Colombia - Power Sector Adjustment Loan

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13453 PROJECT COMPLETION REPORT COLOMBIA POWER SECTOR ADJUSTNENT LOAN (LOAN 2889-CO) AUGUST 17, 1994 Trade, Finance, Industry and Energy Division Country Department III 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.  COLOMBIA PROJECT COMPLETION REPORT POWER SECTOR ADJUSTMENT LOAN (2889-CO) CURRENCY EOUIVALENTS. ABBREVIATIONS AND ACRONYMS Currency Unit = Colombian Peso (Col$) AVERAGE EXCHANGE RATES (Col$/USS) 198 129 1987 1988 1989 1990 142.3 194.3 241.4 299.2 382.6 502.2 FISCAL YEAR = CALENDAR YEAR PRINCIPAL ABBREVIATIONS AND ACRONYMS USED k (kilo) = 103 (thousand) M (Mega) = 10' (million) G (Giga) l0' (billion) T (Tera) = 1012 (trillion) P (Peta) = 10' (quadrillion) E (Exa) = 10" (quintillion) CASEC = Comite Ambiental del Sector Electrico Colombiano CHB = Central Hidroel6ctrica de Betania CONPES = Consejo Nacional de Polftica Econ6mica y Social CORELCA = Corporaci6n Electrica de la Costa Atlantica CVC = Corporaci6n Ad1tonoma Regional del Cauca DNP = Departamento Nacional de Planeacion ECOPETROL = Empresa Colombiana de Petroleos EEB = Empresa de Energfa de BogotA EMCALI = Empresa Municipales de Cali EPM = Empresas Plblicas de Medellfn ESMAP = Energy Sector Management Assistance Program FEN = Financiera Electrica Nacional FODEX = Fondo De Monedas Extranjeras FONADE = Fondo Nacional de Desarrollo ICEL = Instituto Colombiano de Energia IDB = Inter-American Development Bank IRR = Internal Rate of Return ISA = Interconexion Electrica S.A. JNT = Junta Nacional de Tarifas (National Tariff Board) LRMC = Long Run Marginal Cost MCPS = Monitoring Committee of the Power Sector MME = Ministerio de Minas y Energia MHCP = Ministerio de Hacienda y Credito PNblico PSAL = Power Sector Adjustment Loan SCPS - Superior Council of the Power Sector SINSE - Sistema de Informacion del Sector Electrico TAP = Tariff Adjustment Program  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation August 17, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Colombia Power Sector Adjustment Project (Loan 2889-CO) Attached is the "Project Completion Report on Colombia - Power Sector Adjustment Project (Loan 2889-CO)", prepared by the Latin American and Caribbean Regional Office. Part II was prepared by the borrower. This was the first Bank adjustment operation in the power sector in Colombia after two decades of close involvement through 15 loans totalling US$1.9 billion. The US$300 million loan was to help the government implement the 1987-1990 Financial Rehabilitation and Investment Plan for the Sector. The project, approved in 1987, aimed further at broadly removing many inefficiencies not previously addressed in the traditional investment projects. The third tranche of US$75 million was cancelled at the Borrower's request to pursue alone a deeper financial consolidation of the utilities. The project went through several redesigns to achieve a balance between quick disbursements and inducements to sector adjustments. Eventually, general financing of imports was split into three tranches, each conditioned upon specific measures. Those associated with the first two tranches were mostly met. They included the rationalization of the planning of investments and the readying of several utilities for the rationalization of the planning of investments and the readying of several utilities for the restructuring that followed. Bank assistance helped Colombia secure US$1 billion in parallel cofinancing from Japan for the power sector. Disappointments included the delayed creation of the Commision Nacional de Energia, shortcomings in pricing policy adjustments leading to weak financial performance and inadequate follow-up to studies. The PCR gives a satisfactory account of the circumstances leading to the partial cancellation. Overall, the project is rated as marginally satisfactory, its sustainability as uncertain, and its institutional impact as negligible. An audit is planned. Attachment 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.   FOR OFFICIAL USE ONLY COLOMBIA PROJECT COMPLETION REPORT POWER SECTOR ADJUSTMENT LOAN (2889-CO) Preface ..................................................... (i) Evaluation Summary ............................................. (ii) Loan Objectives ........................................... (ii) Loan Results ............................. t .(ii) Lessons Learned .... ...... .............. (iii) Future Bank Support ..... ..... .............. (iv) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Background ............................... 1 2. Bank's Experience with the Power Sector ............................... 2 Bank Lending to the Sector, 1970-87 ............................... 2 3. Preparation of the PSAL:. 2 Macroeconomic and Sector Circumstances. 3 Main Objectives of the Sector Loan: Macroeconomic and Sector. 5 Comments from Executive Directors. 5 4. Implementation of the PSAL ........................................ 6 Release of the First Tranche . ................................... 6 Release of the Second Tranche . ................................. 6 Cancellation of the Third Tranche . ............................... 6 5. Results of the PSAL ......................................... 7 Political and Economic Background ............ ................... 7 Macroeconomics Objectives . ................................... 7 Investment ......................................... 8 Institutional ......................................... . 8 Environmental and Social ...................................... 8 Financial ......................................... 8 Weighted Overal Results ...................................... 9 Impact and Sustainability of the PSAL and Other Parallel Processes . ................................. 9 6. Conclusions ......................................... . . 10 Performance of the Government .................................. 10 Performance of the Bank ..................................... 10 7. Comments to the Government's Evaluation of the PSAL ...... ................ 12 8. Lessons Learned ......................................... 13 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.  9 Future Bank Support ............................................ 15 PART I:PROJECT REVIEW FROM BORROWER'S PERSPECTIVE17-32 PART Im: SUPPLEMENTAL INFORMATION TABLE 1: Related Bank Loans ...................................... 33 TABLE 2: Loan Data .......................................... 35 A. Total Disbursements . ................................. 35 B. Project Timetable . ................................... 35 C. Cumulative Loan Disbursements ....... ................... 35 TABLE 3: Use of Bank Resources .................................... 36 A. Staff Input ........................................ 36 B. Mission Data ....................................... 36 TABLE 4: Main Conditionalities of Loan Agreement ........................ 37 TABLE 5: Schedule of Disbursement Actions ............................ 39 TABLE 6: PSAL's Success Expectation as of 8/31/88 ....................... 43 TABLE 7: PSAL's Estimated Weighted Success as of 9/30/90 .................. 44 ANNEXES ANNEX 1: A Brief Recapitulation of Economic and Political Background 1987-1990 ......... ........................ 45 ANNEX 2: Financial Performance ................................. 48 ANNEX 3: Environmental Components of the PSAL .60 ANNEX 4: Resettlement and Social Components of the PSAL .65 ANNEX 5: Objectives and Results of the PSAL .68 Table 5.1 Comparative Investment Program .69 Table 5.2 Guavio Hydroelectric Project - Comparative Financing until Completion .76 Table 5.3 ICEL - Action Plan . 77 Table 5.4 CORELCA - Action Plan .80 Table 5.5 Results of Electricity Loss Reduction Program .4 Graph 5.1 System Total Energy Losses .85 Graph 5.2 EEB's Energy Losses .86 Graph 5.3 EPM's Energy Losses .87 Graph 5.4 CVC's Energy Losses .87 Graph 5.5 CORELCA's Group Energy Losses .88 Graph 5.6 ICEL's Group Energy Losses . 88  (i) COLOMBIA POWER SECTOR ADJUSTMENT LOAN (2889-CO) PROJECT COMPLETION REPORT Preface This is the Project Completion Report (PCR) on the Power Sector Adjustment Loan 2889-CO; US$300 million) which supported the Power Sector Financial Rehabilitation and Investment Plan for 1987-1990. Loan 2889-CO was approved on November 1987 and was disbursed in two tranches (2889- CO). At the Government request, the third tranche for US$75 million was cancelled effective September 30, 1990. The last disbursement (Second Tranche) was on August 31, 1989. The Borrower was the Government; the executing agency was Financiera Energetica Nacional (FEN); and the beneficiaries were: Empresa de Energfa de BogotA (EEB) and the Instituto Colombiano del Energfa Electrica (ICEL) and Corporacion Electrica de la Costa Atlantica (CORELCA). The report was jointly prepared by the Trade, Finance, Industry and Energy Division of the Latin America and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and M), and the Borrower (Part II). Preparation of this PCR was started during June 1992, and is based, inter alia, on the Presidents Report; the loan; supervision reports, correspondence between the Bank and the Borrower, and internal Bank memoranda.   (ii) COLOMBIA POWER SECTOR ADJUSTMENT LOAN (2889-CO) PROJECT COMPLETION REPORT Evaluation Summary Loan Obiectives The PSAL was intended to address both macroeconomic and sector issues. With this Loan, the Government and the Bank sought to support Colombia's overall adjustment program and catalyze the mobilization of external funds. The Government regarded the PSAL as a key element of its foreign debt strategy. The mobilization of external funding to the power sector was to release resources towards sectors with lower foreign capital and import requirements. Sectorwise, the PSAL was to support the Government's reform programs whose principal objective was to improve the supply and demand efficiency in the power sector. The objective was to be achieved by: (i) rationalizing planning policies and investments in the energy sector; (ii) improving the regulatory framework and management of the weaker utilities; (iii) improving the technical capacity to monitor the environmental and social aspects of the sector in line with international standards; and not least (iv) improving the self financing capacity, capital structure, debt terms, and operational, commercial, and pricing efficiency of the sector. Loan Results The PSAL was successful in helping secure the target amount of external funds (US$1.03 billion) for the power sector, including parallel cofinancing investment loans from the Eximbank of Japan and the IDB. However, the expected release of funds from the power sector to other sectors did not materialize. Lower than expected internal sector savings, and lower disbursement levels from the external sources, caused the Government to borrow a substantial amount of funds totalling some US$793 million, at short term commercial terms, to meet the financing needs of the sector during 1987-90 (para. 5.2). In relation to the adjustment objectives, there have been some significant achievements. Through the PSAL and the preparation of the proposed follow-up operation, the Bank supported the consolidation of a fundamental sector restructuring process which over the last two years has already produced several significant and practical reforms (paras. 9.2-9.6). The rationalization of the planning policies of the power sector was carried out satisfactorily. But, progress in the implementation of integral energy sector planning was impaired by the delayed creation of the Comision Nacional de Energia (CNE). As to the investment objectives of the sector, while the overall dollar targets were met the physical targets were not, particularly at the distribution level and the Guavio project, due to continuing financial and institutional constraints (para. 5.3). The studies required to support the introduction of institutional and financial improvements to the utilities were largely completed on time. In contrast, the recommendations of the studies were  (iii) largely ignored because of insufficient regional and municipal commitment and conceptual ownership (para. 5.4). The ambitious number of environmental and social institutional goals for the sector were successfully met beyond expectations. Also, the action plans set for the Guavio project were carried out satisfactorily (para. 5.5). The major objective of achieving substantial financial rehabilitation of the Power Sector by 1990, was not realized. After 1987, there was slow but steady progress with respect to levels and structure of tariffs; but in real terms this progress during the years 1987-1990 was 17% below that expected at appraisal (Feb/1987), mainly due to circumstances outside the control of the sector. None of the financial targets (tariff levels, self financing, indebtedness, accounts receivable, and energy losses) was fully achieved. On the revenue side these shortfalls were due to lack of mechanisms to deal with the higher inflation and devaluation of the Col$ than expected. On the expenditure side, costs were higher mainly because of the pliant budgetary framework of the sector (para. 5.6). On an overall weighted basis this report estimates that about 65% of the objectives of the PSAL were met (para 5.7). As the Government had overall responsibility for influencing, enhancing and monitoring the environment of the sector, this report concludes that until September 1990, the Government was unable to accord the institutional, financial, and commercial rehabilitation of the sector sufficient priority notwithstanding its commitments under the reform program. Thus, the influence of the Bank on Colombian policy, during the implementation of the PSAL was less than anticipated (paras. 6.1-6.4). Lessons Leamed (section 8) Most of the shortcomings resulted from having structured the PSAL without the support of what are now standard Bank requirements for adjustment operations: (a) clear and complementary country and sector strategies; (b) strong ownership of the reform objectives; (c) tailoring the operation to the available implementation and regulatory capacity; (d) avoiding excessive conditionality; (e) obtaining updated financial information; (e) effective creation of a monitoring system; and (f) obtaining appropriate up-front conditionality. An active dialogue with the Borrower should have been maintained to ensure coordination between macroeconomic and sectoral policy dynamics. Also, a clear technical and politically phased strategy should have been defined before proceeding with the project. These points are particularly critical to the success of infrastructure sector adjustment operations. To improve regulatory transparency a competent auditing firm should have been engaged to assist the Government in reviewing the SINSE initiative (paras. 7.5, 8.4) and propose proper regulations for the timely production of reliable and consistent sector financial statements based on uniform accounting standards. Sectoral strategy papers are an important tool for maintaining institutional memory over time. It allows awareness of key sectoral shortcomings to be maintained during changes of staff assigned to the sector.  (iv) Changing the nature of the operation late in the processing pipeline should be avoided. In instances where the form of the operation must change for internal bureaucratic reasons, the integrity of the project and the consistency between the form and substance of its implementation strategy merit close reevaluation. Unless there is substantial up-front policy action including an effective reporting and monitoring system, it is impractical to enter into quick disbursing operations in a sector whose problems requiring medium to long term solutions have not been strategically sequenced, or where accurate and reliable information is not timely available (para. 8.4). The sector approach requires comprehensive consideration of all significant aspects of sector performance phased over a realistic period of time. Future Bank Support Should the disappointing adjustment performance of the sector during the implementation of the PSAL, which continued the existing pattern of incomplete compliance with covenants, lead to the conclusion that the Bank should discontinue support for Colombia's power sector? The answer should be no, provided that the proposed reforms and effective regulatory transparency (including SINSE) are implemented, for two principal reasons. First, the increased commitment of Colombian officials of the need to reform the power sector and develop an adequate policy and regulatory framework, triggered by the difficulties in implementing the PSAL, and the occurrence of significant local and international sectoral events (para. 5.8); this commitment represents a positive change in the environment for future power projects, and a reduction of the unfavorable conditions that hindered the PSAL. Second, the Bank can offer important comparative advantages in assisting the sector reform which is needed to permit continued economic growth in Colombia. The Bank could bring to the reform process experience across countries in the power sector, coordination and consensus building skills, and positive working relationships developed with counterparts through previous projects such as the PSAL. The effectiveness of the Bank's continued support and technical assistance immediately after the PSAL has been demonstrated. Since the closing date of the PSAL to date, the Bank's participation in institutional reform has matured into a well developed process. It is already showing tangible results such as the creation of the Energy Regulatory Commission, the unbundling of the generation and transmission assets of ISA, and a firm commitment to setting up a workable competitive market for electricity generation. Effective Government action has also materialized in the area of private sector participation through (i) the installation of 95 MW (Mamonal) of private generation in an industrial complex in Cartagena, (ii) a 150 MW BOO contract (La Sevillana) with a foreign contractor, (both of these projects are already in operation), (iii) a 750 MW BOO contract (Barranquilla) awarded and currently being negotiated, (iv) invitations to bid for a 200 MW BOO (Termovalle) and (v) the ongoing divestment of Betania, a 500 MW hydro power plant. The generation capacity of these plants totaling 1695 MW represent 17% of the total installed capacity in Colombia today. These developments are to be followed shortly by the organization of the open access network operated by an independent transmission company. In retrospect, the above achievements should be seen as the consequence of the Bank's contribution to the definition of a new vision for the power sector by (a) supporting the diagnosis of the sector's problems - ESMAP 1986, OED 1990; (b) attempting ambitious adjustment targets for addressing  (v) them - PSAL 1988; (c) fostering consensus on systemic deficiencies, the need for reform action, and the design of a reform program starting with the power subsector -OED seminars and ESMAP TA in 1991; and (d) by supporting the implementation of this program (PERL 1992, and the proposed TA loan - - para. 9.4). Under present circumstances, Bank support for carrying out the ongoing reform of the power sector (para. 9.2) should rely on commitment lending for technical assistance and normal project investments that disburse over realistic time periods. The minimum necessary objectives for further Bank support should be to improve regulatory transparency; financial, economic and environmental efficiency; and the increase of effective competition through private sector participation. These objectives should be achieved by the implementation of the SINSE (para. 7.5), the enactment and implementation of the Electricity Law, consistency with a least-cost investment program of all investments not undertaken by the private sector, achievement of loss-reduction and energy conservation targets, and consolidation of the environmental and resettlement-social policies of the sector.  COLOMBIA PROJECT COMPLETION REPORT POWER SECTOR ADJUSTMENT LOAN (2889-CO) PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE Proiect Identit Project Name: Power Sector Adjustment Loan (PSAL> Loan Number: 2889-CO RVP Unit: Latin America and Caribbean Region LA3TF Country: Colombia Sector: Energy Subsector: Electric Power 1. Backgrund 1.1 The Power Sector Adjustment Loan (PSAL) for US$300 million, approved in 1987, was the latest and most comprehensive effort by the Government and the Bank to reverse the deteriorating trend in power sector efficiency and finances which began in the late 1970s. Its outcome must be judged in the context of several important and interrelated factors: a. the Bank's relations with Colombia, particularly its experience under previous operations in the power sector since 1978. During this period, a primary objective of the Bank was to help improve the sector's efficiency and finances. Also, a pattern of incomplete compliance with agreements by the Colombian authorities (para. 2.3) had been indirectly encouraged by recurrent unrealistic optimism by the Bank in expecting that the next investment operation would reverse the deteriorating trend of the sector; b. the record of the effort to process the Power Sector Loan, its objectives and conditionality designed for an investment rather than for an adjustment loan, compliance with effectiveness and release conditions, and needed amendments therefor (paras. 