Colombia - Toll Road Concession Project

Document of The World Bank Report No: 17986 PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$137.1 MILLION TO COLOMBIA FORA TOLL ROAD CONCESSION PROJECT JUNE 11 1998 Finance, Private Sector, and hIfrastructure (LCSFP) Country Management Unit for Colombia, Ecuador and Venezuela (LCC4C) Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective April 16, 1998) Currency Unit = Colombian Peso (Col$) Col$= US$0.00074 US$1 = Col$1360 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CPPI Committee for Private Participation in Infrastructure CC Concession Contract between INVIAS and the Project Company CONFIS National Council for Fiscal Policy CONPES National Council for Economic and Social Policy DNP National Department of Planning ERR Economic Rate of Return GOC Government of Colombia FRR Financial Rate of Return FVN National Highway Fund (eliminated by Decree of December 1992) IDB Inter-American Development Bank INVIAS National Institute of Highways (established by Decree of December 1992) MOPT Ministry of Public Works and Transport (eliminated by Decree of December 1992) MOT Ministry of Transport (established by Decree of December 1992) MOE Ministry of the Environment (since December 1993) PRG IBRD's Partial Risk Guarantee SENA National Apprenticeship Service Agency (Servicio Nacional de Aprendizaje) Vice President: Shahid Javed Burki Country Manager/Director: Andres Solirnano Sector Manager/Director: Danny Leipziger Task Tearn Leader/Task Manager: Jose Luis Irigoyen  Colombia Toll Road Concession Project CONTENTS A. Project Development Objective Page No. 1. Project development objective and key performance indicators ..................................... ...................2 B. Strategic Context 1. Sector-related CAS goal supported by the project. ............................................................2 2. Main sector issues and Government strategy ............................................................2 3. Sector issues to be addressed by the project and strategic choices .3 C. Project Description Summary 1. Project components ........................................................6 2. Key policy and institutional reforms supported by the project ...................................... ...................7 3. Benefits and target population 7 4. Institutional and implementation arrangements .........................................................8 D. Project Rationale 1. Project alternatives considered and reasons for rejection .......................... .............................. 11 2. Major related projects financed by the Bank and/or other development agencies .................... ................. 13 3. Lessons learned and reflected in proposed project design ......................................................... 13 4. Indications of borrower commitment and ownership ........................................................ 14 5. Value added of Bank support in this project ........................................................ 15 E. Summary Project Analyses 1. Economic ....................................................... 15 2. Financial ....................................................... 15 3. Technical.. 17 4. histitutional.18 5. Social ....................................................... 18 6. Environmental assessment ....................................................... 19 7. Participatory approach ....................................................... 20 F. Sustainability and Risks 1. Sustainability ....................................................... 20 2. Critical risks ....................................................... 21 3. Possible controversial aspects ....................................................... 22 G. Main Loan Conditions 1. Effectiveness conditions ....................................................... 23 2. Other ....................................................... 23  -iv- H. Readiness for Implementation ............................................... 25 I. Compliance with Bank Policies .............................................. 26 Annexes Annex 1. Project Design Summary .............................................. 27 Annex 2. Detailed Project Description .............................................. 29 Annex 3. Estimated Project Costs .............................................. 37 Annex 4. Cost-Benefit Analysis Summary .............................................. 39 Annex 5. Financial Summary for Revenue-Earning Project Entities .............. ................................ 53 Annex 6. Procurement and Disbursement Arrangements .............................................. 55 Table A. Project Costs by Procurement Arrangements .............................................. 55 Table B. Thresholds for Procurement Methods and Prior Review ............... ............................... 56 Table C. Allocation of Loan Proceeds .............................................. 56 Annex 7. Project Processing Budget and Schedule .............................................. 57 Annex 8. Documents in Project File .............................................. 58 Annex 9. Statement of Loans and Credits .............................................. 60 Annex 10. Country at a Glance .............................................. 62 Annek 11. Environmental Assessment Summary ................................ : 64 Map No. 28785  Page 1 Colombia Toll Road Concession Project Project Appraisal Document Latin America and the Caribbean Regional Office Country Department 4 (LCC4C) Date: June 11, 1998 Task Team Leader/Task Manager: Jos6 Luis Irigoyen Country Manager/Director. Andres Solimano Sector Manager/Director: Danny Leipziger Project ID: CO-PE-39082 Sector: Transportation Program Objective Category: Economic Management Lending Instrument: Specific Investment Loan (SIL) Program of Targeted Intervention: f I Yes [/] No Project Financing Data [/] Loan [H Credit [I Guarantee [] Other Amount: US$137.1 million Proposed terms: [ ] Multicurrency [a/] Single currency, specify Standard Variable [/] Fixed [ ] LIBOR- based Grace period and Years to matunty: Standard amortization terms, grace period and interest rate for fixed-rate U.S. dollar single currency loans with an expected disbursement period of 0-3 years. Commitment fee: Standard Service charge: 0% Financing plan (US$m): Source Local Foreign Total Private Project Sponsors (equity and debt committed to initial investment) 212.7 182.4 395.1 IBRD loan to the Republic of Colombia for government capital contribution 75.4 61.7 137.1 Net revenue generation from operation of roads under Project 22.1 18.0 40.1 Total: 310.2 262.1 572.3 Borrower Republic of Colombia Responsible agency(ies) INVIAS, Colombia's National Institute of Roads Estimated disbursements (Bank FYIUS$M): 1998 1999 2000 2001 2002 Annual: - 77.1 60.0 - Cumulative: - 77,1 137.1 137.1 137.1 Project implementation period: " Expected effectiveness date Expected loan closing date:1' 4 years September 30, 1998 June 30, 2000 ISee Implementation Period on page 9.  Page 2 A A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): * Overall Objective. The overall purpose of the project is to improve transport conditions along a strategic road corridor linking BogotA with Medellin and the ports on the north coast through an effective and sustainable private-public partnership. * Specific Objectives. The project specific objectives are to: (a) reduce transport costs and improve the level of service by building and upgrading key sections along the highway corridor; (b) attract and maintain adequate private services to mobilize equity and debt through more favorable financing structures than those attained in previous road concessions in Colombia, to finance road improvements and manage operations; and (c) strengthen INVIAS' capacity to prepare future road concession projects and put into effect key policies for sustainable development of highway corridors. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 17107-CO Date of latest CAS discussion: November 6, 1997 * The project is consistent with the Country Assistance Strategy dated October 15, 1997, which supports the objectives of (i) promoting peace and development, (ii) promoting rural development, (iii) developing human capital, (iv) attaining public sector responsiveness and efficiency, (v) improving infrastructure services, and (vi) ensuring sustainable development. A key element of the government's strategy to improve the quantity and quality of infrastructure has been to encourage and facilitate private sector participation. This policy aims at increasing efficiency in project execution, mobilizing additional resources, reducing the risks assumed by the public sector, obtaining the benefits of competition, and reallocating public resources into the social sectors. Although Colombia enjoys an important advantage over its neighbors in accessing international capital due to its investment grade credit rating, the results so fhr have been a limited number of projects which could attract private investments. * The proposed project is part of the base-case lending program for FY98. The proposed project addresses one of the three areas highlighted in the CAS regarding private sector infrastructure deals: where government plays a key role in mitigating risks, it should assume those risks that can not be covered by the private sector, in a way that minimizes the potential distortions and at a reasonable cost. 2. Main sector issues and Government strategy: * Road Sector Issues. In the past five years the Colombian transport sector has witnessed major changes with regard to its institutional structure and the role of the private sector in the construction and operation of major transport infrastructure facilities. These changes have brought about substantial reductions in transport costs for Colombia's externally traded goods and commerce. Nevertheless, critical weaknesses in the transportation system, particularly in road infrastructure (which serves more than 90% of freight transport, excluding pipelines) undermine the competitiveness of the Colombian economy and introduce higher than nonnal transport costs in all phases of the economy. A recent analysis conducted by DNP estimates that in the 30-year period between 1960-1993, the low levels of investment in infrastructure (below 1% of the GDP in the case of transport), resulted in additional costs to the economy of about 5.3% of the GDP (about 2.7% if only the road sub-sector is counted). * The main problem of Colombia's road system is the poor operating condition of the highways that serve the largest consumption and production centers located on rugged mountain ranges (a factor that  Page 3 notably adds to the cost of expanding and modernizing the road infrastructure). Years of chronic deficit in public funding, untimely implementation of investments as a result of mismanagement, and poor quality of maintenance of primary highways have compounded those conditions. * Government Strategy. The main tenets of the Government's strategy to overcome these constraints have been to: (i) strengthen sector management by splitting responsibility for planning and policy making from execution, and establishing a road agency, INVIAS, to manage a well-defined network of export/import corridors and trunk roads; (ii) decentralize the provision and management of road infrastructure passing on to departments and local governments responsibility over secondary and tertiary roads; (iii) increase the level of investments from the historical average of about 0.7% of GDP before 1994 to about 2.6% for 1995-1998, to clear the existing road investment backlog and accommodate the transport system to present needs; (iv) revise the system of road user charges to eliminate distortions in contributions by different vehicle classes and allocations to the national, departmental and municipal levels of administration; and (v) expand the role of the private sector by contracting out all road operations under INVIAS and bringing the private sector to finance and manage road projects under long-term concessions. * Government has committed itself to an ambitious program of private sector participation in road infrastructure. As presently defined, the road concession program calls for a total private investment for the period 1995-1998 of about US$1.2 billion. Since 1994, 12 concession contracts have been awarded for rehabilitation of about 1,080 km and construction of about 250 km. The final targets, including concessions to be granted beyond 1998, aim at modernizing about 4,900 km of highways, or about 30% of the national network entrusted to INVIAS. The private sector has responded with interest, though the original program targets were downsized to reflect the progress made to date in procuring the projects and more realistic assumptions with regard to engineering projects and mobilizing the financing needed to support them. * Bank Strategy. The proposed project builds on the conclusions of the sector work performed by the Bank between 1994-95. This work pointed out the need to further the institutional reform of the road sector, the main stumbling block to enhanced efficiency, and the rehabilitation and expansion of critical national road links. The main challenges highlighted in the report are both financial and institutional: (a) although road users pay substantial amounts of user charges and taxes, the system of reallocating these funds through the budgetary process has left substantial funding gaps. The manner of ensuring adequate flow of funds to the roads sector is one priority addressed by the Third National Roads Sector Project; and (b) substantial reform of institutional structures is needed to ensure that adequate funding is also matched by greater managerial autonomy and accountability and road management is organized along commercial lines to ensure greater efficiency and effectiveness in service delivery. 3. Sector issues to be addressed by the project and strategic choices: * Current Barriers for Private Financing of Toll Roads. The proposed project would address implementation and financing issues that arose in the execution of the road concession program in Colombia, which pose a challenge for the sustainability and expansion of the program. As opposed to other infrastructure sectors, most of the financing for the privately-funded road projects in Colombia has come from local banks, with maturities and interest rates that are costly and unsecure for undertaking road projects. These arrangements were made possible by the fact that the financing requirements have been relatively modest in size. In contrast, projects the size of El Vino-San Alberto will have to rely on both local and foreign capital markets to obtain the needed amounts and maturities of debt financing. The proposed public-private partnership will allow INVIAS to expand the concession program to larger projects, not fully financeable by the private sector under the prevailing terms.  Page 4 * Toll road projects generally pose more risks to private investors than other infrastructure projects. The predictability of expected traffic is subject to regional development growth and competition from alternative routes, which may significantly alter the traffic patterns on the road network. The willingness of users to pay tolls is largely a function of the wealth of potential users, the value assigned to time savings and other toil road benefits, and the cost of competing routes. These are critical factors in demonstrating revenue streams of sufficient magnitude and predictability to obtain financing, especially for greenfield and intercity roads. Typically, this uncertainty is mitigated in power projects through take-or-pay arrangements which are very similar to the minimum traffic/revenue undertakings used in most of greenfield road projects. Furthermore, demand risk in greenfield projects is compounded by the fact that the investments needed are relatively large to the size of the market, indivisible and tied to a particular location (service to distant markets is not possible), constraining the flexibility of private project sponsors to adapt to low demand scenarios. Without appropriate levels of Government support (in the form of contributions in cash or kind, minimum revenue and other risk- sharing undertakings), commercial lenders are reluctant to consider financing new road projects, irrespective of the project's commercial fundamentals, political environment, or macro conditions. While the specific nature and need of these undertakings may vary from project to project (even within the road sector), their main purpose is to improve the financial viability of the project by allocating certain risks partially or entirely to government, in line with the principles of diversifying risks and allocating them to the party that is in better relative position to manage them. * Addressing Government Support and RiskAllocation Issues through competitive bidding. The proposed project would remove those barriers by providing the level of government support needed under well-structured incentives to minimize government exposure, and by improving risk allocation to the parties in line with the principles presented above. This improved allocation of risks builds on the experience gained from a review of other BOT road projects in Colombia and elsewhere (see Table 1 to Annex 2). Private investors have, however, different attitudes towards country risk, project risks, and revenue potential associated with a project in a particular setting. Thus, the actual level of government support needed for the project was subject to market testing through competitive bidding. Key elements of the support offered during the bidding process, and the rationale for offering them, are described below: a) Government up-front capital contribution. The amount of government capital contribution required would be decided through competitive bidding, so as to make the project sufficiently attractive to private investors and compensate them for the externalities associated with the project. GOC will partially finance the construction costs through a cash contribution, reimbursed in kind when the facility is returned to Government at the end of the concession term or as soon as cumulative project revenues reach the revenue target set in the concessionaire's bid, whichever is earlier. Without this initial contribution, the project would be unfinanceable by the private sector'. The experience gained in several international road concessions demonstrates that it is good policy to base project revenues on affordable toll rates. The toll rates determined by GOC exceed short- run marginal pricing but are deemed affordable to users and adequate to avoid excessive traffic diversion and consequent erosion of benefits accrued to the transportation system as a result of building the project. iNVIAS has also included in the concession the operation of an existing contiguous tolled road section to allow economies of scale in project operation, reduce its financial support, and enhance project revenues. This road opened to traffic in 1995 and will generate net revenues from the very beginning of the concession; The extnalities associated with the project lead to positive net social benefits while private net benefits are negative without a govermnent capital contribution to the project. Such contribution is necessary for the project to be capable of defraying high construction costs, covering debt service, and providing a reasonable return on equity based on (i) expected cash flows during a concession period (about 24 years) that is shorter than the economic life of project assets, and (ii) affordable toll rates that would avoid inefficient traffic diversions and erode the benefits accrued to the transportation system. As noted in Section 13, GOC's contribution is commensurate with what the users of the 570-km road network will contribute in road user charges aside from tolls in net present value terms during the planned concession period.  