Colombia - Rio Grande Multipurpose Project

The W6rld Bak FOR OM CIL USE ONLY lte. P. -3841- REPORT AND RE3COIEw4I(TIO5 OF 7E PRESIr CF IMRiAT1GNAL BANK F(R RECONSTffCUECI AND 1 VELOPM[II TO 7E EKEUrTIVE DIRTORS ON A PROPOSED LOA IN ANR AMN BQUIVALENT TD US$164.5 ION TO EyMPRESA PUBLICAS DE )DELLI WMi IRE GUMANYEE OF F~ lEE IRE REPBLIC OF CMI RID GRIU MUlI1UR}OSE PRDJ:T June 1, 19B4 i Sdument ha a rUe flmm and may be usd by ipeip-aw y* In Se pe(ie o Itir efficd d.ks In cint ma mm lburwhe be dlsdm e_ owm _k isW  CUIMcr EQUIVA ETS rency Unit Colombian Peso (Col$) COI$ - 100 Centavos (eti) C*1$79.50 (L983 average) US$l Col$l,000 = S$12.58 C1983 average) Co}l$,000,000 OOoI$) US$12,578 (1983 average) UEI(ES AID ME&SURES 1 ueter (a) 3.281 feet (ft) I square kilometer (km2) 0-386 squae ulle (oi2) 1 cubic ueter (p3) 35.315 cubic feet (ft3) 2642 galons (gal) = 6.290 barrels (bbl) I kilogrm (kg) - 2.206 poudo (1b) I ton (t; metric; 1,000 g) 1,100 sbort ts (sh.t.) kilowatt (kI) - 1,000 Watts 1103 I) I !egaatt (W) 1,000 W (lOs kg - 06 W) 1 Gigawatt (GW) - 1,000 NW (106 kg l- W) I kilowatt-hmur (kgh) - 1,000 Wat-ours (103 wh) - 830.3 kilocalories (kcal) 1 Gigawatt-hour (Gin) - 1,000,000 kh (106 kWh) aWSS&RY 0? A3UEVIAINS BR 8anco de la Republica COVES National Secoomic and Social Policy Council DNP - National Plannfrg Department ERA3 Empresa de Acueducto y Al rillo de Bogota EUPO - Empresas de Obras Sanitaris EP Empresas PubUlcas de Nedellin FEM Financiera Electrica Nacional FFDK Fondo Financiero de Desarrollo Urbano FOM^DE Foudo Nacional de Desarrollo 1iXS Water Supply Divislon of the Ministry of Health ISA Interconexion Electrica S.&. JNT - National Tariff Board U5S -'Water Supply and Sewerage Department of EPN FISCaL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY COLOB4 RIO GRAIE MUJLTIPURPOSE PROJECT Loan and Project Summary Borrower: Empresas Publicas de Nedelln (EPM) Guarantor: Republic of Colombia Amount US$164.5 million equivalent, includirg front-end fee. * Terms: Repayment in 17 years, including 4 years of grace, with interest at the Ba* 's standard variable rate. Project Descriptiom This multipurpose water supply and hydroelectric project vould support Colombia's efforts to provide the economic and social Infrastructure needed to facilitate growth and enhance well-being. The project includes construction of facilities needed by 1990 to provide safe and reliable water supply to about 61,000 households currently without water or poorly served, about 10,000 commercial establishments, and 8,700 manufacturing and industrial concerns in the Department of Antioqula. The power component of the project would help ensure availability of electricity needed in the Department, witch is a productive center of major importance to Colombia's economy. Moreover, in line with Colombia's efforts to diminish reliance on non-renewable hydrocarbons, the project would enable reducing costly thermal generation In the national interconnected svstem. Project works comprise hydro-facilities on the R'o Grande including an earth-fill dam, tunnels, a 300 RV underground power station, a 22 MW surface power station serving as a pressure reducing facility, a balancing taik and a steeL condult to feed raw water to a potable water treatment plant to be constructed under a second phase of this development. The project also includes the extension of a computerized data processing n-twork, and staff training. Risks: The main risks are those inherent in major eivil works in difficult terrain, including tunneling at great depth. The degree of riak is, however, acceptable because geological conditions in the area have been thoroughly studied, other large civil works have been successfully carried out in the vicinity, EPM's staff and consultants have wide experience in this type of work and, finally, adequate contingencies have been provided for. There is also a risk that the local currency share of the investment may not be available in a timely manner. However, the agreed financial targets and related program of tariff increases would minimize this risk. Further, it is conservatively assumed that planned cofinancing of US$65.5 mlllion would not materialize, with a view to ensuring that the project would be fully financed even under adverse conditions. Thsdcmn _o thanWs teddistn-bution and waybe usedby nxipiensnly im theperformnuce| of ti offical duties. Its contents may not otherwie be dcklsd wrihout World Bank authonrzation  -is - Estimated Cost: Local Foreig Total -U USS million Dam and reservoir 38.8 24.4 63.2 Power stations, transMission 42.4 77.9 120.3 water tank and supply conduit 27.4 35.9 53.3 Training, data network 0.5 1.4 1.9 Engineering and administration 26.4 8.8 35.2 Base cost 1/ 135.5 148.4 273.9 Contingencies: Physical 18.0 19.2 37.2 Price 5.2 35.7 40.9 Front-end fee 0.4 0.4 Total project cost 158.7 203.7 362.0 Interest during construction 6.5 49.2 55.7 Total investment cost 165.2 252.9 418.1 Project Financing Plan: Local Foreign Total -Uzzz-uSS million IB2D: Contracts - 164.1 164.1 : Front end fee - 0.4 0.4 Subtotal IBiD - 164.5 164.5 Cofinancing B-Loan 65.5 65.52/ Suppliers 22.9 22.9 FONADE, Government loans 13.6 - 13.6 EPM 151.6 - 151.6 165.2 252.9 418.1 Estimated Disbursements: Bank FY 85 86 87 88 89 90 91 (US$ millions) Annual 21.0 11.7 34.6 35.4 30.4 20.6 10.8 Cumulative 21.0 32.7 67.3 102.7 133.1 153.7 164.5 Rate of Return: About 18% on the combined power and water investment program of EPH, using actual and projected revenues as a proxy for benefits. Appraisal Report: Report No. 5018b-CO dated June 1, 1984. 