Colombia - Medium Size Cities Water Supply and Sewerage Project (Vol. 1 of 2) : The main report

RESTRICTED Report No. PU-100 ~~V6-1'64~o S This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be pubLished, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECTS COLOMBIA (in two volumes) VOLUME I THE MAIN REPORT July 31, 1972 Public Utilities Projects Department  OUURE! EQUIVALENT Currcy Unit - Col.bium Peo (Col$) US$1.00 - Col$20 (see paragraph 4.15) Col$1.00 - US*0.05 Col$1,000,000 - US$50,000 ME&SMMZS AND nOtJIA=KNS kilameter (km) - 0.62 omles liter (1) - 0.26 US gallons otor (a) - 3.28 feet cubtc mter (W3) - 35.3 cubic feet gallon (gal) - 3.785 liters liter per second (/ec)- 0.023 million US gallons per day or 15.8 US gallons per minute liter per oapita per day (l/c/d) - 0.26 US gallons per capita per day milligrams per liter (wg/l) - 0.058 Grains per US gallon PRIIINIPAL AB BRIATZIONS AND ACRBONM USED INFPMAL - Inatituto Nacional de Famento Municipal FONADE - Fondo Nacional de Desarrollo Rconowico FAHO - Pan Amrican Heath Organiation INRES - Inatituto Nacional pan Programs Zepeciales do Salud DMND - Departamnto Adminiatrscion Nacioral do Estadiatrica Jan. 1 - Dec. 31  COLOMBIA MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECTS VOLUME ONE: THE MAIN REPORT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .............................. i-ii I. INTRODUCTION ......................................... 1 II. THE SECTOR ........................................... 2 Urban Development ............................... 2 Past Investment ................................ 3 Development of the Sector ..... .................. 4 III. THE BORROWER AND THE BENEFICIARIES ................... 5 The Borrower .......... ........ 5 Organization for Administration of Bank Funds ... 6 The Beneficiaries ...... ......................... 7 Management Assistance .................. 9 IV. THE SEVEN PROJECTS ................................... 9 Background ................................ 9 The Seven Projects ............. .. ............... 10 Cost Estimates .................................. 12 Amount of Proposed Loan .......... .. ............. 13 Procurement ....... ........... ................... 14 Disbursement .................................... 14 Execution of the Projects ....................... 14 INSFOPAL's Costs .............. .. ................ 15 V. JUSTIFICATION ........................................ 16 Investment Objectives ........................... 16 Least-Cost Solutions ............ .. .............. 16 Economic Return .............. .. ................. 16 Environmental Aspects ........... .. .............. 17 Institution Building ............ .. .............. 17 This report was prepared by Messrs. Morse, Costa and Kalbermatten.  Table of Contents (Continued) Page No. VI. FINANCES ............................................ 18 Past Finances ............. ...................... 18 Financing Plan ............ ...................... 19 Tariffs ......................................... 21 Future Finances ........... ...................... 22 Risks ........................................... 23 VII. AGREEMENTS REACHED AND RECOMMENDATION ..... ........... 25 LIST OF ANNEXES 1. Bank Loans Made to Colombian Cities for Water Supply and Sewerage 2. Projects Cost and Annual Project Investments (2 pages) 3. Disbursements and Components of the Seven Loans (2 pages) 4. INSFOPAL External Credit Office Cash Flow Statements and Calculation of the Net Internal Cash Generation (2 pages) 5. Population Served and Water Used 6. Past Financial Indicators 7. Distribution of Revenues by Services in 1971 8. Financing Plan (1972-1976) 9. Water Supply and Sewerage Tariff Increases 10. Power, Telephones and Other Services Tariff Increases and Financial Targets 11. Consolidated Future Finances 12. Method of Calculating Rates of Return 13. Evaluation of Risks Chart 6599 INSFOPAL Organization Chart Map 3916 Projects Location  COLOMBIA APPRAISAL OF THE MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECTS SUMMARY AND CONCLUSIONS i. This report (Volumes 1 & 2) appraises water supply and sewerage projects for seven medium-sized cities in Colombia, for which a Bank loan of US$9.1 million equivalent is proposed. The needs of the larger cities (Bogota, Cali and Medellin) for water supply and sewerage are being met by loans from the Bank and the Inter-American Development Bank. The policy of the Government is to improve services in medium-sized cities in order to encourage a more balanced urban development and divert migration to them. This "package" of projects directs itself to the requirement of seven medium- sized cities in Colombia with populations from 80,000 to 300,000: Armenia, Manizales, Neiva, Pereira, Tulua, Buenaventura and Santa Marta. ii. The borrower would be Instituto Nacional de Fomento Municipal (INSFOPAL), the national water supply agency, and the proceeds of the loan would be relent to seven beneficiaries under subsidiary loan agreements ac- ceptable to the Bank between INSFOPAL and the individual beneficiaries. Five of the beneficiaries are municipal corporations (empresas) which supply water and sewage services and in some cases power, telephones and other services including markets, slaughterhouses, street cleaning, etc. Two of the bene- ficiaries are subsidiary organizations of INSFOPAL itself. In addition to conditions of effectiveness for the loan agreement as a whole, each sub- sidiary loan agreement would have its own conditions of effectiveness. iii. The report supports a policy of strengthening INSFOPAL as the na- tional agency to provide assistance in planning, administration and finance in the sector. INSFOPAL would administer international and national loan funds in the sector, would become increasingly responsible for effective project preparation and supervision of project execution, and would organize managerial and technical assistance to individual cities. iv. Substantial tariff increases for water supply and sewerage are pro- jected over 1971 levels. In some cases, increases have already been insti- tuted but further ones will be required. Increases in telephone and power tariffs and in charges for some of the other services provided by the muni- cipal empresas will be necessary to ensure the financial viability of the beneficiaries. Although the projected tariff increases are within the ranges of increases made in other cities and within the guidelines of the National Public Services Tariff Board, some public resistance can be expected. v. The beneficiaries' managements vary from poor to very good. Con- siderable managerial assistance will be needed and it is expected that the Pan-American Health Organization and local consultants will assist in provid- ing it, in collaboration with INSFOPAL.  - ii - vi. The total cost of the seven projects, plus the costs allocated to INSFOPAL for managerial assistance, is US$15.5 million equivalent. The pro- posed loan would cover half the cost of constructing the seven projects (US$7.4 million equivalent), the cost of managerial assistance (US$0.5 mil- lion equivalent), and financial charges on the Bank loan during construction (US$1.2 million equivalent). Expenditure in local currency for construction would be financed by the loan to the extent of an estimated US$5.2 million equivalent. The foreign exchange component is estimated to be approximately 17% of the total cost of construction. vii. Contracts would be awarded on the basis of international competi- tive bidding. Foreign bidders would be primarily attracted to the treatment plant equipment and the larger valves and accessories, amounting to about 10% of project costs. viii. The populations of the seven cities are growing at rates from 5.0% to 6.4% annually, and they will have a combined population of 1.8 million by 1980. These projects would ensure that a population of 1.6 million would be served with an adequate supply of wholesome water--that is, about double the population which has a supply at present. Sanitary conditions in the cities would also be substantially improved. The minimum economic rates of return for the individual projects vary from 9X for Tulua to 17% for Armenia. ix. The seven projects are suitable for a Bank loan of US$9.1 million equivalent for a term of 25 years including a grace period of four years, provided that the general conditions stated in Chapter VII and the conditions specific to each beneficiary listed in the seven "Recommendations" chapters of Volume 2 are met.  COLOMBIA APPRAISAL OF THE MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECTS I. INTRODUCTION 1.01 Instituto Nacional de Fomento Municipal (INSFOPAL), the agency with overall responsibility for water supply and sewerage in Colombia, has applied for a Bank loan to help finance water supply and sewerage projects in the seven cities of Armenia, Manizales, Neiva, Pereira, Tulua, Buenaven- tura and Santa Marta. These projects have an estimated total cost of US$15.5 million equivalent. A Bank loan of US$9.1 million equivalent is proposed, which INSFOPAL would relend to five independent municipal companies and to two utilities which it owns. 1.02 The Bank has made four loans for water supply and sewerage to large cities in Colombia, details of which are given in Annex 1. An attempt is being made to foster better-balanced urban growth by developing medium-sized cities and the loan now proposed would help to finance such development in cities with populations in the range 80,000 to 300,000. This involves the appraisal of smaller and more numerous projects than are usual in the Bank's work, and which would be administratively onerous for both the Bank and the Colombian Government if the usual methods were followed. A group of projects has therefore been selected to form the basis of a single loan to be admin- istered by INSFOPAL. There are further advantages in this approach. Loans to individual utilities can be kept prudently small and can be made in series so that the utility can demonstrate that it is improving and so that the next loan in the series gives it an incentive to continue to do so. Institution- building can also be fostered by assisting INSFOPAL to improve its own opera- tions as the responsible agency for developing the sector, as explained later in this report. 