Page 5 b) GovernmentMinimum Revenue Support. Even with affordable toll rates, the uncertainty of traffic revenue has been one of the biggest issues hindering private financing of new roads. In order to address this issue, GOC designed a revenue support mechanism, limited in duration and size, to improve the bankability of the project and reduce financial costs. Bidders were asked to bid on the minimum level of comfort, if any. This support would only be available during the first nine years (including a four-year construction period and the first five years of operation of the new link) out of the proposed 24-year concession. These first nine years are considered to be the most critical in terms of traffic build-up. The actual level of GOC's support is expected to represent what the successful bidder assesses in its bid as the minimum revenue that such bidder requires for each semester to convince lenders that project revenues would cover estimated debt service and operation and maintenance expenses during the first nine-year period. Revenues in excess of the minimum revenue support would be applied to cover any shortfall during unfavorable years. Thus, GOC's funds will only be used when there is still a shortfall to be filled. Any GOC compensation under this limited revenue obligation would be counted against the revenue target set in the concessionaire's bid. Bidders were also asked to bid on the portion of the minimum revenue obligation that they consider essential to cover likely fluctuations in project revenue during the same availability period. In the event of a revenue shortfall, such portion would have become available to the concessionaire through a Liquidity Mechanism to be funded by a Bank loan to ensure rapid payment. c) Government Support to Tunnel Contingencies. INVIAS would share with the concessionaire or builder contingency costs in tunnel construction, resulting from additional works which could not be foreseen at the design stage (such as changes in geologic or hydrologic conditions), through an incentive structure appropriately designed to contain cost overruns. Under this arrangement, the concessionaire would have absorbed the first 20% of such contingencies, while INVIAS would cover the additional works above that level. The arrangement was intended to lower the final cost of the tunnels to GOC and allow the private project sponsors to manage the risk in a cost effective manner, thus improving the bankability of the project. d) BankPartial Risk Guarantee. Bidders were given the option to use a Bank Partial Risk Guarantee (PRG) to improve project borrowings. The PRG would protect project lenders or bond holders against debt service default due to INVIAS' inability to comply with its payment obligations in the Concession Contract (CC) in respect of: (i) MOT not authorizing the toll adjustments agreed in the CC; (ii) compensation for events of political force majeure ("Extraordinary Excusable Events"); and (iii) compensation for possible changes in the law (such as changes to environrmental standards, imposition of taxes on the collection of tolls, or laws restricting contractual arrangements for toll collection) that would adversely affect the project's ability to service its debt and lead to a default of the debt covered under the PRG. Overall, compared with previous road concessions in Colombia, the structure offered would allocate risks to the various parties in a more cost effective manner, reduce GOC's exposure to contingent obligations throughout the concession period, and promote a more secure financing structure compared to the existing concessions, capable of tapping the international markets, since neither the capacity nor the conditions of the financing available in the local market are commensurate with the size of this project. In particular, the minimum traffic/revenue obligations granted in previous concessions would be reduced to a "start-up minimum revenue support" designed to cover only the initial years of operation. The risks to be covered under the proposed PRG were restricted to political and regulatory risks over which GOC has direct control. Thus, the level of support subject to competitive bidding aims at restricting residual risk-bearing by GOC1. hnfastructure privatization has frequently been accompanied by extensive residual risk-bearing by governments, which threatens to vitiate its efficiency benefits and confront future govermments with large financial liabilities. This issue was  Page 6 * Role antictpated by the Bank. However, to limit GOC's undertakings to what was strictly needed to enhance the viabi}ity of the project, such arrangements must have enough credibility for potential investors to commit funds to the project at an early stage (i.e., at bidding). Thus, the role anticipated for the Bank to support the project and the concession scheme during the bidding stage was designed to both provide enhancement to the project for increased competition at the bidding stage and more secured private financing; and ease Government cash management constraints through Bank backstopping of lNVIAS contingent undertakings (as the budgetary arrangements that otherwise would support government payments may lack the credibility needed). The Bank package consisted of two instruments, namely: (i) one or two loans to lNVIAS to backstop its contingent obligations in respect of eligible cost increases in tunnel construction and a Liquidity Mechanism to support revenue shortfhll during the early years of the concession, and (ii) a Partial Risk Guarantee to improve project private borrowings.. * Bidding outcome. The proposed enhancement instruments and the bid evaluation criteria provided the incentives to minimize the level of enhancement requested from government to what each bidder considered strictly necessary, and led to a more robust competition for the project among bidders. In turn, this yielded significant economic savings to Colombia. The bidding process enabled INVIAS to award successfully this concession with much less exposure than initially envisaged and shift more financing risk to the private sector, as the successful bidder declined the undertakings offered and asked for the lowest government capital contribution. The successful bidder also did not request the use of the Bank's Partial Risk Guarantee in its bid. The fact that two bidders out of the four who submitted bids, requested all of the instruments supported by the Bank (including the Partial Risk Guarantee) in their bids, and the third bidder requested one of the instruments backstopped by the Bank, reinforces the conclusion that the support offered was deemed necessary and critical to attracting competition for the project. - The role anticipated by the Bank has changed since the bidding process. In view of the deterioration of its fiscal position, GOC has requested that the Bank provide a loan to finance its capital contribution to the project. The loan would be made to the Republic of Colombia to finance the budgetary transfers made or to be made for iNVIAS to deposit in the applicable project Trust Account(s), the three capital contributions requested in the successful bid as stipulated in the CC. C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): * The project consists of: (a) the operation and maintenance of the existing road from El Vino to Villeta (51 kIn); (b) the rehabilitation, operation and maintenance of the existing, winding road from Villeta to Honda (72 kIn); (c) the construction, operation and maintenance of a new 68.4-lkn highway from Tobiagrande to Puerto Salgar, including about 15 tunnels and about 37 bridges and viaducts; and (d) the operation and maintenance of the existing road from Honda to San Alberto (380 kIn). The project also includes the transfer of the management of about 200 ha. of a sub-Andean land as a natural forest reserve, in order to preserve the environment along the right-of-way of the new road. The execution and management of the project, and the mobilization of part of the financing required, would be done by a private concessionaire selected on the basis of Intemational Competitive Bidding. extensively discussed at an international conference organized by the Bank. The conference on "Dealing with Public Risk in Private Ifrastucture" was held in Colombia in May 1997.  Page 7 Component Category Cost Incl. % of Bank- % of Contingencies Total financing Bank- ___________________ ____ (US$M) ____ (US$M') financing Road construction, rehabilitation, Physical 496.6 87 137.1 28 and other project works to be undertaken by the concessionaire's Technical Assistant under a fixed- price, fixed-term contract. Project development, management Project 22.5 4 0.0 0 and government supervision Management Financing fees/expenses, and Other 53.2 9 0.0 0 interest during construction Total 572.3 100 137.1 24 2. Key policy and institutional reforms supported by the project: e Bringing private sector participation in managing and financing road projects to (i) mobilize additional resources to provide, in less time, services that users are willing to pay for, and (ii) improve efficiency in project execution. - Structuring a public-private partnership to (i) expand the use of concessions to projects with robust economic justification but not financially viable by the private sector alone, (ii) limit government support to what is strictly necessary to mobilize private financing, and (iii) compensate for externalities in the most cost-effective manner. 3. Benefits and target population: * Benefits. The project would remove physical constraints in transport and reduce transport costs for goods and passengers. This would enable a higher level of economic activity and stimulate trade, exports, and the mobility of people. By reducing travel distances and improving road alignments through construction of the Tobiagrande-Puerto Salgar link, the proposed project would upgrade transport links between Bogota and Medellin--the two most populous and industrialized cities of Colombia-and between BogotA and the Atlantic Ports of Cartagena, Barranquilla and Santa Marta, the origin and destination of over 50 percent of Colombian exports and imports (in tons, 1994). If the improvements proposed along the corridor are not undertaken, congestion and traffic safety will become increasingly serious on the existing Villeta-Honda road, and transport service levels will substantially decrease. Compared to the existing road, the construction of the new road link, with its tunnels, will bring substantial benefits, as follows: (i) the travel distance would be about 25 percent shorter, (ii) average travel time would be reduced by more than 50 percent, and (iii) costs per vehicle- kilometer for the vehicles diverted to the new road would be reduced by around 50 percent. * Implementing the project through a private-public partnership will bring important fiscal and efficiency benefits. First, private sector financing will bring additional resources to Colombia's aggressive infastructure modernization program, which would allow GOC to address the existing infrastructure shortage more rapidly while freeing scarce public funds. With only public funding Colombia could not sustain the increased levels of investment required in all sectors without a further deterioration of its fiscal position or hard investment trade-offs. Secondly, private sector financing and management of project construction and operation, and the limited recourse structure of the project finance, should help improve efficiency. The private sector will bring the latest technologies available and the discipline  Page a needed to avoid cost overruns and delays in project completion that have plagued implementation of public sector road projects in Colombia. The concession contract ensures adequate maintenance of one of the most strategic road corridors in Colombia and the timely provision of traffic services. Through the concession the project will realize substantial benefits to the functioning of transport, reducing transport costs and increasing the reliability, safety and quality of freight and passenger transport services along the corridor. TargetPopulation. The project intended benefits would accrue to two main groups. First, the direct road users would benefit from traveling over about 570 km of high-quality highways, well-maintained through a competent operator who will provide proper safety and emergency services (in 20 years of operation more than 120 million vehicles are expected to travel on the new road link). Traffic on the new highway would come from two main sources: traffic diverted from the existing road, and traffic induced by the shorter travel times and the reduced transport costs which come from shorter distances and better road alignment and gradients. It is estimated that by the end of 2007, with the project, traffic along the corridor would increase by about 100 percent above the present levels on the existing road. The new, generated traffic is estimated to be 45 percent of the traffic diverted from the existing road in the first year after construction, increasing to about 78 percent by year 2025. Second, the population at large would benefit from the increased economic activity and trade between the main centers served by the corridor. The structure and composition of the road transport industry in Colombia is largely unregulated (aside from safety regulations) and highly competitive. Thus, the net reduction in transport costs brought about by the construction project should effectively reduce freight rates, ultimately reducing the price of the transported goods. Passenger transport services between Bogota and Medellin are expected to increase substantially (about 70 percent additional bus departures over the 1996 levels by year 2007) as a result of the project, benefiting the low and middle income population of Medellin and Bogota who primarily use the inter-urban passenger services. 4. Institutional and implementation arrangements: * Sector Responsibility. The Ministry of Transport (MOT) has overall responsibility for the transport sector and the policy framework within which the project will be implemented as a private toll road concession. MOT annually approves the toll tariff proposed by INVIAS for collection on the national road network during the incoming year. For privately operated concessions, MOT approves the initial and subsequent tariffs, as well as the formulae for future adjustments stipulated in the respective concession contract. * lNVIAS, the national road agency under the Ministry of Transport is charged with managing the Colombian national road network. As such, INVIAS owns the road facility and is responsible for: (i) defining the project design and performance standards, (ii) recommending and obtaining MOT's approval of the initial toll rate structure; (iii) granting the concession to a private Project Company, that was selected through International Competitive Bidding; (iv) purchasing within six-months of signing the CC the land for the right-of-way and for a forest reserve; (v) channeling the government's annual capital contribution to the project during the construction period as stipulated in the winning bid and in the CC; (vi) auditing through designated experts the concessionaire's compliance with the design and construction specifications and with operational performance standards and contractual obligations set forth in the CC; (vii) seeking MOT's authorization for tariff adjustments specified in the CC, (viii) enforcing traffic regulations throughout the concession period; and (ix) undertaking unforeseen repairs on selected bridges existing along the Villeta-Honda and Honda-La Dorada road links, if needed, during the concession term. * Franchise Holder - Concessionaire. The concessionaire, a special purpose project company, was selected through a competitive process to build the new road and operate the project throughout the concession term. As such, it is responsible for: (i) mobilizing part of the funds (equity and debt) and  Page 9 the resources needed to undertake the project; (ii) setting a Trustee acceptable to INVIAS to administer project funds, expenditures and operational revenues; (iii) refining the engineering designs and undertaking the project works within the time frame stipulated in the CC through Technical Agreements with qualified Technical Assistants; (iv) obtaining environmental permits for construction activities and funding the operation of the forest reserve; (v) collecting tolls at the specified toll gates and operating the facility in compliance with minimum service and performance standards set in the CC; (vi) returning the facility to INVIAS upon completing the concession period or reaching the expected revenue set at the bidding stage, whichever is earlier. The concession to develop the project was awarded in late November 1997 to Sociedad ConcesionariaMagdalenaMedio, who submitted the lowest bid. This group is formed by Spanish (53%) and Colombian (47%) companies. Detailed information on the composition of the concessionaire is given in Annex 2. * Other GovernmentAgencies. The National Department of Planning, through the Committee for Private Participation in Infrastructure (CPPI)1 is responsible for coordinating private sector participation in the various infrastructure sectors, and monitoring adherence to the National Development Plan. The Ministry of the Environment (MOE) is responsible for issuing and monitoring compliance with the environmental license for the project (MOE has already approved the environmental license and the Environmental Management Plan; both were part of the bidding documents). The Regional