Colombia - Water Supply and Sewerage Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17197 IMPLEMENTATION COMPLETION REPORT COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT (LOAN 2961-CO) November 17, 1997 Finance, Private Sector and Infrastructure Department Country Management Unit 4 Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Colombian Peso (Col $) EXCHANGE RATE EFFECTIVE MAY 24,1988 US$1.00 = Col$287.75 Col$1.00 = US$0.03475 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BCH Central Mortgage Bank CENAGUA National Water Center CONPES National Council on Economic and Social Policy CRAS Water and Sanitation Regulatory Commission DAPSB Drinking Water and Basic Sanitation Directorate of the MOPT DNP National Planning Department DWSS Directorate of Water Supply and Sanitation EAAB Bogota Water Supply and Sewerage Company FFDU Urban Development Finance Fund FINDETER Regional Development Finance Corporation FONADE National Fund for Development Projects INS National Health Institute INSFOPAL National Institute for Municipal Development MDE Ministry of Economic Development MOPT Ministry of Public Works and Transport MSP Ministry of Public Health PSP Private Sector Participation SENA National Training Service SSPD Superintendency of Domestic Public Services Vice President Shahid Javed Burki Director, Country Management Unit Andres Solimano Director, Sector Management Unit Sri-Ram Aiyer Task Manager Menahem Libhaber  FOR OFFICIAL USE ONLY TABLE OF CONTENTS PREFACE ..............................................................;i EVALUATION SUMMARY ............................................................. ii PART I: PROJECT IMPLEMENTATION ASSESSMENT .......................................................1 1. STATEMENT OF OBJECTIVES ..............................................................1 2. ACHIEVEMENT OF OBJECTIVES . .............................................................2 3. MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION .......... ...............5 4. PROJECT SUSTAINABILITY ..............................................................8 5. BANK PERFORMANCE ..............................................................9 6. BORROWER PERFORMANCE ............................................................. 10 7. ASSESSMENT OF OUTCOME .............................................................. 12 8. FUTURE OPERATIONS ............................................................. 13 9. KEY LESSONS LEARNED .............................................................. 15 PART II: STATISTICAL ANNEXES ............................................................. 17 TABLE 1: SUMMARY OF ASSESSMENTS ............................................................. 17 TABLE 2: RELATED BANK LOANS ............................................................. 18 TABLE 3: PROJECT TIMETABLE ............................................................. 18 TABLE 4: LoAN DISBURSEMENTS: CUMuLATIVE ESTIMATED AND ACTUAL .............. 19 TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ................ .......................... 20 TABLE 6: KEY INDICATORS FOR PROJECT OPERATION .................................................... 2 1 TABLE 7: STUDIES INCLUDED IN THE PROJECT .............................................................. 22 TABLE 8A: PROJECT COSTS ............................................................. 22 TABLE 8B: PROJECT FINANCING ............................................................. 23 TABLE 9: ECONOMIC RATE OF RETURN ............................................................... 24 COLOMBIA ............................................................. 25 TABLE 10: STATUS OF LEGAL COVENANTS ........................................................ ...... 25 TABLE 11: COvPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ................. 31 TABLE 12: BANK RESOURCES: STAFF INPUTS ............................................................. 31 TABLE 13: BANK RESOURCES: MISSIONS .......................................... 32 APPENDIX A PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ................ 33 APPENDIX B AIDE MEMOIRE ............................................................. 8 1 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.   IMPLEMENTATION COMPLETION REPORT COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT LOAN 2961 - CO PREFACE This is the Implementation Completion Report (ICR) for the Water Supply and Sewerage Sector Project in Colombia, for which Loan 2961-CO of US$150 million equivalent was approved on June 16, 1988, and became effective on August 16, 1989. The loan was closed on December 31, 1996, 24 months later than the original closing date (December 31, 1994). Final disbursement took place on May 1997, at which time a balance of US$ 5,470,434 was canceled. Cofinancing for the project was provided by the National Government and by FINDETER (Local Loans). TIhe ICR was prepared by Mr. Menahem Libhaber (LCSFP) and by Mr. German Silva (Consultant) of the Latin America and the Caribbean Region, and-reviewed by Mr. Eugene D. McCarthy (ex-Division Chief, LA3EI) and Mrs. Maria Victoria Lister (Quality Assurance, LCSFP). Preparation of this ICR began during the Bank's final completion mission in May 1997. It is based on material in the project files. The borrower contributed'to the preparation of the ICR by working closely with the team which prepared the ICR and by providing comments on the draft ICR, which have been incorporated into the final document. The Borrower comments are included as Appendix A.  - ii - EVALUATION SUMMARY WATER SUPPLY AND SEWERAGE SECTOR PROJECT LOAN 2961-CO COLOMBIA Introduction i. Colombia, with a population of about 36 million inhabitants, 70% of which is urban, has made impressive strides in expanding its water and sanitation sector in the past decade. Over 76% of the population has now access to drinking water, while sanitary sewerage covers 64% of households in the country. The coverage levels in the four biggest urban centers of Bogota, Medellin, Cali and Barranquilla, which together account for 30% of the population, is substantially higher, at 88% for water and 85% for sewerage. The demand for improving and expanding the water supply and sewerage services is still high. Nevertheless, major institutional problems persist, having their origin in highly politicized utility companies which lack operational autonomy and have limited accountability for their performance. A new regulatory framework conducive to efficiency improvements, expanded private sector participation in the delivery of public services, greater accountability, and more arm's length relationship between utilities and local politicians was legislated by the Government as the Domestic Public Services Law (Law 142) enacted in July 1994. The Government's main sector goals are to: (a) restructure the existing institutions; (b) increase national household coverage of water and sewerage services; (c) improve the quality of drinking water from public systems; and (d) formulate and initiate implementation of wastewater treatment strategy for its largest cities. Since 1975 the Bank has made 13 loans, totaling about US$707 million, for water supply and sanitation services development in Colombia. Statement of Project Objectives ii. The main