Colombia - Cucuta Water Supply and Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY ,ijj 2%Po-Co Report No. 4985-CO STAFF APPRAISAL REPORT COLOMBIA CUCUTA WATER SUPPLY AND SEWERAGE PROJECT August 14, 1984 Projects Department Latin America and the Caribbean Regional Office 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 Curret:Ly U:iL = Peso Colambiauo (Col$) Average Calendar 1982 Average Calendar 1983 US$ = Col$64.102 US$1 = Col$78.857 Col$ = US$0.0156 Col$1 = USS0.0127 EXCHANGE RATE EFFECTIVE MARCH 1, 1984 US$1.00 = Col$92.3 Col$1.00 = US$0.0108 WEIGHTS AND MEASURES MeLric SysLem FISCAL YEAR Ja:uary 1 .o December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED DNP DeparLamerLo Naciou:al de Plaaeacioi: (NaLioi:al Plantci:-g DeparLme:;L) EMC Empresas Muo-icipales de Cucuta (CucuLa MuL!iCipal Compan:y) FFDU Foi.do Fiuaiciero de Desarrollo Urba:no (Fu:d for UrbaL: Developme;L) INCOMEX It:stiLuLo de Comercio ExLerior (Lt:sLiLuLe of ExLer.:al Commerce) INAS l:sLiLuLo Nacioaal de Salud (NaLional LnsLiLuLe of HealLh) INSFOPAL IlsLiLuLo Nacioual de Fome:tLo Municipal (NaLioL:al InstiLuLe of UrbaL: Developme::L) JNT Ju::La Nacional de Tarifas (NaLioLal Tariff Board)  FOR OMCIAL USE ONLY COLOMBIA CUCUTA WATER SUPPLY AND SEWERAGE PROJECT Staff Appraisal Report Table of Contents Page No. 1. LOAN AND PROJECT SUMMARY 1 II. THE WATER SUPPLY AND SEWERAGE SECTOR 3 Service Levels . . . . . . . . . . . . . .. . . 3 Sector Institutions . . . . . . . . . . . . . . . . . . . 3 Sector Policies and Finances .. . . . . . . . . . . . . . 4 Bank Role in the Sector . . . . . . . . . . . . . . . . 5 III. THE PROJECT 6 Project Origin . . . . . . . . . . . . . . . . . . . . . . 6 The City . . . . . . . . . . . . . . . . . . . 6 Existing Services an eDemand . . . . . . . . . . . . . . . 7 Metropolitan Area. . . . . . . . . . . .. . 8 The Borrower . . . . . . . . . . . . . . ..8 Project Objectives . . . . . . . . . . . . . . . . . . . . 9 Project Description. . . . . . . . . . . . . . . . . . . . 9 Status of Project Preparation. . . . . . . . . . . . . . . 10 Project Execution. . . . . . . . . . . . . . 11 Project Cost . . . . . . . . . . . . . . .. . 2 Financing Plan . . . . . . . . . . . . . . . . . . . . . . 12 Procurement. . . . . . . . . . . . . . . .. . 13 Disbursement . . . . . . . . . . . . . . . . . . . . . . . 13 Financial Performance. . . . . . . . . . . . . . . . . . . 14 Financial Conditions and Future Performance. . . . . . . . 15 Beneficiaries. . . . . . . . . . . . . . . . . . . . . . . 16 Rates of Return and Average Long Run Incremental Cost . . . . . . . . . . . . . . . . . . . . . 16 Affordability of Services to the Urban Poor. . . . . . . . 17 Project Sensitivity and Risks. . . . . . . . . . . . . . . 17 IV. PROJECT IMPLEMENTATION DETAILS 18 Cost Estimate . . . . . . . . . . . . . . . . . . . . .18 Implementation Specifics . . . . . . . . . . . . . . . . . 19 Procurement. . . . . . . . . . . . . . . . . . . . . . . . 19 Monitoring, Evaluation and Reporting . . . . . . . . . . . 20 Accounting and Auditing . . . . . . . . . . 21 Environmental Protection . . . . . . . . . . . . . . . . . 21 This report is based on the findings of an appraisal mission which visited Colombia from November 30 to December 14, 1983. The mission was composed of Messrs. Richard MacEwen, Engineer and Julio Linares, Financial Analyst. This report was prepared by Messrs. Walter Stottmann, Engineer and Julio Linares. T This document has a restricted distribution and may be used by recipients only in the performance of their officie duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. V. AGREEMENTS REACHED AND RECOMMENDATIONS 21 LIST OF TABLES 4.1 Summary of Project Cost . . . . . . . . . . . . . . . 18 4.2 Procurement Arrangements. . . . . . . . . . . 19 4.3 Limits on Type of Procurement and Prior Review Thresholds . . . . . . . . .. . . . . . . . . 20 ANNEXES 1. Project Area, Existing Service Level, Demand and Plans for Expansion 2. Institutional Assessment of EMC 3. Description of Project Components and Implementation Schedule 4. Institutional Improvement Program and Consultlig Services 5. Detailed Project Cost Estimate 6. Allocation of Loan Proceeds 7. Loan Disbursement Schedule 8. Financial Analysis 9. Economic Analysis 10. Monitoring Indicators 11. Selected Documents and Data Available in Project File MAPS IBRD No. 18145 Water Supply System IBRD No. 18146 Sewer System and Storm Drainage System  - 1 - COLOMBIA CUCUTA WATER SUPPLY AND SEWERAGE PROJECT Staff Appraisal Report I. LOAN AND PROJECT SUMMARY Borrower: Empresas Municipales de Cucuta (EMC) Guarantor: Republic of Colombia Amount: US$18.5 million equivalent, including capitalized front-end fee of US$46,135 and interest during con- struction on the loan until the date for the first principal payment. Terms: 17 years, including 4 years grace, at the standard variable interest rate. Project Description: The proposed project would consist of (a) construc- tion of water transmission, storage and distribu- tion facilities, and development of a new source of water supply for Cucuta; (b) expansion of sewerage system, and construction of a waste water treatment facility to reduce river pollution; (c) storm drainage improvements; and (d) provision to EMC of extensive technical assistance for a program of institutional improvement. Risks: Since the works are relatively simple and consult- ants would he assisting EMC, no significant delays are expected in the execution of the project. While EMC should not find it difficult to generate funds required for the project, its readiness, or ability, to raise water rates does present a risk. Estimated Cost: Local Foreign Total Item -------US$ Miillion-------- Water Supply Equipment and Materials 2.97 7.34 10.31 Civil Works 5.58 1.81 7.39 Sewerage Equipment and Materials 0.78 0.52 1.30 Civil Works 2.14 0.72 2.86 Storm Drainage 1.05 0.35 1.40 Institutional Improvement 0.45 0.31 0.76 Consultants' Services 1.26 0.16 1.42 Base Cost I/ 2/ 14.23 11.21 25.44 1/ In June 1984 prices. 2/ EMC is exempt from taxation on directly imported goods; local purchases are subject to a value added tax which has been included in the local cost component.  -2- Local Foreign ToLal -US$ Mllioa- Physical Coatiageccies 1.55 1.03 2.58 Price CoULiageacies 31 1.76 3.02 4.78 Total ProjeCL CO8L 17.54 15.26 32.80 Interest Duriug CoasLructiou - IBRD Loan 3.19 3.19 - OLher 1.86 1.86 Front-ead fee oa Baak loan - 0.05 0.05 ToLal Financiag Required 19.40 18.50 37.90 Financing Plan: Local Foreign Local z - -USS Milliono EMC Internal Cash Generatioa 8.3 8.3 22 GovernmeaL 6.9 6.9 18 Local Loan 4.2 - 4.2 11 IBRD 18.5 18.5 49 ToLal Financiag 19.4 18.5 37.9 100 Disbursements: 4/ Bank Fiscal Year 1985 1986 1987 1988 1989 1990 1991 1992 -------USS$ Mllion-o-- Aanual 1.6 2.8 3.9 5.0 3.4 1.0 0.5 0.3 Cumulative 1.6 4.4 8.3 13.3 16.7 17.7 18.2 18.5 Rate of Return: 12% 5/ 3/ Based oa Bauk projecLiOus, as of November 1983J of price iaflaLion and peso depreciatioa (para. 3.16). 4/ Icludes up Lo US$500,000 in retroacLive fiaanciag. 5/ Using tariffs requlred to meeL Lhe covenanted rates of return as a proxy for ecouomic becefits; covering 92% of project COSt.  -3- 11. THE WATER SUPPLY AND SEWERAGE SECTOR Service Levels 2.01 In 1983, about two-thirds of Colombia's estimated population of 27.5 million lived In urban agglomerations6/ and one-third in the small com- munities or rural areas. About 60% of total population had access to public water supply and about 50% was connected to a sewerage system. Piped water was available to 80% and sewerage services to 65% of the urban inhabitants. These proportions were much lower for the rural population; about 22% had water connections and less than 20% sewerage connections. 