Colombia - Fourth Guadalupe Hydro Power Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No.P-2779-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS PUBLICAS DE MEDELLIN WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE GUADALUPE IV HYDRO POWER PROJECT May 19, 1980 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 1978 Average Calendar 1979 Currency Unit = Peso - Col$ Col$ US$1 = Col$39.25 42.06 Col$1 = US$0.0255 0.0238 WEIGHTS AND MEASURES 1 meter (m) 2 = 3.281 feet (ft) 2 1 square kilometSr (km ) = 0.386 square mile (mi3) 1 cubic meter (m ) = 35.315 cubic feet (ft ) "1 = 264.2 gallons (gal) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t;metric;1,000 kg) = 1.100 short tonS (sh. togs) 1 kilowatt (kW) = 1,000 Watts (10 kW = 10 W) i kilowatt-hour (kWh) = 830.3 kilocalories (kcal) 1 Megawatt (MW) = 1,000 kW (106 kW = 109 W) 1 Gigawatt (GW) = 1,000 MW (10 kW = 10 W) 1 Gigawatt-hour (GWh) = 1,000,000 kWh (10 kWh) 1 kilovolt (kV) = 1,000 Volts (V) GLOSSARY OF ABBREVIATIONS CORELCA = Corporacion Electrica de la Costa Atlantica cVC = Corporacion Autonoma Regional del Valle del Rio Cauca DNP = National Planning Department EEEB = Empresa de Energia Electrica de Bogota EMCALI = Empresas Municipales de Cali EPM = Empresas Publicas de Medellin ICEL = Instituto Colombiano de Energia Electrica IDB = Inter-American Development Bank ISA = Interconexion Electrica S.A. JNT = Junta Nacional de Tarifas de Servicios Publicos FISCAL YEAR January 1 to December 31  FOK uiFICIAL USE ONLY COLOMBIA GUADALUPE IV HYDRO POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: Empresas Publicas de Medellin (EPM) Guarantor: Republic of Colombia Amount: US$125 million equivalent Terms: Repayment in seventeen years, including four years of grace at 8.25% interest per annum. Project Description: The project would assist the Government of the State of Antioquia in providing required electricity service to facilitate continued industrial and commercial growth in Medellin and its environs. The project would also enable the connection of about 75,000 further households in this area and expand the supply of electricity to rural centers. Another important objective of the project would be to permit the substitution of relatively inexpensive hydro- based power for costly and unreliable electricity from small diesel plants. The project consists of: (a) the addition of a 213 MW hydroelectric generating plant, Guadalupe IV; (b) the construction of 150 km of trans- mission lines; (c) the expansion of 5-6 existing substations; (d) the construction of 4-5 new ones; and (e) the rehabili- tation and expansion of EPM's electricity distribution network; the project also includes construction of a regional energy control center which would enable EPM to participate in the least-cost operation of the national power system. Finally, through a training program for highly specialized staff, EPM's technical capability would be strengthened. Tariff measures provided for under the project would support the Government's objective of sound sector financing and economic structure of tariffs to promote rational energy use. The project is subject to the risks associated with civil works in difficult terrain. However, all appropriate safeguards have been provided for and the project is expected to be carried out as scheduled. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost (net of taxes): Local Foreign Total --(US$ million equivalent)-- Guadalupe IV Hydro Station 28.4 58.3 86.7 Transmission Lines 3.0 7.5 10.5 Substatiuas 2.1 10.1 12.2 Control Center 0.3 5.9 6.2 Distribution and Equipment 2.4 11.1 13.5 Engineering, Administration, Study 8.8 2.1 10.9 Training 0.3 0.8 1.1 Base Cost 45.3 95.8 141.1 Physical Contingencies 6.8 12.1 18.9 Price Contingencies 21.0 47.3 68.3 Total Project Cost 73.1 155.2 228.3 Note: During the period 1980-84, EPM will carry out other power investments with an estimated cost of US$347 million equivalent (including interest during construction). It will also require an increase in working capital estimated at US$39 million equivalent and will invest approxi- mately US$81 million equivalent in Interconexion Electrica, S.A., in which it is a shareholder. Project Financing Plan: Local Foreign Total --(US$ million equivalent)-- Internal Cash Generation 73.1 - 73.1 Proposed IBRD Loan - 125.0 125.0 Suppliers' Credits/Other External Borrowings - 30.2 30.2 73.1 155.2 228.3 1980-86 Investment Program Financing Plan: Local Foreign Total --(US$ million equivalent)-- Internal Cash Generation 533.0 - 533.0 Local Borrowings 25.6 - 25.6 Existing IBRD Loan (874-CO) - 3.9 3.9 Proposed IBRD Loan for Guadalupe IV - 125.0 125.0 Suppliers' Credits/Other External Borrowings 7.5 227.8 235.3 Total 566.1 356.7 922.8 Rate of Return (Financial): 13% Appraisal Report: Report No. 2938b-CO, dated May 16, 1980.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS PUBLICAS DE MEDELLIN WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE GUADALUPE IV HYDRO POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Empresas Publicas de Medellin, with the guarantee of the Republic of Colombia, for the equivalent of US$125 million to help finance the Guadalupe IV Hydro Power Project. The loan would have a term of 17 years, including four years of grace, with interest at 8.25% per annum. PART I - THE ECONOMY 1/ 2. An economic report on Colombia (2535-CO) was distributed to the Executive Directors in June 1979. A small updating mission visited Colombia in mid-December and this section on the economy reflects its major findings. Country data sheets are provided in Annex I. Background 3. Colombia has made substantial progress over the past two decades in the transition from a predominantly rural and agricultural economy scattered among several isolated, but largely self-contained, regions to a more inte- grated, urban industrial economy. The productive base of the economy has been widened and diversified, and a modern sector relying heavily on imported inputs has developed. The country's external sector has been strengthened by the rapid growth of non-traditional exports. Fluctuations in domestic economic conditions resulting from unpredictable shifts in world coffee prices, while still considerable, have become more manageable. 4. Following several years of erratic economic growth and high unemploy- ment, the Colombian authorities introduced in 1967 a dramatic change in devel- opment policy, shifting emphasis from a protectionist policy of import substi- tution to measures designed to expand and diversify exports. With only minor modifications, this export promotion strategy remained in effect until the mid-1970s. These policies were successful in expanding non-coffee exports, thereby alleviating the foreign exchange constraint to growth and making possible a higher level of investment. As a consequence, real GDP growth accelerated to an average 6.5% p.a. between 1968 and 1974, well above the historic average, and non-coffee merchandise exports rose nearly threefold. 5. Despite these advances, the economy showed signs of deteriorating by late 1974. This was largely the result of slower growth in the industrial economies, an inelastic tax system and imported inflation which led to a weakening of the public finances and balance of payments and an acceleration 1/ This section is unchanged from that included in the President's Report for the Bogota Power Distribution Project (Report No. 2676-CO).  - 2 - of domestic inflation. In addition, the country was faced with a pending loss of self-sufficiency in petroleum, its primary energy source. These develop- ments prompted the authorities to introduce a stabilization program, accom- panied by basic reforms of the fiscal, monetary and trade systems aimed at restoring the basis for accelerated long-term growth. Concurrently, petroleum pricing policy was modified to improve incentives for oil exploration and development and policies were initiated to reduce the subsidy on local consump- tion of petroleum products. These reforms were successful in improving the public finances and reducing inflation in 1975, but initially caused economic growth to slow (from 6.0% in 1974 to 3.8% in 1975) as the economy adjusted to the changing domestic and international circumstances. Recent Economic Developments 6. During the three years 1976-78 the Colombian economy was subject to severe inflationary pressures which caused the Government to focus economic policy on short term stabilization rather than on long term development issues. The origin of these pressures was the exceptionally high world coffee price prevailing during this period which caused Colombia's export earnings from coffee to increase to US$1.8 billion and US$2.1 billion in 1977 and 1978, respectively (from an average US$725 million in 1974-75), producing an unpre- cedented rise in incomes and internal demand. The supply of consumer goods, particularly of basic foodstuffs which was adversely affected by drought conditions in most of the country, lagged behind the growth in demand and inflation accelerated to the unprecedented rate of 44% in the twelve months ending June 1977, from 26% the preceding year. The authorities responded rapidly by introducing a broad range of fiscal, monetary and trade policies designed to gain control over the explosive increase in prices. As a conse- quence of these measures and of a favorable second semester harvest, inflation declined sharply throughout most of the following 18 months, with the annual inflation rate leveling off at 29% in 1977 and falling to 18% in 1978. 7. Because of the lack of dynamism in world markets and modest increases in domestic investment, the Colombian economy expanded only moderately in 1976 and 1977, with real GDP growing by 4.6% and 4.8%, respectively, in those two years. In 1978, however, real GDP rose by an estimated 8.5% in response to continued strong growth in aggregate demand, supported by expanded private investment financed increasingly through a rapidly growing extra-bank market and by favorable agricultural conditions. Since growth was concentrated in the relatively labor intensive sectors of the economy--personal services, trade, transport and communications, and small-scale manufacturing and agri- culture--unemployment declined sharply during this period. In 1978, unemploy- ment in the four major cities averaged about 8% of the labor force, compared with an average of about 12% a few years earlier. Both the balance of payments and the public finances generated large current surpluses in the 1976-78 period. Largely as a result of increased coffee export receipts, Colombia's net official international reserves had risen from US$573 million at the end of 1975 to US$2.5 billion by the end of 1978, equivalent to about nine months imports of goods and non-factor services. This increase in reserves occurred despite nearly 12% p.a. real growth in imports and slow growth in manufactured exports. Curbs on public investment and higher revenues from the coffee tax and from earnings on international reserves made possible unprecedented overall surpluses in the public finances.  -3- 8. Despite continuation of the stabilization policies in effect since early 1977, inflationary pressures increased somewhat in 1979. A mild frost in Brazil's coffee areas caused world coffee prices to rise early in the year, resulting in an acceleration in reserve accumulation and in aggregate demand growth. Widening interest rate differentials favoring Colombia and real appreciation of the peso generated short-term capital inflows which, together with delays in import payments, led to further reserve increases. Receipts from illegal exports provided an additional source of funds for the already overly liquid economy. In all, net official reserves rose by approxi- mately US$1.6 billion for the year, reaching the equivalent of 11 months imports at year end. About mid-year the authorities issued a new series of short term securities carrying highly competitive interest rates in an effort to absorb some of the excess liquidity existing in the formal and informal credit markets. This issue, which represents a significant break with past open market operations that were not interest-competitive and were forced onto financial institution portfolios, was successful in attracting funds equivalent to 5.4% of the monetary base by year end, helping to reduce money supply growth (M2) in the formal market from 30% in 1978 to 24% in 1979. Nevertheless, large wage increases and higher energy costs, together with rapid growth in domestic demand, pushed inflation up to 30% for the year. Economic growth was strong again in 1979, with real GDP rising by an estimated 5.5%, and unemployment remained low. Inflation has slowed thus far in 1980 (on an annual basis the increase in the cost of living was 24.9% through March), and the Government is committed to reducing further the rate of inflation in coming months. Distribution and Welfare 9. The steady gains in per capita income, together with rapid rural/ urban migration and expanded employment opportunities for women over the past quarter century, caused a dramatic drop in the crude birth rate. The achieve- ment of lower birth rates was facilitated by expanded family planning programs. Consequently, Colombia's population growth rate declined sharply, from over 3% in the late 1950s, to about 2.8% in the early 1970s and to an estimated 2.1% at present. Although 66% of the population lives in urban centers, there are now 22 cities with populations exceeding 100,000 persons. Some of the major cities have serious transportation, housing and urban congestion problems, however, and large numbers of persons live under poor conditions. 10. Available evidence suggests that the welfare of all income groups in Colombia has increased significantly since the 1950s and that the propor- tion of the population living in absolute poverty has declined. These gains were in part a consequence of reasonably good economic growth and of efforts to raise welfare through investment in health, education, low income housing, water and sewerage, and other social services. Existing data on income dis- tribution trends present a less clear picture. It is probable that some improvement occurred in income distribution between 1950 and the mid-1960s as a result of a strong shift of the labor force from rural areas to higher productivity jobs in urban industry and services and of relative wage gains for urban unskilled workers. Accelerated inflation through the early and mid- 1970s caused real wages to increase less rapidly than returns to non-labor factors of production. While the trends in income distribution during this period are unclear, it seems unlikely that any significant improvement occurred. Since 1977, however, rural wages have risen in real terms and  - 4 - unemployment has declined notably, supporting the presumption of some distributional improvement. Development Strategy of the Current Administration 11. The development strategy of the present Government is essentially unchanged from that of the previous administration, with the most significant variation being a greater emphasis on expanding economic and social infrastruc- ture. The key elements of this strategy are the promotion of non-coffee exports and investment, supported by measures to increase allocative and productive efficiency. Factor (particularly capital) and product markets are to be freed from unnecessary controls in order to increase efficiency and lower costs, and tariff and non-tariff barriers to imports are to be reduced to provide greater competition to domestic industry. These steps, along with periodic exchange rate adjustments as required by relative cost differences, tax rebates and favorable access to credit, are expected to provide the stimulus for rapid growth in non-coffee exports and in private investment. Public investment is to be accelerated, with particular stress on improving and extending the transportation network and on resolving the country's rapidly growing energy problem. Investments in transportation are expected to lower freight costs substantially and those in telecommunications to facilitate economic activity as well as to minimize the unnecessary use of transport; both are aimed at integrating regional growth centers into a national market. Complementary measures to encourage industry to locate outside the four major metropolitan areas have been introduced. 12. Raising investment and productivity in agriculture and industry are important objectives of the Government's plans to expand growth and employment. Substantial increases in credit are being provided to agriculture. Extension programs are to be expanded to cover larger numbers of small and medium scale farms and widened to include farm management and broader dissemination of crop research. Innovative programs such as the integrated rural development (DRI) and nutrition (PAN) projects financed by the Bank are expected to receive continued high priority. Low income rural areas are to be helped through rural electrification, health and education programs and through an expanded feeder roads program. Industry, which is experiencing high capacity utiliza- tion ratios because of lagging investment in recent years, is expected to benefit from improved functioning of domestic capital markets, as controls are eliminated from these markets, and from increased incentives for exports as the real effective exchange rate recovers to pre-1976 levels. This, plus increased competition from imports as tariff and non-tariff barriers are lowered, should provide the stimulus for greater industrial investment and bring about more rapid technological change. 13. Projections of Colombia's energy balance indicate a rapidly growing deficit which is expected to reach significant proportions in the mid-1980s in the absence of an aggressive energy development program. High priority is being given to the development of additional energy resources in order to avoid the constraint on growth that large scale shortages of energy would entail. The strategy adopted is designed to reduce the country's dependence on petroleum as an energy source by developing substitutes. Major projects  - 5 - are being executed and others prepared to expand hydroelectric power genera- tion, and incentives are being given to private foreign companies for accel- erated exploration and development of the country's petroleum, coal and natural gas potential. Exports of coal and natural gas are expected to offset a large portion of the petroleum imports projected for the mid to late 1980s. Higher energy prices are expected to slow the growth in energy demand. While the total investment cost of future energy development is still being deter- mined, preliminary estimates indicate that the required investment could run as high as US$8.0 billion in 1979 prices over the next decade. Even under the most optimistic assumptions regarding development of energy resources, however, Colombia will continue to rely heavily on energy imports until the mid-1980s when exports of coal and natural gas begin to reduce the nation's net energy deficit. 14. With Colombia's long term growth prospects enhanced by the increased availability of foreign exchange and with inflation expected to moderate, the authorities are beginning to focus policies on a number of issues that need to be addressed if the country is to achieve its full growth potential and poverty is to be alleviated at a more rapid pace. These issues include the reduced competitiveness of Colombian goods in external markets brought about in recent years by the relatively high domestic inflation uncompensated by foreign exchange adjustments, and the slow modernization and lowered efficiency of domestic industry resulting from low investment levels and limited foreign competition. Public investment has not increased significantly in the past few years and domestic resource mobilization is still insufficient, particu- larly in comparison to the expansion required in public investment. While income distribution and welfare trends appear favorable, substantial efforts will have to be made to reduce the widespread poverty still existing in the country. 