Colombia - Bogota Water Supply Project

RESTRICTED 1FILE COPY jReport No. P-597 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA DE ACUEDUCTO Y ALCANTARILLADO DE BOGOTA FOR THE BOGOTA WATER SUPPLY PROJECT COLOMBIA May 16, 1968  INTERNATIONAL BANTK FOR RECOUSTRUCTION AND DEVELOPMENT REPORT A.ND RECO1MTNDATION OF THE PRESIDaWT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EaqPRESA DE ACtEDUCTO Y ALCANTARILLADO DE BOGOTA FOR THE BOGOTA WATER SUPPLY PROJECT COLOMBIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$1h.0 million to Empresa de Acueducto y Alcantarillado de Bogota (EAAB). PART I - HISTORICAIL 2. Since early 1966, the Bank has been discussing with the EAAB a project for the improvement and expansion of the Bogota Water Supply system. Bank missions recommended that the EAAB prepare a long-range master plan on which the selection of a first-stage project could be based. Such plan was submitted in mid-1967, followed by a feasibility study on the proposed proj- ect. An appraisal mission visited Colombia twice, the last visit being in January/February, 1968. The Borrower and Government of Colombia were in- formed that the loan would not be presented for approval by the Executive Directors until an anpropriate tariff increase came into effect. This took place on April 25, 1968. 3. Negotiations on the proposed loan took place in Washington April 11-18, 1968. EAAB was represented by Fir. Virgilio Barco, Mayor of Bogota and President of the Board of Directors; Mr. Oscar Torres, General Manager; and Mr. Eberto Jimenez, Secretary of Public Works of Bogota. The Government was represented by Mr. Jose Camacho, Minister Counselor of the Colombian Embassy and Mr. Omar Botero of the Department of Planning. 14. The proposed loan would bring the Bankts total lending to Colombia to US$482.0 million (net of cancellations and excluding the proposed loan of US$18.0 million for the Bogota Power Third Expansion program). In addition, an IDA credit of US$19.5 million for highways was made in 1961. The fol- lowing is a summary statement of Bank loans and IDA credits to Colombia as of April 30, 1968:  -2- Loan/ Amount (US$ Millions) Credit Undis- No. Year Borrower Purpose Bank IDA bursed Fully disbursed Total (less cancellations) 313.8 5 1961 Government Roads 19.5 1.1 345 1963 Acerias Paz del Rio, S.A. Steel 30.0 6.h 369 1964 Empresas Publicas de Medellin Power 45.0 28.2 448 1966 Government Agriculture 16.7 13.2 151 1966 Banco de la Republica Industry 25.0 10.9 499 1967 Empresa Nacional de Communica- Telecomunicaciones tions 16.0 15.2 502 1967 Instituto Colombiano de Irriga- Reforma Agraria tion 9.0 9.0 Total (less cancellations) 455.5 19.5 8).o of which has been repaid to Bank and others 99.6 Total now outstanding 355.9 Amount sold 16.7 of which has been repaid 13.9 2.8 Total now held by Bank and IDA 353.1 19.5 Total undisbursed 82.9 1.1 84.0 5. Twenty-three loans have been completely disbursed and four have been repaid in full. On the remainder, disbursements are proceeding normally. 6. Together with this report, I am submitting to the Executive Directors a proposed loan of US$18.0 million to the Empresa de Energia Electrica de Bogota for expansion of power generation and distribution in the Bogota area. This loan, if made, would raise the Bank's total lending in Colombia to US$500.0 million. In th3 next few months I expect to present to the Executive Directors the following loans: a loan of about US$16.0 million for Power Interconnection, a loan of about US$8.0 million to the Government for Secondary Education, a loan of about US$16.0 million to the Government for Highways, and a loan of US$15.0 million for Rail- way Rehabilitaticn. 7. IFC has made 21 investments and underwriting commitments in 13 enterprises in Colombia totalling US$114.7 million.  - 3 - PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrower: Empresa de Acueducto y Alcantarillado de Bogota (EAAB). Guarantor: Republic of Colombia. Amount: The equivalent in various currencies of US$14.0 million. Purpose: To assist in financing the improvement and expansion of the city of Bogota's water supply system. Amortization: 20 years, including 1-1/2 years of grace, 32 semi-annual repayments beginning on December 1, 1972 and ending on June 1, 1988. Interest rate: 6-1/4 percent. Commitment charge: 3/b of 1 percent. PART III - THE PROJECT 9. An appraisal report entitled "Appraisal of the Bogota Water Supply Project" (TO-639a) on the project is attached. 10. Bogota, the capital of Colombia, is the principal manufacturing, administrative and commercial center of the country and has a population of about 2 million. With a rapidly growing population in the city and sur- rounding area estimated at 7 percent per year over the past decade, the demand for water has for the past five years exceeded the capacity of the water supply system by an increasing margin. Water is rationed and the shortage is felt particularly in the highly populated and industrial southern sections of the city. In 1968, the average shortfall is estimated to be about 15 to 20 percent, but is much higher during the dry seasons. This project is the first major stage of a program to overcome this shortage. However, some deficit is expected to continue until about 1977. 