1.03 Volume 1 of this report is an evaluation of the External Credit Office of INSFOPAL, the borrower, and contains outline data on the seven projects and their respective utilities. It concludes with a set of general conditions applicable to INSFOPAL or the seven projects as a whole. Volume 2 consists of seven separate appraisals of each of the seven projects and its corresponding utility. These seven utilities to whom INSFOPAL would relend the loan are termed the beneficiaries. Each of the seven appraisals in Volume 2 contains specific conditions applicable to that particular utility only. 1.04 Five of the municipal utilities are multi-service, operating such services as power and telephones, in addition to water supply and sewerage, as well as various other miscellaneous services, such as markets, slaughter- house, etc. Because the several services are integrated in one company, it has been necessary to review each service for each company and establish financial criteria which would enable the service to be reasonably self- supporting and able to contribute to its requirements for operating costs, debt service, and a portion of future investment of the utility as a whole.  - 2 - 1.04 The appraisal was undertaken from mid-October to mid-November 1971 by three appraisal teams composed of Alberto Domenge and John Kalbermatten (Bank staff), Roberto Dominguez, Domingo Ruiz and Adolfo Yanes (consultants), and Guillermo Roviralta (Pan-American Health Organization, PAHO). Their work was supervised by Charles Morse and Rene Costa of the Bank. Members of INSFOPAL and the National Planning Department also took part in the appraisals. II. THE SECTOR Urban Development 2.01 Colombia has been experiencing rapid and uneven growth of the popu- lations of its principal cities, where urban services of all kinds have be- come inadequate. The Government intends to promote better-balanced urban growth by encouraging migration to the medium-sized cities, thus reducing pressures on the large cities of Bogota, Medellin, Cali, and Barranquilla. If this policy is to succeed, adequate public services will have to be pro- vided to make the medium-sized cities attractive to rural migrants. 2.02 Inadequacy of public services has been especially marked in the supply of potable water and the removal of water borne wastes. The tradi- tionally low tariffs for water supply and sewerage have made it impossible to rise the large capital sums needed for new works, and there have also been difficulties in attracting competent personnel. Inflation and local political opposition to tariff increases have aggravated the situation, and a vicious circle has been created where deteriorating service makes it more difficult to convince the public of the necessity for tariff increases. The Government favors tariff increases and the National Public Services Tariff Board, created in 1968, advocates realistic tariffs which will cover cash operating costs and generate funds for future investments. 2.03 The country's water supply and sewerage systems can be classified mainly into three main groups: (a) Twenty-one cities with populations ranging (in 1970) from 20,000 to 2.5 million have their own municipal companies (empresas) that provide such public services as water supply, sewerage, electricity distribution, telecommunications, garbage collection, and markets. These cities have a com- bined population of some 7.5 million, or a third of the total population of Colombia. With a few exceptions, from 70% to 90% of this population is connected to the empresas' water supplies. Sewerage is not so universal, and connections to sewers vary from 80% to less than 50%. The empresas have a board of directors mainly appointed by the municipal councils, but they operate with substantial autonomy and are comparatively well run. They finance expansion with internal funds, bank loans, and suppliers' credits.  -3- (b) The majority of the remaining water supply systems, serving some 750 towns with more than 2,500 inhabitants, are ad- ministered by the national water supply agency, Instituto Nacional de Fomento Municipal (INSFOPAL), under the Ministry of Health. Departmentally (Colombia is divided into 22 departments) and locally, INSFOPAL operates through a variety of institutions, such as departmental water supply corporations called acuas, departmental offices called direcciones seccionales, or local systems. The two former types are run regionally on a cooperative basis, the cash profits of the few profitable entities partly covering the operating deficits of the majority and Government grants making up the difference. The total population under INSFOPAL's administration is some 5.5 million, or around a fourth of Colombia's popu- lation. On average, some 70% of the urban inhabitants in this group have a supply of water, but only 50% have sewer- age. The quality of the services is poorer than in the case of the empresas described above in (a), administrative competence is usually less, and funds for investments are Government grants. (c) The rural water systems, generally defined as those serving communities with less than 2,500 inhabitants, are organized under the Instituto Nacional para Programas Especiales de Salud (INPES). Some 9 million inhabitants or 40% of the population are under INPES. Of these, only an estimated 30% have water supply and sewerage. These communities are too poor to afford adequate services and depend primarily upon Government funds for investments, although direct charges are intended to cover operating costs and some depreciation. Past Investment 2.04 Annual investment in the water supply and sewerage sector increased from US$21.6 million in 1965 to US$42.4 million in 1969 and the total for the period was US$156 million. Of this, 74% went to the empresas, 22% to INSFOPAL, and only 4% to INPES communities. About 30% of total investment was financed by the national budget, 20% by external sources, and the remaining 50% by internally-generated funds and domestic credit. 2.05 External assistance for Colombia's water supply and sewerage sector began to be given about ten years ago, and a sum equivalent to some US$180 million was committed from 1961 to 1971. The Bank's share was roughly 70% and that of the Inter-American Development Bank 25%; the remainder was from US AID, Eximbank, and the German Kreditanstalt. In addition, US AID made a sector loan of US$29.0 million in June 1971 for urban development. 2.06 The Inter-American Development Bank has been active in the sector since 1961 and has made 10 loans totalling US$43.4 million. It made two loans to INSFOPAL in 1962 for US$10.6 million for a large number of INSFOPAL's  -4- systems; these loans were disbursed very slowly, partly because of poor plan- ning. Repayment by the individual systems has been generally poor and INSFOPAL has assumed the debt service to the Inter-American Development Bank. 2.07 Previous Bank loans have all been to empresas (Annex 1). Experi- ence from the Bogota loans is good, but it is still too early to assess the Cali and Palmira loans. All three have suffered variously from Government failure to provide its funds promptly. Development of the Sector 2.08 The National Planning Department recently concluded a national survey of the sector to determine the total investment that would be neces- sary to make up deficiencies in the two services and keep abreast of popu- lation growth. The survey assumed that by 1980 certain minimum standards would be reached for the percentage of population served, per capita consump- tion, and quality of water. Annual investment requirements through 1980, which are indicative only due to the quality of the data, were then estimated as follows: Col$1,000 million (US$50 million) for the empresas, Col$630 mil- lion (US$31 million) for INSFOPAL, and Col$550 million (US$27 million) for INPES. 2.09 The difficulty of raising such large sums indicates that goals will have to be reduced considerably and that the mobilization of internal resources through increased tariffs is of vital importance. 2.10 Institution building probably has the greatest chance of success with the municipal empresas, because of their size, managerial competence and concentration of population, and are the Bank's most likely potential borrowers. The five empresas which would be beneficiaries of the proposed loan are all in need of general assistance in operations, administration and finance in varying degrees, but INSFOPAL's two utilities need such assistance even more. 2.11 The strategy of the proposed loan, therefore, is to make use of INSFOPAL to assess and organize such assistance. INSFOPAL has established an External Credit Office 1/ for this purpose which will assist the seven beneficiaries and will handle applications to the Bank for procurement and other administrative matters relating to the Loan, as set out in detail in Chapter III. 2.12 Establishment of the External Credit Office of INSFOPAL as a com- petent national center to provide assistance in planning, administration and finance to the empresas and to the sector generally is seen as one of the major objectives of the proposed loan. The loan would therefore include assistance to INSFOPAL towards the costs of consultants who will advise that 1/ Subdireccion de Financiamiento y Credito Externo.  