Autonomous Corporations are responsible for issuing the environmental permits (location of campsites, protection of water sources and use of quarries) needed during construction. * Concession Structure and RiskAllocation. Annex 2 provides a detailed description ofthe concession structure, the allocation of risks among the various parties, and tariff and regulatory systems as stipulated in the CC. Annex 2 also contains a brief description of the bidding arrangements for procurement of the project sponsors/concessionaire through international competitive bidding. The bid evaluation criteria was designed to mininiize the costs to GOC and its exposure to contingent obligations. This allowed INVIAS to award the concession to the bid that represented the least expected cost to GOC, and pass to the selected concessionaire all construction and traffic/demand risk. - Implementation Period - Concession Term. The CC establishes a long-term concession encompassing three phases: (i) a seven-month pre-construction period, whose implementation started on December 15, 1997 with the signing of the CC; (ii) a 48-month period for construction of the Tobiagrande-Pto. Salgar road link, rehabilitation of the Villeta-Honda road link, and operation of the existing El Vino- Villeta, Villeta-Honda, and Honda-San Alberto road sections. Thus, the Project is expected to be completed during the second semester of calendar year 2002 with the opening to road traffic of the Tobiagrande-Pto. Salgar link; and (iii) a 20-year period for operation of the four links that compose the road corridor, or upon reaching the Total Expected Revenue bid by the successful bidder, whichever is earlier. If the Total Expected Revenue is not achieved by the end of the 20-year term, INVIAS would have the option of either extending the concession annually for up to five additional years, or partially compensating the concessionaire for the non-realized portion of the Total Expected Revenue; the concession will expire at the end of the fifth extension without any further compensation to the concessionaire (even if it has not obtained the intended Total Expected Revenue). * The Bank loan will remain available for disbursements from the effective date (see Section G), which arnong other conditions is subject to achieving conditions defined in the CC for commencement of the construction of the Tobiagrande - Pto. Salgar road link, until June 30, 2000 or 15 months after the last government contribution to the project is due to be paid in accordance with the CC. For the purpose of preparing the Implementation Completion Report and future operational plan, project completion is defined as the date on which the minutes of commencement of the operation stage are signed in The committee is composed of top representatives from the Ministries of Finance and Public Credit, Transportation, Energy and Mines, Environment, and the National Department of Planning.  Page 1 0 accordance with the provisions of the CC (i.e., the constmction of the Tobiagrande - Pto. Salgar road link is completed to the satisfaction of INVIAS). Project completion is expected by December 31, 2002. Accounting andAuditingArrangements. In accordance withthe CC, all project funds, revenues and expenditures will be administered by a project Trustee acceptable to lNVIAS and paid by the Concessionaire. The CC requires the concessionaire to submit to lNVIAS monthly reports on the financial statements of the Trust Accounts, within 20 days after the end of each month. In line with the provisions of the CC, independent auditors with international reputation will conduct the following audits: (a) annual audits of the financial statements of the concessionaire, within three months after the end of each fiscal year; (b) bi-annual audits of the financial statements of the project Trust Accounts, including certification that both INVIAS' capital contribution and toll revenues from operation of the existing road links are either available in the Trust Account or have been used to finance expenditures in respect of (i) construction of the Tobiagrande-Pto. Salgar road link, (ii) rehabilitation of the Villeta- Honda road link, and/or (iii) maintenance and operation of the three existing road links (El Vino- Villeta, Villeta-Honda and Honda-La Dorada); and (c) annual audits of lNVlAS records in respect of the project for each year. INVIAS' financial statements are not required because its financial involvement in the project is limited to the three capital contributions stipulated in Clause 18.2 of the CC. The audit report(s) would be furnished to the Bank within four months after the close of the fiscal year. * Monitoring. The monitoring of project implementation encompasses two levels. One level consists of the reports that the concessionaire and the independent supervisor appointed by lNVIAS will produce throughout the different phases of the concession in accordance with the CC and the Colombian Regulations for Operation of Road Concessions. These reviews include biannual evaluations of the condition and level of service of the facility, monthly reports on maintenance activities, operation and safety performance of the facility, and weekly reports on traffic volumes by category, toll revenues and axle-weight controls generated by the systems operating at tollgates and axle-weight control stations. These reports will be available for consultation from the Sub-directorate of Road Concessions, the unit within INVIAS charged with overseeing the road concession program. INVIAS will appoint independent experts to supervise construction activities and monitor the safe and efficient operation of the facility, under terms of reference satisfactory to the Bank. Their fees and expenses would be paid by the project Trustee from project revenues. A second level of monitoring consists of performance reviews undertaken periodically by INVIAS on (i) the progress made by the project toward accomplishing its development objectives, as measured by the outcome of the performance indicators in the Project Design Summary, and (ii) the implementation of the Resettlement Plan and Social Assistance Program that are part of the project's Environmental Management Plan. * Reporting. INVIAS, through the Office of Concessions, will prepare and furnish to the Bank by August 31 in each year a report integrating the results of the monitoring and evaluation activities performed to determine the progress during the previous year towards implementation and achievement of the objectives of the project based on agreed performance indicators (see Project Design Summary). The reports would also contain other relevant information such as: (i) up-to-date traffic and revenue data for the tollgates in operation; (ii) an assessment of the validity of the critical assumptions stated in the Project Design Summary, and of the problems directly or indirectly associated with the implementation of the project: (iii) status of compliance of the various parties with their obligations under the CC, (iv) status of compliance by GOC and INVTAS with the covenants in the Loan and Project Agreements, respectively; and (v) the measures recommended to ensure the efficient carrying out of the project and the achievement of its objectives. * Bank Supervision - Annual Reviews. Overall it is estimated that the Bank supervision effort would entail about 40 staff-weeks. This would result in an annual average often staff-weeks during the  Page 1 1 project implementation period (construction period for the Tobiagrande-Pto. Salgar road link). The core team would involve a highway engineer, an environmental specialist, and a financial analyst. The team would draw other skills as needed, including a transport economist to perform an evaluation of the project outcome upon construction of the new link, and tunnel, bridge and project finance specialists. During the third quarter each year, the Bank, INVIAS and the CPPI will conduct a formal annual review of the progress made in reaching the project objectives. The annual reviews will also provide an opportunity to (i) exchange views about the project technical, financial and economic performance, (ii) if relevant, the adequacy of the budgetary allocations to support NVIAS' payment obligations under the CC, and (iii) policy and implementation issues related to the execution of the road concession program. The last formal review, which will take place upon completion of the Tobiagrande-Pto. Salgar road link, will also include a retrospective review of the project and an assessment of its development impact, to be incorporated into the Implementation Completion Report. D: Project Rationale 1. Project alternatives considered and reasons for rejection: * Other Project Design Options. Two alternatives have been considered to improve transport conditions along the corridor: (i) improvements along the existing highway to allow enough capacity for the expected increases in traffic, and (ii) the construction of a new highway from Tobiagrande to Puerto Salgar (the project). Both alternatives were compared to the base alternative of maintaining the existing road in acceptable condition, but without any major improvements to its capacity. The economic worth of the construction alternative is higher than the alternative of improving the existing road because of the higher level of induced traffic and the larger reduction in both vehicle operating costs and travel times of the construction alternative. The incremental approach of improving the existing highway is also expensive due to the difficult topographic conditions and extensive development of the area (the improvement cost is estimated at about US$125 million). This alternative would have an overall economic rate of return of about 15% and would generate about US$40 million of net benefits in present value terms. Therefore, this alternative, though economically feasible, does not compare favorably against the construction of the Tobiagrande-Pto. Salgar road (see Section 13). Consideration has been given to another array of alternatives, including the rehabilitation of a parallel railway line, but have not been deemed worthwhile of further analysis due to their much higher costs and limited capacity (and, consequently, expected benefits). * Public Funding Options. The alternatives of funding the project entirely in the public sector or of undertaking part of the road improvements outside the concession were rejected in favor of the proposed private-public partnership. Private sector financing and management is expected to: (i) bring additional resources to undertake the project in a shorter time, freeing scarce government funds for investments in social sectors; and (ii) increase the efficiency in construction and operation of the project through increased market discipline, ensuring the project is completed on time and within budget. These advantages offset the higher cost of mobilizing private financing as determined under a financial assessment undertaken by the Bank during project preparation'. l The assessment of the financial costs to GOC derived from various possible options for financing the project and structuring GOC's subsidy demonstrates that, under ideal conditions, GOC could finance this project at a lower cost than the private sector. But GOC could not sustain these levels of investments in all sectors indefinitely without reducing its creditworthiness. Moreover, after accounting for actual experience with cost overruns and completion delays in public sector road projects, the analysis shows that the proposed private-public partnership approach would be less cosdy. The outcome of the assessment can be summarized as follows: (a) in principle, the public ownership/financing option would yield the highest NPV for GOC due to GOC's good credit standing and access to capital markets. This public funding alternative, however, entails using up a susbstantially larger amount of extemal public borrowing for the project (a larger capital diversion from other sectors) and is highly sensitive to delays in project completion or cost overruns; (b) an overall cost increase of 47% in the value of the turnkey contract (no delays in construction), or a combination of a two-year delay in commissioning the new road with 43% cost increase, or a four-year with a 32% cost increase would be sufficient to render the project as costly as the proposed private-public partnership. Past experience in the road sector in Colombia suggests  Page 12 Other options that may in theory attain comparable levels of efficiency, still in the domain of public financing, were also rejected. Govermnent could auction the building of the project to a private contractor against a lump-sum determined by the lowest bidder that satisfies certain technical requirements, awarding a "turnkey contract". Government could then set up a second auction to concession the operation of the facility. This scheme faces some disadvantages: (i) no market-based incentives to screen the viability of the project; (ii) it has yet to be demonstrated that the same efficiency gains would be achieved in the absence of the discipline that the limited recourse of the proposed project financing arrangements is expected to bring about; and (iii) a greater danger that social or political opposition may prevent charging efficient user-fees, since govemments usually lack the strength to resist such pressures. * Government Subsidy Options. An up-front capital contribution, determined at the bidding stage, was preferred over an operational subsidy because it reduces govermment exposure throughout project operation, enhances bid responsiveness, and reduces the financing risks to be bome by the private sponsors. In addition, an up-front subsidy is subject to budget approval when the project competes with other items in the Govermnent agenda, thus faces serious scrutiny. In comparison, subsidies during project operation --and the minimum revenue undertakings necessarily associated with them-- do not face such a screening and often imply higher liabilities for future administrations. Although the private sponsors' investment at risk would be smaller than if they had to finance the whole project in the absence of GOC's subsidy, the incentives to screen the project for financial viability remain because such investment is still substantial. The option to treat GOC's capital contribution as subordinated debt was rejected because calculations based on the financial analysis demonstrated that the concessionaire would not be able to pay back to INVIAS such amount of debt without extending substantially the proposed concession term (presently 24 years). This could result in having to postpone needed capacity expansions as the concessionaire would remain operating the facility but would not be able to undertake such costly investments, or in having to negotiate the execution of such investments through less cost-effective arrangements with the concessionaire. In this project, the expansion of the tunnels would be too costly to finance with the excess revenue or to contemplate its implementation under the concession contract. A new concession would have to be awarded. G Government Revenue Recapture Mechanism. A revenue recapture mechanism that would require the concessionaire to physically surrender to INVIAS all or a portion of the excess revenue during or after the expiration of the minimum revenue protection period, was rejected as not suitable in this project. Diverting the project's excess revenues to INVIAS would: (i) prevent bidders from taking a position on the project's future potential upside revenue. Bidders would tend to set the Minimum Revenue Support at a higher level than they otherwise would under the current arrangement, to protect their equity return from being transferred to NVIAS. Bidders would also tend to seek a larger up-front contribution from Government, if the recapture mechanism is set at a level that would not allow them to realize the expected return on their investment within the concession term; (ii) deprive the concessionaire from the flexibility and incentive of using its excess revenue to enhance future project performance and income through better service, maintenance, promotion, etc. (as it would have no incentives to improve performance once the "recapture lever' is achieved or exceeded); and (iii) result, in the event that the traffic levels exceed the projections, in having to postpone needed capacity expansions with the drawbacks noted above. that such delays and cost increases are likely to occur if the project is implemented as a purely public project, due to the weaker incentives to contain costs and avoid delays; (c) the proposed structure -with GOC making an up-front contribution- - is more cost effective than a cash-flow deficiency support throughout the concession period; and (d) the fact that GOC has to make a capital contribution to the project does not change the validity of the above conclusions. (The public funding option would also in principle yield the highest NPV, in the event that the project revenues were capable of defraying the costs without GOC's capital contribution).  Page 13 Bank Instrument Options. The initial Bank package proposed to support the bidding process consisted of (i) a Partial Risk Guarantee related to a limited number of contractual obligations of INVIAS; and (ii) one or two loans to lNVIAS to finance partially its contingent obligations in respect of eligible additional works incurred by the concessionaire in the construction of tunnels, and a revenue support mechanism, limited in size and duration. These instruments were chosen to provide enhancement to the project, after considering other possible sources for similar instruments. The market was to determine whether these instruments were needed, as bidders would bid on the size and availability period of the proposed Liquidity Mechanism -subject to caps specified in the bidding documents, and choose whether to use the partial risk guarantee. Bank backstopping of the Liquidity Mechanism through a revolving loan was perceived as the most cost-effective enhancement mechanism compared to other alternatives explored as none of the alternatives considered met all the project requirements within the current legal and budgetary framework in Colombia, or provided the same level of comfort to project investors during bidding as the proposed revolving feature. Although, the successful bidder declined to use these instruments, they had significant impact in increasing competition for the project. 2. Major related projects financed by the Bank and/or other development agencies: Sector Issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress Objective Improving national roads and strengthening MOPT and its Third National S S successor INVIAS. Major institutional reform between 1993- Roads Sector Proj. 4 turned INVIAS into agency more capable than predecessor. Ln 3453-CO. ~~~~~~~..................I............."Il,.............