3.7 and 3.8); c. the adaptation of the sector dialogue to the new modus operandi resulting from the 1987 reorganization of the Bank which inter-alia required a more strict and timely compliance with covenants, particularly of quick disbursing adjustment operations; and d. the sharp deterioration of performance that came with the financial difficulties in the mid- 1980s, when Government did not allow the sector to adjust its tariffs for the effects of the massive devaluation of the Col$, which paradoxically coincided with a successful dialogue between Government and the Bank on changes required in Colombia's economy (paras. 3.1-3.3; and Annex 1).  2 Subsequent sections evaluate the impact of the operation in relation to its objectives (Section 5, and Annex 5) and the performance of the Bank and the Borrower (Section 6); and identify lessons learned from this experience relevant to future operations (Section 8). 1.2 It may be helpful to state at the outset that despite the difficulties and tensions experienced in implementing the PSAL, the situation would have been significantly worse had the Loan not been made. While logical substantiation for this 'what if' type of conclusion is not possible, it is a reasonable inference based on the fact that various actions were taken by Colombian authorities to strengthen sector performance mainly due to continued dialogue with the Bank and (at times) the Bank's insistence on the need for action. For example. according to sector authorities, the urging of the Bank played a positive role, in convincing the Government of the need to restructure the sector, and to raise tariffs in real terms during the last calendar quarter of 1990. Bank participation in underlining the need for sector reform as a prerequisite for resolving the pervasive sector problems on a sustained basis, and in providing funds, has had a positive impact compared to the expected evolution of the sector had this Loan and subsequent Technical Assistance support not been made. 2. Bank's Experience with the Power Sector' Bank Lendin2 to the Sector. 1970-1987 2.1 During 1970-87, the Bank made 15 loans to Colombia for electric power, including the PSAL, totalling US$1.9 billion. These loans were equivalent to 40% of the long term gross borrowing of the sector, some US$5 billion equivalent in 1987. The Inter-American Development Bank (IDB), the other main source of foreign financing for the sector, had contributed another US$1.9 billion in 22 loans. This was a period of rapid growth in installed power capacity and in coverage of the fast growing Colombian population. As of 1987, the total amount of Bank loans to the power sector equalled about 37% of total Bank loans to Colombia, and about one third of the outstanding power sector debt was owed to the Bank. 2.2 Based on the lessons learned from the previous five completed operations since 1970, most of Bank lending over the period supported major sector initiatives such as: the creation of stronger regional utilities, with the existing main companies as a nucleus; the preparation of a development master plan; systematic generation and transmission planning, based on least-cost analysis; balancing investment between generation and transmission on the one hand, and distribution, on the other; reduction of system losses; a unified presentation of financial data and progress toward compatible financial accounting in the utilities; marginal cost pricing; and a reasonable contribution to investment from sector revenues. 2.3 Although substantial success in some of these endeavors was achieved, it had not been possible to bring it to a satisfactory and sustainable level. A pattern of incomplete compliance with institutional and financial understandings and agreements with multilateral agencies had evolved because concerted action among the Government, sector agencies and utilities was lacking. For example, although decided at the highest level of government the creation of new regional aggregations of utilities did not proceed. ' As perceived in 1986-1987. For a more recent in-depth evaluation see OED's Report No. 8893, 'Colombia - The Power Sector and the World Bank 1970-1987," June 28, 1990.  3 Preparation of a sectoral development master plan was drastically curtailed. Generation and transmission planning carried out by ISA, though vastly improved, could not eliminate the flaws stemming from ISA's shareholders tendency to introduce untimely project preferences at the expense of nationally-oriented considerations. And not least, financial and operational efficiency continued in a critical downtrend. 2.4 Despite all efforts, by 1987 the investment program remained quite unbalanced at the expense of distribution. Overall system losses had increased by about 50% to an average of 24%, while those in some utilities had roughly doubled (EEB, and CORELCA's Electrificadoras). Internal cash generation, which had persistently fallen short of targets, never contributing more than 10% to the sector's investments (after a momentary peak of around 15% in 1976) compounded by an increasing level of accounts receivable from municipal and government owned entities, failed to ease the heavy burden the sector had been imposing on government finances. 2.5 By 1986, the Colombian Government, sector authorities and utilities had accepted the principle of pricing according to average long run incremental costs, but its implementation remained slow, leaving the sector far from the goals set. Substantial tariff distortions and subsidies persisted, implying very large subsidies to residential consumers (particularly to high income, high consumption residential subscribers), partly at the expense of industry and commerce. 2.6 The PSAL was the first Bank operation which explicitly attempted to address the sector issues as a whole through a program of concerted actions involving all the principal players in the sector. 3. Pregaration of the PSAL: Macroeconomic and Sector Circumstances 3.1 During 1984-86 the Colombian Government had put in motion a stabilization program to correct the severe fiscal and external imbalances of the early 1980s. Following up on this successful effort, in early 1987 the Government defined a medium term program for 1987-90 aimed to consolidate its adjustment progress and to ensure sustained growth at about 4% p.a. An important element in the overall strategy was the public expenditure program which was at a major turning point. The Government priorities had shifted from a focus on infrastructure development towards social concerns and the need to restrain the level of total public expenditure. 3.2 The Bank had worked closely with the Government in helping to define a plan in support of the public sector medium term investment program. Public sector investment for 1987-90 averaging US$2.7 billion p.a. was approved by the National Economic Policy Counsel (COMPES) in July 1987. Maintaining consistency with macroeconomic and sectoral objectives, the program entailed overall cuts and specific reductions in investments for the energy related sectors of electric power, petroleum and coal, and increases in expenditures on social programs. 3.3 Colombia's external resource mobilization strategy was an essential element of the medium term program. It had important implications for the power sector adjustment program because of the high level of power sector debt and heavy financing needs. The basic strategy was to rely on voluntary lending. The Government's objective was to maintain debt to commercial banks at roughly the current  4 levels then, but at the same time to open possibilities for new lending in the future by broadening access to new financial markets and using a wider range of financing instruments. 3.4 To cope with the heavy bunching of maturities during 1987-90 Colombia had reached agreement in principle with commercial banks on a voluntary financing operation totalling US$1,060 million which reflected the country's strong economic performance. As part of this operation, US$200 million were included as parallel cofinancing for the Power Sector Adjustment Program. Even with a scaled-down investment program, the financing needs of the power sector were large and the PSAL, including its quick disbursing features, was an essential part of the overall financing package. This package together with likely new lending from multilateral sources were to provide the funds which Colombia needed to achieve its growth targets during 1987-90. 3.5 The reduction to the power-sector program was substantial. From a peak of USS1 bilion p.a. in 1982-84 when it made 35% of the investment program, power sector investment during 1987-90 was to decline to an average of US$516 million p.a., reducing its share to 19% of the total program. The program included completion of ongoing generating plants, high priority transmission and distribution projects, and advances in rural electrification supporting social objectives. 3.6 Preparation of the operation began in January 1985 when the Government requested the assistance of the Bank in the formulation, implementation, and financing of a sector rehabilitation program to address long-standing financial, regulatory, and efficiency issues of the sector. Prior plans to restore sector finances through tariff increases and efficiency measures had failed due to relatively high levels of ColS devaluation and inflation, the weak accountability and regulatory frameworks, and deficiencies inherent in the plans or delays in their implementation. It was expected that a more systematic approach which had Bank support could attract substantial amounts of cofinancing from other sources over the next two years. Bank staff cooperated closely with the staff of FEN, ISA and the Ministries of Finance and of Mines and Energy to: (a) diagnose sectoral problems; (b) define policies for the medium and long-term development of the sector; (c) identify investment priorities, financial requirements, and possible sources of financing; and (d) draft the PSAL's Program covering the period 1987-90, based on a least-cost investment program and a corresponding financing plan. 3.7 In February 1985, the operation was originally conceived as a quick disbursing sector adjustment loan. By the time of the final project brief in July 1986, prior to the preappraisal mission of November 1986, the operation was being prepared as a more conventional sector investment loan to be tranched over the 1987-90 period. This conception prevailed through the appraisal mission of February 1987, and until the yellow cover SAR of May 1987, where the idea was to provide about 90% of the loan for financing both the Government's equity investments in troubled utilities, and interest during construction on past Bank loans. 3.8 The need to change the operation into a sector adjustment loan to provide 100% financing against general imports, subject to a negative list, arose because direct financing of interest during construction on past Bank loans was too close to actual refinancing of said loans and thus not appropriate. The rest of the $3 billion 1987-90 power investment program was largely covered by ongoing loans already committed to physical components of the program, and of proposed new financing such as from Japan's Eximbank and the 1DB, which could not disburse'against general imports. The Bank's decision to proceed with the loan as an adjustment operation was based on the linkage between this loan and the US$1.06 billion loan which the Government was negotiating with commercial banks to support its 1987-  5 90 overall adjustment program; on Colombia's satisfactory macroeconomic performance indicators; and on the very significant sectoral policy content of the loan.2 Main Objectives of the Sector Loan: Macroeconomic and Sector 3.9 The Sector Loan intended to address both macroeconomic and sector issues. With this Loan, the Government and the Bank sought to support Colombia's overall adjustment program and catalyze the mobilization of funds from commercial banks, the IDB, and the Eximbank of Japan. The Government regarded the PSAL as a key element of its foreign debt strategy. The mobilization of external funding to the power sector was to release resources towards sectors with lower foreign capital and import requirements. 3.10 Sectorwise, the PSAL was to support the Government's reform programs in the power sector whose principal objective was to improve the supply and demand efficiency of power generation, transmission, and distribution. The objective was to be achieved by: (i) rationalizing planning policies and investments in the energy sector; (ii) improving the regulatory framework and management of the weaker utilities; (iii) improving the technical capacity to monitor the environmental and social aspects of the sector in line with international standards; and not least (iv) improving the self financing capacity, capital structure, debt terms, and operational, commercial, and pricing efficiency of the sector. 3.11 Specifically, the adjustment program (summarized in Annex 5) consisted of action plans on the following areas: a. sector investment, including: investment policies; the 1987-1990 investment program; the 1991-2000 investment program; and the Guavio project. b. institutional, including: management and financial improvement of ICEL, CORELCA and EEB. c. environmental and social aspects of the sector and the Guavio project; and d. financial adjustment program, including: tariff, energy loss reduction and accounts receivable improvement programs. Comments from Executive Directors 3.12 When the Sector Loan was presented for the approval of the Executive Directors on December 8, 1987, two Directors opposed it and expressed severe criticism concerning two principal aspects: (i) on the justification of the loan, underlining that the Bank should not lend to a sector that was overinvested, and that the US$300 million should be part of concrete investments in say education, training, or to give access to electricity to the 40% of the colombian population not yet having it; and (ii) on the timing of the loan, submitting that it would have been more appropriate for the Board to consider the loan in the light of the then impending reports on country economic work and the new Bank volicy on Energy. 2 GrCn Cover review meeting - Minutes, August 12, 1987.  6 3.13 Although the Loan was strongly endorsed by a large majority of the Executive Directors some made comments principally stressing: (i) the perceived vague conditionality of the loan; (ii) the need to have more ambitious targets for the electricity loss reduction program; (iii) the need to reduce the distortion of electricity rates; and (iv) the viability of securing cofinancing funds for US$1,030 million. All points made by the Executive Directors were adequately addressed by staff in their response. (For a fuller statement, see the Summary of Board Discussions of December 8, 1987). 4. Implementation of the PSAL Release of the First Tranche 4.1 Weaknesses relating to the readiness and ownership of the adjustment program by the sector and government agencies, and to the prompt establishment of monitoring mechanisms to ensure timely compliance with dated and tranching covenants, surfaced soon after loan signing on March 16, 1988. Through an early amendment, a number of dated covenants due by March 30, 1988 were postponed to July 30, 1988 (Part m, Table 4). This amendment allowed the disbursement of the first tranche of the loan (US$150 million) on June 6, 1988, just before June 16, 1988, the original deadline for effectiveness. Release of the Second Tranche 4.2 The second tranche (US$75 million) due before March 1989 could not be released on time because of general delays in meeting disbursement conditions (Part HI, Table 5) in particular the targets of the loss reduction program (Annex 5, paras. 28-34) and the legal establishment of the CNE (Annex 5, paras. 5-7). A second set of amendments, revising the loss reduction targets and making the establishment of the CNE a third tranche condition, was agreed upon to enable disbursement of the second tranche to take place on August 23, 1989. Also, the closing date of the loan (June 30, 1989) was extended until January 31, 1990. After the exchanges that took place between the Government of Colombia and the Bank leading to this second set of amendments, the Bank made it clear that it would be very difficult to agree to any further amendments before the release of the third and last tranche. Also, it had become clear that quick disbursing adjustment loans were not suitable instruments to support the Colombian power sector.3 Cancellation of the Third Tranche 4.3 Undoubtedly the establishment of the Consejo Superior del Sector Electrico in charge of monitoring, inter-alia, compliance with the PSAL program, improved significantly the monthly supervision of the various action plans, in particular those relating to the preparation of studies, and reduction of energy losses and receivables of government-owned utilities. The improved monitoring system could not, however, ensure the compliance with targets requiring more fundamental institutional and policy actions. I Minutes of meeting of June 26, 1989 between Colombia's Minister of Finance and the Bank's LAC Region Vice President.  7 4.4 In January 1990, the closing date of the PSAL had to be postponed a second time until September 30, 1990, because of continuing difficulties in the following three areas: (a) closing a large gap of the sector 1990 financing plan; (b) reduction of energy losses and meeting revenue and efficiency targets of sector utilities; and (c) delays in the annual audit report for the 1989 PSAL accounts. 4.5 By June 1990, satisfactory compliance with two main targets were still pending: (a) the sector financing plan for 1990 was still showing an unresolved gap of some US$280 million; and (b) the loss reduction targets for the sector as a whole were off the mark and in particular those of EEB were moving into an increasing deteriorating trend (Annex 5, paras. 28-34). Also, substantial delays in the audit report of the PSAL'a special account, and non-compliance with the specific accounts receivable commitments of the Empresas Publicas Municipales de Barranquilla (EPMB), were two more easily solvable issues that iieeded to be addressed before disbursement of the third tranche. 4.6 The new Government administration that took office in August 1990 was convinced of the imperative need to restructure the sector as a prerequisite to a sustainable solution of the critical sector problems. It established a Task Force to recommend immediate actions to improve sector finances and an action plan with different and more fundamental objectives than those of the PSAL (para 6.4). Based on the recommendations of the Task Force, by mid September 1990 the new Government increased tariffs, established a faster Tariff Adjustment Program (Resolution 90 superseded Resolution 86 covenanted under the PSAL), and begun an in-depth analysis to solve the structural financial and Accounts Receivable problems of the sector by capitalizing the government-owned utilities. 4.7 Realizing that full compliance with the release conditions for the third tranche will require a new set of amendments and one more extension of the closing date of the PSAL, and reasoning that the reform needed by the power sector could be supported more appropriately in the context of the Public Enterprises Reform Loan (then being processed by the Bank), and of a future sector investment operation, by letter of September 25, 1990, the new Government informed the Bank its decision to relinquish disbursement of the third tranche and let the PSAL expire on its closing date of September 30, 1990. 5. Results of the PSAL Political and Economic Background 5.1 Throughout the period 1985-1990, the processing and implementation of the Sector Loan, and the efforts of the Bank and sector authorities to restore the operational, commercial, and financial conditions of the sector were complicated and delayed by economic difficulties and by political and institutional factors: a series of internal and external shocks, high levels of inflation and devaluation, increasing fiscal deficits, and a falling rate of economic growth. Annex 1 provides a brief recapitulation of these factors and their economic impact as they occurred in a continuous chronological sequence. Macroeconomic Objectives 5.2 The objective of improving current savings and mobilizing external funds to the power sector to release internal resources towards other sectors, was not met. Lower than expected internal savings from the power sector, and lower disbursement levels from external sources, forced the Government to distract  8 a substantial amount of funds totalling some US$793 million (from FODEX and commercial banks) to meet the financing needs of the power sector during 1987-90 (Annex 2, paras. 