office initially and INSFOPAL itself (para. 4.23). The financing plan dis- cussed in Chapter VI includes in its sources budgetary funds from the Colombian Government. The External Credit Office would lend these govern- ment funds and in later years, after it had received repayments, would re- lend them again in the sector. A role of increasing importance and author- ity in guiding the sector towards greater efficiency and full development is therefore envisaged for INSFOPAL and its External Credit Office. III. THE BORROWER AND THE BENEFICIARIES The Borrower 3.01 The Borrower would be the Instituto Nacional de Fomento Municipal (INSFOPAL), the national agency responsible for water supply and sewerage in Colombia. INSFOPAL was created in 1936 under the Ministry of Public Works. In 1968 under Decree 2561 of October 7 and 3178 of December 26, it was placed under the Ministry of Health. 3.02 The principal functions of INSFOPAL can be summarized as: (i) to prepare public investment programs in the water supply and sewerage sector; (ii) to construct water supply and sewerage projects for com- munities with more than 2,500 inhabitants; 1/ (iii) to supervise construction of projects financed by govern- ment funds; (iv) to establish standards of construction and operation; (v) to submit applications for tariff increases to the National Public Services Tariff Board for those systems under its jurisdiction; (vi) to operate and maintain those systems. 3.03 The Minister of Health is president of INSFOPAL's board of direc- tors; the directors comprise one representative each of the National Planning Department, the Colombian Society of Engineers, INPES, the Colombian Associa- tion of Municipalities, the Colombian Association of Agriculturists, and the National Federation of Coffee Growers. 1/ The empresas of the larger municipalities, including the five included herein, are excluded in practice, although the decree makes no mention of them.  3.04 The management of INSFOPAL has been uneven over the years and its administration is generally poor. INSFOPAL has therefore made an agreement with PAHO for large-scale general managerial assistance and reorganization in accordance with the objectives of the National Planning office which are to transform INSFOPAL into the financial institution for the sector. Funds for this program would be included in the proposed loan, and its implementa- tion will be reviewed with the Bank from time to time. 3.05 INSFOPAL is presently divided into three departments--technical, operational, and administrative--and operates regionally as noted in paragraph 2.03(b) (see organizational Chart 6599). It has recently created a new de- partment, "Subdireccion de Financiamiento y Credito Externo" (the External Credit Office), to handle national and foreign lending in the sector. The head of the External Credit Office reports directly to the general manager of INSFOPAL and the office has eight professionals, including engineers and financial analysts. 3.06 The functions assigned to its External Credit Office, in summary, are to: (i) assist the empresas in the preparation of projects for foreign and national financing; (ii) assist the Bank in the appraisal of projects; (iii) assist the empresas in the preparation of periodical reports; (iv) review and approve bidding documents and bid evaluation; (v) assist the empresas in the preparation of disbursement requests; (vi) oversee loan conditions; (vii) establish uniform administrative procedures for certain matters, such as programs of construction and cost accounting; (viii) coordinate and promote training programs; and (ix) coordinate, when feasible, joint purchases. Organization for Administration of Bank Funds 3.07 INSFOPAL would relend the proceeds of the proposed loan to the seven beneficiaries, under subsidiary loan agreements acceptable to the Bank. In addition to general conditions in the proposed loan agreement applicable to all beneficiaries (including the conditions of effectiveness), each beneficiary would have to comply with specific conditions included in its subsidiary loan agreement (with its own conditions of effectiveness).  - 7 - 3.08 The intention is that the External Credit Office would carry out the responsibilities of INSFOPAL under the proposed loan, including super- vision of project execution, bidding review, centralization of information, and disbursement applications. It is expected that future projects would be prepared under the supervision of the External Credit Office and appraised by it for presentation to the foreign lending institutions. As the office develops and proves its competence, the Bank would progressively delegate supervisory and appraisal responsibilities to it. Nevertheless considerable project supervision by Bank staff will be necessary in the early years. If successful, this office would be an important institution-building achieve- ment of the proposed loan. 3.09 The success of the proposed "package" approach to lending in the water supply and sewerage sector in Colombia will depend upon the effective- ness of the External Credit Office. There is an appreciable risk, however, which is both a question of staff competence and institutional ability. The chief of the office is an experienced financial manager from the Empresas Municipales de Cali, and the staff, although of limited experience, seems to have the necessary potential. 3.10 It will be necessary to have the External Credit Office assisted by experienced consultants for a period of one to three years. INSFOPAL has contracted with a consortium of Colombian firms to provide an engineer, a financial analyst and an administrative expert. The assistance will have an important training function. Assurances were obtained during negotiations that assistance in a satisfactory form will be continued as long as the Bank deems it necessary. Funds for this assistance have been included in the es- timates. INSFOPAL has also concluded a contractfor training assistance with the Empresas de Acueducto y Alcantarillado de Bogota. The Beneficiaries 3.11 The following is a list of the seven cities and the services they provide: Services in addition to City Organization water supply and sewerage Armenia Municipal Empresas Power, telephones, other Manizales " " Telephones, other Neiva Is it Other Pereira " " Power, telephones, other Tulua " " Telephones, other Buenaventura INSFOPAL Acuavalle None (no sewerage) Santa Marta INSFOPAL Acuadelma None Note: "Other" includes street cleaning, markets, slaughterhouses and garbage collection.  -8- 3.12 Each municipal empresa (with the exception of Pereira, which has been established by a national law) has been created by a decree of its municipal council and is governed by a board of directors, numbering five to seven, appointed by the municipal council. To ensure independent and businesslike administration, the decrees have required councils to appoint a majority of the directors from lists proposed by local banking and profes- sional organizations. However, this requirement has been recently removed in most municipalities so that all appointments are made directly by, and solely at the pleasure of, municipal council. This leads to some concern, on the basis of Cali's experience, that boards exclusively appointed by municipal councils may lead to excessive interference in the daily affairs of the empresas and to deterioration of management as experienced people leave and new staff without the same competence or experience are brought in. This is a risk it is necessary to take. 3.13 The boards of directors have considerable authority, including authority to fix tariffs and select and dismiss the general managers. De- tailed administration is delegated in practice to the general managers, all of whom at present are competent and experienced. 3.14 The technical operations of the empresas vary from poor to good. Lack of revenue and a shortage of qualified technicians are the principal obstacles to improvement. The first should be remedied, and the second should be improved under the proposed loan. 3.15 Financial management varies from poor to very good. Pereira is an outstanding examDle of good financial management; it has detailed five- year investment plans for all its services and a financial management that is knowledgeable and efficient. The other empresas have moderate financial skill; the basic elements are present but more knowledgeable and imaginative application is required. 3.16 The two INSFOPAL systems considered in this report both belong to acuas. An acua is a kind of incorporated cooperative, its shares being held by INSFOPAL, the department, and the municipalities it serves in the amount that each shareholder has subscribed in money or physical assets. Gov- ernment budget appropriations are usually converted by INSFOPAL into additional shares so that INSFOPAL is almost always a majority stockholder. The cash earnings (in no case is a profit earned after adequate depreciation) of the more profitable municipal systems are used to cover the cash operating de- ficits of the others. The short-term goal of the Colombian Government is that the water revenues of any acua should cover at least operating costs. 