1/ At December 1982 prices, adjusted to April 30, 1984. Does not include taxes and import duties, from which EPM is largely exempted in relation to the project. 2/ Cofinaucing of approximately US$65.5 million will be sought in 1985. However, given capital market uncertainties, the financial projections assume that EPM would need to finance from operations most of the US$65.5 million shown.  INTERTTIONAL BA!K FOR RECONSTRUCTION AND DELPME5T REPGRT AND RECOMMENDTIOtf OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED L(.N TO E?PREESAS PUBLIC4S DE MDELLIN VITEU THE GUARANTEE OF THE REPUBLIC OF O)LOMBIA POR THE RIO GRANDE MULTIPURPOSE PROJECf 1. 1 submt the following report and recmendation on a proposed loan to Enpresas Publicas de Nedellin, with the guarantee of the Republic of Colombia, for the equivalent of US$164.5 million to help finance the Rio Grande Multipurpose Project. The loan would have a term of 17 years, including 4 yeaMr oF grace, with interest at the Bank's standard variable rate. PART I - TE ECONO=5YII An economic mission visited Colombia in July 1982 and its report (4444-co) was distributed to the Executive Directors in August 1983. This mission was folloved by a small updating mission which visited the country in February 1984. A.so, a mission to review the external sector and agriculture visited Colombia during April/Nay 1983, and its report (4981-C) was distributed to the Executive Directors in April 1984. This section reflects both missions' major findings. Country data sheets are presented in Annex I. Background 3. The Colombian economy has become more resilient to external shocks as a result of the structural changes that have occurred over the past thirty years. Rapid economic growth has resulted in a substantial structural trans- formation of the country from a predominantly rural and self-contained eco- nomy to a more diversified urban, industrial, services and open economy. Colombia has reached a point where population pressure on laid no longer increases much, if at all. Public sector investment and output now play a greater role, primarily as a result of increased activity on the part of decentralized agencies ant public enterprises. Also, non-coffee exports, particularly exports of manufactured goods, expanded rapidly and the range of v products sold abroad widened considerably. The growing urban-industrial- services oriented economic activity and a rapid expansion of surplus labor in rural areas attracted by higher wages and better services in the cities has given rise to rapid rural-urban migration. This phenomenon, together with the increased participation of women in the labor force, has been instru- mental in reducing poverty and improving income distribution over time. Financial and capital markets have evolved pari-passu with the growing needs of the economy, and Colombia has become an active participant in interna- tional capital markets. I/ This section is an updated version of Part I of the report for the Power Development Finance Project (No. P-3750-CM, March 8, 1984).  -2- 4. Real GDP per capita rose by about 2.2% on average during the 1950-83 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, which after having remained In the 3.OZ to 3.5: range during the l950s and early 1960s, declined dramatically after 1965 as a consequence of a sharp fall in the fertility rate. Greater economic and educational opportunities for women, rapid rural-urban migration, rising per capita income and increased effec- tiveness of family planning programs contributed to the decline in fertil- ity. Colombia's population i: presently growing at an ann-al rate of 2 .OZ. As a result of the high proportion of women now entering ch ldbearing years, this rate of population growth is likely to cortinme until the early 1990s. 5. The combination of rising per capita income and expanded public services has brought about a significant improvement in the welfare of the poorest, in absolute and relative terms. As a result of increased sanitation control, improved diets and better health care, the crude death rate fell by about 50Z and life expectancy rose from 48 years in the early 1950s to 63 years currently. The child mortality rate declined from 11 per thousand Lu the early 1960s to 3.5 per thousand in the late 1970s. Infant xDrtality fell to 55 per thousand in the late 1970s, from about 124 per thousand in the early 1950s. School enrollment ratios have increased substantially at all grade levels since the 1960s and, by the late 1970s, 79% of urban children aged 7 to 14 were enrolled in school. The poorest income groups have experi- enced the greatest increases in electricity and water services in recent years and have benefitted more than the average of the population from services of the national health system. In spite of this progress, Colombia rem-ins largely underdeveloped, with a relatively small mDdern sector super- imposed on a broad, traditional and economically poor base. Development has been concentrated in relatively few areas of the country, public services are still not available to many of the rural and urban populations and unemploy- ment and underemployment are relatively high. The coverage of health care and water supply requires further improvement, and adequate housing is not available to a substantial portion of the population. Rapid migration to the large and medium-sized cities has created urban development problems, with attendant social difficulties. Moreover, in spite of the steady increase in per capita income over the past 30 years, substantial efforts are still required to improve and extend the benefits of development to the poorest income groups. 