6-9). Investment 5.3 The overall 1987-90 investment target in dollar terms was met, and significant improvements were introduced to the long term planning methodology of the power sector. But, because of delays in creating the CNE, the deteriorating financial and commercial base of the sector, and the unresolved institutional constraints, the physical targets of the investment program were only partially met. The Guavio project incurred additional substantial cost and time overruns, 257% and 15% respectively (Annex 5, paras. 5-16). Institutional 5.4 The goal of introducing sustainable institutional improvements in the sector was not met, despite considerable efforts by the Government agencies and the team of high level Government officials in charge of coordinating the implementation of the PSAL. The studies required to support the introduction of the institutional and management improvement were largely completed on time. In contrast, the recommendations of the studies were largely ignored. The principal reason being the lack of regional and municipal commitment to change, which rendered the institutional reform goals of the program unrealistic. (Annex 5, paras. 17-34). Environmental and Social 5.5 The ambitious number of environmental and social institutional goals for the sector were successfully met. Noteworthy was the creation of an effective weighting system of critical parameters to rank the environmental and social impact of hydropower and thermal projects, and its introduction into the planning process of the sector. The targets specifically associated with the Guavio project, which was being implemented under weak financial and managerial conditions, were also satisfactorily carried out (Annexes 4 and 5). Financial 5.6 As measured by key indicators for the years 1987-1990, the actual tariff and other financial policies implemented during the PSAL led to a sector performance substantially below its forecast. During 1987-90, rates deteriorated in real US-dollar terms by about 17%. The self financing ratio, expected to increase from minus 12% up to 15.7% by 1990, dropped to minus 73.9%. Similarly, other key ratios also deteriorated, or improved but significantly below expected targets. The financial restoration of the sector was undermined by: lower rates in real terms; higher operating costs with resulting considerably lower debt service capacity; insufficient progress in both the energy loss reduction program, particularly in the case of EEB (Annex 5, para. 28-34) and in the collection of receivables owed by Government or regional agencies (Annex 2, para. 14); and by the shifting priorities of the Government in its effort to combat inflation and a falling rate of economic growth (Annex 1, paras. 2-5). The actual and forecast performances of the sector are set forth in Annex 2.  9 Weighted Overall Results 5.7 An attempt has been made to provide and integrated assessment of the PSAL - lest the above imperfect outcomes, when viewed piecemeal, may not do justice to the substantial achievements of the PSAL, notwithstanding its implementation tensions and difficulties. The allocation of weights to the expected and reported results of the principal components of the PSAL, renders a weighted overall performance of 65%. Table 7 of Part III shows the criteria, individual weights, and arithmetic used. While it would be difficult to reach consensus on the criteria and all the individual performance weights used, a deliberate conservative approach was used in formulating and assigning values to them. Impact and Sustainability of the PSAL and Other Parallel Processes 5.8 The catalogue of results reported in Annexes 1 through 5 does not reflect the overall contribution of the PSAL and other ongoing events to the reform process of the sector. One of the most important results was the increased consensus among the Government, sector officials, and public opinion on the need for fundamental reform to address the sector problems on a sustainable basis. While the need for sector reform had been felt for a number of years, the results of four processes could be regarded as having been instrumental in helping focus the restructuring objectives of the ongoing reform of the Colombian power sector: - First, the high level of tension experienced during the implementation of the PSAL underlined with conclusive clarity the growing ineffectiveness of the sector's accountability and regulatory framework. - Second, the energy pricing study prepared by the Bank (LA31E) in June 1990, pointed eloquently to the pricing problems of the overall energy sector, to the serious inefficiencies derived from the pervasive maintenance of a series of implicit subsidies in the power sector, and in particular to the existence of a substantial amount of regressive subsidies to large residential consumers - the study left no doubt that the ongoing tariff adjustment program under Resolution 086 had to be revised. e Third, the results of the OED report on the Evolution of Colombia's Power Sector (para. 9.2) highlighted the need for structural sector reform and a new legal and regulatory framework. * Finally, the power sector reform and privatization processes in the UK, Spain, New Zealand, and in particular that of Chile which towards the end of 1990 was already showing measurable positive results, abetted strong emulating forces (para.9.2). 5.9 The impact and sustainability of the sector improvements resulting from the PSAL were doubtful at the time of the cancellation of the third tranche. However, the significant sector achievements since then (paras. 9.2-9.6) triggered by the above mentioned processes, provide a basis for cautious optimism. The sustainability of these achievements, and their further consolidation, would depend on the success of the recommended commitment-lending by the Bank (para. 9.7).  10 6. Conclusions Performance of the Goverrunent 6.1 The expectation that the PSAL would increase the capacity of the Government to ensure the timely carrying out of all the specified measures to rehabilitate the power sector proved to be unfounded. The Government placed a higher priority on the implementation of macroeconomic policies (including a faster devaluation of the ColS) which were devoid of actions to allay likely unfavorable impacts on the savings capacity of the power sector. These policies, and the lack of mechanisms to ensure commitment to the objectives of the adjustmnent program by the municipal and regional utilities, had and adverse effect and resulted in increased contributions by the power sector to the public sector deficit. 6.2 Part II, paras. 186-192, underline specific shortcomings of the Government's performance. It is clear that those related to the design of the PSAL also apply to the performance of the Bank, namely: unrealistic goals more suited to investment than to quick disbursing operations; overestimation of the Government's capacity to ensure commitment to the PSAL from the regional and municipal utilities; underestimation of the effect of agreeing to financial targets based on optimistic assumptions and poor financial estimates; and insufficient knowledge of all pertinent institutional constraints. 6.3 Due note should be made of the larger amount of intellectual and executive resources deployed by the Government and sector agencies, particularly during those times approaching the scheduled disbursement dates of the various tranches of the PSAL.' These efforts were instrumental not only in the preparation of the two amendments that were required to effect the first two tranches of the PSAL, but also in the creation of consensus on the need for sector reform. 6.4 Convinced of the need for reform, the new Government that took office in August 1990, with Bank support, and an ad-hoc high-level Working Group carried out a substantial action plan (para. 9.2). By December 1991, the Working Group had drafted an electricity Bill to introduce a new sector policy aimed at: (a) fostering competition by creating a wholesale market for electricity and an open-access transmission network with possible participation by the private sector; (b) introducing regulation of the sector in order to prevent monopolistic behavior and ensure economic pricing where market mechanisms are ineffective; (c) disengaging the Government from direct participation in electricity production through divestment of power plants; (d) undertaking the development of new power plants with private sector participation; (e) rehabilitating deteriorated utilities with the ultimate view of privatizing them; and (f) creating a Grid Operator Company to manage the transmission system and to act as a clearing house in wholesale market transactions. Performance of the Bank 6.5 As for the Bank's performance, there were also strengths and weaknesses. The strengths of the Bank were in providing support in: (a) developing a comprehensive approach toward investment ' During the implementation of the PSAL three specific missions from the Government visited the Bank Headquarters for about one full week each, during February and March 1989, December 1989, and August 1990. These missions consisted of delegations of high Government and sector officials, led by the Vice-Minister of Mines and Energy.  11 programming in line with macroeconomic, environmental and social parameters; (b) attempting to strengthen the financial planning and reporting capabilities of the sector; (c) fostering review of the organizational and ownership structure of the sector; and (d) strengthening the regulation of environmental and social aspects of the sector and addressing important environmental problems resulting from the investment program, in particular those of the Guavio project. 6.6 The sector's financial performance fell short of what was expected at appraisal. Given this shortfall, was the loan justified or timely as doubted by some EDs (para. 3.12)? The answer is clearly positive. At the time there was an urgent need for external loans to support Colombia's overall adjustment program if there were to be a chance that it would succeed, and the Sector Loan plus the parallel cofmancing investment loans it helped attract from the Eximbank of Japan and the MDB served to meet this need (Annex 2, para. 6). The subsequent extent of the Government's difficulties in addressing macroeconomic problems (Annex 1, paras. 3-5) as well as the extent of the problems in relation to inflation, public sector deficits, foreign exchange problems, and those caused by faster devaluation of the ColS to producers of non-tradeables like the power sector, could not have been fully foreseen. 6.7 At appraisal the President's Report (PR) recognized risks associated with: (i) possible failure to timely secure the envisaged cofinancing levels; (ii) regional resistance to more centralized planning and stronger monitoring and regulation; (iii) market volatility; (iv) the pace of tariff increases particularly in the event of adverse developments in expected inflation; and (v) the forthcoming increase in municipality independence from the central government that might affect the tariff adjustment program. Only the first and fourth risks had assurances that the Government would take all necessary measures to cover them. The remaining risks, clearly outside the direct control of the Government, were only flagged in the PR but no plan, strategy or up-front conditionality was given as an indication that they had been reasonably covered. Three important risks were not anticipated: Devaluation of the Col$ faster than inflation (Annex 1, para. 7), protracted Government commitment to monitor the PSAL (Annex 5, para. 18), and constraints to effective supervision due to lack of timely and consistent sectoral financial data (para. 8.4). 6.8 Soon after loan-signing implementation of the PSAL became extremely difficult. The identified risks turned into certitudes, further complicated by the effect of the unanticipated risks. In retrospect, these risks were not hedged adequately. It was not sufficient to point out that the risk of deviations will be addressed through specific yearly measures to be defined during the annual reviews of the updated investment and financial plans for the sector and by reference to the Bank's intention to supervise implementation of the PSAL closely. 6.9 The PR did not indicate the performance status of the Bank's active power sector operations, and did not evaluate properly its effect on the design of the PSAL. When preparing the PSAL there were nine investment loans to the power sector, approved since 1978, at various implementation stages, totalling US$1.3 billion, and equivalent to 81% of the historical total to the sector: three to EEB, three to EPM, one to CORELCA, one to ISA, and ONE to 'FEN (Part III, Table 1, items 22-30). While the physical aspects of these loans, with the exception of Guavio, were being implemented largely without major problems, there was a critical pattern of increasing non-compliance with most of the institutional, financial and operational efficiency aspects (loss reduction, accounts receivable, return on rate base, contribution to investment).  12 6.10 Faced with the above situation and the need to continue having commitments for remedial actions, the Bank opted for an approach based on proliferation of conditionalities.' This approach added considerably to both the time and effort required to prepare, appraise and negotiate the PSAL, and to the difficulty in verifying satisfactory performance as a condition of releasing the various tranches of such a loan. This ambitious attempt at correcting a serious status of non-compliance with multiple operations without updating their respective covenants, and improving sector performance by tying disbursement to tranches at relatively short intervals, did not work out satisfactorily (para. 4.2). 6.11 The Bank placed too great a reliance on the Government's ability to provide either equity contributions from its own resources to cover any shortfalls in cofinancing funds, or in its resolve to depart from the Tariff Adjustment Program (TAP) of Resolution 86 to make up for any shortfalls in funds to be generated internally. In fact and until September 1990, the Government and the utilities regarded the TAP of Resolution 86 as non-negotiable, and expected to make up for any shortfalls, regardless of cause, exclusively through additional borrowing from FODEX and other types of long and short-term borrowing (Annex 2, para. 8) 6.12 The Bank was also unrealistic to assume that ownership of the considerable amount of action plans, and rehabilitation and reform targets of the adjustment program would automatically be adopted by the municipal and regional utilities under the incentive of obtaining financing from FEN if they did perform. The results indicate that, in the absence of mechanisms to ensure performance (Part II, para. 192, 2nd. bullet) the utilities preferred to do without FEN financing than to comply with the more fundamental conditions of the PSAL. As a result considerable amount of development financing through FEN, for investments in distribution and loss reduction programs, remained undisbursed during the implementation of the PSAL (Annex 5, para. 9). 6.13 As the Government had overall responsibility for influencing, enhancing and monitoring the environment of the sector, this report concludes that until September 1990, the Government was unable to accord the institutional, financial, and commercial rehabilitation of the sector sufficient priority notwithstanding its commitments under the reform program. Thus, the influence of the Bank on Colombian policy, during the implementation of the PSAL was less than anticipated. 7. Comments to the Government's Evaluation of the PSAL 7.1 Through FEN, the Government prepared a comprehensive and well documented completion report of the PSAL. Part II reproduces complete translations of the most pertinent sections. They convey important insights and capture quite eloquently the sentiment of the counterpart Government officials that were involved in the design and implementation of the PSAL. While it may be difficult to reconcile the numerous differing perceptions on the multiple stages and complex aspects of the PSAL, in general the Bank agrees with the results and the conclusions presented in the Government's report. The operation I In an effort to properly size the resources required by the sector and help establish an effective monitoring system to implement the PSAL, the supervision mission of October 1988, determined that some 139 tasks, actions and complex activities had to be carried out in order to implement the adjustment program and comply with disbursement conditionalities of the PSAL.  13 was by no means perfect, but there is a clear agreement that a large number of impressive achievements were made under the PSAL (Part II, paras. 182-184). The following clarifications, however, bear noting: 7.2 The flexibility of the Bank (Part II paras. 179-180) was shown through out. During implementation the Bank agreed to amend the PSAL targets and conditionalities twice to enable disbursement of the first two tranches, and extend the closing date of the PSAL also twice. It is clear that any more flexibility would not have been prudent in the context of an adjustment operation. 7.3 The information requested by the Bank was in line with normal supervision requirements to monitor the large number of complex undertakings of the adjustment program. The tensions on this aspect of the PSAL reflect the failure of both the Bank and the Borrower to establish up-front all the required reporting resources and systems. 7.4 The technical assistance (TA) provided by the Bank (Part II, para. 181) was substantial. It included the TA components of the eight ongoing Bank loans to EEB, GUAVIO, EPM, ISA, FEN, and CORELCA (para. 6.9). In addition there was substantial indirect TA transferred during the supervision of the PSAL in the areas of pricing (an energy pricing study was delivered to the Government in June 1990) environment, resettlement, planning, loss reduction monitoring, and in the strengthening of the reporting hardware and software capacity including through the SINSE. Therefore the assertion regarding a dearth of technical assistance is unfounded. Further, the PSAL did not include a significant sector-wide TA component to supplement the ongoing project specific TA linked to outstanding loans because the quick disbursing adjustment operation is not a suitable vehicle for TA. The medium to long term time frame needed for a TA program does not match the accelerated disbursement format of adjustment operations. Had a need for sector-wide TA been justified, a TA loan parallel to the PSAL could have been processed. Both, the Government's and the Bank's preparation teams, however, deemed that no complementary TA loan was necessary to the success of the PSAL. 7.5 The ESMAP program sponsored the SINSE project (Sistema de Informacion del Sector Electrico). It was designed to enhance the regulatory transparency of the sector by producing a reliable and consistent Management Information System including a uniform system of accounts - a long felt need of the sector. It was launched in February 1989, and its design tardily completed in April 1991. Unfortunately the need, impact and sustainability of the SINSE were not tied to the covenants of any of the ongoing loans -'the Bank. Not being part of the reform objectives of the sector it now appears that the important SINSE initiative has been shelved. 8. Lessons Learned 8.1 The long list of pertinent lessons indicated in Part II (paras. 196-212) result from having structured the PSAL without the support of what are now standard Bank requirements for adjustment operations: (a) clear and complementary country and sector strategies derived from in depth country and sector work; (b) strong internalization of the reform objectives and implementation sequence; (c) tayloring the operations to a comprehensively appraised regulatory institutional capacity to implement the reform program; (d) avoiding complex operations with excessive conditionality; (e) obtaining updated financial information; (e) effective creation of a monitoring system; and (f obtaining appropriate up-front conditionality. These requirements were derived from the lessons of some 99 adjustments operations  14 carried out by the Bank during 1980-1991 in 42 countries.6 Although some concepts may be repeated, the following paragraphs refer to lessons which are particular to this PSAL operation. 8.2 The experience under this loan demonstrates the importance of carefully evaluating the political and economic context in which a project will take place. The conditions of political and economic tensions that prevailed throughout the implementation of the PSAL severely limited the ability of the Bank to influence the decisions of Colombia's policy makers. An active dialogue to ensure coordination between macroeconomic and sectoral policy dynamics is particularly critical to the success of infrastructure sector adjustment operations. 