2.02 Nationwide water and sewerage service levels place Colombia among the better served countries in Latin America; several countries with similar income levels rank far below. However, the quality of service is uneven. Many water supply and sewerage systems are in need of repairs or have become obsolete. In large and medium-size cities, safe water is generally available on a continuous basis, but service tends to be irregular in some neighbor- hoods. In small communities and rural areas, the quality of water is often unsatisfactory. In practically all urban and rural areas, waste water is discharged untreated, often causing severe pollution in rivers and streams. Sector Institutions 2.03 The Ministry of Health is in charge of the sector and formulates sector pclicy in coordination with the National Planning Department. TwO decentralized entities, the National Institute for Urban Development (Insti- tuto Nacional de Fomento Municipal, INSFOPAL) and the National Institute of Health (Instituto Nacional de Salud, INAS) are responsible for central planning and financing of sector investment in urban and rural areas, res- pectively, and act as technical and financial intermediaries. In 28 princi- oal cities, where about 48% of the country's population is concentrated, autonomous municipal utility companies (Empresas Publicas Municipales) are in charge of water supply and sewerage, and - in many instances - of other muni- cipal services such as power, telephones, solid waste collection and dispo- sal, public markets and slaughterhouses. As a rule, these companies have a General Manager, appointed by the Mayor, and a Board whose members are appointed by the City Council and civic organizations. In most smaller cities and towns, sanitation works companies (Empresas de Obras Sanitarias) are in charge of construction, maintenaice and operation of water supply and sewerage systems. The activities of these sanitation works companies are coordinated and supervised by municipal or departmental authorities, and by INSFOPAL; in fact, some of them were operating subsidiaries of INSFOPAL before 1975, when INSFOPAL was reorganized and relinquished the operation of sanitation facilities. Sanitation works companies are managed by executives selected jointly by INSFOPAL and the local authorities, and their Boards 6/ 2,500 or more inhabitants.  - 4 - consist of representatives of INSFOPAL, the departments and municipalities, and civic organizations. In many small towns, local administrations provide water and sewerage services directly. In rural areas, water and sanitation facilities are built by departmental offices of INAS In coordination with the beneficiary communities. 2.04 While the water supply and sewerage sector in Colombia might have reached a higher stage of development than in most other Latin American coun- tries, the record of INSFOPAL, INAS and most of the companies supplying the services has fallen short of expectations. Performance of these operating entities Is largely determined by local conditions and the attitudes of the local authorities. Thus, INSFOPAL and INAS found it difficult to provide the leadership required to ensure within the sector adequate standards of opera- tion, maintenance and financial management. Moreover, they never acquired the necessary proficiency in investment programming and supervision of pro- ject execution by local operating entities. Frequent changes in management, shortage of competent and experienced staff, and deficient administrative and operational procedures have further limited the effectiveness of the two institutions. At the local level, most of the operating companies are handicapped by poor and often unstable management, unduly large and poorly trained work forces, deficient maintenance and operation practices, high levels of unaccounted-for water, reluctance - or inability - to charge proper water rates and inadequate accounting, billing and collection procedures. Sector Policies and Finances 2.05 Government policy aims at expanding water and sewerage services, and improving their quality. For 1990, it has set for urban areas service level targets of 90% for water and 80% for sewerage. For rural areas, ser- vice levels are to be raised from about 22% to 40% for water supply and from less than 20% to 35% for sewerage. This would mean reaching an additional 5.5 million people in the urban areas and an additional 2.0 million in the rural areas by the end of 1990. In line with the Government's goal of "development with equity", most of the new beneficiaries would be low-income families, consuming relatively little water and paying minimum rates. 2.06 The Government recognizes that these service level targets are very ambitious. In the 1970s, annual sector investment averaged about US$160 million equivalent at 1983 prices. The peak of almost USS200 million was reached in the middle of the decade, but thereafter investment fell to about US$120 million annually. About 92% of the investment benefitted urban and only 8% rural areas. About 60% of the capital expenditures was financed by budget appropriations and domestic credit; about 20% by external lenders, primarily the Bank and the Inter-American Development Bank; and the balance largely from internal cash generation of the local operating companies.  -5 - 2.07 The Government is well aware of the financial implications of its policy aims for the sector, which would call for capital expenditure of the order of US$1.7 billion (at 1983 prices) over the next six years. Conse- quently, attainment of higher levels of self-financing through internal cash generation by the local companies providing water and sewerage services has been affirmed as an objective of Government policy for the sector. The Government also endeavors to ensure more than in the past a steady flow of funds for sector investment, recognizing that its sporadic contributions in the past have hampered planning for expansion and delayed execution of projects. The Government is also well aware of the problems with the central sector institutions INSFOPAL and INAS. A major assessment of their functions and performance is underway and may lead to a reform of these institutions. As a first measure, the Government In September 1983 changed INSFOPAL's man- agement with the expectation of strengthening INSFOPAL's leadership and supervisory role in sector affairs and of accelerating the implementation of ongoing projects. Bank Role in the Sector 2.08 Between 1968 and 1979, the Bank made nine loans, totalling US$233.4 million, for water supply and sewerage in Colombia. In addition, water and sewerage components were included in the first urban project and the nutri- tion project of 1978, and in two rural development projects financed by the Bank. Six of the loans, US$166.3 million in the aggregate, were made to the autonomous municipal utility companies in Bogota, Cali and Palmir:;, and three, for a total of US$67.1 million, to INSFOPAL for relending to local companies in support of 36 projects in medium-size and small cities and towns. By far the largest borrower has been Empresa de Acueducto y Alcanta- rillado de Bogota (EAAB), to which the Bank has lent US$132 million in three separate operations; a fourth loan is being discussed. To date, performance audit reports were issued for the first Bogota project of 1968 and the first Call project of 1970, and a project completion report for the Palmira project of 1971.7/ These reports were critical of the optimistic projections of demand for water, which have been disproved by a declining trend in urban growth in the 1970s and by a concomitant fall in water use per household, as low-income Inhabitants came to represent a rising proportion of the benefi- ciary population. They pointed to delays in project execution which, in an inflationary environment, resulted in cost overruns for most of the projects. Furthermore, the reports emphasized the generalized failure to raise water rates sufficiently to allow the compliance with financial per- formance targets. 7/ SecM78-260 of March 3, 1978, SecM79-632 of August 29, 1979 and SecM83-714 of July 11, 1983.  