6. In large part, the achievements of the past 30 years were the results on government efforts to stimulate the productive sectors, provide the required economic and social instrastructure and establish an effective institutional base in the economy. In the 1950s and early 1960s, development policy favored import substitution supported by high tariff protection and the provision of economic infrastructure by the public sector. It was during this period that the country's major communication and transportation net- works were developed and the transformation to a semi-industrial economic structure began in earnest. By the mid-1960s, the prospects for further import substitution were substantially diminished, and the country was con- fronted with great economic uncertainty, arising from the fact that economic activity and the balance of payments were heavily influenced by developments in the world coffee market. In order to ease this constraint, during 1967 the authorities adopted an outward-looking development strategy, expanding and diversifying exports and, among the export markets, increasingly tapping  the Andean Group countries. Export promotion policies, including frequent small exchange rate devaluations, export tax rebates amd other export incen- tives were introduced and the aathorities began lowering tariffs somewhat and freeing capital markets from controls as means of raising efficiency and increasing the competitiveness of Colombian goods in external markets. These measares were highly successful in relieving the foreign exchange constraint and stimulating growth and employment. However, by the mid-1970s the economy was once again experiencing difficulties casned primarily by the world recession and by excessive Central Bank financing of the Central Government's overall fiscal deficit. Recent Economic Developments 7. In late 1974, the Government introduced a wide range of measures designed ro correct the structural and policy veaknesses prevailing in the economy at that time. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures arising from a sharp increase in world coffee prices. The increased receipts from coffee exports, togetther with some official surrender of foreign exchange from illegal exports, caused a turnabout in the balance of payments. Incomes rose rapidly and stimulated aggregate demand; inflation accelerated- Economic growth also accelerated, and unemployment fell substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 12 of GDP during the 1976-78 period and, by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to about 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreign exchange boom had a somewhat negative impact on the evolution of the Colombian economy, largely as a consequence of the need for measures to stabilize the economy. Public investment was curbed, thereby delaying some badly needed additions to econo- mic and 3ocial infrastructure. The rate of currency devaluation was slowed, and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with adverse effects on export expansion and diversification. Also, the Government was compelled to maintain high reserve requirements and expand controls over credit thereby reducing, in real terms, the financing available to the private sector via the official capital market. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 and were partially successful in restraining aggregate demand growth, but relatively high inflation persisted. In response to the effects of increasing restraint on aggregate demand and the troublesome financial market distortions caused by inflation and the extended period of monetary restraint, the authorities began in late 1979 to adjust the stabilization program. The rate of peso devaluation was advanced to increase export incen- tives and reduce borrowing abroad, and in early 1980, credit restraints were relaxed by lowering reserve requirements. At the same time, interest rates on time deposits captured by commercial banks and development finance compa- nies--and on lending therefrom--were freed from controls. To offset the inflationary effects of these measures, the authorities further liberalized import payments and adopted the policy, supported by the emission of new short-term certificates, of not expanding the subsidized selective credit  - 4 - operations of the Central Bank in excess of the resources captured from private savings for this purpose. The authorities also increased the sur- veillance and control of the illegal export trade. The effects of the above measures were not immediately noticeable. Real GDP growth declined to 4% in 1980, unemployment started to creep up, and inflationary pressures continued. 