Colombia - Second Multi-city Water Supply and Sewerage Project

FILE COPY, DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1549-CO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INSTITUTO NACIONAL DE FOMENTO MUNICIPAL WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT December 31, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY EQUIVALENTS (as of December 5, 1974) Currency Unit - Colombian Peso (Col$) US$1 - Col$28 Col$l - US$0.0357 Col$1 million - US$35,700  INTERNATIQNAL BA1NK FDR RECONSTRUCTION AND DEVEIOPMENT REPORT AND RECOMMENDATION OF THE PF.SIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INSTITUTO NACGINAL DE FONENTO MUNICIPAL FOR A SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Instituto Nacional de Fomento Municipal (INSFOPAL) with the guarantee of the Republic of Colombia for the equivalent of US$27 million to help finance a Second Multi-City Water Supply and Sewerage Project. The loan would have a term of 25 years, including 5 years of grace, with interest at 8% per annum. PART I: THE ECONOMY 2. The Bank's most recent economic report (Economic Position and Prospects of Colombia, 138-C0) was distributed to the Executive Directors on May 18, 1973. A note on major developments in the economy since that time is included in Annex I. 3. The Colombian economy has shown impressive gains in the recent past. The rate of economic growth has accelerated to more than 7% per annum, and the expansion of non-traditional exports has been remarkable. Such improvements are very much needed in order to accelerate employment generation and to raise gross national product per capita, currently US$400, one of the lowest in Latin America, to a more acceptable level. Colombia also needs to spread the benefits from growth more widely in order to surmount problems of poverty and population pressures in both rural and urban areas. Concentration of land ownership, technical backwardness, and under-employment characterize most rural areas. In urban areas, pressures of population growth, compounded by heavy migration from the countryside, have generated serious unemployment and a severe housing deficit. Prospects for coping with these problems seem brighter as a result of the accelerated growth upon which the Colombian economy has embarked in the past several years. 4. Recent Government administrations have reacted to rural poverty and urban unemployment in a more systematic fashion than in the past, but much remains to be done. In spite of the passage of an Agrarian Reform Law and the creation of the Agrarian Reform Institute (INCORA) in 1961, only modest results have been achieved in alleviating rural poverty. Addi- tional legislation has been enacted which lays a better basis for land  -2- reform but much remains to be done to raise income in rural areas. In recognition of the problems of urban concentration and unemployment, Colombia's previous Government placed greater emphasis on urban development, particularly in the housing field, but despite such action unemployment continued to increase in most of Colombia's major urban centers. Preliminary indications suggest that the new Government, which took office in August 1974, will strive to sustain a high rate of economic growth while simultaneously attempting to achieve a more equitable distribution of its benefits, inter alia through expansion of employment opportunities and increased investment in education, health and agriculture. There is likely to be more emphasis on the development of agriculture and industry, and less reliance on the urban construction sector to provide a stimulus to economic growth. Export diversification will continue to be a major component of development strategy and the Government is currently rationalizing the export promotion system. These development programs have necessitated and will continue to require a strengthening of the fiscal effort. 5. At the latest Consultative Group meeting held in June 1973, members of the Group expressed the view that growing needs for public investment and other public expenditures called for increases in domestic fiscal efforts. While the Government then expressed the intention to further increase revenues by new tax measures and by increasing the savings of public enter- prises, little progress was achieved, and the fiscal situation remained weak. To overcome these problems, Colombia's new Government has instituted a comprehensive structural reform of the fiscal system which includes major modifications of the sales and income taxes, and a strengthening of the fiscal contribution of decentralized public enterprises. Discussions between the Government and the Bank on fiscal issues are continuing. 6. Colombia's efforts to expand exports have been amply rewarded in recent years. Merchandise exports amounted to US$1,334 million in 1973, of which over half came from non-coffee items. Allowing for price increases, this represents a fourfold increase (representing an average annual real growth of 24%) in non-traditional exports since 1965-67. Flowers, clothing, emeralds, cotton thread and cloth, chemical and pharmaceutical products, sawwood, and wood products enjoyed particularly large gains, although raw cotton, sugar, meat, and other agricultural products continued to account for the greatest absolute amounts. Coffee receipts were up largely as a result of high international prices as the volume of coffee exports has increased relatively little in recent years. 7. Rapidly expanding exports accompanied by more slowly rising imports, despite progressive removal of import restrictions, have created substantial balance of payments surpluses. Net foreign exchange reserves of the Banco de la Republica reached at the end of February 1974 nearly US$600 million, or the equivalent of about five months' imports of goods and non-factor services at the 1973 rate. This compares favorably with the US$345 million and US$170 million held at the end of 1972 and 1971, respectively, and to the  -3- deficit positions that were common prior to 1968. Since February, accele- rated import payments resulting from liberalization of import restrictions and lengthening of the lag between export registrations and exchange surrender together with lower world prices for coffee, moved the current account of the balance of payments from a surplus position in 1973 to a deficit for the first eight months of last year. Sharply reduced external borrowing by the Government has further lowered the inflow of foreign exchanges and reserves probably declined by about US $120 million during 1974o Care will have to be exercised in foreign exchange reserve management since world coffee prices may remain weak for some time and prices of several of Colombia's non-traditional agricultural exports appear to have peaked, while those of imports are expected to continue to rise. The new Government is aware of the possibility of some weakening in the balance of payments, and since taking office in mid-August has more than doubled the rate of depreciation of the peso, ahead of domestic price increases, in an effort to hold down the rapid growth of imports and sustain adequate incentives to exporters. A longer-term problem is that, unless appropriate action is taken, Colombia will become a sizable net importer or crude petroleum near the end of the decade, and the pressure oni the balance of payments from petroletum imports, should they become necessary, could be considerable. A high-level Energy Council is studying exploration incentives, taxation and foreign-exchange arrangements, product pricing, P1.l othler aspects of this problem. e. The rapid growth of Colombia's GDP in 1972-73 was accompanied by a sharply accelerated rate of price inflation. Consumer prices jumped 22% in 1973, as compared with 14% in 1972, 12% in 1971, and an average of 7% yearly in 1967-70. Food prices, which have a weight of about 50% in the cost of living index, increased by 30% in 1973. The authorities have taken a number of measures to dampen price pressures, including liberalization of import controls, reduction of tariffs, and tighter controls on public expendi- ture, but given the weak state of public finances, inflation continued being a problem throughout 1974 and is expected to have reached 25% by year end. To deal with this situation, the new Government has invoked emergency economic powers and is moving forcefully to implement a comprehensive fiscal and monetary reform aimed at strengthening public finances and at producing a more balanced flow of resources through Colombia's financial system and at providing the authorities with greater monetary control. 9. Colombia's public external debt repayable in foreign currency amounted to US$2.6 billion at the end of 1973, or US$1.9 billion excluding undisbursed commitments. The Bank's share of this external debt (disbursed only) as of end 1973 was about 28%, but this share is expected to decline to 25% in 1978 as Colombia relies to a greater extent on other external borrowing. Service on this debt is modest (12% of foreign exchange earnings in 1973) relative to other developing countries. Since exports have risen more rapidly than debt service in recent years, there has been a decrease in the debt service ratio at a time when economic growth has accelerated.  -h - The debt service ratio is expected to rise moderately and peak in the mid-1980s at about 18% as a result of greater capital inflows associated with a high growth rate. The Bank's share of total debt service is expected to peak at about 28% in 1975 and is likely to decline thereafter. Should economic growth continue at a rapid pace, which appears feasible, and should that growth be accompanied by a further strong expansion of non-coffee exports and the maintenance of sound economic and financial policies, Colombia should find it possible to secure the amounts of external capital it needs and to service the indebtedness that this borrowing would generate. Some of this capital will have to be provided to finance local costs if total foreign assistance is to be large enough to enable the country to cover its resource gap on appropriate terms and maintain its rate of economic growth at an acceptable level. PART II: BANK GROUP OPERATIONS IN COLOMBIA 10. The proposed loan l/--the fifty-eight to be made to Colombia--would bring the total amount of Bank loans to Colombia to US$1,112.8 million (net of cancellations). Of the foregoing amount, US$854.6 is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia in 1961. 11. Disbursements have been completed on 33 loans and the one IDA credit. IFC has made effective investments and underwriting commitments in 20 enterprises in Colombia, totalling about US$27 million of which IFC now holds US$13 million. Annex II contains a summary statement of Bank loans, the IDA credit, and IFC investments as of September 30, 1974, and notes on the execution of the 23 on-going projects. SECTORAL COMFOSITION OF BANK GROUP OPERATIONS TO SEPTEMBER 30, 197h (Amounts in US$ millions) Sector Share of Total Sector Number of Loans Total Amount % Agriculture 8 80.7 7.5 Telecommunications 2 31.0 2.9 Education 3 33.8 3.1 Industry 7 221.5 20.5 Power 18 34h4.1 31.9 Transportation 12 229.6 21.2 Water Supply 5 131.6 12.2 Pre-Investment 1 8.0 0.7 Total 16 1,080.3 100.0 1/ This loan is being presented simultaneously with two other proposed loans for a Small-Scale Industrial Development Project and for a Telecommunications Project.  -5 - 12. Since 1968, Bank lending in Colombia has become more diversified than in earlier years. All three loans in the education sector have been made since then as were one-half of the eight agricultural loans, four of the five loans in the water supply sector and four of the loans for industry. This compares with six loans during these past five years in the sectors where the Bank has been traditionally active, i.e., power and transport. Bank efforts have been focused on production-oriented activities and activi- ties which carry social as well as economic benefits. Projects being developed will seek to combine the objectives of increasing output with maximum benefits in terms of employment and improving the income of the poor, particularly in rural areas. 13. We expect over the next several years to make an increasing contribution to the agricultural and industrial sectors, with particular emphasis on projects involving small and medium size farmholdings and industrial enterprises. The other major focus of our activities would be in such social sectors as education and water supply. We would continue to support projects in the traditional sectors of Bank lending--electric power and transportation--in those cases where support is required for necessary institutional development. Projects are currently in an advanced stage of preparation for rural settlement and irrigation rehabilitation. 1a. The operations of external lenders in Colombia are shown in Annex I, pages 3-1. While IBRD, IDB, and AID provided about four-fifths of total external financing to Colombia in the 1961-72 period, their share has de- creased since then. The IDB has assisted projects in low-cost housing, university education, agrarian reform, ports, electric power, water supply, transportation, and industry. AID has shifted the emphasis of its lending in recent years from program to sector loans, particularly for education, urban development, and agriculture. PART III: WATER SUPPLY AND SEWERAGE SECTOR IN COLOMBIA 15. Like most other developing countries, Colombia is experiencing a process of very rapid urban growth, far in excess of the national rate of population growth, which recently has been about 3.2%. Unlike many other developing countries of Colombia's size and stage of economic develop- ment, the country has a number of major urban centers. Bogota, the capital, has a population now estimated at about three million. It is growing rapidly at an estimated rate of 6.8% per annum. The population should reach five million by 1980. Two other cities, Cali and Medellin, have already surpassed the one million mark. Barranquilla has over 700,000 while Cartagena, Bucaramanga, Manizales and Pereira have about 300,000 inhabitants. Thirteen other cities have over 100,000 inhabitants. In recent years, the growth rate of the cities in the 100,000-700,000 range has averaged about 5.5% per annum.  -6- 16. The Colombian Government has pursued a policy of providing public facilities in the medium size cities in order to help divert some of the rural migration to the large number of such cities instead of encouraging a further inflow into the three largest urban centers. An important expression of this policy has been a program of lending for medium sized cities by the National Institute of Municipal Development (Instituto Nacional de Fomento Municipal, INSFOPAL) which was supported by a Bank loan of US$9.1 million in 1972 to provide improved water and sewerage facilities in seven medium size towns with a total population of 1.2 million. In the proposed project, a second loan of US$27 million to INSFOPAL would help provide improved water and sewerage facilities in eight cities with popula- tions of 50,000 to 700,000, increasing the total population served in these cities from 1.3 million in 1973 to 2.1 million in 1980. 17. Even though the growth of water supply and sewerage systems has been fairly rapid during the last eight years, one-fourth of the urban population (living in towns of more than 2,500 inhabitants) still does not have direct access to public water supply. About 50% of the urban population has access to sewerage services and less than 30% of the rural population is connected to public water supply and sewerage networks. 18. The insufficiency of water supply and sewerage services has been due primarily to institutional problems, especially poor planning by the local entities and inadequate allocation of central government investment funds, and to traditionally low tariffs which have made it impossible to raise the large capital sums needed for new works. Inflation has aggravated the situation and local opposition to tariff increases has perpetuated it. A vicious circle has been created where deteriorating services have made it more difficult to convince the public of the necessity of tariff increases. The Government favors such increases and the National Public Services Tariff Board created in 1968 advocates the implementation of adequate tariffs which will cover operating costs and generate funds for P 'Are investments. 19. The Colombian water and sewerage sector is made up of three main groups: (a) The Empresas Twenty-one cities with populations ranging from 25,000 to 3 million have their own municipal utilities ("empresas") to provide public ser- vices. These cities have a combined population of about 8.0 million or a third of the total population. From 70% to 90% of this population receives water supply services; 50% to 80% is connected to the sewerage system. In general the empresas are reasonably well-run and finance their system expansion with internal funds, suppliers' credits, and loans from the National Government and foreign lending institutions. The Bank has been active in lending to the empresas, making four loans totalling US$122.5 million to the empresas in Bogota, Cali and Palmira.  -7- Five other empresas in cities with a total population of one million obtained financing under the First Medium Cities Loan and it is now proposed that four empresas in cities with a total population of 1.3 million benefit under the proposed project. Thus, Bank lending for the sector would reach about 80% of the population in cities served by the empresas. (b) INSFOPAL The remaining cities with more than 2,500 inhabitants have their water supply systems operated by INSFOPAL. The total population served by these systems is about 6.0 million or a fourth of Colombia's popula- tion. Approximately 70% of the inhabitants in this group have a supply of water but only 50% are connected to the sewerage system. The quality of services is poorer than that of the empresas previously described, administrative competence is usually less, and their operating deficits and investments are generally financed with government grants. Of the cities in this group, two, with a total population of 2h0,000, benefitted under the first Bank project for medium cities. Four with a total population of about 0.5 million would benefit under the proposed loan, which would also provide 30 smaller communities with additional ground- water facilities. Under the proposed project, a reorganization of INSFOPAL would be carried out whereby all the systems now operated by the agency would become independent and autonomous entities. The basic Presidential Decree authorizing this transformation was signed on April 20, 1974. Implementation of this decree is expected to be completed by mid-1976. (c) INPES The rural communities (less than 2,500 inhabitants) have their systems planned and executed by the "Instituto de Programas Especiales de Salud" (INPES). Only an estimated 30% of the population in this group receives water supply and sewerage services. These communities are too poor to afford adequate services and rely on Government funds to finance their operating deficits and investments, although direct water charges will cover operating expenses and some depreciation. 20. Annual investments in the sector increased from US$21.6 million in 1965 to US$46.3 million in 1971 and the total investment for that period was US$253 million. Of this, 75% were by the empresas, 20% by INSFOPAL and only 5% for INPES communities. About 35% of the total investment was financed from the national budget, 20% from external sources and the remain- ing 45% with internally-generated funds and domestic credits. 21. External assistance for the sector started about twelve years ago and US$196.1 million was committed from 1961 to 1972. Of this amount, 70% was from the Bank, 25% from the Inter-American Development Bank (IDB) and the remainder from USAID, Eximbank and the German Kreditanstalt. In addition,  - 8 - USAID made a sector loan of US$29 million in June 1971 for urban development. IDB has made 10 loans in the sector, totalling US$h3.h million. Two of these, made to INSFOPAL in 1962, amounted to US$10.6 million and were for 327 towns. 22. The Government objective is to extend by 1980 water supply and sewerage facilities to at least 80% of the urban population. This would require large annual capital investments, estimated in 1972 (in prices of that year) at Col$1,000 million (US$50 million) for the large and most of the medium cities, at Col$630 million (US$31 million) for the smaller cities and at Col$550 million (US$27 million) for rural communities. These are commendable objectives but the Government goal can only be reached if funds of this magnitude can be provided. In this connection, the mobilization of internal resources through increased tariffs is of vital importance. The magnitude of the required increases, however, is such that resistance by the public is to be expected. Therefore, it may well be that the Government goals may not be reached within the next five years. 23. Sewage and industrial wastes are largely untreated in Colombia. So far, pollutant loads have been low compared with the natural self- purification of the receiving rivers and waste waters have been dispersed without much nuisance or causing harmful deoxygenation of the river waters. No serious problems are foreseen in the next few years, except in Bogota and Cartagena. In the case of Bogota, the Bank's second loan for water supply and sewerage has helped finance a study of River Regulation and Pollution Control which will assist in the preparation of a Bank project. In the case of Cartagena, the preparation of a master plan for treatment and disposal of domestic and industrial waste waters in the Cartagena area could be included in an urban study for which UNDP financing is being sought. 24. The Bank's first medium cities project not only provided funds for priority projects in the seven cities covered but was also aimed at convert- ing INSFOPAL into a more efficient agency that would be better able than in the past to identify, plan and evaluate projects in the sector. Initially, progress under several of the subloans of the first project was slower than expected, mainly because of delays in implementing the tariff increases required in the subsidiary loan agreements (as a condition of effectiveness), interference of the Boards of Directors in the daily management of some of the empregas and a shortfall of internal cash generation. Moreover, water demand has not increased at quite the rate forecast and consequently the empresas have experienced difficulties in financing their 25% share of the investment costs. (This experience has been taken into account in making demand projections for the proposed second project and the new projections are more conservative.) This slow start in part must also be attributed to the low capability of the personnel of D.t1SPAL and its External Credit Office (ECO) which had been established to administer the operation financed by the Bank loan but did not provide the utilities with adequate assistance. ECO has recently hired more competent staff who are now effectively helping the empresas. Project execution under the first project is now proceeding satisfactorily.  -9- 25. The proposed loan would continue to develop INSFOPAL's capacity to assist the empresas and its subsidiary systems (the so-called "acuas") in technical operations, administration, finance and project preparation. It again would aim at helping the agency to become a competent national institution through which a major share of investment funds for the sector would be channelled. This would mean the gradual elimination of the operational functions of INSFOPAL through making the acuas and similar utilities now dependent on it into independent entities. At the same time, INSFOPAL's financial and advisory functions would be strengthened. The groundwork for this reform has already been laid through the issuance of a presidential decree, reorganizing INSFOPAL and redefining its functions. The new status of INSFOPAL would be furthered by the establishment under its direction of a revolving fund to receive repayments by the empresas and acuas of Government budgetary funds lent to them by INSFOPAL. An increasingly important function of INSFOPAL would be to oversee the tariffs of the local water systems so as to ensure that operating costs are covered and sufficient savings generated to cover an important proportion of future investments. PART IV: THE PROJECT 26. The appraisal of the proposed Multi-City Water Supply and Sewer- age Project was carried out in November-December 1973; project data were revised in November 1974. Loan negotiations were held in Bogota during September-October 1974 with a Colombian delegation led by Dr. Cristian Mosquera, Director General of Public Credit, Ministry of Finance. 27. The proposed loan would be made to INSFOPAL, the national water supply agency, and would help finance water supply and sewerage projects to be executed from 1975 to 1979 in eight cities with populations between 50,000 and 700,000, namely Barranquilla, Cartagena, Cucuta, Ibague, Pasto, Popayan, Valledupar and Villavicencio. The projects in Valledupar and Villavicencio will not include sewerage works. In addition, the project will provide some 30 small communities with additional groundwater supplies and assist the installation of about 100,000 water meters in the systems operated by INSFOPAL as well as providing staff training and management assistance to INSFOPAL and the beneficiaries; the installation of these 100,000 meters as well as 91,000 in the eight cities financed under the proposed project will further implement the policy of introducing into the sector more rational charges for water. A loan and project summary is attached as Annex III to this report and an appraisal report (464a-co) is being circulated separately to the Executive Directors. 28. The total cost of the project is estimated at USA52.9 milliorn in- cliudir,g funds for managerial assistance to INSFOPAL and beneficiaries, as weli as training or the water supply utilities stanf. lhe cost ot consult- irc services for INSFOPAI anc the beneficiaries is estimated at US$2.6 million.  - 10 - About 51i` of the project cost would be financed with the Bsnk loan which would cover the foreign excharge component estimated at US$16.7 million and part of the local expenditures, or US$10. 3 million equivalernt. The financing of local currency costs is justified on the grounds indicated in paragraph 9 above. lJ 29. The financing plan includes US11.24 million of works not related to the project to be carried out by the empresas during the construction period (1975-79), interest during construction of US$6.58 million, and an increase in the working capital of the empresas of USW3.LO million. This bri ngs the total need for funds to US$67.5L million. Of this amount, US$27 million will be provided by the proposed Bank loan, US$16.5L million would be provided as a Government grant for onlending by INSFOPAL, US$19.02 million from the net internal cash generation of the beneficiaries, andr US$L.98 million from an industrial complex in Cartagena. 30. The Bank loan would be re-lent to the beneficiaries under substantial- ly the same terms as extended to INSFOPAL (Section 3.03 (a) (i) of the draft Loan Agreement) and the sub-borrowers would bear the exchange risk. The Govern- mernt grant to INSFOPAL (excluding grants totalling about US$0.29 million equivalent for the acquisition of fixed assets to Ibague, Pasto and Vallendupar) would be onaent to the beneficiaries at an interest rate of 12% to be repaid in 20 years after a 5-year grace period (Section 3.03 (a) (ii) of the draft Loan Arre ement . The funds being repaid would constitute a revolving fund, admin- is.ered by INSFOPAL, for future lending in the water supply and sewerage sector. 31. IINSFOPAL has been running a recurring operating deficit which has beer covered by the Goverrznent. The Government also pays INSFOPAL's capital investment program and service on loans made by IDB and USAD to it for re- lending to the municiralities. With the separation of the operating agenc es Lroa INSFOFAL, and the tariff increases contemplated under the reorganization of the sector, INSFOPAL's operating deficit would be eliminated in the future. The draft Loan Agreement (Section 3.03 (a)(v)(2)(3) requires INSFOPAL tc obtain assurances from the sub-borrowers, in the eight main project cities, that they will maintain. water supply and sewerage tariffs and other charges for their services at levels sufficient to cover their operating expenses, debt service and a percentage satisfactory to the Bank of project investment costs; in the case of the 30 smaller cities, the required tariffs would be sufficient tc cover operating expenses and debt service. In the eight major cities, the wrter and sewerage rates would be set at levels aiming at the generation by th:e enterprises of some 28% of the costs of their investment program. In the subsidiary loan agreements the enterprises will be required to achieve the followinig rates of return on their assets which are to be revalued at least annually in a manner satisfactory to the Bank: 1, See also para. 20 of hnnex I.  Financial rate of return (percentage) City 1975 1978 1982 Barranquilla 3.2 3.3 Ln.O Cartagena 5.8 i.l b.6 Cucuta 0.3 L.8 7.9 Ibague 5.7 L.L 5D0 Pasto 0.5 3.3 406 Popayan 2.L 3.3 306 Valledupar - 3.0 5.6 Villavicencio 1.2 2.8 6.2 Such fixed assets of the Barranquilla and Cartagena empresas, in particular for sewerage, will substantially increase during the construction period and a temporary decrease in the rates of return will be allowed which would be regained by 1982. Except for Barranquilla and to some extent Cartagenia, the finpncial situation of the sub-borrowers is difficult and immediate tariff irncreoses wi]l be required in order to meet the standards established under the Bank loan. Such increases are established as conditions of disbursement under the subsidiary loan agreements (sub-paras. (iii) and (iv) of paregraph (,b of Schedule 1 of the draft Loan Agreemert). 32. Except for civil works under US$100,000, all contracts would be placed by means of international competitive bidding. Foreign suppliers are expected to win most of the contracts for treatment plant and pump sta- tion equipment, water meters and operation equipment, amounting to about US$8.8 million. Colombian contractors are expected to win all civil works and pipe supply contracts. For bid evaluation purposes, a 15% margin of preference (customs duties are substantially higher) would be allowed for equipment manufactured in Colombia. The beneficiaries are not liable to pay customs duties, and consequently no regional preference will be accepted in bid evaluation. 33. The loan would be disbursed against the full CIF cost of all direct imports, the foreign exchange cost of consulting services and a varying percentage of the cost of all supplies, civil engineering works and services procured locally. IL. The populations of the eight cities are growine at rates from i.+ 5to 6vs annually and their present population of 1.8 million is estimated tc rise to 2.3 million in 1980. The project would ensure that a population of 2.1. million would have access to wholesome water supply and sewerage. Many of the new consumers would be from the lower income groups. Sanitary conditions would be substantially improved in the urban areas involved  - 12 - through construction of sewers and the pollution of streams in built-up areas will be considerably reduced. The inclusion of the relatively populous cities of Barranquilla and Cartagena on the Caribbean coast will benefit lower income groups in the coastal areas and it will bring new areas under the influence of INSFOPAL, and thus strengthen its constructive role within the sector. 35. The internal financial rate of return for the individual sub- projects are: Barranquilla 10%, Cartagena 11%, Cucuta 15%, Ibague 12%, Pasto 8%, Popayan 8%, Valledupar 10% and Villavicencio 12%. The financial rates indicated are lower than the expected economic return on the project because all benefits, such as for health and environment, are not fully reflected in the prices charged for water services. PART V: LEGAL INSTRUMENTS AND AUTHORITY 36. The draft Loan Agreement between INSFOPAL and the Bank, the draft Guarantee Agreement between the Bank and the Republic of Colombia as well as the Report of the Committee provided for in Article Im, Section 4 (iii), of the Articles of Agreement and the text of a draft Resolution approving the proposed loan, are being distributed to the Executive Directors separately. 37. The draft Agreements conform to the normal pattern for loans for water supply and sewerage projects. 38. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 39. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments by J. Burke Knapp December 31, 1974  Page 3. of 12 pages COUNfTRY DATA - CCLOSUIIA ARI.A popouojN KBsrrT 1,139,000 kj.2 23.0 ni1l1on (md1-1-972) Pe r k.iof *rahbls land SOCIAL MISCATORS gfsfrene GCntries Tuke 1razil Xeotoc OW FIR CAPITA 15$ (ATLAS BASIS) A .. C0 Ia 370 La 530 /a 750 /a DE5.GRA.PhC raCm te t (par Ulecasnd) 39a 5d38/ am,- 38 /A 4.3/a Crud. deathI. rte (P.r thoauad) 1727 11 7 13/ la07 10- Infat mortality rate (Per thousan.d limo births) 100 70 145 P 110 - 58la Life exectancy at birth (years) 57 L 59 55 7UZE 61 /d Si _ Cross rpo ta rte / 3. ? 3.2 /d 2.6/Iyb 2.6 3.1 Id Populatio grot rat . 3.1 3.3 7? 2.5 7! 2 .pl .5 7t PopulatiOegrcwth-to - urba. 6/36 57Vj 4.5 7- 57-9 575 Age structur (percent) LI7 / LI1 /q .i.8 42 f66 * 0-16 5076 07 53.9 53r 50 15-64 7 L 7 65 and 3vr1. 3t .7 1.2 i57s 1./ Denedenny ratio 4417 .1. 57 19t Urban PnPuloiieina perc...t of total 57 /p,i 62 laki 38.7 /c 56/ 59 1s PanilY Planning siNc, of acceptors cbnetlati-e (thau.. 1.. 5 316 (.86 7F, 250 Ba. of csere (% of mrideon .....d. 0 .2 7F- 1.6 33PIOTHENT '7fRfbar forc (thbonada) 5,100 /P 6,200 4q 14,500 /61 29,500 / 13,000 Percen.tage misplayed in agoicolture 4i7 6p 4 59- 6h 39 Peran..itge oelepyoyd 67 24 I Pe -R31rcetm atmL income receined by hoighest 5% 36 ny 33AI 32 Ah.a-,o6 33 lab 3t /ah,ac Percent of notomai i .came receive-d by highest 20% 63 9' 59 7- 60 /h!aa ab 62 756 Eitma Pe rceot of.otima maa esvdby 1oast 20% 3 7f 7; 3 7ht05t99 3 7T9 Percent of cetiom. jcs ecmdb oss 0 9 'l, 10 7; 10 IN a h10 Tau 11___ 2iiIZClUTOFN 0!IAND OWNlERSHiIP I ese ytop I(% of ower . . 53 % ownd by enalbent 10% of asee... .9 HEALTH AND NUTITION P.pulatico pe physecien 7,630 2,16,0 lam 2,220 1,950 am 1,14h0 Poplatiam per nooing person 3,520 /ad 1,060 /an 1,080 /be 3,300 Ia,n1,570 Population per hospital bed 580- 4650 - 690 - 260 930 Psr capita malaria supply a$ % of reornn /910 /af 88 113 /g 106 0 Per capita protein oupply, itoi. (grans per dsy+46 50 791 So 78 g 67 ' Of shlob, animal and pu1a 265 7;!' 26 F2 39 2 5 Deatb rote 1-6 yeore /7 l2 j . 