Colombia - Palmira Water Supply and Sewerage Project

RESTRICTED Report No. PU-33b 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE PALMIRA WATER SUPPLY AND SEWERAGE PROJECT COLOMBIA May 5, 1971 Public Utilities Projects Department  CURRENCY EQUIVAIENTS Currency Unit = Peso (Col$) US$1 = Col$19.00 (see paragraph 7.07) Col$1.00 = US$0.05 Col$1 million = US$52,600 ABBREVIATIONS ha = hectare = 2.47 acres in. - inch = 2.54 centimeters km = kilometer = 0.621 miles kwh = kilowatt hour 1 = liter = 0.264 US gallons I/c/d = liters per capita per day 1/sec = liters per second = 16 US gallons per minute m = meter = 3.28 feet m2 = square meter = 10.8 square feet m3/sec - cubic meter per second = 22.8 million US gallons per day mgWl = milligrams per liter ABBREVTATIONS AND ACRONYNS Empresas - Empresas Publicas Municipales de Palmira Fonade - Fondo Nacional de Desarrollo Insfopal - Instituto Nacional de Fomento Municipal  COLOMB IA APPRAISAL OF THE PALMIRA WATER SUPPLY AND SEWERAGE PROJECT TABLE OF CONTENTS SUMARY AND CONCLUSIONS i I. INTRODUCTION 1 II. THE ECONOMY AND THE SECTOR 2 A. Basic Data 2 B. Urban Development 2 C. Water Supply and Sewerage Sector 2 D. Paluira 4 III. EXISTING WATER SUPPLY AND SEWERAGE FACILITIES 5 IV. THE PROJECT 7 A. Description of the Project 7 B. Cost of the Project 7 C. Loan Amount 8 D. Procurement 9 E. Disbursement 9 F. Project Execution 9 G. Environmental Quality 9 V. JUSTIFICATION 10 VI. THE BORRYdER 11 A. Empresas Publicas Mhnicipales de Palmira 11 B. Organization and Management 11 VII. FINANGE 13 A. Past Record and Present Position 13 B. Financing Plan 13 C. Water Supply and Sewerage Financial Forecasts 15 D. Telephone Financial Forecasts 16 E. Markets and Slaughterhouse Financial Forecasts 17 F. Consolidated Financial Forecasts 17 VIII. RECOMMENDATIONS 18 This report is based on the findings of Messrs. Charles Morse and Jean-Louis Ropiteau who visited Palmira, Colombia, in July 1969 and in November 1970.   LIST OF ANNEXES Amnex 1. Water Supply and Sewerage Facilities 2. Annual Project Investments 3. Estimated Schedule of Bank Loan Disbursement 4. Construction Program 5. Urban Population Growth 6. Population and Whter Consumption 1964-1978 7. Internal Financial Rate of Return 8. Organization Chart 9. Present Water Supply and Sewerage Tariffs 10. Bmpresas 1970 Financial Statements 11. Water Supply and Sewerage Estimated Income Statements, 1970-1978 12. Water Supply and Sewerage Estimated Cash Flow Statements, 1970-1978 13. Water Supply and Sewerage Assumptions for Financial Projections 14. Telephone Services Estimated Income Statements, 1970-1978 15. Telephone Services Estimated Cash Flow Statements, 1970-1978 16. Telephone Services Assumptions for Financial Projections 17. Markets and Slaughterhouse Estimated Income and Cash Flow Statements, 1970-1978 18. Markets and Slaughterhouse Assumptions for Financial Projections 19. Consolidated Estimated Income Statements, 1970-1978 20. Consolidated Estimated Cash Flow Statements, 1970-1978 21. Consolidated Estimated Balance Sheets, 1970-1978 22. Notes on Revaluation MAP - General Project Area   COLOMBIA APPRAISAL OF THE PALMIRA WATER SUPPLY AND SEWERAGE PROJECT SUMMARY AND CONCLUSIONS i. This report covers the appraisal of a water supply and sewerage project for Palmira, Colombia, a city of 160,000 inhabitants, for which a Bank loan of US$2.0 million equivalent is proposed. Palmira and other major urban centers in Colombia have grown very rapidly , with their urban services becoming more and more inadequate. Water supply and sewerage especially have lagged, because they require large amounts of capital which they have not been able to provide from internal funds since their rates are traditionally low. ii. The project includes new water supply, treatment and distribution works and some sewerage and drainage works. Palmira's population is grow- ing at about 6% annually, and the project would eliminate the present deficit in water supply and meet future demand for the next decade. iii. The project's financial requirements total US$4.2 million (US$3.8 million for the estimated project cost and US$o.4 million for the estimated interest on the Bank and the local loan). Of the total amount, the Bank loan of US$2.0 million would finance about 47%, covering the foreign exchange cost of US$1.2 million (including US$0.2 million for interest on the Bank loan) and local currency