- --...........', ",...................,.... ......l",......................................... ..... ...................................... ..................................................................... ..... ................. Developing institutional, regulatory and enforcement Regulatory Reform S S capacity within Government to design infrastructure projects Techn. Assistance. .A.r.Pprivate financing. (cofinanced with IDB). Ln. 4138-CO. ................................ . .............................................................. .............................................. .. ...................................... ..................... Establishing an Infrastructure Finance Facility under an Private Sector experienced public sector bank to provide refinancing Infrastructure commitments to improve terms of local debt financing. acilit (FY99) C^onsolidating INVIAS as a high-performance road agency, National Roads and improving two strategic highway corridors. JY0 Other development agencies: IDB Transport Corridors. n/a Improving highway corridors and department's capacity. Departmental Roads. n/a n/a IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: * Both the project's design and the choice of Bank instruments build on the experience available internationally, and in particular the results obtained so far in Colombia with the on-going plan for infrastructure development through private sector participation. A precondition is to have a credible, enabling regulatory framework in place, supported by tangible evidence of Government's commitment to private sector participation in infrastructure. * Project Design and implementation Lessons. Most of the implementation issues experienced with the road concession program can be addressed by emphasizing quality-at-entry in project preparation, by: (i) retaining financial advisors with international experience to structure the project, prepare the legal documentation and advise TIVIAS throughout the procurement process; (ii) designing the bidding process to attract high quality international investors (including a well-targeted promotion campaign and a clear bid evaluation criteria to prompt bidders' attention on the few parameters upon which strong competition is critical for achieving long-term efficiency); (iii) making available to prospective bidders detailed engineering data but allowing them the time needed to quote their own estimates; (iv) using state-of-the-art technology to produce traffic forecasts and undertake risk analysis; (v) addressing in advance environmental and social issues that may arise from the proposed route location, the toll  Page 14 rate structure, and the location of toll collection facilities; (vi) having the right-of-way purchased before the concessionaire reaches financial close; and (vii) in view of the long duration of the concession term, designing a robust contract with built-in incentives to improve performance and with flexibility to manage uncertainties but avoiding opportunistic negotiations. Project Finance Lessons. Selecting the appropriate projects is essential, as financial engineering will not turn a bad project into a successful one; the project should have a robust justification for the transportation system, and its design standards and the tariffs commensurate with its functional justification and the ability of users to pay the tolls. Financial sustainability of a BOT project of the size of the El Vino-Pto. Salgar project requires mobilizing more secure and favorable financing structures than those prevailing in current road concessions in Colombia. This requirement necessitates ensuring access to both international and domestic markets by (i) improving the allocation of risks among the parties in the current concession contracts (in particular termination clauses); (ii) redefining government support through fewer obligations but directly aimed at helping the concessionaire meet its debtor obligations, particularly at the beginning of the concession; (iii) giving liquidity to these obligations through clear and credible compensation mechanisms; and (iv) minimizing the impact of the foreign exchange risk (in view that all project revenues are in local currency). 4. Indications of borrower commitment and ownership: * Commitment. GOC is strongly committed to bringing private sector participation in infrastructure. As stated in the CONPES document of May 30, 1995, the objectives of this policy decision are to: (i) increase efficiency in project construction; (ii) mobilize additional resources to supply necessary services in shorter time; (iii) reduce public sector risks; (iv) obtain the benefits of competition; and (v) channel government resources into social sectors. The document also set the policy guidelines for private sector involvement, and created a permanent group within DNP to support the CPPI. The unit assists in the promotion of projects and ensures consistency in the application of Government policy, definition of risk-sharing arrangements, and approval of Government-backed contingent undertakings. For 1996-1998 the National Development Plan envisions about US$30.2 billion in infrastructure expansion, of which about US$13.5 billion would come from the private sector. GOC has requested IDB and the Bank to support through a technical assistance project the development of appropriate regulatory frameworks and institutional capacity for project design and regulation enforcement (see Section 9 above). Monopolies in shipping, railways and ports have been dismantled by allowing private entry and by liquidating existing public monopolies. * Ownership. GOC's ownership of the project is demonstrated by: (i) the priority given to the project in the National Development Plan; (ii) the approval by the CPPI in August 1996 of the project scope, the Government's capital contribution to the project, the proposed allocation of risks, and the Bank's enhancement to the project; (iii) the approval by CONFIS in December 1996 of the budgetary allocations for GOC's support to the project, including the future budgetary commitments to support INVIAS capital contribution and contingent payment obligations under the CC; and (iv) the interest shown in Bank support through enhancement instruments. * Prior to Board presentation, INVIAS will have undertaken the following actions: (i) procuring the concessionaire and entering into a long-term concession contract, following prequalification and bidding procedures satisfactory to the Bank, (ii) starting the acquisition of land for the right-of-way in accordance with the Environmental License and the engineering designs submitted by the concessionaire, and (iii) depositing into the project Trust Account the first (advance) capital contribution to the project.  Page 15 5. Value added of Bank support in this project: * Bank participation in the phases of project design and procurement of private sponsors provided enhancement for increased competition and more secured private financing. The proposed project is the first operation in LAC that contemplated Bank support to a privately funded project through credit enhancement instrunents offered at the bidding stage. Bank involvement helped GOC to remove some of the concession design and financing constraints that have slowed down implementation of the road concession program: attract more qualified bidders to compete for the project; design concessions with less risk-bearing by government than the previous ones (especially in the case of public-private partnerships); and help establish a track record that would ultimately attract private investors with less government involvement. INVIAS is using the experience gained so far in structuring the proposed project to improve the design of new concessions contemplated under its road program. Further Bank involvement during project implementation will bring worldwide knowledge on best practices to help strengthen INYIAS' capacity to oversee and enforce road concession contracts. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): [/] Cost-Benefit Analysis : NPV= US$290.0 million equivalent; ERR= 19.5% [ ] Cost Effectiveness Analysis: [ O Other (Specify) * Economic Analysis. The economic analysis encompasses the comparison of the incremental economic costs and benefits that the construction of a new road would bring to the transportation system of Colombia and, consequently to the country's economic wealth. Both costs and benefits are calculated, in economic values, for the situation with and without the project to generate the annual incremental costs and benefits during the project's life. It required simulating the deterioration of conditions of the road caused by climate and the expected traffic, given the topographic and geometric specifications of the existing and proposed roads, and the calculation of the savings in operating costs to the traffic diverted to the new highway, the traffic induced by the existence of a faster and better facility, and the traffic that will remain on the existing road. The analysis also included the evaluation of the alternative of expanding the capacity of the existing highway to better service the expected traffic volumes. Both the construction and the expansion alternatives were compared to the base alternative of maintaining the existing road, without any major improvements to its capacity. * The economic rate of return, estimated at around 19.5 percent provides an indication of the economic robustness of the project and its benefits to advance the economic development of Colombia. Quantifiable project benefits include (see Annex 4): (i) changes in consumer surplus for the current traffic as a consequence of reduced vehicle operating costs; (ii) savings in time for current traffic; (iii) consumer surplus for the generated traffic; (iv) the generated traffic times the respective toll on the new highway, to fully account the value of the willingness-to-pay of the generated traffic; and (v) reduction in accidents and vehicle damage 2. Financial (see Annex 5): Pre-bid.financial assessment Sponsors base case Project FRR % 7.7 8.3 EquityIRR% 18.0 12.0 Net Present Value' (US$M) 104.5 25.3 (1) In calculating the NPV, cash flows discounted at 5.5% and 7.7% for pre-bid finanial assessment, and sponsor's base case, respectively. * Pre-bid financial assessment. Initial project design incorporated various incentive mechanisms within  Page 16 the financial parameters to attract sufficient and competitive interest from private sponsors and lenders. The initial financial assessment developed the framework for setting the maximum government contribution and contingent undertakings offered, and eventually reduced through competitive bidding. The key parameters in which the initial assessment was based include a real return on private equity of 18 percent, average debt service coverage of 2.0x, and minimum debt service coverage of 1.4x. From this assessment, the project framework estimated a maximum Government contribution of US$250.0 million, total private financing of about $208.0 million, and use of the Bank's Partial Risk Guarantee. Revenue forecasts were very conservative as the traffic assumptions prepared by GOC's consultants in 1996 were based on somewhat average annual population and GDP growth rates for the concession period of around 1.2 and 2.5 percent, respectively. During the ramp up period upon completion of the new road link, annual traffic growth was estimated at around 8.3 percent, dropping to around 3.3 percent in the later years of the concession. * Post-bidfinancial assessment. Although the concessionaire is in the process of finalizing its financial plan and lining up the necessary debt financing, the Bank has reviewed the basic parameters of the project, which appear to be feasible. Using these similar traffic assumptions except for more robust increases in the later years of the concession, the winning bidder estimated a higher upside revenue generation for the project and structured its bid, accordingly. The concessionaire, which based its bid on the greater upside potential of the project, predicted annual growth rates of around 8.4 percent during construction and 5.1 percent for the later years of the concession. The concessionaire's bid is based on a lower Government contribution of US$137.1 million, and without the enhancement mechanisms offered in the bidding package. In its indicative financial plan, the concessionaire estimated that it will mobilize approximately $390.0 million (debt/equity ratio of 75:25), financed in both local and foreign currency, but with a larger percentage of the former. In addition, the concessionaire estimated that construction costs would be about 12% higher than in the pre-bid assessment, but with all the contingencies included (e.g. geologic risk). Based on the Bank's review of these parameters, it estimated that the concessionaire real rate of return on equity would be around 12.0 percent, project NPV of about US$25.3 million, and an average debt coverage ratio is 1.7x. * Considering that the financial plan has not yet been finalized, the following sensitivity analysis summarizes the possible outcomes under three scenarios: a) Local debt financing only. If the project is financed by using solely local debt, interest costs would increase, and the real rate of return on equity would drop slightly to 11.0 percent, average debt service coverage would decrease to 1.4x and the NPV for the would become slightly negative. The concessionaire may experience a cash shortfall for 3 to 4 years during the operational period, which would be made up through either equity or short-term borrowings. This scenario is unlikely to occur given that the concessionaire already indicated in its bid that its had obtained a commitment of approximately US$90.0 million in foreign-currency denominated debt. b) Lower Equity Contribution. If the concessionaire reduces its equity contribution to minimum debt to equity ratio stipulated in the CC (80:20), then the real rate of return on equity would drop to about 10.5 percent, the net present value would be around $20.8 million, and average debt service ratio would be 1.5x. c) Lower traffic levels. If average annual traffic growti for the later years of the concessions falls to the 3.3 percent estimated by the government consultants in early 1996, then the real rate return on equity would be around 8.6 percent, the net present value would become negative, and average debt service coverage would be around 1.3x. Under this scenario, the concession term would be extended for an additional five years, the maximum extension possible under the CC. * The concessionaire is expected to finalize the security arrangements and reach financial closure within  Page 17 three months. Both items are conditions for commencing project works, and Bank loan effectiveness. The CC has adequate safeguards to mitigate against potential delays in reaching financial closure. To prevent against construction delays and cost increases, the concessionaire will enter into a fixed-term, fixed-price construction contract. * Fiscal impact. Project costs were compared to current budget levels of INVIAS and of the national government, as well as to their recovery from users (in the form of tolls and other charges) to assess the fiscal impact of the project. With no participation of the private sector in the financing of the road, the project would represent, during the construction period, between 12 and 18 percent of the road sector investment program for the national network, taking at the peak a sizable percentage of the budgetary resources of lNVlAS. However, with partial private financing the Government contribution would be reduced to between 4 and 6 percent, and hence the project's fiscal impact from the perspective INVIAS would be manageable. As a measure of fiscal prudence, lNVIAS had accounted in its budget the expected losses that could result from eligible cost increases in tunnel construction and revenue shortfall during the availability of the Minimum Revenue Support; however, the outcome of the bidding process has eliminated the need for such budgetary contingencies. * The tolls established for the various links of the project, though higher than the short-run marginal costs of maintaining, operating and rehabilitating the road, are compatible with those currently existing in the rest of the Colombian road network. These tolls attempt to balance the level of revenues with the levels of service and maintenance requirements for each link of the network. The tolls would cover operating and maintenance costs and provide the concessionaire with a reasonable return on the investment, net of the government contribution. * A calculation of the charges currently paid by road users aside from tolls (in the form of import, registration, fuel and sales taxes and other fees above the general levels applied to most goods in the economy) reveals that the users of the project's 570-km network would contribute in present value ternms and during the planned concession period, with about US$290 nillion. This value compares favorably with the expected cost to Government which, based on the amount requested in the successful bid for its up-front contribution (no exposure to other contingent obligations) is estimated at about US$130 million in net present value terms. As such, GOC's capital contribution would be covered from taxes and fees allocated to the road sector and, although embedded in the overall budget, it would actually come from the road users. 3. Technical: * The project would remove one of the main transportation bottlenecks in Colombia's trunk road system. The completion in 1995 of the Troncal del Magdalena highway' brought significant improvements to the transportation system, as its good technical specifications attracted the long-distance traffic from the slow, competing routes. The project would provide a high quality connection between the Bogota area and the Troncal, at the expense of costly tunnels needed to overcome the rugged terrain without compromising the design standards. The technical specifications proposed for the road are well-suited to the project objectives and commensurate with traffic projections. lNVIAS retained specialized international consultants to carry out the traffic study. The resulting traffic forecasts are based on state-of-the-art methodologies and reasonable assumptions for regional population and economic growth. * Although the project's reliance on tunnels is a rather new approach in Colombia, ample experience exists internationally of its efficient use (most notably in Europe). International experts in tunnels have The Troncal delMagdalena highway has been a major investment partially funded by previous Bank loans. Its construction took ten years to complete between 1985 and 1995. Since the aligmnent goes along the Magdalena River basin, it avoids the mountain ranges that substantially reduce operating conditions on alternative routes.  