objective of the project was to underpin the implementation of the first sector reform program (SRP) by financing a US$ 430 million slice of the Government's US$ 600 million 1988-1992 sector investment program and help the Government in bringing about sectoral, institutional and policy reforms. Its specific objectives were to assist the Government in: (a) Providing by the end of 1992 water supply services to about 1.9 million additional people and sewerage services to about 1.3 million additional people, most of whom belong to the poorer segment of the country's population; (b) Introducing a new lending policy designed to: (i) reinforce the adjustments to sector financing policy; (ii) promote greater operational efficiency and financial viability of water and sewerage companies; and (iii) stimulate the preparation and execution of more cost-effective investment projects; (c) Strengthening the institutional framework at the national level through the: (i) promotion of a strong financial intermediation capacity (BCH/FFDU) capable of enforcing the provisions of  - iii - the new lending policy; (ii) introduction of adequate global sector planning (DNP) and (iii) development of a strong technical support and monitoring agency (DWSS of MOPT); (d) Promoting, at the departmental, regional and/or municipal level, the development of companies of sufficient size and operational and financial autonomy to operate efficiently water and sewerage systems; (e) Reviewing and updating technical norms, design parameters and technologies for future preparation of more cost-effective and appropriate investment projects; and (f) Establishing a permanent human resources development capacity for all levels of sector personnel and strengthening the performance capability of sector personnel by developing and implementing a comprehensive training program. Achievement of Objectives iii. As a result of institutional changes that occurred within Colombia's water and sanitation sector during the project implementation period, the loan had to be amended three times. Although the basic objectives of the project were retained, the investment program was reduced from US$ 430 million to US$ 285 million. Nevertheless, the Borrower provided more counterpart funds than planned and finally, the total investment under the project amounted to US$ 419.7 million. Project objectives were not fully achieved. FFDU and FINDETER financed the execution of 401 subprojects which are now completed, benefit more than 450 Colombian municipalities, and have most probably achieved the goal of providing water supply and sewerage services to 1.9 million and 1.3 million additional inhabitants, respectively. Although the infrastructure works were executed, several of them suffered from problems of conception, design or operation. The project positively contributed to initiating the change in the culture of financing water supply and sanitation projects by assisting the implementation of the first sector reform of 1986, and it provided inspiration and guidance for the second sector reform introduced by Law 142 of 1994. However, the objectives of institutional strengthening and financial self-sufficiency of the sector companies were not achieved in most of the subprojects, and the sector development and training programs under component C were subject to delays. Nevertheless, all these programs have been initiated, are under implementation and will be completed in early 1998, through complementary Government financing. FINDETER has not estimated the rates of return for each of the subprojects, since the small size and the small amount of investment in most of them would make it relatively costly to carry out such estimates, and since, given that they are water supply and sanitation projects which form a basic social necessity, the investment decision was not based only on economic considerations. In any case, since a minimum rate of return of 12 per cent was used in the evaluation methodology for each credit transaction and since the works were dimensioned with a view of minimum cost, FINDETER estimates that in general, the rate of return of 10% set as a goal in the SAR was achieved for each subproject. Major Factors which Affected Project Implementation iv. Implementation of the project was negatively affected by a number of factors: * Institutional changes at the sector level: The institutional changes which occurred in Colombia's water sector during the loan implementation period disrupted execution and led to successive amendments to the loan agreement. Instability and lack of continuity resulted in the  - iv- loss of much of the sector's institutional memory as well as staff and with technical and operating experience, and this in turn caused delays in execution. Responsibility for the sector and for executing the project lay initially with FFDU and two other newly-established entities, namely DAPSB and CENAGUA. Internal problems within those agencies led to their replacement during the course of project execution by other, equally new agencies, FINDETER and the MDE, that had no institutional background or experience in the sector. These changes had a detrimental impact on project implementation and caused delays. * Project formulation and design problems: The AT-PAS program [Technical Assistance - Sector Adjustment Program] executed by DNP under Component B was aimed at providing technical assistance to municipalities in the preparation of projects, but the results were on the whole not satisfactory. The preparation of subprojects was not financed by the loan and the quality of the pre-investment studies and designs was, in many cases, not satisfactory. * Cofinancing grants: Resources from the national cofinancing grant system, which originated from parliamentary appropriations, introduced distortions to project objectives as a result of being allocated on the basis of political criteria, without being subject to the same conditions as those attached to the Bank loan proceeds. This introduced a disincentive for business-oriented performance on part of the sector companies and resulted in distorting one of the loan's most important objectives, namely promoting the creation and strengthening of self-sufficient municipal service companies. v Political interference: Regional and local politicians intervened repeatedly in decisions regarding the execution of infrastructure works. This feature of the institutional environment cannot be overlooked, but is difficult to eradicate as long as the operation of services is not privatized. Political intervention also interfered with FINDETER's performance. In the early years of its operation, FINDETER's management was guided by technical criteria, and was supported by expert staff transferred from FFDU. Unfortunately, during the last years of project implementation this situation changed as political criteria influenced investment decisions, in part because of FINDETER's new role in handling large amounts of cofinancing grants. As a result, key experienced personnel were withdrawn, and FINDETER was used as a political instrument. * Failure to change the focus with respect to strengthening the service providing entities: During project preparation, the focus of the institutional strengthening programs was personnel training and building up the administrative and financial capacity of the existing service companies. Privatization was not recognized at that time as an institutional development strategy and the project was not designed to promote private sector participation. In recent years it was recognized that the traditional approach to institutional development was not effective and the overall Bank's approach to institutional improvement in the water sector has evolved to focus on promoting private sector participation. In several subprojects, the Bank succeeded in inducing the incorporation of the private sector into the service companies. Such are the cases of Cartagena and Barranquilla. The project, however, was not restructured to adapt to Law 142 of 1994, i.e, to assist in incorporating private sector participation in a significant number of companies.  