15. Economic policy is presently in a period of transition as the authorities attempt to combine stabilization and growth measures so as to arrest inflation while still permitting the economy to expand. Some advances have already been made in dismantling the existing stabilization program and in bring- ing about conditions favorable to increased investment and growth. For example, the 100% marginal reserve requirement imposed on commercial banks has been rescinded and the Government has taken a more active role in the capital market through open market operations. The transition process, however, has been moving slowly in certain respects and the Government recognizes the importance of acting quickly in finding appropriate solutions to these potential constraints to growth. Exchange rate adjustments are expected once again to become a tool of development, rather than a component of stabilization policy, and further measures to stimulate private investment and encourage technological change are proposed. As inflationary pressures continue to recede, controls on interest rates and credit, which have already been relaxed somewhat, are expected to be further reduced as are tariff and non-tariff barriers to trade. Such measures, once fully effective, could be expected to produce a sizeable jump in private investment and in economic efficiency. Delays in carrying out economic and social infrastructure investments could adversely affect growth of the pro- ductive sectors and reduce economic welfare. Thus public investment is to be accelerated at the maximum consistent with continued progress toward economic stability. The Government is particularly concerned with the slow growth of energy sector investment (with the exception of investment in hydropower).  - 6 - Although some progress has been achieved as capital outlays by foreign oil companies have risen as a result of more profitable wellhead prices and the growth in demand for petroleum products has been slowed by higher retail prices, the Government intends to advance development of the country's other energy resources, i.e., coal and natural gas. 16. Since in the absence of corrective measures both the current account of the balance of payments and public sector savings are expected to weaken over the next few years, mobilization of domestic resources to support the strong expansion required in public investment is likely to be a critical issue in carrying out the Government's strategy. The authorities are already moving ahead on this issue, having taken measures to improve tax administration and enforcement and to generate resources through large real increases in charges for public services. Additional tax measures will probably be needed, however. Capital market improvements, including realistic interest rates on savings deposits, are expected to stimulate private savings. These efforts are being complemented by measures to encourage the production of basic foodstuffs-- which weigh heavily in the consumer market basket--as a means of reducing infla- tionary pressures and moderating inflationary expectations, which should have a further favorable effect on savings. 17. Given the country's strong resource base and with continued sound economic management, Colombia is expected to achieve annual real GDP growth averaging about 6% during the 1980-85 period. However, because of the expected decline in coffee prices and with accelerating oil imports and the high import content of future investment, the current account of the balance of payments is expected to be in deficit throughout the early to mid-1980s. Colombia is expected, therefore, to continue to be a large net importer of capital for some time to come. Even assuming that the Colombian authorities permit a drawdown of international reserves to the equivalent of three months' imports in the years immediately ahead, gross external capital requirements are projected at US$10 billion between 1980 and 1985, or an annual average of about US$1.7 billion. An increasing proportion of this capital inflow is expected to be provided by foreign commercial and financial sources. 18. Colombia's public external debt repayable in foreign currency amounted to an estimated US$4.4 billion at the end of 1978, equivalent to about 18% of GDP, of which US$2.8 billion was disbursed and outstanding. The Bank/IDA share of this external debt was 26.5% in 1978. Because of the expected decline in commitments from bilateral sources and corresponding recent acceleration in Bank lending, this share is expected to exceed 30% in the early 1980s, before falling to about 27% by 1985. Although the public debt service ratio fell in recent years as export growth accelerated, this ratio is expected to increase from 10% in 1978 to about 15% in 1985. The World Bank's share in public debt service is expected to rise to 26% in 1985 from 24% in 1978. Balance of payments prospects beyond the early 1980s will depend heavily on the timely development of domestic energy sources and on progress made in executing several natural resource-based export- oriented projects currently under preparation. Given the expected continuation of sound economic and financial management and timely execution of the country's energy program, Colombia is considered creditworthy for the required external borrowing on conventional terms.  PART II: BANK GROUP OPERATIONS IN COLOMBIA 19. The proposed loan, the 88th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$2,707.6 million (net of cancella- tions). Of this amount the Bank held, as of March 31, 1980, US$1,924.1 million; IDA made one credit of US$19.5 million for highways in 1961. Disburse- ments have been completed on 49 loans and the IDA credit. During 1972-77 disbursements averaged US$86 million equivalent per year, then declined slightly to US$74 million in 1978 but increased sharply to US$135 million in 1979. The improved performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures which should allow relaxation of fiscal restraint and the recent Bank lending for infrastructure projects, all point to higher levels of disbursements in the future. IFC has made investments and underwriting com- mitments of US$53.9 million in 24 enterprises and, as of March 31, 1980, it held US$16.5 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of March 31, 1980. The Annex also contains summaries on the execution of the 36 ongoing projects. 20. In response to the priority objectives established by successive Governments (self-sustained economic growth, increased employment and improved income distribution), since 1966, Bank lending to Colombia has become increas- ingly diversified and has been concentrated on production-oriented programs and activities which emphasized social as well as economic benefits. All three loans for education have been made during this period, and so have twelve of the fourteen loans for industry, eleven of the thirteen agricultural loans, one loan for a nutrition project, two loans for urban development projects and all nine loans for water supply and sewerage. During the same period, fifteen loans were made in the power and transport sectors, while before 1966, twenty-two out of a total of twenty-five loans were made to these sectors. 21. Bank lending to Colombia in FY79 consisted of two loans each for water supply/sewerage and power, and one each for urban development, aviation development and agricultural credit, totalling US$311.5 million equivalent. In addition to the loan proposed in this report, the FY80 program includes already approved loans for a nickel project, telecommunications, power dis- tribution, and credit to small-scale industry and to development finance companies for medium and large-scale industry. Work is also under way on projects for secondary oil recovery and exploration, land settlement, vocational training, agro-industries, railways, ports, feeder and rural roads, further mining development, power (including village electrification), irrigation, agricultural credit, water supply and sewerage, urban development and environmental improvement, for possible consideration by the Executive Directors during the next two years.  - 8 - 22. The proposed Bank lending conforms closely with the Government's development strategy which is attuned to the requirements of the era that began with the 1973 price rise of internationally traded petroleum. To help Colombia develop domestic sources of energy, a sizeable part of the proposed lending would be for hydropower. The Bank intends to assist the development of coal mine., and petroleum, which hold potential in helping Colombia meet part of its energy requirements and in diversifying exports. Bank involvement 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 (including agro-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 this context, the Bank is assisting the Government in preparing a rural and feeder roads project to integrate the more backward areas of the country into the modern economy. Other loans under preparation for ports and railroads are aimed at helping Colombia handle larger volumes of non-traditional exports and the imported inputs on which the modern sector of its economy relies for expansion. Lending for telecommunications would assist the Government in its efforts to integrate cities and towns into the national economy and reduce the congestion in existing networks. Finally, a relatively large number of loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. Lending for urban development and slum improve- ment, rural electrification, agricultural credit, land settlement, water supply and sewerage, irrigation and environmental improvement projects is principally designed to improve the standard of living of the poor. 23. The operations of external lenders in Colombia are shown in Annex I. While IBRD, IDB, and bilateral sources provided about 75% of total external financing to Colombia in the 1961-72 period, their share has decreased since then to approximately 50% for the 1975-77 period and it is expected that during the period 1979-83 this share will decline further to about 38% of external capital requirements. Like the Bank, IDB has given increased emphasis to social projects and has financed projects in low cost housing, urban and rural development, agrarian reform, university education, water supply, rural electrification and land erosion control. In the future, it proposes to assist Colombia to develop sources of domestic energy and to expand the activity of the productive sectors to help generate increased employment. USAID has supported programs in education, urban development and small farm development, but is phasing out its aid program in Colombia over the next few years with about US$10 million remaining to be disbursed on previous loans. The Governments of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for social and regional integration projects.  - 9 - PART III - THE ENERGY SECTOR AND POWER REQUIREMENTS Energy Resources and Requirements 24. Colombia is endowed with substantial primary energy resources (hydropower, natural gas, petroleum and coal). Low cost hydropower, with a potential estimated at 100 GW, has been developed on a limited basis to date (3 GW). Coal resources are believed to be considerable, with reserves ranging from 10-40 billion metric tons of both steaming and coking coal, but explora- tion has been insufficient. The coal deposits identified are reported to be of high quality, characterized by high caloric and low sulfur content. A recent discovery of natural gas in the Guajira Peninsula, amounting to 3.5 trillion cubic feet, has brought proven reserves to a level well above 4 trillion cubic feet. However, known reserves of crude oil have been falling for several years and are estimated to last less than 13 years at present extraction rates. Of the country's 13 sedimentary basins, few have been systematically explored; thus, there is potential for new oil discoveries. In an attempt to find addi- tional crude oil reserves, the state-owned oil company, ECOPETROL, in part with proposed Bank financing, plans to investigate several basins and undertake de- tailed explorations of promising areas. It is also carrying out explorations and development in association with foreign oil companies. 25. Since 1965, output of primary energy has lagged behind overall economic growth, mainly because of declining crude oil output. By 1978, production of crude (267 trillion Btu) had fallen to 65% of 1965 output. While during 1965-78 total energy output increased by 12%, from 578 trillion Btu to 650 trillion Btu annually, energy consumption increased by 132%, rising from 271 trillion Btu to 628 trillion Btu. (Exports and losses account for the difference between production and consumption figures.) By 1979, hydro- carbon imports exceeded exports by US$362 million equivalent. Projections of Colombia's energy balance indicate an expanding deficit that could become so large in the 1980s as to become a constraint on economic growth (paragraphs 13 and 15). Energy Development Objectives and Strategy 26. As stated, the Government's objective is to overcome the energy deficit by developing domestic energy sources and by promoting rational use of them. To this end, it has adopted several measures. First, it has recast its hydrocarbon pricing and regulation policy to stimulate output of petro- leum, natural gas and coal. Foreign oil companies, in response to these measures, have initiated new explorations based on association contracts (paragraph 15). Second, the Government has been moving domestic consumer prices for hydrocarbons toward international levels, and has adopted a policy calling for charging consumers the full cost of electric energy, in order to promote efficient energy use and self-generate an important share of the financing required for investment (paragraph 31). Third, CARBOCOL, a Government agency established to develop the country's coal resources, has concluded contracts with various foreign companies to explore and develop several coal fields, particularly El Cerrejon, in the Guajira region. Fourth, considerable  - 10 - substitution of gas for petroleum products in industry and thermal power generation is being carried out on the Atlantic Coast. Fifth, a program for rapid expansion of power generation and transmission facilities to meet forecast demand over the 1978-85 period is being carried out. Lastly, the Government has concluded a contract with the French Minatome Group to explore the country's uranium potential. Although these measurps have already yielded positive results, the Government recognizes that its planning and policy efforts have been insufficiently coordinated among the various energy subsectors. To remedy this, the Government has begun a study to evaluate the country's options in developing domestic energy resources (mainly hydro-power, coal, oil and natural gas). The study will also focus on the policy measures that can maximize the benefits to be derived from recommended investments, based on least cost solutions. The Bank is working closely with the Government in this endeavor and would continue to do so during implementation of the proposed project. In the interim, the project would assist the Government in increasing output of low-cost hydroelectric energy. The Power Market, Service Levels and Institutional Framework 27. Electric power is the fastest-growing form of energy use in Colombia. Its share of total energy consumption has risen from 14% in 1960 to 23% in 1978. Colombia's installed capacity at the end of 1978 was about 3,900 MW, including self production; hydro stations account for 69% of total power generated. Since 1971, production of electricity has been growing at an annual rate of 9.7%, i.e., one and a half times as fast as the growth rate of GDP. Power sales have also been rising rapidly (9.2% per annum since 1972). Annual per capita electricity generation stands at 670 kWh, which is below the average for Latin America. Households (44% of the total), industry (32%) and commerce (14%) are the major electricity users. 28. About 62% of Colombia's 25.2 million population has electric power, compared to 26% in 1950 and 45% in 1970. The urban population, comprising about 66% of the population, has greater access to electricity. 1/ In 1976, for example, 85% of households in large cities (population of 50,000 or more) had electrical service while in rural towns (population between 500-2,500) the corresponding figure was 36%; in other rural areas, 16%. With the assistance of external lenders, the Government is carrying out programs to increase the supply of electricity to rural areas. 29. The Ministry of Mines and Energy is charged with formulating national policy for power generation, transmission and distribution. In defining investment priorities, it shares responsibility with the National Planning Department (DNP). The Government cannot enforce its policies directly on the municipally controlled power companies, but Interconexion Electrica, S.A. (ISA), a generating and transmission company, of which the shareholders are the largest municipal power companies and the Government-owned national 1/ Residents of cities with 2,500 or more inhabitants.  - 11 - power companies, 1/ provides a mechanism for reaching agreement on major issues affecting the sector. ISA defines the generation and transmission expansion program for the interconnected s)stem; after approval by DNP, this becomes the national power expansion program. Public utility tariffs are regulated by the Junta Nacional de Tarifas de Servicios Publicos (JNT) in DNP. JNT, which was established in the late sixties with Bank support, has the power to approve requests from the power companies for tariff increases. The power companies, however, are free to set rates lower than those approved. Power Development and Its Financing 30. Colombia's power sector has developed rapidly. Between 1950-1977 installed generating capacity increased by 3,690 MW or about sixteenfold, electricity service has been provided to one-third more of the population (paragraph 28) and the task of interconnecting the country's regional systems to form an integrated national network is nearing completion (paragraph 39). A substantial part of this expansion was financed with internal cash generation (in the case of the large municipal companies, about 40% of total capital outlays) and with contributions from the National Treasury, chiefly to ICEL, CVC and CORELCA. The Bank and IDB were the main sources of foreign financing for the power sector, although in recent years suppliers' credits and external commercial banks have increased their participation. 31. During 1971-74, power tariff adjustments lagged behind cost increases and the companies' finances deteriorated, with the result that construction of needed works was delayed and the operating efficiency of the companies suffered. However, investment outlays have picked up sharply since 1977, when the Government and the major power companies initiated a program of tariff increases with the aim of generating an adequate portion of investment funds for planned expansion (paragraph 26). They propose to continue adjusting tariffs as necessary to generate sufficient resources for investment. Also, to promote rational energy use, the power companies and the Government, under the San Carlos I Hydro Power Project (1582-CO), are studying the internal structure of rates with a view toward bringing them more in line with the cost of supply to each consumer category. The study is taking into account the Government's social welfare policies with respect to rates to be charged to low income consumers, which include cross-subsidies between the high and low income electricity users (paragraph 56). Power Requirements and Proposed Investments 32. To catch up with rising power requirements, in view of the under- investment in new facilities during the first half of the 1970s and to sub- stitute some electricity for more costly forms of energy, effective generating 1/ Empresas Publicas de Medellin (EPM), Empresa de Energia Electrica de Bogota (EEEB), Corporacion Electrica de la Costa Atlantica (CORELCA), Corporacion Autonoma Regional del Valle del Rio Cauca (CVC), and Instituto Colombiano de Energia Electrica (ICEL).  - 12 - capacity is planned to be increased by 115%, or about 4,300 MW, by 1985. Of this total, about 3,200 MW are under construction. 33. Investments in generation and transmission through 1985 are expected to amount to about US$4.2 billion in mid-1979 prices, of which some 60% would be foreign exchange. Thus, in accordance with national policy of financing only foreign-costs with external borrowings, external financing on the order of US$600 million equivalent on average per annum, in nominal terms, would be required. A substantial share of such borrowings is expected to come from foreign capital markets, which have recently been providing increased financing to the power sector, including to Bank-financed projects. Future distribution investments are estimated to amount to at least 25% of total investments. 