8.3 The policies and regulatory framework of the sector should also be assessed with a view to determining whether the sector context is conducive to the successful completion of the project under consideration. Because the policies and regulatory framework of the Colombian power sector were fragmented and ineffective, progress in implementation was hampered. A clear technical and politically phased strategy should have been defined before proceeding with the project. 8.4 Historically, there had been considerable difficulties, including during the implementation of the PSAL, in obtaining reliable and consistent financial information of the many power companies which make up the sector (Annex 5 paras. 17, 20).' The PSAL did not attempt to address this fundamental regulatory shortcoming that had been identified under Loan 1582-CO in 1980 and forgotten until the 1989 ESMAP-supported SINSE project (para. 7.5). The SINSE would have enabled the Government to improve the regulatory transparency and monitoring effectiveness of the sector. To this end, a competent auditing firm should have been engaged to assist the Power Sector Regulatory Agency to review the SINSE initiative, and propose proper regulations for the timely production of reliable and consistent sector financial statements based on a uniform system of accounts for the sector. 8.5 The lack of a long term sectoral strategy paper updated at regular intervals contributed to the inadequacy of institutional memory. It allowed awareness of key sectoral shortcomings such as the above, to be lost in the change of staff assigned to the sector. Sectoral strategy papers are an important tool for maintaining institutional memory over time. 8.6 Changing the nature of the operation late in the processing pipeline should be avoided. It is clear that the PSAL changes from adjustment to investment and finally back to adjustment operation had an important effect in the complex design of the PSAL (paras. 3.7-3.8). In instances where the form of the operation must change for internal bureaucratic reasons, the integrity of the project and the consistency between the form and substance of its implementation strategy merit close reevaluation. 8.7 The significant difficulties experienced in applying the quick disbursing adjustment approach to a sector with complex structural problems that will take a long time to assess, much less untangle and internalize, should be recognized. For example, in releasing the first and second tranches of this loan in June 1988 and August 1989, reliance was placed on estimates of sector performance to determine 6 Report No. 10870, World Bank Structural and Sectoral Adjustment Operations: The Second OED Overview - June 30, 1992. 7 This shortcoming has also been underlined in the OED Report No 8893: Colombia The Power Sector and the World Bank, 1970-1987, Vol I, paras. 29, 30, 114, 115, 133, and 139.  15 whether the PSAL was being carried out satisfactorily. Those estimates proved to be misleading (Annex 2, Table 3 and Graphs 1-8. Unless there is substantial upfront policy action including an effective reporting and monitoring system, it is impractical to enter into quick disbursing operations in a sector whose problems requiring medium to long term solutions have not been strategically sequenced, or where accurate and reliable information is not timely available (para. 8.4). The sector approach requires comprehensive consideration of all significant aspects of sector performance phased over a realistic period of time. 9. Future Bank Support 9.1 Should the disappointing adjustnent performance of the sector during the implementation of the PSAL, which continued the existing pattern of incomplete compliance with covenants, lead to the conclusion that the Bank should discontinue support for Colombia's power sector? The answer should be no, provided that the proposed reforms (Electricity Law) and effective regulatory transparency (through a SINSE) are implemented, for two principal reasons. First, the difficulties in implementing the PSAL helped to convince Colombian officials of the need to reform the power sector and increased their commitment to developing an adequate policy and regulatory framework. This commitment represents a positive change in the environment for future power projects, and reduction of the unfavorable conditions that hindered the PSAL. Second, the Bank can offer important comparative advantages in assisting the reform of the power sector, which must occur to permit continued economic growth in Colombia. The Bank could bring to the reform process experience across countries in the power sector, coordination and consensus building skills, and positive working relationships developed with counterparts through previous projects such as the PSAL. 9.2 The effectiveness of the Bank's continued support and technical assistance immediately after the PSAL has been demonstrated. The reform process, which followed a phased approach, was designed by the Government and the Bank in December 1990. The first phase, sponsored with ESMAP funds, was formally launched in March 1991 at a sector wide seminar in Santa Marta where the results of the OED evaluation of the power sector', presented by the Bank, were widely debated. Immediately thereafter, a high level task force staffed with representatives from the sector agencies and supported by consultants, reviewed and sharpened the issues and options for institutional reform, and recommended a new sector structure and implementation program. The first phase ended in July 1991 with a seminar and a workshop where the Government, backed by sector authorities, firmly endorsed the power sector restructuring program. The second phase (between August and December, 1991), led by a larger task force with considerable consulting support, produced a draft Electricity Bill currently being discussed in the Congress. A third, much more resource-intensive phase, initiated by the end of 1992, aims at producing the detailed power sector regulations based on the Government's policy and the findings of Phase 2. The consultants hired for the development of phases 2 and 3 have been financed by the Bank through the Public Sector Reform Loan. ' OED, Colombia-The Power Sector and the World Bank. 1970-1987, Report No. 8893 (June 28, 1990). This report, developed during a two year period with the participation of Colombian experts, identified many of the structural weaknesses of the power subsector and recommended its reform through the introduction of adequate regulation and private sector participation.  16 9.3 Since the closing date of the PSAL to date, the Bank's participation in institutional reform has matured into a well developed process. It is already showing tangible results such as the creation of the Energy Regulatory Commission, the unbundling of the generation and transmission assets of ISA, and a firm commitment to setting up a workable competitive market for electricity generation. 9.4 To continue supporting the implementation of institutional reforms to introduce market mechanisms and efficiency incentives in the energy sector, the Bank is currently processing a US$15 million Technical Assistance operation. It will further facilitate private sector participation, pricing reform, effective regulation, demand side management and environmental protection. 9.5 Effective Government action has also materialized in the area of private sector participation through (i) the installation of 95 MW (Mamonal) of private generation in an industrial complex in Cartagena, (ii) a 150 MW BOO contract (La Sevillana) with a foreign contractor, (both of these projects are already in operation), (iii) a 750 MW BOO contract (Barranquilla) awarded and currently being negotiated, (iv) invitations to bid for a 200 MW BOO (Termovalle) and (v) the ongoing divestment of Betania, a 500 MW hydro power plant. The generation capacity of these plants totaling 1695 MW represent 17 % of the total installed capacity in Colombia today. These developments are to be followed shortly by the organization of the open access network operated by an independent transmission company. 9.6 In retrospect, these achievements should be seen as the consequence of the Bank's contribution to the definition of a new vision for the power sector by (a) supporting the diagnosis of the sector's problems - ESMAP 1986, OED 1990; (b) attempting ambitious adjustment targets for addressing them - - PSAL 1988; (c) fostering consensus on systemic deficiencies, the need for reform action, and the design of a reform program starting with the power subsector -OED seminars and ESMAP TA in 1991; and (d) by supporting the implementation of this program (PERL 1992, and the proposed TA loan - para. 9.4). 9.7 Under present circumstances, Bank support for carrying out the ongoing reform of the power sector (para. 9.2) should rely on commitment lending for technical assistance and normal project investments that disburse over realistic time periods. The minimum necessary objectives for further Bank support should be to improve regulatory transparency, financial, economic and environmental efficiency, and the increase of effective competition through private sector participation. These objectives should be achieved by the implementation of the SINSE (para. 7.5), effective competition through increasing participation of private investors, consistency with a least-cost investment program of all investments not undertaken by the private sector, achievement of loss-reduction and energy conservation targets, and consolidation of the environmental and resettlement-social policies of the sector.  17 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE Backgouxnd 1.01 In compliance with Section 1.01 (b) of the Loan Agreement, the Borrower prepared and sent to the Bank a completion report of the project. Based in part on this first report, the Bank prepared a draft PCR and sent it for comments to the Borrower. By fax of May 13, 1994, the Borrower through FEN sent a no comments letter. 1.02 The completion report prepared by the Borrower is entitled "COMPLETION REPORT FROM THE BORROWER'S PERSPECTIVE - POWER SECTOR ADJUSTMENT LOAN 2889-CO." This comprehensive and well-documented report gives an account, from the standpoint of the implementation agencies, of the evolution of the sector economic indicators and of the preparation and implementation stages of the project. For future reference, the Borrower's report has been included in the project file. 1.03 To reflect the Borrower's views on the main achievements and lessons learnt, this section contains English translations of the cover; the Table of Contents; and highlights of the following key sections: Introduction; Results and Limitations: Design and execution of the program; Conclusions; and Lessons. 2.0 Translation of Selected Sections of the Borrower's Report 2.01 Borrower's Report - Cover COLOMBIA POWER SECTOR ADJUSTMENT LOAN (2889-CO) PROJECT COMPLETION REPOR PART II COMPLETION REPORT FROM THE BORROWER'S PERSPECTIVE POWER SECTOR ADJUSTMENT LOAN (2889-CO) FINANCIERA ENERGETICA NACIONAL S.A. "FEN" (LUIS BERNARDO FLOREZ ENCISO - Consultant) Santa Fe de Bogota, May 1992  18 Part II - Borrower's Perspective 2.02 Borrower's Report - Table of Contents [Nt: From the following table of contents, only the salient parts of items shown in bold (1,6,7 and 8) have been translated and included in this Part II of the report] TABLE OF CONTENTS 1. INTRODUCTION 2. GENERAL ECONOMIC FRAMEWORK 1987-1990 2.1 The Economic and Social Plan 1987-1990 - Fiscal Policy - External Policy - Public Spending 2.2 Principal Results - Balance of Payments - External Financing - External Debt - Fiscal Deficit - Inflation, Employment and Growth - The Modernization Program 1990 3. THE POWER SECTOR ADJUSTMENT PROGRAM AND THE WORLD BANK SECTOR LOAN 3.1 The Power Sector Adjustment Program 1987-1990 3.2 The Sector Adjustment Loan 2889-CO - Background - Objectives and Actions - Conditions and Commitments - Benefits and Risks - Disbursements and Times 4. RESULTS AND LIMITATIONS: INVESTMENT PROGRAM AND FINANCING PLAN 4.1 The 1987-1990 Investment Program - The Goals and Attainment of Them 4.2 The Financing Plan - The Obstacles and the Results of the Plan - FODEX and the Contingent Plan - ISA as Source of Financing 4.3 The Expansion Plan 1991-2000 4.4 Rate Policy  19 Part II - Borrower's Perspective 5. RESULTS AND LIMITATIONS: INSTITUTIONAL AND ADMINISTRATIVE ASPECTS 5.1 General Institutional and Regulatory Changes 5.2 Accounts Receivable Recovery Plan 5.3 Loss Reduction Program 5.4 Rehabilitation Plan, ICEL and CORELCA Groups 5.5 EEEB Reorganization Plan 5.6 Guavio Project 5.7 Environmental and Socioeconomic Programs 5.8 Adjustment Program Monitoring 6. RESULTS AND LIMITATIONS: DESIGN AND EXECUTION OF THE PROGRAM 6.1 Most Important Changes Relating to the PSAL 6.2 Design and Execution of the Program - Commitments and Conditions - lNon-compliance with the Financing Plan and its Implications 6.3 Relations Between the Bank and Colombia 7. CONCLUSIONS 8. LESSONS ANNEXES A. Background: General Development 1980-1986 B. Financing Plan: Attainment of Goals C. Development of the Investment Program D. Policy Letters From the Minister of Finance and the Minister of Mines and Energy (Summaries) E. Summary of Principal Government Communications F. Summary of Principal Bank Communications G. Summaries of Aide-Memoires, World Bank Missions H. Graphs I. Bibliography TABLES 1 Financing Plan 1987-90: Comparison Based on Reports (US$ Millions) 2 Financing Plan 1987-90, CONPES Estimates of 1987, Cash Flow (USS Millions) 3 Principal Assumptions for Projections and Profits and Losses 4 Financing Plan: Comparison between Proposed and Actual Results 5 Projected Status in January 1989 (USS Millions)  20 Part 11 - Borrower's Perspective 6 Profit and Loss Statement (US$ Millions) 7 Origin and Use of Funds (US$ Millions) 8 Actual Cash Operations 1987-90 (USS Millions) 9 Energy Sales and Current Payments: Differences Due to the Exchange Rate (USS Millions) 10 Actual Cash Operations ($ Current) 11 Actual Cash Operations ($ 1987 Constant) 12 Adjustment Plan Disbursements: Comparison Between Proposed and Actual Results 13 Development of Long Term Debt (US$ Millions) 14 Principal Financial Indicators: Comparison Between Proposed and Actual Results 15 Loss Reduction Program: Goals and Actual Results  21 Part 11 - Borrower's Perspective 1. INTRODUCTION 1. This project completion report contains the ex-post evaluation of the power sector adjustment Loan 2889-CO for US$300 million from the World Bank to the Republic of Colombia, as one of the actions taken under the Power Sector Adjustment Program carried out between 1987 and 1990. Pursuant to the contract signed by the consultant and Financiera Energetica Nacional 'FEN," this report was prepared in accordance with the methodological guides provided by the World Bank. 2. This loan operation was approved by the Board of Executive Directors in November 1987. Its estimated disbursement period was 15 months, but from the very start, ongoing controversies and lengthy delays occurred. Loan effectiveness and the first disbursement of US$150 million did not take place until the loan agreement was amended in June 1988 to change the timetable governing several of the actions agreed by the Government and the Bank. The second tranche, for US$75 million, was not disbursed until August 1989, following an extension of the deadline and another contract amendment. The deadline was extended for a second time until September 30, 1990, but in view of the inability to reach agreement on the level of compliance with the conditions, the Bank did not disburse the final tranche of US$75 million. In September 1990, the new government requested cancellation of this disbursement and in January 1991, the Bank agreed to that cancellation and closure of the loan effective September 30, 1990. 3. The Power Sector Adjustment Loan (PSAL) bore novel characteristics in contrast with the traditional loans that the World Bank had extended to finance investments in power sector companies. Two areas stand out in this connection: one, a new approach to issues in this sector, which attached importance to supporting reform policies aimed at resolving the structural, institutional and financial problems of the electricity sector; and two, their contribution to the fiscal, foreign exchange and external debt objectives set out in the country's macroeconomic program. 4. As discussed in this report, the results in terms of making substantial changes in key policy and sector management areas were limited: the wide array of actions undertaken during the period did not advance the reorganization and financial recovery of the companies; and controlling the impacts that the crisis in the sector had on the macroeconomic situation was based on the application of alternative financing plans not provided for in the loan. 5. To prepare this report, a detailed review was made of the principal documents, memoranda and letters relating to development of the operation (Annexes D, E, F and G include summaries of these materials). Furthermore, the consultant had the opportunity to exchange opinions with the senior government officials and advisors of the 1987 to 1990 period who participated in the negotiation, approval and execution of this loan. These interviews enabled the consultant to have a fuller view of the situation and were extremely useful in analyzing the complex matters that had come up during execution of the loan. 6. This report has eight chapters, this included, and nine annexes. Chapters 2 and 3 delve into the analysis of the general economic framework for the period 1987-1990 and the objectives and policies of the sector adjustment program and the operation of the loan covered in this evaluation. Chapters 4 to 6 evaluate the results and limitations of the loan, focusing on three major themes, in order: financing plan and investment program; administrative and institutional aspects; and design and global execution of the program. The last two chapters summarize the principal conclusions and the lessons that this loan has taught the Colombian government. The annexes, besides the topics mentioned in the preceding paragraph, cover the following areas: analysis of  22 Part II - Borrower's Perspective general economic and sector conditions prior to adoption of the adjustment plan (Annex A); evaluation of fulfillment of the goals projected in the financial plan, with pertinent comparative information (Annex B); description of the investment prograrn as executed (Annex C); and presentation of several illustrative graphs on developments during the period (Annex H); bibliography (Annex I). 7. Finally, the consultant wishes to give his special recognition to Dr. Carlos Garcia for his valuable and timely collaboration in preparing this report. Thanks also go to Dr. Alberto Rodriguez, the FEN Lending Vice President, for his cooperation and Dr. Teresita Alvarez, a professional staff member of FEN, for her very effective assistance in obtaining the documents and preparing the financial information required for this report. 6. RESULTS AND LIMITATIONS: DESIGN AND EXECUTION OF THE PROGRAM 156. This chapter intends to evaluate the results and accomplishments of the PSAL from a broader perspective than that of the preceding chapters. It examines the concept and development of the principal policies and actions to which the Government of Colombia committed itself to secure the loan support of the World Bank. 157. The principal conclusions drawn here relate to the design of the PSAL and the viability of the objectives it sought to achieve in those four years. In particular, it would appear excessive to say that this program was oriented toward adopting structural reforms in the power sector at all levels despite the intentions and willingness of those who participated in preparing it. It would be more appropriate to underscore that what this program sought was less ambitious, but necessary nonetheless: that the sector should deal as best as it could with the fmnancial difficulties of the period 1987-1990; that it should nitia a series of actions that would lay the groundwork for more efficient performance in the future; and especially, that the negative effects on the exchange and fiscal stability and the macroeconomic policies of the country should be kept to a minimum. 158. It is possible that the lack of a common ground of understanding on the scope of the work among the different players, both internal and external provided a weak base for a clear dialogue between the parties. Likewise, this factor could have added to the difficulty of redesigning the program and finding other effective and better timed solutions. As a consequence, in the end, the government was forced to commit significant additional resources to the sector far beyond those originally planned. 