v - Project Sustainability v. Frequent institutional changes within the sector led to the loss of institutional memory, staff and technical and operating capacity. At present, the availability of capable managers, technical and operating staff to operate and maintain the water supply and sanitation systems is insufficient. Sector sustainability is therefore uncertain. The sustainability of the project will depend primarily on the commitment of local leaders, mayors, governors and politicians to cooperate in the future - during a period in which the provision of services has ceased to be the obligation and responsibility of the Government but rather the obligation and right of the community - to ensure that these services are provided efficiently, and that the systems are properly operated and maintained. Community participation is a prerequisite for institutionally stable and financially self-sufficient sector companies. The following are essential elements consolidating the institutional setup and for ensuring that the works executed under the project become sustainable: (a) providing advisory services provided to the companies regarding their obligations and responsibilities; (b) providing information to the communities on their rights and duties as consumers; (c) continuous monitoring and control by the new supervisory entities recently created under Law 142 (the CRAS and the SSPD) over compliance with preparation of management and results programs and over adequate performance; (d) the effective handling of technical, human and financial resources; (e) tariff adjustments to ensure financial self-sufficiency; and (f) ensuring compliance with programs to reduce UFW. Adoption of strategies for promoting private sector participation in the provision of services is also a key element for the future sustainability of the sector companies. Bank Performance vi. The identification, preparation and appraisal of the project by the Bank was based on previous familiarity with the water and sanitation sector in Colombia, in which it had carried out 13 lending operations since 1975. As a result of the unsatisfactory performance of the water sector during the previous two decades, the Government was implementing, with the active participation and advisory services of the Bank, an important program of institutional reform to improve the sector's management. Through the project, the Bank helped to finance a portion of the Government's investment program in water supply and sanitation for the years 1988-1992. The staff appraisal report (SAR) clearly identified the sector priorities, defined the strategies and established the specific conditions for carrying out the project and for assisting in restructuring the sector. It also identified the risks and proposed remedies to mitigate them. An assessment of the results shows that the risks where correctly identified. The size of the loan was appropriately dimensioned. There is no doubt that the loan significantly contributed to changing the financing and implementation culture of projects in the sector. During the project implementation period, organizational changes took place in the Bank. This led to frequent changes of task managers and resulted in loss of continuity and of institutional memory, changes of management styles and on emphasis on project implementation. It had a negative impact on the relations with the Borrower. A total of 15 supervision missions were carried out during the eight years of project implementation, utilizing 171 staff- weeks. vii. The Bank played an important role in inducing the institutional development of the water company of Cartagena through the incorporation of the private sector in the provision of the water and sewerage services in this city. In addition to the important positive impact of this Private Sector Participation (PSP) process on the city of Cartagena, it has the significance of being the first PSP process in the water sector in Colombia and is helping in paving the way for similar processes in other cities in the country. The Bank had a crucial role in ensuring the success of the privatization process by promoting ideas, extending  - vi - technical assistance, convincing the political decision makers to support the institutional change acting as an important catalyst to accelerate the implementation of the PSP process, and serving as a mediator in the negotiations of the PSP contract. Overall the Bank's performance has been satisfactory. Borrower Performance viii. The National Government supported the project and adopted important institutional reforms that established a clear legal framework for decentralized operations and for regulating and supervising the water and sewerage service companies (Law 142 of 1994). Nevertheless, while that reform is conceptually valid and well conceived, the institutional design still needs to be improved. There is no clear identification of the executing agency responsible for providing technical assistance to the municipalities and utilities in preparing their projects and in verifying their technical and financial feasibility. The performance of FFDU and especially FINDETER in tenns of management, processing and disbursement of a large number of subprojects (401 compared to 80 envisaged in the SAR) was very satisfactory. These institutions were able to implement the new loan policy in the midst of a process of profound institutional change, and they succeeded in mobilizing, allocating, controlling and disbursing resources and in supervising the execution of 401 subprojects throughout the country. This represents an important accomplishment and demonstrates a high level of administration capacity. Nevertheless, FINDETER was not very strict in reviewing the designs submitted by the municipalities and the utilities, it failed to insist on tariff changes, and it did not impose compliance with all of the requirements for institutional strengthening. It should, however, be noted that it is doubtful that the institutional improvement objectives of the project were realistic and achievable, and the resources allocated for implementing these objectives were not sufficient. FINDETER was active and involved in the subprojects during the procurement stage of goods and works. Nevertheless, it was less active during the execution stage, when it made only a few visits to the subproject sites, usually, only when serious problems occurred, and was not at all present during the stages of project