande Multipurpose Project II is viewed as one of the most important ever undertaken by EPM, considering its great benefit to the community in terms of both potable water service and energy supply to the Aburri Valley and also in terms of the variety of investments entailed, such as those relating to the intake and conveyance of - 27 - water to the treatment plant, in the case of the Empresa de Acueducto, and those for the expansion of infrastructure for all the processes involved in electricity generation, transmission, substations and distribution, in the case of the Energy Company. 40. The foregoing plus the experience gained and the training acquired by the staff are elements that will continue to be extended to both the Company and to the community. I. Bank Performance 41. EPM wishes to highlight, in this report, the assistance it received from the Bank, especially during the project preparation phase and in all aspects of the operational management of the loan. The Bank provided the resources needed to enable EPM to make the best possible use of the proceeds of the loan and although it was strict on aspects relating to the bidding conditions, it was flexible on all those relating to the administration of this loan: procedures, disbursements, extension, resource allocation, etc. 42. The Bank's assistance was pivotal in improving many procedures and especially those relating to the handling and processing of financial data, with which it always provided excellent guidance. The supervision missions were sufficient in number and generally provided important input toward achieving good technical and financial performance. 43. The Bank's relationship with the project was satisfactory, in that the Bank paid attention to the suggestions put forward during supervision missions and our requests for extensions of the disbursement schedule were favorably received by it. 44. Although the Bank still offers its borrowers certain favorable conditions compared to other international financial organizations, in terms of longer repayment periods, it must be borne in mind that interest rates and currency fluctuations now make the Bank's financing very similar to what is offered by the competition, i.e. commercial banks. 45. The improvements introduced by the Bank in 1993 to the information and debt management system have been satisfactory, since they allow greater agility and equity in payments and a more practical overview of the elements involved in the monitoring of loans. J. EPM'S Performance 46. Generally speaking, EPM's administrative and technical staff was successful in meeting the requirements of the project and the Bank, at all phases of the project, i.e. from preparation through to project completion. 47. The experience gained at all levels of the organizational structure has had a multiplier effect with respect to the projects that have recently been started in all - 28 - departments, including the formation of the Porce II Division, which will be in charge of the construction of the Porce II hydroelectric project within the Energy Company, the Technical Division and the San Fernando Group, which is responsible for coordinating the design and construction of the future wastewater treatment plant within the Water Supply and Sewerage Company, and the Special Projects Division in the telecommunications sector, which is coordinating the telephone plan for East Antioquia. 48. Particular attention is drawn to the work done by the Rio Grande II Division, as the project implementation unit, responsible for carrying out all the phases and works of the project, coordinating all relations with the Bank on technical aspects, which facilitated the integrated management of the project from its design through to its entry into operation. The Rio Grande II Division was also assisted by other areas of the company in accomplishing the objectives proposed, which made it possible to handle the project in accordance with project management criteria. This enable the Company to execute more works at a cost that was lower than estimated at appraisal. 