3.17 These two systems present an unattractive picture. Buenaventura has been badly operated for a number of years. With the retirement of its manager, INSFOPAL merged the Bulenaventura system into Acuavalle (one of the better run acuas) which has a dynamic and competent manager, and its staff have addressed themselves to correcting its grosser deficiencies. The ills there of fraudulent connections, losses of water, uncollected bills and the like are formidable but the prognosis is good.  - 9 - 3.18 Acuadelma, which includes Santa Marta, has had poor management. A new manager who has promise has been assigned to Santa Marta, but the present management of Acuadelma itself is unimpressive. The difference from Buena- ventura lies in the absence of a strong organization to which Santa Marta could be attached. It will, therefore, be necessary to supervise closely the development of this system to encourage improvement. Santa Marta will be re- moved from Acuadelma and become an empresa. Management Assistance 3.19 The seven beneficiaries require varying degrees of management as- sistance in administrative and financial aspects and technical assistance in the operation of their water supply and sewerage systems. The provision of management and technical assistance and training is a major objective of the proposed loan. A principal activity of the External Credit Office would be to send missions to review all the operations of the beneficiaries and pre- pare terms of reference for management consultants to assist them. Their other services must also require technical assistance, but neither the ap- praisal mission nor INSFOPAL has competence in this matter. 3.20 The beneficiaries would then be free to make contracts for this assistance with Colombian firms, with PAHO directly or through the External Credit Office, or by any other means the External Credit Office and the Bank considered satisfactory. The External Credit Office could recruit specialists itself or in cooperation with the Colombia Water Supply and Sewerage Associa- tion. The beneficiaries would bear the cost of this assistance and funds have been provided in the project cost estipnates. Assurances were obtained during negotiations that a management assistance program satisfactory to the Bank will be carried out and a program with target dates has been established for its implementation. The subsidiary loan agreements will stipulate that the beneficiaries will employ competent consultants as required by INSFOPAL's reviews. IV. THE SEVEN PROJECTS Background 4.01 US AID and the Fondo Nacional de Desarrollo Economico (FONADE) financed the feasibility studies for the projects of the five empresas serving the cities of Armenia, Manizales, Pereira, Neiva and Tulua. These feasibility studies were prepared by Colombian consulting engineering firms with minor collaboration in some cases with US consulting firms. The proj- ects for the two INSFOPAL systems serving Buenaventura and Santa Marta were prepared by Colombian consultants under contract to INSFOPAL and then were updated for this appraisal by a Colombian consulting firm under contract to INSFOPAL and financed by FONADE.  - 10 - 4.02 The appraisal included a water supply project for the Empresas of Cartagena. This company's pipeline is duplicated by a pipeline built for a government-owned industrial plant. The most efficient joint use of these two pipelines must first be agreed upon before a project for further expan- sion of municipal water supply and distribution can be designed. This problem is receiving the attention of the Colombian Government. 4.03 A project for the Empresas of Villavicencio was also appraised but it has been postponed while the company reviews the size of the project it can afford and establishes its financial viability. 4.04 The appraisal also reviewed projects for two INSFOPAL-administered water supply systems and a proposed INSFOPAL sewerage system. One water supply project in Riohacha was dropped because it was not the least-cost solution by a substantial margin, and another in Popayan because the project was not adequately defined. A sewerage project in Tumaco was dropped because it is not justified at the present time. The Seven Projects 4.05 The table below lists some principal statistics for the seven proj- ects. Full details are in the seven reports in Volume 2, and Map 3916 at the end of this report shows the seven cities. The figures for output of water given in the table do not correspond with the project costs since rehabilita- tion, distribution system and relief of overloaded plants are important in some cases. Brief descriptive notes follow the table. The Seven Projects Percentage of Capacity Estimated P?opulation for Cost Now Served Water Supply of Project by: Before After Popula- Depart- Col$ Water Sewerage Project Project City Served tion ment Million X __ 1/sec 1/sec Armenia 170,000 Quindio 44 79 70 500 800 Manizales 300,000 Caldas 100 80 80 1,070 1,400 Neiva 130,000 Huila 47 73 80 400 700 Pereira 240,000 Riseralda 92 80 70 440 1,460 Tulua 80,000 Valle 51 74 75 229 400 Buenaventura 100,000 Valle 23 50 small 350 350 Santa Marta 140,000 Magdalena 18 72 47 410 510 Note: The first five projects are for water supply and sewerage. The last two (INSFOPAL's systems) are for water supply only.  - 1 1 - 4.06 Armenia. Water is abstracted from the Quindio River; operation and maintenance of the system are poor, and 50% of its water is unaccounted for. The project would increase the capacity of the treatment plant, in- crease storage capacity, improve the distribution system, augment transmis- sion and distribution mains add some service, and purchase equipment for maintenance. It would be the first phase of a larger expansion program. 4.07 lManizales. A number of small streams supply water to an old treat- ment plant of 400 l/sec capacity (overloaded at present to 750 1/sec) and a new treatment plant of 670 1/sec capacity. The distribution system is limited in capacity and coverage. The project would involve increasing the capacity of the new plant to 1000 1/sec, adding storage capacity, and improving the distribution network. The sewerage system would be extended to discharge into streams away from populated areas (which in turn discharge into the Manizales River) and to reduce erosion of the steep slopes on which consider- able areas of low-income housing are built. 4.08 Neiva. Water from Las Ceibas River is treated at a new plant with a capacity of 400 1/sec. The distribution system is inadequate. The project would consist of improving the intake and main to the treatment plant, in- creasing the capacity of the plant to 700 1/sec, and augmenting storage and piping in the distribution network. Some sewers and drains would be con- structed. Operation and maintenance of both water supply and sewerage need to be improved. 4.09 Pereira. Water is taken from the Otun River. Two old treatment plants have a joint capacity of 370 1/sec; an additional 70 1/sec are sup- plied by bypassing the plants. The distribution network is inadequate and has many small and corroded pipes. The project would consist of enlarging the two treatment plants, building a new treatment plant of 560 1/sec capa- city, adding new storage and extending the distribution network. A new in- tercepting sewer would be built to improve the existing sewerage system, and equipment for operation and maintenance would be purchased. The operations of this empresas are generally very good. 4.10 Tulua. The Tulua River feeds a treatment plant of 75 1/sec capa- city, and two wells supply a total of 154 1/sec. The distribution network is adequate. The project would provide a total capacity of 400 1/sec. Three new wells and improvement of the two existing wells would be undertaken, and the existing treatment plant would be abandoned. Additional storage and an extension of the distribution system would be included. Operation and mainte- nance of the sewerage system are poor; additional sewers and drainage works are included in the project. Sewage drains into the Tulua and Morales Rivers; pollution is approaching their capacity to absorb it and therefore sewage treatment will have to be considered in due course. 4.11 Buenaventura. This city's source of water is the Escalerete River. The water needs no treatment, but a treatment plant has been built. The service is poor, maintenance and operation are inadequate, and losses are up to 73%. A new administration is attempting to remedy the situation. The  - 12 - project would be the first stage of a larger program; it would improve dis- tribution and storage, reduce losses and connect about 2,000 new customers. There is little sewerage or storm drainage in the city, which presents serious problems, but this matter is the responsibility of a regional de- velopment corporation and the project concerns water supply only. 4.12 Santa Marta. Water is abstracted from the Manzanares River and treated at a plant with an output of 300 1/sec; two wells each supply 55 1/sec. The service is poor. There are 11,800 registered connections and an estimated 2,800 illegal connections. At present the water source compo- nent of the project has not been fully defined. It will be either a modifi- cation of the existing treatment plant, to increase its capacity by 100 1/s, or more wells. A ground water and an economic study will be performed to de- cide between the two alternatives. In either case transmission and distribu- tion mains would be constructed. Sewerage is not included in the project, but may be financed by a US AID loan. The city has a limited sewerage system and storm drainage is not a great problem. Cost Estimates 4.13 The total cost of each project is given below; details are in Annex 2. Costs include all contingencies. Col$ (million) US$ (million) Local Foreign Total Local Foreign Total Armenia 36.8 6.8 43.6 1.6 0.2 1.8 Manizales 93.4 6.3 99.7 3.6 0.3 3.9 Neiva 41.8 4.9 46.7 1.70 0.2 1.9 Pereira 66.8 24.7 91.5 2.6 1.0 3.6 Tulua 43.3 7.7 51.0 1.7 0.3 2.04 Buenaventura 20.6 2.1 22.7 0.90 0.1 0.99 Santa Marta 14.8 3.3 18.1 0.6 0.2 0.8 INSFOPAL's Costs - 11.4 11.4 - 0.5 0.5 TOTAL COST OF THE PROJECTS 317.5 67.2 384.7 12.7 2.8 15.5 Interest on Bank Loan during Construction - 31.1 - - 1.2 - Total Foreign Exchange - 98.3 - - 4.00  - 13 - 4.14 The estlmates are based on the feasibility studies (updated and modified as necessary for those studies done before 1971) and costs of works recently executed by INSFOPAL. Technical contingencies have been analyzed project by project and range from 10% for imported equipment in some projects to 30% for the construction cost of sewerage in others; technical contingen- cies as a whole amount to 12.5% of the estimated total cost of the seven proj- ects. Engineering design and administration of construction were generally estimated at 10% of the net construction cost and amounts to 6.8% of the total cost of the seven projects. 