2.09 The Bank's experience wiLh the Bogota projecLs and with EAMB has been relatively good. The first LWo projecLs, though completed after sub- stantial delays, have achieved their basic objectives. The third projecL is being carried OUL saLisfacLorily and should be compleLed by mid-1985. In the case of the other projecLs and borrowers, the Bank has encountered difficul- Lies in accomplishliLg ItS instituLioaal objectives. In particular, INSFOPAL in spite of Lhree loans has uor developed into Lhe sLrong and efficient regu- latory, technical support and financial assistance lnstitution through which the Bank planned LO supporL projecLs la medium-size ciLies and towns. The financial performance of many municipal utilities (Call, subborrowers of INSFOPAL projects) was laadequate, largely because of the combined effect of insufficienL tariff levels and excessive operaLiag costs. The financial via- biliLy of many companies was Impaired particularly in 1981 and 1982 when the Government rejected applications for water rate adjustments. Only in 1983 did the Government move to correct the Bstuation by authorizing large rate increases; however, Lhese increases were reduced or delayed in some instaaces because of political opposILion. AnoLher obstacle for more efficient project implemenLation was Lhe Government's inability to make available budget appro- priations for invesLment Lhrough INSFOPAL and INAS In a timely fashion. 2.10 Faced with Lhe failure of INSFOPAL, the Bank has changed Its sector strategy for Colombia. Multi-city lending is no longer considered feasible until INSFOPAL can improve Its performance dramatically, or alternative lntermedlary arrangements satisfactory to the Bank are established. Consi- deration is being given at this time to direct lending on a selective basis to the larger municipal uLility companies, which have demonstrated the will to Improve their standards of performance and to accept outside advice, even though this Is regarded as an inferior solution likely to constrain efforts to raise service levels throughout Colombia. Empresas Municipales de Cucuta would be the first of these companies. III. THE PROJECT Project Origin 3.01 The projecL was ldenLified by a Bank misslon which visited Cucuta in November 1981 aL the requesL of Empresas Muimcipales de Cucuta (EMC), the proposed Borrower. Following Lhis mission's recommendations, EMC engaged local consultants LO update existing master plans for waLer and sewerage in preparaLion of Lhe proposed project. Between the laiLial visit In November 1981 and appraisal in December 1983, several Bank missions assisted in the preparation of Lhe project. The City 3.02 Cucuta, capiLal of the Department of Norte de Santander, is located in Northeastern Colombia on the Colombian/Venezuelan border (IBRD Map 18145). WiLh a curreaL population of about 350,000 it is Colombia's elghth largest city. Cucuta gained its regional lmportance and relative  prosperity as Lhe cenLer of Lrade beLweeu Colombia aLnd Veuezuela. The devaluaLiou of Lhe Venezuelau curreucy in February 1983 shaLLered CUCULa'S ecouomic base. Siuce LheLL, Lrade wiLh Veaezuela and Lhe provisiou of related servlces has come tL a virLual sLaudsLill, iL.come levels have falleu and uuemployment has spread. To revive CucuLa's economy, Lhe CeaLral GoverumenL euacLed aiL emergeucy ecouomlc assisLanLce program whose mosL imporLaUL compouetL is Lhe promotlou of ladusLrial developmetL Il CucuLa Lo creaLe more employment opporLuaities. The GoverLmenLt's program aud Lhe expecLed gradual lac:rease ln Lhe Lerms of Lrade along Lhe border because of the conLlnued Teal depreciaLlou of Lhe ColombiaL Peso aud iacreasing lnflatiouary pressure la Veuezuela are expecLed Lo lead LO Lhe gradual improvemenL of CucuLa's ecoaomic slLuaLioU over Lhe medium Lerm. During the celebratioU of CucuLa's 250Lh auniversary lc Juue 1983 Lhe President of Colombia pledped a Col$800 milliou graLL lI supporL of Lhe proposed projecL. AL thiL. occasion, Lhe PresidenL appoiLned a persoual represeULaLive Lo supervise, coordiEate aud expediLe Lhe execuLlou of Lhe proposed projecL. ExisLing Services and Demand 3.03 As of December 1983, EMC operaLed abouL 46,000 waLer coLunecLioUs which serve abouL 80Z of CucuLa's populaLioU. People uot connecLed LO EMC's waLer system belong to the pooresL segment of CucuLa's populaLlou and are served Lhrough Lauk cars operaLed by private vendors licensed by EMC. EMC's waLer producLIOU ca-aciLy, recently expanded LO 1.4 m3/sec, would be sufficietL LO serve 95% cIf CucuLa's projecLed populaLlon Lhrough 1988, If adequaLe waLer Lransmissioa, storage and disLribuLion capaciLy were avail- able. Currently, abouL 40% of EMC's cusLomers are affecLed by waLer raLioulag caused by insufflclenL water Lransmission capaciLy and high unaccounted-for water. Therefore, Lhe expansion of EMC's LrausmissLon; aad disLribuLiOn facilliles Is Lhe highesL prlority componenL of Lhe projecL. The proposed Z'llLa River scheme included under Lhe projecL would lacrease EMC's waLer producLion capaciLy by 1 m3/sec and musL come on liae in 1989 to mainLain an adequaLe service. The waLer dema_d forecasL (AMnex 1) is based on cocservatlve projecLions for populatLion (annual growLh rate decliaing from 3.8% lc 1982 to 3.1Z Ia 1991) and waLer co:sumpLio;; (assumed Lo remal couSLacL aL 36 m3/motLh/connecLIon equivalenL to abouL 200 1/capiLa/day). Abou; 402 of the new connecLions Lo be coE.SLructed durlug the projecL period would be desLined for Lhe currenL uuserved populaLion of CuCULa. 3.04 AbouL 722 of 'ucuLa'S populatioa Is served by a sewerage sysLem Lhrough abouL 42,000 hoL.se connectiocs. In abouL 30% of Lhe area sewered, primary collectors are overloaded and need capaciLy expanslon. EMC's targeL is LO provide sewerage services to abouL 80% of Cucuta's populaLlon by 1988 (Annex 1). All wasLe water (currently 450-500 1/sec) is discharged unLreated inLo Lhe PamploOiLa River which, as a resul;, is heavily polluLed downsLream of CucuLa duriag average and below average flow conditions. Present waste water discharges from CucuLa do noL cause acy nIoLiceable deLerloraLlon of waLer quality l the Zulia River inLO whlch Lhe PamploniLa Rlver discharges about 60 Km downstream of Cucuta. However, waste waLer  - 8 - flows are expecLed LO lacrease ILL Lhe fULure (Lo aboUL 750 1/sec projecLed for 1991) aUd, wiLhOuL LreaLmeLL, would beglu _o lmpair waLer qualiLy LL Lhe Zulla River iL: Lhe early 1990s. WasLe watEr LreaLmetLL lincluded uLider Lhe projeCL would Improve waLer qualiLy L. Lhe FaUplOlILa Rlver aud enisure cot.Lliued accepLable waLer qualiLy iL: Lhe Zulia RLver. MeLropoliLau Area 3.05 During Lhe last Lwo decades, several comulULes locaLed adjacenL LO Lhe MunicipaliLy of CucuLa (Vllla Rosarlo, Zulla, Los PaLios) have growLn exLeLsively. The concept of a "MeLropoliLan Area" Is emergilg aud has beeL Lhe subjecL of discussiou beLwee;. local aud deparLmenltal aiaLhoriLles. IL appears thaL LL&egraLiLg the provision of public services LhroughouL Lhe HMeLropoliLan Area" mighL be a promisilng meaus of providlg beLLer services Lo all more efficieLtly. The Borrower 3.06 EMC is an auLoLomous muLLcLpal agency, gc.verued by a six-member Board of DirecLors WiLh Cucuta's Mayor as Chairman. EMC provides waLer, sewerage, solld WasLe collecLlol; aLnd disposal, and streeL cleaning services aLd operaLes public market faciliLies and a slaL'.ghterhouse. DeLailed informaLion on. EMC's orgaalzaLlou aud an assessmeL.L of ILS operaLioual, admiulatrative an:d managemeLLL capabiliLies are pro%ided in Annex 2. In commoL wi;h mosL Colombiau mulicipal ageucies serving medium-size ciLles, EMC has a hisLory of frequenLt chauges li iLS LOp managementL. EMC's secoL;d-level managemeLt, however, has beeL: essenLiLallj kepL LaLacL ALd pro- vided conLtLiuiLy in running Lhe affairs of Lhe compan;a. 3.07 EIC's organizaLion, admiLisLraLion, mauagement aud operatlonal efficiency need upgradi,g LO permiL the company LO cope wiLh the auLiCl- paLed growth of i;S operatlous. IL. Lhe operaLloual area, EMC's malLi prob- lems are high unaccounLed-for waLer (36% l 1983) aud poor maf..LenaLnce a,d operaLion pracLIces. Ic Lhe administraLive/managerial area billlug and collecLton, accounLting, budgeLltg, planlag aud couLrol sysLems aAd Lhe macagemenL of human. resources are prioriLy areas requirlng improvemeUL. EMC's Lariff sLrucLure and sysLem for assessig connec.lou charges ueeds LO be improved. The proposed projecL ilncludes Lechuical assisLa..ce a.d Lrainlig to upgrade EMC's capabillltes i;; the above areas aud a review of EMC's Lariff policies (Aa:ex 4). 