start up and operation. FINDETER was inflexible in granting supplementary financing for subprojects in cases of cost overruns, with the result that several subprojects remained incomplete and the municipalities could not mobilize the small additional resources required to complete the works and put the systems into operation. Overall the perfonmance of FINDETER has been satisfactory. Assessment of Outcome ix. Overall, the project results can be regarded as moderately satisfactory. A total of 401 subprojects were executed, compared with only 80 envisaged in the SAR. Infrastructure works were executed in 450 municipalities, compared to an expected number of 400, and the beneficiary population of three million, set as a goal in the SAR, has, most probably, been achieved. In many cases, the newly constructed or rehabilitated systems are operating satisfactorily, have contributed to improving the quality of services, have favorably benefited the respective communities and resulted in extending the provision of water and sewerage services to consumers who without the project had no chance of receiving these services. Nevertheless, several of these works suffered from problems of inadequate concept, design or operation. The project assisted the implementation of the first reform of the water sector carried out through Law 77 (liquidation of INSFOPAL) and Law 12 (the decentralization Law). It supported the resulting institutional change in the sector, and the creation of municipal service companies, and contributed to changing the culture whereby the municipalities used to depend on the central Government to resolve their water supply and sanitation problems.  - vii - x. The institutional strengthening programs were not implemented in most of the sector companies. It should, however, be recognized that the achievement of the institutional objectives of the project is a difficult task and it is doubtful that the respective targets were ever realistic in the first place. During the period of project implementation, both the Bank and the Government policies with respect to institutional aspects of provision of domestic public services were re-oriented towards promoting the involvement of private capital and managerial capacity. The loan, together with the new directions and strategies with respect to PSP adopted by the Bank during the project implementation period, had a positive impact on inducing the second reform in the sector, i.e., on the formulation and enactment of the Domestic Public Services Law (Law 142 of 1994), which opened the way to private sector participation. Although progress achieved in privatizing the sector companies was sporadic, the project had an important role in initiating a wave of PSP processes which will result in a significant improvement in the sector's performance in the future. In some municipalities, such as Cartagena, Barranquilla and Santa Marta, an impressive institutional development is being achieved in the framework of the project by incorporating the private sector in the provision of the water and sewerage services. The Cartagena case is of special importance, since for the first time, the water and sewerage services in one of Colombia's major cities have been privatized and are being managed by an experienced European private operator. Similarly, it is the first case in which the recommendation of Law 142 has been applied in providing public services through a company constituted as a shareholder corporation (Sociedad por Acciones, article 17 of the Law). The Cartagena model, which has been successful, serves as an example to many other companies in Colombia and is paving the way for the implementation of Law 142 and the promotion of PSP in the sector. In this sense, the project had an important impact on the institutional development of the water and sanitation sector companies by showing the beneficial impact of PSP. xi. The sector development and training studies under component C were subject to setbacks and delays and have not yet been completed. Nevertheless, all of them have been initiated and are under implementation. MDE has managed to mobilize the required resources which will ensure the completion of the activities of Component C by the first quarter of 1998, and so the project has induced the compliance of component C. Future Operations xii. Future Bank operations should attempt to address the main sector problems. i.e., institutional weakness at the sector management level, instability and poor management capacity of the sector companies, inadequate capacity of the sector companies in terms of preparation, design and supervision of projects, and the lack of training opportunities for all personnel. It is indispensable to put in place mechanisms for improving the quality of project formulation, design and budgeting, and for supervising the execution of works, without undermining the autonomy of the municipalities under the decentralized system. Future operations will depend on the availability of such mechanisms. Participation of the private sector in the provision of water and sewerage services through various models of association with the new enterprises created under Law 142 appears to offer the best prospects for achieving institutional improvement and stability in the sector companies, and is undoubtedly the route that will be adopted by many enterprises. Support for such initiatives, which will help to improve operational efficiency of water companies is a priority area for future Bank operations. The initiative adopted in the formulation of this loan to establish a permanent system for training water-sector personnel was an appropriate and necessary strategy. Unfortunately, its implementation was not implemented under the project. Given the scarcity of trained personnel within the sector after ten years of institutional changes, the training problem should be addressed on a permanent and institutionalized basis. Technical and financial support should be provided  - viii - to SENA and to universities, to mount a long-term training program for the sector. With the growing presence of the European operating utilities in Colombia, training programs should also be developed with these utilities, especially in areas of commercial and operational management. Since the Loan Closing Date, FINDETER continued to: (i) supervise the performance of the completed subprojects; (ii) finance similar subprojects with its own resources; and (iii) implement an institutional improvement program. It has also requested a new Bank loan for the Second Municipal Development Project. Key Lessons Learned xiii. Reform of utility collateral must be undertaken by bringing to an end the pledging of Government transfers as a collateral for revenue earning projects, but instead pledging utility revenues from user charges. This should be embedded in the collateral legislation and apply to all sector pledging, not just for loans rediscounted by FINDETER. This will serve as an incentive for the commercial banks to perform serious due diligence in appraising utility credit worthiness and ensure business-oriented perfonnance of the borrowing utilities. This form of pledging could, however, be waived for small municipalities, where the corporate structure of the utilities might have limited scope for