6.1 MOST IMPORTANT CHANGES RELATING TO THE PSAL 159. The most novel component of the adjustment plan approved by the Government of Colombia and in the operation of the World Bank loan was the shift of emphasis made by both parties and the renewed focus on the diagnosis of the financial crisis affecting the electricity utilities. In effect, when the program and the loan were designed, the emphasis was on sectoral issues. Also, discussions were started about how all the components involved in the development of the financial crisis were interacting, and the potential that each had to resolve this crisis on a solid footing. 160. The issues on the new agenda of discussions had the common denominator of economic efficiency and modernization of business management. These issues had surfaced in a relatively isolated fashion during earlier discussions when direct loans were negotiated for the utilities.  23 Part II - Borrower's Perspective The most significant dealing with the sector, from the standpoint of World Bank action, came in 1967 which ultimately led to the creation of ISA. 161. From the standpoint of the Colombian government, several times it had attempted to deal with the sector in a way that would go beyond handling the recurring financial crises of the electricity utilities. However, it was not until 1985 that some consolidated financial statements for the power sector became available, along with a system to monitor the cash financial management of the utilities, both of which made it possible to study the evolution of sector finances in fuller detail. 162. However, the general redirection of the less optimistic approach to the problems in the power sector lacked a more objective reading of the Colombian government's ability to control all the utilities, and also missing was an evaluation about the risks of further deterioration of the financial situation in both the national and international arenas. 163. Furthermore, it was not possible to factor in the effect that on-going evaluations within the World Bank, especially the evaluation being conducted by OED (Operations Evaluation Department) and the review of the Third World electricity loans policy, and what effect they could have on the follow-up of a loan such as 2889-CO and on the position Bank staff took in their assessment of the actions that the Government of Colombia was taking. 6.2. DESIGN AND EXECUTION OF THE PROGRAM 164. The body of matters discussed and agreed between the Government of Colombia and the World Bank corresponded in fact to what could be considered essential medium and long term objectives to carry out the structural reform of the sector (chapter 3). However, one observation here would be that the actions established to achieve those objectives proved insufficient for those purposes: (i) In regulatory matters, the mechanisms set out in the PSAL did not truly constitute a new framework of rules and procedures for coordination and operation of power sector companies. (ii) In institutional issues, the creation of the National Energy Commission represented a substantial step forward to include power sector planning as part of energy policy. However, there was no clear redefinition of the responsibilities and functions held at other planning and control levels. That, for example, was the case of ISA, in which precedence was given to the Bank's insistence on centralizing within this company the ownership and construction of new generating plants. In addition, no progress was made in developing a new design for the organizational and market structures of the regional utilities. (iii) In connection with the rehabilitationpla of the weakest companies (ICEL and CORELCA groups), it can be stated that the emphasis of the action plan was oriented to improve their critical finances and their administrative management rather than to assess the need for strategies for structural reform. This was the case despite the agreements on the need to define the long-term objectives and policies of these groups.  24 Part II - Borrower's Perspective 165. The sectoral and aggregated approach of the financing plan and its goals, which was not only a novel element but also an essential one to deal with the complex cross-relations and intertwined conditions among the power sector utilities, was not supported in the end by a simultaneous approach to deal with the individual problems and specific solutions for them. In this respect, four difficulties stem from that lack of supplementary support: (i) Not enough emphasis was put on the different nature of the financial problems that each of the utilities in the sector faced and that they also needed different solutions. As was revealed in the ex-post analysis, financial solutions that would have been viable for companies facing lack of liquidity proved totally inadequate for problems of insolvency. (ii) The projections could not reflect in all their magnitude the impacts that the long-running failure to meet energy payments by almost all the member utilities would have had on the financial situation of ISA. (iii) Computations of the sector's aggregate deficit systematically underestimated that deficit since they assumed implicitly that there would be transfers from the surplus entities to the deficit entities, a transfer that was in no way guaranteed since there were no legal mechanisms or procedures in place for that purpose. (iv) The impact of the many and complex interrelations among the power sector's utilities was underestimated in terms of their operational and financial relations. 166. During the process of executing the program and the loan, internal divergences arose among the different parties regarding the critical areas and solutions: for the economic authorities, the most important were issues of macroeconomic order and financial discipline among the utilities; for the power sector authorities, it was important to balance the aspirations of the utilities against the commitments assumed in the area of action measures (pricing, receivables, energy losses), but they did not have available to them effective mechanisms to secure compliance with the goals; and for the utilities, the essential matter related to fullest execution of the investment program. 167. Into this environment a certain disassociation of responsibilities came about. The government assumed much of the burden of ensuring, no matter how, the funds needed to meet the utilities' external debt obligations. These companies, in turn, largely free of that basic financial responsibility, did not see it as necessary to be more tightly disciplined in generating more income and controlling current expenditures. To a certain extent, then, the country's successes in maintaining its credit-worthy status and an adequate macroeconomic environment were achieved at the cost of what, for some, was financial and institutional disorder in the power sector. It is symptomatic, for example, that the 'forced compliance' agreements signed by the utilities with the Ministry of Mines had no real practical effect since noncompliance did not triggered any difficulties for the companies. 168. Differences in policy priorities and the ranking of commitments were evident in the relations between the Government of Colombia and the World Bank. For the Government, as said before, it was essential to bring to a happy end the debt strategy it had adopted and to control the impact that the sector was having on aggregated indicators of external debt, investment and fiscal deficit, so that it could reorient public investment into new social and infrastructure programs within a framework of stability. On the other hand the Bank, which shared those priorities in the program  25 Part II - Borrower's Perspective design, exerted pressures on each of the actions and the commitments which it viewed almost individually, during execution of the program and, in any event, it did so without giving due consideration to the development of the macroeconomic situation. From this perspective, the Bank missions did not share the government's urgency to receive timely payment of the fund disbursements stipulated in the financing plan. Commitments and Conditions 169. A review of the commitments signed and the conditions accepted by the Government of Colombia reveals, among others, the following traits: (i) a considerable number of actions to take and a variety of ambitious goals to be achieved in very short terms; (ii) a complete lack of priorities for this variety of action measures and commitments in which policies with very different scopes and impacts were all put on the same level: thus, to agree to disburse the loan tranches or not, it was all the same for the Bank to have approved a least Cost Expansion Plan or to have received the preliminary administrative enhancement program for CORELCA and ICEL; (iii) the relations among the objectives, the actions and the goals stipulated in the PSAL were not spelled out clearly; (iv) too many studies were made that did not necessarily lead to immediate adoption of action measures, no matter how important they might have been. In this context, it is obvious that not all the requirements established to ensure the disbursements were related to the central objectives pursued in the program and the loan. 170. In looking at the correspondence between the government and the Bank, it is not easy to see the underlying causes that led to the delays in the second disbursement and the ultimate cancellation of the third (Annexes E and F). It does not appear to be a simple matter of deciding which of the two was right. In effect, many letters from the Government of Colombia noted the substantial progress made on the actions and that it considered them highly satisfactory. For their part, the responses from the World Bank focused steadily on details regarding the failure to achieve some of the many action steps required to release the disbursements. The context actually appears to suggest another interpretation: the dialogue between the parties turned increasingly troublesome and neither the Bank missions nor staff responsible for supervising and monitoring the loan helped develop a more productive understanding that would clear the way for the loan and make it easier to find additional agreements. 171. Consequently, it appears reasonable to argue, in connection with the partial or total compliance with the loan commitments, that an increasingly wider gap developed in the issues of the dialogue. The government's analyses emphasized the fiscal and exchange implications of the financing gaps of the sector and verified the advance of program actions in terms of the overall trends. The Bank's studies emphasized microeconomic aspects and details of timetables and the deadlines for each action or commitment. In this perspective, naturally, grounds for noncompliance could always be found. Ihis debate was present throughout most of the period but it became increasingly more intense. Non-compliance with the Financing Plan and its Implications 172. Annex B examines in detail the assumptions and goals set in the program and the results obtained during the period. It clearly shows major differences between the principal assumptions adopted for the projections and the final figures. The analysis shows that, with the exception of the projected investment levels, the financing plan's goals were not achieved, when one takes into account each of its major components (internal fund generation, financial deficit, sector debt). The process of executing the loan, in summary, entailed enormous differences between what  26 Part II - Borrower's Perspective was programmed and what was achieved. All in all, as chapter 4 indicates, this should come as no surprise, considering that since the end of 1987 and in a number of CONPES documents of 1988 and 1989, there had been insistent warnings on these matters2. 173. The wide gap left by lower internal fund generation and very low execution of the US$1.330 million from the sector loan (disbursements equivalent to only 42% of programmed amount) meant that the government had to raise money that it had not budgeted amounting to US$1.240 million (Annex B), both to replace sources and to cover added deficits. 174. This significant additional effort, totaling more than 2.5 points of GDP in 1990, was funded by mobilizing domestic savings (through FODEX) and channeling new external debt that could be transferred to the power utilities. The most important implication of this phenomenon was the inability to meet in full the financing priorities for the physical and social infrastructure works included in the poverty relief programs and the national rehabilitation plan. This situation generated an extremely high opportunity cost and economic and social costs for long term development programs in exchange for maintaining-by ways other than those defined in the PSAL-relative stability on the exchange and fiscal fronts. 6.3 RELATIONS BETWEEN THE BANK AND COLOMBIA 175. In connection with the 1987-1990 Power Sector Adjustment Program itself, at first glance it might appear that the government went too far in accepting the large number of commitments and conditions set in the PSAL, given the relatively low percentage of funding committed by the Bank to the sector. However, the importance of Colombia's relations with the Bank went beyond quantitative considerations: (i) General Bank support for economic and social policies has been considered fundamental in dealings with the international lending community. Furthermore, Bank support (and from the International Monetary Fund) in managing macroeconomic policy has been one of the necessary elements of the external debt strategy adopted by Colombia, especially to secure new loans from commercial Banks. (ii) The resources provided by the Bank are used as a lever to secure other sources of co- financing and they play a multiplier role in this way. (iii) Traditionally, the Bank has been a standing source of financing for power sector investment programs. (iv) Internally, the agreements between the government and the Bank constitute, to a certain extent, one additional pressure mechanism that can prove useful in accelerating compliance with sector commitments. 22. See, among others: CONPES, 'Situacion Financiers de; Sector Electrico a Mediano Plazo [Medium Term Financial Status of the Power Sector]'. Document DNP-2.408, Bogota, January 11, 1989. 23. A detailed evaluation of these historical relations between the Bank and the power sector for the period 1970-1987 appears in the OED report entitled, 'Colombia: The Power Sector and the World Bank 1970-1987,' op. cit.  27 Part II - Borrower's Perspective 176. With this as the general context, the relations between Colombia and the Bank during this period experienced, however, difficulties of different types. In the dialogue on macroeconomic aspects and the structural reforms undertaken by the government, several discrepancies arose regarding the scope and the speed of the reforms. From Colombia's standpoint, there appeared to be a resistance by the Bank to its proposals that was inexplicable. These facts, in addition, manifested themselves in an extremely slow pace in defining agreements and processing new operations that were to support the reforms in progress. That also led to a slower pace in the disbursements of on-going loans. 177. These circumstances also affected the financing plan of the power sector. Apart from the considerable delays in the PSAL disbursements and the cancellation of the last tranche, the financing proposed by the government for 1990 included resources from a proposed loan supporting public sector reforms that the government had discussed at length with the Bank. The expectation was to secure disbursements amounting to US$200 million in 1990 which would go to the power sector. The Bank thought, however, that this was not acceptable 'because it does not appear realistic to count on those resources during this period' (see letter dated June 27, 1990, Annex F). 178. During this process, the government also explored the possibility of securing a new loan for the sector. This loan would cover the missing large financial sums projected for the period 1990-1992, amounting to US$1.5 billion. A joint IDB-World Bank mission indicated the requirements in terms of medium and long term policies and requested a large volume of financial and technical information which was provided by the government2'. This operation did not make much headway, however. 179. The general and sectoral relations during much of the period can be considered quite critical and tense, on the whole. The Colombian side perceived a mounting rigidity in considering other practical ways of dealing with the fast development of the financial crisis. Both the events in terms of the general dialogue as well as the possible internal effects on the Bank that the findings of the OED report could have produced must have been among the reasons behind this state of affairs. 180. The requested information consumed large quantities of human resources. As a rule, the analysis by the Bank stuck to the letter of the contract regarding the goals which were known in advance to be unattainable in such a short time. 181. The Bank only offered and put into progress one technical assistance project to create the National Power Sector Implementation System (SINSE) which progressed very slowly and did not yield results until 1991. The Bank offered no type of technical assistance within the framework of the PSAL that could be considered either relevant or timely even though several study drafts had been in the hands of ESMAP since 1987. As in the case of the expansion plan, unfounded expectations grew with regard to financing some of these studies which were offered systematically by ESMAP staff on their many visits. The funds for these studies appeared under the annual programming in the reports of this joint World Bank-UNDP programn but were never committed during the period of the loan. 24. World Bank and IDB Mission, *Prestamo Propuesto de Inversion Sector Electrico [Proposed Power Sector Investment Loan].' Aide-Memoire, October 26, 1989.  28 Part II - Borrower's Perspective 7. CONCLUSIONS 182. The PSAL represented an undeniable advance in dealing with the problems of Colombia's power sector by shifting the emphasis to a medium term proposal of sector reform that took up central issues relating to regulatory, institutional and pricing matters, rationalizing investment, administrative management and financial restructure. From the standpoint of the country's macroeconomic goals, it was considered strategic for the objectives of reorienting investment into sectors that were less intensive in capital and imports, supporting the external debt policy, boosting internal fund mobilization, starting with appropriate pricing policies, and upgrading management of the utilities. 183. The PSAL had three important areas which need discussion because of their positive impacts: (i) it served as a way of mobilizing additional co-financing resources to cover the financing gap by having an implicit World Bank endorsement to display to commercial lending establishments; (ii) it introduced environment and socioeconomic issues to the work agenda of the Govermnent of Colombia and the World Bank, and to the basic criteria for national electricity planning; (iii) it shifted the emphasis from building the generating, transmission and distribution facilities of each utility to a more comprehensive sectoral analysis. 184. In general terms, the principal actions to which the Government of Colombia committed itself were largely complied with, although with delays and imbalances compared with the agreed timetables: (i) the pricing policy stipulated in JNT Resolution 086 of 1986 was applied; (ii) the National Energy Commission was created and went into effect, and the program follow-up mechanisms were developed; (iii) the investments were within predefined goals; (iv) the government provided the loans and contributions to capitalize the utilities; (v) the minimum cost expansion plan was approved; (vi) the utilities as a group, and several as individuals, complied with the loss reduction goals; (vii) the principal targets agreed with respect to reducing the portfolio in arrears were achieved; (viii) the rehabilitation plans for the ICEL and CORELCA groups were prepared; (ix) the action plan developed for Guavio was advanced; (x) the action measures for the environment and socioeconomic plans were developed. 185. Contrary to the plans laid out in the PSAL, the preceding impressive record did not have positive implications on boosting the efficiency or improving the sector's finances. On the contrary, these actions moved in tandem with a considerable additional deterioration in internal cash generation, rising deficit and maintenance of high debt levels, all of which are indicators of poor sector performance during the period. 