3.08 EMC has already carried out two waLer supply aud sewerage pro- jecLs fiLatced i;: parL from Lhe proceeds of Bank loa:.s LO INSFOPAL. The projecL firanced under Lhe second INSFOPAL Loa_ (1072-C0, allocaLion LO EMC US$1.58 millioc) i;cluded the consLructlon of storage, reaLment and Lraus- missioa facilities and was compleLed in December 198;. The firsL Urba. DevelopmenL Loan (1558-CO, allocaLlons Lo EMC US$3 milliov) is flcaclg Lhe expa;;sion of water producLion capaciLy at Lhe El PorLico TreaLmeLL Plat:L and Lhe ConsLrucLionz of secondary distribuLlon neLworks in low-iacome Lnelghborhoods (Zo_as Margiales). The projecL Is scheduled for compleLlon by mid-1984. I_ both projects, the execuLion was d.elayed by about two years. The finaucial LargeLs stlpulated iL Lhe INSFOPAL-iMC agreements  - 9 - were not fully met. INSFOPAL's poor managemeut of the projects and the Government's refusal to authorize requests for tariff increases in 1980, 1981 and 1982 are partly responsible for EMC's inability to complete the projects in time and to meet financial targets. Project Objectives 3.09 The proposed project has two prime objectives: (a) to improve and expand water, sewerage and storm drainage services in Cucuta; and (b) to assist EMC in developing into a strong multi-service municipal company which could serve as a model for similar companies in other medium-sized Colombian cities. Specific targets for service improvements include: for water, the expansion of services through house connections to 95% of Cucuta's population by 1988 and the construction of the Zulia River water production and transmission scheme which, with complementary investments in water transmission, storage and distribution, would provide an adequate source of safe water for the next 20 years; for sewerage, the extension of services to 80% of Cucuta's population by 1988; and for storm drainage, improvement of drainage facilities in some downtown areas. By providing waste water treatment the project aims at improving water quality in the Pamplonita River and at protecting water quality in the Zulia River, there- by protecting Venezuela's Riparian Rights on the latter. The institutional improvement effort would be designed to improve EMC's operational effi- ciency, maintenance practices, tariff system and administrative and manage- rial capabilities through technical assistance and training. A major goal would be to improve EMC's financial performance through the introduction of appropriate financial policies including the financial self-sufficiency of each of EMC's services. The project would also assess the advantages of the integration of municipal services in the emerging Cucuta Metropolitan Area (para. 3.05) by financing a feasibility study on this subject. Parti- cipation in the proposed project would be in line with the Bank's current sector strategy for Colombia (para. 2.10). Project Description 3.10 The proposed project would include (for more detailed description see Annex 3): (a) Part A Expansion of Water Transmission and Distribution Capacity including the construction of water transmission lines '(about 40 Km in length), two storage tanks (about 8,000 m3 capacity), a pumping station (about 120 1/sec capa- city), secondary distribution networks (about 120 Km in length), aad service connections (about 10,000)8/, purchase and installation of water meters (about 50,000), leak detec- tion and repair, and improved pressure zoning; 8/ The construction of a total of about 20,000 water and about 16,400 sew- erage connections Is projected before the end of 1991. The project would include 10,000 water and 8,200 sewerage connections to complement project investments in secondary networks included in the project; the remaining connectioas would be made by EMC in areas with existing net- works or provided by developers and would not be financed under the project.  - 10 - (b) Part B Construction of Zulia River Water Production and Transmission Scheme with a capacity of 1 m'/sec including the construction of two pumping stations, a water treatment plant, transmission mains (about 20 Km in length), and three storage tanks (about 7,000 m3 capacity); (c) Part C Sewerage including the construction of collectors (about 11 Km in length), a waste water stabilization lagoon (about 1 m3/sec capacity), secondary sewerage networks (about 100 Km in length), and service connections (about 8,200)8/, and the execution of erosion control measures; (d) Part D Storm Drainage including the construction of storm drainage collectors (about 5 Km in length) and the lining of lower portion of Canal Bogota (about 1.3 Km in length); (e) Part E Institutional Improvement through technical assist- ance, training and purchase of equipment to upgrade EMC's maintenance and operation capabilities (including leak detection and repair) and managerial, administrative and financial systems (organization, accounting, budgeting, per- sonnel, planning, tariffs and charges); and (f) Part F Consulting Services for project administration and supervision of construction, the preparation of a study on the feasibility of integrating mumicipal services in the Cucuta -Metropolitan Area' and final engineering of waste stabilization lagoons. Consultants have demonstrated that the water supply and sewerage works to be executed under the project are part of long-term expansion strategies representing least-cost solutions at a discount rate of 11%. Status of Project Preparation 3.11 Project preparation is well advanced. Engineering consultants to EMC have completed about 90% of final designs and bidding documents for the works included in the project. With the exception of the designs for the waste water stabilization lagoons, for which consultants are currently carrying out treatability tests on a pilot facility, all designs and bidding documents are expected to be completed by the end of July 1984. Draft terms of reference for the project administration and supervision of construction consultancy have been discussed during negotiations. After incorporating the Bank's comments, EMC expects to invite proposals from four local engineering firms with qualifications satisfactory to the Bank by mid-June 1984 and have the consultants on board by September 1984. Draft terms of reference for the various technical assistance consultancies are being prepared by EKC and are expected to lead to the beginning of work in March 1985 in accordance with the timetable presented in Annex 4.  - 11 - Project Execution 3.12 EMC's limited capacity to contribute to the cost of the project from its internal generation during the initial years of project execution makes it unlikely that the project can be completed by the end of 1987, as EMC is urged to do by the President's Representative and municipal and departmental authorities. A 7.5-year implementation period (mid-1984-1991) with the bulk of investment carried out during the first five years would be more in line with the Bank's experience in the Latin America and Carib- bean Region. The contracting and implementation schedule for the project is shown in Annex 3. Highest priority components within the proposed investment program would be the expansion of water transmission, storage and distribution facilities, the institutional improvement program and the construction of several sewer collectors. A first bid for the purchase of transmission pipes is already being analyzed. Since first payments on this contract may come due before the signing of the Loan, retroactive financing up to a total of US$0.5 million for goods and services procured after December 31, 1983 and in accordance with Bank guidelines is recommended. For the Zulia River water production and transmission scheme to come on line in 1989, procurement has to be initiated in 1985. 