7 EDUCAT ION JX-9i- /8 pimary echnol enroll.cent ratio 77 95At ill 130 /4a 118 /io Adjusted 73 secniry ochonl e-11loet ratio 12 21 7 28 27 1 Tears of nhoboling proided, fleet -mA s.eod leve 11 iti 11 13 32 Vematiooal enrolleent as % of sec. eschol e-r11-et 70 lab 25 /nk 1c i 17 26 lam Adult Iiteracy rote % 73p7Fo 76 9.9n 55 /c, 68 lam 8i 72F Average No. of Persons per r-o (urbam) ...1.9 1.0 /o 2.5la Percent of occpied unts wsithot piped oator 59 oru ." . 66 apa 67 77'n, at i 7-. A...ece to electricity(aI of total population) 667/0 41&o 4l 7 /a 7 6 7 Percent of fcra1 popalatin concocted to electricit) Ii f 10 a P;t 9 0 CONSUMIPTION IG. per 1000 ppalatton 1ill' t03 Icc 99 60 2 " P..e..sger mere Per 1000 pepalatimo 777t,cc ZI,a 25 5 Electric pear caneceptloo (kceh p-) 23' 7t 1!, 266 a77 536 Newsprint consuption p.m. kg per year 2.2 1.9la 2.0 2.9 3.1 Notes, Plgmrs refer either to the blen.t periodo cr in acoojt of envir-oeniul tenperalore, body .eighte, and the lesnyas'ostprne ne npiopem .tribatics by age scsi ca of nattesal populations. the yea.rst196-6C or 1966-70; the latnet y-ar in prim- IS Prime tadrs(euret)foalmutia eeab ciple t 1960 nd190 linhed by DAm EconomIc caeo-h rvc pr-ids for l iiu /I The Per CepidtalCUlP estino.in t at nokot primno fur.1 allwace If 60 vgn of idol1 proteto per day, an 20 gone of y-ar th-r thea 1960,-1moLcuotd by the coe orrlm anisoa and pulee protein, of hbich 10 goons siould be animal te-hciqae nm the .992 World Book thilos. prtotin. These standards are sa-hat lone than thees of 75 2 Anerge n-ber of doughtere Per- cono f roprdm-micn gra-a of talprotein and 23 gran of animal protein an an age. a.e.agn far the world, propoend by PAO tc the Third World Fond L. Populotion groth misc are for the deca.des endlcg in S-re.Y 1960 nod 1970. /7 lone studies ban euggeotds that crude death rates of hbildoen A Rotim of ander 151 md 65 cod ovr age bronbeto in age I throuh I nay be need neafiret apprcateti-n idsxa of the se in icbor fro- braket of oge 15 throgh 66.. na'~ irtrut-n 4 A P6rferecc ntacdc-dm repre.nn phynhmlcgiIua - AR Permo-ge er.r1ld of nornccugpopulatlo- of -obc1 age quirnoento for nrnul activity m.d becth, tahkiti an cf-d f-c comb muor-. /a 192 Ic l 4;i In Registered only,; /d 1965-70 184 estimate; In 1967; If 154; aebsdc tartsl /1 1966-77; /s ad2'ninit-i-c "netre nf prrrirc7? nod diitrlcts ('~7iluyet- nod "Kano" ceters); /c liruon an,t nnhuFr.e cones ny1 a,t9nin-.rattv colesofso,nPcte o ditricts; /I LocaZitien of' 7,500 or mor;- /p 1961; 4 Ete-t.et; lr 15-59 years; /n 60 yearn andaer /t Ratio of79pupatioe order i ~nd 65 non -'er to total labor forte; /I 7?atio of popmla tioWonde.r 15 non 60 anod .eveto total bier force; Ic Raced on 1 .3 Por-ent samPle tabulation of censua returns, -omludin-g Indian (angle population; /. Bogto only; 77; 19?63; 4V Incom reciplern; /c Ec-meimally actire pcplalnioe; lao Dllnpcnable income; /ab Roaseheldo: l/am 1969;- /ad 1965; /ae Hospital personmel; /of 1961-63; //a 1966-66; /ah 19i6-67; /aO Gr?fl. enrell-nt hticFTm-lcdrc cc7iege eta- dento; 4 he nt nrllment ration . 1971 ne ro Si ermont and 1 ipemennt for basic and secondary edcatico" rspem- Ihetl 75;, icuing te...h-c trainIng at third tne-1; /1 16 Year acd 00cr; Ian Pers- 6 yearn li aol ocer oho tell tme Cn.o- taher tmat tiny cao red na write,; /aW'O~finiti-m unkoco; /9 Total, urban nod rural; /ap isoel on r-nulo of saple nurvoy; 4q As peenset of d.;Mtgs; /a, Water pipedThside; Ian Ectimutn bayed on eanPle tablatiom of mess eaen n innie or -utoide; /a - hclding nc-pornanen d--Tltngo; lo 1971; lao nml-inQg special p-rpue vehicles; 1s 961; /an Deorlled 1799 n-pte s-.cy estimates (240,302 p-erncr.3 eou-- img i7, eotorn provicoec; /.- 1965-7?7 Iba 1979tbT; /hi i9Si-tcoo 1976, 86 p-,ceot -ieig Oils; Joe 1oriading -ooistc,tlm...e an nbi doives. Me .eamo Ls nele-tod ao the bhjsotin~c.ontryceos Ch-niic is cow in the stage ef economic deo.pniero that m-di.ca tnyearn ago. B.tI -oantries aim at a 0OP g-otih rut of at:7 pesrocnt and at a oubstanti.l reduotuc nf --oplcyn-ct. AM:0mb 86 Dscnber 11, 197L  ANNEX I Page 2 of 12 pages COLOMBIA ECONOMIC DEVELOPMENT DATA (Amounts in millionS of U. S. dollars) Act.al Projected 1966- 1970- 1972- 1977- 1966 1970 1972 1974 1977 ' 1980 1970 1972 1977 1980 1966 1970 1977 NATIONAL. ACCOUNTS 3-Year Average at 1967-1969 PriceS & F-ch-nge Rates Averge Annual Growth Rates As Percent of CDY Gross D.-etic Ps'odact 5507.6- 6916.1 7932.6 8979.2 11000.0 13475.4 5.9 6.4 7.0 7.0 99.1 98.3 97.5 Gains from Toes. of Trade (+I 50.1 118.8 218.4 267.2 287.6 336.1 . . . . 0.9 1.7 2.5 Cross Domnestic Income 5557.7 7034.9 8051.0 9~246.4 -112 87 .6 13811.4 6.0 7.0 7.0 7.0 100 o .0 1005.0 100.0 Import (ci.,. NFS) 793.1 1170.1 1279.2 1432.1 1809.6 2216.9 1D.2 4.6 7.2 7.0 14.3 16.6 16.0 E.ports "(import capacity) 7L48. 7 983.8 1202.0) 1409.1 1T717.4 20O76.1 -7.1 1 0.5 7. 6. 135 1.0 1. Resource Gap 44.4 164 7. 23.0 92.3 140.8 43.0 -35.5 3.6 14.4 0.8 0. 10 ConoSoption E.penditores 4482.2 5706.7 6355.2 7156.0 8790.7 10780.5 6.2 5.5 6.7 7.0 80.6 81.1 77.9 Investment (iscl. stocks) 1120.0 1514.6 1773.0 2113.5 2589.1 3171.7 7.6 6.2 7.9 7.0 20.2 21.5 22.9 Domestic Dovi,gs 1075.5 1328.2 1695.7 2090.4 2496.8 3030.9 5.4 13.0 8.0 6.7 19.4 18.9 22.1 National S-vings 894.5 0191.6 1143.1 1989.2 2400.4 2904.6 4.6 13.8 9.3 6.6 17.9 16.9 21.3 I4ERCHIAGDISP, TRADE Annual Data at Current Prices As Percent of Total Imports Capital Goo.ds 261.5 396.4 402.4 625.9 1092.3 1659.5 11.0 0.7 22.0 15.0 38.8 47.0 50.0 Intvrnediate Goods 271.0 273.9 295.8 486.8 655.4 968.7 0.3 3.9 17.2 13.8 40.2 32.5 30.0 Pools 7.8 8.8 6.3 15.0 48.1 100.0 3.1 -15.0 50.0 27.0 1.2 0.0 2.2 Coosamption Goods 118.9 035.3 172.4 233.3 349.5 531.2 3.3 6.7 15.1 15.0 17.6 16.0 16.0 Others 74.9 29.6 3L4.3 35.0 39.3 59.7 18.7 7.6 2.7 15.0 2.2 3.5 1.8 Total merch. 1mpots (cif) 674.1 844.0 911.2 1391.0 2184.6 3319.9 58 39 179.1 15.0 1-00.0 1 b00.0- 1050.0 Exports Primary Prodacts 380.1 559.4 569.8 653.2 1070.0 1424.2 10.1 1.8 13.4 9.9 72. 5 71.5 45.0 PF-Is 70.6 74.6 51.3 25.0 00.0 00.0 1.4 -17.0 - - 13.5 9.5 - Mavef-ctared Goods, 73.3 148.0 224.0 828.9 1307.9 2124.3 19.2 23.0 42.0 17.5 13.9 16.9 55.0 Total Mccci. Exports (fok) 524.0 782.0 84. 571 2729 34. 39 4. 0 23.0 14-.3 100.0o 100.0 100.0 Merc.handise Trade Indices Average 1967-69 =100 Export Price loden 100.97 127.03 128.87 135.48 169.89 209.33 5.9 0.8 5.7 7.2 Import Price loden 95.76 90.01 98.19 137.37 175.89 218.20 -1.6 4.4 12.4 7.5 . Tem. fi Trade loden 105.44 141.13 131.35 98.62 96.59 95.93 7.5 -3.6 -6.0 -0.3 E.psrts Volume Index- 88.4 109.46 124.49 144.53 180.96 267.80 5.5 6.6 7.8 8.2 VALUE ADDED BY SECTOR Arnnal Data at 1967-68 Prices and Exchange Rates- Average Ann.al Growth Rates As Percent of Total Agriculture 1749 1969 2130 2330 2856 3402 3.0 4.0 6.1 6.0 31.7 28.4 24 Industry acd Mining 1422 1796 2036 2370 3294 4384 6.0 6.5 10.0 10,0 25.7 25.9 30 Service 0352 3170 3637 4432 4833 5669 7.6 7.1 5.8 5.5 42.6 45.6 44 Total 553 93-5 7801 8-965 10983 1f3455 5.8 6.1 -7.0 -7.010. 100 10 PUBLIC FINANCE * *As Percent of GDP (Central Governmet)* Current Receipts 143.6 638.3 695.1 796.4 975.7 1287.3 17.4 4.3 7.0 9.7 9.9 9.2 8.9 Current Expenditures 355.8 422.4 492.5 584.8 691.9 912.9 18.7 8.0 7.0 9.7 6.5 6.1 6.3 Budgetary Savings 187.8 215.9 202.6 231.6 283.8 374.4 15.0 -3.1 7.0 9.7 3.4 3.1 2.6 Other Public Sector 213.7 385.7 354.4 406.8 498.3 657.4 80.5 -4.1 7.0 8.7 3.9 5.6 4.5 P.blic Doctor Investment 249.4 290.3 361.3 413.9 507.1 669.0 16.4 11.5 7.0 9.7 4.5 4.2 4.6 CURRENT EXPENDITURE DETAILS Actual Prelim. Est. Proj. DETAIL ON As Percenc of Total (As 7. Total Current Expend.) 1966 1870 0972 1973 19 74 NATIONAL GOVERNMENT (1968/72 - 1 973 /75) Edaca.t ion I. . . . . NVESTMEINT PROGRAM Other Sacia1 Servicen . . . . . Social Sectors 26.2 Agric.lt.- ~~~~~~~~~~~~~~~~~~Agric.1tume 23.8 Other Economic Services . . . .Industry and Power -3/1, Administration and Defense .. . . . .Transport and Cossnnications 31.6 Other . . .. . ..Other 6.0 Total sCrrent Expenditures .. . . .. ..Total Empeeditores 101.0 SELECTED INDICATORS 1960- 1965- 1970- 1973- FINANCING (Calculated from S-year averaged data) 1965 1870 1975 1978 Average ICOR 3.96 -T. 17 3-.32 3.25 Puhlic Doctor Savings 69.4 70.7 Import Elasticity 1.10 1.16 O.91 1.00 Domestic Borrowing (net) 0.8 1.1 Marginal Domestic Savings Rate 0.11 0.19 0.31 0.17 Foreign Borrowing (met) 29.8 78. Marginal National Savings Rate 0.08 0.14 1. 29 0 .213 Total Financing 100.0 100.0 LABOR FORCE AND Total Labor Force Value Added Per Worker (1967-69 Prices 4 Ext. Rates) OUTPUT PER WORKER in MIil-li.s 7. of Total 1960-70 In U.S. Dollars Percent of Average 1960-70 1960 1970 1960 1970 Crowth Rate 1960 1970 1960 1970 Growth Rate Agricu1tnre 2.14 2.4-2 48.6 42.0 1.3 -616 7T50 -66.4 63.7 2.0 Industry 1.00 1.37 22.7 23.7 3.2 1327 1663 143.0 140.6 2.3 Service 1.26 1.98 28.6 34.3 4.6 1142 1367 123.1 115.7 1.8 Total '4.40 5.76 100.0 10.0 269828 100 100.02. Not applicable - nil or negligible 9/74 Not available - loss than half the smalles unit shown 82 a/ Incloding Miming* 1969 data ** 1969-70 growth rt.t  A'NNE X I Page 3 of 12 pages BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT (mounts in millions of U.S. dollars at current prices) Avg. Annual Actual Estimated Projected Growth Rate 1968 .1969 19 70 1971 1 972 1973 1974 19 75 19 76 1977 1978 1968-1978 SUMMIARY BALANCE OF PAYMENTS Exports (inc. NFS) 788.0 870.0 1000.0 983.0 1198.6 1626.1 1803.9 2198.9 2561.5 2972.4 3410.3 15.8 Imports (inc. NFS) 866.0 939.0 1149.0 1294.0 1217.1 1487.4 1989.7 2361.0 2714.4 3120.8 .3588.0 15.3 Resource Balance (X-M) -78.0 -69. 0 -14 9.0 -3 1. 0 -18.5 138.7 -185.8 -162.1 -152.9 -148.4 -177.7 8.6 Interest (net) -66.0 -70.0 -89.0 -105.0 -128.1 -139.9 -76.4 -88.1 -108.6 -131.8 -157.1 9.1 Direct Investment Income -47.0 -74.0 -91.0 -71.0 -69.5 -67.6 -78.0 -80.0 -81.0 -84.0 -90.0 6. 7 Workers' Remittance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current Transfers (net) 31.0 38.0 36.0 34.0 34.7 39.8 45.0 46.0 48.0 50.0 52.0 5. 3 Balance on Current Account -160.0 -175.0 -293.0 -453.0 -181.4 -29.0 -205.2 -284.2 -294.5 -314.2 -372.8 8.8 Private Direct Investment 48.0 50.0 39.0 40.0 18.5 26.5 51.0 30.0 32.0 38.0 46.0 -0.4 Official Capital Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 14.3 6.9 4.0 0.0 Public M&LT Loans Disbursements 219.8 200.8 236.5 223.1 355.9 341.0 128.0 465.4 511.1 566.0 686.4 12.1 -Repayments -74.0 -67.3 - 75. 1 -94.3 -95.0 -112.6 -120.0 -128.4 -142.7 -161.5 -207.6 10.9 Net Disbursements 145.8 133.5 161.4 128.8 260.9 228.4 160.0 3 37. 0 368.4 404.4 478.8 12.6 Other MALT Loans Disbursements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -Repayments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Disbursements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Short-Term Credit (Net) -22.0 -15.0 58.0 67.0 -22.8 -38.6 0.0 0.0 0.0 0.0 0.0 Capital Transactions n.e.i. -17.8 3.5 28.6 117.2 70.3 12.9 -32.8 0.0 0.0 0.0 0.0 Change in Net Reserves 6.0 3.0 6.0 100.0 -145.5 -200.2 117.0 -97.1 -112.8 -132.2 -152.0 Actual Estimated Actual GRANT AND LOAN COMMITMENTS 1968 1969 1970 1971 1972 1 9 73 DEBT AND DEBT SERVICE 1968 1969 1970 1971 1972 1973 Official Grants & Grant-like 27.0 27.2 42.9 2~~~~~~~~_9.2 0. 0.0 Public Debt Outs. & Disbursed 958.5 1090.9 1251.8 1386.4 1649.1 1867.5 Interest on Public Debt -30.4 -35.6 -44.1 -48.6 -58.0 -80.5 Public MALT Loans RepaymentS on Public Debt -74.0 -67.3 -75.1 -94.3 -95.0 -111.7 IBRD 105.6 60.3 109.3 153.1 74.1 162.2 Total Public Debt Service -104.4 -102.9 -119.2 -142.9 -153.0 -192.2 IDA 0.0 0.0 0.0 0.0 0.0 0.0 Other Debt Service (Net) -35.6 -34.4 -44.9 -56.4 -70.1 -59.4 Other Multilateral 0.4 55.6 0.0 41.5 40.6 29.1 Total Debt Service (Net) -140.0 -137.3 -164.1 -199.3 -223.1 -251.6 Governments 98.5 154.2 111.9 108.8 113.9 79.3 Suppliers 33.5 20.7 107.3 28.9 40.5 20.9 Burden on Export Earnings (. Financial Institutions 25.2 14.1 19.0 36.1 90.7 86.0 Public Debt Service 13.2 11.8 11.9 14.5 12.8 11.8 Bonds 0.0 0.0 0.0 0.0 0.0 45.0 Total Debt Service 17.8 15.8 16.4 20.3 18.6 15.5 Public Loans n.e.i. 15.9 0.0 0.0 0.0 0.0 0.0 TDS+Direct Invest. Inc. 23.7 24.3 25.5 2 7. 