11. Methods of correcting the deficit include the physical expansion of the water supply system and provision of equipment to measure water use and control wastage. The adoption of the tariff increase in April 1968, was coupled with a new rate structure designed to reduce wastage, rcducing the allowance for consumption under the minimum charge and introducing pro- gressively higher charges for consumption in excess of the allowance.  12. The EAAB is an autonomous public entity, established in 1955 and owned by the Special District of Bogota. The Mayor of Bogota is the Presi- dent of the Board of Directors which consists of two members appointed by the Municipal Council, three members appointed by the banks which hold the EAAB's bonds and a representative of the central bank (Banco de la Republica). The General Manager is appointed by the Board. 13. The project is expected to be completed by the end of 1971. Its total cost is estimated at US$35.3 million equivalent, including interest during construction. The principal feature of the project is the Tibito II A Scheme. This scheme is the first stage of the long-range pro- gram. It includes engineering and construction for: (a) additions to the pumping and treatment facilities now existing at Tibito; (b) manufacture and installation of a large diameter pipe- line from Tibito, to the north of the city, and through the city to its southern limits; (c) distribution system improvement and expansion. In addition, included in the project are feasibility studies and preparation of the final design for the next stage after the Tibito II A project as well as studies on future projects in the long-range plan. Pro- curement of maintenance and other equipment designed to improve the bor- rowerts operation are also provided for. 14. The foreign exchange cost of the project is estimated at US$17.3 million equivalent, including interest during construction. Of this sum, up to US$14.0 million would be from the Bank loan and not less than US$3.0 million from supplier countries participating in joint financing (described below). Foreign exchange to cover interest during construction on the joint loans amounting to US$300,000 equivalent would be obtained by the SAAB. The local currency component of US$18.0 million equivalent would be provided by the borrower from several sources: They are primarily (a) net cash generated internally, (b) equity contribution from the national budget and other public entities, and (c) domestic loans. Total external financing would cover about 50 percent of project costs (Bank loan up to 40 percent), and 50 percent would come from local sources. 15. All contracts proposed for Bank financing are being awarded on the basis of international competitive bidding. Procurement is advanced and as of May 1, 1968 several major contracts, including the one for the water pipeline, had been awarded and were about to be signed. W4hile no foreign currency expenditures on the construction part of the project had been made as of that date, down payments may become due after May 1, 1968, but prior to approval of the loan. It is proposed that the Bank reimburse the EAAB for the foreign exchange component of such payments. It is also proposed to reimburse the EAAB for the foreign exchange expenditures made on engineering contracts up to one year prior to approval. These amounts are not expected to exceed US$500,000 and US$100,000 respectively.  16. The EAAB in the past several years has not been able to generate the internal resources which would provide an adequate contribution to further development. While tariff increases have been put into effect to cope with increasing operating costs, only a modest return was earned. The new tariffs introduced in April 1968 together with a change in tariff structure, are expected to result in an average rate billed of US$0.26 per 1000 gallons, an increase of about 80 percent. This new average is still rather moderate as compared to other major urban water supply systems. No further tariff ad- justment is expected to be required until about 1971 when construction should commence on the next stage of development. 17. The EAAB and the Government would agree to take all appropriate steps (including tariff adjustments) required to provide net revenues after operating expenses sufficient to produce a reasonable rate of return on net fixed assets in operation. It has been agreed that, on the basis of present estimates of EAAB's financial requirements, a return of 5 percent on net assets during the construction of the project and of at least 9 percent thereafter would be required. On this basis, the EAAB should be able to contribute substantial funds to financing its expansion. Pending intro- duction of a satisfactory method of revaluation of assets of public utilities generally, locally acquired assets will be revalued periodically using a cost of living index and assets acquired abroad will be revalued on the basis of the exchange rate between the Colombian peso and the U.S. dollar. The adequacy of EAAB's tariffs would be reviewed quarterly and any necessary ad- justments in the tariff structure would be introduced by the end of the fol- lowing quarter. In addition EAAB would agree to revise and simplify its tariff structure by June 30, 1971 in order to permit a more efficient use of water. 