revenue generation. xiv. Resources of the national cofinancing grant system, which originate from Congress appropriations, have introduced distortions to project objectives as a result of being allocated on the basis of political criteria, without being subject to the same conditions as those attached to the Bank loan proceeds. This in tum has introduced a disincentive for business-oriented performance on the part of the sector companies and resulted in distorting one of the loan's most important objective, namely that of promoting the creation and strengthening of self-sufficient municipal service companies. The cofinancing funds should be allocated as matching grants when central fine-tuning of local sectoral performance is needed, while their allocation should always be based on transparent criteria. xv./ FINDETER's management, staffing and project appraisal and supervision capability have deteriorated sharply with growing political considerations entering into decision making because of its new role in handling large cofinancing grants. This hampered its credibility and its leadership in the sector reformn. In addition to resolving the cofinancing problems, clearer staffing criteria should be used by FINDETER, based on education, experience and managerial capacity. xvi. The successful experience of institutional improvement through private sector participation in Cartagena and Barranquilla indicates that PSP is the most promising strategy for achieving institutional improvement in the sector companies. Mechanisms to finance TA activities for supporting the implementation of PSP processes should be put in place (either by DNP, MDE or FINDETER), so as to increase the number of companies which have incorporated the private sector in the provision of the water and sewerage services. In addition, FINDETER should develop mechanisms which will permit private concessionaires to have access to FINDETER's resources. xvii. The preparation of subprojects was not financed by the loan and the quality of the pre-investment studies and designs was, in many cases, unsatisfactory. Loan proceeds should be allocated to finance subprojects preparation and FINDETER should provide mechanisms for improved review of designs and supervision of implementation, so as to ensure the sustainability of these investments. This should preferably be done through setting standards by FINDETER for project preparation and then facilitating borrowers and financial intermediaries to hire specialized consultants to meet these standards, rather than undertaking these steps directly by FINDETER's own staff.  - ix - xviii. FINDETER was inflexible in granting supplementary financing for subprojects in cases of cost overruns, with the result that several subprojects remained incomplete and the municipalities could not mobilize the small additior.al resources required to complete the works and put the systems into operation. It is recommended that in the future FINDETER be more flexible in providing supplementary financing, whenever it is warranted. xix. Community participation mechanisms were not practiced under the water and sewerage sector loan and there was no real participation in the subprojects on part of the communities, so that in many cases the communities were not committed to their subprojects. Community participation is an important factor in the success of projects of this type, and it is strongly recommended that community participation mechanisms be incorporated into FINDETER's future operations. XX. Technical assistance activities should be demand driven. It is clearly a service that benefits the recipient, and it should not be subsidized. Financing should be provided by FINDETER to its borrowers to address their specific technical assistance needs, thus FINDETER should serve more as an advisor and facilitator to borrowers rather than be involved in direct provision of technical assistance. In this respect, FINDETER should establish strategic alliances with private and public entities for optimal utilization of their capacity to provide technical assistance and avoid duplication. Also in this regard, FINDETER should publish best practices in sector projects implementation through newsletters and other publication methods, as well as serve as a clearing house on sector financing and management practices.   IMPLEMENTATION COMPLETION REPORT COLOMBIA WATER SUPPLY AND SEWERAGE SECTOR PROJECT LOAN 2961-CO PART I: PROJECT IMPLEMENTATION ASSESSMENT 1. STATEMENT OF OBJECTIVES l . The main objective of the project was to underpin the implementation of the sector reform program (SRP) by financing a US$ 430 million slice of the Government's US$ 600 million 1988-1992 sector investment program and help the Government in bringing about sectoral, institutional and policy reforms. Its specific objectives were to assist the Government in: (a) Providing by the end of 1992 water supply services to about 1.9 million additional people and sewerage services to about 1.3 million additional people, most of whom belong to the poorer segment of the country's population; (b) Introducing a new lending policy designed to: (i) reinforce the adjustments to the sector fmancing policy; (ii) promote greater operational efficiency and financial viability of water and sewerage companies; and (iii) stimulate the preparation and execution of more cost-effective investment projects; (c) Strengthening the institutional framework at the national level through the: (i) promotion of a strong financial intermediation capacity (BCH/FFDU) capable of enforcing the provisions of the new lending policy; (ii) introduction of adequate global sector planning (DNP) and (iii) development of a strong technical support and monitoring agency (DWSS of MOPT); (d) Promoting, at the departmental, regional and/or municipal level, the development of companies of sufficient size and operational and financial autonomy to operate efficiently water and sewerage systems; (e) Reviewing and updating technical norms, design parameters and technologies for future preparation of more cost-effective and appropriate investment projects; and (f) Establishing a permanent human resources development capacity for all levels of sector personnel and strengthening the performance capability of sector personnel by developing and implementing a comprehensive training program. 2. The project components are: Component A: The financing of Sub-projects consisting of rehabilitation and expansion of water supply and sewerage systems, upgrading of solid waste services, institutional strengthening programs and training.  -2 - Component B: A program to strengthen the Borrower's operating capabilities, including staff training and the preparation and implementation of: (i) a comprehensive operating manual statement reflecting SRP policies; (ii) investment project preparation and evaluation guidelines; and (iii) improved computerized management systems for lending and supervision. Component C: (1) A program to strengthen DWSS (later replaced by DNP and afterwards by MDE) including staff training, acquisition and utilization of equipment and the carrying out of studies: (i) to review and update existing technical norms and parameters for the design, construction and maintenance of water and sewerage facilities; (ii) to prepare guidelines for the application of low- cost appropriate technologies; (iii) to update NPBRS procedures and technologies for rural water supply; and (iv) to prepare an inventory of Colombia's water supply and sewerage sector. (2) A comprehensive training program for the personnel of Colombia's water supply and sewerage sector. 