3.13 EMC would carry out the project through its Project Coordination Office assisted by consulting engineers for project administration and supervision of construction. This arrangement would strengthen EMC's capa- ciLty to carry out the project satisfactorily. EMC agreed during nego- tiations that it would maintain a competently staffed Project Coordination Office throughout the period of project implementation. The signature of the contract between EMC and qualified consultants for project administra- tion and supervision of construction would be a condition of effective- ness. Final agreement on the scope and the timetable for the implementa- tion of the institutional improvement program and other consultancies (Annex 4) was reached during negotiations. Assurances were obtained from EMC during negotiations that consultants to carry out these assignments would be hired under terms and conditions acceptable to the Bank and that EMC would give the Bank the opportunity to comment on their recommenda- tions. 3.14 The areas where sewerage networks would be built have not yet been determined definitely. EMC has agreed to furnish to the Bank for review by no later than March 31, 1985 a program for their construction establishing priorities based on population density, and willingness and ability of the potential beneficiaries to pay. EMC also agreed to con- struct waste water stabilization lagoons in order to improve water quality in the Pamplonita River and to preveat the impairment of water quality in the Zulia River. Consultants satisfactory to the Bank have already been engaged by EMC to prepare the final engineering for the lagoons. The consultants are expected to complete their work by the end of 1984. EMC agreed during negotiations to purchase the land required for the lagoons by no later than December 31, 1986. No major problems are foreseen in the  - 12 - purchase of the land, since uuder Colombian law Cucuta's Municipal Council would have the right to expropriate the laad under a "common good" provisiou. In most poor neighborhoods water coaLections would be provided ahead of sewerage connections. Continuing its present practice, EMC would take appropriate temporary measures for the sanitary disposal of sullage water until sewerage is provided. Project Cost 3.15 The cost of the project, excluding interest during construction and the front end fee on the Loan, is estimated at US$32.8 million equiva- lent (para. 4.01). The base cost, in June 1984 prices, is US$25.4 million. No allowance is included for duties and taxes for imported goods since EMC is exempt from such charges. Local goods are subject to a tax on the value added by local manufacturers which on average amounts to about 4Z of the purchase price. This tax is included in the local cost component. Physical Contingencies add US$2.6 million (about 10% of base cost) and price contingencies another US$4.75 million (about 17% of base cost plus physical contingencies). Price contingencies were calculated assuming that local inflation varies from 20Z in 1984 to 18% in 1991, foreign inflation from 9.5% in 1984 to 6% in 1991 9/ and exchaage rates from Col$96.8/US$ in 1984 to Col$233.6/US$ in 1991. Interest during construction is estimated at US$5.05 million and the front-end fee to US$0.05 million. Total financ- iag required thus amounts to US$37.9 million. The foreign exchange cost of the project including project investment, interest during construction on the Bank loan up to the date of the first repayment of principal and the capitalized front-end fee would amount to about US$18.5 million (48.8% of total financing required). Consulting services are estimated to cost about US$1.8 million for a total of about 600 man-months including professional and non-professional personnel (Annex 4). With the exception of about 12 man-months, all consulting services are expected to be provided by local personnel. Financing Plan 3.16 The Bank Loan would finance the projec.'s foreiga exchange requiremeats of US$18.5 million. Local funds would come from the following sources: EMC's internal cash generation (US$8.3 million, 21.9% of total); long-term loans from local financial institutions in the amount of Col$600 million, or US$4.2 million equivalent (11.1% of total); and a Government contribution of Col$800 million, or US$6.9 million equivaleat (18.2% of total). The Government's budgetary contribution would be made available during the 1984-1986 period. Assurances by the Government to provide these funds in a timely fashion were obtained during negotiations. The local 9/ Projected Inflation Rates Year 1984 1985 1986 1987 1988 1989 1990 1991 Local Inflation (Z) 20.0 20.0 20.0 18.0 18.0 18.0 18.0 18.0 International Inflation (%) 9.5 9.5 8.0 6.0 6.0 6.0 6.0 6.0  - 13 - loau would be ueeded iu 1986 and 1987. Most likely it would be provided by Fondo Fiaanciero de Desarrollo Ilrbano (FFDU) which has already, through a letLer of inLent, expressed iLS preparedness to make Lhese fuads available. During negotLatious assuraaces were obLained thaL EMC would make arrangemeLts to obtain the loan by no laLer Lhan December 31, 1985. The GovernmenL has given assur.saces that iL would Lake the actions necessary Lo euable EMC Lo obLain Lhe loan. ProcuremenL 3.17 WiLh few excepLions equipiuent coaLracLs are expected Lo be won by foreign manufacturers. Contracts for water pipes and accessories mosL likely would be awarded to local manufacturers, although large diameLer pipe may be supplied by foreign manufacturers. Qualifyiag domesLic manu- facLurers would receive a preferenc.e in bid evaluation of 15% of Lhe CIF price, or Lhe prevailiag import duLy, whichever is less. Civil works con- Lracts are expecLed to be won by local contractors, buL because of Cucuta's locaLion, participatiou of foreign l:Oatractors Is posslble. ConLracts for Lechnical assistance and consulLants' services are expecLed to be awarded to local firms which for specialized areas would rely on foreign cousultanLs. 3.18 In order Lo atLracL compeL.ILiOa from abroad conLracts would be grouped inLo large packages for boLtl suJpply of goods and civil works. Au excepLioa would be Lhe construction .)f v-iater and sewerage networks and ser- vice connections which are more convenliently bid in smaller packages. Works by force account are noL fore-seena. A deLailed contracting schedule is presenLed in Annex 3, ALtachment. 2. The thresholds established for InLernational CompeLitive Bidding (ICB) aud Local Competitive Biddiag (LCB) (para. 4.04) would easure that conLr;acLs awarded through ICB would accouat for more than 80% of projecL cost. The limits for prior review of bidding documentaLiou by the Bank (US$100,000 for goods contracts and US$500,000 for civil works contraCLS) would re3ult iLL a coverage of abouL 90% of Lhe total estimated value of goods conLra:ts ar.;d abouL 80% of civil works con- tracLs. All cousulting contracts wou: d be procured in accordance with Bank Guidelines. To avoid delays in the g; antintg of import licences which have arisen li Lhe pasL, the GovernmenL provided assurances during negotiaLiOnS LhaL import licences for BaLnk fiLnanced good's under Lhe projecL would be granLed promptly by ILstLituto de Comercio ExLterior (INCO1EX). Disbursemeut 3.19 Disbursemeut of Lhe Bank Loan (Annelx 6) would be against: (a) 100% of foreign expendiLures for direct import:;; 60% of local expendiLures for imporLed equipmenL aud maLerials procured locally aud 60% of Lhe ex- factory COSL of locally manufactured goods; (b.' 30% of total expendiLures for civil works; (c) 100% of foreign expenditur es for foreign cousultants and training and 30% of local expenditures f7or local consultanLS and training; and (d) amounLs due for inLeresL and o Lher charges on Lhe Bauk's loan until Lhe date of the first principal repaymenL to the Bauk.  - 14 - For local contracts, whose value is less than US$30,000 equivalent, dis- bursement would be against Statements of Expenditure certified by EMC. Documentation for these expenditures would not be submitted to the Bank, but retained in EMC's Project Coordinatic.n Office for periodic review by the Bank. All other disbursements would be fully documented. The dis- bursement schedule for the project is shown in Annex 7 and is consistent with the past experience in water supply projects in Latin America (para. 3.12). The Loan's closing date would be June 30, 1992. 