34. To provide for future sector expansion, ISA and its shareholders, under San Carlos I, are preparing a Master Plan for generation and transmission facilities covering the period 1980-1990 in detail, and 1991-2000 in more general terms. This plan is being supplemented by a Master Plan for distri- bution covering the same period. This combined effort should encourage not only improved investment planning but also greater attention to system design, operation and maintenance in light of modern techniques with a view toward enhancing the quality and reliability of service to consumers. Overall, the consolidated master plan is expected to provide a valuable framework for long-range decisions on sector expansion, including rural electrification, financing and pricing. Recent Sector Developments 35. In recognition of the power sector's important role in Colombia's development process, in the mid-1970s the Government and the main power companies established a framework, the Sochagota Agreement, for orderly and efficient sector expansion. To enable equitable sharing among the regions of the financial burden of the large investments contemplated, to foster least- cost development of high priority generating plants, and to assure that adequate supply from these plants would reach all regions, the Agreement envisaged that ISA would be responsible for planning, building and owning all plants of national interest. Since then, ISA has functioned on this basis. However, in 1979, the shareholders of ISA expressed reservations about the concentration almost 70% of planned expansion in generating facilities through 1985 in the national company and the associated loss of parity among themselves in relative generating capacity. Another worrisome aspect has been the fact that ISA's construction capacity is nearly fully committed over the next few years with works in progress (1,910 MW of hydro plant, numerous 230-kV lines and a 500-kV line). These reservations have given rise to a proposal that the four plants in ISA's 1980-85 Investment Program be constructed, owned and operated by individual shareholders. Although these plants represent less than 1% of the hydroelectric resources that Colombia will develop over the next 20-30 years, the Government feels that it should maintain a sound pattern of development and use of the country's electric energy resources. Therefore, it has confirmed-in principle that (a) ISA would have ownership of a substan- tial portion of total sector capacity sufficient to enable it to function  - 13 - effectively as the planning, coordinating and future dispatch agency for the national system, (b) the regions would continue to share, through investments in ISA, in the cost and benefits of relatively low-cost hydro-electric resources, which are geographically concentrated in only a few regions, and (c) viable financing plans would precede the undertaking of any major plant investments. The Bank has been working closely with the Government and the companies in defining the specific long-term arrangements that would enable Colombia to make further progress along the lines reflected in the Sochagota Agreement, while taking due account of the realities attendant upon the heavy investments planned. Another matter under discussion between the Government and the Bank has been the rapid growth in overdue payments to ISA by the largely rural-based ICEL, which depends upon national budgetary resources to meet a substantial portion of its financial obligations to ISA. The Government realizes that, if not resolved, this problem could constrain the sector's development capacity. Thus, in seeking a means to overcome it, it is actively considering the establishment of an Electricity Development Fund to assist in financing the sector's development (a surtax on electricity use would be the principal source of revenue for the fund). The Power Market of Medellin and of the Surrounding Area 36. Medellin is the capital and principal center of Antioquia, the most heavily populated state in Colombia. Medellin and its immediate suburbs, situated in the Aburra Valley of the Central Mountain range, account for about one-half of the department's estimated 3.5 million people. Colombia's industrialization began in Medellin which for many years was the leading industrial and commercial center in the country. Though it has been overtaken by the rapidly growing Bogota, it is still the major industrial center for production of a large range of commodities, including textiles, garments and leather goods, and accounts for about 23% of the country's industrial employment and 19% of its output. Surrounding Medellin is also a rich agricultural area farmed by notably efficient small owner-operators (many of whom are being provided with assistance under a loan for Integrated Rural Development, 1352-CO) producing flowers, beans, vegetables and a variety of other food crops. Colombia's major coffee producing region is also nearby. 37. The area within about a 35 km radius of Medellin includes a large number of towns ranging in population from about 10,000 to over 100,000 inhabitants. These towns have been growing rapidly since the physical growth potential of Medellin is approaching its limits. Two major developments are expected to influence greatly the spatial development of the entire southern region of the department. Construction of a new Medellin airport at Rio Negro, in the valley adjacent to the Aburra Valley, is currently underway with the assistance of a Bank loan (1624-CO). An industrial and free trade zone is also planned for construction close to the airport. Together, these develop- ments are expected to result in a rapid growth of industry, population, housing and services. Another urban complex is also planned north of Medellin adjacent to Bello, a town with over 100,000 population, which may nearly double the population of that area by 1990. The demand for public services, including electricity, can be expected to grow rapidly in areas further away from Medellin.  - 14 - 38. EPM supplies electricity to the city of Medellin, to 35 of the above-mentioned towns and, through sales to the Electrificadora de Antioquia, to 67 small municipalities. In 1978, EPM served directly 270,000 customers, plus a further 100,000 users through sales to the Electrificadora, who in that same year consumed 3,035 GWh. Households (44%), industrial (30%), commercial (7%) and bulk sales (14%) are EPM's major customers Reflecting the robust growth of industrial, commercial and agricultural activity, the company's sales have been growing rapidly at an annual rate of 9.6% since 1968. For the reasons cited above, it is expected that EPM's sales will continue to grow during the period 1978-86 (about 9% per annum). To serve the expanding market and improve the coverage and quality of services in rural areas, EPM will undertake substantial investments in new facilities, both directly and through participation in ISA. The expansion program (1980-86) includes the proposed project, which would enable EPM to increase its generat- ing capacity, subtransmission and distribution system, to supply inexpensive electricity to rural areas in place of some costly and unreliable power now provided from small local diesel plants, and to provide part of the electricity required by the interconnected system. Further, the construction of a regional energy control center would enable EPM to participate, together with ISA and its other partners, in an effort to achieve least-cost operation of the national electricity network. Finally, the capability of EPM's professional staff would be enhanced under the project. Bank Participation in the Power Sector 39. Since 1950, the Bank has supported Colombia's power sector with loans totalling US$763 million which have assisted the expansion of generating capacity and transmission and distribution facilities in the systems serving Bogota, Medellin, Cali, Cartagena, Bucaramanga and Manizales, including expansion of electricity distribution to low income areas (874-CO, 1973). The recently approved Bogota Power Distribution Project (US$87 million, March 1980) is the first Bank loan to Colombia to support exclusively distribu- tion expansion and, in addition to other beneficiaries, would directly benefit about 340,000 lower income consumers. In addition, the Bank has supported rural electrification under 246-CO (1960) and 313-CO (1962) and under the ongoing Integrated Rural Development Project (1352-CO, 1977). The most recent loans included the 500-kV Interconnection Line (1583-CO, 1978) and the San Carlos I and II Hydropower Projects (Loans 1582-CO, 1978; 1725-CO, 1979) which would, respectively, complete the task of interconnecting the country's regional power systems begun under 575-CO (1968), and add 1240 MW of capacity to the national interconnected system. EEEB's Mesitas Hydropower Project (1628-CO, 1979) would meet about 95% of projected incremental demand in the Bogota system during 1982-84. Taken together, the abovementioned projects reflect the Bank's participation in overall power development in Colombia, from the planning stage through financing and construction of generation and transmission facilities, to delivery of service to the final consumer. It is envisaged that the proposed project would be followed in the coming year by a project in support of village electrification in northern Colombia and further projects for hydro power development to assist Colombia in developing renewable domestic sources of energy.  - 15 - 40. Past Bank lending to Colombia's power sector has been found gen- erally successful in several OED reports. For instance, the most recent report, "Power Interconnection (Loan 575-CO) and Chivor Hydroelectric Projects (Loan 681-CO)" (Report No. 2720, October 29, 1979), commented upon the Bank's participation in Colombia's successful effort to evolve a stronger and more efficient power sector organization. Through the creation of ISA in conjunc- tion with these projects, and the steps taken to overcome financial and institutional difficulties, real progress was made toward more coordinated sector development. Despite implementation delays and increased costs, both projects were successfully implemented. Also, the report entitled "Bank Operations in Colombia, an Evaluation" (Report No. Z-18) of May 25, 1972, concluded that Bank financing was successful in assisting the power companies to develop hydroelectric plants at lower unit cost than they otherwise would have been able to do. In turn, this permitted greater urban coverage as well as cheaper and more reliable electricity to supply to industry. The report commended Bank efforts in the establishment of JNT and the central intercon- nected system which facilitated further power sector development. Among other things, the report recommended that in the future the Bank pay increased attention to the companies' financial planning, tariff structures, distribu- tion programs and energy losses. These points have been addressed under the aforementioned recent loans, and complementary measures are provided for under the proposed project. 