4.15 All project costs are based on 1971 prices, to which were added price contingencies of 10% per annum for local currency costs and 5% per annum for foreign currency costs. Price contingencies amount to 21.5% of the total estimated cost of the seven projects. The 1971 rate of exchange averaged Col$20 to US$1 and this rate of exchange has been assumed to in- crease by 9% annually throughout the construction period. Amount of Proposed Loan 4.16 A loan for US$9.10 million is proposed, equal to the sum of - (a) about 50% of the cost of US$15.05 million of the seven projects; (b) 100% of INSFOPAL's cost of managerial assistance of US$0.48 million (paragraph 4.23); and (c) US$1.19 million of interest and committed charges payable on the proposed Bank loan during construction. 4.17 The loan would cover the following: (a) US$2.75 million, or 30% of the loan, for the estimated total foreign exchange cost of the projects; (b) US$1.19 million for the interest and commitment charges on the Bank loan during construction; and (c) US$5.16 million, or 57% of the loan, for local currency expenditures. 4.18 If costs are greater than estimated, the beneficiaries would be ex- pected to meet the overruns, but assurances have been obtained from the Colombian Government that it will promptly provide the necessary funds if the beneficiaries cannot do so. Should any of the projects cost less than es- timated, the Bank would consider applying savings toward 50% of the cost of additional related water supply or sewerage works.  - 14 - Procurement 4.19 All contracts would be let on the basis of international competitive bidding. Foreign suppliers are expected to win contracts for treatment plant equipment, larger valves and piping accessories, meters and certain operation- al equipment amounting to perhaps US$1.3 million. Colombian bidders are ex- pected to win all civil engineering contracts and supply contracts for pipes and smaller valves and fittings. For the purpose of evaluating bids, a 15% preference (customs duties are substantially greater) would be allowed for equipment manufactured in Colombia except for pipes, where no preference has been requested by Government as Colombian suppliers have a very substantial local advantage and are able to compete effectively without a preference. The amount of equipment procured locally is expected to be small. The beneficiaries are not liable for import duties. As in previous loans, no regional preference is contemplated. 4.20 Contracts for management service to INSFOPAL by PAHO and limited engineering consultant service to Armenia and Pereira have been signed and retroactive financing of payments under the contracts is recommended. This would amount to less than $150,000 equivalent for payments made after May 31, 1972. The Board has already been informed. Disbursement 4.21 Applications for all disbursement would be made by the External Credit Office. The loan would be disbursed against the full CIF cost of all direct imports, the full cost of foreign consulting services, and a percentage (about 43%) of the cost of all supplies, civil engineering works and services procured locally. The exact percentage would be calculated in each case so that the Bank would finance half of each project's cost. In Annex 3 is a disbursement schedule showing estimated disbursements for each project and consolidated for the loan as a whole. Also in Annex 3 is a table listing the percentages of foreign exchange costs, local currency costs, and interest charges during construction, financed by each project loan. Execution of the Projects 4.22 The projects would be executed in the years 1972 through 1975. In the cases of Buenaventura and Santa Marta the work is expected to be completed in 1973, and in the case of Neiva and Armenia in 1974. Each of the empresas has retained a Colombian consulting firm for final design and supervision of construction; these firms are satisfactory to the Bank. Assurances were ob- tained that the subsidiary loan agreements will contain provision that satis- factory consultants will continue to be employed, and that arrangements satis- factory to the Bank for final design and supervision of construction will also be made for the Buenaventura and Santa Marta projects, using either INSFOPAL's staff or consultants.  - 15 - INSFOPAL's Costs 4.23 INSFOPAL's responsibilities under the proposed loan would be handled by its External Credit Office. The costs which the proposed loan would help to finance would include the cost of general managerial assis- tance to INSFOPAL given by PAHO and to the External Credit Office given by local consultants (paragraphs 3.04 and 3.10). An estimate of these costs for 1972-1976 and the costs of running the External Credit Office is sum- marized below, and a cash flow forecast is given in Annex 4. Col$ million US$ million Local Foreign Total Local Foreign Total Operating cost of External Credit Office 18.2 - 18.2 0.70 - 0.70 Management Assistance to External Credit Office 5.7 5.7 0.24 0.24 Management Assistance to INSPOPAL - 5.7 5.7 - 0.24 0.24 Total Cost 23.9 5.7 29.6 0.94 0.24 1.18 Interest during Construction - 2.0 - - 0.06 - Total Foreign Exchange - 7.7 - - 0.30 - 4.24 The expenses of the External Credit Office in 1972 have been esti- mated at Col$2.9 million (US$0.13 million), consisting largely of personnel costs. The budget is forecast to increase by about 10% a year to reflect assumed general price level increases. The amount of US$0.54 million is in- cluded in the loan to cover management assistance to INSFOPAL and to the Ex- ternal Credit Office plus interest during construction. 4.25 It is assumed that 40% of the interest collected by INSPOPAL on national (Colombian Government) loans to the beneficiaries amounting to Col$13.4 million will be used to meet the expenses of the External Credit Of- fice from 1972 to 1976. The balance of the interest collected and the amounts corresponding to amortization of national loans would be used by INSFOPAL for further lending in the sector. Debt service on the loan amount corresponding to managerial assistance to the External Credit Office would be met out of the interest on the national loans. INSFOPAL would finance from its own budget the debt service on the amount of the Bank loan for the PAHO's assistance to INSFOPAL itself.  - 16 - V. JUSTIFICATION Investment Objectives 5.01 The objective of the investment is to meet the near future demand for water at price levels which are financially adequate and within the levels in effect for other Bank financed water projects. Recent censuses in the seven project cities show annual rates of population growth ranging from 5.0% to 6.4+%. These growth rates are expected to continue, thus increasing the seven cities' population from 1.1 million at present to 1.8 million by 1980. The percentage of this population with a supply of water is now around 75%, with the exception of Buenaventura where it is only 40%; by 1980 it should increase from 75%7 in Buenaventura to 90% in other cities. A population of 1.6 million --double that now supplied--would then be supplied with adequate quantities of water of reliable quality. 5.02 Gross consumption (including losses and commercial and industrial consumption) of 250 l/c/d to 290 l/c/d is projected in the seven cities around 1980. Net daily consumption per capita will remain unchanged because additional connections will probably be in poorer areas where the average consumption will be lower. Losses should drop from 55% in some cities to around 25%. These estimates are necessarily speculative, since data on water consumption are poor. Consumption by type of customer, the propor- tion of people served and the amount of unaccounted for water can only be estimated approximately. The figures discussed above are tabulated in Annex 5. Least-Cost Solutions 5.03 The projects have been pared by the postponement of works to the financial capacity of the beneficiaries, yet meet the most urgent needs; they are the least-cost solutions in this context. Where comparisons of alternatives were appropriate (e.g., choice of water source for Tulua and sizing of transmission mains) discount rates of 10% to 12% were used by the consultants. In some cases existing plants could be upgraded permitting new plants to be reduced in size or deferred (Pereira, Armenia). In others, sub-optimal supply works had already been constructed (Manizales, Neiva). 