Colombia - Urban Development Project

RETURN TO Document of REPORTS D 5' SK The World Bank ONITHI N FOR OFFICIAL USE ONLY Report No. P-2158-Co REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR AN URBAN DEVELOPMENT PROJECT April 14, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Average Calendar 1977 March 31, 1978 Currency Unit = Peso - Col$ Col $ US$1 = Col$36.985 38.42 Col$ = US$0.027 0.02603 ABBREVIATIONS AND ACRONYMS BP = Banco Popular CDV - Neighborhood Development Center CFP = Corporacion Financiera Popular DNP Departamento Nacional de Planeacion ICBF = Instituto Colombiano de Bienestar Familiar ICCE = Instituto Colombiano de Construcciones Escolares ICT = Instituto de Credito Territorial INSFOPAL Instituto Nacional de Fomento Municipal MAC = Basic Module of Health Care PAN = National Nutrition Program SENA = Servicio Nacional de Aprendizaje SIP = Secretaria de Integraci6n Popular FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY Page 1 of 2 COLOMBIA URBAN DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Colombia Amount: US$24.8 million equivalent Terms: Repayable in 17 years, including 4 years of grace, with interest at 7.5% per annum. Terms of Loan Proceeds Transfer: US$10.9, US$5.0, and US$2 million equivalent of loan proceeds would be transferred to Instituto de Credito Territorial (ICT), Instituto Nacional de Fomento Municipal (INSFOPAL), and Corporacion Financiera Popular (CFP), respectively, as equity contributions. Project Description: The project would provide comprehensive assistance in several mutually supporting fields to about 550,000 people, mostly among the poorest 30% of the population, in 27 zones in 23 selected towns, in order to improve their living standards and productivity. The assist- ance would include construction of community develop- ment centers, extensions of primary education to about 95% of the eligible population, health and nutrition services, promotion of community enterprises and credit, regularization of land tenure, home improvement, sites and services, and water supply and sewerage. Achievement of the project's benefit will depend upon the coordination of the agencies charged with carrying out the project. The coordina- tion mechanisms devised at local and national levels, the Government's strong commitment to social programs to assist the poor and the monitoring system proposed in the project should ensure that coordination will indeed be effective. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page 2 of 2 Estimated Costs: Local Foreign Total ----(US$ Million)---- Social Services Community Development Centers 3.6 1.2 4.8 Education 1.9 0.4 2.3 Health 0.3 0.1 0.4 Child and Family Care 0.6 0.1 0.7 6.4 1.8 8.2 Employment and Productive Credit Vocational Training 1.4 0.7 2.1 Small Enterprises Credit 3.3 0.8 4.1 Technical Assistance 0.1 - 0.1 4.8 1.5 6.3 Physical Improvements Water Supply and Sewerage 5.1 1.7 6.8 Land Tenure Regularization 0.9 0.3 1.2 Home Improvement 5.9 2.0 7.9 Sites and Services 3.9 1.3 6.8 15.8 5.3 21.1 Project Management and Evaluation 3.0 0.5 3.5 Engineering and Administration 0.7 0.4 1.1 Base Costs 30.7 9.5 ':0.2 Physical Contingencies 4.0 1.2 5.2 Price Contingencies 14.8 3.8 16.6 Total Project Cost 47.5 14.5 62.0 Financing Plan: Internal Resources of Participating Entities Instituto de Credito Territorial 12.6 - 12.6 Instituto Colombiano de Bienestar Familiar 1.1 - 1.1 Servicio Nacional de Aprendizaje 2.0 - 2.0 Government 19.5 - 19.5 Banco Popular 2.0 - 2.0 Proposed IBRD Loan 10.3 14.5 24.8 TOTAL 47.5 14.5 62.0 Estimated Disbursements: Bank FY 1979 1980 1981 1982 ----------(US$ Million------ Annual 7.0 6.5 6.2 5.1 Cumulative 7.0 13.5 19.7 24.8 Appraisal Report: Report No. 1681-CO, dated April 10, 1978  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR AN URBAN DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Colombia for the equivalent of US$24.8 million to help finance an urban development project. The loan would have a term of 17 years, including 4 years of grace, with interest at 7.5% per annum. US$10.9 US$5, and US$2 million equivalent of loan proceeds would be transferred to Instituto de Credito Territorial (ICT), Instituto Nacional de Fomento Municipal (INSFOPAL), and Corporacion Financiera Popular (CFP), respectively, in pesos, as equity contributions, for physical improvements and productive employment generation. PART I: THE ECONOMY 1/ 2. The latest economic report on Colombia (1548-CO) was distributed to the Executive Directors in May 1977. It assesses current developments and provides a medium-term perspective of the Colombian economy. Country data sheets are provided in Annex 1. Background 3. During the past two decades substantial structural transformation has taken place in the Colombian economy. The country has made impressive progress in the transition from a predominantly rural and agricultural economy made up of largely self-contained regions to a more integrated urban industrial economy oriented increasingly toward international trade. This broadening of the country's productive base has been accompanied by rapid growth of nontraditional exports and development of a modern sector which relies to a considerable extent on imported inputs. From 1967 to 1974 GDP rose by an average of 6.5% per annum in real terms, well above the historical average of less than 5% (1950-67). Accelerated economic growth coupled with a decline in population growth brought about a rapid increase in per capita incomes. Increased investment and relaxation of the foreign exchange con- straint were the major factors responsible for this acceleration in growth. Merchandise exports expanded more than four-fold during this period, and, most significantly, nontraditional exports became an increasingly important source of foreign exchange earnings, in large part compensating for the slow 1/ Substantially unchanged from President's Report, Second Cali Water Supply and Sewerage Project (Report No. P-2169-CO).  -2- growth of receipts from coffee exports. Much of this increase in non- traditional exports was the result of both product and market diversifica- tion attributable to the Government's export promotion program. Substantial medium- and long-term capital inflows to the public and private sectors for development projects helped sustain investment levels and enabled Colombia to maintain the favorable structure of its external debt. However, despite the substantial progress made during the past two decades, Colombia still has a long way to go on the road toward modernization; it still is essentially an underdeveloped country with a limited modern sector super- imposed on a broad, traditional and poor base. 4. When the present Government took office in August 1974, the country was faced with a generally deteriorating economic situation--weakening balance of payments, loss of self-sufficiency in petroleum production, accelerating inflation, deterioration of the public finances, and reduced public invest- ment. GDP growth showed signs of slowing and unemployment was increasing, especially in the urban areas, reaching a peak of 13% in 1974. As a con- sequence, the new administration moved rapidly to introduce an economic stabilization program along with a set of reforms aimed at restoring the basis for long-term economic growth. In line with these goals, it initiated basic reforms of the fiscal, monetary and price systems. 5. To help strengthen the public finances, the new Government undertook a comprehensive tax reform designed to achieve a substantial improvement in the progressivity and elasticity of the tax system. Steps were also taken to correct major distortions which existed in the price system. Price controls on a number of important agricultural products were removed, thereby providing greater stimulus for increasing farm production. Far-reaching modifications in petroleum pricing policy aimed at regaining self-sufficiency in production of crude petroleum by improving incentives for exploration and exploitation were introduced. Concurrently, measures were taken to reduce the subsidy on local consumption of petroleum products, with the dollar equivalent price of gasoline being raised in successive steps by 150% between August 1975 to January 1977. 6. Economic growth slowed in 1975 and 1976, with real GDP increasing by less than 5% in both years. This was the result of the stablilization measures adopted at the end of 1974, the effects of the world recession, reduced private investment, and, in 1976, a poor harvest stemming from adverse weather conditions. The stabilization program succeeded in reducing inflation from 27% in 1974 to 18% in 1975, but the expansionary impact of rising inter- national reserves caused by higher coffee prices and shortages of basic food items produced an acceleration of inflation to 26% in 1976. Private invest- ment declined in real terms during this period as a consequence of attempts to stablize the economy through tighter fiscal and monetary measures. Public sector revenues and savings were strengthened as a result of the tax reform and of increased revenue from coffee export taxes. The balance of payments improved substantially in 1976, mainly as a result of an increasing trade surplus caused by higher world coffee prices. Consequently Colombia's net international reserves rose by nearly threefold, from US$437 million in 1974 to US$1,166 million in 1976.  -3- Recent Economic Performance 7. Growth and employment picked up significantly in 1977, largely as a result of increased internal demand generated by the income effects of exceptionally high export receipts from coffee. GDP is estimated to have increased by 5.4%. This higher level of growth was distributed evenly over all sectors of the economy except non-coffee agriculture which was affected by the continuation of the severe drought which began in the second half of 1976. High world coffee prices during 1977 produced a record trade surplus and the balance of payments registered an overall surplus for the year of US$686 million. By year end, Colombia's net international reserves stood at US$1,852 million, equivalent to seven months' imports, the highest level in the country's history. Increased export receipts from coffee contributed to a further strengthening of public finances over that which had occurred in 1975-76. Increased receipts from taxes on coffee exports caused a substantial increase in the current surplus of the Central Government, more than off- setting unexpected slower growth in some of the country's other major taxes. 8. Expansion of coffee earnings combined with the shortages of basic food items led to an unprecedented acceleration of inflation during the first half of 1977. For the twelve month period ending in June 1977 infla- tion reached 45%. In an attempt to reduce inflationary pressure the Govern- ment introduced a number of fiscal and monetary measures aimed at curbing growth of coffee producers disposable income, at further strengthening public finances and at slowing the growth of the monetary aggregates. Legal reserve requirements were increased, limits were placed on external borrowing, and Central Bank rediscounts were reduced. The coffee retention tax rate was doubled from 23% to 46%, and the system of delayed payments to coffee pro- ducers was used to further limit growth of coffee producers' disposable in- come. In order to increase aggregate supply and stem the rapid accumulation of foreign exchange reserves, import duties were reduced and the import licensing system was liberalized. In an effort to curb upward pressure on prices, the authorities temporarily discontinued their policy of periodic adjustments in the foreign exchange rate and in prices of petroleum products. The last two measures were only a temporary expedient to break the infla- tionary spiral. From July 1977, the Government has resumed periodic ex- change rate adjustments and in January 1978 increased the price of gasoline by 20%. The Government intends to continue to pursue policies that maintain Colombia's international competitiveness and that help regain petroleum self-sufficiency. 9. Another conflict between short-term and long-term objectives exists in the Government's interest rate policies. To avoid cost push effects, nominal interest rates were frozen during the period of accelerating inflation and real interest rates declined rapidly and became sharply negative. As a consequence there was a growing unwillingness on the part of the public to hold medium- and long-term financial assets, and investment funds had to be increasingly allocated by cumbersome administrative controls. The problem has become less serious as inflation has abated, but will require further attention by the Government.  -4- 10. The stabilization measures taken earlier in the year, the gradual decline of world coffee prices from June 1977 on, and the availability of more ample agricultural supplies on the domestic market resulting from both im- proved weather and increased imports, produced a dramatic slowdown in infla- tion in the second half of 1977. For the full year 1977, inflation was re- duced to 29%. Further declines in the rate of inflation are expected this year as the Government maintains tight fiscal and monetary policies. Additionally, declines in international coffee prices and rapid increases in imports are expected to further reduce inflationary pressures from the ex- ternal sector. Prospects for this year's agricultural output appear good, and the Government is prepared to increase food imports substantially if needed. Development Strategy and Prospects 11. The Government's development strategy, embodied in the 1975-78 development plan, aims at creating the conditions necessary for substantially increasing employment opportunities, particularly for the poorest segments of the population. It provides incentives for private sector investment in the least developed areas of the country and for the use of more labor intensive production techniques. Public sector investment specified in the Plan concen- trates on expanding and improving infrastructure and on socially oriented projects designed to alleviate rural and urban poverty. This includes compre- hensive integrated rural development and nutrition programs which directly benefit the lowest income groups of the population. Because of the importance of commercial agriculture in generating employment and expanding exports, Colombia's development plan assigns a high priority to providing farmers with credit and technical services required to increase output. In order to alleviate urban poverty, the Plan places emphasis on reducing migration to the cities by increasing employment in agriculture and through provision of improved services in slums of Colombia's major cities. These efforts are being complemented by policies and programs to encourage the development of small- and medium-scale enterprises and to decentralize industry away from the three largest cities. Special priority is given to the development of domestic energy sources to reduce the country's growing dependence on imported oil. 12. In the past three years substantial progress has been made in carrying out this strategy despite the economic dislocations occasioned by the world recession and the need to concentrate on short-term economic management. Most of the Government's development efforts during this period have focussed on improving the standard of living of the poorest 50% of the population, with a substantial share of the benefits of public sector expenditures accruing to this segment of the population. Provision of improved social services has been a major objective of the current administration. This is reflected in the increase in expenditures on education, health, water and sewerage, which rose from 33% of total expenditures in 1974 to 37% in 1976. Preliminary estimates show an even higher share spent on such programs in 1977. 13. Projections of Colombia's energy balance indicate an expanding deficit which could reach significant proportions by the early 1980s. To avoid the constraint on growth that shortages of energy would entail, the Government is giving high priority to the development of alternative energy  -5- sources. Major projects are being developed to expand hydroelectric power generation and incentives are being provided private companies for accele- rated exploration and exploitation of the country's hydrocarbon potential. Coal and natural gas are expected to provide an increasing contribution to the country's energy needs in the future. An energy development program, which would nearly triple power generation by 1986, has been drawn up by the Government, with estimated investment requirements of between US$6.0 and US$8.0 billion in constant 1976 prices. Given the long gestation periods of power projects, their execution must be initiated without delay if energy constraints on future growth are to be avoided. 14. The Government is making a major effort to accelerate growth of the agricultural and industrial sectors. In the past, Colombia has been largely self-sufficient in basic foodstuffs. However, an increasing food deficit is projected for the years ahead in the absence of major advances in food pro- duction. The Government is attempting to meet these needs through integrated rural development programs directed towards small farmers, through expanded farm credit, research, extension and marketing facilities and through improved farm management practices, including farm investment planning. Industry has been singled out as the leading growth sector for the future and the Government has adopted exchange rate, fiscal incentive, credit allocation, and locational policies intended to assure that the sector fulfills its role as a major con- tributor to employment growth and exports. 