cost of US$0.8 million. A Colombian Government loan would finance 28% of the total requirements and the remaining 25% would be financed from internally generated funds. iv. All project elements would be subject to international competi- tive bidding. V. The Borrower would be Empresas Publicas Municipales de Palmira, a municipal company set up to provide water supply, sewerage and the telephone services, and operate the markets and slaughterhouses. The Empresas would construct and operate the project, while consultants design the project and supervise its construction. Although management is fairly competent substantial administrative improvements are required. vi. The Borrower's financial position is weak. In the past it has been unable to meet debt payments for a telephone equipment supplier's credit. The financial position wil improve with the higher tariffs for water supply and sewerage and telephones recently introduced and the future increases projected. Still, short-term borrowings will be neces- sary to service the supplier's credit.  -ii - vii. Further increases in water supply and sewerage and telephone tariffs are necessary. With the projected water supply tariffs, its estimated earnings would awount to 4.7% on net revalued assets by 1973 and 9.1% by 1977. The projected telephone tariffs would enable this service to meet its debt service and finance expanaion. The internal financial rate of return on the project would be 20%. viii. With the agreements reached during negotiations noted in Section VIII, the project is suitable for a Bank loan of US$2.0 million equivalent for a term of 25 years, including a four-year grace period.  COLOMBIA APPRAISAL OF THE PALMIRA WATER SUPPLY AND SEWERAGE PROJECT I. INTRODUCTION 1.01 The Government of Colombia has applied for a Bank loan to help finance a water supply and sewerage project for the City of Palmira (see Map), to be undertaken by the municipal public utility company, the Empresas Publicas Municipales. 1.02 The project includes water supply and treatment facilities, tran;3mission mains, distribution lines, sewers, drainage canals, and house conmections for water and sewage. 1.03 The cost of the works is estimated at Col$77.8 million (US$3.78 million equivalent), plus interest and commitment charges during construction of Col$9.2 million (uS$o.45 million). The Bank loan would be US$2.0 million, of which US$1.2 million would cover the estimated total foreign exchange cost. 1.04 The project was initially appraised in July 1969, based on a feasibility study by a consortium of two Colombian firms and a U.S. firm. The initial project was reduced to keep it within the financial resources of the Empresas by redesigning treatment plant expansion, staging water distribution, and postponing some sewerage/drainage works. 1.05 During negotiations in April 1970 the Empresas' representatives were not authorized to agree to water and sewage tariffs which would enable the Empresas to be financially viable. It also developed that the Empresas .as i*n default onr a supplier's loan for telephone equipment. Therefore, negotiations were suspended to enable a viable financing plan to be deve- loped by the Empresas and a settlement made on the supplier's credit. This report is based on the new tariff schedule presented by the Empresas, which is slightly less than was proposed in the original appraisal report. A settlement on the supplier's credit has also been reached. Meanwhile, new engineering consultants, Indesco Ltda. of Bogota and Kennedy Engineers of San Francisco, reviewed the original feasibility study and refined the reduced project, and are currently preparing the detailed designs.  -2- II. THE ECONOMI AND THE SECTOR A. Basic Data 2.01 Colombia has a population of about 22 million. The Gross Domestic Product in 1968 was about Col$96 billion, equivalent to an average per capita income of about US$300. The population is growing at a rate of approximately 3.3% per year, and emigration from rural to urban areas has resulted in urban growth of 5% to 8% annually. The urban population represents about 57% of the total, compared to less than 40% in 1950. B. Urban Development 2.02 The Government's urban development policy is intended to preserve some reasonable balance and proportion in the rates of growth of the various cities. For this purpose, the cities have been divided into categories, each of which is intended to have a specific role in balanced development. The caterrories h-in -it.h +he nn4 1-1tr.'Pc2 D 4 _.. I 4, _- _ - 4+i is to reduce demographic and social pressures. The remedy in the short term is to promote growth in the next ranking cities, the "equilibrium metropo- lises" of Medellin, Cali, and Barranquilla, so as to offer alternative centers to attract economic activity and internal migration. 