Page 18 supervised the feasibility of the designs and its application to the conditions in Colombia. The proposed project structure will allow GOC to best tap the international experience available. The first project in Colombia's road modernization program to make use of tunnels is the Bogota-VilDavicencio highway. Two tunnels (about 2.5 km and 4.1 km long respectively) are currently under construction under that project. Project preparation gave priority to surveying geologic, hydrologic and soils conditions along the proposed alignment and in particular the tunnels. Borings and soil core investigations were conducted along the tunnel alignments and for each tunnel portal. The surveys provide a detailed description of the rock class that would be encountered in the tunnels (about 90% is hard rock). Because of their high costs, bidders may not be inclined to undertake such detailed surveys during the bidding process. However, making available this information to bidders allowed them to submit more accurate quotations and reduce uncertainties during construction. 4. Institutional: * Executing agencies: The concessionaire, a private Project Company formed specifically for the purpose of undertaking the project, would be responsible for mobilizing aDl the resources needed. Details on the composition and implementation arrangements are given in Annex 2. The incentives provided by the limited recourse structure of the project together with the qualifications required under the competitive selection of the concessionaire, give reasonable assurance that the project company will look after a timely and efficient implementation of the project. Structuring the project as a BOT has forced INVIAS to address carefully the potential project risks. INVIAS has demonstrated its commitment to implementing the road concession program and solving the issues that arose in the on- going concessions. The lessons learned in this process were taken into account for project design (see Section 10). - Project management: The concessionaire will manage the execution of the project through various contracts specifically designed to diversify the risks and allocate them in the most efficient manner, such as a fixed-price, fixed-term contract for construction of the new road, and other contracts (Technical Agreements) for the design, operation and maintenance of the facilities. Specialized consultants will monitor the execution of the project on behalf of INVIAS. The Sub-directorate of Concessions within INVIAS will oversee project implementation and the concessionaire's compliance with the performance standards. The capacity to enforce such performance standards derives from INVIAS' reliance on specialized consulta'nts, who will be retained to perform periodic evaluations of the condition of the road network. 5. Social: * The proposed project would benefit long-distance traffic traveling between BogotA and Medellin, and Bogota and the ports on Colombia's northern ports. For the new road link, road users will enjoy substantial savings in vehicle operating and travel time costs, ranging between Col$21,000 per vehicle for cars and Col$82,000 per vehicle for articulated trucks. The proposed tolls represent contributions from users varying between 9 and 36 percent of users' savings (the lowest value corresponding to buses and the highest to medium trucks). Given that the structure and composition of the road transport industry in Colombia is largely unregulated (the main exception being safety regulations) and highly competitive, the net reduction in transport costs brought about by the construction project should effectively reduce freight rates, ultimately reducing the price of the transported goods and bus passenger tariffs, facilitating the mobilization of population and the integration of the country. * In addition, the construction of the new link would benefit the currently largely-isolated areas in the municipios of Nimaima, Quebradanegra, Utica, Guaduas, Caparrapi and Puerto Salgar (a combined population of about 70,000 inhabitants). The prevalence of poverty in these municipios is higher than the average for the country. About 70% of the population is rural, and devoted to low-income  Page 19 activities. Through the Social Assistance Plan agreed under the project, these local communities would realize the potential development that the construction and operation of the Tobiagrande-Pto. Salgar road section would bring about (see Section 18). By reducing congestion on the existing road, the towns of Villeta, Guaduas and Honda would improve their prospects as tourist destinations for the population of Bogota, although certain commercial activities (such as gas stations, mechanic services, and food stores) may see their business reduced by the diversion of traffic to the new link. 6. Environmental assessment: Environmental Category [ v A [ ] B [ ] C * Project Enironmental Impacts. The main environmental issues related to the proposed concession concern to the construction of the El Vino-Puerto Salgar road link. Direct and indirect impacts on soils, vegetation, archaeological sites, and population have been analyzed extensively, and appropriate mitigation and compensation measures have been identified and incorporated into the project design and the financing arrangements. The environmental and social management measures, and the detailed definition of institutional responsibilities among the different actors (INVTAS, concessionaire, municipalities), discussed below, have set benchmarks for private sector participation in infrastructure projects in Colombia. The Environmental Impact Assessment Study is available for consultation in the Public Information Center. The study includes a detailed Environmental Management Plan, with a plan for resettlement of about 12 vulnerable families and a program for Social Assistance for the people and municipalities affected by the construction ofthe Tobiagrande-Pto. Salgar road link. * Direct Impacts. Main direct environmental impacts include: (i) increased erosion and landslides along unstable geological formations; (ii) clearing of very small patches of Andean forest and protective vegetative cover; (iii) crossing of areas with yet unknown but with some potential for archaeological remains; (iv) displacement of small number of dispersed rural population; (v) passing through rural communities; and (vi) disposal of earth cuts. The selection ofthe alignment and the technical specifications of the road has been an important environmental management planning tool. This evaluation was done through an iterative process that entailed the analysis of various route locations, the assessment of their environmental impacts, and consultations with affected communities. As a result, the final road alignment and the conceptual design avoids the need for the resettlement of population (about 40 families will be displaced), the passing through rural communities and small towns, and the crossing of unstable areas through the construction of about 15 tunnels minimizes the need of clearing of sensitive vegetation covers. * Mitigation and compensatory measures for possible direct impacts include: (i) the design of a disposal plan for management of construction disposal. The plan identifies possible disposal sites and specifies drainage and vegetation recovery plans for their proper management; (ii) the establishment of a small, yet ecologically significant Andean forest conservation area in the Rio Negro canyon. The reserve will help preserve 200 ha. of sub-Andean forest and protect the most critical part of the canyon. The river is also a natural hazard for the villages of Tobia and Utica. INVIAS will purchase the land, and the concessionaire will finance through the project the infrastructure needed to operate the reserve (e.g. demarcation, paths, etc.); (iii) the implementation of the relocation plan for displaced rural families. Although displacement of families has been kept to a minimum, about 40 households will need to be relocated. The socioeconomic studies have identified the most vulnerable families (about 12 families without land tittles, elderly inhabitants, single mother families, below poverty line or in peril of impoverishment), which in addition to housing will receive social and economic assistance during the relocation process; (iv) establishment of chance-finding procedures for management of archaeological sites and remains during construction; and (v) the use of a specialized environmental supervision to monitor the construction process and the concessionaire's compliance with the environmental requirements and plans. * Indirect Impacts. Socioeconomic conditions in the area of influence of the road are precarious, with  Page 20 high urban and rural unemployment, low coverage of water, sanitation and health services, and weak institutional capacity within the municipalities. Indirect impacts on land use and land speculation, and the potential for disorderly development of rural towns and villages, have also been identified as important issues along the new road. INVIAS has designed technical and social assistance programs for all municipalities in the area of influence of the road. The programs, which are already under implementation, will: (i) provide technical assistance to municipalities to review, prepare or strengthen municipal land use programs and strengthen their enforcement capacity; (ii) finance through an agreement with the National Apprenticeship Service Agency (SENA) a training program aimed at developing the basic skills needed for more than 500 local workers to perform intermediate road construction jobs (such topographic surveys, equipment operation and maintenance), thereby allowing them to have access to employment opportunities generated by the construction of the road; (iii) implement a community information and consultation program. These programs include implementation schedules, institutional responsibilities, and sources of funds. * INV4AS' Environmental Responsibilities. INVIAS' Sub-directorate of the Environment, with the assistance of consultants, prepared a full Environmental Assessment and conducted public audiences and consultations with the affected municipalities. The report has been reviewed by the Bank and found satisfactory. INVIAS' environmental unit was initially established under MOPT and strengthened with the support of the Third National Road Sector Project. Now it houses a multidisciplinary group of about 50 engineers, biologists, socials scientists, geographers, social workers, and lawyers. In its five years of existence, it has developed into a skilled unit capable of addressing environmental and social issues in road projects, with recognized impact on the decision making processes of INVIAS. This capacity gives further assurance for the successful implementation of all environmental and social plans for the project. INVIAS specific environmental responsibilities in respect of the project include (i) purchasing the land needed for both the right-of-way and the forest reserve, (ii) supervising project implementation and compliance with the environmental standards and requirements set forth in the CC, and (iii) monitoring the social assistance program outlined above. * Concessionaire 's Environmental Responsibilities. All of the environmental responsibilities assigned to the concessionaire in the Environmental Tmpact Assessment Study were clearly identified and incorporated into an Annex to the CC. The environmental guidelines for road construction developed by INVIAS under the Third National Road Sector Project also form part of the CC. 7. Participatory approach: * Primary beneficiaries and other affected groups. INVIAS consulted with the affected communities and the five municipios in the project area (Tobiagrande-Pto. Salgar link) during project preparation. These consultations resulted in changes to the initial route location to avoid passing through or too close to some villages and other sensitive areas. The location of tollgates was also determined by lNVIAS based on consultations with the affected municipios along the project corridor CC. * Other key stakeholders. Through the project's Social Assistance Program community groups along the Tobiagrande - Pto. Salgar area will receive training to participate directly or indirectly in project activities; local government will receive technical assistance in land- use planning and development of enforcement capacity. Local community groups will participate in the implementation of these programs. The concessionaire is required to establish a Community Information and Consultation Unit. F: Sustainability and Risks 1. Sustainability: * The sustainability of the project benefits derives from: (i) the ability of the concessionaire to complete the project and comply with the performance standards set in the CC; and (ii) the acceptance of the  Page 21 proposed toll rates by road users. Choosing a competent project sponsor, with sufficient qualifications as an operator of long-term concessions, strengthens the project's sustainability. Initial toll rates were set by INVIAS taking into account the user's willingness to pay and possible impact on traffic diversion. The Government's contribution is intended to make the project financially viable with affordable toil rates. In turn, the project must generate enough revenues to enable the concessionaire service the debt and cover operation and maintenance expenditures. A critical factor is to mobilize long-term debt to avoid excessive exposure during the first years of operation of the concession. 2. Critical Risks (reflecting assumptions in thefourth column ofAnnex 1): Risk Risk Rating Risk Minimization Measure Annex 1, cell 'from Outputs to Objective" Overall project economic and financial S The uncertainty of traffic forecasts has been a major perfonnance hampered by traffic volumes issue in greenfield projects. The inclusion of significantly below forecasts. Traffic existing sections with an established traffic pattem growth along the corridor may be reduces, albeit partially, this risk. The project was restrained by deterioration of economic design on the basis of conservative traffic activity, or changes in traffic patterns on projections prepared by an independent consultant national road network induced by other with ample experience in toll roads. Base-case government investments. scenario shows a robust traffic-growth potential, with the early years of the concession the most critical. Concessionaire's revenue expectations are slightly higher than base case scenario towards the ................. .............................................................................. .............................. .14 i y R g~ ..........o A Public opposition to toils, resulting from S Historically, toll rates on national highways have rates that after the inflation adjustments kept pace with inflation, and the expansion of the stipulated in the CC, exceed users' road concession program reassures this policy will willingness or ability to pay (which largely continue. Initial toll rates are deemed affordable in depends on how country economic this context. conditions evolve). ...................................................................................................... . . . . . . . ................................................................................................... Poor project performance due to(i) M Risks minimization measures include: (i) the concessionaire's inability to comply with concessionaire's potential to realize an accelerated the standards stipulated in the CC, (ii) return on the investment in the event that the constraints imposed by the project design facility outperforms the traffic projections, or a loss (e.g., deficient level of service in tunnels), of revenue in the event traffic falls because of poor or (iii) interference with the operation of performance; (ii) the operator liability to the facility or the development of traffic performance penalties set forth in the CC for non- resulting from the deterioration of security compliance with stipulated standards; (iii) the conditions in the project area (exposure to discipline brought by the lenders' scrutiny of current areas of guerrilla activity is low but financial covenants; (iv) stringent qualifications northern sections on the Honda-San requirements met by the concessionaire, which Alberto link are close to the Magdalena minimize the risk of unskilled operator; and (v) Medio region, one of the most violent in availability of insurance for the concessionaire to the country). protect its investment from guerrilla interference. ~~~~~~.... i r exa. .................................... ............... ................... .................. .............................. ...... ................................................................................ Fluctuations of foreign exchange and M The use of the Minimum Revenue Support, which interest rates (where project revenues are in being denominated in US currency would protect currency different to debt) may result in a (albeit partially) against normal variations in debt-service burden beyond the capacity of exchange and interest rates during construction and the project. ramp-up period, was declined by the successful bidder. Other measures available include the use of a mix of local and foreign financing and hedging arrangements.... floating debt and stand-by  Page 22 ............................................................... . ............................................... ............... . .... .. -".............................. ...... .... .............. . .. . .. funding.. Annex 1, cell 'from Components to uQ ts"f ... ......... ................. .... ............... ...... ............................ .......... Delays in project start-up due to (i) the S The initial bid structure attracted strong inability of the concessionaire to reach competition for the project. The successful bidder, financial close, (ii) international financial however, declined to use the enhancement markets not eager to invest in the project, instruments offered and requested the lowest capital and (iii) inability of INVIAS to purchase contribution, thus increasing the project and 95 percent of the right-of-way. financial risk assumed. Although the project risks to be borne by the concessionaire are still reasonable (as otherwise they would have not been subject to market testing), the financial risk is larger than envisaged at project design. The CC contains safeguards to reduce the risk of long delays in reaching financial closure. The Bank loan will not become effective until conditions for commencement of construction are met Most of .................................... ........................t l.............................. ......... t h e.land has 0alead . .been p Delays in project completion due to (i) the M The combination of the following factors minimizes inability of the concessionaire to control this risk: (i) the stringent prequalification cost overruns, (ii) shortages of funds during requirements that bidders have to meet in respect of construction resulting from unforeseen financial strength, technical capacity and increases in financing costs or delays in construction experience; (ii) the limited recourse placing bonds, (iii) security unrest in nature of the project provides strong incentives for project area or other force majeure events. controlling costs and imposes use of start-up arrangements for stand-by funding and other financial instruments (swaps, hedging) required by lenders; and (iii) construction activities are located in areas not exposed to political violence. The tunnels impose substantial construction and operation risks, but successfil bidder declined the limited coverage offered in this respect during the ............................................................................................... .............................. ........ .... ............................................................................. Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: High visibility ofaprojectfailure. The project entails the operation of about 570 km of a neuralgic portion of the trunk road network, while previous concessions did not extend beyond 100 km. Although the net economic benefits of the project appear robust, the project's high investment cost and its reliance on the successful operation of the tunnels in the Tobiagrande-Pto. Salgar link, make it more vulnerable and visible in the event of failure. The inclusion of the competitive route for the construction section, where most of the investment is concentrated in, mitigates the risk of bail out by Government. With the opening up of the economy, Colombia's economic players have increasingly become convinced that the current infrastructure bottlenecks hinder economic growth, and are also convinced that the removal of the main bottlenecks in the transportation system implies solutions different from, and in many cases more costly than, those considered in the past. A first example in this regard is the on-going Bogota - Villavicencio road improvement project, which uses costly viaducts and tunnels to overcome the topographic difficulties that have for years severely reduced service levels along the road.  Page 23 G: Main Loan Conditions 1. Effectiveness Conditions * Special conditions to the effectiveness of the Loan Agreement between the Republic of Colombia and the Bank are: a) (i) the minutes of commencement of the construction stage, as defined in Clause 1.1 of the CC have been executed and delivered on behalf of INVIAS and the Concessionaire'; (ii) INVIAS shall have submitted to the Bank a report, showing to the satisfaction of the Bank, that lNVIAS, the Concessionaire, and each of the Technical Assistants are in compliance with all their respective obligations under Clause 2.1 of the CC, and each of the Technical Agreements; and (iii) the list of amicable settlers required under Clause 35.1 of the CC has been agreed upon between INVIAS and the Concessionaire; b) (i) INVIAS has hired the services of an Interventor required for the purpose of Clause 39 of the CC; (ii) the Concessionaire has made the payments required under Clause 39.5 of the CC; and (iii) the terms of reference of the Interventor are in compliance with the CC2; and c) all of the Technical Agreements have been executed and delivered in term and substance satisfactory to the Bank. * Prior to disbursement of Bank loan proceeds in respect of the second and third contribution the Interventor, through INVIAS, shall have furnished to the Bank certifications that (i) INVIAS, the Concessionaire and each of the Technical Assistants are in compliance with their respective obligations under the CC or under the Technical Agreement; (ii) the biannual audit of the applicable Trust Account performed in compliance with Clauses 5.9 and 5.22 of the CC, for the applicable six-month period next preceding the date of the corresponding withdrawal application, provides an unqualified opinion on the use of the Borrower's or INVIAS' finds deposited in the applicable Trust Account; and (iii) there are no reasons to qua]lif said opinion for accounting variations or adjustments, if any, since the end of the period covered by such audit and a date preceding by five working days the date of the withdrawal application. 2. Other conditions (Loan Agreement between Republic of Colombia and the Bank) * Procurement. To the extent that the Project shall be constructed and operated by a concessionaire who has been awarded the CC on the basis of international competitive bidding procedures in accordance with the provisions of Section II of the Guidelines for Procurement under IBRD Loans and IDA Credits, the goods, works and services required for the construction of the Project shall be procured in accordance with the applicable procedures of the said concessionaire. The CC stipulates that prior to signing the Commencement of Construction Stage Minutes, the Concessionaire must (i) submit the required performance guarantees, (ii) sign all of the implementation agreements (Technical Assistant Agreements) stipulated in the CC, (iii) establish the Trust, (iv) reach financial closure, and (v) submit the final designs. On the side of INVLAS, it must (i) transfer to the concessionaire 95% of the right-of-way needed for construcfion of the Tobiagrande - Pto. Salgar road link (including all of the land already required by the Concessionaire for the first year of construction), (ii) transfer to the concessionaire for operation the existing road sections which are part of the Project (with the exception of the Pto. BoyacA - San Alberto section that will be transferred on January 1, 1999); and (iii) deposit the initial capital contribution into the Trust Account. 2 The terms of reference cover, inter alia, to the satisfaction of the Bank the supervision and control of (i) execution of the construction of the Tobiagrande - Puerto Salgar road link and other project works in accordance with the CC, (ii) Concessionaire's compliance with the technical specifications and performance standards set forth in the CC for construction, maintenance and operation of the Project road network, (iii) compliance by the parties to the CC with the requirements of the project's Environmental Mlanagement Plan (comprising also the Resettlement Plan and the Social Assistance Program), (iv) uses of project funds and audits both according to requirements stipulated in the CC, and (v) verification of Project revenues as stipulated in the CC for the purpose of determining the progress made towards meeting the Total Expected Revenue target  Page 24 * Flow of Funds. The Borrower shall not submit withdrawal applications in respect of Loan proceeds allocated to Categories 2 or 3 of the Loan Agreement, before each of the Second and Third Contribution, respectively, has been deposited in the Trust Account(s) or without attaching thereto the evidence required under the conditions of disbursement above. Other conditions in the Project Agreement between INVIAS and the Bank: * Implementation. INVIAS: (a) shall take all such action on its part as shall be required to caffy out the Project and to cause the Concessionaire to caffy out the Project, and shall provide, or cause to be provided, the funds, facilities, services and other resources required for the Project as stipulated in the CC; (b) (i) shall comply with all its obligations under the Environmental Management Plan, the Resettlement Plan and the Social Assistance Program in respect of the Project, and (ii) shall exercise its right under the CC to cause the Concessionaire and each of the Technical Assistants to comply with their respective obligations under the CC, the applicable Technical Agreement, and under the aforesaid Plans and Program; (c) except as otherwise agreed with the Bank, (i) shall not assign, amend, revoke, abrogate or fail to enforce the CC or any of the aforesaid Plans and Program or any provision thereof; and (ii) shall cause the concessionaire not to assign, amend, revoke, abrogate or permit the assignment or fail to enforce any Technical Agreement. * Monitoring, Review and Reporting. INVIAS: (i) shall maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the indicators agreed upon (Annex 1), the carrying out of the Project and the achievement of its objectives; (ii) prepare under terms of reference satisfactory to the Bank, and furnish to the Bank on or about August 31 in each year, a report integrating the results of the monitoring and evaluation activities during the twelve-month period preceding the date of said report, and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of its objectives during the period following such date; and (iii) review with the Bank by September 30, the report and thereafter take all measures agreed upon based on the conclusions and recommendations of the report and the Bank's views on the matter; * lNVIAS shall prepare, on the basis of guidelines acceptable to the Bank, and furnish to the Bank not later than six months after the Project completion date (December 31, 2002) or the date on which the minutes of commencement of the operation stage are signed in accordance with Clause 2.2 of the CC, whichever is earlier, a plan for the future operation of the project. * INVIAS shall, (i) at the request of the Bank, exchange views with the Bank with regard to progress of the Project, the performance of its obligations under the Project Agreement, the performance of the Concessionaire's obligation under the CC and of each Technical Assistant's obligations under the applicable Technical Agreement, and (ii) promptly inform the Bank of any condition which interferes or threatens to interfere with the progress of the Project. * Resettlement. If during the life of the CC, an unforeseen population resettlement is required from any site where Project works will be carried out (other than the resettlement(s) specifically foreseen under the Resettlement Plan of the Environmental Impact Assessment Study): (i) INVIAS shall submit to the Bank an ad-hoc resettlement plan for the population in question, prepared following the principles and guidelines satisfactory to the Bank contained in the documents titled "INVIAS Resettlement Policy" and "Methodology for the Assessment of Properties Affected by Road Construction" applied to the Resettlement Plan under the Environmental Management Plan; and (ii) after receiving Bank confinnation that the ad-hoc plan submitted is consistent with such principles and guidelines, INVIAS shall execute, and cause the Concessionaire and each of the applicable Technical Assistants to execute the resettlement in question in accordance with the corresponding ad-hoc plan, and shall cause the Concessionaire and each such Technical Assistant not to commence any work unless INVIAS has  Page 25 given the corresponding authorization after being satisfied, and having satisfied the Bank, that all the corresponding steps under the ad-hoc plan in question have been taken. * Financial. JNVIAS shall: (i) maintain and cause the Concessionaire to maintain records and, exclusively in the case of the Concessionaire, separate accounts adequate to reflect their respective operations and financial condition in respect of the Project; and (ii) cause the Trustee to maintain similar records and separate accounts adequate to reflect the transactions and other entries in each Trust Account. * INVIAS shall: (i) have its records in respect of the Project, for each fiscal year audited in accordance with appropriate auditing principles consistently applied by independent auditors acceptable to the Bank; and (ii) furnish to the Bank as soon as available but in any case not later than four months after the end of such year the report of such audit. * INVIAS shall: (i) exercise its right under the CC to ensure that the Concessionaire and the Trustee have the Concessionaire's accounts and each Trust Account, respectively, audited for each fiscal year in accordance with appropriate auditing principles consistently applied by independent auditors; (ii) furnish to the Bank as soon as available, certified copies of all information on accounting matters to be furnished to INVlAS under Clauses 5.9 and 5.22 of the CC; and (iii) take all such action as shall be necessary or convenient to ensure that the services of the Interventor shall be available until the termination of the CC. * INVIAS (a) shall exercise its rights under Clause 2.1.1(v) and 6.2 of the CC, or under the laws of the Borrower, in respect of (i) the Concessionaire, or (ii) the performance by a Trustee, both in regard to each Trust Account, and especially INVIAS' ability to recover any amount unduly paid by the Trustee to the Concessionaire; and (ii) if any amount is recovered, INVIAS shall promptly inform the Bank, so as to enable the Bank to deternine whether the amount in question shall be refunded to the Bank and, in such case, whether said amount shall be credited to the Loan Account for subsequent withdrawal or for cancellation in accordance with the relevant provisions of the Loan Agreement. H. Readiness for Implementation [/] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [] Not applicable. [v/] The procurement documents for the first year's activities are complete and ready for the start of project implementation. The Concession Contract (CC) was awarded in November 1997 and signed in December 1997. [v/] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [l/] The following items are lacking and are discussed under loan conditions (Section G): INVIAS and the Concessionaire have yet to meet the conditions stipulated in the CC for signing of the minutes for commencement of construction stage. Among these obligations, the concessionaire must reach financial close and enter into Technical Agreements with some of its shareholders for the undertaking of certain joint and several obligations with the concessionaire.  P4e 26 L Compliance with Bank Policies V] This project complies with all applicable Bank policies. [ ] The following exceptions to Bank policies are recommended for approval: Jos6 Luis Irigoyen Danny Leipziger (ndr6s So lim Task Manager Director SMU (LCS P) Country Director CMU (LCC4C)  Page 27 Annex 1 Toll Road Concession Project Project Design Summary Narrative Sunmmary Key Performance Indicators' Monitoring and Critical Risks and Supervision Assumptions CAS Objective By year 2007... (CAS Objective to Bank Integrate the country, * freight tariffs for transportation of key * Statistics DANE Mission) facilitate trade, and support products cost 15% less in real tenns and Transport * Colombia's macro-economic private-sector-led growth by than the average Col$48,000 and Master Plan conditions remain favorable; expanding and improving Col$46,200 per ton between Bogota- * Periodic tariff * Govermnent continues infiastncture services Santa Marta and Bogota Medellin, surveys published committed to opening up respectively, in 1997; by COLFECAR the economy and increasing * the number of bus departures from * Statistics Bogota private sector participation Bogota to main destinations (Atlantic Bus Transport in infrastructure. Coast, Medellin, Bucaramanga and Terminal * Infrastructure projects Manizales) through La Dorada /Pto. * Audited traffic support economic growth Salgar increased by 70% over the counts El Vino-Pto. and provide equitable 730,000 annual departures in 1996; Salgar-SanAlberto access to the * traffic volumes on corridor increased Road Concession; poorer/disadvantages groups by 100% above the average 5,200 * Network statistics, * Resources released from daily vehicles using the existing road lNVIAS public provision of between Villeta and Honda in 1996; infrastrcture are effectively * share of private sector participation in used in social sectors and financing and managing roads other activities in GOC's increased from 10% in 1997 to about strategy for poverty 35% of national network, reduction Project Development By end- 2002 ... (Development Objectives to Objectives * vehicle operating costs on the * HDM analyses CAS Objective) Improve transport conditions upgraded corridor from Tobiagrande performed by * Current trend in along a strategic highway to Puerto Salgar reduced by 50% for lNVIAS Planning international trade to/from corridor linking Bogota with trucks from those in 1996; Office; the ports on the Caribbean Medellin and the ports on * travel time between Bogota and Pto. * Road usage surveys sea continues; the north coast, through an Salgar reduced to an average of 2.5 performed by * Traffic growth along the effective and sustainable hours for cars and buses from an INVIAS road corridor not restrained by private-public partnership. average of 4 hours in 1996; administrators; (1) deterioration of * the level of service (expressed by the * Audit of concession economic activity, (2) volume/capacity ratio) on existing records on traffic changes in traffic patterns road from Villeta to La Dorada volumes. on trunk road network, or increased as a result of deviating (3) INVlAS' untimely truck traffic onto the new highway, completion or poor * a competent private operator maintenance of road links continues effectively operating the connecting with project corridor, providing road users with modern security and emergency services under a viable concession; * about 200 Ha. of endangered sub- Andean forest out of the 270 Ha. in the region preserved. Project Outputs By end-2002 ... (Outputs to Development * Key links built or * 68 km of a high-standard two-lane * Road usage surveys Objectives) upgraded along the highway between Tobiagrande and performed by * Ramp-up traffic selected corridor to Pto. Salgar built; INVlAS road development during early reduce transport costs; * 380 km of existing highways administrators years of concession not * A competent private rehabilitated and maintained in * iNVlAS' approval restrained by reasons stated project company set to compliance with high performance of the Construction above; mobilize private equity standards; Completion Report * Users do not oppose to and debt through more * a (first) reserve of sub-Andean forest prepared by the inflation adjustments to toll favorable financing established under private concessionaire rates, even if increases are structures to finance administration in support of policy to * Audit of Project higher than those on the 'Baseline and targeted values should be showni, with the latter divided into values expected at mid-term, end of project and full impact  Page 28 Narrative Summary Key Performance 1ndicators' Monitoring and Critical Risks and Supervision Assumptions improvements and compensate for enviromnental Entity Financial national highway system manage operations; impacts of road projects; Statements and * Security conditions in Strengthened institutional Project Accounts project area do not severely capacity for INVIAS to * Signing of Minutes interfere with project prepare future road for Commencement construction and operation. concession projects and of Operation Stage. * The concessionaire's ability put into effect key to comply with the policies for sustainable standards stipulated in the development of road CC, and the project design corridors; (e.g., the tunnels), do not constrain the operation or performance of the project, * Fluctuations of foreign exchange and interest rates do not exceed debt service rcapacity. Project Components Project Inputs: (Components to Outputs) Private Project Company * Turnkey contract for project works * Signing of * Project start-up not delayed selected through (US$496.6m); Concession by the inability of the international competitive * Development, project management Contract between concessionaire to reach bidding to: and government supervision INVLAS and financial close, international * undertake civil works to (US$22.5m) selected Project financial markets not eager build a new road and * Financing fees/expenses, and interest Company. to invest m the project, or improve existing road during construction (US$53.2m); * Trustee and the inability of INVAS to sections along the Financial Plan: independent purchase the right-of- way. selected corridor, * Government capital contribution experts/advisors * Project completion not * provide services to supported by the Bank loan appointed by the hampered or significantly maintain and operate the (US$137.1m) concessionaire and delayed by (i) security road corridor under a * Private Equity and Debt (US$395.lm) INVIAS unrest in project area or long-term concession. * Net project revenue generation from respectively, other force majeure events, * mobilize financing operations (US$40.1m) * Signing of Minutes (ii) concessionaire (including all reserves, for Commencement incapable of managing cost liquidity requirements of Constuction increases, or (iii) shortages and considering Stage. of funds during construction government financial period resulting from support) for the above increases in financing costs works and services and or delays in placing bonds. for independent experts and advisors required by INVIAS to monitor/audit the project's company perfornance under the concession.  