15. Based on its strong resource base and its high level of international reserves, Colombia should be able to sustain annual real growth of no less than 6% over the period 1978-82. Private sector investment is expected to recover as inflation subsides and fiscal and monetary policies are eased. Public sector investment is expected to increase as restraints on such spending are lifted and major energy projects enter the execution stage. Non-inflationary increases in public sector investment spending depends to a large degree on continuing Government efforts to maintain high levels of public sector savings. In this regard, timely and adequate adjustments of tariffs on public services is especially important, and the Government has already gone a long way in the adoption of such policies. 16. Less buoyant terms of trade as world coffee prices decline from the high 1977 level and rapidly increasing imports to meet the requirements of expanding investment are expected to lead to a renewed widening of the resource balance beginning in 1978. Assuming that economic growth accele- rates in the industrialized countries and that appropriate incentives-- particularly continuation of periodic exchange rate adjustments--are provided, nontraditional exports should resume the high rate of growth achieved in the early 1970s. Colombia is projected to require gross capital inflows of about US$3.7 billion during the five year period 1978-82, of which US$340 million should be disbursed from commitments made through the end of 1976. This inflow would enable Colombia to maintain an adequate level of foreign ex- change reserves during the period. A significant increase in capital require- ments is expected in the early 1980s when major additional projects in the energy sector will have to be initiated. To achieve these targets, annual gross  -6- capital inflow will have to increase from US$600 million in 1976 to over US$1.0 billion in 1982. Since the projected foreign exchange requirements associated with the public investment program would be greater than the foreign exchange component of the portion of it that is suitable for project financing, and in view of Colombia's progressive development policies and domestic resource mobilization efforts, local-cost financing by external agencies is justified. While about half of Colombia's capital inflow is expected to be provided by official multilateral and bilateral sources, financing from commercial sources is expected to become increasingly important during the period as Colombia gains greater access to international capital markets. 17. Colombia's public external debt repayable in foreign currency amounted to US$3.3 billion at the end of 1976, or about US$2.4 billion excluding undisbursed commitments. The Bank/IDA share of this external debt was 28.5% and is expected to decline to about 25% by 1982. Although the public debt service ratio fell during the past two years as export growth accelerated, this ratio is projected to increase from 9.5% in 1976 to about 11% by 1982. Balance of payments prospects beyond 1980 will depend among other factors on the timely development of domestic energy sources and on progress made in executing several natural resource-based export oriented projects currently under preparation. As a developing country, it is normal to expect Colombia to be a net capital importer, i.e. to have a deficit in its balance of payments on current account. However, to avoid an excessive growth in this deficit over the next few years, careful management of internal demand will be required. Given such management, it should be possible to prevent the external sector from again becoming a constraint on economic growth, and to maintain Colombia's present creditworthiness for external borrowing of substantial amounts on conventional terms. PART II: BANK GROUP OPERATIONS IN COLOMBIA 18. The proposed loan, the 71st to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$1,587.2 million (net of cancella- tions). Of this amount, US$1,170.3 million is now held by the Bank; IDA made one credit of US$19.5 million for highways in Colombia in 1961. Disbursements have been completed on 46 loans and the IDA credit. IFC has made effective investments and underwriting commitments of US$53.7 million in 24 enterprises and how holds US$28.1 million. Annex II contains a summary statement of Bank loans and the IDA credit as of February 28, 1978, and IFC investments as of February 28, 1978. The Annex also contains summaries on the execution of the 23 on-going projects. 19. Since FY68, Bank lending in Colombia has become more diversified and has been concentrated on production-oriented programs and activities which carried social as well as economic benefits. Eight of the eleven agricultural loans have been made since then, seven of the ten loans for industry, all three loans in the education sector and all seven loans for water supply and sewerage and one nutrition project. This compares with only seven loans since FY68 in the power and transport sectors.  -7- 20. Bank lending to Colombia in FY77 consisted of loans for rural devel- opment, agricultural credit, telecommunications, highways and small-scale industry, totalling US$281 million equivalent. In addition to the proposed urban development project, the FY78 program includes the recently approved loans for nutrition improvement, water supply and sewerage, and proposed loans for power and industry. Work is also under way in development finance companies, further urban development, urban sanitation and slum improvement, power, transportation, mining, and small farm development for possible considera- tion by the Executive Directors during the next two years. 21. The proposed Bank lending conforms closely with the Government's development strategy. To help Colombia develop domestic sources of energy, a substantial part of the proposed lending would be for hydropower. The Bank would also attempt to assist the development of coal mines, which hold poten- tial in helping Colombia meet part of its energy requirements. Bank involve- ment in the energy sector would help mobilize additional external financing as some of the projects would require co-financing. Other future loans would finance agriculture and industry to assist the Government in its efforts to raise overall productivity, income and employment and to strengthen and diversify exports. Closely related to these objectives would be the proposed Bank lending for transport infrastructure in more backward areas of the country to integrate them into the modern economy. In this context, we are proceeding with a project to improve domestic airports. Finally, we are preparing a relatively large number of loans in support of the Govern- ment's efforts to help the lowest 50% of the Colombian population. The proposed urban development, urban sanitation and slum improvement, and water supply and sewerage projects are principally designed to improve the poor's standard of living. 22. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB, and AID provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approximately 40%. Like the Bank, IDB and AID have given increased emphasis to social projects. For instance, the IDB has assisted projects in low cost housing, urban and rural development, agrarian reform, university education, water supply, and land erosion; in the future IDB proposes to assist Colombia in its plans to develop sources of domestic energy and to expand the activity of the productive sectors to help generate increased employment. AID has supported programs in education, urban development and small farm development. More recently, it has moved to small project loans aimed chiefly at improving the distribution of income. It is expected to phase out its aid program in Colombia in 1979 with the commitment of a US$6 million nutrition loan. PART III - THE LOW-INCOME URBAN SECTOR IN COLOMBIA Background 23. During the past several decades Colombia experienced one of the highest rates of urban growth in Latin America. By 1977, the urban popula- tion is estimated to have reached about 70% of the total; this is more than  -8- double that of 1938. During the period 1951-64, which coincided with wide- spread rural violence, the urban population grew at an average annual rate of 6% or one and a half times faster than the growth of total population. Growth of urban population has since decreased to an annual average rate of around 4.6%. 24. Unlike other countries of comparable size and development, Colombia has several fairly large urban centers. Sixteen cities have more than 100,000 inhabitants. Bogota has about three million, Medellin 1.5 million, Cali over one million, Barranquilla over 700,000 and Cartagena, Bucaramanga, Manizales and Pereira each have about 300,000. Industrial development has concentrated around the four largest cities which, together, account for over 80% of the industrial employment and output of the country. Service Levels, Income, Unemployment and Housing 25. Average living conditions in the urban centers are better than in the rural areas, largely as a result of the Government's programs to expand and improve basic public services. In 1974, for example, 90% of all house- holds with electricity were in the urban areas, as were 88% with piped water and 96% with sewerage connections. Nevertheless, one-fourth of the urban population still does not have direct access to water and two-thirds lack sewerage disposal facilities. The situation in the four largest cities, however, with respect to basic services, is on average more favorable at all income levels. 