2.03 While these equilibrium metropolises provide the most immediate alternative growth centers, the Government is taking a longer view to direct future economic growth and migration towards the next tier, the intermediate cities. These cities have populations of 30,000 to 200,000. The Govern- ment's policy towards these intermediate cities, of which Palmira is one, is to establish labor-intensive industry, integrate agriculture with industry, provide the necessary public services, and prepare urban development plans for the more important ones. C. Water Supply and Sewerage Sector 2.04 The rapid growth of the Colombian cities has resulted in inadequate urban services of all kinds. The inadequacy has been especially marked in the supply of potable water and the removal of liquid wastes, and is due to the inability of the municipalities to provide the large capital requirements for such services because of the traditionally low tariffs charged for them. Often these services have not earned even their cash operating costs, much less generated funds for the very large investmnents required. The Government is now actively encouraging water supply systems to increase tariffs progres- sively so as to earn a rate of return sufficient to meet their financial requirements. 2.05 The country's urban water supply and sewierage sector can be divided into three groupsy described below. (a) Some 21 cities with populations above 20,000 have organized their 7wr. municipal empresas (companies) to provide such public services as water supply, sewerage, garbage disposal, electric power dis- trlbution, telecomnunications, marketplaces, and the like. These cities have about 7 million of the total urban population of some 12 million. The empresas are generally well run.  -3- (b) There are about 750 water supply systems in the smaller cities, which are under the control of the national water supply agency, Instituto Wacional de Fomento Mumicipal (Insfopal), recently transrerred to the Ministry of Health. These systemns are run on a regional cooperative basis, with the cash profits of the few profitable systems partially covering the cash deficits of the ma-jority and Government grants making up the difference. Their admqinistrative competence is usually poor. The major source of fundls for their :investments is Governrnnt grants. (c) The systems admianistered directly as municipal departments by the synaller municipalities make up the third group). For the most part these systems are poorly administered and their services are grossly inadequate. Their number is unlmown but may amount to a few hundred. The tendency is for them to affiliate with Insfonal's system in order to get government funds. 2.06 The rural water systems, defined as those in towns of less than 2,5(o ponulation, are the responsibility of the Ministry of Public Health's rural water supply -program, although some affiliated with Insfopal before lhe rural program was fully established. The Ministry has started a com- bination loan/grant program which includes technical assistance; the TProqram1s success cannot be assessed as yet. 2.(7 The Colombian Government gives first priority to the municipal empresas. Because of their size, managerial competence, and the concen- tration of population, the empresas offer the best hope for achieving the greatest benefits and institutional improvements relative to the other categories of the sector. Also, this is the category where the major nhstqcle to development of the sector -- low tariffs -- can be most easily overcome. 2.03 The Bank made a loan of US$14 million to the Empresa de Acueducto y Alcantarillado Bogota in June 1968 (536-co), and a second Bank loan for expansion of the water supply service in Bogota is in preparation for fiscal 1971. A loan of US$18.5 million was made in 1970 to the Empresas Municipales de Cali. The Inter-American Development Bank has made nine loans, totalling US$43.2 million, to four empresas and to Insfopal. 