41. EPM has received five Bank loans, totalling US$135 million for power development and a recently-approved loan of US$44 million for telecom- munications. The previous power loans have assisted with expansion of generation, transmission and distribution capacity. An OED report, "Third Medellin Power Project - Loan 369-Co" (Report No. 450, May 24, 1974) concluded that the project had been very well executed despite cosiderable geological difficulties. PART IV - THE PROJECT Background and Objectives 42. The project, prepared by EPM, with the assistance of consultants, comprises part of its 1980-86 investment program, and covers planned 1980-84 hydro power, transmission and urban distribution system expansion. The project was appraised by a Bank mission which visited Colombia in November/ December 1979. Negotiations were held in Washington D.C., during the week of April 28, 1980, with a Colombian delegation led by Dr. Virgilio Barco, Ambassador of Colombia to the United States, and Dr. Diego Calle, General Manager of EPM. 43. Project objectives are: (a) to provide the power capacity and facilities necessary to supply electricity to an estimated 330,000 urban consumers by 1984, including about 60,000 new industrial, commercial and residential users; (b) to expand electricity supply to rural areas, as well  - 16 - as to enable substitution of relatively inexpensive hydro-based electricity for costly and unreliable diesel plant generation; (c) to enable EPM to participate in a program for least-cost operation of the national power system; (d) to assist EPM in forming the specialized technical expertise needed to cope with its increasingly complex responsibilities; and (e) to continue support of the Government's objective of sound sector financing through maintenance of adequate tariff levels and economic structure of tariffs to promote rational energy use. Project Description 44. The physical facilities comprise: (a) Guadalupe IV Power Plant: the 213-MW hydroelectric generating plant, to be constructed on the Guadalupe River, would operate under a gross head of 417 m and generate an average of 1,077 GWh per annum. It would consist of a power tunnel (6.5 km), two surface penstocks, a surface power station with 3 vertical turbines and generators (3x71 MW) and a substation with two banks of 3 single- phase transformers of 59 MVA each; (b) Transmission and Subtransmission: 10 km of single circuit 44-kV lines, 30 km of single circuit and 15 km of double circuit llO-kV lines, and 93 km of double circuit 230-kV lines; (c) Substations: expansion of 5-6 existing and construction of 4-5 new substations, together with about 420 MVA of transformer capacity; (d) Urban Power Distribution: renovation and expansion of EPM's urban distribution network, consisting of about 129 km of 13.2-kV overhead lines, 111 km of 13.2-kV underground cables, 2.2 km of 44-kV overhead cables, 111 km LT lines, 11 MVA in distribution transformers and miscellaneous specialized equipment; (e) Energy Dispatch Center: construction of a regional control center which, together with similar centers to be constructed by EEEB and CORELCA, would function as local satellites of ISA's national energy control center. In order to realize the full benefits of least cost operation of the national grid, the centers would have to be completed as soon as possible. The required detailed studies for EEEB's center are being carried out under 1807-CO; ISA's national center is under construction and CORELCA has recently awarded a supply-and-erect contract. Designs for all the facilities are compatible with each other; and (f) Training: 8 scholarships in each of the years 1981-84 would be provided for specialized training of EPM's professional staff, in the areas of hydrology, soil and rock mechanics, geomorphology, seismology, energy planning and dispatch, specialized equipment and civil works. Also, EPM's power planning staff would receive training at suitable foreign public utilities in order to update their expertise. This program would be carried out in coordination with ISA, which is studying its similar manpower requirements and possible training resources (under 1725-CO).  - 17 - Costs and Financing 45. Total project cost is estimated at US$228.3 million equivalent, of which US$155.2 million equivalent, or 68%, correspond to the foreign exchange component. During project execution (1980-84), EPM plans to carry out other investments at a cost of US$467 million equivalent, including interest during construction and investments in ISA, and will require an increase in working capital of US$39 million equivalent. Project costs are based upon estimates prepared by EPM and include physical contingencies amounting to approximately 13% and price contingencies equivalent to about 48% of base costs. The cost of consultant services for engineering supervision includes 3,200 man-months at an average of US$1,100 per man-month for the Guadalupe hydro plant and 20 man-months for the transmission study at an average cost of US$10,000 per man-month. All such services would be provided by consultants whose qualifica- tions, experience, and terms and conditions of employment would be satisfactory to the Bank and EPM (Section 3.02 of the draft Loan Agreement). 46. The proposed loan of US$125 million would finance 55% of the total funds required for the project, i.e., 80% of the project's foreign exchange cost. The remaining costs (US$103.3 million) would be financed by EPM's internal cash generation (32% of total cost), commercial borrowings and suppliers' credits (13%). The Borrower, EPM 47. EPM is an autonomous company owned by the Municipality of Medellin. It was established in 1955 and is responsible for providing Medellin and nearby areas with electricity, water, sewerage, and telephone services. 48. EPM is administered by a seven-member Board of Directors and a General Manager appointed by the Board. The General Manager is responsible for day-to-day operations and is assisted by four Assistant Managers heading, respectively, the administrative, financial and commercial, technical and operational branches of the organization. Additionally, a secretary general in charge of legal matters and office records and a planning director report directly to the General Manager. Below the level of the managers, each of whom is responsible for all three services, the organization is administered separately for each service. The corresponding three branches of EPM function independently of each other. The Board of Directors is headed by the Mayor of Medellin who selects the remaining members at large. 49. EPM's management and staff are, in general, well-qualified and competent. Average length of employment is 10 years, as turnover is low. Pay scales are attractive on the whole. EPM has a satisfactory training program for existing and new operational staff; in 1979, 950 participants each obtained about 60 hours of instruction. However, EPM's professional staff requires some post-graduate work in highly specialized areas to enable the entity to reduce reliance on consultants for detailed design, procurement and construction supervision. Financing for this has thus been included in the proposed project (paragraph 44).  - 18 - 50. EPM had 3,618 employees at the beginning of 1979 of which 1,700 are directly concerned with the Power Department. The latter includes a technical staff of 56, and 759 operations personnel, as well as 33 construction staff. The history of the company's staff growth over the past ten years, in relation to number of customers served and energy sold, shows a steadily improving trend: 167 customers and 2.9 GWh per employee in 1979, compare-d with 138 customers and 1.4 GWh per employee in 1970. These figures compare favorably with those of other electric utilities serving similar markets. 51. EPM's accounting and internal audit systems are satisfactory. Independent external auditors, satisfactory to the Bank, would carry out annual audits under the proposed loan (Section 5.02 of the draft Loan Agreement). Billing and collection procedures are sound; on average during 1973-79, accounts receivable as a percentage of annual sales have not exceeded 19.2%. EPM has already started improving the insurance coverage of its power assets. In line with this, it has agreed to maintain adequate insurance in the future (Section 4.03 of the draft Loan Agreement). Finances 52. EPM has in general maintained a satisfactory financial position throughout its 21-year relationship with the Bank. The measures it has taken under the San Carlos projects, including full revaluation of assets for monitor- ing financial performance, have strengthened EPM's financial structure. At the end of 1978, EPM's debt to equity ratio was 36/64, calculated on the basis of revalued assets and the coverage ratio of debt service plus investments in ISA was 1.4. The company's cash flow and working capital flow have been adequate in recent years, with the current ratio rising from 1.5 in 1976 to 3.3 in 1978. EPM's 1980-84 investment program amounts to US$695 million equivalent, of which US$228.3 million pertain to the proposed project. In line with Government policy to finance the local cost of investments only from domestic sources, EPM would be required to generate internally 57% of the funds required during this period, taking into account the limited availability of financing in the domestic capital market. The proposed loan represents 18% of the investment program's requirements. Approximately 36% of total investments would be financed from other external sources. The favorable structure of EPM's debt and its program of tariff increases (paragraph 56) place it in a good position to obtain the additional financing it will need over and above that provided by the Bank. For example, EPM has recently signed a loan with the Bank of America for US$32 million for transmission and substation system expansion (with a term of 10 years including 5 years of grace; interest, LIBOR plus 5/8% for the first 2 years, 3/4% thereafter; management charges 1/2%, commitment 1/4%, government guarantee not required). Prior to effectiveness of the proposed loan, EPM would make satisfactory arrangements for the balance of financing required to carry out scheduled investments during 1980-82 (Section 8.01 of the draft Loan Agreement). 