5.04 The standards of service for which the projects have been designed were reviewed by the missions and generally agreed by them. In a few in- stances there were reductions during appraisal, such as reducing storage, reducing the number of pressure zones, etc. Economic Return 5.05 The minimum estimate of the economic return for the individual projects are as follows:  - 17 - Armenia 17% Manizales 11 Neiva 10 Pereira 13 Tulua 9 Buenaventura 14 Santa Marta 13 5.06 The calculations were made using 1972 prices and are presented in Appendix 3 of the reports for the individual projects in Volume 2. Benefits were 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 were those of the project and subsequent investments necessary to utilize it fully. Variations in the rates of return are explained by differences in topography, hydrology, existing facilities, investment phasing and tariff levels. 5.07 Not all benefits are captured by this method, which equates revenues from sales with economic benefits. Consumers do not generally have to pay as much as water is worth to them, and the consumers' surplus is thought to be substantial. Health benefits, both direct and indirect (through a general improvement in the health of the whole community), and improvement in the com- munities' environment are examples of benefits which may be understated or completely omitted by this analysis. Environmental Aspects 5.08 Sanitary conditions should be substantially improved in the urban areas through the provision of improved and expanded water supply service and sewage collection. The discharge of untreated sewage into watercourses will, of course, increase by the provision of better water service and more use of the sewerage system by urban inhabitants. However, in all cases the receiving waters are currently able to handle the immediate pollutional load without untoward effect. Pollution of streams in built-up areas will be reduced. The improved water supply and sewerage services will be pro- vided predominately in areas inhabited by lower income groups. 5.09 There will be a need for sewage treatment in due course for Tulua, and at Santa Marta the same problem will need to be reviewed in a few years. Institution Building 5.09 The establishment of an effective mechanism in INSFOPAL to prepare projects and channel loan funds in the sector, as well as take over loan supervision from the Bank progressively, is an important objective. The management assistance to be provided to the seven beneficiaries should have a substantial spillover effect on other municipal empresas and institutions in Colombia, in addition to the improvement in operations of the beneficiaries themselves.  - 18 - VI. FINANCES Past Finances 6.01 The consolidated financial positions of the five municipal empresas that are beneficiaries are acceptable, but the positions of the INSFOPAL ben- eficiaries are precarious. Annex 6 shows consolidated financial indicators of the seven beneficiaries for 1969-71. 6.02 The largest revenues earned by the empresas are from their power and/or telephone services, followed by the other services such as, slaughter- houses., markets and street cleaning. Water supply and sewerage generally produce the smallest portion of revenues (Annex 7). 6.03 The finances of water and sewerage have been characterized by operating losses and cash shortages which have precluded substantial invest- ment. The cash shortages are largely due to low tariffs, less than Col$0.80/m3 (US$0.15/1000 gallons) and to high percentages of unaccounted for water (from 26% in Manizales to 73% in Buenaventura). The Government has made capital grants to Manizales, Neiva and Buenaventura because of urgent problems in those cities. 6.04 The municipal empresas, except Neiva, have telephone services. These services have been profitable; adequate internal cash generation and suppliers' credits have enabled the empresas to provide five telephones per 100 inhabitants, a ratio above the national average. 6.05 Only the Pereira and Armenia empresas have electricity services. The two cities operate their own distribution systems and generating stations and also purchase power in bulk from Central Hidroelectrica de Caldas. The financial position of the electrical power division in Pereira is fair; in Armenia it is poor. Neither city has recently invested in new plant nor provided adequate maintenance; as a result, losses average 25% to 30%. Tariffs are too low to support any substantial investment program, and a recent increase in the bulk price of power has not been passed on to consumers. 6.06 The slaughterhouse, market and street cleaning services of the municipal empresas are labor-intensive. Operating costs often exceed revenues and cash generated by slaughterhouse and market services is gen- erally used to offset losses incurred by street cleaning. 6.07 About all that can be said about the INSFOPAL systems (Buenaven- tura and Santa Marta) is that the future should be better than the past. The financial results of Santa Marta seem to have improved from very bad to poor and the system has, in effect, defaulted on its debt to INSFOPAL. Buenaventura has before its transfer to Amadelena been little better.  - 19 - 6.08 The use of independent accountants for audit has been unknown. In anticipation of loan requirements, steps have been taken by some empresas to employ them, but only Pereira and Tulua have independent auditors. The subsidiary loan agreements will stipulate the employment of satisfactory auditors. The accounts of INSFOPAL's External Credit Office will be audited similarly. Financing Plan 6.09 The financing plans for water supply and sewerage during the various construction periods are summarized below. Annex 8 gives the financing plan by project and detailed past finances are given for each beneficiary and by services in Volume 2. Col$ US$ % ---million--- Applications of funds Capital Investment: Expenditure on projects 384.6 15.53 66.4 Interest charged to construction 65.9 2.47 10.6 Other works 77.1 2.98 12.7 Total investment 527.6 20.98 89.7 Increase in working capital 64.8 2.41 10.3 Total applications 592.4 23.39 100.0 Sources of funds Internal Sources: Internal cash generation 274.8 10.48 44.8 Less: debt service 87.0 3.36 14.4 net internal sources 187.8 7.12 30.4 Government grant 9.2 0.42 1.8 Borrowings: IBRD loan 230.5 9.10 38.9 Foreign loan 10.4 0.37 1.6 National loan I 131.7 5.41 23.2 National loan II 17.5 0.73 3.1 Local loans 5.3 0.24 1.0 Total borrowings 395.4 15.85 67.8 Total sources 592.4 23.39 100.0  - 20 - 6.10 The sources of funds would be: (a) a Bank loan of US$9.1 million equivalent at an assumed interest rate of 7.25%, with amortization over 21 years after a four-year grace period. The Bank loan would cover interest and other charges on the loan during construction; (b) national (government) loans for Col$ 131.7 1/ million (US$5.41 million equivalent) at an interest rate of 12% 2/, repaid in equal semi-annual payments over 11 years after a four-year grace period. This would also cover interest and other charges to be paid during construction; (c) various local bank loans for a total of Col$5.3 million at various terms; (d) internal cash generation of the beneficiaries of Col$188 million; and (e) two government grants already made, one to Buenaventura for Col$7.2 million, and one to Santa Marta for Col$ 2.0 million; (f) the foreign loan and the national loan II are for a subse- quent project in Armenia which would begin in 1975. 6.11 Although this financing plan has been established on the basis of completely independent projects, the consolidation was necessary to determine: (i) the total Bank loan amount and disbursement to INSFOPAL, including the financing of PAHO's and local management assistance; (ii) the amounts and disbursements of the national (government) loan. 6.12 National (Colombian Government) loans which were included in the financing plans drawn up for Bank Loans 638-CO (Cali Water Supply and Sewerage Project) and 738-CO (Palmira Water Supply and Sewerage Project) have not been provided promptly as required under the Guarantee Agreements. This has placed both projects in financial difficulties although recent steps should resolve the delays in the future. Other Bank projects in Colombia have suffered similarly. To ensure efficient and prompt execution of the seven projects, assurances were obtained from the Colombian Govern- ment during negotiations that the national loan funds for 1972 will be made available and for 1973 will be included in the budget as a condition of loan effectiveness. A schedule of specific amounts and dates when funds would be passed to INSFOPAL has been established for 1973 and subsequent years' funds. 1/ Not including Col$1.0 million that will be disbursed in 1972, before the construction period. 2/ Assumed to be 14% for AID loan in Santa Marta.  - 21 - Tariffs 6.13 The financial requirements for water supply and sewerage have been projected in some detail and the financial needs of the other services of the beneficiaries have been estimated as well. If these financial require- ments change, the required revenues and the necessary tariffs by these other services would change also. The revenues necessary to meet the projected financial requirements have been calculated either as rates of return or operating ratios (for "other services" and the Santa Marta water supply) and will be included as targets in the subsidiary loan agreements, which also provide for their annual review and prompt tariff application and implementa- tion as required. The required tariffs were estimated on the basis of the revenues necessary to meet operating expenses, service debt and generate some 20% to 40% of total project costs and an initial increase would be a condition of effectiveness for the subsidiary loan agreements. The projects were reduced in varying amounts so that the resulting tariffs for water supply and sewerage would not be out of line with those of the other beneficiaries and Bogota and Cali. The tariffs are discussed in detail in Volume 2, and compared in Annexes 9 and 10. 