Page 29 Annex 2 Toll Road Concession Project Project Description The project consists of the following: (a) operation and maintenance of the existing two-lane road from El Vino to Villeta (about 51 1m). The section connects with Bogota through a two- and four-lane highway operated under a separate concession; (b) rehabilitation, operation and maintenance of the existing road from Villeta to Honda (about 72 km); (c) construction, operation and maintenance of a new highway from Tobiagrande to Puerto Salgar (about 68.4 kIn); (d) operation and maintenance of the existing road from Honda to San Alberto (about 380 km); and (e) establishment and management of a natural reserve of sub-Andean forest in support of a policy to compensate for the environmental impact of the project. INVIAS will purchase about 200 ha. of land along the Rio Negro Canyon for this purpose. The project includes the basic infrastructure needed to operate the reserve through private administration. The project's components have been given in concession for a specified period of time (24 years, including four for construction) and under the terms of a concession contract (CC). Project Component 1 - US$496.6 million (Project Works) This component comprises the project works to be undertaken during the construction phase of the concession. The works entail: (i) rehabilitation of the Villeta-Honda road within 24 months, including an asphalt concrete overlay and improvements to sections in critical condition due to recurring landslides and drainage deficiencies; (ii) construction of a new two-lane highway from Tobiagrande to Puerto Salgar, with a total length of 68.4 km, including about 15 tunnels and about 37 bridges and viaducts; and (iii) miscellaneous repaving works needed to maintain the level of service along the road network assigned to the concessionaire and build the infrastructure needed to collect tolls and operate the natural reserve along the Rio Negro. The works will be undertaken by the concessionaire's Technical Assistant --a construction consortium formed by some of the shareholders of the concessionaire-- under a fixed-term, fixed-price contract (Technical Agreement). INVIAS will contribute the equivalent of US$137. 1 million to defray, in part, the costs of the works under this component. INVIAS will deposit the above amount in the applicable Trust Accounts; the three annual contributions requested by the successful bidder and stipulated in the CC, are as follows: US$37.1 million during pre-construction stage, US$40 million in 1998 upon commencement of construction of the Tobiagrande-Pto. Salgar road link, and US$60 million in 1999. According to the CC, government funds and toll revenues collected on existing road sections can only be used to finance expenditures in respect of: (i) construction of the Tobiagrande- Pto. Salgar road, (ii) rehabilitation of the Villeta-Honda road, and (iii) maintenance and operation of the existing project road sections. The project Trustee will make payments to the Technical Assistant on the basis of monthly certification of completed work, subject to the conditions and payment retentions of the turnkey contract. Project Component 2 - US$22.5 million (Project Development, Management and Government Supervision) This component comprises (i) all the studies and services needed to develop and manage the project, finalize the engineering designs, and assure quality control of construction and operation activities undertaken under the concession during the pre-construction and construction phases (about US$18.5 million); and (ii) external supervision services to be hired by INVIAS to oversee the execution of the concession contract. The terms of reference of the Interventor cover, inter alia, supervising the execution of the construction of the Tobiagrande - Puerto Salgar road link and other project works in accordance with the CC, monitoring concessionaire compliance with technical specifications and performance standards set forth in the CC for construction, maintenance and operation of the project road network; monitoring compliance by the parties to the CC with the project's Environmental Management Plan (comprising also the Resettlement Plan and the Social Assistance Progran); auditing project funds; and verifying project revenues as stipulated in the CC for the purpose of deternining the progress made towards meeting the Total Expected Revenue target. INVIAS will hire the Interventor prior to starting the construction phase.  Page 30 Project Component 3 - US$53.2 million (Financing costs) This component comprises project expenditures related to financing fees, financing expenses and interest during construction needed to mobilize the private financing. The concessionaire has indicated in its bid that it will obtain a mixture of local and foreign debt financing. Summary of Concession Design Legal Framework. Laws 80 (Public Procurement Law) and 105 (Transport Law), both enacted in 1993, form together the legal basis for the concession. The concession contract would grant the franchise-holder the right to build the highway between Tobiagrande and Puerto Salgar and operate the project road network throughout the concession period. Upon termination of the concession, the facility will be returned to lNVIAS. At that time, the up-front capital contribution will be reimbursed in kind, as INVIAS will be able to either invite bids for a new concession or operate the project itself and collect toll revenues. RiskAllocation. The design and structure of the concession, as offered during the bidding stage, attempted to strike a balance in the distribution of the project's risks among the sponsors, the lenders, and lNVIAS. The distribution of risks is summarized in Table 1. Table 1. Initial Risk Allocation by Institution and Project Phase as offered at bidding stage Investors & Under Bank Concession Phase Risk/Obligation INVIAS Lenders Insurance PRG Pre-construction Land Acquisition/Right-of-Way V Environmental Approvals V GOC Financing Contribution(l) ).' Project Design (Tunnels) V Project Design (Roads, Bridges) V Debt & Equity Financing V Concession Term Political Force Majeure (2) Changes in Law (3) V Expropriation I V Natural Force Majeure (4) V Currency Devaluation Currency Inconvertibility Construction Cost Overrun (roads-bridges) V/ Cost Overrun (tunnels)(5) / Construction delaystproject completion / Operations Tort Liability V Toll Evasion I Traffic Level (years 1-9)M6 4,(1) Traffic Level (years 9+)(7) V Toll Adjustment " V Operations & Maintenance 1/ Actual amounts or level of comfort subject to bidding. 2/As defined in the CC, political force majeure refers to "Extraordinary Excusable Events" which comprise terrorism, sabotage, guerrilla acts, war (declared or undeclared), civil disorder, national and regional strikes, coups d'etat, finds (archaeological-mineral-treasures), and delay in the award of, or impossibility of awarding, project permits. 3/ As defined in the CC, "Changes in Law" events are defined to comprise. (i) rights granted and obligations imposed by the Environmental License; (ii) imposition of taxes and levies on the collection of tolls; and (iii) laws restricting toll collection. 4/ As defined in the CC, natural force majeure refers to "Ordinary Excusable Events" borne exclusively by the concessionaire, which comprise: Acts of God, employee and sub-contractors strikes, earthquakes and hurricanes, fires, floods, landslides, scarcity of materials and goods needed for construction & operations, road accidents, interruption in the supply of electricity. I/ Cost sharing arrangement to compensate for additional works in tunnel construction due to changes in geologic conditions (see Box 3). 6/ Minimum revenue support, limited in size to caps set forth in the bidding documents and in duration to "ramp-up" period (see Box 2).  Pagr 31 'I Bidders were asked to bid on the Total Expected Revenue, upon which the concession will revert to INVIAS even if the contractual concession term has not yet expired. If the Total Expected Revenue is not achieved by the end of the concession term, ]NVI4AS would have the option of either partially compensating the concessionaire for the non-realized portion of the Total Expected Revenue, or extending the concession term for one year for a maximum of five years, even if the Total Expected Revenue has not been achieved. Table 2 summarizes a comparison of key government undertakings in earlier concessions and the project, as offered at the bidding stage and the resulting allocation based on the bidding outcome. Table 2: Comparison of Government undertakings in Colombian Road Concessions Government Undertaking Earlier Concessions Project Project in Colombia (Bidding Stage) (Bidding Outcome) Capital Contribution For large projects exceeding Up front capital contribution Lowest financial viability, part of during construction stage in investment undertaken with public the form of a grant. The funding outside the concession, and specific amount subject to transferred to concessionaire for bidding. . ~~~~~~~exploitation upon completion. ...............................C. -o. s t... . n...c............a. s. e--. . . ................................................................... ...................................... ................................ ......................................................... Construction Cost Increases: - Roads and bridges: Full compensation of cost increases No coverage granted up to 30% of bid cost, and 75% of cost increases between 30-50% over bid cost. - Tunnels: Initially no tunnels considered Limited to geologic risk. Not taken by under concession (undertaken First 20% to be absorbed by successful bidder. outside concession) concessionaire. ... ................. ................i...................................................................................................................................................... ....................... ................................................... Minimum Revenue Support: - Size and duration: Historic traffic throughout Ceilings (targeted at debt). Not taken by concession term Nine years out of 24 year successful bidder. term (ramp-up period). - Form of compensation (i) term extension; (ii) toll increase; Cash payment .. .. . . . . . ..(iii. cash paymnent Maximum Revenue or 50-50% share of additional revenue Capped at total expected Highest. Recapture Mechanism over 125% of historic traffic revenue by successful bidder. Toll Rates and Toll Regulation System. The toll road will operate as an open systern, with tolls collected in five toll booths whose location has been predetermined by INVIAS. MOT has already approved the initial toll rates and the formulae for their subsequent adjustment, which is based on the Consumer Price Index (Decree of December 18, 1996). Initial toll rates for seven vehicle categories defined in the CC are listed in Table 3. For existing road links, these toll rates are on average about 20 percent higher than those currently charged by INVIAS on national roads not operated by the private sector l. For the new road link, toll rates are about double the average national tolls, but represent contributions from users varying between 9 and 36 percent of expected savings in operating costs. Overall, the proposed tariff system reflects values above short-term marginal prices and sufficient to cover the concessionaire's investment costs, net of GOC's up-front capital contribution (which is largely covered through other road-user charges as noted in last paragraph of Section 13). The CC gives the Concessionaire flexibility to manage the toll rates to maxinmize road use and project revenues, provided that these rates do not exceed the stipulated ceilings. This would allow the concessionaire to apply commercial practices aimed at capturing a larger consumer surplus and user preferences (such as charging a lower rate for certain types of vehicles, or for off-peak periods, or offering discounts to organizations or users that pay in advance for a certain number of trips). Toilgates on existing roads would be transferred to the concessionaire for operation upon meeting the conditions for commencement of construction of the Tobiagrande-Puerto Salgar road. National roads managed by INVIAS are subject to tolls. The tariff is set annually to cover lNVIAS' rehabilitation and maintenance costs.  Page 32 Table 3. Toll Rates by Vehide Category and Road Section Vehicle Category Toll aspaid at gate (Col$ of 1997) Section 1 (1) Section 2 (2) Section 3 (3) Section 4 (4) .~~~~~(51km. . (72 km.?. (68.4 kmn? (380khm.2 1 Cars and pick-ups 2,500 1,600 4,500 2,000 2 Buses and vans 2,900 1,800 5,100 3,000 3 Small 2-axle trucks 2,900 1,800 5,100 3,000 4 Large 2-axle trucks 3,000 1,900 5,100 3,100 5 3- and 4-axle trucks 7,600 4,900 13,400 7,000 6 5-axle trucks 9,400 6,500 17,500 9,300 7 6-axle trucks and larger 11,500 7,400 20,000 10,500 ' One tollgate located between El Vino and Tobiagrande. (2) One tollgate located between Villeta and Honda. The toll rates similar to those charged on other national roads operated by INVIAS. (3) One tollgate located in El Bosque, between Tobiagrande and Pto. Salgar. Starts operating upon finalizing construction of Section 3. (4) Three tollgates located between Honda and San Alberto. The toll rates are based on the ones charged by lNVIAS on the Troncal del Magdalena road. Maximum Revenue Regulation. The maximum revenue that the concessionaire is entitled to (not guaranteed) is capped at the Total Expected Revenue bid by the successful bidder. Upon reaching this target, the concessionaire has to revert the concession to INVIAS even if the contractual term has not yet expired. The Total Expected Revenue indirectly permits INVIAS a share in the project's revenue upside '. An upside in project revenue would accelerate the attainment of the Total Expected Revenue target, bid by the successful bidder, upon which the concession reverts back to INVIAS (even if earlier than the original concession term). In the event that project revenues exceed the projections, an accelerated termination of the concession would enable INVIAS to award a new concession for the same project on more favorable terms for operating the road and financing future capacity expansions. The new concession would rely on established traffic patterns, a key element in attracting more favorable financing terms, and would therefore require minimal, if any, cash or revenue support from INVIAS. The Total Expected Revenue target would also enable flexibility and transparency in the event that a renegotiation of the contractual terms, or an advanced termination of the concession, are necessary to improve the economic performance of the project2. Selection of the Project Sponsors / Concessionaire Bidding Conditions. INVIAS selected the project sponsors/concessionaire through international competitive bidding, following procedures satisfactory to the Bank. The process started in March 1997 with an invitation to prequalify prospective bidders. Eight international groups were prequalified in June 1997, meeting the technical and financial requirements set for this purpose in the prequalification document. The bidding process followed. As stated in the bidding documents, bidders were asked to quote in their bids: (i) the annual capital contributions requested from Government; (ii) the cost of 11 work activities associated with geologic risk in the construction of tunnels (based on unit costs determined by bidders and work quantities provided by INVIAS in the Bill of Quantities); (iii) the amounts requested in respect of the Minimum Revenue Support for each calendar semester Each road project that is deemed to need revenue support from the host govermment or the implementing agency may require a different approach in the way such support is structured to ensure that government also has a share or "recaptures" potential revenue upsides. The mechanism depends largely on the applicable concession regulations, toll rates and traffic projections, and the trade-off that the implementing agency is willing to make between recapturing potential excess revenue and giving the most appropriate incentives to the concessionaire to ensure the optimum performance of the project throughout the concession term. 2 The initial concession design contained two additional mechanisms during the revenue protection period (if taken by the successful bidder): (i) all payment made by INVIAS under its Minimum Revenue Support obligation would count as part of the Total Expected Revenue in calculating the point in time when the concession would revert to INVIAS; and (ii) any income exceeding the bidder's Minimum Revenue Support (MRS) quoted for a semester would be accounted to an Accumulated Revenue Surplus Account Thus, the concessionaire would have to tap into any previously accumulated revenue before INVIAS is asked to make any compensation. While there is no actual excess revenue cash transferred to INVLAS, this mechanism allows INVIAS to take full advantage of all revenue earned by the concessionaire in excess of the MRS. As such, knowing that they have access to all the revenue up-side, bidders may be prepared to quote a lower MRS level, just sufficient to cover their estimated costs of debt financing and project operating expenses.  