2. ACHIEVEMENT OF OBJECTIVES 3. As a result of institutional changes that occurred within Colombia's water and sanitation sector during the project implementation period, the loan had to be amended three times. Although the basic objectives of the project were retained, the investment program was reduced from US$ 430 million to US$ 285 million. Nevertheless, the Borrower provided more counterpart funds than planned and in the end, the total investment under the project amounted to US$ 419.7 million, i.e, similar to that originally envisioned in the SAR. In general terms, the project objectives were not fully achieved. The institutional strengthening programns in most of the service companies were not fulfilled, and the sector development and training programs were subject to delays and will be completed only after the closing date of the loan. On the other hand, new lending policy was put in place, a strong financial intermediation capacity was developed and the sector reform supported by the project led to a second important reform which was not envisaged in the SAR. 4. FFDU and FINDETER financed the execution of 401 subprojects which are now completed. Given that several subprojects involved regional programs, it is estimated that water supply and sewerage works were executed in more than 450 Colombian municipalities. Although the number of communities benefiting from the project is higher than that foreseen in the SAR, some of the subprojects suffer from inadequate design, operation or insufficient capacity problems. Four independent consultants were hired by FINDETER and DNP to evaluate 70 projects, and found that more than 50 per cent of them - a much too high percentage - were in one or other of these situations. 5. In its fifteen years of existence within BCH from 1975 to 1990, FFDU became the leading source of long-term credit for municipal investment in Colombia. Its fast expansion in the late 80's, however, created conflicts of priorities with BCH's mainstream mortgage business, and became constrained within the organizational structure of BCH. This led the Government to transform FFDU into a self standing agency. Law 57 of November 1989 authorized the creation of Financiera de Desarrollo Territorial (FINDETER) as a second-tier financial intermediary for  - 3 - regional and local infrastructure investments. The new institution, legally established on May 14, 1990, took over the operations of FFDU. The Loan Agreement was amended to take into account the change of Borrower, and the loan closing date was extended by two years (from December 31, 1994 to December 31, 1996) to compensate for the time spent in making FINDETER operational and transferring to it the operations of FFDU. FFDU executed 102 subprojects prior to its liquidation, but most of the information related to them was lost during the transfer of responsibility to FINDETER and is not available at present. The only information at hand refers to the 299 subprojects executed by FINDETER. The increase in the number of beneficiaries of the water supply service as reported by FINDETER was 1,037,987, while that for the sewerage services was 655,682. FINDETER estimates that if the increase in the number of beneficiaries through the 102 subprojects executed by FFDU are also taken in account, it is most probable that the SAR goal of increasing the water supply and sewerage services to 1.9 million and 1.3 million inhabitants, respectively, has been achieved. Because of technical problems noted in some of the systems that were built, it is likely that not all of the inhabitants reported as additional beneficiaries are actually receiving service. In any case, the infrastructure works constructed under the project have had a major impact in improving the quality of life for an important number of the country's population, who are generally among the lowest income groups. 6. The loan policy adopted for this project certainly contributed to changing the financing culture for water projects, by replacing a centralized national institution as the borrower, and using instead financial intermediation to assign credits and making local entities (municipalities or municipal service companies) directly responsible for cofinancing, project execution and loan repayment. Initially, it was very difficult for the municipalities to prepare financing requests and design sound projects, using proper project formulation criteria such as least-cost solution, or to accept the need to establish and implement adequate tariff structures. While these shortcomings have not been totally resolved, the project did make a positive contribution to inducing a change and bringing about a new culture in the sector. The project was the instrument for implementing the first important sector reform of decentralization, which in turn was the basis for the second important sector reform legislation, namely Law 142. The project provided input for a process of institutional change in the sector, culminating in the preparation of Law 142, the setting up of the CRAS, the SSPD and the Water Supply Directorate within the MDE. Today the sector has a new structure and a new legal framework. Various initiatives are underway to consolidate sector policies, including regulatory aspects and the promotion of private sector participation. The implementation of the new law is at the initial stage and the consolidation of the institutions created by it has just begun. FINDETER and the Bank were both slow in responding to the need to restructure the project to the requirements of Law 142. In 1996, the Bank tried to convince FINDETER to undertake such a restructuring but FINDETER was slow to react and the approaching closing date prevented the implementation of a corresponding restructuring. 7. The objective of building up the financial intermediation capacity of BCH/FFDU to reinforce reform in sector financing policy, to encourage greater operational efficiency and financial viability in the sector's companies, and to stimulate the preparation of more cost-effective investment projects was only partially achieved. This was not done, in fact, directly through FFDU, but rather through the creation of a replacement agency, FINDETER, a step that, as noted above, helped change the culture of the sector. Nevertheless, the new Water Supply Directorate in MDE is still very weak: it does not have sufficient staff and, as with DAPSB and MOPT, it has limited experience within the Ministry nor are its functions and responsibilities  - 4 - clearly defined. It is still too early to qualify it as a "strong technical support and monitoring entity" for the sector. 