6.14 Except for Pereira, no beneficiary had prepared any long-range investment programs. The programs assumed in the projections are the best estimates of the appraisal missions but are quite conjectural. A condition of effectiveness for each subsidiary loan agreement will be that each bene- ficiary has prepared a five-year investment plan for each service, which will be revised annually. Supervision missions would assist in improving these plans progressively. 6.15 Tariff applications must be made by the empresas themselves to the National Public Services Tariff Board but implementation is the sole respon- sibility of the empresas. INSFOPAL initiates tariff requests for its systems; implementation is the responsibility of the local managers. Assurances were obtained that INSFOPAL will make appropriate tariff applications on behalf of Buenaventura and Santa Marta. Their implementation by local managers will be required by the tariff requirements in the subsidiary loan agreements. 6.16 It is the policy of the Colombian Government that public services should charge tariffs to earn conventional rates of return, although these may vary by size of locality. In the size of cities represented by the ben- eficiaries, these rates are in the range proposed by this report. The Na- tional Public Services Tariff Board is responsible for the review and ap- proval of public utilities' tariff applications for all the services dis- cussed in this report. It has already approved some tariff increases for the beneficiaries. Assurances were obtained that the Government will promptly approve tariff requests made to meet the targets set for the pro- posed loan. The Board has acted promptly and effectively in the past, both for systems in general and for Bank-financed projects.  - 22 - 6.17 Average tariffs for water supply and sewerage vary from city to city and are highest in Santa Marta (Col$1.40/m3 or US$0.27/1,000 gal); none of the other cities has been charging nmre than Col$0.80/m3 (US$0.15/ 1,000 gal). Some of these tariffs have not been increased for a number of years. Sewerage services are charged as a fixed percentage of water bills and this percentage also varies from city to city (Annex 9). 6.18 The estimated tariffs and annual increases necessary for the empresas to meet the financial requirements of the water supply and sewerage investment program are given in Annex 9. The tariffs are about the same as in Palmira, and less than in Bogota and Cali, and are within the general range considered acceptable by the National Public Services Tariff Board. Nevertheless, some public resistance can be expected, and it may well occur that the effectiveness of individual subsidiary loan agreements will be de- layed. Except for Santa Marta, large increases from 80% to 120% over 1971 are projected for 1972 when the construction work begins; during construction some further increases will be necessary to compensate for price increases estimated at 10% annually. The projections assume no increases after the final year of construction (1975). 6.19 Increases in telephone tariffs would also be required to compen- sate for past annual inflation. They would vary annually from 6% to 29% on average for telephones in 1972 and 1973 and should be easy to obtain (Annex 10). 6.20 Tariff increases would also be necessary for power services (see para. 6.05). They would vary annually from 5% to 76% on average per kWh in 1972 and 1973 (Annex 10). 6.21 There is no uniform tariff structure for slaughterhouse, market and street-cleaning services. Slaughterhouse revenues depend on the number of animals killed, market revenues are generated by rents, and street-clean- ing revenues are generally collected through a municipal tax. Some adjust- ments should be implemented; they would vary by city and by individual serv- ice. Future Finances 6.22 The financial performance of the beneficiaries' water supply and sewerage services would improve during and after construction of the projects because of larger sales of water, increased tariffs and reduced losses of water. The subsidiary loan agreements will stipulate that funds generated by these services should be reserved exclusively for them during the cons- truction period. 6.23 Annex 11 gives a stmmary of principal consolidated financial data for the empresas. Operating ratios would decrease progressively from as high as 88% to about 50% by 1979 and internal cash generation should cover debt service comfortably. Fixed assets have been revalued in some cities as recommended by the National Planning Office, and in others according to  - 23 - replacement value calculated by management consultants. Therefore, the fi- nancial rates of return are not readily comparable. Valuations should be reviewed at least annually and tariffs adjusted promptly as necessary. Assets which have not been properly revalued by the empresas will be revalued within six months of signing the subsidiary loan; valuations should also be reviewed annually and will appear in the Balance Sheets. Provision for both measures will be included in the subsidiary loan agreements. Annex 12 gives the method of calculating rates of return and the operating ratio. 6.24 Telephone services would continue to provide the empresas with a high level of income, enabling them to maintain a minimum average of five telephones per 100 inhabitants, and in Pereira and Armenia to meet their target ratio of seven. 6.25 Armenia and Pereira will not make new investments in generating stations since additional power demands will be met by purchasing in bulk. Investments in new and improved distribution systems will be substantial, however, and should enable the empresas to reduce the present high losses. 6.26 The slaughterhouse, market and street-cleaning services would have operating ratios of about 80% by 1979. However, it is not expected that these services will ever be managed at a high level of profitability. Risks 6.27 The probability that each of the projects will achieve its institu- tional, financial, and operational objectives has been determined on a sub- jective basis by assessing the risks associated with general, financial, and operational management; public resistance to tariff increases; and the present financial position. These assessments were made in the context of the proj- ect themselves and the Bank's experience in earlier water supply projects in Colombia. The probability of successful completion of all objectives was then concluded from a review of the individual parameters (Annex 13). As illustration, this method would have rated the probability of achievement of all project objectives in Bogota as high, in Palmira as medium, and in Cali as low. (In the case of Cali, a political change in the municipal council has resulted in a new board and new managers whose administration of that empresas is causing the Bank concern.) It is noted that achievement of only some objectives (higher tariffs, improved operations, etc.) would still be a significant advance and would justify the investment even in the higher risk projects. 6.28 Armenia. The Empresas Publicas de Armenia's organization is inade- quate for its responsibilities. Mereover, low power revenues have jeopar- dized its overall financial position. A tenacious general manager never- theless succeeded in 1971 in getting important tariff increases of 100% for water supply and sewerage, and has hired qualified management consultants for a complete reorganization. Substantial increases in the power tariff would be necessary for the financial viability of the company (paragraph 6.19). The probability of achievement of all objectives of the project is medium.  - 24 - 6.29 Manizales. The Empresas Publicas de Manizales has a competent general manager and its financial position is good. Some improvements are necessary in its management information system, particularly in cost and general accountancy, and a financial manager should be appointed. Provided that the recommendations of the management consultants are implemented and the proposed tariff increases are applied, the Empresas should be able to meet its managerial and financial obligations. The probability of achieve- ment of all objectives of the project is medium. 6.30 Neiva. The Empresas Publicas de Neiva requires higher tariffs for water supply and sewerage, and some administrative reorganization. It has a good general manager and an adequate financial assistant. No major financial problems are expected, provided the Empresas' debt service to INSFOPAL (Col$16 million) is postponed until 1975 and the debt to the municipality (Col$1.8 million) cancelled. The probability of achievement cf all objectives of the project is medium. 6.31 Pereira. The Empresas Publicas de Pereira has a young, competent general manager and a highly qualified financial manager. The empresas has recently been reorganized to adapt to its well-studied and well-established expansion program. The financial position of the Empresas is sound. Although tariff increases will be necessary in all the services in 1972 or 1973, no major financial problems are likely to develop in the future. The probabi- lity of achievement of all objectives of the project is high. 6.32 Tulua. The financial soundness of the Empresas Municipales de Tulua has been maintained by its telephone revenues and adequate management. The poor financial results of water and sewerage services will improve when the tariff increases approved in August 1971 become fully effective. Never- theless, their progressive application and the increases required subsequently are expected to be resisted strongly by the city's population. The proba- bility of achievement of all project objectives is medium. 