26. Income distribution appears to be more skewed in the urban than in rural areas. A recent Bank study found that the lowest 40% of the house- holds in Colombia encompassing some 47% of the population received roughly 14% of total income in 1974. However, the urban portion of these households received only 13% of the urban income while the rural component's share of the rural income amounted to 21%. 1/ About 36% or six million of the urban population were living below the poverty level estimated at US$150 per capita annually while the corresponding figure for the rural sector was 60% or 4.3 million in 1974. 27. Unemployment and under-employment continue to be serious problems in the urban sector, although the situation has improved recently. The highest unemployment rate is among people under 25 years of age, 60% of the urban unemployed in 1973 and females. About 40% of the urban unemployed are the heads of households. Unemployment is higher among those having primary education or less (23% unemployed) than for those with secondary and higher education (11% unemployed). 28. One of the disturbing aspects of the urban growth in Colombia has been the significant housing deficit. A recent survey by one of Colombia's major public agencies, Instituto de Credito Territorial (ICT), found that in I/ The Distribution of Public Services by Income Groups: A Case Study of Colombia (RPO-296) by Marcelo Selowsky, IBRD.  -9- 69 cities surveyed, 41% or 4.5 million of the population live in substandard housing conditions, while 13% or 1.4 million lacked title to the land. The urban poor obtain land either by takeover or fraudulent land sales (pirate subdivisions). Land takeover is promptly followed by community organization so as to effectively articulate demands on municipal governments. If settlers are not allowed to stay, arrangements for resettlement are often made. "Pirate subdivisions" are those started by promoters who purchase plots and subdivide them without municipal consent because the plots lack basic services. The promoters disappear as soon as the land is sold. It has been estimated that more than one-half of the 1972 population of Bogota lived in "pirate subdivisions". Since the houses are built on land over which the occupants receive no legal title, because the final deeds are not executed or cannot be registered, the improvement of the property, which often is quite valuable and represents an impressive savings effort, cannot be used as collateral to obtain credit. Causes of Urban Poverty 29. Successive Governments in Colombia have concentrated their develop- ment efforts on two interrelated goals: a) achieving self-sustaining economic growth; and b) expanding employment opportunities. Over the last two decades considerable progress has been achieved. Between 1960 and 1976 the GNP per capita in current dollars rose from US$210 to US$640, while employment increased by nearly one-half in that period. Significant advances were also made in a variety of social services, including the expansion and consolida- tion of the education sector and the spread of potable water supply and health services. The decline in population growth has also contributed to an improve- ment in the standard of living of a large number of Colombians (see para 3 above). 30. Poverty has continued and in some cases increased, despite the progress achieved. The sluggish growth of agriculture and the insufficiency of non-farm employment opportunities have prevented a large segment of the population from participating in productivity and income gains. In the urban sector, poverty has been accentuated by the continuing influx of people from the countryside who cannot find employment; they often lack education and/or technical skills. A study carried out by the Universidad de Los Andes found that in 1973 six out of every ten urban unemployed were born outside the city surveyed. The lack of urban employment opportunities has led to a large number of under-employed, who are mostly engaged as street vendors and at best obtain subsistence incomes in the informal sector. Additionally, nutritional deprivation, poor shelter, lack of safe water and deficient sanitation often IF result in diseases which go unattended because of inadequate health facilities. Thus, the vicious cycle of low productivity, poverty and unemployment continues regardless of increased opportunities available. Government's Programs 31. Without abandoning the major objectives of maintaining high rates of economic growth and employment, the present Administration has given greater emphasis to programs that assist the poor and has allocated an  - 10 - important part of public funds to finance them. To improve living conditions in the rural sector and thereby discourage migration to urban areas, in September 1976 the Government launched an Integrated Rural Development Program (IRDP) to assist 500,000 small farmers raise their productivity, output and income. The IRDP includes the upgrading of social services, with the purpose of reducing the disparities between rural and urban amenities. This program is being assisted by the Canadian International Development Agency (CIDA), the Inter-American Development Bank (IDB) and the Bank. The IRDP is being complemented by the National Food and Nutrition Program (PAN), which seeks to reduce malnutrition among the poorest 30% of the population. The rural two-thirds of PAN beneficiaries are generally landless and therefore benefit only indirectly from the agricultural investments of IRDP. To assist PAN, last September the Bank approved a US$25 million equivalent loan. 32. In the urban sector, the Government is continuing to give priority to water supply, sewerage and public health programs. At present, water supply and sewerage programs are being carried out in 15 departmental capital cities and in 37 small towns. A National Health Plan was started in 1975 and is covering almost one-half of the urban regions of the country. The Govern- ment is also promoting integration of the more backward regions into the national economy through increased and better distributed industrial credit and through development of medium- and small-scale industry. The Bank loan for the Second Small-Scale Industry Project approved in June of 1977 is a case in point. The project, at full implementation two and one-half years hence, is expected to generate 3,000-4,000 direct jobs and another 1,000-1,500 jobs through forward and backward linkages. Additionally, the Government is providing telecommunications facilities in smaller towns which lack such service, and in June 1977, the Bank approved a US$60 million loan for this purpose. 33. While these programs are essential, the Government recognizes that in the short run they are unlikely to lead to a substantial betterment of the living conditions of the urban poor. It has, therefore, designed the Integrated Services and Community Participation Program (IPC) - which seeks to attack the causes as well as the symptoms of urban poverty. IPC's basic philosophy is that improvements in the standard of living of the urban poor can be sustained over time only if a reasonable increase in their incomes takes place, which in turn depends upon improved nutrition, health and educa- tion, and sustained employment within the same household. 34. IPC's other basic approach is the realization that the urban poor have an impressive community organization capability, and only by enlisting this talent can integrated urban poverty programs be successful. IPC, there- fore, involves the urban poor in management and coordination of multisectoral activities which constitute the root basis of the program, i.e. social services, infrastructure, communal enterprise development, and credit.  - 11 - PART IV: THE PROJECT BackRround and Oblectives 35. The project constitutes the first phase of the Integrated Services and Community Participation Program (IPC). It was prepared by the National Planning Department with the assistance of Secretaria de Integracion Popular of the Office of the Presidency (SIP), which would be responsible for its overall implementation. 36. The Bank has assisted the Government since early 1975 in defining the program, particularly its integrated approach, community participation, and gradual implementation. The latter is important because it would enable the Government to improve the program on the basis of continuous feedback obtained from monitoring its progress. 37. The project was appraised by a Bank mission which visited Colombia in February 1977. Supplementary work was performed by another mission in May 1977. Negotiations were held in Washington, D.C. in the week of February 28, 1978, with a Colombian delegation headed by Dr. Gabriel Turbay, Director of Public Credit. 