Page 33 during the first nine years of the concession, if any; (iv) the maximum portion of this Minimum Revenue Support that would become available to the concessionaire through the Liquidity Mechanism (to be funded by a Bank loan), if any; and (v) the Total Expected Revenue that as concessionaire plans to realize during the concession term. Items (i), (iii) and (iv) were subject to caps set forth in the bidding documents. The bidding document required that the CC be awarded to the bid that represented the least expected cost to the government. A bid seeking less support from government would reduce government exposure to contingent obligations and, thus, have a lower cost for GOC. Thus, the comparison of the four bids received on October 15, 1997 accounted for the expected cost to GOC resulting from each of the bidding variables mentioned above, as follows: the amounts quoted by bidders (all in present value terms with the exception of the total expected revenue target) were multiplied by the respective weighting factors stated in the bidding documents, and added to determine the total expected cost to government. The weighting factors represented the probability of GOC incurring in a loss due to the exposure resulting from the obligation.' Table 4: Outcome of the bidding process BiddingVariable Bidder I" Bidder 2 Bidder 3 Bidder4 GOC contributon (grant) ' ''''''''''' ''''''.'''' '''.'.'''''''.7--....-.----...----.- GOC Share of Tunnel Contingencies (to be supported by the Bank) I / Minimum Revenue Support I I / Liquidity Mechanism (supported by the Bank) I I Bank Partial Risk Guarantee / I 17 Successful bidder. The competitive selection of the project private sponsors is an integral part of the project. Although the successful bidder declined to use the enhancement instruments offered by INVIAS (some of them to be supported by the Bank), they were key to increasing competition for the project. Boxes 2 to 4 briefly describe how the proposed Bank backstopping of INVIAS' contingent obligations was initially structured, and what coverage was sought for the proposed Partial Risk Guarantee offered in the bidding documents. Bo . ...... . ... ., .......,,,.v, r.e. ',, ..de . ......11 .. .. ...... ... ., .Xli , .~~.... g-.a - ., . ...... .c. .......W Box ~ Prpose covrageunde Patial -Ris Guan aee:-:-:: .................................... ...................... ........... ....~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~........ .Mechaisrundr CC, Debt -SerieRser) the -urte wudpoet pjec wendesbidodasaait. ,de,b, ser e . ,, vce ....l d aie ,,te . b h.e C, e.d. ..... the G.ars .te. As rrently define itbe CC, the. ...... 'i.. -. ... .be cvrd... ..h......e. .P........ - * XOT not nau thorizing..... ..the... pr i........... .......... te M Copnstoib IN I foi evnt - of politialfoc majeue nacrac ihCas 0o h Ci~ ''r ...&...le'.s.. n'~~~~~~~~~~~.. ' >.''-- -.- ...-..--.. ..-- .... ..... .......... "Et AoriniEcsal EM vns'.. .utW 4 * Compensation for peesible changes . 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IAs such, the governmnent capital contribution would have a weighting factor of 1.0, since the amnount requested by the successfull bidder will become an actual cost. The remaining variables would have factors lower than 1.0, since due to their contingent nature it is uncertain whether goverment will incur in a cost. Thus, the weightig factors for the latter variables were detemiined on the basis of statistical analysis as follows: each variable was assumed to follow a normal probability curve (with the exception of tunnel costs which was assigned a skewed distribution) using typical variation parameters suggested by the consultants; the values expected from the financial model developed by GOC with its financial advisors were assumed as the mean or the most expected value for the variable in question; finally, the probability of incuning a loss because of the coverage, represented by the area of the probability curve within the boundaries of the comfort offered in the bidding documents, became the respective weightng factor. The resulting factors were then converted into percentages, so the capital contribution received a factor of 69 percent, the cost of the eleven items for tunnel construction 12 percent, the Minimum Revenue Support 10 percent, the Liquidity Mechanism 6 percent, and the Total Expected Revenue 3 percent.  a... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E ......... US$ ..... ...... .... ... .... .. ...... ..... .. .. .. . ........... .. .. ...0 itI ....A. ... ... ... .. ~~~~ -~~~~~~~~~~ 0 0 ~~~~~~~~~~~~~~0 0 0) 0 0) 0 .....0..... .. ... ............ Na :H_ R iO % it it ...... ... . : ... ....i . I. . .. ....... .... . . .. .. ..... A it t .......... .. . . . . . . . . . . .i it it it~~~~~~~~~~~~~ it N it it it 9! 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.. .. ....... eD ::::::::%: ........... ............ ................. . .. ... . :::: :: ::: .... I .......... .... .. .. . ............ . O ... .... . Cr CD . .. ... .......... . ::: : :;.: ::: .. :: . V :: :AE:: ... .................. .......... -11 . .... ............ .. ............ .................. .... ... ........ .......... ... . .... . ...... ... .... ....... .......... ... ... ... .... ... ...... .... C D ........... .... ........... v !ii : ::: : :: : ............. . . ...... .... ........... ........... ...
h cr . .. .......... I. I I. ... .. .. ............ ........... a . ... ... .. ............ ....... .... aQ a ... .. .. ........... .. ... ... .. . .. . . .. .. ... ........... .. ............ ......... ... ............ .......... ... .. ......I .................. :Hs H: ........... ........... .................. ........... H H
iH
. .................. . .... ............. .. .. .... " :;: ....... ........... 23 .............. .................... vq Or 9 02 ..............I ....... ........... ........ ............ .................... C ........... .......... .......................... .............. ........ ............................................  Page 36 Table 5. Composition of the Concessionaire Shareholder % of Function .................................................. ................................................................................................................................................................... SACYR SA 22.00 Construction & Maintenance OCP Construcciones SA 22.00 Construction & Maintenance Empresa Nacional de Autopistas 4.00 Operation and Maintenance Banco Central Hispano 4.00 Financing Estudios yProyectos Tecnicos Industriales SA 1.00 Design ~ ~ ~~~~~~9 .:I c i o n u t i l s S .0 .............. ................................................................................................ ................................ Instituto de Fomento Industrial - IFI 20.00 Financing Corfiestado Corporaci6n Financiera 3.00 Financing Equipo Universal Ltda. 7.34 Construction & Maintenance Castro Tcherassi y Cia Ltda. 7.33 Construction & Maintenance Gerc6n Ltda. 7.33 Construction & Maintenance Cano Jimenez y Construcciones SA 1.00 Quality Control Wakenhut de Colombia SA 1.00 Toll Collection Table 6: Main contract performance guarantees Phase Guarantee Coverage Duration Pre- Performance security Bank guarantee for 10% of estimated value of From signing of CC to construction CC (set as 25% of total expected revenue). end of construction phase plus 1 year Construction Performance security 100% of cumulative government contributions Construction phase plus (disbursed plus planned for that year). 1 year Advance payment 100% of first government capital contribution Construction phase plus guarantee 6 months Personal and property Col$ 10,000 million per event, adjusted for Contract term plus 6 insurance; tort inflation. months liability Operation Performance security 100% of average operation and maintenance Renewed annually costs adjusted for inflation, incurred during during operation phase Construction phase for first year of operation, plus 1 year after or during last five years for second year of contract termination. operation and on. concession term. Termination Quality control 2% of actual construction cost adjusted for 5 years after contract security inflation. termination  Page 37 Annex 3 Toll Road Concession Project Estimated Project Costs Project Component Local Foreign Total ---------------------US $ million--- Turnkey contract for project works 273.1 223.5 496.6 Development, engineering, construction management, quality 15.8 6.8 22.5 control and government supervision costs Financing Fees/expenses and interest during construction 21.3 31.9 53.2 Total Proiect Cost 310.2 262.1 572.3 (Including physical and price contingencies)  Page 38 Annex 4 Toll Road Concession Project Cost Benefit Analysis Summary (Col$ billion, 1997) Present Value of Flows (@, 12%) Fiscal Impact Economic Financial Taxes and Analysis Analysis1 FOREX premium Subsidies Incremental Benefits 508.9 518.5 9.6 Incremental Costs 276.4 319.4 43.0 Net Benefits: 232.5 199.1 (33.4) ERR (%): 19.5% 17.7% Summary of Benefits and Costs / Main Assumptions: * Alternatives. The analysis focused on the economic feasibility of constructing the new highway between Tobiagrande and Puerto Salgar, as interventions on the rest of the network would not effect the project (except for management efficiency gains). The analysis included the evaluation of the alternative of expanding the capacity of the existing highway to better service the expected traffic volumes. Other alternatives, such as revamping an abandoned railway line, were analyzed early in the project preparation process, and discarded due to their high costs and reduced economic benefits. * Costs. Construction costs were adjusted incorporating the foreign exchange premium (estimated at 6.4%) and subtracting customs duties and sales taxes, yielding an overall economic conversion factor of 0.86. Annual maintenance costs were estimated with the HDM-Q model and, for the new highway, included tunnel maintenance costs equal to 1 percent of the investment costs of the tunnels. It was estimated that 70 percent and 25 percent of the financial costs for routine and periodic maintenance, respectively, were related to unskilled labor, for which it was applied a conversion factor of 0.70. Overall conversion factor for routine maintenance was 0.76, for periodic maintenance 0.88, and for tunnel maintenance 0.90. * Benefits. Traffic growth on the corridor would average 3.0 percent from year 2003 to year 2025. The following quantifiable benefits (adjusted as in the case of costs) were accounted for: (a) changes in consumer surplus for the current traffic; (b) savings in time for current traffic; (c) consumer surplus for the generated traffic; and (d) the full value of the willingness-to-pay of the generated traffic. Other benefits, namely the reduction in accidents and the environmental improvements and amenities were not quantified. A replacement value of half the initial investment-- representing an annual average depreciation rate of 2.5 percent--was accounted for in year 2025. The value of time for those traveling on cars was conservatively assumed to be equal to 30 percent of the prorated wage for a mix of passengers consisting of 8 percent low income, 20 percent medium income, and 72 percent high income. For those traveling on buses, the value of time was estimated to be 30 percent of the minimum wage. Sensitivity analysis / Switching values of critical items: * Construction costs must increase by 90%. * Maintenance costs must multiply by 16. * Traffic level on new highway reduced so as by year 2025 it would be about 20 percent of the projected value. * Without generated traffic or without travel time benefits the project would still be economically feasible. * Risk analysis was performed with the following probabilistic assumptions: (a) traffic with a Beta distribution of economic (and, consequently, traffic) growth rates between -0.2 and 1.5, with a median of 0.75; (b) generated traffic with a Beta distribution with changes in the percentage of generated traffic from 0 to 1.2 of the estimated values and a median of about 0.9; and (c) construction and maintenance costs with a triangular distribution with a maximum of 1.7 and a minimum of 0.95 of the estimated costs. With these probabilistic assumptions, the Monte-Carlo simulation yielded a distribution of IERR with a 8-percent probability of being lower than 12 percent. IThis refers to the results of the economic analysis at financial prices. The detailed financial results for the entire project are included in Annex 5.  Page 39 Annex 4 El Vino-Tobiagrande-Puerto Salgar ToU Road Project Economic Analysis Introduction 1. The project consists of (a) the operation and maintenance of the existing road from El Vimo to Villeta (51 lan); (b) the maintenance and rehabilitation of the existing, winding road from Villeta to Honda (72 kan); (c) the construction of a new 68.4-akm highway from Tobiagrande to Puerto Salgar, by the road "Troncal del Magdalena," including 19.5 km of tunnels and 2.9 km of bridges; and (d) the operaton and maintenance of the existing road from Honda to San Alberto (380 km). The execution and management of these activities would be transferred to a private concessionaire, selected competitvely among a list of pre-qualified companies. By reducing travel distances (see Chart 1) and improving road alignments, the project would upgrade tanwsport coummunications between Bogoti and Medellin-the two most populous and industrialized cites of Colombia-and between Bogoti and the Atlantic Ports of Cartagena, Barrnquilla and Santa Marta, the origin and desdnation of over 50 percent of Colombian exports and imports (in tons, 1994). In addition, through the concession contrct, by ensuring the adequate maintenance of one of the most strategic road comdors of Colombia and the timely provision of traffic services, the project will realize substantially benefits to the functioning of transport, reducing transport costs an increasing the reliability, sa&ety and quality of freight and passenger transport services along the corridor. The project further includes the transfer of the management of sub-Andean land as a natural reserve, in order to preserve the enviromnent along the right-of-way of the new road. Chart 1: Road Prolles (project and existing road) 2000. 0.0 50.0 100.0 150.0 200.0 Bogota-RtoSalgar 177.01exisTin1oad) vs. 132.2Ian 2. 'Me economic analysis focuses on the calculation and comparison of costs and beneits brought about by the construction of the new road link. 'Me rest of the project's network would not be affced by the construction project, except for the managernent effiiencies that the . .;~~~~~~~~4.~  Page 40 concessionairc is expected to bring to the operation and maintenance of the overall project. In this respect, the following sections will present the methodology and results of the construction component of the project. General Methodological Approach 3. The economic analysis encompasses the comparison of the incremental economic costs and benefts that the construction of a new road would bnng to the transportation system of Colombia and, consequently to its economic wealth. Both costs and benefits are calculated for the situation with and without project to generate the amnual incremental costs and benefits during the project life. It required the simulation of the deterioration conditions of the road caused by the climate and the expected traffic, given the topographic and geometnc specifications of the existing and the proposed roads. 4. The analysis also included the evaluation of the altemative of expanding the capacity of the eisng highway to service better the expected traffic volumes. Both the construction and the expansion alternatives were compared to the base alterative of maintaining the existng road, without any major improvements to its capacity. Box 1 summarizes the results of the economic evaluation of the expansion altemative. Other alternanves, such as revamping an abandoned railway line, were analyzed early in the project preparation process, and discarded due to their high costs and reduced economic benefits. Traffic BxLSmay1eut fAtraieo Expandin~~~LxistingRDtid 5. The average daily traffic on thea existing road amounts to about 5,400 sand i uldcoo S1 veh2icles, of which about 40% are trucks. In iiloado[ipa diinlCllOO the four years before the completon of the a forria a new highway, pasenger car traffic on the out C. i annual existing road is eimated to increase by 2.8 a STe e percent annually and truck traffic by 5.0 P z cot.adraeumbr percent annually-a total of almost 1,000 i ~ w a ne vehicles. Traffic on the new highway would economir eno1 dwolga come from two main sources: traffic diverted abou omii et (i pt from the exsting road, and traffic induced by 'value t .Te ratofnetbenefits to ini the shorter distances and the reduced transport ':capita s is .39. Tis aT 3 tivehoughi costs (which come from shorter distances and economicallesiledoes not comparemfaorab W: beter road alignment and gradients). Ongin ag iono Tobi and desdnation studies reveal thit about 69 Salgar road, as can be seen.bS;he resulpresen: percent of the exsting trffic is through below: traffic which would divert to the now highrway, while 31 percent is local traffic and would rmain on the existing road. On the basis of f=ctors like traffic growth in recent years, the probable development of the Colombian and the egional economy, and the present stage of the road transport industry, the percentage increases in annual traffic have been estimated.  Page 41 Graph 2. Traffic Projections for the Tobiagrande-Puerto Salgar Section 18,000............... 14,000 10,000 Z,, 'M 8.000. '4