Colombia - Cali Water Supply and Sewerage Project

RESTRICTED FILE COPY Report No. P-818 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 The report may not be published nor may it be quoted as representing their views.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 THE ESTABLECIMIENTO PUBLICO EMPRESAS MUNICIPALES DE CALI WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA May 13, 1970  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELORENT REPORT AND RECOIlvIENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ESTABLECIMIENTO PUBLICO EMFRESAS MUNICIPAIES DE CALI WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$18.5 million to the Establecimiento Fublico Empresas lNunicipales de Cali (Emcali) for a water supply and sewerage 1roJect. PART I - HISTORICAL 2. The proposed loan would be the Bank's second loan for water supply and sewerage in Colombia. The first loan (536 CO) for US$14 mil- lion to the Empresa de Acueducto y Alcantarillado de Bogota was made in June 1968 for the expansion and improvement of Bogota's water supply system. 3. A Bank mission to Colombia appraised the proposed Project in September 1969, and negotiations were held in Washington from March 30 through April 9, 1970. Emcali was represented by the General Manager, Mr. Garces, and by the Financial Director, Mr. Arana. The Colombian Gov- ernment was represented by Mr. Barrera of the National Planning Depart- ment. Mr. 2engifo, Mayor of Cali, attended the negotiations on behalf of the city of Cali. 4. The proposed loan, which would be the forty-third made to Colombia, and the proposed loan of US$52.3 million to Interconexion Electrica S.A. for the Chivor Hydroelectric Project, would increase the amount of Bank loans to Colombia to US$727.6 million (net of cancella- tions), of which US$485.7 million is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia. A summary state- ment of Bank loans and IDA credits to Colombia as of April 30, 1970 was included in my Report and Recommendation on the proposed loan for the Chivor Hydroelectric Project (B-817), dated May 13, 1970.  5. The status of disbursements on loans is described in paragraph 5 of my Report and Recommendation on the loan for the Second Education Project (P-799), dated April 30, 1970. 6. IFC has made 34 investments and underwriting commitments in seventeen enterprises in Colombia totalling US$17.9 million (net of cancel- lations). PART II - DESCRIPTION OF THE FROPOSED LOAN 7. Borrower: Establecimiento Publico Empresas Municipales de Cali (Emcali). Guarantor: Republic of Colombia. Furpose: To assist in financing the expansion and improvement of the water supply and sewerage system in the city of Cali. Amount: The equivalent in various currencies of US$18.5 million. Amortization: In 25 years, including a 8-year grace period, through 42 semi- annual installments beginning August 1, 1974 and ending February 1, 1995. Interest Rate: 7 percent per annum. Commitment Charge: 3/4 of one percent per annum. PART III - THE PROJECT 8. A detailed description of the Project is given in the attadhed report entitled "Appraisal of the Cali Water Supply and Sewerage Project" (PU-30a). 9. With the encouragement of the Bank, the Colombian Government is studying the national water supply and sewerage sector to prepare long- range goals and a short-term program. The results of this study should be available in late 1970, but in the meantime, the Colombian Government is giving priority to the water and sewerage services in the large and medium- sized cities, which are growing rapidly. These developments are associated with improvements in public utility tariff policy under the recently esta-  - 3- blished Pablic Utilities Tariff Board. 10. The proposed Borrower and executing agency, the Establecimiento Fublico Empresas Municipales de Cali (Emcali), is an autonomous public entity which was created in 1961 by municipal decree to provide water supply, sewerage, power distribution and telecommunication services. Emcali's Board is composed of six members: two elected by the Sunicipal Council, one nominated by the Mayor, one nominated by the Board of the Banco de la Repu.. blica in Cali and two members representing major Colombian creditors of Emcali. 11. Cali is the third city of Colombia and the political, administra- tive and industrial center of the Department of Valle. Its population, presently 920,000, has been increasing at nearly 8 percent annually. A large part of this growth is the result of mechanization of the commer- cialized agriculture of the Department of Valle, which has tended to re- duce the demand for farm labor, and of rural poverty in neighboring depart- ments where agriculture is dominated by small holders. 