10. In 1981 the economic situation took a turn for the worse and the problems have continued through 1983. Real GDP growth which had decelerated to 2.5% in 1981 fell to 1.4Z in 1982 and to about 1% in 1983. Agricultural output was hard-hit both in 1982 and 1983 as the production of cotton, oil seeds and other agricultural commodities dropped as a result of low international prices, reduced fertilizer use and adverse weather. Industrial activity deteriorated on account of depressed aggregate demand, and unutilized capacity continued to increase, particularly in manufacturing. After experiencing a surplus for six years, a deficit emerged in the resource balance in 1981 of about US$1.5 billion, which continued at roughly this level through 1983. These deficits resulted mainly from a drop in exports by about 9% annually in re-l terms: major reasons were the slowdown in world demand, a major devaluation and the introduuction of import restrictions in Venezuela-a major trading partner-in 1981, and the reduction in Colombia's coffee export quota in the International Coffee Agreement significantly below the 1981 coffee export level. Net foreign exchange reserves declined by about USS,800 million in 1983 and Colombia's net international reserves were equivalent to about 6.7 months of imports of goods and non-factor service at year end. To a significant extent, the fall in foreign exchange reserves was caused by the difficulties in tapping capital markets which resulted from the external debt problems of other countries. Inflation slowed down in 1983 to a 20% average for the year, down from 28% in 1981 and 25% in 1982. 11. Since 1983 the Government has been introducing a series of measures designed to stimulate aggregate demand and to initiate the adjustment process required to expand and diversify non-coffee exports, stimulate domestic production, and resume economic growth. The rate of peso devaluation is being accelerated with a view to regaining the 1975 real exchange rate during 1984; the housing construction industry is being provided with incentives to mobilize an increasing amount of resources; and open market operations are being discontinued to increase liquidity in the economy. Temporary import restrictions are being introduced to arrest the falling foreign exchange reserves; these are to be lifted once the real exchange rate achieves its equilibrium level and exports respond fully to this incentive. The stabilization measures introduced in 1977 have been gradually dismantled, followed by government legislation, measures and regulations designed to reduce the fiscal deficit and ease distortions and restrictions in the financial system. While these measures have been in the right direction, there is need for significant additional efforts, as recognized by the authorities. In particular, the country continues to be affected by the tight international capital market in 1984, which together with a somewhat slower export growth than expected by the Government, have produced furthec declines in foreign exchange reserves. The continuing pressure on the external sector has brought to the Government's attention the need for further and timely actions to reverse the current trends. Such a policy package would need to include export promotion, external resource mobill-- zation, promotion of foreign investment, fiscal and monetary measures.  -5- Development Strategy 12. The Government's strategy for accomplishing its development objectives is set forth in the 1983-86 National Development Plan. This strategy emphasizes growth with equity with the purpose of expanding the benefits of -ievelopment to Colombia's population. This is to be achieved through increasing participation of all social and regional groups in the process of economic growth. The strategy also places high priority on the * resumption of gro-wth while maintaining price stability. The strategy strengthens rhe previous emphasis on export promotion as a means of supplementing domestic demand and assuring balance of payments stability, and on policy measures designed to increase economic efficiency and raise institutional capacity. It proposes a contimation of the large effort in public invesrment, giving high priority to energy, agriculture and industrial projects and to the provision of transport infrastructure. Economic decentralizarion, regional autonomy and the uniting of regional growth centers through improved transport, communication and financial links are directed towards creating an integrated national market. The development plan's strategy also places emphasis on the promotion of both small-scale and commercial agriculture as a means of diversifying and increasing exports, assuring adequate domestic food supplies, holding down inflation aid contributing to the Government's nutrition and welfare goals. Industrial policy objectives are to provide an environment of certainty, along with adequate credit and infrastructure, so that entrepreneurs are encouraged to Invest and expand output. Because of its benefits in opening foreign markets, creating employment and