49. The training financed by the loan enabled the institution's professional and technical staff to achieve a high standard of preparation and experience, due to the size of the projects undertaken by EPM, the competence and efficiency it displays in contracting out its services and the reliability it shows in operating these services. Besides energy the project also covered finance and administration, which were areas that had not be taken into account in previous externally financed programs. K. Institutional Aspects 50. The project for the large-scale supply of natural gas to the city of Medellin and its Metropolitan Area is of immense importance for bringing down the cost of the energy basket in the residential and industrial market. Empresas PiTblicas de Medellin began this project in earnest in the course of 1991, with the creation of the Unidad del Gas (Gas Unit) to assume responsibility for coordinating and implementing the household natural gas distribution project. This program is consistent with the guidelines established by the National Government in its large-scale distribution policy undertaken with the support of the Ministry of Mines and Energy and ECOPETROL. 51. In 1991 the Directorate of Computer Technology was formed with the aim of systematizing the community-wide services provided by EPM. Its projects include, among others, a Data Processing Master Plan designed to formulate strategy at the management level for applying computer technology with the Companies, seeking to procure advanced and appropriate technology systems that will be integrated and will allow the exchange of information with existing systems. 52. Among the major objectives of the Master Plan is the SIGMA Project, whose aim is to bring about comprehensive and systematized management of all the service networks, - 29 - to develop the software needed to be able to optimize the information systems, and to provide information resources for office computerization and for expansion and optimization of the centralized computer services. 53. Development of the SIGMA project and the procurement of equipment and software for the organization received great technical and financial support from the Bank as part of the Rio Grande II program. 54. During 1992 the Loss Division responsible for loss recovery was assigned an additional task in the form of an energy conservation plan, which adapted the administrative structure to the current energy problem, seeking to create ongoing action on energy demand. 55. For this reason its name was changed from Loss Division to Conservation and Energy Control Division and the Department of Energy Savings was created, whose primary role has been to design, implement and execute the rational energy use program which, combined with the loss plan, should eventually make the system work more efficiently for the Companies. 56. A highlight of 1992 was the incorporation of the Directorate of Internal Audit into the administrative structure of the Empresas Publicas, in accordance with the regulations contained in the new National Constitution and with the aim of providing the entity with a system that warns and informs the organization of any deviations in its operations, promotes more expeditious methods for correcting such deviations and constantly seeks to improve the Entity, the system itself and job satisfaction. L. Lessons Learned 57. During project implementation EPM had direct and personal relations with the Bank, which made it easy to make any changes that were needed in the loan. 58. Toward the end of the decade these relations were affected by the tightening up of the Bank's policies toward Colombia's electricity sector, which was reflected in the sectoral manner in which problems were handled. EPM needs to maintain and develop its presence vis-d-vis the Bank and insist on receiving the differential treatment its particular administrative and financial features warrant. 59. EPM has taken decisive actions with a view to improving project preparation and avoiding the mistakes identified in the preparation of previous projects. It has a complete project management unit to take charge of the preparation and administration of the Porce II Hydroelectric Project. 60. In order to improve its financial performance, EMP must work with the Bank to find mechanisms to shorten the long periods of time that elapse between negotiation, - 30 - effectiveness and the first and last disbursement, in order to minimize commitment fee costs and extend the grace periods so that the amortization schedule does not begin so long before the projects actually enter into operation. This will unquestionably improve the flow of funds, making the Company's financial situation less risky. 