38. The objectives of the project are (i) to provide comprehensive assistance in several mutually supporting fields to about 550,000 urban poor in 27 zones of 23 selected towns, 1/ in order to improve their living stand- ards and productivity; (ii) increasingly to base the delivery of services on the beneficiaries' organizations; (iii) to strengthen the capability of the Government to coordinate the activities of the various executing agencies in order to ensure attainment of the project's objectives; and (iv) to enable the Government, through continuous monitoring and evaluation, to improve the program. Summary Description 39. The project includes: (a) Construction of a community development center in each of the 27 areas selected, which would accommodate facilities to render certain services, and would enable the promotion of organized community support for, and participation in, the delivery of such services; and the delivery of more and better educational, health and child and family care services. 1/ The towns are the following: Armenia, Barrancabermeja, Bucaramanga, Cartago, Cucuta (4 zones), Girardot, Ibague, Riohacha, Manizales, Monteria, Neiva, Pasto, Pereira (2 zones), Quibdo, Sabanalarga, San Andres, Santa Marta, Sincelejo, Tulua, Tumaco, Turbo, Valledupar, and Villavicencio.  - 12 - (b) Establishment of promotion units in each of the selected areas to assist members of the community in the organization of productive enterprises, and in obtaining credit; promotion of savings and loan cooperatives; a credit program to provide working capital and fixed assets financing on medium- to long-terms to small enterprises in the communities; and a program of training and of technical assist- ance, especially in marketing and management, to enable members of the communities to obtain employment and increase their produc- tivity. (c) Extension of water supply to the selected areas, including metered connections where not available; regularization of land tenure; construction of about 7,300 housing units under a "sites and services" program; and a credit program for home improve- ment, especially for installation of sanitary facilities. (d) Project management and evaluation, especially to enable Secretaria de Integracion Popular (SIP) adequately to monitor, evaluate and refine the program. Costs and Financing 40. The total cost of the project is estimated at the equivalent of US$62 million, including contingencies but excluding the contribution of beneficiaries of the credit programs to the cost of the specific investments to be financed with such credits. US$14.5 million equivalent, or 24% of the cost, is estimated to represent foreign exchange costs. 41. The proposed Bank loan of US$24.8 million equivalent would finance 40% of the estimated cost of the project and would cover the estimated foreign exchange cost of US$14.5 million equivalent and US$10.3 million equivalent of local currency costs. Local currency financing is justified for the reason stated in paragraph 16 above. 42. The remainder of the financing for the project would be provided by local sources, as follows: US$ Million % of Equivalent Prolect Cost Government 19.5 32 Banco Popular 2.0 3 ICT 12.6 20 ICBF 1.1 2 SENA 2.0 3 Total 37.2 60  - 13 - 43. US$10.9, US$5.0 and US$2 million equivalent of Bank loan proceeds would be transferred by the Government to Instituto de Credito Territorial (ICT), Instituto Nacional de Fomento Municipal (INSFOPAL), and Corporacion Financiera Popular (CFP), respectively, as equity contributions. Such transfers would enable these agencies to participate in the project and, afterwards, to increase their participation in similar projects. Detailed Features of Components 44. A Plan for Each Area. The project consists of a set of investments and community organizational efforts in defined areas with population ranging between 10,000 and 25,000 inhabitants each, within selected intermediate-size cities. A plan would be formulated for each area to ensure the provision of resources to the target beneficiaries. Four of such plans have already been prepared. Assurances were obtained that a plan satisfactory to the Bank would be prepared for each area which will identify the works to be performed, rate their urgency, schedule their implementation, and budget the pertinent expenses of all the agencies involved. Works would not start until the plan is approved by the National Council (see para. 67 below) and no disbursement of Bank loan proceeds on account of expenses in the area would take place prior to approval of the plan by the Bank (Section 3.01(b) and para 4(b) of Schedule 1, Loan Agreement). A. Social Services 45. Community Development Centers (CDV). A CDV would be constructed in each area to accommodate, to the extent required, the provision of training, education, population, health and nutrition, and child and family care to the community, to facilitate its organization to participate in the delivery of these services, and to improve the communication between the agencies respon- sible for providing these services and the potential beneficiaries. Twenty- seven modular installations, flexible in design to permit gradual expansion, would be constructed in accordance with design standards satisfactory to the Bank (Section 3.01 and Part A(a) of Schedule 2, Loan Agreement). 46. The participation of the community in organization and coordination is considered crucial to ensure that there will be a recurrent commitment to maintain the services at adequate levels. Assurances were obtained that a coordinating committee would be organized in each area, composed of representa- tives of the agencies providing services through the CDV, community representa- tives, and chaired by the regional administrative coordinator of the CDV, who is a CDV manager appointed by SIP (Section 3.09(c), Loan Agreement). The CDV manager would be responsible, among other things, for preparing the area plan (para 44) and submitting it to SIP after it is approved by the CDV Committee. 47. Education. Primary education would be extended to about 95% of the eligible population in the selected areas by providing facilities where they do not exist, optimizing use of existing ones (e.g. through multiple shifts), and improving the quality of teachers and didactic material and methods.  - 14 - Construction of new schools would be carried out by ICT where the facilities can be accommodated in the CDVs, and by Instituto Colombiano de Construcciones Escolares (ICCE) in all other cases. School facilities would also be used, when available, for other programs such as adult literacy, training, and recreational and cultural activities. Teaching materials developed with the assistance of the Government of the Federal Republic of Germany would be provided to each school. All designs and equipment specifications conform to ICCE's standards and the Ministry of Education's pedagogical norms, and are satisfactory to the Bank. It is estimated that facilities would be provided for an additional 22,000 students. Assurances were obtained regarding the design of the proposed facilities (Section 3.01 and Part A(b)(i) of Schedule 2, Loan Agreement). 48. Teachers in the areas included in the project would be offered two training programs: a 60-hour course for all teachers in the areas, to famil- iarize them with the new teaching equipment and generally to upgrade their skills; and a 120-hour course for teachers who have not attended training school or completed high school. 49. Health. The health and nutritional status of the areas's population, especially of the young children and lactating mothers would be improved. Currently, health services are largely non-existent in the areas, and where they exist they are characterized by low capacity and heavy dependence on an insufficient number of physicians. This component would be an extension of the on-going National Health and Food and Nutrition Programs. 50. The component would stress preventative (as well as curative) care; delegation of functions to auxiliary personnel; relocation of ambulatory medical services from hospitals to the health centers located in the CDVs; and community participation. A team, composed of promotoras, i.e. trained community health workers, would render basic health, nutrition and population services through home visits. It is estimated that given the density of population, each promotora could reach about 2,000 persons. There would be two trained nurses for each four promotoras: one supporting and supervising the outreach work of the promotoras, and the other assisting the physician and the dentist who would work on a full-time basis in the health centers, and could support up to four of the above described teams, to reach the entire population of the catchment area. This would be the urban scheme for the National Health Plan. 51. The promotoras would be selected with the assistance of the community. The largest reasonable degree of community participation would be sought to ensure acceptance of the program, continued emphasis on preventative health care, and, especially, to ensure financial support for the continuation of the program. The provision of formal health care services to larger sectors of the population would result in increased recurrent costs, even if average costs are lowered by the delegation of functions to auxiliary staff. The organiza- tion of the community would facilitate the introduction of health service charges. Assurances were obtained during negotiations that, as agreed also on the occasion of the nutrition project, a system of charges would be applied to the health services rendered under the project to recover from the beneficia- ries the equivalent of the cost of drugs and medicines provided, thereunder (Section 4.06, Loan Agreement).  - 15 - 52. Child and Family Care. Instituto Colombiano de Bienestar Familiar (ICBF) would equip a basic facility for an integrated pre-school care center (CAIP) in each CDV. Each CAIP would serve as a resource center for a community outreach program; most of basic day care services would be decentralized to home-based community-run units, so that CAIPs will only render services requiring a higher degree of specialized professional care (which include care for children who require specialized attention, a center for nutrition recuper- ation, legal assistance to minors and women, and a family life education center). Day-care services, performed by women who would be required to register, would care for up to 10 children each. The women would receive training and certain basic education and developmental equipment, and will receive loans to enable them to improve their homes for purposes of these services. Besides collecting the traditional fee from the mothers of the children, the women would be paid a wage. One supervisor would assist each 10 groups of home day-care units. Bank loan proceeds would not be used to finance this component because ICBF, which is financed from earmarked employer contributions equal to 2% of all salaries paid, has enough resources to finance this part of the program. B. Employment and Productive Credit 53. Vocational Training and Promotion. There would be a full-time small enterprise promoter in each area who, with the assistance of SENA's staff, would be responsible for promoting cooperatives and other small-scale enter- prises, assisting in their organization, and especially in enabling them to obtain access to bank credit. This person would coordinate the training and basic skills improvement services to be rendered by Servicio Nacional de AprendizaJe (SENA) at the CDVs through its Mobile Training Program. Over 62,000 workers attended courses under this program throughout Colombia in 1976, which used more than 1,100 (almost 30%) of SENA's instructors. SENA is competent and experienced in this field, and close coordination with the area promoter would ensure that the program for each area is designed so as to meet the particular needs of the community. SENA would deliver between three and four thousand hours of training per CDV per annum, and it is expected that 26,000 people would be trained under this component. Besides upgrading of technical skills, courses would be offered in accounting, management and marketing in order to foster the creation and strengthening of community enterprises. The area promoter would also assist in the organization and development of community-owned savings and loan cooperatives, which would have access to a cooperative credit program being provided by Banco Popular, a Government-owned commercial bank, and would make loans not exceeding US$300 equivalent to their members for working capital and purchase of items such as tools and construction materials. 54. Small Enterprises Credit. Credit would be made available by Corporacion Financiera Popular (CFP), a publicly owned DFC which specializes in lending to small- and medium-scale industry, to productive enterprises with total assets not exceeding US$15,000 equivalent owned by residents of the areas included in the project, and to community and cooperative enterprises  - 16 - with total assets not exceeding US$100,000 equivalent, substantially owned by area residents, to finance fixed assets and working capital requirements. Enterprises with total assets exceeding these limits, including those which after receiving credit under the project would surpass the limits, or which belong to an industrial or business group with total assets above US$50,000 equivalent, would be referred to CFP's regular lines of credit, where the appJicable interest rate is 24% per annum. Loans would bear interest at 18% per annum, and would be repaid in not less than two years, including six months of grace, in the case of working capital financing, and not less than four years, including one year of grace, in the case of fixed asset financing or a combination of both fixed assets and working capital. In view of the receyit rate of inflation in Colombia (over 30% per annum) it is unlikely that i n the early stages of disbursements, CFP's relending rate would be positive in real terms. However, as the Government's stabilization effort continues to rake hold the interest rate should gradually turn positive in real terms. The proposed interest rate is Justified by the present marginal economic viability of many of the target enterprises, due to their lack of capital, and their need for assistance during the gestation period. 55. CFP has developed streamlined appraisal and supervision procedures, and is experienced in the financing of this very small-scale productive sector, especially on account of the administration of a US$5 million USAID loan it received for this purpose in 1975. The area promoters referred to in paragraph 53 above will assist, with the collaboration of SENA's staff assigned to the CDV, in subproject preparation and loan application, and would be responsible for project promotion and technical assistance. In order to ensure satisfactory progress, CFP, with SENA's support, would provide training in project appraisal and supervision to the promoters and SENA's staff. i6. US$2 million equivalent of Bank loan proceeds would be made avail-- able to CFP by the Government as an equity contribution. At the time of the Second Small-Scale Industry Project (approved in June 1977), assurances were obtained that CFP's capital would be gradually increased by not less than Col$225 million by the end of 1980. The proposed transfer of the Bank loan proceeds is consistent with the goal of strengthening CFP's resource base, and would be additional to the abovementioned agreed capital increase. The other US$2 million equivalent for this credit program would be made available to CFP by Banco Popular as a loan with interest at 18% per annum, repayable in 17 years including four years of grace. It is estimated that 1,200 to 1,500 entrepreneurs would receive financing under the program, and that about 3,800 new jobs would be created at an average cost of about US$1,050 each, which compares quite favorably with the average cost of jobs created under Loan No. 1071-CO (Small-Scale Industry Project), which was US$5,100. Assurances were obtained regarding the above described transfers and lending terms and condi- tions (Section 3.01(h), and Schedules 6 and 7, Loan Agreement). Execution of a contract for the loan by Banco Popular to CFP would be a condition of effectiveness (Section 6.01(a), Loan Agreement).  - 17 - C. Physical Improvements 57. Water Supply and Sewerage. US$12.4 million equivalent would be made available through Instituto de Fomento Municipal (INSFOPAL) to the municipal enterprises in charge of water supply and sewerage in the towns included in the project, for distribution system in the target areas, as provided in the plans referred to in paragraph 44 above. Priority would be given to water supply, and it is estimated that 280,000 people would benefit from metered connections. Engineering designs and provisions for additional water supply facilities in each city would be reviewed to ensure that the distribution network is extended only in cases where increased water supply is foreseen. Assurances were obtained that no Bank loan proceeds would be withdrawn on account of such works in each area, until the Bank is furnished satisfac- tory studies of water sources and treatment facilities available, including plans for financing any needed additional works (Schedule 1, para 4(d), Loan Agreement). 58. The US$5 million equivalent of Bank loan proceeds allocated to this component and the equivalent of US$7.4 million to be provided by the Government, would be transferred to INSFOPAL as an equity contribution. This is justified in view of the very large requirements of the sector, for which INSFOPAL has overall planning and financial responsibility. INSFOPAL, which has received two Bank loans for intermediate-size cities and smaller towns (some of which are included in the proposed project) is undergoing a reorga- nization with the assistance of the Bank that will strengthen its overall planning role and operational capabilities. 