5 24.4 19.6 Total Public MALT Loans 279.1 304.9 37.5 36. 358 425 Average Terms of Public Debt Actual Debt outstanding on Dec. 31. 1972 EXTERNAL DEBT Disbursed Only Percent Iut. as 7. Prior Year DO&D 3.7 3 .7 4.0 3.9 4.2 4.9 World Bank 453.4 27.5 Amort. as 7. Prior Year 0040 9.1 7.0 6.9 7. 5 6.8 6.8 IDA 20.9 1.3 other Multilateral 85.5 5.2 IBRD Debt Out. & Disbursed 289.9 313.1 354.1 390.8 453.3 504.5 Governments 766.4 46.5 ' as 7, Public Debt 040 30.2 28.7 28.3 28.2 27.5 27.0 Suppliers 114.9 7.0 as 7. Public Debt Service 27.9 31.4 30.8 29.0 31.1 31.6 Financial Institutions 173.8 10.5 Bonds 14.0 0.8 IDA Debt Out. & Disbursed 19.5 19.5 19.5 19.4 20.9 22.9 Public Debts n.e.t. 20.2 1.2 as 7, Public Debt 040 2.0 1.8 1.6 1.4 1.3 1.2 Total Public MALT Debt 1649.1 100.0 as 7. Public Debt Service 0.1 0.1 0.1 0.2 0.3 0.3 RI 3 12/74  Annex I Page 4 Of 12 pages COLOMBIA: EXTERNAL PUBLIC DEBT COMMITMENTS, 1970-73 a (Millions of Dollars) Source of Financing: 1970 1971 1972 1973 / INTERNATIONAL ORGANIZATIONS 109.3 194.6 114.7 191.3 IBRD 109.3 153.1 74.1 162.2 IDB/ - La.5 40.6 29.1 GOVERNMENTS 111.9 108.8 113.9 79.3 Germany (F.R.) 14.3 6.5 4.6 5.4 U.S. 96.6 92.6 109.3 a1.4 Other 1.0 9.7 0.0 32.5 SUPPLIERS 107.3 28.9 40.5 20.9 Germany (F.R.) 36.0 6.8 0.0 1.7 Japan 0.6 0.8 13.5 0.0 Sweden 15.8 1.5 3.6 14.5 U.K. 0.0 6.1 9.1 0.0 U.S. 1.3 7.1 1.1 2.0 Others 53.6 8.1 12.9 2.7 PRIVATE BANKS 18.1 36.1 83.7 83.4 Japan - - - 25.0 U.K. 7.7 10.0 10.0 - U.S. 6.4 13.1 42.8 17.2 Others 4.0 13.0 0.9 41.2 BOND ISSUE - - - 45.0 OTHER FINANCIAL INSTITUTIONS O,9 0.0 7.0 2.6 TOTAL 347.5 368.4 359.8 422.5 / a/ Data contain estimated components and are therefore suitable only for illustrative purposes. b/ Estimated on basis of information available on July 5, 1974. j IDB commitments (Board approvals) exclude amounts repayable in Colombian Pesos. d/ Net of refinancing loans totalling US$83.5 million from private banks in the Euromarket. Source: IBRD 8/7L  ANNEX I page 5 of 12 COLOMBIA - MEMORANDUM ON RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS A. Recent Economic Developments Economic Growth 1. The Colombian economy has performed impressively in a number of important respects in the past several years. Real growth of gross domestic product accelerated from an average of 4.7 percent in 1950-67 to an average of 6.4 percent over the 1967-72 period. During the past two years, Colombia has sustained even higher rates of growth, 7.1 percent in 1972 and 7.3 percent in 1973, the highest rates of growth achieved in 25 years. Strong expansion of the industrial, agricultural, and in 1973, construction sectors, rapid- growth of non-traditional exports, and favorable coffee prices were the key factors in this achievement. Preliminary indications are that GDP growth has decelerated slightly in 1974 as a result of a slowdown in the construction boom and a weakening of coffee prices. While industry continues to be the leading growth sector, expanding by 10 percent in real terms in 1973 and accounting for about 30 percent of growth of GDP, a boom in construction generated an increase in value added by that sector of 12.6 percent. Despite rapid growth of the labor-intensive construction sector, unemployment has continued to increase in most of Colombia's major urban centers, in part as a result of accelerated rural to urban migration. While the rate of growth of agriculture (4.8 percent in 1973) was well above the historical average, most of the growth was concentrated in agricultural commodities for export. Lagging production for domestic consumption, insufficient to keep pace with domestic demand has contributed to inflationary pressures. Mining production has declined steadily for the past several years as a result of declining petroleum production. Inflation 2. Inflation has become a serious problem in Colombia and seems likely to persist for some time, despite a number of measures taken in recent months to combat it. The cost-of-living index is expected to have risen by about 25 percent in 1974 as compared to 22 percent last year, 14 percent in 1972, 12 percent in 1971, and an average of 7 percent per year between 1967 and 1970. Accelera- tion in the rate of inflation during 1973 and the first quarter of 1974 was the result of a surge in the level of demand stemming from (a) the substantial increase in the income of the export sector; (b) the large fiscal deficit in the cash operations of the,public sector; and (c) continued strong private investment. Rising cost of imports, labor and credit, combined with tight controls on imports and a decline in the output of agricultural production for domestic consumption further aggravated inflationary pressures. Measures adopted in late 1973 and early 1974 to limit the rate of expansion of aggregate demand and increase aggregate supply have begun to take hold and the rate of  ANNEX I Page 6 of 12 inflation has declined during the second and third quarters of 1974. However, increasing pressure for substantial upward wage adjustments from organized labor and the need to eliminate some subsidies and allow upward adjustment in prices of a number of items which have been controlled for the past 12 months have caused some increase in the rate of inflation during recent months. Progress in reducing the rate of inflation in 1975 will depend heavily upon the Government's success in arresting the deterioration in public finances which has taken place since 1972. Balance of Payments 3. Colombia's rapid growth in 1972-73 was sparked by strong growth of coffee and most minor exports which permitted a large accumulation of foreign exchange reserves. Coffee exports increased an estimated 34 percent to US$630 million, largely as a result of continuation of the upsurge in world coffee prices (an average of US$0.73 per pound in 1973 as compared to US$0.57 in 1972) which began in mid-1972 as Brazilian coffee production declined. Of even more significance from the point of view of the long-term growth of the Colombian economy was the continued strong performance of minor exports which increased 48 percent to US$680 million. Price rises for these goods accounted for a significant proportion of the increase, but volume exported also rose by a substantial 15 percent. Despite the impressive 40 percent increase in total export earnings which took place in 1973, Colombia continued throughout most of the year to maintain tight controls on imports. As a consequence the value of imports exceeded the 1972 level by only 22 percent, not substantially more than the increase in import prices. The increased real availability of imported goods accordingly did little to dampen domestic inflationary pressures. Despite official measures to speed up import payments and to reduce foreign exchange inflows to the Bank of the Republic arising from private borrowing abroad, official reserves increased from US$345 million at end-1972 to US$524 million at end-1973. 4. Export performance during the first seven months of 1974 was out- standing. Higher world coffee prices and a 32 percent increase in the volume shipped resulted in a 36 percent increase in coffee export registrations during this period as compared to the same period of 1973. Registrations of non-traditional exports increased 51.4 percent through July, an increase of over 30 percent in real terms. Exports of manufactured products have been a major element in the strong expansion of non-traditional exports with earnings from textiles increasing three-fold, while those from chemicals and pharmaceuti- cals, and metals and metal products, doubled. Import liberalization has led to accelerated import payments and there has been a lengthening of the lag between export registrations and exchange surrender. Thus, despite strong export performance the current account of the balance of payments has shifted from a surplus of over US$100 million during the first seven months of 1973 to a deficit of US$80 million during the same period of this year. Sharply reduced external borrowing by the Government has further lowered the inflow of foreign exchange, and reserves probably declined by about US$120 million during 1974.  ANNEX I Page 7 of 12 5. The estimated decline in foreign exchange reserves of US$120 million for 1974 should not present any problem to Colombia since an appropriate cushion of reserves, sufficient to cover about 4 months of imports, probably still existed by year end. Foreign exchange reserve management over the next eighteen months should aim at preventing further losses, since world coffee prices may remain weak for some time, and prices of several of Colombia's non-traditional agricultural exports appear to have peaked, while those of imports are expected to continue rising. The new government is aware of the possibility of some deterioration in the terms of trade and is attempting to sustain the high rate of growth of non-traditional exports by accelerating devaluation of the peso so as to compensate exporters for the differential between internal and ex- ternal inflation. Since mid-August the rate of depreciation of the peso has been substantially greater than the differential between domestic and world inflation and the Government intends to continue this policy for the fore- seeable future. Public Finances 6. Deterioration of Colombia's public finances since 1971 has made it increasingly difficult for the authorities to manage aggregate demand so as to contain inflation while maintaining a desirable pace of development. Despite an average annual real rate of growth of GDP in excess of 7 percent, National Government tax revenue has failed to show any significant increase in real terms and, as a percentage of GDP, declined from the peak of 9.4 per- cent in 1971 to an expected 7.4 percent in 1974. This weakening in domestic resource mobilization through the tax system was, in 1972 and 1973, reflected in increased Government recourse to general purpose external borrowing to cover the Government's cash deficit, and in declining real levels of public investment. In order to overcome these problems, the new Government has initiated a comprehensive structural reform of the fiscal system which includes major modification of the sales and income taxes, elimination of the wheat subsidy, reduction of fiscal incentives for non-traditional exports, and strengthening of the fiscal contribution of decentralized public enterprises. The reform has not yet been fully put into effect, but it could, if fully implemented and supplemented by an urban property tax and measures to eliminate the subsidy of gasoline consumption, produce a substantial strengthening of public finances. B. Development Problems and Policy Requirements 7. Wlile Colombia's growth, and balance of payments performance has been excellent in recent years, lagging performance in several important areas could, if permitted to continue, jeopardize the country's development effort. The key areas where policy action is required include improving the performance of the petroleum sector, strengthening public finances and  ANNEX I Page 8 of 12 investment, maintaining the appropriate balance in the flow of resources through the financial system, further improving income distribution and the employment situation, and assuring continued strong expansion of non-tradi- tional exports. Petroleum 8. Colombia is fortunate in having sufficient crude petroleum supplies to escape any immediate adverse balance of payments' effect of recent in- creases in world oil prices. However, an unrealistic pricing policy has, in recent years, encouraged excessive consumption and contributed to a decline in output. While the internal reference price paid to producers for "new" crude oil was increased to US$4 per barrel in February 1974, prices to producers for petroleum flowing from existing fields as well as prices at the refinery and consumer levels have not been changed since June 1971, and are far below prices in international markets. 