2.09 The proposed loan for the Palmira project would be to one of the empresas in the so-called medium cities. A group of these have feasibility studies, financed in part by US-AID funds, ready for appraisal and may be presented to the Board in fiscal 1972. As the sector program progresses, the Bank may be asked to consider financing projects in the Insfopal system.  -4- D. Palmira 2.10 Palmira is the twelfth city of Colombia and the second city in the Cauca Valley. It represents the northern portion of the major urban area developing around Cali-Yumbo. With the new international airport close to Palmira, future urban industrial development should tend to fill in between Cali and Palmira. A national agricultural university and research center have been established in Palmira, along with a number of agricultural processing industries. 2.11 The proposed Borrower, the Empresas Publicas Municipales de P'almira, is fairly well administered and has reached a level of profi- ciency which will permit it to markedly improve its operations with the financial and technical assistance proposed.  -5- III. EXISTING WATER SUPPLY AND SEWERAGE FACILITIES 3.01 Palmira's present water supply is limited in quantity and is poor in quality. Some industries have had to turn to the highly-mineralized ground water because of insufficient public supply. Some unfiltered and therefore unsafe water has been supplied to consumers because the capacity of the treatment plant is insufficient. There are not enough sewers so sewage and storm water cannot flow away. A number of inhabited areas have open sewers, and some central areas of the city become flooded after heavy rains with water heavily contaminated with sewage. 3.02 Palmira takes its water from the Nima River (see map). The autho- rity responsible for regional water resources, the Corporacion Autonoma Regional del Cauca, has awarded the Empresas the right to abstract up to 1,000 1/sec provided the Empresas constructs a small holding dam when it takes more than 600 1/sec (about 1974), at a cost of about Col$300,000. 3.03 The tail-race canal of a small hydro-electric plant on the Nima River is used as the intake for Palmira's water supply. There is another canal which also serves the intake if the power canal is not in use. Raw water flows from the intake to a conventional treatment plant. The nominal capacity of this plant is 290 1/sec, but the average rate of supply is over 400 1/sec. The treated water flows by gravity through two mains to the city, 5 kms away. Annex 1 describes the system in more detail. 3.04 It is estimated that 87% of the city's population (that is about 139,000 people) is supplied with water. The house connections total 15,800, of which 13,400 have meters although many of the meters do not work. There are some hOG km of distribution piping, of which 85% is 10 cm in diameter or sralle-r. Piping 5 cm in uiameter or smaller (22.5%) is mostly of gal- vanized steel, and should be replaced as it is too small and often corroded. 3.05 The sewerage system is a combined one, that is it carries storm water as well as sewage, and with its 100 Im of sewers serves about the same area as that which is supplied with water. About 15,000 houses have sewer connections. Untreated sewage and rain water drain into the Palmira River, which flows through the city's center. The river frequently floods adjacent low-lying areas, some of which are occupied by slum housing. 3.06 The Palmira River, which has a minimum flow of 600 l/sec at Palmira, discharges into the Bolo River, which has an average flow of 10,000 1/sec, 11 kms below Palmira. These rivers drain agricultural lands below Palmira and are not utilized for water supply or other pur- poses. Sewage treatment will be needed at Palmira by about 1980 to pre- vent deterioration of the River Bolo below a standard of quality Of at least 3 mg/1 of dissolved oxygen.  -6- 3.07 The maintenance of both the water distribution and the sewerage systems suffer from lack of personnel and attention from the management. The Empresas is aware of this, and of the need for additional personnel and some technical assistance. A meter maintenance program needs to be instituted and meter repairing accelerated. Programw to correct these deficiencies will be established by the Empresas with technical assist- ance from the Pan-American Health Organization (see paragraph 6.08).  -7- IV. THE PROJECT A. Description of the Project 4.01 The Project would consist of a new intake on the canal from the River Nima. Should demand grow so as to require construction of a small holding dam (see paragraph 3.02) duiring the construction years of 1971-73, this would be built also. A new main would lead to a new water treatment plant with a nominal capacity of 900 1/sec. This plant would be built in parallel with the existing one, which would be renovated, mainly at a later stage of the Project, to give a total nominal capacity of 1,500 I/sec of adequate and reliable water treatment. Storage for treated water would be provided, initially by a tank of 12,000 m3, and later by a second tank of the same size. A new main with a diameter of 27 inches from the plant to the city would be added to supplement the mains already in use, so increasing the total capacity of those mains to 2,300 1/sec to meet peak demands estimated at 1.8 times average demand. h.02 At the city, extensive additions would be made to the network of pipes, valves, etc. of the distribution system, including house con- nections. Sewerage and drainage works would also be constructed. Con- sulting services for engineering and management would form part of the Project. Details of the various constructional works proposed are listed in Annex 1. 4.03 Although a large number of sewers and drains are needed, only the most urgent would be constructed. Additional works would be built later as funds permitted. h.ohv4 Palmira has plenty of ground water, and its utilization as an alternative source was investigated in the feasibility study. The ground water is high in iron and manganese and in hardness, and the cost of treatment would make it more expensive than surface water from the Nima River. The next expansion of water supply (about 1980) would be from the Amaime River, 13 kms away. B. Cost of the Project 4.05 Costs are summarized below. The holding dam is not included. Except for the price contingency, the prices are at 1970 values, with an exchange rate of Col$19.00 to US$1.00. The annual investment program is given in Annex 2.  -8- ---- Col$ Million-- ----- US$ Million------ Item Local Foreign Total Local Foreign Total Intake and Raw Water Line 0.9 0.1 1.0 0.05 - 0.05 Treatment Plant 6.2 7.5 13.7 0.33 0.39 0.72 Storage Tank 1.5 0.2 1.7 0.08 0.01 0.09 Transmission Line 8.0 1.3 9.3 0.42 0.07 0.49 Distribution System 11.9 2.1 14.0 0.62 0.12 0.74 House Connections 2.1 1.3 3.4 0.11 0.07 0.18 Sewerage Works 9.5 .5 10.0 0.49 0.03 0.52 Construction Sub-total 40.1 13.0 53.1 2.10 0.69 2.79 Technical Contingencies 8.0 2.6 10.6 0.43 0.1.4 0.56 Engineering and Adminis- 4.0 1.3 5.3 0.21 0.06 0.28 tration Price Contingency 6.7 2.1 8.8 0.12 0.03 0.15 Total 58.8 19.0 77.8 2.86 0.92 3.78 4.o6 The project cost estimates were made by the consultants who revised the feasibility study. The unit prices were built up using 1970 prices. Technical contingencies are 20% and engineering and administration costs are 10% of the construction sub-total. An annual local price contingency of 8% and an annual foreign price contingency of 3% were added through the construction period, reflecting price changes in recent years for these types of works. C. Loan Amount 4.07 A loan amount of US$2.0 million is proposed, representing about 47% of the project's financial requirements totalling TJS$4.2 million, after adding to the estimated cost of works (US$3.8 million), interest and other financial charges (US$o.4 million) payable during construction on the pro- posed Bank and Government loans. 4.08 The proposed loan amount would cover the following: (a) US$0.92 million, the estimated foreign exchange cost of the project, of which about 70% would be for the cost of direct imports and the remainder for the foreign exchange component of civil works; (b) US$0.23 million for the interest and commitment charges on the Bank loan during constructions; and (c) us$o.85 million for local currency expenditures.  -9- 4.09 If the project cost is more than estimated, the Empresas would be expected to meet the overrun and the Colombian Government has under- taken to have promptly provided the necessary funds if the Empresas could not do so. Should the project cost less than anticipated, the Bank should consider financing 47% of the cost of additional sewerage and drainage works. D. Procurement 4.10 All contracts would be bid on an international competitive basis. Since the construction works are small and routine they would probably attract only Colombian bidders. 