186. The foregoing statements lead to the conclusion that the objectives set were not fully in line with and expressive of the wide and varied array of policies and actions agreed by the Government of Colombia and the Bank to be carried out in very short times. Under these circumstances, as a result, the assumptions of substantial improvement of the indicators and the financial projections made for the period proved entirely too optimistic, especially in view of the considerable cumulative deterioration of the sector. 187. In particular, the final figures show that, despite the new pricing policy that was applied, earnings from energy sales were much lower than the projections. This, coupled with operating expenses that were going beyond the projected amounts, was reflected in generation of equity resources that was much lower than the projected amount and, as a consequence, in the greater need of external funds.  29 Part II - Borrower's Perspective 188. The development of the financing plan was likewise affected by the substantial delays in the loan disbursements programmed for the sector. The World Bank operation itself was conceived and agreed as a fast disbursement loan that would not take more than 15 months. Nevertheless, as described throughout this report, the prior conditions for the disbursements covered such a long list of issues, actions and goals that in practice, it was foreseeable that the funds would be very slow in execution. 189. To a large extent, the financial strategy to meet the massive commitments of external debt proved inadequate; this was clear virtually at the very moment the loan received the approval of the World Bank's Board of Executive Directors. However, none of the parties attached sufficient importance to the empirical evidence that came from the new financial projections and which suggested that the PSAL, as formulated, had little financial viability. In the follow-up of the loan, the Bank missions did not conduct a systematic evaluation of these problems and were even less concerned with developing alternatives that would have implied a redesign of critical areas in the PSAL. 190. The government did not draw either from its own warnings all the required implications: if the new projections were showing an intense and growing financial deterioration within the power sector, it was obviously important and urgent to amend the PSAL and to proceed to renegotiate the entire financial support package. This course of action, however, was never explicitly raised. 191. In practice, the remedy turned to was applying a new and costly short term financing plan. In effect, to cover the new financing gaps, the government was forced to allocate the equivalent of more than 2.5 points of GDP of 1990, using resources drawn from domestic savings (through FODEX) and new external loans. This significantly limited the financing of priority programs set out for the plan to combat poverty and the national rehabilitation plan. It also generated an extremely high opportunity cost for long term development programs in exchange for maintaining-by ways other than those defined in the PSAL-relative stability on the exchange and fiscal fronts. 192. The governrment did not give careful consideration to a variety of factors that in the long run would affect the viability of executing the plan: - First, several of the agreed goals outstripped any realistic possibility of being achieved within such short times. This was particularly true of goals relating to reducing electricity losses and adjusting the pricing structure of EEEB, a job in which the Bank had failed in its own direct action. Second, appropriate value was not given to the fact that the Ministry of Mines and Energy did not have effective instruments to ensure that the utilities *met their commitments, or the technical capacity to conduct supervision and coordination. Third, the new focus on the sector's problems was not grounded on a careful analysis of the government's ability to control all the utilities or on a less optimistic evaluation of the risks in both the international and the national environments, in terms of any additional deterioration of the financial situation. Fourth, the emphasis on the sectoral nature of the loan operation lost sight of the individual peculiarities of each of the utilities that had to be involved in achieving the goals.  30 Part II - Borrower's Perspective 193. The PSAL stirred too many expectations which proved totally unfounded regarding the financing of the Electricity Generation Expansion Plan. This amounted to a waste of the utilities' technical and human resources to deal with the ongoing demands for information and simulations of expansion sequences. 194. The requirement to give ISA exclusive responsibility for building all generating plants larger than 100 MW and the acceptance of this condition by the Government of Colombia contributed even more to the worsening relations between ISA and its members. This took the form of uncontrolled growth of accounts receivable for energy and a campaign within the region to undermine ISA's monopolistic control over all the generating works. Both parties were incapable of evaluating fully the consequences that this condition had on the sector's ability to adjust. 195. The dialogue between the Government of Colombia and the World Bank was distressed by the differences in the policy priorities and the priorities among the commitments. For the former, it was essential to control the impact that the sector was having on the aggregated indicators of external debt, investment and fiscal deficit. The latter, which shared those priorities in the design of the PSAL, turned its attention during the process of execution to each one of the actions and the commitments and did not attach major importance to developments in the macroeconomic situation. VIII. LESSONS 196. A loan operation such as the one reviewed in this report leaves a body of useful teachings for the process of relations between the Government of Colombia and the World Bank. The principal components of these lessons have been pointed out over the length of this report and refer essentially to the inadequate consideration of the critical situation the sector was experiencing, the lack of a close coherence between the structural reform objectives and the numerous and scattered action measures to be carried out in a very short time and the optimistic appraisal of the financial scenario projected for the period. 197. Concept of the Adiustment Program and the Sector Loan: The adjustment program designed in 1987 for the Colombian power sector suffered from three basic flaws: (i) its scope did not square with the magnitude of a massive financial crisis such as that which occurred between 1987 and 1990; (ii) the program was unrealistic in terms of goals and times, bearing in mind the deteriorated state of the indicators taken as references and the low level of government regulation over the electricity utilities; (iii) a lack of priorities among the conditions, leading to an undesirable confusion between strategic actions and short term actions of little impact. 198. The conditions agreed within the framework of the PSAL proved virtually unattainable in the context of a fast disbursement loan. Since no plans had been made for any type of control over attainment of the goals that went beyond the original horizon of the loan, the almost inevitable result was extending the disbursement periods in order to watch over the compliance with the conditions. 199. The loan should have been conceived as support for the phases of a broader sector reform program, using follow-up loan operations that would guarantee the continuity of actions that constituted only the first phase of development in this period. In this way, the existing barriers could have gradually been brought down, the institutional and regulatory changes could have been made on  31 Part II - Borrower's Perspective a graduated basis and both government agencies and the utilities could have been strengthened technically. 200. The concept of the PSAL almost as a 'terminal operation' barred a fruitful dialogue with the government and made more remote the possibility of reaching new agreements on a common way of dealing with the sector's problems. 201. Executive Capacity of Colombian Government Agencies: The leadership assigned legally to the Ministry of Mines and Energy was not in line with the dimensions of the program adopted or the technical capacity that prevailed at that time among the different internal offices of the ministry. This aspect was not dealt with adequately in the risk analysis that the Colombian government had to make. 202. The rest of the government agencies had very low technical ability to control the electric utilities and supervise their performance. In the end, these agencies did not exercise major control but designed other mechanisms for offsetting the effects of the deterioration. The PSAL did not provide any modification of central Colombian government agencies and for this reason enhancement of their technical skills did not appear among the basic conditions for the development itself of the program. 203. The government lacked a management strategy for in-house conflicts which would have put to positive use the technical and administrative potential that was available, both at the central government level and within the utilities. The conflicts grew out of what could be called a "zero-base game," which viewed that whoever yielded space did so to the benefit of another player within the government and therefore 'lost" some part of his prerogatives. The need for a purposeful strategy in this area became evident in the fact that no agency could impose any specific policy on others but was, at the same time, unwilling to have any imposed upon itself. 204. The design of the program control process was not very effective since it depended on data produced very slowly within the utilities. In addition, effective control capacity over the departmental utilities was not developed. These utilities remained discreetly on the sidelines of the efforts to make sector adjustments since they did not have many external debt commitments that would force them to tap resources allocated by the Ministry of Treasury or to FODEX. 205. Priority Items on the Agenda of Bank Missions: Those who participated in the Sector Adjustment Plan share a widespread opinion that the predominating factor in this aspect was the continuing shift of emphasis on what items should be controlled. The emphasis varied from pricing, to the accounts receivable portfolio, to the environment, to the CNE, to losses and so forth. Also perceived was an emphasis on matters that proved irrelevant over the short run, especially the discussions on the expansion plan. 206. As a result, it was not possible to start a dialogue on new issues or advance toward new proposals. Most of the discussions dealt with the discrepancies regarding progress made on the actions and their completion timetables, as well as the preparation of varying financial projection scenarios. These action, however, did not constitute a good basis for the evaluation of the prolongation of the crisis or a better understanding of the situation of FODEX and its high cost for the economy. 207. Institutional and Regulatory Changes Announced: The most positive institutional change during this period was the creation of the National Energy Commission. This new  32 Part II - Borrower's Perspective commission gave the government a legal instrument to coordinate and study all aspects of integrated energy planning involving all resources. The newly created CNE went beyond the traditional impotence of government agencies, at different levels, to manage a long term concept in the energy area. 208. This transformation, however, was isolated from the complex and vast network of national and regional agencies engaged in the electricity sector. For these no new regulatory framework was designed nor their institutional interrelationships redefined. The new level of coordination, the Consejo Superior del Sector Electrico [Higher Electricity Sector Council], while useful in the dialogue between the sector and the economic authorities, lacked the legal and enforcement powers to carry out its responsibilities. 209. Establishment of Goals and Understanding of the Utilities: The most critical goal of the adjustment program were reducing electricity losses which had been established on the basis of several existing studies. The benchmark level selected for several utilities were quite optimistic. These goals were set without a thorough understanding of the true state of the technical and commercial structure of the utilities. In this area, the operating capacity of the distribution area, which must have been very weakened by the pronounced worsening of the loss rates, was overestimated as was the ability of the Ministry of Mines and Energy to orient and control the process. 210. In particular, the goals for EEEB (energy losses) and EPMB (portfolio recovery) were accepted without major evaluation by the Government of Colombia since they came from two World Bank loan operations engaged shortly before and were being disbursed in 1987. The impossibility of controlling these two utilities became an obstacle that surfaced during development of the adjustment loan. 211. Evaluation of Benefits and Risks: Based on the president's report to the Bank Board of Executive Directors, the principal benefit of the loan was to come from its positive effect on the economy by reducing public spending through enhanced efficiency, planning, price setting and the decision-making process. While a considerable drop was recorded in annual levels of investment during the period, the attainment of this benefit does not appear to have been correlated very closely to the attainment of those parameters. 212. Among the central risks, the report of the president to the Bank Board of Executive Directors had emphasized the uncertainties regarding the procurement of additional resources, both in terms of amounts planned and their timely disbursement. This risk occurred fully with the disbursements themselves of the World Bank loan, as well as with those from the IDB and EXIMBANK. For that reason, the government was forced to raise additional funds from commercial bank loans and domestic public savings, with the attendant disruptive effects on other public investment programs.  PROJECT COWPLETION REPORT COLOMBIA POWER SECTOR ADJUSTMENT LOAU (LOAN 2889-CO) PART 111. SUPPLEMENTAL INFORMATION TABLE 1. RELATED BANK LOANS Amount Year Dis- (in USS of bursement mill- Apro- as of Number and Title ion) val Borrower 12/31/93 Purpose 1. 38-CO: Achicaya Hydro-electric 3.53 1950 CVC/CHIDRAL 100X Anchicaya units 1 and 2 (2 x 12 MU hydro) 2. 39-CO: La Insula Hydro-electric 2.6 1950 CHEC 100X The Insula units 1 and 2 (2 x 10 MU hydro) 3. 54-CO: Labrija Hydro-electric 2.4 1951 LABRIJA 1001 Palmas units 1 and 2 (2 x 4.4 MU hydro) 4. 113-CW: Anchicays Yumbo Power 4.5 1955 CHIDRAL 100X Anchicaya unit 3 (20 MU hydro) and Yumbo unit 1 (10 NU thermal) 5. 215-CW: Yumbo Extension 2.8 1958 CHIDRAL 100X Yumbo unit 2 (10 NW thermal) 6. 217-CD: La Esmelalda 4.6 1959 CHEC 1002 La Esmeralda units 1 and 2 (2 x 13.3 MU hydro 7. 225-CD: Guadalupe 12 1959 EPH 1001 Guadalupe units 1 and 2 (2 x 45 NW hydra) and Troneras unit 1 (18 MU hydro) 8. 246-CD: Bogota Power 17.6 1960 EEEB 1001 Laguneta unit 4 (18 MW hydra) and Zipaquira unit 1 (33 MU thermal) 9. 255-CD: Yumbo III Calim I Poaer 25 1960 CVC/CHIDRAL 1001 Yumbo unit 3 (33 MW thermul) and Calti units I and 2 (2 x 30 NW hydro) 10. 282-CD: Second Guadalupe 22 1961 EPH 1001 Troneras unit 2 (18 MU hydro) and GuadaLupe wnits 3, 4 and 5 (3 x 45 MU hydro) 11. 313-CD: Second Expansion 50 1962 EEEB 1001 Zipaquira unit 2 (37.5 MU hydro) and Colegio units 1, 2 and 3 (3 x 50 MW hydro) 12. 339-CO: Power ExpansIon 8.8 1963 CVC/CHIDRAL 100X CalIm units 3 and 4 (2 x 30 Mu hydro) 13. 347-CD: Cospique Power 5 1963 ELECTRIBOL 1001 Cosplque units 2 and 3 (2 x 12.5 MU thermaL) 14. 369-CD: Nare 45 1964 EPH 1001 Guatape units 1, 2, 3 nd 4 (4 x 70 MU hydro) 15. 537-CD: Third Expansion 18 1968 EEEB 1001 El Colegio units 4, 5 and 6 (3 x 5) MU hydro and Canoes (1 x 50 Mu hydro) ^ 00 Ii =  TABLE 1: Related Bank Loans (Continuation) Amount Year Dis- (in USS of bursement mill- Apro- as of Number and Title ion) val Borrower 12/31/93 Purpose 16. 575-CO: Power Interconnection 18 1968 ISA 100% Central System Interconnection (230 kV trans- mission line and Substation) 17. 681-CO: Chivor Hydroelectric 52.3 1970 ISA 100% Chivor 1 (4 x 125 hydro) 18. 874-CO: Guatape 11 Hydroelectric 56 1973 EPH 100% Guatape 11 units 1, 2, 3 and 4 (4 x 70 MW hydro) 19. 1582-CO: San Carlos I Hydro Power 126 1978 ISA 100% San Carlos I (4 x 155 MU hydro) 20. 1583-CO: 500kV Interconnection 50 1978 GOVERNMENT 100% 500 kV Interconnection Central System/ Atlantic System 21. 1628-co: Mesitas Hydroelectric Powe 84 1978 EEEB 100% El Paraiso 3 x 90 MW; La Guaca 3 x 100 NW pumping 3 x 10 MHP; Sesquile dam strengthenin 22. 1725-CO: San Cartos 1I Hydro Power 72 1979 ISA 100% San Carlos If (4 x 155 MW hydro) 23. 1807-CO: Bogota Power Distribution 87 1980 EEEB 100% Bogota distribution 24. 1868-CO: Guadalupe IV Hydro Power 125 1980 EPM 100% Guadatupe IV (3 x 71 MW hydro) 25. 1953-CO: Playas Hydro Power 85 1981 EPH 100% Playas (3 x 67 MW hydro) 26. 1999-CO: Village Etectrification 36 1982 CORELCA 100% Attantic coast village electrification 27. 2008-CO: Guavio Hydro Power 359 1982 EEEB 100% Guavio (5 x 200 MW hydro) 28. 2401-CO: Power Development Finance 170 1984 FEN 100% Power development finance 28.2 1984 FEN 100% Power development finance (Cofinancing) 29. 2449-CO: Rio Grande Multipurpose 164.5 1984 EPH 70% Rio Grande Hydro (3 x 100 MW hydro) 30. 2634-CO: Bogota Distribution II 171 1986 EEEB 70% Bogota Distribution II 31. 2889-CO: Power Sector 300 1988 GOVERNMENT 75% Power Sector Adjustment File: 2889\report\P3-TBI.WKI 0 o J  35 PART III Page 3 of 12 TABLE 2: LOAN DATA (US$ millions) A. TOTAL LOAN DISBURSEMENTS Original Disbursed Cancelled Outstanding (as of closing date: September 30, 1990)l Loan 2889-CO 300 225 75 225 B. PROJECT TIMETABLE a/ Original Actual (12/30/85) Initial Project Brief 12/30/85 Final Project Brief 10/24/86 Pre-Appraisal 11/86 Appraisal 02/87 Negotiations 11/87 Board Approval . 12/08/87 Loan/Credit Agreement 03/16/88 Effectiveness (1st tranche) 06/16/88 06/06/88 Effectiveness (2nd tranche) 03/30/89 08/31/89 Effectiveness (3rd tranche) 06/30/89 09/30/89 (cancelled) Loan/Credit Closing 06/30/89 09/30/90 C. CUMULATIVE LOAN DISBURSEMENT FY88 FY89 FY90 (i) Planned 150 150 (ii) Actual 150 75 (iii)(ii) as % of (i) l00 50 _/ This operation was transformed from an investment loan to a sector adjustment in May 1987 when it was agreed that it would be a key element in the overall 1987-90 financing plan for the public sector. File: P3-TB2  36 PART III TABLE 3: USE OF BANK RESOURCE5 Page 4 of 12 A. STAFF INP Bank FY 1985 1996 1987 1988 1989 1990 1991 1992 TOal Preparation 3.1 57.4 74.0 134.5 Apprais 29.4 29 4 Negotiations 4.7 37.7 42.4 Supervision 39.2 72.1 20.9 16.7 0.2 149.1 T otal 3.1 57.4 108.1 76.9 72.1 20.9 0 16.7 0.2 355.4 8. MISSION DAT Type of Mission Montb I No. of Staff No. of Performance Typ. of Year Weeks Weeks Persons / Rilng c/ Poblems l in Field Preparation I Oct/85 1.5 4.5 2 PE, PA Preparation 2 Jun/86 3.0 14.0 2 PE, 2FA, LO, CO Preparation 3 Sep/86 2.0 2.0 ES (Environment) Preappraisal Nov/86 2.0 11.0 3 FA, PE, LO, Co Appraisal Feb/87 2.0 8.0 3 FA, PE Prepamion Post Ap. Ian/Bs 1.0 1.0 ES (Environment) Preparation Post Ap. Feb/SS 1.0 2.0 2FA (Cofinncing) (Jeximbank) Supevision I March/88 1.0 1.0 PE 2 F.T.M. Supervision It May/8s 0.5 1.5 PE, FA, LA N.A. Supervision m July/83 2.0 9.0 3PE, IE, IES 2 F.T. Superviion IV Sp/S8 1.0 1.0 IPB N.A. Pros. Repot Supervision V Oct/S 2.5 9.5 3PE, 3FA, I 2 F.T. Supervision VI Janl/9 2.0 4.0 IES, IS N.A. ENV Supervision VU April/89 1.5 3.0 IES, ISE N.A. ENV Supervision Vm Jun1/89 1.5 1.5 IPE _ Supervision IX Oct/89 1.0 3.0 2PE, I (PA,E) 2 F, T Supervision X MArchJ90 1.5 4.5 PE, FA, ES 2 F. T Supervision XI lunc/90 1.0 2.0 PE, PA N.A. F, T Supervision XU Sept/90 1.5 3.0 2FA Lam mission F, T |TOTAL 29.5 S5.5 A/ I -Problem-free or minor problems; 2 - Moderate problenu; and 3 - Major problems. b/ F F Fnancial; T - Technical; M - Managemaen. c/ PE - Power Engineer, FA - Financial Analyst; E - Economist; LO Loan Officer, CO - Consultant; LA lAwyer, ES - Environmental Specialist; SE - Social Specialist. File: P3-TB3  3 7 PART III Page5 of 12 TABLE 4: MAIN CONDITIONALUES OF LOAN AGREEMENT (LA) Source Condition Compliance Comment L PARTICULAR COVENANTS LA 3.01a Both parties should exchange views in progress Yes achieved LA 3.01b Report on progress required before exchange of views Yes LA 3.02 Procurement to be carried-out according to Bank Yes guidelines LA 3.03a Update Sector Investment Program and financing plan Partial By the time of the cancellation of (SIP) 1987-1990 by 12-31-88 & 12-31-89 satisfactory the loan the SIP had still a sub- to the Bank stantial financing gap (text para. 4.5) LA 3.03b Exchange of views by 10-31-88 & 10-31-89 Yes LA 3.04a ISA's action plan by 03-31-88 on solutions for social Yes Amendment of 6/6/88. Date & ecological problems to be carried out satisfactory to changed to 7/31/88 Bank LA 3.04b Satisfactory implementation of ICEL & CORELCA's Partial Management studies and timeta- Financial Rehabilitation & Management Improvement bles were prepared. Actual Plans improvements in the management and finances of the utilities were below program expectations 3.04c By July 31, 1988 furnish full progress report on exe- Yes Amendment 6/6/88. This new cution of financial rehabilitation plans of ICEL and condition was added as a result of CORELCA utilities the amendment LA 3.04d EEEB's Management Improvement Plan to be provid- Partial Amendment of 6/6/88. Originally ed by June-30-89 (date was PostDoned to Dec. 31/89 3.04c, this article became 3.04d. on July 14/89) & carry it out according to a satisfacto- The study was done but the actual ry timetable management improvement could not be carried out satisfactorily (Annex 5 paras. 