bringing in new technology, private foreign investment is to be encouraged. The financial sector is also to be strengthened. The Gove rnnt's approach to helping the poor takes on a new orientation in the development plan's strategy. Its efforts are focused upon improving efficiency in the use of resources, broadening coverage of services and strengthening the social service institutions. Programs in the housing, health, and education sectors are to be better focused and integrated, and selected low income and disadvantaged grouwps, such as workers in the informal sector, children and unemployed youth, are singled out for special attention. Combined with a significant expansion in construction of low-income housing and the extension of the Integrated Rural Development (DRI) program, the new directions given to social programs are expected to raise significantly the welfare of low income groups in Colombia. 13. After many years of being a net petroleum exporter, Colombia became a net oil importer in the mid 1970s and, in recent years, 10-15% of merchandise imports have been accounted for by petroleum. In the absence of rapid energy development, energy shortages could become a major constraint on growth later in this decade. Resolution of the energy problem depends on the country's success in developing its abundant domestic energy resources-- hydroelectricity, coal and natural gas-and also upon I'ncreasing petroleum exploration and development. The strategy for doing this will require energy pricing policies that balance consumption with energy resource availabili- ties, a least cost program of investments, sufficient domestic and external financing for these investments, strengthened sector institutions, improved program execution capabilitv and rapid carrying out of investments. Although planning and policy making have improved substantially in many energy sector institutions in recent years, further improvements in overall sector planning and coordination are needed. A recently completed National Energy study  - 6 - carried out by the Government is providing the basis for seekirg such improvements. Additionally, recent oil pricing decisions have gone a considerable way towards providing the correct signals for regulating consumption and encouraging production. The prices paid to producers (primarily foreign companies) for -incremental and 'new- crude provide adequate production incentives, and the retail prices of petroleum products have been increased substantially in recent yeara, reflecting, on the whole, international levels. 14. Colombia's agricultural growth performance has slowed down markedly in recent years. Both demand and supply constraints have been responsible for this. To increase output, utilization of additional acreage for cultiva- tion is projected to involve greater investment than in the past, implying S the increasing need to pursue options of yield improvements. In addition to productivity gains, additional land could and should be brought under irriga- tion and/or drainage for more intensive cultivation. Watershed management and forestry development should also become integral parts of a long-term strategy for growth and for conserving the natural resources. The generation and delivery of technological innovations should receive priority in the array of long-term measures. Research and extension institutions are in need of rehabilitation and strengthening. Marketing constraints also need to be relaxed if higher production is to be sustained. Sufficient credit availabi- lity for production and marketing is also essential. Recently the Government initiated a major policy redirection to address these issues and the develop- ment plan assigns a key role to future investments in the sector. 15. Colombia's high transportation costs and inadequate services could become a constraint on economic growth and exports, affecting particularly the development of the country's vast coal reserves and its agriculture. The State Railway is in poor condition and the road network needs maintenance and rehabilitation. The authorities have taken steps to improve the country's infrastructure and the development plan assigns an important share of future investments to the sector. An important part of this effort is the ongoing Rural Roads, Railway Rehabilitation, and Highway Sector Projects. Investment and its Financing 16. A large increase of public sector investment will be required in the next several years to carry out the development strategy outlined in the development plan. Over the 1984-86 period, such investment is expected to increase by about 5% p.a. in real terms. The energy and transportation sectors are expected to account for the bulk (about half) of this investment; however, real increases in investment are also expected in the sma11- and medium-scale agriculture, housing, nutrition and health, industry (including mining), water and sewerage, and education sectors. Overall, public fixed investment is projected to average 9Z of GDP during the 1984-86 period, and is expected to total ColSl,312 billion. Private investment will have to increase also during this period to provide the goods and services required by the expanding economy. 