59. 40% of the financing made available by INSFOPAL to each enterprise (aggregating US$5 million equivalent) would be as a 17-year loan, including four years of grace, with interest at 12% per annum. An equal amount would be made available as an equity contribution. The remainder (20%) would be made available either as equity contribution or as a loan, or a combination thereof, depending on the financial situation of each enterprise. INSFOPAL would decide upon the financing-mix for each enterprise on the basis of specific criteria agreed with the Bank. The enterprises would be required to set their rates at such levels as to ensure full recovery of the operating and investment costs, except that the Bank may agree that if the income level of the population served by an enterprise is very low, less than the total investment cost be recovered. For enterprises that have received financing from INSFOPAL under either of the two loans made by the Bank, the provisions contained in the existing agreements regarding level of revenues would be maintained. In the case of all other enterprises, INSFOPAL and each enterprise would agree to conditions satisfactory to the Bank on the revenue requirements, before INSFOPAL makes funds available to such enterprise under the proposed project. Furthermore, before extending financing, INSFOPAL would obtain assurances that the enterprise would utilize the revenues originating from the additional services resulting from the proposed project, to the extent they are not needed to service its debt with INSFOPAL, for further water supply and sewerage investments. The repayments made by the enterprises to INSFOPAL would be used, until 6 years after the closing date, to finance water supply  - 18 - and sewerage services in similar low-income urban areas of the country. Assurances were obtained regarding the above arrangements (Sections 3.02, 4.07 and 4.08, and Schedule 7, Loan Agreement). 60. Land Tenure Regularization. US$1.7 million equivalent would be provided by Instituto de Credito Territorial (ICT) to community groups and individuals as loans with interest at 13.8% per annum and repayable in up to 15 years for expenditures related to transferring title to settlers, all in the areas included in the project. It is expected that 31,000 households would regularize their land tenure. 61. Home Improvement. ICT would provide US$13.1 million equivalent in supervised credits to the residents of the project areas for home expansion and improvement, and particularly to install the sanitary facilities made possible by the water supply and sewerage component. Most of the work would be done through "self-help," and intensive technical assistance would be supplied free of charge. It is estimated that about 18,500 people would receive such credits. ICT will assign a team of one architect, two social workers, and a loan officer to work in each of the project areas. These credits would carry interest at 14% per annum, would be repayable in up to 15 years, and would finance up to 90% of total cost. ICT will also, parallel to the project, make credit available to municipalities and community action groups for neighbor- hood improvements such as paving of roads and footpaths, construction of bridges over canals, flood and erosion control, and recreation areas. 62. Sites and Services. 7,300 new sites would be developed by ICT, at a cost including contingencies estimated at US$8.7 million equivalent, mainly to resettle about 6,600 households (7Z of the total) whose houses would have to be eliminated in order to carry out neighborhood improvements. A credit program would be undertaken by ICT to finance the purchase of the following alternative solutions with loans repayable in up to 15 years, with interest at 13.8% per annum: (i) a basic serviced lot with no construction, with an average cost of US$625 equivalent, for families earning up to US$350 equivalent per annum; (ii) a serviced lot with a sanitary core, with an average cost of US$1,285 equivalent, for families earning up to US$850 per annum; and (iii) a unit consisting of a serviced lot, sanitary core, and up to 40 m2 of enclosed construction, with an average cost of US$1,834, for families earning up to US$1,100 per annum. It is estimated that 30% will opt for solution (i), 60% for (ii) and 10% for (iii). The purchase price would be determined on the basis of criteria agreed upon with the Bank to ensure that they reflect the full cost plus about 10% to cover ICT's administrative cost. 63. The proposed interest rates for ICT's onlending are likely to be negative in real terms during the early part of the commitment period. For the reasons pointed out in paragraph 54 above, however, these are expected to gradually become positive. The interest rate subsidy in the early part of the commitment period is justified in view of the low income of the target beneficiaries, most of which are at present below the poverty line.  - 19 - 64. Of the total cost of the last three components (i.e., land tenure regularization, home and neighborhood improvement, and new housing) estimated at US$23.5 million equivalent, ICT would provide US$12.6 million from its own funds, while the equivalent of US$10.9 million of proceeds of the proposed Bank loan would be transferred to ICT in pesos as a Government equity contri- bution, to finance the last two components. This is justified in light of the need to capitalize ICT and, in this manner, be able to take care of the very large requirement for low-income housing in the country. ICT would use the repayments of the credits made under the project, until 6 years after the closing date, to finance similar projects. Assurances were obtained regarding the features of these three components and ICT's use of such funds (Sections 3.01(c) and 4.08(b), and Schedule 6, Loan Agreement). Organization and Management 65. Secretaria de Integracion Popular (SIP) would be responsible for the overall implementation of the project, and especially for coordinating the activities of the various Government ministries and agencies, municipalities, and regional and municipal enterprises which will participate in its execu- tion. SIP is part of the Office of the Presidency, and therefore reports directly to the President of the Republic. Although SIP is relatively new, it has adequate staff. Its structure and operations have benefitted from a program of technical assistance provided by the Government of The Netherlands. 66. General guidance would be provided by a National Council composed of representatives of the Department of National Planning, the Ministry of Health, the Ministry of Education, ICBF, SENA, ICT, INSFOPAL, and CFP (Section 3.09, Loan Agreement). 67. On the basis of the plans for each area (para 44 above), which would be prepared with SIP's assistance, and approved by the CDV coordinating committees (para 46 above), SIP would prepare annual plans and budgets for the implementation of the project, which will be submitted to the National Council for approval. SIP would then coordinate the activities of all the agencies involved to ensure the efficient and timely execution of the plans. Such coordination would be ensured each municipality through a local council headed by a representative of SIP and composed also by the chief of the municipal or departmental planning and the regional chief of each of the Ministries and agencies involved. The participation of each agency in the project would be governed by an agreement to be entered into between each of them and SIP, on terms and conditions satisfactory to the Bank. Conclusion of such agreements would be a condition of effectiveness of the proposed Bank loan (Sections 3.01(d) and (e) and 6.01(b) and (c), Loan Agreement). 68. SIP would also oversee that the agencies involved provide competent staff in adequate numbers to render the services contemplated in the project. Assurances were obtained regarding this, and on adequate maintenance of all facilities included in the project (Section 3.08 and 4.05, Loan Agreement). 69. SIP will set up a training program to upgrade the skills of selected professionals involved in planning and execution of the project. Assurances were obtained that such program would be carried out in a manner satisfactory to the Bank (Sections 3.01 and Part E of Schedule 2, Loan Agreement).  - 20 - 70. SIP would also be responsible for monitoring the execution of the project, both at local and national levels. Assurances were obtained that such monitoring, and the continuous evaluation of the progress and results of the project, would be performed under terms satisfactory to the Bank (Sections 3.06(b) and (c), Loan Agreement). Procurement and Disbursement 71. Contracts for goods estimated to cost the equivalent of US$150,000 or more will be let under international competitive bidding in accordance with Bank guidelines. Other goods would be procured in accordance with the Govern- ment's competitive bidding procedures, which are considered to be satisfactory. Civil works contracts would be let under local competitive bidding procedures. Civil works estimated to cost less than US$15,000 equivalent may be procured on a negotiated basis or by force account, and, in the case of CDV and class- room construction, they may be carried out by force account with the prior approval of the Bank even if their estimated cost exceeds US$15,000 equivalent. Suppliers of goods manufactured in Colombia and procured through international competitive bidding procedures would receive a margin of preference of 15% on the value of import duties, whichever is lower. 72. The proceeds of the proposed Bank loan would be disbursed over a four-year period, against (i) 100% of the foreign expenditures for imported equipment; (ii) 40% of the ex-factory cost of locally manufactured goods; (iii) 40% of the cost of imported goods purchased in Colombia; (iv) 40% of civil works expenditures; (v) 50% of amounts disbursed by CFP under the program of production credit; (vi) 50% of the amounts disbursed by ICT under credits for home improvements and sites and services; and (vii) 50% of the costs of training and technical assistance. Benefits and Risks 73. The project would benefit 550,000 people, four-fifths of whom have a per capita income of less than one-third the national average. The benefits derived from the social services component are well-known and do not lend themselves to quantification. Education will enable the children to reach employment age with a better preparedness for obtaining employment. The health component would, besides offering the usual benefits derived from better and more intensive care, such as increased worker productivity, contribute to more efficient health services and to lower costs. The child and family care component would improve the care given to children under school age, precisely at the time when their capacity to develop is the greatest, while freeing the mothers to supplement family incomes. This component would also support the family counseling services which have assisted the improvement of population planning in Colombia. 74. The production services component would bring effective opportunities of employment to the beneficiaires. While some of the beneficiaries would seek employment outside the areas where they live, the great bulk of the beneficiaries would benefit from promoting, organizing and financing employ- ment opportunities in the project zones. The production services component  - 21 - would address specifically the needs of each area, concentrating on the very bottom of small-scale productive units. 75. The physical improvements component would have an immediate impact on the quality of life of the target beneficiaries, bringing it up to stan- darfd' closet to'those-t'f higher-i.ncome groups. Calculation of the economic return of a multi-city, poverty neighborhood project requires strong, often arbitrary assumptions, since it is extremely difficult to assess the increase in value derived from the improvements. The internal economic rate of return of the water supply and sewerage component is estimated at 10%. The return on the land tenure regularization component cannot be quantified. Such regulari- zation, however, is apre-condition to enable the householder to gain access to credit and thus increase its capacity to invest in the improvement of his home. The rate of return of the housing improvement and sites and services components,-which -account for 56% of total project costs, is estimated at 10%. 76. An important benefit would be derived from the monitoring and conti- nuous evaluation included in the project. This feature would enable the Government to refine its national urban development program and gradually increased effectiveness at cost levels sufficiently low to enable expansion of the program's coverage. 77. The project is subject to risks derived from its uniquely comprehen- sive nature. The coordination of the various entities involved will not be an easy task to accomplish. Coordination efforts would be mounted at tha local as well as national levels (see paras 46, 66, and 64) and it is expected that the necessary degree of coordination will be attained. SIP is in no hierarchical position to force the Ministries and agencies involved to assign their resources in a particular way, but through the Presidency of the Republic is expected to accomplish this. On the other hand, SIP's very own status constitutes a risk by itself, since the influence of a Presidential office may be different under future administrations. This, however, is a reasonable risk in the light of the general acceptance of the program by all political sectors. PART V: LEGAL INSTRUMENTS AND AUTHORITY 78. The draft Loan Agreement between the Republic of Colombia and the Bank, and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 79. Special conditions of the loan are listed in Section III of Annex III. Special conditions of effectiveness would be the signing of the agree- ment providing for Banco Popular's loan to CFP (para 56) and of the agree- ments between the Government and the other project entities and between SIP and the other participating ministries (para 67). Disbursements for expenses in each zone would be conditioned upon the completion of a development plan for the particular zone which has been approved by the Bank (para 44).  - 22 - PART VI: RECOMMENDATION 80. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President bY E. t% ^ W% $L Attachments Washington, D.C. April 14, 1978  MEX I COLOMBIA - SOCIAL INDICATORS DATA SHEET Page 1 4f 4 pages LAND AREA (THOU KM2) ~-------------- COLOMBIA REFERENCE COUNTRIES (1970) TOTAL 1139.9 MOST RECENT AGRIC. 223.9 1960 1970 ESTIMATE TURKEY. BRAZIL MEXICO*** GNP PER CAPITA (USS) 210.0* 350.0* 640.0*/a 500.0* 550.0* 690.0* POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR, MILLION) 15.4 20.6 24.2/a 35.6 92.8 50.4 POPULATION DENSITY PER SQUARE KM. 14.0 18.0 21.0 46.0 11.0 26.0 PER SQ. KM. AGRICULTURAL LAND 71.0 93.0 108.0/a 65.0 49.0 52.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 46.1** 44.3** 40.6** 40.6 38.4 43.8 CRUDE DEATH RATE (/THOU,AV) 14.7 11.0 8 14.4 9.9 10.2 INFANT MORTALITY RATE (/THOU) 100.0/a 70.0/a ,, 153.0/a 110.0 68.5 LIFE EXPECTANCY AT BIRTH (YRS) 54.7 58.5 60.9 54.4f 59.4 62.4 GROSS REPRODUCTION RATE 3.2 3.2 3.1 2.6/b.C 2.6 3.1 POPULATION GROWTH RATE (%) 3 TOTAL 3.2 2.9 2.8 2.5 2.9 3.4 URBAN 6.0/b 5.5/b 4.6 4.9/d 5.0 4.8 URBAN POPULATION (% OF TOTAL) 53.0/c 60.0 70.0 /b 38.7 56.0 58.7 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 46 6/C 46.6 44.1 41.7 42.0 46.2 15 TO 64 YEARS 50 S4 O 50.4 52.7 54.0 55.0 50.1 65 YEARS AND OVER 3.0w 3.0 3.2 4.3 3.0 3.7 AGE DEPENDENCY RATIO 1.0/c 1.0 0.9 0.9 0.8 1.0 ECONOMIC DEPENDENCY RATIO I.87E 1.6/c 1.6/c 1.1/e 1.5 2.0 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 0.5 306.9 955.1 .. 250.0 55.5 USERS (% OF MARRIED WOMEN) .. .. 31.0 8.2 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 5100.0/C 6200.0 6800.0 14Soo.O/f 29400.0 13000.0 LABOR FORCE IN AGRICULTURE (%) 47,0/c 39.0 .. 67.0 40.4 45.0 UNEMPLOYED (% OF LABOR FORCE) 8.0/d e 7.0 10.2/d 4.6/ 7.5 INCOME DISTRIBUTION % OF PR3VATE lNCOME PEC D By- HIGHEST 5% OF HOUSEHOLDS 41.-2 e 31.9tM 27.2/i 32.8/h 35.0/a 2t.9 HIGHEST 20% OF HOUSEHOLDS 67.7/c f 60.1/d 54.4/j 60.6/h 62.0/a 58.3 LOWEST 40% OF HOUSEHOLDS 2 35 a, 5.2A 2.9/h 3.0 a 3.4 ___/_< 10.1~ 14.3/i, 9. 4L lO.O/a 10.5 DISTRIBUTION OF LAND OWNERSHIP _____________________________ % OWNED BY TOP 10% OF OWNERS .. .. 80.0/e 53.0 45.0 37.1 % OWNED BY SMALLEST 10% OWNERS .. .. 0.2/e 0.9 1.5 0.3 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 2400.0 2110.0 2100.0/f 2250.0 1910.0 1480.0 POPULATION PER NURSING PERSON 3520.0j ., 1450.0 7T 1770.0/i 3220.0/b 162o0o/a POPULATION PER HOSPITAL BED 560.0 430.0 470.07w 500.O 260.0 960.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 94.0 97.0 97.0/g 110.0 109.0 114.0/b PROTEIN (GRAMS PER DAY) 50.0 51.0 51.07jj 78.0 64.0 65.o -OF WHICH ANIMAL AND PULSE 28.0/h 29.0/e .. 22.0. 39.0 28.0/c DEATH RATE (/THOU) AGES 1-4 16.3 8.4 ., 14.7/k . 9.8 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 77.0 100.0 106.0 109.0 87.0 104.0 SECONDARY SCHOOL 12.0 23.0 36.0 28.0 .. 22.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 11.0 11.0 11.0 11.0 11.0 12.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 31.0/l 20.0 17.0 14.0 17.0 24.0 ADULT LITERACY RATE (X) .- 73.0 74.0/f 55.0/4 64.0 76.0 HOUSING PERSONS PER ROOM (URBAN) .. .. .. 1.9 1.0 2.2 OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) 59,0,cj . , 64.0 73.0/c 61.o/d ACCESS TO ELECTRICITY - - (% OF ALL DWELLINGS) 47.0/c .. .. 41.0 48.0 59.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) 8.0/c .. .. 18.0 8.0 28.0 CONSUMPTION RADIO RECEIVERS (PER THOU POP) 139.0 105.0 117.0 89.0 60.0 276.o PASSENGER CARS (PER THOu POP) 7.0 11.0 15.0 4.0 25.0 24.0 ELECTRICITY (KWH/YR PER CAP) 244.0/e 414.0 599.0 247.0 491.0 567.0 NEWSPRINT (KG/YR PER CAP) 2.4 2.7 2.1 0;7 2.7 3.2