23-27) LA 3.05 Oril: System to monitor performance of Power Replaced Co. & compliance with targets should be put into effect by March-31-88 The Amendment of June 6/88 replaced original cove- nant as follows: LA 3.05a by July 31/88, furnish full progress report on compli- Yes ance with PSAL objectives and covenants based on satisfactory monitoring indicators. LA 3.05b by Sept. 30/88, put in effect system to monitor perfor- Yes mance under the PSAL LA 3.06a Carry out the loss Reduction Program, satisfactory to Partial By amendment of 8/14/89 the the Bank. Bank accepted program dated 4/89 and related program report of 6/89.  38 PART III Pagc 6 of 12 TABLE 4: MAIN CONDMONALITlES OF LOAN AGREEMENT (LA) Source Condition Compliance Comment LA 3.06b The amendment of June 6/88 added the following Yea see text para. 4.1 covenant: by July 31/88 furnish a full progress report and satisfactory timetable on execution of loss reduc- tion program by each utility LA 3.07a Ogiinal: Partial Complied with for 2nd tranche. Arrears Reduction Plan satisfactory to Bank Partially complied with for 3rd tranche LA 3.07b The amendment of June 6/88 added the following (i) Yes See text para. 4.1 covenants: (i) by July 31/88 the Borrower will com- pensate adequately Electrificadora del Caribe; and (ii) ensure timely payment of current billings by EPMB (ii) No LA 3.07c Date for payment of departmental arrears stated in Govt. policy letter of March 30/88 was extended to Yes Sept. 30/88 LA 3.08a Separate records of expenses financed by Loan to be Yes maintained LA 3.08b Records to be audited each fiscal year & submitted to Yes the Bank along with relevant data LA 3.08c Records and accounts of expenses out of Loan to be Yes maintained & retained for at least one year; Bank delegates to be enable to examine them & ensure their inclusion in annual audits LA 3.09 Taking account of Bank comments, carry out recom- Yes Through Miniterial Decree No. mendations of study on legal mechanisms for the 1303 from MME. Government treatment of ilegal uses of electricity instructed utilities to carry out recommendations. IL EVENTS OF SUSPENSION X_______ LA 4.01a Occurrence of events or situations obstructing Program n.a. LA 4.Olb Significant am-dment to Programs obstructing achiev- n.a. ement of goals LA 4.01c Repeal of Resolution 86 or failure to implement its n.a. provisions LA 4.02 Notice to be given by Bank if events defined in Section n.a. 4.01 shall occur & continue for a period of 60 days m. EFFECTIVENESS _ _ _____________________ LA 5.01 Secure from external lenders additional $200,000,000 Yes financing File: P3-TB4  TABLE 5: SCHEDULE OF DISBURSEMENT ACTONS REPORTED REPORTED FOR RELEASE OP COMPUANCE FOR RELEASE OP COMPLtANCE POLICY AREA OBJECTlVES ACTlON SECOND TRANCHE YES/NO THIRD TRANCHE YES/NO A. INVESTMENT POLICIES (Nok: After tde AND DECISIONS Amendment of June 6/tS, conditions of effectiveneus I. lnvehmeni Policies To samme dia mapr werc ret and tde Is Completion, in a manner Yes Leag-cost program Yes irvemt deciions ae Tranche was disbured on uttisfactory to the Bank, fibn version, sconomnicaUy sound ud tune - text par. 4.1) of a draft least cost approved by Energy finncially viable program for gcneration Board (or MME) and associated & Sched. 4B No Ia) transmission through year 2000, apprtoed by ISA (Sched. 4A. No. 2) 2. Level of Invedsmen To keep level of power Level aNd cosyoents of Compliance with Yes Submission of No invegmeo5s cmartibk 1987-90 sector iavetmei Pgram execution updated 19S8-90 with mcerccoaomc progam Nd financing (ached. 4A. No.3) rmvemnm program expectatiom pan 1987-1990 ad reled funcing pan satisfactor to Yeady updatin ofdie yes the Bink inveeunet3 program and reective fi ing pbla an joint reviews of dies Joit revie in Oct. 19U Yes and Oct. 1939 (Soct. 3.03e) Updating in Dec. 1938 and Dec. 1989) (Set. 3.03b) 3. Project Specific (Guavio) To addres the oeial InVleamem proge on Compliance with the Yes Coapiance with the Yes disruption caused by ocial imes in Guavio Guavio Progrmm (Sched. Guavio Pfogrm Guwvio 4A. No. 4) (Sched. 48 No.4) To enure satisfactory Fiunacing pln nd new Satisfactory progres in Yea Satisfactory progreu Ye compktioa of the project mgement stutr, the implerentaio in their including schedule for (Sched. 4A. No 4) implerastio. their implementation (Sched. 48 No.4) (Annex 3. action program)  REPORTED REPORTED FOR RELEASE OF COMPLIANCE 'FOR RELEASE OF COMPLUANCE POLICY AREA OBJECTIVES ACTION SECOND ThANCHE YESfNO THIRD TRANCHE YES/NO B. INSTrTUTIONAL ISSUES I. Power Sector Policy To impnowe coordintion Govenunent bha Converted ito Governtent to give Yes of the pow'er subector esablished intuiutional condition for ISA authority to wiLh other energy arrangenents to improve 3rd. tranche own, conamuct and subecton and instil a ector coordination release operate all future national focua to (Energy Board BiU mnjor generation investment decision approved by Congrea and tranamiaeion or Satisfactory prxjects (Sched. 4B. alternative adopted). No.2) (Scbed. 4A. No.1) 2. Reguistion (a) to naws *tiag of Goavernment to establish Compliance Compli ace performance indi and aitoring conmittee to: nonitor compliance (I) establish and monitor (I) Yes (I) Yes performance indicators for (b) to easure proper linkc all sector utilities between tariff seuing and (2) etblish proper (2) Partial (2) Partial operating efficiency linkage between tariffs setting and compliance with performnance indicaton Monitoring system to be Yes in Sept/lS effective March 31, 19S7 (Sect. 3.05) _ 3. Management and Efficiency (a) to emmre conpliance Management improvement No; postponed Submisaion of EEBs Yea with agreed performnnce action plan for EEB will till Junc 1990 managemnent indicators be subntitted for Bank and delivered in improvement plan apprival, by December OctJ1990 (Sched. 4B No.3) 31, 198S Managemnt imnproveent Subninuion of daft Yes Submiiaion of final Yes action plans for ICEL and management management CORELCA will be improvement plana for improvement plans submitted on: Oct. 31, ICEL and CORELCAs for ICEL, 19SS all eletrificdonas electrificadoras CORELCA and Feb. 25, 1959 ICEL and (Schedule 4A No.5) EEEB (Schedule 4B CORELCA parent No. 3) conpanies (b) to enure eontinuation By December 31, 1987 Satisfactory progress in No (see text Satisfactory progres Partil (see text of los reduction program submission of mdy on schieving lo reduction par. 4.2) in achieving loss pars. 4.3) kgal fmervork ad targets (Sched. 4A reduction targets 00 policies against electricity No.4) (Sched. 4B No.4)co; theft (Sect. 3.09) .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 . iQ  REPORTED REPORTED FOR RELEASE OF COMPUANCE FOR RELEASE OF COMPUANCE POLICY AREA OBJECTIVES ACTION SECOND TRANCHE YES/NO THIRD TRANCHE YES/NO 4. Environmental and Social To ensure application of Reforetation in the Compliance (Sched. 4A Yc Compliance (Sched. Yes Issues sound environrnental and Chivor reservoir No.4) 4B No. 4) social sandards, before projects re siected and Action plan to reinfomte Yes during project ISA's envinmuenutal unit implemncltstion By March 31, 193f, submision of action Compliance (Sched. 4A Yes Compliane (Sched. Ye progam, including No 4) 4B No. 4) staffing plan, budgt and training progrm stisfactory to the Bank C. FINANCING 1. Sector Finaers To *nr viability of Fnancing plan for 1917- Compliance Yes Addioal S250 Yea financing plan 1990 and resourc,e million of ($200 million of mobilization targeCI (see cofinancing funds cofinanciang funds whould A.2 above) committed or have been cominined, or equivwlent equivIlent contingency contingency plans plan impiemented (Sect, implemenated. 5.01 a). Tbis condition of (Sched. 4B No.5) Effetivenes was comnplied with) Detailed contingency Compliance Yes Updated financial No (see teal finaneial plan in case plan satisfactory to paras 4.3-4.5) cofinancing does not the Bank (See A.2 develop as expected above) 2. Utility Finances (a) To ensure adequate Commitment from the Compliance (Sched. 4A Yes CompliAnce (Sched. Yes flow of funds for power Governmcat regarding its No.4) 4B No.4) subsector equity contributions to ICEL AND CORELCA. (USS240MILL+ 150 MILL) (Action Progrm, Annex 3) (b) to ensure the financial Implemeat the fin ncial Satisfactory progress in Yes Satisfactory progres Yes viability of ICEL & rehabilitation plans for the implementation of (see Annex 5 in the (see Annex S CORELCA utilities and ICEL and CORELCA the rehabilitation plans paras. 21-22) implementationof pams. 21-22) help them improWe their (Sect. 3.07 and Action for ICEL and the rehabilitation efficiency Pogrm) CORELCA (Sched. 4A plans for ICEL and No.4) CORELCA (Sched. 4B No.4) a g  TABLE 5: SCHEDULE OF DISBUIRSEMENT ACTIONS REPORTED REPORTED FOR RELEASE OF COMPLIANCE FOR RELEASE OF COMPUANCE POLICY AREA OBUECTIVES AClION SECOND TRANCHE YESINO THIRD TRANCHE YES/NO 3. Public Sector Anrars To achieve financial Govemmneat plan to Satisfactotr progress in Yes Satisfactory progrec Panial discipline and eonsur that eliminate public weto" eliminating the public in eliminating the the required fDw of armrea within 24 months sector arrea (Sched. public ector arrears (Text pars. 5.6) resources to the ector is (Sect. 3.07 and Action 4A No. 4) (Sched. 4B No. 4) provided Program) D. Pricing To enaute chievement of Adverse changes to Compliance with Action Yes Compliance with Panial financial urgets nd to legisation setting LJMC Program Action Program improwe tariff tucte by framewor or failure to aligning it with LRMC uinpkment i to be condition of defaul (Sect. 4.01c) Consution block for basic needs to be reduced fion 0-200 to 0-100 kwh/month: before June 30, 198S Government defines timing and criteria for block reduction Household rates to conaunmpion up to 400 kwhimonth to reach target levels by 1993 in Bogoti Fil: P3-TB5 ao o  43 PART 111 Page II of 12 Table 6: PSAL's SUCCESS EXPECTATION AS OF 8/31/88 (in %) a/ Agency Responsible IWeight Factor b/] Probability Expectation Actions/Programs _ _ _ National Government and Congress l National Energy Commission 12 75 9 National Government Investment Policy & Program 12 67 8 Cofinancing I I 100 11 Monitoring Committee 5 100 5 National and Local Governments Tariff Adjustments Program 13 67 9 Arrears Reduction Program 10 67 7 ICEL and CORELCA Manag Improv 6 67 4 Electric Companies Loss Reduction Program 11 50 6 Guavio Program 7 75 5 Environmental and Resettlement 6 100 6 ICEL and CORELCA Financ Rehab 7 75 5 Total 100 74 a/ Back-to-Office Report, October 6, 1988. __ b/ Relative importance determined on the basis of average opinion of staff involved in the appraisal and supervision of the program. _ File: P3-TB6.exl  4 PART IlI Page 12 of 12 TABLE 7: PSAL's ESTIMATED WEIGHTED SUCCESS AS OF 9/30/90 (in %) Estimated Com pliance/Success Levels Agency Responsible OverAll CornpiUne with scilon Plahr Success of reform Coals Overall Relativ Actios/Prognums Weight Wieighte WWeight weih Weitdgh IRem Factor Actions Factor Complianc Succes Factor Success Success Conpliance NOTES ,fastonsl Government and Congres National Energy Commrtission 12 20 50 1.20 90 50 5 40 6.60 55 rI Nadtonal Governmeast Investment Policy & Program 12 70 50 4.20 50 50 3.00 7.20 60 (2 CofinaneinrrT' 75 40 41 6 50 3 0 7 4 68 (JI Monitoring Comrninee 5 ~ *! 6 0 1 ~F51 75 50 1 88 * T1 68 Notlonsl and Lcaf 6overnrienti TariffAdjustentm Progam 13 80 50 5.20 S0 50 5.20 10.40 S0 (5I Arears Reducion Progrm 10 60 50 T 60 6 0 3 00 60 , ICEL and COR LCAMiggmanFncial Rehabltn 6 7T -; T7 22 Z ! . _ 'Jectic Compan_s Lo" Reduction Progrm 11 60 50 3.30 81 50 4.46 7.76 71 Ai Guavio Investmenm Program 7 703 2. 470 50 2 44 70 ; Environmenual *nd Re3etniement 6 2 6 8 5 0 -2e ICEL and CORELCA Financ ial R=ehsblt 7 75 2 6 20 50 0 70 3-3 48 Total JI 100 32 4 3 62 65 a/ Relative inportance determined on the basis of average opinion of stff involved in the appmisal and supervision of the program. Note: The basis for this estimate explained in the notes below is not the only one possible. While many different criteria could be used to produce better or lesser results, not one could have a claim on perfection. The above flgures are only Intended to present a fair representation of the success of the Reform Program based on expected and reported results (1) Had it been timely created, the CNE would have been effectively active for 18 months (March 89 through SepL 90). Slnce it became fully staffed and operational only in June 90 (4 months) timely compliance was only 22%. However, its effectiveness for the long term Improvement of the sector is assessed at 90% (Annex 5, pars. 6). (2) Even though the overall investment target was met, the physical targets of individual utilities were noL The financing plan, particularly of 1990, was only 70% funded. Also no effective institutional improvement was achieved to ensure the timely execution of financin plans and physical implementation of sector projects However, because of the Impnroved planning poUcies developed during the PSAI. reform goals are deemed to have been 50% achieved. (Annex 5, parlL 5-12). (3) Of S1,330 milUlon to be mobilized under the PSAL (contracted and disbursed) about 75% were contracted on tdme and only 60% (USS796 million) were dlsbursed from the original intended sources (Annex 2 parL 6-7). (4) In terms of timeliness the Monitoring Committee operated effectively 60% of the time from Apr11 89 Instead of March 88 (18 months out of 30). Its impact is assessed at 75% on account that it had diMculty in coordinating the development of a system to timely monitor the consolidated finances of the sector (Annex 5, paris. 17-20). (5) The mechanics of Tariff Adjustment Program (TAP) according to Resolution 86 was largely complied with although with apglicatlon flaws In the smaller cities responsible for about 30% of demand. Also, actual revenues expressed in U.S. doUar terms were 17/. under the forecast. Hence in terms of actions and impact TAP compliance is considered to have been 80% in both cua (Annex 2, paas. 11-12 and 17-21). (6) Arrears Reduction Program (ARP). Sector receivables were to be reduced to 66 days equivalent of sales. OveraU compliance is considered to be 60% because of the way the program was implemented (Annex 2, paras 14-16) and the fact that at the end of 1990 sector receivables were equivalent to 100 days of sales. It is diMcult to assess the amount of success of both the management and financial rehabilitation programs of ICEL and CORELCA. Most of the studies were completed largely on time, but the implementation of recommendations was not carried out satisfactorily. A 75% compliance Is given to actions and a 20% to success of reform goals (Annex 5, parts. 21-22). (8) Under the Loss Reduction Program (LRP), the sector reduced losses by 2.1% Instead of the 2.6% tarzet (Annex 5, Table 5.5, lines 26 and 38). Compliance was equivalent to 81%. Since the program only began in earnest after the CONES resolution of April 89, it was operative only for 18 months Instead of 30, compliance with the timeliness of the action plan was only 60% (Annex 5, pars. 28-34). (9) The Guavio Investment Program Incurred further cost (25%) and time (20%) overruns during the PSAL Also, Its management Improvement tariets were only partially met and its accounts payable also increased above reasonasble commercial levels. It is difrlcult to visualize a success factor greater than 70% (Annex 5, pares. 13-16). (10) The sectoral environmental and resettlement commitments have been 100% compiled with by ISA. Those for Guavio on account of the reported results (Annexes 3 and 4) could be considered to be 70%, with a weighted average of 88% /f a weight of 60% is given to the sector and 40% to Guavio. Ftlc:p3-tb7 cxl  45 ANNEX 1 Page 1 of 3 COLOMBIA POWER SECTOR ADJUSTMENT LOAN (2889-CO) PROJ.ECT COMPLETION REPORT BRIEF RECAPITULATION OF THE ECONOMIC AND POLITICAL BACKGROUND, 1987-90 1. Background. In late 1984, following the collapse of the coffee boom of the late 1970s and sharp increases in inflation and the fiscal deficit, the Colombia Government introduced an economic adjustment program designed to achieve stabilization with growth. The 1984-86 adjustment program, together with higher coffee prices and rapid expansion of petroleum and coal exports, substantially improved both fiscal and balance of payments performance. Nontraditional exports and private investment grew rapidly. As a result, the rate of GDP growth recovered from an average of only 1.6% during 1980-83 and 3.3% during 1984-85 to 5.8% in 1986. 2. Initial Years of the Barco Administration. The economic adjustment program was maintained by the Barco administration which took office in August 1986. Despite a sharp decline in coffee prices, GDP growth was kept at 5.4% in 1987. The effect of the drop in coffee prices on the balance of payments was offset by a large increase in private transfers and rising non-coffee exports, particularly petroleum and coal. The current account showed a small deficit of 0.1 % of GDP in 1987. On the fiscal side, however, the strengthening of Central Administration revenues resulting from the tax reform of the program was not able to compensate for the drop in coffee prices. The fiscal balance deteriorated, registering a deficit of 1.8% of GDP. After difficult negotiations the Government succeeded in obtaining a quasi-voluntary US$1 billion "Concorde" loan from the commercial banks. 3. While the 1984-86 economic adjustment program was able to restore some degree of macroeconomic stability, particularly external balance, and economic growth by 1987, inflation started to accelerate at the end of 1985. From 20% in 1986, the rate of inflation increased to 24% in 1987 and 28% in 1988. The authorities responded by reducing credit expansion and increasing permitted agricultural imports. As a result of tighter monetary policy, more restrictive quotas on coffee exports, and guerrilla attacks on oil pipelines, economic growth slowed in 1988 to a rate of 4.1%. The current account deficit rose to 1.0% of GDP in 1988 and the fiscal deficit increased to 2.7% of GDP. 4. As the slowdown in economic growth continued into 1989, two developments occurred in the middle of the year which further darkened the economic outlook for Colombia. First, the demise of the International Coffee Agreement reduced international coffee prices by half, sharply cutting earnings from Colombia's main export industry. Second, the assassination of presidential candidate Luis Carlos Galan triggered a generalized conflict between the drug traffickers and the Government, with adverse effects on the investment climate, increased fiscal pressures from the security effort, and reduced drug-related revenue. The economic authorities responded quickly to the coffee-drug shock by tightening credit policies and cutting investment and subsidies. As a result, the fiscal deficit was reduced to 2.0% of GDP in 1989, and the inflation fell from its high of 28.1% in 1988 to 26% in 1989. Economic growth, however, continued to decelerate to 3.4% in 1989.  46 ANNEX 1 Page 2 of 3 5. Thus, after the initial recovery of economic growth in 1986-87 that followed the economic adjustment program, the rate of GDP growth diminished indicating a deterioration in overall macroeconomic performance. GDP growth fell from an average of 5.6% in 1986-87 to 4.1% in 1988, and 3.4% in 1989. Part of the slowdown in economic growth can be explained by the series of internal and external shocks that occurred during the period and required continued stabilization measures. Clearly, swings in international coffee and oil prices had a dominant and volatile influence on both the balance of payments and the consolidated public sector deficit. The slow economic growth of the G-5 countries in the late 1980s and the increase in global interest rates also influenced the position of the balance of payments. However, the other major explanation of the deteriorating economic performance was that the growth response to the correction in macroeconomic imbalances in the mid-1980s could not be sustained without structural reforms to address microeconomic efficiency issues. Indeed, by the end of 1989, the Colombian authorities had recognized that economic stabilization measures alone would be insufficient to raise longer term productivity and growth in the economy. 