9. Crude oil production has declined 20 percent since 1970, and crude exports have stopped altogether. Creation of appropriate incentives for in- creased exploitation of oil from fields already in production, and a modest dampening of domestic demand by means of long-overdue price increases, would permit Colombia to hold off crude oil imports until 1979-80. If decisive action is taken in the months ahead to encourage exploration and drilling, it is entirely possible that new oil, sufficient to meet domestic demand, could become available in 5-6 years. Failure to act in the immediate future, however, could, in the early 1980's, result in a heavy burden on Colombia's balance of payments. 10. Prices of petroleum products are controlled by the Government and the retail price of gasoline is among the lowest in the world (regular gasoline is US$0.12/gallon). Considering the country's supply and demand situation, product prices to the consumer and at the different stages of production should be increased so as to be more in line with international prices. Such a price adjustment should be done as soon as possible since low petroleum product prices have not only discouraged production of petroleum, but have diverted attention from development of the abundant coal, natural gas, and hydroelectric resources which Colombia possesses. Hydropower, coal, and natural gas currently account for only 4 percent, 12 percent, and 17 percent, respectively, of energy production and there is considerable scope for sub- stituting these alternative energy sources for petroleum. To develop them will, however, require careful planning and sizable capital outlays, as well as proper pricing to encourage an appropriate energy balance. There is a close relationship between petroleum pricing policy and the fiscal situation since price increases of petroleum products would increase the Central Govern- ment's fiscal resources through further improved finances of the State-owned oil company, ECOPETROL, and through increased gasoline tax collections. This would help to overcome the revenue shortfalls which hamper the investment program and which limit the government's ability to reduce present inflationary pressures.  ANNEX I Page 9 of 12 Public Savings and Investment 11. Notwithstanding the booming production and trade conditions of the economy over the past few years, Colombia's public finance performance has been disappointing. Largely because of poor tax collections in 1972 and 1973 (especially for the income tax) the real current surplus in both years was below that in 1971. The real decline in income tax collections in 1973 oc- curred despite a 7.3 percent increase in real GDP and reveals a serious weakness in income tax administration. Real public investment spending in 1973, covered in part by severe compression of current outlays and by US$80 million in Eurocurrency borrowing, fell sharply despite the continued pressing need for expanded social and economic infrastructure. Preliminary data for 1973 indicate that the decline in public investment has not been offset by an increase in private investment and that the share of total investment in GDP has fallen from an average 21.4 percent in the 1969-72 period to 19.3 percent in 1973. Without substantial strengthening of public finances, public investment could continue to decline in real terms and the expansion of the private sector could be constrained by lack of complementary social and economic infrastructure. 12. Reliable data are not yet available concerning Colombia's overall public sector accounts for 1971-74, but enough is known to make it clear that the decline in National Government investment during this period was not offset by spending in the rest of the public sector. The new Government is aware of the need for increased investment by decentralized public sector agencies and is expected to move rapidly in the coming months to assure an appropriate increase in the internally generated resources of these agencies. Deficits of public enterprises in the electric power, water and sewerage, and telecommunications sectors, with the exception of Empresa Nacional de Telecomunicaciones (TELECOM),have risen in recent years as a result of lagging tariffs. Three decentralized enterprises, Empresa Colombiana de Petroleos (ECOPETROL), TELECOM and Empresa Colombiana de Puertos (COLPUERTOS), have in the past few years accounted for 90 percent of the total current surplus of the public enterprises. Dissaving of public enterprises was concentrated in four enterprises; IDEMA (the-Government's agricultural marketing agency), the Railways (CNR), Instituto Colombiano Agropecuario (ICA), and Instituto Colombiano de la Reforma Agraria (INCORA). In the rest of the public sector the tendency has been for savings to decline also since 1969. As a result total public savings fell from 7.0 percent of GDP in 1969 to 5.0 percent in 1973. 13. The recently completed fiscal reform contains an impressive array of measures aimed at (a) increasing tax revenue; (b) improving the progressivity of the tax system by reducing the tax burden on the lowest income groups, increas- ing taxes on the highest income groups, and by closing numerous loopholes which have permitted high income groups to avoid paying taxes; (c) increasing the elasticity of the tax system; and (d) improving tax administration. While it will be several months before the revenue implications of the fiscal reform become completely clear, preliminary estimates indicate that new tax revenue of about Col$ 2.5 billion will be generated in 1975. In addition, elimination of the wheat subsidy has reduced the need for transfers to IDEMA by an esti- mated Col$ 1.2 billion in 1975. The outlook for 1975 is for a sharply  ANNEX I Page 10 of 12 reduced National Government deficit as the recent revenue generating measures begin to take hold. The Central Government deficit should be reduced from about 2% of GDP in 1971-72 to 0.2% in 1975; but it must be noted that this is likely to be achieved only with the help of a further reduction in real terms in investment expenditures by the National Government. Reform of the Financial System 14. In August 1974, the new administration introduced a series of execu- tive decrees and resolutions aimed at domestic monetary reform. These measures involve restructuring of interest rates, including establishment of a maximum ceiling on the rate of monetary correction, a simplification of Colombia's complex reserve requirement system, the elimination of numerous portfolio requirements, the elimination of several rediscount facilities, and the adoption of more stringent controls over existing facilities. in broad terms, these measures should produce a more balanced flow of resources through Colombia's financial system and provide the authorities with greater control over the functioning of the monetary system. Income Distribution and Employment 15. Despite the paucity of suitable statistics it seems clear that t:!2 existing distribution of personal income is markedly unequal. The poorest fifth of the population appears to be receiving 3 percent of total income, while the richest fifth gets about 60 percent. Not much can be said about changes over time, but since rural incomes seem to be more highly skewed than urban incomes, the increasing demographic importance of the towns and cities would seem to present a prima facie case for presuming a modest improvemenT- in the overall national income distribution. This conclusion is to some extent supported by national income accounts data which indicate that the share of wage and salary income of GDP increased from 36 percent in 1950 to 40 percent ii 1970. Few Colombians would accept past rates of improvement as adequate, however, and a great deal remains to be done in order to s-r- the benefits of economic growth more widely. Rural land redistribution, more effective taxation, higher public spending for education and health services, and a vigorous effort to boost overall production and employment growth are all needed, together with continuing efforts to prevent abuses arising from monopoly power. Colombia's authorities have accelerated their efforts to do all of these things in recent years. 16. The employment goal is perhaps the most important of all the major national objectives in the economic sPhere. Increasing and spreading employ- ment opportunities is the single most effective way to raise the level and improve the distribution of national income. Data on unemployment are sparse, but the available figures for 1972 point to an improvement in Bogota accom- panied by deterioration in Medellin, Barranquilla, and other urban centers. If rough weights by city are applied, a slight overall deterioration seems to have occurred. Since 1972 rural to urban migration appears to have increased and as a result unemployment in Colombia's najor urban centers has increased. The one exception to this has been in Cali where accelerated rural to urban migration has not been as pronounced because of its rich agri- cultural hinterland and decentralized agro-industries located in a number of  ANNEX I Page 11 of 12 smaller cities throughout the Departments of Valle and Cauca. The challenge facing Colombia's authorities is to encourage and shape growth of employment through the use of excise taxes, depreciation allowances, import tariffs and general monetary/fiscal policies. Special incentives should be provided to industries which are labour-intensive and to firms willing to undertake multiple shifting as a means of increasing employment. External Borrowing 17. Available data indicate that Colombia's public external debt out- standing at the end of 1973 came to US$2.6 billion, of which US$1.9 billion had been disbursed. During 1973 contracts were signed to borrow US$421 million (of which US$305 million were project loans). The levels and composi- tion of 1973'borrowing closely approximated the amounts set forth'in the 1973 project list (as described in the May 1973 IBRD Economic Report net of expected slippage and droppage). An estimated disbursement of US$340 million on public external borrowing occurred in 19-73, as compared to US$355 million in 1972 and US$223 muillion in 1971. While disbursements on project loans increased 20 percent in 1973, a slowdown of such disbursements has taken place since late 1973, reflecting a scarcity of local counterpart funds stemming from the deteriorating fiscal performance. However, the fiscal actions now being taken by the Colombian Government, and those under consideration may to some extent ameliorate this situation, and it is hoped that by the time of the 1975 Consultative Group Meeting sufficient action will have been taken to enable the Group to proceed with consideration of a full assistance program for 1975-76. C. The Growth Perspective and Capital Requirements 18. Recent IBRD Economic Reports on Colombia have concluded that the economy can sustain a 7 percent annual rate of growth over the long-term without excessive foreign borrowing, provided that exports can be increased at a reasonable rate. During 1972-73 this growth target was attained, and it is likely that in 1974 real growth will again reach about 7 percent. These high rates of growth were accompanied by a strong export and balance-of-payments performance, which made possible a large build-up of foreign exchange re- serves, and a decline in the debt service ratio. The long-term projection made last year is being revised, to take into account recent developments and new information on the outlook for commodity prices and world inflation. 