53. The projected cash generation in EPM's financing plan is based upon the company's planned tariff increases. The plan assumes continuance through 1983 of the recently re-instated 2.2% monthly tariff increase (Section 5.08 of the draft Loan Agreement), which had been reduced to 1.5% (residential)  - 19 - and 1.8% (all other customers) in 1979, plus a further increase estimated at 10% in June 1981, in order to generate adequate cash. 54. Based on the above, EPM's projected net operating income would produce minimum annual rates of return on fully revalued assets ranging from 9% in 1980 (as provided under 1582-Co), to 10.5% in 1981, 13% in each of the years 1982 and 1983, and 10% in 1984 and annually thereafter (Section 5.07(b) of the draft Loan Agreement), compared with the 9% yearly agreed under the San Carlos loans. (During 1978 and 1979, EPM exceeded the agreed annual targets.) These returns are consistent with the aforementioned internal cash generation (paragraph 52). 55. EPM's debt service coverage ratio during 1980-84 would range from 1.5 in 1980 to 2.6 in 1984 as a result of the substantial revenue increase and the grace period of foreign borrowings. In subsequent years, the ratio is expected to fall no lower than a satisfactory 2.2. EPM has confirmed that, unless the Bank should otherwise agree, it would not incur debt in any fiscal year which would reduce the coverage of its maximum future debt service by internal cash generation below 1.5 times (Section 5.06 of the draft Loan Agreement). It is expected that the company's debt/equity ratio will improve slightly from the current proportion of approximately 36/64 during the next two years, reaching 33/67 by the end of 1984. Lastly, to ensure adherence to the financing plan as well as to the national least- cost power expansion program, until project completion, EPM has agreed not to undertake without prior concurrence of the Bank, aggregate investments in any year in excess of 1% of the value of its net fixed assets in service other than for: (a) the proposed project; (b) generation expansion included in the national expansion program (with the exception that plants of 100 MW or less could be undertaken under the 1% limitation referred to above), provided that adequate financing would be available; (c) its obligations to ISA; and (d) other investments in its agreed 1980-84 program (Section 5.10 of the draft Loan Agreement). In addition, EPM would not incur, without Bank concurrence, investments unrelated to the operations of its departments (Section 5.09 of the draft Loan Agreement). 56. Tariff Structure and Rates. EPM's average rate has been rising in real terms and is scheduled to continue doing so over the next three years. However, its charges to industrial and commercial consumers are higher than to households, even though the cost of servicing the latter is estimated to be at least equal to the cost of the former. Since late 1977, the difference between residential and other rates has widened by the alloca- tion of a smaller portion of overall rate increases to the residential category. A study on cost of service to final consumers and pricing implica- tions, being carried out under San Carlos I, is expected to detail the precise dimensions of the structural imbalance. In view of the importance to the energy sector, and to the Colombian economy as a whole, of minimizing dis- tortions in energy pricing structure, EPM would take account of the study's recommendations and establish a related program in agreement with the Bank. The revised tariffs would take account of the government's social welfare policies with respect to the lowest-income consumers. Should the study be delayed, EPM would implement an interim program to correct the most obvious rate differentials (Section 5.12 of the draft Loan Agreement).  - 20 - Procurement, Implementation and Disbursements 57. All the items to be financed by the proposed loan (except consult- ing services) would be procured by international competitive bidding (ICB) under Bank guidelines. Colombian manufacturers would receive a margin of preference of 15% or the applicable import duties, whichever is the lower, for purposes of bid evaluation. The cost estimate assumes that local manufacturers would supply conductors, constructional steel, tower and miscellaneous distribution equipment, at an aggregate cost of about US$10 million equivalent. Project works would begin in June 1980 and be completed by end-1984. 58. Disbursements would be made against: (a) 52% of total expenditures for civil works; (b) 100% of foreign expenditures for directly imported equipment and 94% of the ex-factory cost of locally-manufactured materials and equipment; (c) 100% of foreign expenditures for foreign consultants and 50% of local expenditures for local consultants; and (d) 100% of foreign expenditures for training. Retroactive financing in the amount of US$500,000 has been included in the proposed loan to avoid delays in EPM's construction program. The loan is expected to be fully disbursed by June 30, 1985. Benefits and Risks 59. The project would have a considerable impact upon the State of Antioquia, and particularly upon the municipality of Medellin and the surround- ing areas. Through provision of needed electricity services to industrial and commercial establishments, the project would facilitate continued growth of economic activity in the area and support the Government's objective of stimulating development of townships in Medellin's sphere of influence. Increased employment opportunities are expected to result from supplying electricity to about 6,000 new industrial and commercial users. Moreover, the standard of living of the substantial number of lower-income people who would be connected for the first time to electricity service would be enhanced. The increased bulk sales to other areas of Antioquia would provide support to the Government's aim of substituting hydro-based energy for costly power currently supplied from local diesel plants, as well as to the aim of increasing the access of the rural population to basic services. It has been found in the Medellin area that provision of reliable electricity supply to small-scale economic activity improves efficiency and productivity. 60. A return on investment was calculated by relating the combined costs (capital and incremental operating/maintenance costs) of EPM's 1979-86 development program to estimated incremental revenues at levels that would prevail over the period (as a proxy for benefits). On this basis, the return on investment would be 13%, i.e., above the estimated opportunity cost of capital in Colombia. The incremental revenues, however, which are based on tariffs rather than on the--unmeasurable--consumers' willingness to pay, underestimate the benefits to subscribers, particularly in commerce and industry. The measurable benefits also exclude the social benefits accruing from connecting more than 50,000 households for the first time.  - 21 - Ecology 61. EPM has carried out previous projects with due regard to environ- mental protection and safety considerations. Under the proposed project, the works will be carried out in a like manner, consistent with the aim of minimal effect on land usage and adverse visual impact. PART V: LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Loan Agreement between the Bank and EPM, the draft Guarantee Agreement between the Republic of Colombia and the Bank and the report of the Committee provided for the Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 63. Special conditions of the loan are listed in Section III of Annex III. An additional condition of effectiveness would be that EPM has made satisfactory arrangements to secure financing for the balance of its 1980-82 investment program (paragraph 52). 64. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RECOMMENDATION 65. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 19, 1980  -22- ANNEX I COLOMBIA - SOCIAL INDICATORS DATA SHEET Page I of 5 COLOMBIA REFERENCE GROUPS (ADJUSTED AylRAGES LAND AREA (THOUSAND SQ. KK.) - MOST RECENT ESTIMATE) - TOTAL 1138.9 SAME SAME NEXT HIGHER AGRICULTURAL 225.6 MOST RECENT GEOGRAPHIC INCOME INCOME 1960 /b 1970 /b ESTIMATE /b REBION /c GROUP /d GROUP /e GNP PER CAPITA (US$) 240.0 380.0 870.0 1124.4 1097.7 1942.6 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 491.0 606.0 685.0 943.1 730.7 1646.7 POPULATION AND VITAL STATISTICS POPULATION, KID-YEAR (MILLIONS) 15.8 21.3 24.6 URBAN POPULATION (PERCENT OF TOTAL) 48.2 59.8 65.5 59.3 49.0 51.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 38.0 STATIONARY POPULATION (MILLIONS) 55.0 YEAR STATIONARY POPULATION IS REACHED 2065 POPULATION DENSITY PER SQ. KM. 14.0 19.0 22.0 23.5 44.6 28.2 PER SQ. KM. AGRICULTURAL LAND 71.0 93.0 109.0 80.5 140.7 100.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 46.0 46.8 38.0 40.9 41.3 35.4 15-64 YRS. 51.0 50.5 59.0 54.4 55.3 56.3 65 YRS. AND ABOVE 3.0 2.7 3.0 3.9 3.5 5.1 POPULATION GROWTH RATE (PERCENT) IOTAL 3.1 3.0 2.1 2.4 2.4 1.7 URBAN 6.0L. 5.2 3.9 3.7 4.5 3.0 CRUDE BIRTH RATE (PER THOUSAND) 46.0 36.0 30.0 32.8 31.1 27.5 CRUDE DEATH RATE (PER THOUSAND) 14.0 11.0 8.0 8.5 9.2 9.1 GROSS REPRODUCTION RATE 3.2 3.2 1.8 2.4 2.2 1.8 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 115.4 263.8 USERS (PERCENT OF MARRIED WOMEN) .. .. 48.6 17.7 34.7 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 97.0 99.0 107.0 99.4 104.4 102.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 94.0 92.0 94.0 /k 107.0 105.3 120.8 PROTEINS (GRAMS PER DAY) 50.0 51.0 45.5 /k 60.4 64.4 80.9 OF WHICH ANIMAL AND PULSE 28.0 29.0 36.8 /k 28.3 23.5 31.3 CHILD (AGES 1-4) MORTALITY RATE 17.0 13.0 9.0 6.7 8.6 5.1 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 53.0 58.5 62.0 63.6 60.2 65.6 INFANT MORTALITY RATE (PER THOUSAND) .. .. 98.0/j 76.1 46.7 45.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL *- 63.0 64.0 63.4 60.8 69.4 URBAN .. .. 