61. In conclusion, we feel that the SAR should not be the main parameter used in making the final project evaluation because it results in greater emphasis being placed on the bad side, i.e. the delays and differences, than on the good side, i.e. the successes achieved. -31 - COLOMBIA RIO GRANDE MULTIPURPOSE PROJECT (LOAN 2449-CO) PROJECT COMPLETION REPORT PART HI: RELATED STATISTICAL INFORMATION 1. Related Bank Loans Loan Title Purpose Amount US$ Approval Status Million 1868-CO Guadalupe IV Hydro 124.55 1980 Completed 1953-CO Playas Hydro 85.00 1981 Completed 2889-CO Power Sector Adjustment 225.00 1987 Ongoing 3278-CO Public Sector Reform 304.00 1990 Ongoing 3336-CO Municipal Development 60.00 1991 Ongoing 2. Project Timetable Task Date Planned Date Actual Appraisal 11/83 11/83 Loan Negotiations 5/84 5/84 Board Approval 6/84 6/84 Loan Signing 7/84 9/84 Loan Effectiveness 12/84 12/84 Loan Closing 12/91 6/94 Project Completion 6/90 5/94 - 32 - 3. Loan Disbursements Estimated Actual Fiscal Year and Cumulative Cumulative Actual as % of Semester US$ Million US$ Million Estimated 1985 Dec. 1985 413.00 0.41 3 Jun.. 1985 21.00 8.47 40 1986 Dec. 1985 25.80 14.85 58 Jun. 1986 32.70 18.94 58 1987 Dec. 1986 48.10 22.27 46 Jun. 1987 67.30 30.94 46 1988 Dec. 1987 85.30 35.97 42 Jun. 1988 102.70 35.97 35 1989 Dec. 1988 119.00 38.91 33 Jun. 1989 133.10 52.22 39 1990 Dec. 1989 144.30 58.19 40 Jun. 1990 153.70 65.15 42 1991 Dec. 1990 160.20 83.98 52 Jun. 1991 164.50 104.95 64 1992 Dec. 1991 120.14 73 Jun. 1992 125.12 76 1993 Dec. 1992 127.40 77 Jun.. 1993 137.79 84 1994 Dec. 1993 142.46 87 __ I_Jun. 1994 156.80 95 Date of Final Disbursement: June 30, 1994 Cancellations: US$7.70 million - 33 - 4. Allocation of Loan Proceeds (in US$) Category Original Actual Allocation Disbursement 1. Civil Works for Parts A, B, C, and D of Project 81,000,000 65,515,000 2. Equipment and materials (excluding turbines and 43,000,000 75,894,000 generators) and ancillary services for Parts A, B, C, and D of Project 3. Equipment and materials and ancillary services 800,000 2,338,000 for Part F of Project 4. Consultants' services for Parts A, B, C, and D of 8,000,000 19,287,000 Project 5. Training and equipment for Part E of Project 800,000 1,356,000 6. Initial Deposit 8,000,000 7. Fee 410,224 410,000 8. Unallocated 22,489,776 Total US$164500 0001 156,800000 A total of US$7,70 million was canceled from the Loan at the request of the Borrower. - 34 - 5. Project Implementation Component SAR Estimate Actual Civil Works Intake and main tunnel 6/88 4/89 Dam and spillway 9/88 9/88 Tasajera cavern 10/89 7/93 Niquia cavern and conduit 12/88 12/98 Substations 7/88 5/93 Transmission Lines 5/88 3/93 Equipment Turbines-First Unit Tasajera 10/89 10/93 Generators and busbars First Unit 10/89 10/93 Powerhouse Crane 6/86 6/91 Tunnel Linings 11/87 9/92 Gates 11/87 9/93 Auxiliaries Tasajera 11/87 9/93 Auxiliaries Niquia 1/87 9/93 Substation equipment 12/87 9/93 Transmission line materials 6/87 3/93 Completion of Project 6/90 5/94 - 35 - 6. Project Costs and Financing Project Funding (in US$ Million) SAR Actual IBRD Loan (2449-CO) 164.5 156.8 Cofinancing B-Loan 65.5 Suppliers (Turbine/Generators) 22.9 26.9 FONADE-FEN and Government 13.6 17.5 EXIMBANK Jap6n - FEN 36.0 EPM 151.6 157.7 Totals 418.1 394.9 7. Project Results The SAR evaluated the return on investment as the discount rate equalizing the present values of the stream of benefits and costs associated with EPM's 1984-1990 water supply and power development program of which the Rio Grande Project is a part and cannot be reasonably segregated. In calculating the revised internal rate of return a similar methodology has been used. The cost streams comprise the capital cost of this program (including Phase II of the Rio Grande Scheme - water treatment, and distribution and sewerage) and incremental operational and maintenance cost related to the incremental sales of electricity and water associated with the program. These costs where deflated to March 1984 (original price level in the SAR). Foreign costs were then converted to Colombian Pesos at the March 1984 exchange rate. As proxy for benefits, revenues from sales of power and water