19. For the time being it seems safe to assume that the volume of coffee exports will increase 1.5 percent annually from 1975 through the remainder of C 'r an decade 'and t1iht 6kxprt earnings ftoMt coffee hi current prices will increase an average 7.6 percent annually, until 1979. Growth in the volume of other exports whi'ch include a wide ranRe of manufactured and agricultural exports, can be assumed on that basis to decline from 20 percent in 1975 to 10 percent for 1979. Total exports would increase in current prices at an average 14.3  ANNEX I Page 12 of 12 per year from 1974 on. In real terms the growth rate of total exports may thus be between 7% and 7.5%. Imports may be assumed to be about 15 percent of GDP throughout the projection period provided that Colombia will not require sub- stantial imports of crude oil. Under these assumptions Colombia will require public external assistance disbursements totalling about US$3.5 billion during the five-year period 1975-79. This level of external assistance implies new commitments averaging US$700 million annually. These public external assistance requirements imply only modest increases in real terms over recent levels. 20. In the past the strqucture of Colombia's external debt has been strongly influenced by the receipt of large amounts of development assistance from inter- national development agencies. This, together with the successful export per- formance, explains the low and relatively stable debt service ratio which Colombia has experienced over the past decade. As a result of continuing rapid growth of non-traditional exports and favorable coffee prices, the burden of debt service, on the balance of payments declined moderately in 1973. The debt service ratio.. (principal and interest payments as a percentage of exports of goods and nonfactor services) amounted to a modest 12 percent in 1973 compared to 12.9 percent in 1972 and 14.3 percent in 1971. The debt service ratio is now'lower than throughout most of the 1960s. Despite the expected shift away from external assistance from international development agencies and the large increase in total external borrowing (in current prices) which is foreseen at least until the end of the current decade, the debt service ratio would remain well manageable during that period. In these circumstances, and assuming that Colombia is able to sustain its export expansion and avoid external borrowing on unfavorable terms to cover fiscal shortfalls, the country should have little difficulty in obtaining the required external capital and in servicing its external debt obligations. However, some of this capital will have to finance local costs, if the country is to cover its justifiable resource gap, since the foreign exchange content of the projectizable portion of the investment program is likely to be comparatively small.  ANNEX II Page 1 of 8 pages THE STATUS OF BANK GROUP OPERATIONS IN COLOMBIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1974) US$ million Loan Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed fully disbursed loans and credits 502.3 19.5 -- 502 1967 Instituto Colombiano de ia Reforma Agraria Irrigation 9.0 1.8 536 1968 Empresa de Acueducto y Alcantarillado de Bogota Water Supply 14.0 0.4 575 1963 Interconexion Electrica,S.A, Power 18.0 2.8 624 1969 Colombia Agriculture 17,0 3.2 625 1969 Banco de la Republica Industry 25.0 0.1 651 1969 Colombia Agriqulture 18.3 4.5 679 1970 Colombia Education 6.5 1.9 680 1970 Colombia Roads 32.0 6,3 681 1970 Interconexion Electrica,S.A. Power 52.3 12.6 682 1970 Empresas Municipales de Gali Water Supply 18.5 10.8 738 1971 Empresas Municipales de Palmira Water Supply 2.0 1.2 739 1971 Colombia Agriculture 8.1 3.5 740 1971 Empresa Nacional de Telecomunicaciones Communications 15.0 5.3 741 1971 Empressa de Acueducto y Alcantarillado de Bogota Water Supply 88.0 73,2 742 1971 Banco de la Republica Industry 40.0 4.2 842 1972 Colombia Industry 30.0 4.9 849 1972 Instituto Colombiano de la Reforma Agraria Irrigation 5.0 4,8 860 1972 Instituto de Fomento Municipal Water Supply 9.1 8D3 874 1973 Empresas Publicas de Medellin Power 56,0 49.9 903 1973 Banco de la Republica Industry 60o0 54.7 920 1973 Colombia Education 21.2 21.1 926 1973 Ferrocarriles Nacionales Railways 25,0 23.5 971 1974 Colombia Pre-Investments Studies 8.0 8.0 TOTAL 1,08503 19.5 307.0 Cf which has been repaid 222.7 0,6 Total now outstanding 857o6 18,9 Amount sold 20.5 Of which has been repaid 17.5 3.0 Total now held by Bank and IDA 854.6 18.9 TOTAL UNDIoBURSED 307.0 307.0  ANNEX II Page 2 of 8 pages B. STATEMENT OF IFC INVESTMENTS (As of September 30, 1974) Type of Amount in US$ million Year Obligor Business Loan Equity Total 1959 Laminas del Caribe, S.A. Fiber-board 0.50 - 0.50 1960-1965 Industrias Alimenticias Noel, S.A. Food products 1.98 0.08 2.06 1961 Embases Colombianos, S.A. Metal cars 0.70 - 0.70 1961-1968 Morfeo-Productos para el Hogar, S.A. Home furniture 0.08 0.09 0.17 1961 Electromanufacturas, S.A. Electrical equipment 0.50 - 0.50 1962 Corporacion Financiera Development Colombiana financing - 2.02 2.02 1962-1963 Corporacion Financiera Development Nacional financing - 2.04 2.04 1963-1967 Coinpania Colombiana de Tejidos, S.A. Textiles 1.86 0.27 2.13 1964-1970 Corporacion Financiera Development de Caldas financing - 0.81 0.81 1964-1963 Forjas de Colombia, S.A. Steel forging - 1.27 1.27 1966 Almacenes Generales de Deposito Santa Fe, S.A. Warehousing 1.00 - 1.00 1966 Industria Ganadera Colombiana, S.A. Livestock 1.00 0.58 1.58 1967-1974 ZNKA de Colombia, S.A. Textiles 5.00 2.70 7.70 1969 Compania de Desarrollo de Hoteles y 'l'urismo, Ltda. Hoturismo Tourism - 0.01 0.01 1969 Corporacion Financiera del Development ilorte financing - 0.45 0. 1969 Corporacion Financeera del Development Valle financing - 0.43 0.43 1970 Promotora de Hoteles de 'iurismo MIedellin, S.A. Tourism 0.23 0.11 0.34 1970 Pro-Hoteles, S.A. Tourism 0.o0 0.22 1.02 1973 Coruoracion Colombiana de Ahor'ro y Vivienda Housing - 0.32 0.32 197L Cementos Hoyaca Cement 1.50 - 1.50 Total gross commitmernts 15.15 11.40 26.55 Less cancellations, termtinations, repayments and sales 8.87 4. 9 13.56 Total cormmitments now held by lFC 6.28 6.71 12.99 To-tal unldisbursed 3.97 .67 k4.64  ANNEX II Page 3 of 8 pages C. PROJECTS IN EXECUTION 1/ 1. Summarized below is the current status of all loans signed but not fully disbursed: Ln No. 502 Irrigation (Atlantico I); US$9 million, June 1967. Closing date: original - December 31, 1973; current - December 31, 1974. 2. While all physical works should be completed by the current clos- ing date, final payments to contractors will not occur until March or April 1975. A further extension of closing date to June 30, 1975, is therefore being considered. The delays in project execution have been occasioned by poor selection of areas suitable for irrigation, technical problems in the construction of irrigation and drainage works, and non-compliance by con- tractors with established schedules. Agricultural development has also been slow, due to poor project management and lack of adequate supporting services to the farmer. However, INCORA has now appointed a very capable Project Manager who has brought with him a competent agricultural team who, it is believed, have the potential to develop the project satisfactorily under its less than ideal circumstances. Citrus has now been abandoned as a project crop. Rice is now proposed as a temporary irrigated crop in order to allow the leaching of salts from the soil profile. The intensive cropping pattern needed to justify the investment in irrigation facilities will be several years in development. Ln No. 536 Water Supply (Bogota I); US$14 million, June 1968. Closing date: original - June 1972; current - December 31, 1975. 3. As of September 30, 1974, US$13.6 million or 97 percent of this loan has been disbursed. Notwithstanding that the Project is essentially completed, the Closing Date was extended because of delays in procurement and to permit final payments to suppliers. Ln No. 575 Electric Power (Interconnection): US$18 million, December 1968. Closing date: December 31, 1974. 4. The original project was completed and commercially operational in 1971. The Bank agreed that an undisbursed balance could be used to fi- nance a 220 kv transmission line, Guatape - Barrancabermeja, which would 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 4 of 8 pages be completed in the first quarter of 1975, one year behind schedule. The cost is estimated at US$7.2 million of which about US$4.1 million represents the foreign currency component. The Bank is seriously concerned about ISA's financial situation which is being discussed with the borrower and the Govern- ment. Ln No. 624 Agricultural Credit II, US$17 million, June 1969 Closing date: original - December 31, 1973; current - June 30, 1975. 5. After disappointing performance in the first three years, changes in project management and organization and an increase in technical personnel provided the basis in February 1973 for the Bank's agreeement to enlarge the project area and include lending to small farmers under the project. As a result, the project is now proceeding in a satisfactory manner. All project funds are expected to be committed by end 1974. Ln No. 625 Development Finance Companies III: US$25 million, June 1969. Closing date: June 30, 1974 6. The loan is fully committed to sub-projects. The Bank will ascertain whether the Borrower wishes the Closing Date postponed or the small undisbursec balance cancelled. Ln No. 651 Livestock II; US$18.3 million, December 1969 Closing date: July 31, 1975 7. After a disappointing performance during the first three years after signing, 1970-72, CAJA's project administration was reorganized and the project area was extended to cover the entire country. The project has, since early 1973, progressed satisfactorily. Demand for on-farm investments is high an disbursements have been accelerating. All loan funds are expected to be cuIii- mitted by end 1974 and disbursements might be completed befor'e the original closing date of July 31, 1975. Ln No. 679 Education II; US$6.5 million, June 1970. Closing date: original - June 30, 1973; current - December 31, 1974. 8. Major civil works have been completed and all nine project schools have been in operation since January 1973. However, operation of schools is below the expected level because of inadequate organization and shortage of local funds to meet current expenditures. Procurement of equipment and furniture has been delayed. All contracts will be signed before the extended closing date, but disbursements should continue later on. A further post- ponement of the closing date is therefore planned. Ln No. 680 Hlighway VI; US$32 million, June 1970 Closing date: original - November 30, 1974; current - November 30, 1976.  ANNEX II Page 5 of 8 pages 9. The largest component of the project, the paving program, has ex- perienced considerable cost increases and is still experiencing delays. The Ministry of Public Works has taken many steps (approved by the Bank) which have reduced, although not avoided, delays and contractor bankruptcies. Due to cost increases, the Bank's participation in the paving program has been reduced to 15 percent. The status of the other components of the project is more satisfactory. Ln No. 681 Chivor Hidroelectric Power; US$52.8 million, June 1970. Closing date: June 30, 1977. 