73.0 79.5 75.7 85.1 RURAL .. .. 46.0 38.6 40.0 43.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 47.0 48.0 58.8 46.0 70.1 URBAN .. 75.0 73.0 77.8 46.0 88.3 RURAL .. 8.0 13.0 24.5 22.5 33.2 POPULATION PER PHYSICIAN 2400.0 2170.0 1820.0 1841.9 2262.4 1343.2 POPULATION PER NURSING PERSON 3740.0 2040.0 .. 933.7 1195.4 765.0 POPULATION PER HOSPITAL BED TOTAL 580.0 510.0 530.0 563.4 453.4 197.6 URBAN .. .. 320.0 279.4 253.1 260.2 RURAL .. .. 9670.0 1140.9 2732.4 1055.0 ADMISSIONS PER HOSPITAL BED .. 23.0 25.0 25.7 22.1 17.3 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 6.0 5.7/1 5.0 5.3 4.7 URBAN .. .. 5.S/j 4.8 5.2 4.4 RURAL .. .. 5.9s 5.3 5.4 5.1 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. -.8/ 1.3 1.9 1.1 URBAN .. .. 1 .6f 1.3 1.6 1.2 RURAL .. .. 1 2.5 1.2 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 47.0/f .. 58.1/1 54.3 50.0 66.0 URBAN 83.d7F .. 87 .5 80.1 71.7 85.1 RURAL 8.07 .. 13.2j 14.2 17.3  -23- ANNEX I Page 2 of 5 COLOMBIA - SOCIAL INDICATORS DATA SHEET COLOMBA REFERENCE GROUPS (ADJUSTED AyERAGES - MOST RECENT ESTIMATE) - SAME SANE NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 /b 1970 lb ESTIMATE lb REGION /c GROUP /d GROUP /e EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 77.0 100.0 106.0 107.3 102.5 101.7 MALE 77.0 96.0 103.0 109.1 103.6 110.0 FEMALE 77.0 102.0 109.0 107.4 97.1 92.8 SECONDARY: TOTAL 12.0 23.0 35.0 40.5 33.5 51.2 MALE 13.0 23.0 35.0 40.4 38.4 56.4 FEMALE 11.0 22.0 35.0 39.0 30.7 43.7 VOCATIONAL ENROL. (X OF SECONDARY) 31.0/h 21.0 17.0 18.5 11.5 18.3 PUPIL-TEACHER RATIO PRIMARY 38.0 38.0 30.0 37.1 35.8 27.1 SECONDARY 11.0 17.0 19.0 17.9 22.9 25.3 ADULT LITERACY RATE (PERCENT) 63.0 73.0 81.0 77.4 64.0 86.1 CONSUMPTION PASSENCER CARS PER THOUSAND POPULATION 7.0 11.0 16.5 29.1 13.5 53.4 RADIO RECEIVERS PER THOUSAND POPULATION 139.0 105.0 119.0 172.1 122.7 225.9 TV RECEIVERS PER THOUSAND POPULATION 11.0 38.0 51.0 67.9 38.3 102.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 56.0 69.0 76.1 40.0 78.5 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. 6.8 4.2 3.7 3.6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 5100.0/f 6200.0 6700.0 FEMALE (PERCENT) 18. 24.6 24.6 21.5 25.0 24.5 AGRICULTURE (PERCENT) 51.4 37.9 31.0 30.2 43.5 28.9 INDUSTRY (PERCENT) 19.2 21.0 23.0 23.8 21.5 30.6 PARTICIPATION RATE (PERCENT) TOTAL 30.6 29.7 29.7 30.9 33.5 33.8 MALE 49.8 44.9 44.7 47.3 48.0 51.3 FEMALE 11.6 14.6 14.6 13.3 16.8 16.3 ECONOMIC DEPENDENCY RATIO 1.7/f 1.7 1.6 1.5 1.4 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 41.2/fi 31.9/i ., 23.7 20.8 HIGHEST 20 PERCENT OF HOUSEHOLDS 67.7/f i 60.iTi 58.7 52.1 57.6 LOWEST 20 PERCENT OF HOUSEHOLDS 2.17T 3.5/i . 2.9 3.9 3.4 LOWEST 40 PERCENT OF HOUSEHOLDS 6.8Ti 10.17? i 9.9 12.6 11.0 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 214.0 265.6 270.0 RURAL .. .. 197.0 185.1 183.3 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 267.0 396.3 282.5 550.0 RURAL .. .. 122.0 308.1 248.9 403.4 ESTIMATED PoPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 34.0 35.2 20.5 RIURAL .. .. .. 46.6 35.3 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwtse noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1977. /c Latin America & Caribbean:; d Intersediate tiddle Income (5551-1135 per capita, 1976); /e Upper Middle Income (51136-2500 por capita, 1976); If 1966; a. 1951-64; L Includes teacher-training at the third level; /i Economically active population; Li 1973. /1 National data, not strictly comparable vith previous years. Recent PAO data show 102.0, 52.0 and 26.0, respectively for these three measures.- Most Recent Estimate of GNP per capita is for 1978. Revised October 1979  ANNEX I -24- Page 3 of 5 DUnI3TIOUS Or SOCIAL CISICATORS Notes: Although the data are draw from sores generally judged the most authoritative and reliable, it should also be noted that they MaY not be uten-- tti ..Lly comparable because of the lack of standardloed definitions and nonCepta used by different countries in collecting the data. The data are, nontheless, se flh.1 to deooribe orders of magnitude, indiotte treds, and oharactei.e osrtato major differences hetoren countries. The, djuotod group aveage for each indicator are population-wighted no-tcici means, eoo]od.tg the eutreme value of the indinator and the mast Populated countrydo eahgoP. ma to lack of data, grop avrages of all indicators for Capital Surpius Oil tporters and of Indicators of Access no Water and ESnerta Dinposal, Rousing, Income Distribution and Poverty for other country groups nr. ppo.lation-eighted geometric ne-n sithout exclusion of the conrem vles and the most populated coutry. Since the coverage of countries gposg the indicators depends on wavalabIlity of data ed is not unform caution must be exerised in reisigaeae foeindicator to enother. These merages are mostly use ful as aproaimations of "expected" values V whe copaing the Values of one indic"ato ttimesngth n.-try nod -refeence grouse. LAR AREA (thousand oq.as.) Acess8 to lEcreta Dispesal (percent of Poplto)-oa,urn.edual- Ttl-Ttal surfac area. coprising lend area and island eaters.,me fpoi ttl ra,sdrrl s-erd by ari A disposl an Agric-ltural - M.st recent estimate of agricultural1 aras used temporarily Peretages of their respective pepul-ixn. berets disposal esy inclde or peranet ly for croPs, Pastures, sachet endl kitchen gardens or to the ce1.e-tlon end disopeal, with or without treatment, of humac . eoreta lie fallow end sane-eater by water-borne nystemg or the nor of pit privies und s-ilar GN? PR CATTA US$)- GN peL pit...tl-.. a oneeat arke prie.,)Installations. - iS paPaiaetmae tcretsaktpie, 7p4glapio. jhysMlyj.pn Population dlridd by nuber of practining physicians o oul"ted o same converso method as World lank Atlas (1976-78 basis) qi fi d teW7Wm diial school t university level. 1960, 1970, end 19178 data. Population per pursing Person - Population dirided by outelr of praticing male McmvY C:5RiWTN PEA fAPTTh -Annaml, consumption of onaseial - and female gradate nurses, practical nurses, and assistantnus. (oladlnite,ptroem,ntural gas and hydro-, nuclear end gee- Population err noeita B.d - toa. urban an rra - Population (total, urban, thraelectrcitiyP) in ilogras of coal equialent par capita; 1960, sadn l iie yterrsetv ubr o hos. a esealbei 1970 and 1976 data. puhliteand private general and specialied hostpital asnd rehabtilitation centers. R.spitals ace. establishmests permanently staffed by at least one physician POPULATION AND VITAL STATISTICS Estblishments providing principally Custodial care ar not molded. Rural Total Population. Nid-YeaiNii=lIions) -As of July i; 1960, 1970, and hospitals, howeve, include health end medical centers sot peranntly utaffed 1977 data, bY a physician (boo by a medical assistant, nurse, ldetfe, etc.) which iffee Urban Popuatin(prcet of total) - Ratio of urhi to total PpopattiPn; in-patient nocomodation and procide a limited range of medical facilitie.. different definitions of m d area say affect comp-rahility of data Adm'I'issionsper Hoseital Bed - Totl nuber of admiusioss to or dischargen from sagconris 16,97,ad975 dat. osita diided by the number of bed.. Population inyear2000 - Curret Population projections are based no HOUS5N5 1975 total pultion by ge end sex snd their -rtallty And fertili ty Average lice of Household (,ors,ms per houn,ehold)-total, rban and rural - rates. Projection Parsamters for esrtality rates comprise of three A household -oosivtu fag of ofidoiu ho sar living quartern and levels assuming life expectany at birch increasing with country's their main mean . A hoarder or lodger may or may sot ho included on the Per capita incoe lecel, and feml life expectancy tabilising at household for statiuti-Il Purposes. 77.5 fer." Th _arntero for fertility rate also hav three levels Average nubro esn e om- totl butn and rrl-Acrae ounte asouwing ecline infertility -rcoding to income leve and past ofPersnpe room isal. uba.ndrua occupie onot-iol dselliog, famIly csnn perforsmanc. Each coatry in then assigned ocr of thewe respectively. D.eIlingo o-lude non-peraent stritures and unccpied porto. nin cobiatinsof mortality and fertility trends for projection Accens 1toi ilectricity (percent ofidoellingo)1 - tonal, -In. said r-al1 fo. Puross ctca dwlings nith eletricity inivig quartero at per-utege o dtwtiooory population - Is a stationar y Population there is no groeth total, urban, nod rural doellinga reop-otively. .ninc the birth rate is equal to the death rate, and aLso the age structur reaici o...utent. Thin in achieved only aftor fertilitty rates EiRifATI105 ocolloc to the replacemet leve of unit net reproduction rate, shou Adjusted Enrolinet Ont'co each generation of .omm repae Itnf -oscly. The stationary popo- Frimaury schoo - totl aeadf feal - Groon total, male en icoale -11- atIoc vice sa es...timated othehaul of the projected characteriutica mant of all ages at the piryle-ria percentages of reopoctl- Primar y of the popolation in the year 2000, and the rate of decliss of fertility school-age pplati..ss; normally includes otild- aged 6-li yearn but rate to reclanreent level. ~~~~adjusted for different Ivogtho of pinacy education; for o_triv- ith fastaticeny pultio 1ein moohed - The year when stationary population universal education enrollment ma -eoed 100 p-erot since some po.pilo nice has been reached. urn below or ohov the official -ci-c age. Poculatio benicy loec..d,cuhcol - totl. eal and female - Computd ni nice; oooocosry Per to. inP. - Md-year population Per square Ailoeter (iio heotsren) of edction requiren at l,east four yesos of approvd pri mary irtrctio-; total re prociden geacral voctional , or teacher training inotructiot :"o proilo Per ou. to. ori-o1tural bend -Coputed en above for agricultural land usualy of 12 to 17 years of age; correspondence ...ne ore gt-ersaly only. occluded. PonltocAeStutr (peret - hildren (U-14 yearn), working-age Vocational enrollmet (percent of -ecodary - Pocatiova1 foutitotion -o ndoo 15-tbyar) an eird syer nod over) as percentages of mid-pear thia,duntrial, or other progras ohich operate iodeped ent ly or s populntiot; 1960, .1970, and 1977 data. de-tsmsttn of uccondary inutitoti on.. Population ircoth Hate (orront) - total -Annua growth rates of total mid- Neltahrrtio - orima-;no ucondory - Total stuin-to c-1oid in year pplati..n for i950-hb 6-0 en 19_77-. primay and secodary level divided by tubert of tractors oi th