were used, derived from incremental sales associated with the program and average annual exchange rates, deflated for adjustment to March 1984. This exercise was extended for 40 years after commissioning of the Project in mid-1994, which is considered the useful life of the Project. On these basis the recomputed rate of return is 9% compared to 18% in the SAR. This recomputed rate of return, compares nevertheless favorably with the opportunity cost of capital in Colombia, estimated to be about 10-12%. - 36 - 8. Use of Bank Resources Staff Inputs Staff inputs in carrying out the various task through the project cycle from appraisal in FY84 to preparation of the Project Completion Report in FY94, were as follows: Task Input (Staff Weeks) Appraisal 83 Negotiations 15 Supervision 76 Total 174 Mission Data Type of Mission Fiscal No. of No. of Staff Performance Type of Year Weeks Persons Weeks Rating' Problems2 Field Appraisal 84 3 4 9 Supervision I 85 1 3 3 1 Supervision II 86 1 3 3 1 Supervision III 87 2 2 4 1 Supervision IV 88 1 3 3 1 Supervision V 89 1 5 5 2 0 Supervision VI 90 1 3 3 2 0 Supervision VII 91 1 2 2 2 0 Supervision VIII 92 1 4 4 2 0 Supervision IX 93 1 1 1 1 PCR 94 1 1 1 I = Problem-free or minor problems 2 = Moderate problems 2 F = Financial; M = Managerial; and 0 = Other - 37 - 9. Status of Legal Covenants EPM has complied with the covenants in the Loan Agreement, as shown below: Status of Section Brief Description Compliance A. PROJECT COVENANTS 3.01 (a) Carry out the Project with efficiency Complied 3.01 (b) (i) Carry out a training program Complied (ii) Implement a Data Processing Network 3.02 (a) Employment of Consultants to assist EPM in Project Complied Implementation 3.02 (b) Employment of three Consultants for its board of experts Complied for the overall supervision of the Project. 3.03 (a) Insure the imported goods Complied 3.04 (a) Furnish to the Bank plans, contracts and schedules for the Complied Project 3.04 (b) Keep records to monitor the Project progress, its cost and Complied benefits 3.05 Acquire lands and rights required for the construction of the Complied Project 3.06 Implement the Project with due regard to ecological and Complied environmental factors 3.07 Take actions necessary for the completion of the water Complied treatment plant and related distribution networks 3.08 Sign agreements with the Municipalities of Envigado, Complied Sabaneta and La Estrella on water supply and sewerage services 4.01 Carry on its operations and plan its expansion in accordance Complied with sound practices, with qualified management and experienced staff 4.02 (a) Maintain its facilities adequately Complied 4.02 (b) Cause all of its dams and other large structures to be Complied periodically inspected 4.03 Maintain insurance against risks Complied 5.01 (a) Maintain separate records for each Department Complied 5.01 (b) Keep records of expenditures withdrawn through S.O.E. Complied 5.02 (a) (i) Auditing of accounts and financial statements Complied (ii) Auditing of Special Accounts - 38 - Status of Section Brief Description Compliance 5.02 (b) Submit to the Bank within five months after the end of each Complied year copies of: (i) Financial Statements and Special Account; (ii) Audit Reports 5.02 (c) Monthly certified statements of the Special Account Complied 5.03 Annual report on actual and forecasted financial Complied performance 5.06 No new debts if net revenues are less than 1.5 times the Complied debt service in any year 5.07 (a) (i) Rate of return (R.O.R.) in power operations not less Complied than 10% in 1987 and thereafter (ii) R.O.R. in water supply and sewerage operations not less than 5.2% in 1989 and thereafter 5.07 (b) (i) Quarterly calculation of R.O.R. Complied (ii) Submit to the Bank quarterly calculation of R.O.R. (iii) Actions to obtain required R.O.R. 5.08 Monthly tariff increases Complied 5.10 (a) Expenditures for capacity expansion larger than 100 MW Complied only if it is part of ISA's program and approved by the Bank 5.10 (b) Bank's approval for expenditures larger than 1% of fixed Complied assets 5.11 Transfers among Departments only if they are in excess and Complied treated as a loan 5.12 Obtain financial resources for about Col$1,200,000,000 for Complied the Water Supply and Sewerage Department  丁「IAG工【こテ レeg、－-’じLNr ユ4り／H TyF,-：いCR