12. Of Cali's present population of 920,000, 710,000 are served by the water and sewerage system. By 1973 when population is expected to reach 1,100,000 over 1,000,000 people will be served, representing an increase of about 300,000 in three years. Services would be extended to areas inhabited by the city's lowest income groups where, on account of inadequate sanitation, health conditions are inferior to those elsewhere in the city. 13. The water supply portion of the Froject includes a new intake and a water treatment plant on the Cauca River, and new or improved supply lines and house connections, and some new distribution lines. The sewerage portion includes a major sewerage interceptor, which will reduce pollution of water at the intake of the water treatment plant, a pumping station,trunk and secondary sewers and drainage canals for the removal of storm water. The Foject does not include a sewerage treatment plant, as pollution of the river downstream from Cali is expected to remain at tolerable levels at least until 1975, and possibly until 1985. 1. The financial requirements of the Project total US$37.5 million, consisting of US$33.5 million estimated Project cost and US$4.0 million estimated interest on the Bank and local loans. The proposed loan of US$18.5 million would finance approximately one-half of the total requirements. All bidding would be on an international competitive basis. About US$11 million of the loan would be used to pay for the foreign exchange cost of consultants' services and the cost of imported equipment, materials, supplies and tools,  and US$2.1 million would finance interest and other charges on the Bank loan. The remaining US$7.5 million would be for local expenditure. Local firms are expected to win the civil works contracts because of their technical and financial capacity and their natural competitive advantage, and various items of equipment, materials, supplies and tools can best be procured locally. Some 41 percent of the cost of these items would be covered by the loan. Despite Colombia's efforts to mobilize domestic re- sources for development, there remains a gap which has to be financed externally. The amount of external financing required for this purpose cannot be fully provided if external lenders finance only the import content of key projects, and in these exceptional circumstances and taking into account the importance of the proposed project, I consider that the inclusion of some local expenditure financing is justified. 15. The water supply and sewerage division of Emcali will contribute the equivalent of about US$10 million to the financial requirements of the Project from its own revenues and capital receipts. A Government loan equi- valent to about US$9 million, bearing interest at 14 percent per annum and repayable over a period of eleven years after a grace period of four years, will complete the Project's financing plan. The Loan Agreement provides that water rates will be set to achieve a rate of return on revalued assets of two and one-half percent in 1970, to be gradually increased to eight percent by 1978. Emcali has established a program, duly authorized by its Board of Directors and the National Tariff Board, according to which the combined water supply and sewerage tariffs will be increased by Col. $0.016 per cubic meter every month from June 1, 1970 through December 1, 1973. On the basis of these rates, the financial rate of return on the incremental investment being undertaken under the Project would be about 14 percent. To maintain Emcali's overall financial equilibrium, the company has also undertaken to maintain in its power and telephone divisons a rate of return of 7 percent on revalued assets. Debt service will be covered about one and a half times. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and the Establecimiento Publico Empresas Nunicipales de Cali and the draft Guarantee Agreement between the Republic of Colombia and the Bank, as well as a Report of the Committee, provided for in Article III, Section b(iii) of the Articles of Agreement of the Bank and the text of a Resolution approving the proposed loan, are being distributed to the Executive Directors separately.  17. The draft Loan Agreement contains provisions generally used for water supply and sewerage projects. Section 5.12 contains rate of return requirements not only for water and sewerage services but also for Emcali's power and telecommunication services. The debt limitation covenant in Section 5.08 applies to power and telecommunication services as well as to the water supply and sewerage services. 18. The Guarantee Agreement does not differ in substance from previous agreements with the nepublic of Colombia. The Guarantor would agree to take all steps necessary on its part to enable Emcali to set and maintain its tariffs at the levels specified in the Loan Agreement (Section 3.05). PART V - THE ECONOMY 19. A summary of recent developments and a favorable conclusion regarding Colombia's creditworthiness for additional external borrowing was contained in paragraphs 15 - 20 of my Report and Recommendation on the loan for the Second Education Project (P-799), dated April 30, 1970. PART VI - COMPIIANCE WITH THE ARTICIES OF AGREEMENr 20. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMDENDATION 21. I recommend that the Executive Directors approve the proposed loan. Robert S. McMamara President by J. Burke Knapp Attachments Washington, D.C. May 13, 1970