18. Arrangements have been made for the financing of this project on a joint basis with supplier countries. The Memorandum on Jcint Financing of Projects in Colombia and Mexico (JF 68-2, of January 24, 1968), which is attached, agreed upon by the twelve countries, provides for the financing of procurement in the participating countries for three Colombian projects in accordance with the following formula: external financing of the imported goods would be 50 percent by the Bank and 50 percent by the supplying country. This would apply only to individual orders for imported goods of at least US$200,000, provided that the accumulated value of such orders placed in the country is at least US$1.0 million for each individual project. 19. The proposed loan of US$1l.0 million takes into account contracts already awarded on the basis of completed bidding. These contracts should result in financing from participants of not less than US$3.0 million. Addi- tional financing of up to anotherUS$3.0 million may result from these con- tracts and from other contracts yet to be awarded. The Bank loan agreement would contain provision for early cancellation of any excess amounts should contracts eligible for joint financing be higher than this minimal joint financing estimate of US$3.0 million. PART IV - LEGAL INSTRU1ENTS AND AUTHORITY 20. The draft Loan Agreement between the Bank and Empresa de Acueducto y Alcantarillado de Bogota and the draft Guarantee Agreement between the Republic of Colombia and the Ban1 as well as a Report of tho  - 6 - Committee, provided for in Article III, Section L (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 21. These draft Agreements contain covenants normally included in agreements for water projects. Particular attention is drawn to the pro- visions requiring the Borrower and the Guarantor to use their best efforts to secure other loans (under the joint financing arrangements) for the project (Section 5.11 of the Loan Agreement and Section 3.06 of the Guarantee Agreement); the Bank would be entitled to reduce the loan by any amount in excess of the foreign exchange requirements of the Project, after taking into account the joint financing arrangements made (Section 2.08 of the Loan Agreement). The Bank would also agree to adjust, within limits, the Amortization Schedule for the loan to reflect the amortization of other loans under the joint financing arrangements so as to provide an aggregate amortization of the external financing for this Project reasonably approxi- mate to that which would be normally applicable to a Bank loan of the same maturity (Section 2.07 of the Loan Agreement). 22. The Borrower would undertake not to incur, without the consent of the Bank, debt with a maturity of a year or more in excess of the esti- mated foreign exchange cost of the Project unless its net revenues for the 12 months prior to the incurrences of the debt cover at least 1.5 times its maximum future debt service in any year (Section 5.07 of the Loan Agree- ment). 23. The Borrower and the Guarantor would agree to take all appropriate action required to maintain the Borrower's revenues at a level sufficient to produce a reasonable return on the Borrower's net fixed assets in opera- tion (Section 5.08 of the Loan Agreement and Section 3.05 of the Guarantee Agreement). Detailed arrangements for the implementation of the undertaking concerning revenues and tariffs referred to in paragraph 17 will be em- bodied in an exchange of letters. PART V - THE ECONOMY 2b. A section on the Colombian economy is contained in the Presi- dent's Report on the Proposed Loan to Banco de la Republica in Colombia for the Development Finance Companies Project (P-592) of May 2, 1968. PART VI - CO0MPLIANCE WITH THE ARTICLES OF AGREEIENT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 7 - PART VII - RECOMIENDATION 26. I recommend that the Executive Directors adopt the folloking resolution: RESOLUTION NO. Approval of Loan to Empresa de Acueducto y Alcantarillado de Bogota (Bogota Water Supply Project) in the amount of the equivalent of US$14,000,000 to be guaranteed by the Republic of Colombia. RESOLVED: THAT the Bank shall grant a loan to Empresa de Acueducto y Alcantarillado de Bogota, to be guaranteed by the Republic of Colombia, in an amount in various currencies equivalent to fourteen million United States dollars (US$l1,ooo,ooo), to mature on and prior to June 1, 1988, to bear interest at the rate of six and one-quarter percent (6-1/4%) per annum, and to be upon such other terms and conditions as shall be sub- stantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Bogota Water Supply Project) between the Bank and Empresa de Acueducto y Alcantarillado de Bogota, and the form of Guarantee Agreement (Bogota Water Supply Project) between the Republic of Colombia and the Bank, which have been presented to this meeting. Robert S. McNamara President Attachment Washington, D.C. May 16, 1968