17. This increase in investment will demand a major resource mobiliza- tion effort on the part of Colombia's public sector. In particular, the size of the overall Central Government deficit will have to be reduced signifi- cantly. The buoyancy of the tax system (excluding coffee tax revenues and receipts from earnings on foreign exchange holdings), which has declined in recent years, will have to be increased through new taxes and better tax  - 7 - administration; the growth of expenditures will have to be checked; resources will have to be used more efficiently; and the charges levied for public services will have to be raised substantially in real terms. A package of measures to tackle some of these issues was approved by Congress in 1983, including measures related to broadening the base and increasing the average rate of the sales tax, increasing other indirect taxes, reducIng the earmarking of revenues, reducing tax evasion, and strengthening tax administration which are expected to have an effect in 1984. Additional actions on the expenditure side are expected to follow. Since this effort is likely to coincide with increased private sector demand for investment resources, the importance of measures to expand domestic savings cannot be * over-stressed. The recent capital market liberalization should encourage savings. A significant increase in voluntary private savings is not likely, however, as long as inflation remains high. Consequently, stabilization remains a sine qua non for the country's future growth and development. Growth and Balance of Payments Prospects 18. Given the country's strong resource base and sound economic manage- ment, Coloubia's growth prospects for this decade are reasonably good and significant advances in economic welfare are anticipated. However, because of the decline in coffee prices and the weakening in exports caused by the recession in some of traditional Colombian markets, in addition to the need to increase imports to develop the country's resource potential and restore higher economic growth, the current account deficit of the balance of pay- ments is projected to average US$1.7 billion per year during 1984-86, equiva- lent to 4% of GDP. Almost half of the deficit is projected to be financed by reducing foreign exchange reserves and by direct foreign investment. By the end of this period, net official international reserves would have fallen to a level of about three months of imports of goods and non-factor se-vices (a level Which is adequate for Colombia) without prejudice to the country's creditworthiness. This should be sufficient to support an average growth of real GDP of 4% during this period. Beyond 1986, the current account deficit should improve as a result of increasing export proceeds (particularly coal) and a leveling-off of Imports resulting from increased domestic production of petroleum. The current account deficit would gradually fall to about 1% of GDP by 1990. To achieve real GDP growth of about 4% per annum during 1984-86, gross fixed investment will have to be maintained at 20% of GDP, and to avoid too large an increase in foreign indebtedness, gross national savings would need to average about 192 of GDP. 19. Gross external capital requirements are projected to total US$6.1 - billion in current prices for the 1984-86 period, for an annual average requirement of about US$2.0 billion. Net foreign investment is expected to account for US$0.9 billion during 1984-86. This should provide about 15% of the gross external financing required. Of the remaining 85Z (US$5.2 billion) about US$2.5 billion, has been either committed or is expected to be secured from multilateral and bilateral sources, while the difference, US$2.7 billion, will need to be borrowed abroad from financial markets and supp- liers' credit sources. At the end of 1982, Colombia's public and publicly guaranteed external debt disbursed and outstanding amounted to US$6.2 billion, equivalent to 16% of GDP. The BanklIDk share of this external debt was 22%. Reflecting the recently increased Colombian borrowing from commer- cial sources, this share is expected to remain at about 201 during 1983-86.  - 8 - The public debt service ratio at the end of 1982 was 18% and is expected to climb to 25% by 1986, peak at about 27Z in 1988 and then decline gradually to 24Z in 1990. The World Bank's share in public debt service is expected to remain below 25X during 1983-86. With continued sound economic and financial management, Colombia is expected to maintain its creditworthiness through and beyond the 1984-90 period. PART !I - BANK GROUP OPERATIONS IN COLOMBIA 20. The pruposed loan, the 103rd to be made to Colombia, would bring s -he total amount of Bank loans to Colombia to US$3,983.3 million (net of cancellations). Of this amount the Bank held, as of March 31, 1984 US$ 2,981.3 million; IDA made one credit of US$19.5 million for highways in 1961. Disbursements have been completed on 66 loans and the IDA credit. Before 1979, disbursements averaged US$86 million equivalent per year, but had increased to to US$250 million per year by 1982, and US$294.5 million in 1983, reflecting the higher level of commitments in the late 1970s. While disbursements in Colombia have been slower than those recorded in the Latin American