3.20 In order to reduce the interval during which EMC would finance with its own resources the Bank's share of goods and services, a Special Account would be opened at Banco de la ftepublica and an initial deposit of US$1.0 million would be made into it through one or more withdrawals from the Loan Account. EMC would claim d-isbursement of the Bank's share of expenditures from the Special Account. Upon the presentation of withdrawal applications, the Baak would replenish the Special Account. The Bank would require a monthly statement of the Special Account which would reflect the transactions during the previous month.. Financial Performance 3.21 Between 1978 and 1982, EMC generated revenues sufficient to cover operating costs, working capital needs and debt service for all its ser- vices on a consolidated basis, but its financial performance fell short of the targets established under Loan 1072-CO (Annex 8). Water and sewerage, traditionally, has been EMC's strongest revenue earner, and revenues from this service have been used to taubs-1.dize deficits in other services. Between 1978 and 1982, expenses fc,r WELter supply and sewerage quadrupled under the impact of Inflation and ser%rice expansion, while the growth of operating revenues fell behind because of very low tariff levels which did not change throughout 1980 - 198.2. :-n this situation, investments were small and financed mainly by loa-as and Government grants. Thanks to sub- stantial tariff increases for weter arid sewerage (90% in April 1983 fol- lowed by monthly 1.5% increases through December 1983) and slaughterhouse services (sevenfold in October 1982), EMC's overall financial performance improved substantially in 1983 ilespite a depressed demand for slaughtering services and stagnant market reIrenues as a result of the devaluation of the Venezuelan currency. Only the solid waste service incurred a cash deficit of an estimated CoIS30 million which was covered by the cash surplus generated by other services. 3.22 EMC's average (Decemnber 1983) combined water and sewerage tariff is CoIS11.6/m3 (USSO.14/m3). The sewerage tariff Is 50% of the water tar- iff. EMC's customers are dL,v,ded into several categories (5 residential according to socio-economic * apacity, commercial, industrial), and the tar- iffs are progressive (Annex 8, Attachment 4). The lowest residential cate- gory benefits from a fixed c.harge of only ColS46 (USS0.03/m3) for a monthly minimum consumption of 20 mrJ. In line with other cities in Colombia, high- income customers pay rates about five times higher than those collected from low-income families. On balance, water and sewerage rates, even after the recent i.creases, rema i:n low in comparison with other Colombian cities with a comparable socio-economic level. Likewise, solid waste tariffs are low. Consequently, raisi.ng tariffs in real terms over a period of time would not inflict undu e hardship on EMC's customers (para. 3.29).  - 15 - EMC derives abouL 20% of its waLer and sewerage operating reveaues from connection charges which for a combined water/sewerage connecLion are abouL ColS28,000 (US$350). The present sysLem of charges is distorLed, since the sewerage conneCtiOn charge is only abouL 10% of the combined charge. Depending on a cusLomer's ability to pay, concection charges can be paid in up to 40 monLhly installments. Uader the Lechnical assistance program (Anaex 4), consulLauts would assist EMC in reviewing aud upgradiag its sys- tem for tariffs and charges. 3.23 Some of EMC's existiag debt is secured by liens oa asseLs of the slaughterhouse, solid wasLe and markets services. According Lo the docu- mentation supplied by EMC at negotiaLions, these liens are quite small and not ou asseLs critical to the execution of the projecL aad Lo EMC's ability to perform satisfactorily aud Lo service the proposed Bank loan. The Bauk has, Lherefore, accepted exisLing liens wiLhouL requiring parn passu treat- ment. Financial CondiLions and Future Performance 3.24 During the period of the execution of Lhe proposed project, EMC would adopt and implemenL financial policies and measures aimed at rehabil- itating its financial performance and aL raisiag iLs capaciLy for internal generation. As a first step, EMC has already raised tariffs for its water and sewerage (1.5% monthly) and market (25%) services. Adequate tariff increases for Lhe solid waste service are expected to be approved by Lhe National Tariff Board and implemented by EMC before the end of 1984. Beginning in 1985, EMC would mainLain the full financial self-sufficiency of all services oLher than water supply and sewerage by raising tariffs and charges sufficiently LO cover operating costs, and working capital needs aud debt service or revalued depreciation, whichever is higher. For its waLer acd sewerage service, EMC would maintain tariffs and charges suffi- cient to meeL Lhe annual rates of return on fixed assets revalued annually according Lo Lhe consumer price index (indice al consumidor obrero) rising from about 1.0% ia 1984, to 3.5% ia 1985, 5% in 1986, 5.5% in 1987 and 1988, 6% in 1989 and 7% in 1990 aud sLaying aL LhaL level thereafter. EMC also would noL incur any debL which would reduce the debt service coverage below 1.5 during any 12-month period. In addiLion, EMC would not undertake any investmenL program wiLh aggregaLe expendiLures in excess of US$1 million annually without the prior concurrence of Lhe Bank. By September 30 of each year, EMC would present to the Bauk a finaacial plan for the next Lhree fiscal years which would include inter alia, for each service, financial projections based on proposed tariff actious and CoSL control measures. Tariff adjustmeats would be introduced gradually by means of monthly aud quarLerly increases to reach desired levels. EMC would also reduce the level of sales in accounLs receivable, including arrears for all services, from a presenLt 3.0 months to 2.5 months of billing by the end of 1985. Assurances on these points were obLained from EMC during negotiations. 3.25 While adequate tariffs for all of its services would be Lhe key Lo EMC's financial rehabiliLation, technical assisLance provided uader the proposed projecL would assume an importanL role ic raising productiviLy and bringing about cosL-savings throughouL EMC. Among the specific targets agreed to by EMC (Anaex 10) would be a reduction in Lhe number of employees per Lhousand water conceCLions (from a preseut 7.5 to 6.0 in 1989) and con- trol of unaccoun-ed-for water (from a present 36% Lo 26% in 1988).  - 16 - 3.26 The above measures would briag about a gradual lmprovemeat of EMC's finaucial condilious. DurJug 1985 and 1986 Lariff lcreases would be about 7% ia real Lerms aud the rate of returu of EMC's waLer and sewerage operaLioL would rise LO 5% ia 1986. The relaLively slow raLe of lacrease of EHC's Lariffs during 1984-1986 Lakes iLto coaslderaLlon CucuLa's ecoao- mic situatLio which Is expected LO sLill be recoveriug during Lhese years from Lhe effecLs of Lhe devaluaLioU of Lhe Veuezuelan currency iu 1983. Nevertheless, wiLh the avallabIlILy of Lhe GoverameLaL conLribuLion and Lhe local loan EMC's cash generaLionL (about 10% of projecL il 1985 aad abouL 20% in 1986) would be sufficlenL Lo meeL local flaucing requiremeaLs. As Cucuta's economy Improves, annUal Lariff increases of about 12% in real terms would be lmplemented each year duriug 1987-1990. This would bring the raLe of reLurn ou EMC's waLer aad sewerage service to abouL 7% by 1990. Beyoud 1990 Lariffs would be adjusLed in lile wILh laflatLon. In real terms, Lhe average waLer and sewerage Lariff would increase by about 65% betweeu 1984 and 1990. EMC's aggregaLe conLribuLIon to the projecL from its lnLernal generaLloa would be a saLisfacLory 22% of the total pro- Ject cost. Beneficiaries 3.27 DirecL benefiLts of Lhe