4.11 Foreign bidders are expected to supply treatment plant equipment, major valves and accessories, and water meters. A 15% preference will be allowed local manufacturers of equipment in the evaluation of bids. This is not expected to change substantially the distribution of supply contracts between local and foreign suppliers. E. Disbursement 4.12 The Bank loan would be disbursed against the CIF cost of all direct imports and against a percentage (about 36%) of all local procurement and civil works to reach 47% of the cost of the total works. A disbursement schedule is attached as Annex 3. F. Project Execution 4.13 The present consultants, Indesco, Ltda., of Bogota and Kennedy Ingineers of San Francisco, are acceptable to the Bank and are employed to design the project and would supervise project construction. Assurances that satisfactory consultants would continue to be employed were obtained during negotiations. The design work is being financed by a loan from the Colombian Development Fund (Fonade), while the cost of construction supervision would be covered by the Bank loan. 4.14 A three-year construction period, 1971 through 1973, is expected. Project design would carry on into early 1971 and major construction would take place in 1972 (see Annex 4). G. Environmental Quality 4.15 The project would improve environmental quality by providing ample supplies of safe water to the city. It would reduce environmental pollution by removal of sewage and storm waters from the -urban area. Pollution in the Palmira River would increase and sewage treatment would be necessary by 1980 (see paragraph 3.06).  -10- V. JUSTIFICATION 5.01 The results of recent censuses in Palmira show a population growth rate of about 6% per year (4nnex 5). This growth rate is expected to con- tinue, which would bring the present population of L60,000 to 240,000 by 1978. At present 87% of the population is supplied with water. In 1978, 95% of the population expected at that time would be supplied, with water of reliable quality and in adequate quantity, with the project in operation. The project would be especially useful to industries now forced to use the mineralized ground water. A substantial improvement to the sanitary conditions would be started with the sewers and drains proposed in the project. 5.02 The gross per capita daily consumption (including lost water and commercial and industrial consumDtion) is Proiected to reach '00 liters. Lost or unaccounted-for water should drop from the present estimated -,V to 21% by 1978. These estimates are necessarily speculative, as is the past and projected consumption shown in Annex 6, since the data on water consumption in Palmira are poor. Consumption by type of customers and the proportion of people served and the amount of water lost can only be esti-4(ated within approximate but adequate limits. 5.03 The internal financial rate of return for the project, including sewerage and drainage works, as measured by total water supply and sewerage revenues is 20%. The calculation is shown in Annex 7. The benefits are measured by the additional quantities of water provided, valued at the proposed combined water supply and sewerage tariff after deducting incre- mental operating costs due to the project. The costs are those of building the project and the post-construction period investments necessary to utilize it fully. 5.04 Not all of the benefits mentioned above are included in this type of measurement, which relies on the willingness to pay as a measure of the value of the benefits. Health benefits, both those directly accruing to the consumers and indirectly accruing through a general improvement in the health of the whole community, are examples of benefits which may be under- stated or completely omitted by this analysis. 5.05 Projected earnings on water supply and sewerage services should increase from a loss in 1970 to a small profit during project construction (before interest) and reach a 9% return a few years thereafter. This means that the Empresas could amortize the national and the Bank loan and continue investments to catch up on the backlog of water distribution, sewerage, and drainage needs. K.06 4dditionally, although the Empresas of Palmira has a competent C