10. The Chivor Hydroelectric Project is expected to be put into ser- vice in June 1975, six months behind schedule. The project's foreign and total costs are expected to be 35 percent higher than originally estimated. Because the shareholders have not made their financial contribution to ISA when due, ISA has not been able to pay its contractors on time. Another problem facing ISA is the present ownership of its capital stock, which permits three of the four shareholders holding individually more than 25 percent of the shares to block any resolution requiring a 75 percent majority. The Bank is seriously concerned abbut ISA's financial situation. The Government has now formulated a plan of near term action which is expected to shortly restore ISA's financial viability. Ln No. 682 Cali Water Supply and Sewerage; US$18.5 million, June 1970. Closing date: original - June 30, 1974; current - December 31, 1975. 11. As of September 30, 1974, about 42 percent of the loan amount was disbursed. Disbursements were delayed due to a late project start, but the entire project is under execution, and it is expected that construction activities will be finished by June 1975. Ln No. 738 Palmira Water Supply and Sewerage; US$2 million, May 1971. Closing date: March 1, 1975. 12. As of September 30, 1974, about 40 percent of the loan amount was disbursed. Disbursements were delayed due to initial management and fiscal problems. A financial crisis in early 1973 has now been resolved through higher tariffs and tight budget control. Construction is expected to be terminated in late 1975. Ln No. 739 Land Settlement Caqueta I; US$8.1 million, May 1971. Closing date: April 30, 1975. 13. Because of considerable price increases and unexpectedly difficult physical problems, project objectives were reduced to about 70 percent of appraisal targets in August 1973, halfway through the project period. Since then, the livestock credit program has picked up speed so that the revised goal for this component should be achieved ahead of time. On the other hand, the road construction program has fallen behind schedule so far that not  ANNEX II Page 6 of 8 pages enough time remains to catch up, even with an accelerated work pace. Despite these problems, the project is making a substantial contribution to the suc- cessful colonization of the Caqueta area. A second-phase project was ap- praised in February 1974. Ln No. 740 Telecommunications II; US$15 million, May 1971. Closing date: June 30, 1975. 14. Due to initial delays in the procurement of project equipment, a slippage of about one year in the completion date of some works on the project is now anticipated. Ln No. 741 Water Supply (Bogota II); US$88 million, May 1971. Closing date: June 30, 1978. 15. Disbursements up to September 30, 1974 amounted to 17 percent of this loan, only 42 percent of the appraisal estimate. Slow progress in the construction of the vital Palacio - Rio Blanco Tunnel is the main reason for the project's delay; the orevious foreign contractor has been replaced by another firm. EAAB's financial situation was weak, but important mea- sures to improve it have been taken by the Empresa. Ln No. 742 Development Finance Companies IV: US$40 million, May 1971. Closing date: December 31, 1974. 16. This loan is fully committed. Disbursements are ahead of schedule. The Borrowers will soon request postponement of the Closing Date. Ln No. 842 Development Program and Export Expansion Project; US$ 60 million, June 1972. Closing date: December 31, 1974. 17. The US$10 million DFC portion of this program loan is now almost fully committed. The last subproject which will utilize the unallocated balance of the loan (US$943,000) was oresented to the Bak before the final date for sub- project submission September 30, 1974, and is now under review. Disburse- ments are proceeding satisfactorily and amounted to US$5.2 million as of October 31, 1974. However, itwiUl be necessary to extend the present clos- ing date of December 31, 1974 to allow commitments to be fully disbursed. Ln No. 849 Irrigation (Atlantico II), US$5 million, June 1972. Closing date: March 31, 1978. 18. Construction of drainage facilities is lagging far behind schedule primarily due to the poor performance of the contractor having the major re- sponsibility for the drain construction financed under this loan. Steps are being taken to either force compliance with the contract or replace the con- tractor with another. With the high world prices of livestock products, it appears that more of the project area will be devoted to combination cattle feeding and milk production than was previously envisaged. The returns per ha from such enterprises will not differ too much from the field crops originally contemplated.  ANNEX II Page 7 of 8 pages La No. 860 Medium-Size Cities Water Supply and Sewerage Project; US$9.1 million, October 1972. Closing date: September 30, 1976. 19. As of September 30, 1974, about 6 percent of the loan amount was disbursed. Disbursements were delayed due to initial serious management pro- blems. Lower demand than estimated has prompted investment reprogramming and it is expected that-construction activities will not be finished until 1979.- Ln No. 874 Guatape II Hydroelectric Power Project; US$56 million, January 1973. Closing date: December 31, 1978. 20. The progress of the work is generally satisfactory except for delays in the resettlement of El Penol and Guatape villages, which will make-it' difA ficult to start filling the Santa Rita reservoir before mid-1977, two years ;- behind schedule. If filling of the reservoir does not begin in mid-1976, an energy deficit in the interconnected system of at least 10 percent fromi 1978 to 1981 is expected. The revised project cost estimate (US$119.2 mil- lion) is 21.3 percent above appraisal estimates, mainly due to higher costs of the works at El Penol and Guatape. EPM has failed to achieve the 9 per- cent rate of return required under the Loan Agreement and it has fallen behind in its payments to ISA, thus contributing to the problems experienced by the latter (see Loan 681). The Bank is seriously concerned about EPM's financial situation which is expected to be adequately improved soon by a substantial increase in EPM's electricity tariffs. Ln No. 903 Development Finance Companies V; US$60 million, May 1973. Closing date: June 30, 1977. 21. Commitments of the loan were interrupted for several months this year pending agreement on a revised interest rate. Commitments are proceeding well, and it is expected that the balance of US$27.2 million unallocated at October 31, 1974, will be fully committed early in 1975. Currently, loan applications pending approval exceed the unallocated funds available. Disburse- ments are still behind schedule, but in view of the rapid rate of commitment, they should be completed by the closing date, June 30, 1977. Ln No. 920 Education III; US$21.2 million, July 1973. Closing date: June 30, 1977. 22. This loan became effective on January 9, 1974. Shortage of counter- part funds delayed to September 1974 the opening of construction bids for the first 22 project institutions. Construction works are expected to proceed smoothly by April 1975. Procurement of teaching equipment has been progressing satisfactorily and 60 percent of the purchase orders have been placed. Im- plementation of the technical teacher training program is expected to commence within the next six months. Various studies for the sector analysis are also expected to begin within the next four months.  ANNEX II Page 8 of 8 pages Ln No. 926 Sixth Railway Project; US$25 million, August 1973. Closing date: June 30, 1976. 23. Implementation of CNR's Investment Plan is progressing satisfac- torily; track rehabilitation and maintenance, together with workshop produc- tion, continue to improve. Project objectives probably will have to be reduced by 35 percent because of the large increase in the price of materials. CNR's financial picture has continued to improve because of increased traffic and tariffs. However, the Government's recent emergency program, which intends to halt imports of wheat, will have a serious adverse impact on that traffic between Santa Marta and Bogota. The Government's performance under the fi- nancial provisions of the Guarantee Agreement was satisfactory to the end'of J=e but subsequently has been inadequate. The matter is currently under review. Ln No. 971 Preinvestment Studies Project; US$25 million, March 1974. Closing date: December 31, 1978. 24. This loan became effective on June 27, 1974.  ANNEX III Page 1 of 3 COLOMBIA SECOND MULTI-CITY WATER SUPPLY AND SEWERAGE PROJECT LOAN AND PROJECT SUMMARY Borrower: Instituto Nacional de Fomento Municipal (INSFOPAL) Guarantor: The Republic of Colombia Amount: Theequivalent in various currencies of US$27 million Terms: Repayment in 25 years, including a grace period of five years, with interest at 8%. Rlni n: Substantially the same as under Bank loan. Project Description: The project will finance the construction of water distribution and sewage collection facilities in eight departmental capital cities and of additional sources of water for 30 small towns. It will also finance the purchase and installation of water meters in these and various other systems operated by INSFOPAL, as well as management and technical services, and staff training. Estimated Cost: The total cost of the project is US$52.9 million equivalent, including US$6.58 million equivalent in interest during construction on both loans. Of the project cost proper of US$46.32 million, $16.72 million is foreign cost and US$29.60 million local cost. The break-down on subprojects and categories is as follows: US$ Million Barranquilla 10.32 Cartagena 5.80 Cucuta 1.53 Ibague 1.70 Pasto 0.93 Popayan o.86 Valledupar 0.57 Villavicencio 0.57 INSFOPAL's Program 5.15 Subtotal 27.43 Engineering and administration 2.60 Physical Contingencies 4.15 Price Contingencies 12.14 Interest during construction 6.58 TOTAL 52.90  ANNEX III Page 2 of 3 Financing Plan: The financing plan includes US$11.24 mil-lion of works not related to the project to be carried out by the Empresas and acuas during the construction period (1975-79). It also includes an increase in the working capital of the empresas of US$3.40 million. This brings the total need for funds to US$67.54 million. Of this amount, US$27 million will be provided by the proposed Bank loan, US$16.54 million would be provided as a Government grant for onlending by INSFOPAL, US$19.02 million from the net internal cash generation of the empresas, and US$4.98 million from an industrial complex in Cartagena. Estimated Disbursements: Fiscal Estimated Cumulative Year Disbursement Disbursement 1976 3.9 3.9 1977 7.5 U-4* 1978 9.2 20.6 1979 6.h 27.0 Procurement Arranpements: Except for civil works under US$100,000, international competitive bidding procedures will be followed in placing orders for all goods and civil works financed under the loan. For bid evaluation purposes, a 15% margin of preference (customs duties are substantially higher) would be allowed for equipment manu- factured in Colombia. Consultants: The loan would provide for financing of US$1.69 million for the costs of consultant services. Included in this amount is about US$110,000 expected to be used for continuing consultant services by the Pan-American Health Organization to INSFOPAL. Rate of Return: The internal financial rate of return on the proposed investments in each city is estimated as follows: Barranquilla 10 Cartagena 11 Cucuta 15 Ibague 12 Pasto 8 Pbpayan 8 Valledupar 10 Villavicencio 12  ANNEX III Page 3 of 3 Appraisal Report: Report No. 464a-CO dated December 22, 1974