water supply componeat of the project would accrue Lo abouL 240,000 people by 1991. Beneficiaries would include abouL 130,000 people who would receive water services and abouL 110,000 whose service would be upgraded. By 1991, abouL 100,000 more people would be served wiLh sewerage Lhan aL presenL. The Zulia River scheme would pro- vide waLer producLion capaciLy for an addiLlonal 200,000 people between 1991 aud 2008. The LreaLmenL of waste water would Improve waLer and eavi- ronmeaLal qualiLy ic Lhe PamplonlLa River and prevent the deLerioration of water qualiLy in the Zulia River and thus benefiL an uakaown aumber of people who live adjacenlt Lo these rivers. AbouL 60% of the project benefi- ciaries would be urbac poor, i.e., people below the relative poverLy level (income less Lhaa US$220 p.a./persou, or Col$130,000 p.a. per family). RaLes of ReLurn and Average Long Run IncremeaLal CosL 3.28 Using revenues from Lariffs required Lo meeL Lhe coveuanced raLe of reLurn (para. 3.24) as a proxy for ecoaomic benefiLs, ecocomic raLes of return were calculated for Lhe water supply (74% of LoLal projecL COSL) and sewerage (18% of total projecL cost) components and for water supply aad sewerage combiced (92% of LoLal projecL COSL). The calculatlons detailed iv Annex 9 used shadow prices. No rates of retura were estimated for Lhe instiSuLioual improvemen; aad storm drainage compouent because Lhelr cosLs cannoL be reliably assigned to a_y specific group of beneficlaries. The cosL of these Lwo componeaLs ls small, equalliag ouly 8% of total project COSt. The resulting rates of return are 10% for waLer supply, 19% for sewerage and 12% for boLh components combined. They are saLisfacLory con- sideriag LhaL finaccial reveLues do nOL reflect fully the ecouomic and social/healLh benefiLs of water supply and sewerage inves;meats.  - 17 - 3.29 At aa 11% discounL rate the average long-rua incremental cost of water is Col$20.0|m3 and thaL for sewerage Col$6.4/m3. Projected 1990 Lariff levels expressed in June 1984 prices would be Col$16/m-3 for water and Col$8/m3 for sewerage (50% of water tariff) aud would be about 80% of marglal COSL for water and 125% of marginal cost for sewerage. Consider- ing that under EMC's progressive Lariff structure high- and medium-income consumers would pay more than the marginal cost for both water and sewerage for consumption levels In excess of 20m3/month, the magaitude of future Lariffs is acceptable. AffordabiliLy of Services to the Urban Poor 3.30 At present Lariff levels, the monthly charge to a poor family consuming water up to the minimum consumption rate of 20m3/month is a low Col$46 (US$0.03/m3) representing only 0.5% of a family's income at the estlimated relative poverLy income level of about Col$130,000 per family and year. Sewerage and water supply Lariffs combined amount to about 0.7% of family income. Assuming thaL family income increases in tune with infla- tion, 0.8% of Lhe family income would have to be spent for water and 1.1Z for water and sewerage combined for projected 1990 tariff levels. Thus the cost of service is easily affordable for Lhe urbaa poor. The urban poor would have to pay connection fees of about Col$18,000 for water and Col$12,000 for sewerage. EMC would coatinue iLs policy of allowing poor families Lo pay these fees in up to 40 monthly installments. The burden on the budgeL of a poor family would be monthly payments of Col$450 (4.2% of family income) for a water supply and Col$300 (2.8% of family income) for a sewerage connection. These moathly payments would not be beyoad the poor population's capacity to pay. Project Sensitivity and Risks 3.31 The effect of variations in costs, beaefits and implementation dalays for water supply and sewerage has been aaalyzed (Annex 9). The ana- lysis demonsLrates that the economic rate of return is only moderately sen- sitive tO chaLnges in cost and reveaues. Even if revenues were overesti- mated by 20% and actual costs were 20% hlgher than projected, the resulting rate of retura would still be above 6% whlch Is acceptable for water and sewerage projecLs considering that nelther health benefits nor the consumer surplus are iacluded In the calculations. 3.32 The Bank's experience shows that the maln risks associated with water supply and sewerage projects in Colombia are institutional and finan- cial. In partlicular, the aLtitude of central and local authorities regard- ing the implementation of timely tariff increases of sufficienL magnitude presents a risk. However, EMC's past record ln this respect, although not fully satisfactory, has beea better Lhan that of most. Colombian utilities of comparable size. Several projecL feaLures tend to reduce the risk of failure in institutional aud finaacial areas. By strengtheniag EMC's man- agemenL sySLems acd improving the quality and efficiency of its services, the projecL would eahauce the utiliLy's acceptance in the community and its ability Lo defend tariff increases. In addition, revenue estimates are conservative coasidering that populaLion aad COnSumption forecasts are modest and that projected 1990 tariff levels would still be low in compari- son to those charged in other Colombian cities and well within the  - 18 - population's capacity to pay. There would be therefore the poteatial for increasing tariff levels beyoad the projected rates to compensate for unex- pected cost increases. The risk of low-income households not belag able to connect is reduced by EMC's policy of providing credit for connection charges. 3.33 The risk of major project delays Is low in view of the fact that all works are simple and that the services of qualified consultants for project administration and supervision of constructlion are expected to safeguard against major delays in project start-up and project execution. In addition, the project has been given highest priority by local, depart- mental and central authorities. The presence of the President's Repre- sentative (para. 3.02) is expected to be very helpful in accelerating pro- ject implementation. IV. PROJECT INPLENENTATION DETAILS Cost Estimate 4.01 Detailed project cost estlmates for each project element are pre- sented in Annex 5. A summary is shown in Table 4.1. Total project cost is US$32.8 million. Physical contingencies are about 10% of base cost. Price contingencies are about 17% of the base costs plus physical contingencies. TABLE 4.1. Summary of Project Cost US$ Million Foreign Z Col$ Million Project Component Foreign Local Total of Total Foreign Local Total Water Supply Expansion ExistLing System 4.08 4.08 8.16 50.0 395 395 790 Zulia Scheme 5.07 4.47 9.54 53.1 491 433 924 Sewerage 1.24 2.92 4.16 42.5 116 283 399 Storm Drainage 0.35 1.05 1.40 33.3 34 102 136 Institutional Improvement 0.31 0.45 0.76 40.8 30 44 74 Consulting Servlces 0.16 1.26 1.42 12.6 15 122 137 Base Cost 10/ 11.21 14.23 25.44 44.1 1081 1379 2460 Physical Contingeccies 1.03 1.55 2.58 39.9 100 150 250 Price Contiagencies 11/ 3.02 1.76 4.78 63.2 1122 1214 2336 Total Project Cost 15.26 17.54 32.80 46.5 2303 2743 5046 Iaterest During Constructlon Bank Loan 3.19 - 3.19 100.0 486 - 486 Other Loans -- 1.86 1.86 0.0 - 387 387 Front End Fee 0.05 -- 0.05 100.0 5 - 5 Total Financing Required 18.50 19.40 37.90 48.8 2794 3130 5924 10/ In mid-1984 prices; 1 US$ equivalent to Col$98.6. 11/ Based on local and irternational inflation rates and local currency devaluation (para. 3.16).  - 19 - Implementation Specifics 4.02 The project implementation schedule depicted in Annex 3, Attach- ment 1s outlines the sequence of activities during the construction period. The schedule has been developed based on expanding service to Cucuta's population and improving EMC's institutional capabilities and financial performance at the fastest pace possible and takes into account the avail- ability of local funds. The expansion of EMC's transmission, storage and distribution system (Part A of the Project) would have highest priority since it would enable EMC to make full use of the 1.4 m3/sec water produc- tion capacity avallable at the El Portico Treatment Plant (para. 3.03). The technical assistance program (Part E of the Project) to improve EMC's -Institutional capabilities is likewise a high priority project component and would get under way in early 1985. The scope of the technical assist- ance program and a timetable for its implementation are detailed in Annex 4. Construction of sewerage collectors (Part C of the Project) and storm drains (Part D of the Project) is planned to begin by mid-1985. Bidding for the Zulia River scheme (Part B of the Project) would begin in late 1985; construction is scheduled to begin in 1986 and would take about three years. The waste water treatment facilities (Part C of the Project) are the last project component to be constructed. The construction of second- ary water and sewerage networks and service connections would extend throughout the project Implementation period. Procurement 4.03 Table 4.2 summarizes proposed procurement arrangements for the project. TABLE 4.2. Procurement Arrangements Procurement Method ICB LCBI27 Other13/ Total Project Element USs Million Cost Equipment and materials 15.7 0.3 -- 16.0 including pipes (10.1) (0.2) - (10.3) Civil Works 10.1 4.3 - 14.4 (3.0) (1.3) (4.3) Consulting services - 2.4 2.4 and training (0.7) (0.7) TOTAL 25.8 4.6 2.4 32.8 (13.1) (1.5) (0.7) (15.3) 12/ See Table 4.3. 13/ Based on proposals from short-list of consultants. Note: Figures in parentheses are respective amounts financed by the Bank.  - 20 - 4.04 The division of contractlng by type of procurement shown in Table 4.3 would assure that contracts accounting for more than 80% of total pro- jecL cost would be open to foreiga bidders. Small civil works contracts procured on the basis of price quotations (llcitacion privada) would be for the coastruction of sewerage and water networks and service coanections. TABLE 4.3. Limits on Type of Procurement and Prior Review Thresholds (USS '000) Prior Type of Revlew Contract Aggregate Type of Contract Limit Value Limit Procurement Goods 100 )e. 50 ICB < 50 300 LCB with foreign bidders having the opportunity to participate. Civil Works 500 500 ICB 100 - 500 3000 LCB with foreign bidders having the opportunity to participate. 5 100 1500 Price quotatlon from at least three qualified local bidders. Monitoring, Evaluation and Reporting 4.05 Indicators to monitor progress in operatioaal, management and financial areas are presented in Annex 10. During negotiations EMC con- firmed that the proposed monitoring indicators reflect the expected pro- gress In project execution and lmprovement of EIC's performance. EMC would submit to the Bank semi-annual reports (due February 28 and August 31 for preceding semesters ending December 31 and June 30, respectively) on the progress of project implementation including details on the implementation of technical assistance and on its operating aad financial performance. These reports would measure progress against monitoring indicators (Annex 10), the contracting schedule (Annex 3), the project implementation schedule (Annex 3), and the disbursement schedule (Annex 7). A completion report would be prepared by EMC and submitted to the Bank no later than six months after the closing date of the Bank Loan.  - 21 - Accounting and Auditing 4.06 EMC would at all times keep adequate project accounts. EMC's flnancial statements, separate for each service and consolidated, and the Special Account (para. 3.20) and the certified statements of expenditures (para. 3.19) would be audited annually by independent auditors satisfactory to the Bank. The auditor's report would be sent to the Bank no later than five months after the close of each Fiscal Year (December 31). Environmental Protection 4.07 The treatment of waste water (para. 3.14) would result in the rec-yery of water quality in the Pamplonita River and prevent the deterio- ration of water quality in the Zulia River, which would take place in the absence of sewage treatment in Cucuta. The upgrading of water quality in the rivers downstream of Cucuta would benefit people living next to the rivers and depending on them for water supply. It would also ensure that Venezuela's riparian rights on the Zulia River would not be adversely affected. V. AGREEMENTS REACHED AND RECOMMENDATIONS 5.01 During negotiations assurances were obtained from EMC that it would: (a) take tariff and other measures as required to: (i) earn for its water and sewerage operation rates of return on revalued fixed assets of not less than 1.5% in 1984, 3.5% in 1985, 5.0% in 1986, 5.5% in 1987 and 1988, 6.0% in 1989, and 7% in 1990, and thereafter (para. 3.24, Annex 8, Attachment 1); and (ii) produce for each of its services other than water sup- ply and sewerage revenues sufficient to cover operating costs, working capital needs, and tebt service or revalued depreciation, whichever is higher (para. 3.24); (b) present to the Bank before September 30 in each fiscal year a financial plan for the next three fiscal years with a pro- posal for tariff and other measures required to meet the conditions established under (a) (para. 3.24); (c) not incur any debt which would reduce the debt service coverage below 1.5 during any 12-month period and not undertake any capital expenditures in excess of US$l million annually without prior consent by the Bank (para. 3.24);  - 22 - (d) reduce Lhe level of sales li overdue accouuts recievable for all services combined to 3.0 moaLhs il 1984 and 2.5 months by Lhe ecd of 1985 aud nOt exceed Lhls level LhereafLer (para. 3.24); (e) carry out, wiLh Lhe help of consulLants, the LnsLiLUtioUal lmprovemefL program liu accordauce wiLh Lhe scope of work and lmplemenLaLlou plau agreed Lo duriLng uegoLiaLlons and con- sulL with the Baak on Lhe recoumendatlons made by the cou- sulLauLs (para. 3.13, Aunex 4, ALLachmenL 3); (f) Lake Lhe measures required to safeguard WaLer qualiLy in the Zulia River aud cOnsLrUcL LO Lhis ead a wasLe waLer sLabili- zaLlon lagoon wiLh a capaclLy of abouL 1 m3/sec and complete final eugineering for Lhe lagoous by uo laLer thaa June 30, 1985 aud purchase Lhe laud requlred for Lhe lagoons by no laLer Lhaa December 31, 1986 (para. 3.14); (g) submiL by uo laLer Lhan March 31, 1985 a sewer neLwork con- sLrucLioa program (para. 3.14); (h) obLain by no later Lhan December 31, 1985 a loan from local financlal lastituLlOns ln the amouant of Col$600 million (para. 3.16); and (I) malnLain an adequately staffed project coordlnation office (para. 3.13). 5.02 In addition, EMC coafirmed thaL it would adjust annually its level of revalued fixed assets according to the method of valuatioa reviewed durLng aegotLatLons (para. 3.24). 5.03 During aegoLiaLioas the Goverament has provided assurances Lhat: (a) imporL liceases would be granLed by INCOMEX ln a Limely fashlon (para. 3.18); (b) a GovernmenL contributiou of Col$800 million would be made available la a Limely fashlon (para. 3.16); and (c) il would Lake all Lhe acLions cecessary Lo enable EMC to secure a local loan of Col$600 million (para. 3.16). 5.04 The sigrgture of Lhe COntracL beLveen EMC and engiaeering con- sultants for projecL admiLisLration and supervision of construclion (para. 3.13) would be a condiLloa for Loan effectiveness. 5.05 Retroactive financing Lotalliag US$500,000 for equipmenL and pipes procured afLer December 31, 1983 and accordiag Lo the arraageeneLs outlined in para. 4.04 Is recouaended (pars. 3.12). 5.06 WiLh the above assurances, agreemenLs and conditions, the pro- posed project would be suitable for a Back Loan of US$18.5 million Lo be repaid over a perlod of 17 years, including four years of grace.  - 23 - ANNEX 1 Page 1 COLOMBIA CUCUTA WATER SUPPLY AND SEWERAGE PROJECT Project Area, Existing Service Levels, Demand and Plans for Expansion Location 1. The municipality of Cucuta is locaLed in Northeastern Colombia on Colombia's border wiLh Venezuela. It is the capiLal of the department of Norte de Santander. The city occupies a wide valley on the eastern flank of the Andean Mountains and is located at abouL 350 m above sea level. Its climate is tropical with annual average temperatures of about 28