6. The Economic Modernization Program. To address the longer term structural problems of the Colombian economy the Barco Administration announced, in February 1990, an Economic Modernization Program (EMP) to improve the efficiency of resource allocation and use. The EMP contained a set of structural reforms and accompanying macroeconomic policies designed to raise economic growth to 5% per year, bring inflation below 20%, and reduce the incidence of poverty. The centerpiece of the EMP was a substantial trade reform program aimed at increasing the competitiveness of the tradeable goods sector. Complementary financial and public sector reforms, and industrial restructuring policies were designed to enhance factor mobilization, improve efficiency in the use of resources and ensure an adequate supply response of the productive sectors. These structural reforms were to be underpinned by fiscal and exchange rate policies to maintain internal and external balance. 7. Growth in 1990 was strong at 4.1 %, due mainly to exports, but inflation accelerated sharply. From late 1988 through 1990, the Government had pursued an aggressive policy of devaluation to counter the potentially adverse effects of the coffee-drug shock and of the trade liberalization on the balance of payments. The Colombian peso in real terms was devaluated by 20% during 1989-90. The slow response of imports to the trade liberalization program, together with the higher than expected energy exports due to the Gulf crisis, resulted in a current account surplus of 1.5% of GDP in 1990. International reserves grew by US$600 million, putting pressure on the money supply. Along with a fiscal deficit close to 3% of GDP in the first half of 1990, this contributed to raise inflation to 32.4% in December 1990, the highest level observed since the 1970s. Upon assuming office in August 1990, the Gaviria administration announced its intention to reduce inflation substantially during 1991. Fiscal policy was tightened in late 1990 and, aided by higher petroleum prices, the fiscal deficit fell to 0.1 % of GDP for 1990 as a whole. In all, the acceleration of inflation in 1989-90 seems to have been due to the aggressive devaluation by the Government. The Government's exchange rate policy was inconsistent with fiscal and monetary policies and the initial speed of trade reform. 8. Importantly, the structural reform program initiated by the Barco Administration and accelerated and expanded by the Gaviria Administration marked a significant break from the inward- oriented development model of the past. The challenges now are to prevent backtracking, to  47 ANNEX I Page 3 of 3 strengthen institutional capacity, to monitor the supply response of the private sector and remove remaining barriers to that response, and to continue to adopt complementary policies.  48 ANNEX 2 Page 1 of 12 COLOMBIA POWER SECTOR ADJUSTMENT LOAN (2889-CO) PROJECT COMPLETION REPORT FINANCIAL PERFORMANCE 1. The Colombian Power Sector did not accomplish the financial objectives set forth in the 1987-90 Adjustment Program. Its weak regulatory framework prevented it from responding to the heavy burdens imposed by the effects of higher than anticipated internal inflation, and devaluation of the Col$ with respect to the USS. At the end of the Program the sector as a whole, although wiser as to the need for fundamental regulatory and structural reform, was financially weaker. Serious liquidity and solvency problems prevented it from servicing its debt and contribute to the relatively large investments needs. 2. The Government's long term objectives articulated in the Adjustment Program were to: (i) improve the sector financial structure, by reducing the debt portion within the total financing mix; (ii) lengthen the average term of the sector's debt, and gradually increase the sector's self financing capacity through a sound pricing policy, based on economic principles; (iii) reduce progressively, and eventually eliminate, Government contributions to the sector; and (iv) improve financial discipline by ensuring prompt payment of electricity billings by Government and regional institutions. At the end of 1990, the sector was still bearing a heavy debt service, as these objectives had not been met. 3. The final results of the most relevant financial parameters from 1987 to 1990, is exhibited in tables 1 and 2, and depicted in graphs 1 through 8 for the period 1983-1992. Table 3 summarizes the evolution of the comparative financial projections and investment programs. All tables and graphs compare actual results against those projected at the time of the Loan's appraisal. The graphs also show proforma results for 1991 and 1992 as they were expected towards the end of 1990.1" I/ Actual data was gathered from the financial tables of Annex B of the Loan Completion Report prepared by FEN in May 1992. In this report FEN has made an admirable effort to present the consolidated sector finances on a cash and accrued basis from COMPES and sector sources, underlining that while the limitations of the data cannot support exact auditing precision, it provides reliable orders of magnitude, sufficient to draw meaningful conclusions about the evolution of sector finances and performance indicators. The data of the report is in turn based on the report 'Financial Statements for Colombian Power Utilities - 1983 to 1990", formulated by FEN, dated January 1991. The 1990-1992 data was taken from financial projections updated by FEN. Forecast data for the Adjustment Program was taken from Annex 6 of the "Report and Recommendation from the President of the International Bank for Reconstruction and Development to the Executive Directors on a Power Sector Adjustment Loan to The Republic of Colombia", November 10, 1987. (Report No. P-4676- CO).  49 ANNEX 2 Page 2 of 12 First Objective 4. Graphs I and 2 show that the expected improvement of the sector's capitalization structure was not achieved. Actual total liabilities, short and long term, for 1990 were US$1.4 billion higher than expected. This caused the debt over debt plus equity ratio to be actually higher at 62% in 1990 than the actual value of 58% in 1987, and considerably higher than the expected 1990 value of 47%. 5. By the end of 1987, when the Adjustment Sector Loan was presented to the Executive Directors, total liabilities of the power sector had already increased by some US$1.24 billion over the value estimated during the appraisal mission of February 1987. At about US$5.9 billion, the debt was already 27% higher than the starting value estimated under the Adjustment Program. About US$0.8 billion of the increase were due to currency revaluations for the years 1986 and 1987. Failure to update the principal parameters of the financial projections for the negotiations of the loan, did not allow a proper revision of the financing plan of the Adjustment Program. 6. During 1988-90, lower internal cash generation and lower levels of disbursements from the external loans forced the Government to obtain larger disbursements from commercial banks TABLE 1: COLOMBIAN POWER SECTOR ADJUSTMENT LOAN Comparative Disbursement Program 1987 - 1990 (US $ Million) Forecast Actual Variation Existing Loans 1,120 1499 379 FEN Local Borrowing 402 n.a. -402 Other Local Sources 204 n.a. -204 Cofinancing Loans 1,330 1,589 259 I.B.R.D. 300 225 -75 I.D.B. 300 141 -159 Eximbank Japana 300 3/ -300 Comm.Banks and Suppliers 430 736 306 FODEX 0 487 487 Total Disbursements 3,056 3,088 32 _/Because the Eximbank loan, intended to finance lengthy investments, had not been secured at the time of negotiations of the PSAL (November 1987), it was unrealistic to have forecast the full disbursement of that loan during 1987-90.  50 ANNEX 2 Page 3 of 12 and from FODEX totalling US$793 million. Compensated in part by higher disbursements from older existing loans (US$379 million), actual total disbursements under the program were close to the cofinancing targets. However, the higher portion of borrowing at commercial terms at the end of 1990 resulted in a debt stock with shorter maturities and higher interest costs2'. Table 1 compares planned vs. actual disbursements under the programn: 7. The slow progress of the IDB loan reflects delays in compliance with disbursement covenants. Although approved in 1989, effectiveness of the loan from the Eximbank of Japan was delayed until the last quarter of 1991: first, by the negotiations of the sovereign guarantee of the loan, and second, by the effects of the colombian financial reform of 1990-91 which modified the legal and institutional frarnework of the borrower -- Financiera Energetica Nacional (FEN). TABLE 2: COLOMBIAN POWER SECTOR ADJUSTMENT LOAN Comparative Financing Plan 1987-1990 (US$ Millions) Forecast Actual Variation Investment Prgrm-excl.idc 2062 2102 40 Working Capital & Other Uses 234 -57 -291 Total Uses 2296 2045 -251 Gross Cash Generation 3128 2684 -444 Less Total interest incl.idc 1878 1655 -223 Net Cash Flow A 1250 1029 -221 Gov. Contrib. & Others B 453 449 -4 Total Non Borrowed A+B 1703 1478 -225 Gross Borrowing 2,756 2863 107 Less Amortizations 2163 2296 133 Net Borrowing C 593 567 -26 Total Sourcs A+B+C 2296 2045 -2S1 a/ This seemingly logical conclusion appears to be at variance with the actual interest expenses reported as being 12% lower than estimated at appraisal. Only a full audit could determine whether the source of the inconsistency lies with the 1991 consolidation of estimated actual results or with the appraisal forecast figures (Table 2, line 5: and Table 3, lines 31 and 55).  51 ANNEX 2 Page 4 of 12 Second Objective 8. The second objective '... lengthen the average term of the debt stock and increase self financing capabilities," was not achieved. The 1987-90 financial evolution of the sector (Table 3) shows that, gross internal cash generation fell 14% below the target. This shortfall in sector revenues, equivalent to USS 444 million, worsened an already poor record of compliance with financial targets covenanted with multilateral financial institutions, and slowed both the disbursement of recently approved loans, and the processing of new ones. These two outcomes produced a large gap in the financing plan of the PSAL which, as pointed out above, the sector and the Government acquiesced to fund through the traditional soft-budget-constrain mechanism. The latter was based on emergency financing plans based on short term obligations, mainly Government funds through FODEXY and direct Government loans. Contrary to the macroeconomic objectives of the adjustment program, the diversion of these funds to the power sector contributed to the depletion and curtailment of national budget resources earmarked for other sectors. 9. The individual results of the large number of less efficient utilities were more dramatic than suggested by the consolidated shortfall in net cash flow of US$221 million during 1987-90. This is because of the lack of mechanisms enabling the transfer of resources from the surplus to the insolvent utilities. 10. Table 3 shows that the main components of the US$444 million shortfall in gross cash generation were: (a) US$347 million from lower than expected income from sales, mainly because average prices in real terms did not reach the proposed targets; (b) US$107 million from Other Operating Income did not materialize; (c) US$164 million from higher operating expenses; and (d) US$139 million from lower Other Income and Expenses not related to operations. These negative outcomes were partially off-set by relatively lower depreciation costs and net exchange rate gains of the dollar vs the currency basket of the sector (Table 3, line 63). Graph 3 depicts the sector's Gross Internal Cash generation which except for 1987, fell below expected targets. Similarly, Graph , illustrates the negative trend of the Net internal Cash Generation which was US$860 million below the financial plan estimate; the actual yearly values of this item have to be viewed with caution since it depends on an arbitrary estimate of the interest during construction (idc). 11. Groh 5, shows the historic variation of actual prices in current dollars; Graph shows it in constant Colombian pesos of 1985; and Graph 7, expresses it as an index related to the 4/ The Fondo de Monedas Extranjeras (FODEX) was an account of transitory use managed by the Banco de la Republica under a Government contract. Its purpose was to ensure the timely payment of the foreign debt under sovereign guarantee. The growing financial problems of the power sector prompted the Government into an increasing use of FODEX as a sort of automatic financing mechanism to cover the debt service of the power sector. Faced with the inability of the power sector to fund its debt service, the Government placed short and medium term securities with public entities having surplus generation of foreign exchange (Ecopetrol, Telecom, National Coffee Fund), and channeling these funds through short term loan agreements to the power utilities, at relatively expensive commercial terms. The original goal of channeling internal savings to avoid temporary monetary and macroeconomic misalignments, was debased when the power utilities begun defaulting on a massive scale in its obligations to FODEX.  52 ANNEX 2 Page 5 of 12 average price forecasted in the financial plan. Average prices, expressed in Col$ of 1985, were slightly under forecasted. However, since devaluation of the national currency was higher than anticipated, average prices expressed in dollars were 17% under the forecast for 1990. 12. Graph 8, correlates total income projected versus actual sales figures. Total sales in Gwh were only 0.5% higher than expected at the time of the appraisal, even though loss reduction targets were not met. It is estimated that sales for 1987-1990 would have been US$347 million higher, should sector utilities had complied with the proposed tariff increases in real terms, particularly in relation to dollar equivalent values. Third Objective 13. The Government was unable to attain the third financial objective of reducing and eventually eliminating government contributions to the sector as expected under the PSAL program. During 1990, Government contributions were greater than expected particularly through the long and short term funds borrowed from the FODEX facility. Massive capitalization programs continued during 1991 and 1992 as part of the more realistic financial and institutional restructuring of the sector approved by the new administration that took office in August 1990. In 1991, for instance, the Government capitalized ISA by an amount equivalent to US$579 million by paying the accrued receivables owed to ISA by the Government-owned utilities, in exchange for the ISA shares owned by the utilities. As part of the sector restructuring strategy developed during 1991-92, the Government developed a program to capitalize CHB, ICEL, CORELCA and subsidiaries in amounts over US$ 1 billion. Fourth Objective 14. The expected performance, in terms of number of equivalent days of sales represented by the volume of Accounts Receivables, was far from satisfactory. The lack of updated accounting information once again produced false expectations at the time of appraisal estimates, and large discrepancies between forecast and actuals begun as early as 1987 (Table 3, line 75). The result was that the 66 days of receivables expected by the end of 1990 were in fact 100 days. Accounts Receivable Reduction Program 15. The actual Government commitment under the PSAL was to settle in full the sector's receivables owed by the central and regional governments and agencies. These receivables totalled Col$10.6 billion (US$49 billion equivalent) at December 31, 1986, as follows: (a) 39% in actual cash payments during 1988 (28%) and 1989 (I 1 %); and (b) 61% in payments or payment agreements. About two third of the latter figure corresponded to arrears from the municipally-owned Empresas Publicas Municipales de Barranquilla (EPMB). The commitment under the PSAL also included that the current electricity consumption of these official entities be paid on average within 66 days of billing. These commitments became conditions of disbursement for the second and third tranches of the PSAL. 16. Full compliance with the cash payment targets was not met. The Bank however regarded as satisfactory compliance for the disbursement of the second tranche, that the cash short falls be added to the long term payment agreements. Despite the existence of a number of legal,  53 ANNEX 2 Page 6 of 12 fiscal and budgetary instruments (retention of the value added tax due to the municipalities, off-setting electricity billings with accrued debt owed by the utilities to FODEX) the pervasive problem of Government and official accumulating arrears to the power utilities did not improve in any material way. By the time of the third tranche, current billings had accumulated yet again. Also, most agencies were delinquent in the payments due under the long term agreements signed to settle the outstanding arrears at end-1986, and the Government was about to meet the letter of the arrears' covenant through a new set of long term agreements. At the time of cancellation of the third tranche, the long term objective of the PSAL to a reach satisfactory sustainable level of receivables had clearly not been met. Tariff Adjustment Program (PAT) 17. In 1986, through Resolution 086 (R086), the Government had assumed control of the tariff policy for electric power service by eliminating the utilities' discretionary faculty to request and apply authorized rates. The main technical feature of R086 was the setting of targets based on the structure of cost of service, social considerations and ability to pay. The residential tariff consisted of fixed and variable charges. Fixed charges, depending solely on the ability to pay of each of six strata (income brackets) in June 1987, ranged from Col$36.45/month to Col$1678.81 for the highest bracket. The variable consumption charge was to reach the following LRMC targets gradually by 1994: - 20 - 30% of LRMC by the subsistence block (0-200 Kwh/month) * 50 - 80% of LRMC by the basic block (201400 Kwh/month) * 90 - 125% of LRMC by the intermediate block (401-800 Kwh/month) - 100 - 125% of LRMC by the high block (over 801 Kwh/month) 18. Additionally, under R086, the TAP included the following principal commitments to meet the above targets: * the reduction of the residential subsistence block from 200 to 100 Kwh/month whenever on-going gas and LPG electricity replacement programs approached 85% coverage. * the value of Residential rates would be increased according to the minimum wage index plus 4%; and those of non-residential rates, according to the power sector cost index plus 5%. 19. For the particular case of EEB whose tariffs had the greatest distortions from LRMC structure and levels, a program of gradual adaptation to R086 with the following main features was agreed: * the fixed charge for its residential rates was set at 50% of the national value to be raised to 75% in 1988 and 100% in 1989. * to lower the impact of converting to the new tariff structure a new block covering consumptions from 200 - 300 kwh/month was introduced; it was agreed that this block would be gradually phased out before 1993.  54 ANNEX 2 Page 7 of 12 * any rate reductions required EEB's non-residential rates that were higher than LRMC were to be introduced so as to preserve the company's overall revenues in real terms. 20. With the exception of EEB, the TAP was implemented in the larger cities in line with R086. In most of the smaller cities, however, despite the carrying out of social stratification studies, the implementation was flawed. It turned out that most of the residential consumers in the smaller cities were classified as belonging to the lowest strata having the smallest fixed monthly charge. This flaw was being looked into by the JNT at the end of the PSAL (9/30/90). 21. Initially EEB did not comply in full with the gradual implementation of R086. It delayed the adaptation to the national fixed charges by one year. It begun to reduce rates in real terms to industrial and even to residential consumers, with resulting negative effects to its already critical cash generation capacity. However, by the time of the third tranche, EEB had reportedly caught up with its commitments under R086.  55 ~~~~~~~ANNEX 2 Page 7 of 11 * ~~~~~~~09-Jun-93 TABLE 3: COLOMBIA I ~~~~~~~~POWER SECTOR ADJUSMENT LOAM (2a89-CO) - PROJECT COMPLETION REPORT 2 COMPARATIVE FINANCIAL PROJECTIONS SUMMKARY (Current USS mitLLion) 1/ 3 (FiLe: ANX2TBL3.wkil 4 ...1987---- ---198.8---- ---1989---- ---1990 --- ACUN 1987-1990 Differ. S ECONOMIC ASSUMPTIONS S.A.R. ACTUAL S.A.R. ACTUAL S.A.R. ACTUAL S.A.R. ACTUAL S.A.R. ACTUAL 1987-90 6 -- - - - - - - - - --- - -- - -- - .. . .. . .. . .. . -- - - -- - -- -.. . . 7 INFLATION RATE 20.0% 24.01