Region for similar projects, concentrated efforts to overcome problems to initiate project execution have resulted in a 272 increase in disbursements during FY83 compared to the previous year and in the current year disbursements have continued at the higher level. The gradually improving performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressu'res and the effects of the recently-introduced fiscal reforms, which should improve counterpart funding, and the increased Bank lending for infrastructure projects, all point to a higher level of disbursements in the future. IFC has made investments and underwriting commitments of US$119.9 million in 29 enterprises and as of March 31, 1984, it held US$48.0 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC invest- ments as of March 31, 1984. 21. During the past 17 years, Bank lending to Colombia has become quite diversified. While before 1966, 22 loans out of a total of 25 loans made to Colombia were for power and transport projects, since then, from a total of 79 loans only 24 have been made to these sectors. In addition, all four loans for education, 13 of the 15 loans for industry, 15 of the 17 agricultu- ral loans, one loan for nutrition, two loans for urban development, all nine loans for water supply and sewerage and one each for coal exploration, were made after 1966. The diversification was indeed a desirable aim as it helped provide close contact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's role can ouly be a marginal one and, thus, to enable lending to be focused upon sectors in which the Bank's presence can have a meaningful impact. 22. Bank lending to Colombia in FY83 consisted of loans for rural edu- cation and agricultural research totalling US$78.4 million equivalent. In addition to the loan presented in this report, the current program includes  already approved loans for coal exploration, power seector financlng. and earthquake reconstruction. To assist Colombia in the face of adverse economic conditions, efforts have been stepped up to associate the Bank vith directly productive projects. Thus, loans are being considered for smal-scale Industry, agrieltural diversification and infdustrial credit, and are expected to be presented to the Exective Directors in the coaming months. Work is also uaJerway on projects for export development, petroleum, electricity distribution, development finance, agricultural extension and marketing, roads. water supply and sewerage, and Irrigation, for possible consideration by the Executive Directors during the next two years. 23. The proposed Bank lending is consistent with the Government's deve- lopment strategy- To help Colombia develop renewable sources of energy, a sizeabie part of the proposed lending would be for hydropower. The Bank in- tends to assist in the development of coal nines Which hold potential to help Colombia meet part of its energy requirements and in diversifying exports. Bank financing in the energy sector would also assist in strengtbening major institutions and iu mobilizing external finance, as wost of the projects would require substantial cofinancin-g Otber future loans would finance agriculture and industry to support the Government in its efforts to raise overall productivity, income and employment, and to increase and diversify exports. Closely related to these objectives would be Bank lending for in- frastructure that would facilitate the increasing inter-regional flow of goods and services. Finally, several loans are being prepared in support of the Government's efforts to help the lowest 50% of the Colombian population. Proposed lendiig for further rural electrification, rural development, agricultural credit, public health, and irrigation projects are principally designed to improve the standard of living of the poor. 24. The operations of external lenders in Colombia are sbown in Ansex }. While IBRD, IDB and bilateral sources provided about 75% of total exter- nal financing to Colonbia in the 1961-72 period, their share had decreased since then to some 60Z for the 1975-82 period and is expected to decltne fur- ther to about 30Z of external capital requirem2nts during the eighties. Like the Bank, IDB has given increased emphasis to projects with a poverty orient- ation and has financed projects in low-cost housing, urban and rural develop- ment, agrarian reform, university education, water supply, rural electrifica- tion and land erosion control. la the future, it is proposed to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased employment. USAID bas supported programs in education, rural development and small farm development, but is phasing out its program in Colombia. The Governments of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional financing for basic needs and regional integration projects.  - 10 - PART :El - THE W&TER SUPPLY AND P-llER SECfO2S A. Water SUnplV and Sewerage Service Levels 25. iationwide water and sewerage service levels place Colombia among the better served countries in Latin America, although there Is st1il substantial room for Improvements. In large and meiirum-size cities, safe water is generally available on a contlnuous beais, although service tends to be irregular in some neighborhoods. In mll commin