6.33 Buenaventura. The Acuavalle which has taken over the water system of Buenaventura is directed by a capable manager, who has recently appointed qualified staff for Buenaventura. The present unsatisfactory financial position of Buenaventura, the difficulties of administering and financing the 31 small water systems which Acuavalle operates, the large number of illegal connections in the city, and the strong resistance to tariff in- creases expected from customers, all make the probability of achievement of all project objectives very low. 6.34 Santa Marta. The financial and technical operations of both Santa Marta and Acuadelma have been unsatisfactory. There is some hope that the new manager of Santa Marta and the stimulus of the proposed loan will achieve an adequate financial basis for further expansion.  - 25 - VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 Assurances were obtained during negotiations that: (i) Implementation of the general management assistance to INSFOPAL will be reviewed periodically with the Bank (3.04). (ii) Consultants acceptable to the Bank will continue to be employed to advise the External Credit Office (3.10); (iii) The program of management assistance and the provision of assistance to the beneficiaries will be carried out by the External Credit Office in an adequate manner (3.20); (iv) The accounts of the External Credit Office will be audited by independent accountants (6.08); (v) INSFOPAL will take all action to apply for or support the water supply and sewerage tariff applications of the Santa Marta and Buenaventura beneficiaries (6.15). 7.02 In addition to specific conditions set out in the Recommendations in each of the reports in Volume 2, it was agreed during negotiations that each subsidiary loan agreement will provide for the following: (i) employment of competent consultants in administration, finance, and engineering as required by INSFOPAL (3.20); (ii) employment of competent engineers for design, bidding and supervision of construction (4.22); (iii) employment of independent accountants for audit (6.08); (iv) initial tariff increases as a condition of effectiveness of the subsidiary loan agreement and the maintenance of adequate tariffs to meet specified rates of return or operating ratios and an annual review of water supply and sewerage, telephone and electricity tariffs and prompt tariff applications and implementation as required (6.13); (v) each beneficiary will prepare a five-year investment plan for each of its services as a condition of effectiveness of the subsidiary loan agreement, and will agree to revise that plan at least annually (6.14); (vi) reservation of funds generated by water supply and sewerage services, for the exclusive use of those services during construction of the project (6.22); valuation within 6 months of signing the subsidiary loan agreement of improperly reached assets on which a rate of return applies; and  - 26 - (vii) revaluation annually, in a manner acceptable to the Bank, of fixed assets on which a rate of return is required (6.23). 7.03 During negotiations, the Government gave the following assurances: (i) National loan funds will be made available in accordance with an acceptable schedule and additional funds will be made available as required should the beneficiaries be unable to do so (4.18 and 6.12); (ii) All tariff applications made in conformance with the Loan Agreement will be approved promptly (6.16). 7.04 A condition of effectiveness of the proposed loan is the provision of national funds to INSFOPAL for 1972 and inclusion of the amounts for 1973 in the budget for that year (6.12). 7.05 With the assurances indicated above, and those indicated in the Recommendations in the report on each project in Volume 2, the seven projects constitute a suitable basis for a Bank loan of US$9.1 million for a term of 25 years including a 4-year grace period. July 31, 1972  ANNEX 1 COLOMBIA MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECTS BANK LOANS MADE TO COLOMBIAN CITIES FOR WATER SUPPLY AND SEWERAGE Amount of Population of Loan City Served US$ Million by Borrower Loan Number Equivalent Date of Loan Borrower - Millions 536-CO 14 1968 Empresa de Acueducto 2.5 y Alcantarillado de Bogota 741-Co 88 1971 Ditto Ditto 682-CO 18.5 1970 Establecimiento 0.92 Publico Empresas (1970) Municipales de Cali 738-C0 2 1971 Empresas Publicas 0.16 Municipales de Palmira   COLHBIA ME01U1 SIZE CITIES WATm SUPPLY AND SESmRAOE PROJEETS PIRJECTS COSTS lAight Construction Technical Ehgineering Price Total of Each City Sub-Total Gontinganci- ad Adlnitatio Conting Tnoias Cost in Total Coat Local Foreign ~ToUta Local Freign Total Local Foreign Total Lo0cal Foreign Total Local Foreign Tfotal ARMENIA In Cnl$ million 23.6 L.1 27.7 5.s o.5 5.1, 2.3 0.7 3.0 6.o 1.5 7.5 36.8 6.8 43.6 ( In US$ million 1.2 0.2 1.4 0.3 - 0.3 0.1 - 0.1 - ' 1.6 0.2 1.8 ( 11.8% % Local - Foreign 85.2 14.8 100.0 90.? c.3 100.0 76.7 23.3 100.0 80 20 100.0 84.4 15.6 100.0 MANIZALES In Col$ million 52.1 3.4 55.5 13.2 0.R 14.1 6.3 - 6.3 21.8 2.0 23.8 93.4 6.3 99.7 In US$ million 2.5 0.2 2.7 0.7 0.1 o.8 0.3 - 0.3 0.1 - 0.1 3.6 0.3 3.9 ( 26.2% % Local - Foreign c3.c 6.1 100.0 93.6 6.11 100.0 100.0 - 100.0 91.6 8.5 100.0 93.7 6.3 100.0 NEIVA In Gol$ million 25.7 3.3 20.0 5.5 0.7 6.2 2.8 - 2.8 7.7 0.9 8.6 41.7 4.9 46.6 In US$ million 1.2 0.2 1.)a 0.1 - 0.3 0.1 - 0.1 0.1 - 0.1 1.7 o.2 1.9 ( 12.6% 8 Local - Foreign 88.6 11.4 100.0 88.7 11.' 100.0 100.0 - 100.0 89.5 10.5 100.0 89.5 1O.5 100.0 PEREIRA In Col$ million 37.8 1L.8 52.6 7.6 1.7 9.3 6.1 1.0 7.1 15.3 7.2 22.5 66.8 24.7 91.5 In US$ million 1.9 0.7 2.6 0.4 0.1 0.5 0.3 0.1 0.4 - 0.1 0.1 2.6 1.0 3.6 ( 24.6% % Local - Foreign 71.c 28.1 lOO.0 81.7 18.3 100.0 85.9 15.1 100.0 68.o 32.0 100.0 73.0 27.0 100.0 TUDJA In Col$ million 26.0 1.5 30.5 5.1 o.c 6.2 2.6 0.2 2.8 9.5 2.1 l.5 43.3 7.7 51.0 In US$ million 1.2 0.3 1.5 ., - 0.3 0.1 - 0.1 0.1 - 0.1 1 7 0. 2.0 ( 13.8% % Local - Foreign 85.r 15.o l00.r 85.5 14.5 100.0 52.9 7.1 100.0 81.7 18.3 100.0 84.9 15.1 100.0 BU 97AV aTURA In Coll million 13. 1.5 1L.' 2.7 0.2 2.e 1.5 - 1.5 3.0 0.4 3.4 20.6 2.1 22.7 In 5S$ million U.7 (.1 0.3 0.1 - 0.1 0.1 - 0.1 - - - 0.9 0.1 1.0 ( 6.2% % Local - Foreign 89.9 10.1 101.0 3.1 i.e 100.0 100.0 - 100.0 88.2 11.8 100.0 90.7 9.3 100.0 SANTA MARTA In Col$ million 5.4 2.2 11.6 1.0 0.2 2.1 1.1 0.1 1.2 2.4 o.8 3.2 15.8 3.3 18.1 In US$ million 0.5 0,2 o.6 0.1 - 0.1 0.1 - 0.1 - - - 0.6 0.2 o.8 ( 4.8 % Local - Foreign 81.0 19.0 100.0 90.5 9.5 100.0 91.7 8.3 100.0 75.0 25.0 100.0 81.8 18.2 100.0 ( In Col$ million 188.c 33.8 221.8 51.1 5.1 46.2 22.7 2.0 24.7 65.6 14.9 80.5 317.5 55.8 373.2 ( In US$ million 9.1 1.9 11.0 2.2 0.2 2.h 1.1 0.1 1.2 0.3 0.1 0.4 12.7 2.3 15.0 1 ioo.o% % Local - Foreign 84.8 15.2 100.0 80.3 11.0 100.0 91.9 8.1 100.0 81.5 18.5 0l.o 85.0 15.o 100.0  COIftIA MEDIUM SIZE CITIES WATER SUPPLY AND SlERAOGE PROJECTS ANNUAL PROJECT INVEEThWS (Col$ million) ARMENIA MANIZALES NEIVA PEREIRA TULUA BUENAVENTURA SANTA MARTA 7OTAL % SUBTC TAL CONSTRUCTION 1S72 5.2 5.3 4.2 6.o - 5.o 3.8 29.5 1973 10.0 18.2 17.9 14.3 16.2 9.9 3.8 90.3 1974 12.5 16.6 6.9 23.9 10.5 - 4.0 714.4 1975 T 15.4 - 8.4 3.8 27.6 Total ~77 555 9. 52.6 Thr ___ 5 Percent of the Total Sub-Project Cost 63.5 55.7 62.0 57.5 59.8 65.5 64.1 TEINICAL CONTINCENCTES 1972 0.9 1.3 0.7 0.9 - 0.9 0.8 5.5 1973 2.0 4.6 4.2 3.1 3.0 2.0 0.8 19.7 1974 2.5 4.3 1.3 3.8 2.4 - 0.5 14.8 1975 Tt3.l - 1.5 0.8 - 6.2 Total 3l1T629362 29_2.75 Percent of the Total Sub-Project Cost 12.4 14.1 13.2 10.2 12.2 12.8 11.6 ENGINEERING AND ADhINISTRATTON 1972 0.7 0.6 0.3 0.6 - 0.5 0.5 3.2 1973 1.3 2.0 1.8 2.7 1.4 1.0 0.5 10.7 1974 1.0 1.8 0.7 3.2 1.0 - 0.2 7.9 1975 - 1.9 - o.6 0.4 - - 2.9 Total T6. -- -_ - 1.2 2 2.7 ___ Percent of the Total Sib-Project Cost 6.9 6.3 6.0 7.8 5.5 6.6 6.6 PRCCE CONTINYGENCIE 1972 1.0 0.7 0.7 0.9 - 1.1 0.8 5.2 1973 2.5 5.4 4.9 4.2 4.3 2.3 1.1 24.7 1974 4.0 7.7 3.0 12.2 4.8 - 1.3 33.0 1975 - 10.0 - 5.2 2.4 - - 17.6 Total 23. 5.6 25 !1;3 73.4 32 1 . Percent of the Total Sub-Project Cost 17.2 23.9 18.8 24.5 22.5 15.1 17.7 1972 7.8 7.9 5.9 8.4 - 7.5 c,9 43.5 11.6 A 1973 15.8 30.2 28.8 24.3 24.9 15.2 6.2 145.2 39.0 1974 20.0 30.4 11.9 43.1 18.7 - 6.a 130.2 34.9 o 1975 _ 31.2 - 15.7 7.4 - - 54.3 14. Total . 69.7 46.6 91.5 510 _ 71. 373.2 _100 r Total Percent of the Total Sub-Project 100.0 100.0 100.0 100.0 100.0 100.0 100.0 a - - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~cs  COLOMBIA MEDt UM SIZE CITIFM WATIR SUPPLY AND SEWERAM3 PROJECT'S ESTIMETED CUMUIATIVE QULRTIRLY M1SBURSED(TS AND PERCENTAGE OF PROJECT 0OSTI/ FD&N CED BY IRD (US$ 000 equivalent) IBRD FISCAL YEAR SANTA SUB- AND QUARTER ARMENIA MANIZAIES NEIVA PEREIRA IULUA BUEN VENTIJRA MARTA TOTAL TNSFOPAL TOTAL ---------------------------------------- -dmulative disbursement at end of quuretre---------r------------------- -- 1972/73 2nd quarter 130 130 - 203 - 86 100 649 - 649 3rd quarter 230 21,0 143 260 - 185 188 1246 130 1376 4th quarter 330 390 301 355 188 281 238 2083 130 2213 1973/74 1st quarter W30 540 461 445 356 379 288 2899 270 3169 2nd quarter 540 690 621 550 460 512 331 3704 330 4034 3rd quarter 650 840 803 720 566 534 371 4484 490 4974 4th quarter 760 1000 1067 1340 669 534 411 5781 490 6271 1974/75 1st quarter 870 1180 1067 1460 772 534 431 6314 510 6824 2nd quarter 980 1360 1067 1580 877 534 431 6829 510 7339 3rd quarter 1010 1540 1067 1710 982 5324 431 7274 5240 7814 4th quarter 1010 1720 1067 1800 1035 534 431 7597 540 8137 , 1975/76 1st quarter 1010 1870 1067 1930 1089 534 431 7931 540 8471