8. The results of the four ex-post evaluation studies of a sample of 70 subprojects show that there has been relatively little progress in institutional reform of the sector companies. While there was some progress in decentralizing services, in most of the subprojects the goals of institutional strengthening and financial self-sufficiency were not achieved.. The municipalities and the municipal public service companies have neither the required staff, managerial capacity or procedures to operate efficiently, their accounts, in many cases, form part of the general municipal accounts, their tariffs bear no relation to the cost of the services provided nor to the need to repay the loans, and an excessively high proportion of water consumed is not billed. The project had, however, some significant success in institutional development by helping bring private sector participation in some sector companies, Cartagena, Barranquilla and Santa Marta being the most important cases among several others. These are the first cases of implementing the reform introduced by Law 142 and they serve as an example to many other municipalities who are currently trying to follow that route, and will most probably induce similar reforms in many other municipalities and sector companies in the future. 9. The executing agencies of component C (DWSS, DNP and MDE) were unsuccessful, for a variety of reasons, in achieving the intended objectives (i.e., improving the water sector policy, executing sectoral studies and implementing a training program for the sector personnel). At the first stage, the responsibility for executing this component was assigned to DAPSB, which was created for that purpose. However, because it was located within a ministry whose responsibility, tradition, technical capabilities and interest lay in the transport sector, it was not able to achieve its objectives and responsibilities as the executing agency of this component. The DAPSB was replaced by the DNP in October, 1992, which was also no more successful. The MDE took over responsibility for executing this component in March 1994. As a result of problems with incorporating the loan resources into its budget, it was not able to make commitments and disbursements until the second half of 1996. For this reason, by the loan closing date, financing of the sector development studies with those resources had only started; the same was true for the revision of technical standards, the national sanitation inventory and the selection of appropriate technologies for water purification. All these activities are under implementation and will be completed after the loan closing date. Consequently, the proposed objective was not fully achieved. Nevertheless, the contracts for all the studies have been signed and the studies are underway. MDE has mobilized alternative sources to finance them and they will be completed by mid 1998. 10. FINDETER has not estimated the rates of return for each of the subprojects, since the small size and the small amount of investment in most of them would make it relatively costly to conduct such estimates, and since, given that they are water supply and sanitation projects, which are considered a basic social necessity, the investment decision was not based only on economic considerations. In any case, given the fact that a minimum rate of return of 12 per cent was used in the evaluation methodology for each credit transaction and that the works were dimensioned to have a minimum cost, FINDETER estimates that in general the rate of return of 10% set as a goal in the SAR was achieved for each subproject. 11. Total disbursements under the Bank amounted to US$ 144.5 million, representing 96.3 per cent of the loan. The value of the total investment was US$ 418.7 million, a figure which is  - 5 - close to the initial SAR forecast, and which includes the investment of local resources by FINDETER, which exceeded the planned level of US$ 140.1 million. Project execution by component was as follows: * Component A: US$ 141.2 million (96.7% of the planned amount of US$ 146 million). * Component B: US$ 0.75 million (75% of the planned amount of US$ 1 million). * Component C: US$ 2.6 million (87% of the planned amount of US$ 3 million). 3. MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION 12. Implementation of the project was hampered by a number of factors: (a) Institutional changes: The combination of frequent and radical institutional changes within Colombia's water sector during the project implementation period disrupted execution and led to a series of amendments to the loan agreement, creating instability and lack of continuity among the entities and personnel responsible for project execution, and resulted in delays in execution. These changes also resulted in the loss of institutional memory and replacement of staff, and resulted in loss of a great part of the technical and operational capacity in the service providing companies. At present, with the exception of the companies in the major cities, their managerial, technical and operations staff capability to maintain and operate the systems is deficient. During project inception, FFDU was responsible for the sector and for executing the project. This entity was a relatively new executing agency, with a good reputation for promoting and executing high-quality projects. However, it was replaced by the new regional development financial agency FINDETER, as envisaged in the SAR. The implementation of component C was assigned to two other entities, DAPSB and CENAGUA, which were replaced after a short period by two other new agencies, DNP and the MDE, that had no institutional background or experience in the sector. These changes resulted in problems and delays in the implementation of the program. The major institutional changes which occurred were the following: At the time the project was identified, the country's institutional system was based on centralized national agencies that were responsible for planning, financing and execution of infrastructure works, and in many cases for their administration and operation, acting through regional entities reporting to the central agency. In the water sector, CONPES, DNP and MSP set overall policy and prepared sectoral plans, and INSFOPAL and INS were the national entities responsible for implementing them. The systems were administered and operated by municipal public utility companies (EPMs), in 35 major cities accounting for 51 per cent of the national population; Sanitation Works Companies (EMPOS), reporting to INSFOPAL which held 90 per cent of their capital (covering 26 per cent of the population); Water Supply and Sewerage Corporations (ACUAS), autonomous enterprises owned by the municipal or department governments in which INSFOPAL held less than 30 per cent of the capital (covering 4 per cent of the population); and small municipalities, rural communities and communes that ran their own water and sewerage systems (19 per cent of the population). During preparation of the loan, the Decentralization Law (12 of 1986) was enacted. This Law transferred to the municipalities the responsibility for setting up, administering and operating their own water and sewerage systems.  -6 - * Law 77 of 1987 and its regulating decrees abolished INSFOPAL and the Water and Basic Rural Sanitation Division of INS, and created DAPSB under MOPT, an entity with experience in highway construction, which was made responsible for technical assistance and overall planning in the water and sanitation sector. The Government decided that financial resources for the sector should be channeled through BCH's FFDU, and in the SAR it was stated that the executing agency for components A and B of the loan would be FFDU, while component C would be executed by the new DAPSB and component D would be executed by CENAGUA, a new entity to be created for this purpose. * As a result of Law 75 of 1989, the Regional Development Finance Corporation, FINDETER, was created as a second-tier financial internediary responsible for administering investments for regional and municipal infrastructure works. This was part of the decentralization reforn, which the project was designed to assist. As a result of that Law's provisions, FFDU was liquidated, and this led to an amendment of the Loan Agreement to reflect the replacement of FFDU by FINDETER as the executing agency of components A and B, and to reduce the investment program under these components from US$ 430 million to US$ 285 million, while still maintaining the amount of the Bank loan. The transfer of responsibility from FFDU to FINDETER caused a delay of two years in project implementation. In addition, because of internal conflicts within CENAGUA, the agency responsible for implementing component D, it was decided to merge components C and D under one category, and assign the responsibility for its execution to DAPSB. * In October 1992, the Loan Agreement was amended again, to transfer the responsibility for executing component C from DAPSB to DNP, a non-executing entity that was responsible for the overall sector planning. * As a result of a new institutional reforn in the sector introduced in mid 1994 through Law 142, responsibility for the water and sanitation sector was assigned to the Ministry of Economic Development (MDE). In November 1993, as part of the preparation of the new reform, the Loan Agreement was amended once more to replace DNP with MDE with responsibility for implementing component C. As a result of budget allocation problems, the change from DNP to MDE led to a delay of two years in the implementation of component C. * Law 142 of 1994 - the Law of Domestic Public Services - introduced the second fundamental reforms legislation of the water sector, particularly with respect to promoting competition in the provision of services, regulating monopolies and encouraging private sector participation, as well as establishing a new financial policy to clarify the role of water tariffs and subsidies. The Water and Sanitation Regulatory Commission (CRAS) was created as a dependency of the MDE, responsible for promoting competition among the suppliers of these services, for supervising monopolies, establishing tariff-setting formulas and setting service quality standards. The Superintendency of Domestic Public Services (SSPD) was created as the supervisory agency. Although the sector has now a defined structure and a legal framework, the process of transformation of the sector companies has just begun (the last date for transforming the service companies into joint-venture corporations had to be extended by 18 months to December 1997) and there are no guidelines nor instruments to promote and support any serious and systematic approach to privatization in the sector. The project, which was structured to assist the 1987 reform, was not restructured to adjust to Law 142. In 1996, the Bank attempted to induce a restructuring aimed at assisting the privatization of the sector companies, but the response of FINDETER was too slow and the restructuring was not implemented.  -7 - (b) Project formulation and design problems: Originally, it was planned that the Borrower would reach an agreement with FONADE to fund the pre-investment studies needed to prepare the project, but this never happened. The AT-PAS program executed by DNP provided technical assistance to nunicipalities to formulate their projects, but the results were not on the whole satisfactory. Apparently, during the project formulation phase, there was no real participation on the part of the communities, so that in many cases they were not committed to their subprojects. FINDETER was created to operate as a second-tier bank, and its role was to ensure the efficient management of financial resources. Yet, in light of the technical weakness of municipalities in formulating projects, FINDETER, in promoting its "product", came to assume the function of providing technical assistance, but has not done it with the required commitment and attention. The submission of detailed designs to FINDETER by the municipalities was an indispensable precondition for having their credit requests considered and processed, yet it seems to have been treated more as a formality than as a substantive requirement. Most of the smaller municipalities had never been responsible for administering their own public services, they had no experience or capacity to execute projects properly, they had no culture that would recognize the importance of sound pre-investment work, and they were certainly in no position to make all the investments needed to achieve high-quality project design. In general, design work was contracted out to individual consultants, local or regional, many of whom seem to have lacked sufficient experience, and FINDETER, which assumed a technical role to some extent, did not provide sufficiently effective mechanisms for proper supervision and review of the designs. It is apparent that during the execution phase, FINDETER did not provide the careful monitoring that the physical execution of the subprojects required, and has not conducted any subsequent follow-up during the operating phase. There is almost no documentation in the municipalities on the projects that were executed nor on the changes that were made to them, and there are no "as-built" plans. This reflects problems related to the supervision of works and lack of understanding by the municipalities about the importance of having the technical information on the subprojects being constructed . (c) National Cofinancing system: The funds provided by the National Cofinancing System supplied the counterpart funds for executing the works. Since these funds were allocated by the congress, however, the allocation criteria were based on broad political considerations and they tended to introduce distortions into project objectives, by being allocated without any institutional or financial performance conditions, unlike the Bank loan funds. In practice, they became a decisive factor in selecting and formulating the subprojects. The cofinancing resources that were allocated directly by the congress members in accordance with regional policies, as well as the local counterpart funds, which came mainly from the municipal budgets and the pledging of municipal revenues (transfers from the national budget) rather than from any effort or financial responsibility on part of the service companies themselves, tended to distort one of the most important objectives of the loan, which was to encourage the creation and strengthening of self-sufficient municipal service companies. Instead, the availability of cofinancing resources relieved the service companies of their commitments to adjust their tariffs, to carry out Unaccounted For Water (UFW) reduction programs, and to improve their administration and operations so as to be able to repay their loans. (d) Political interference: While there are no concrete cases cited in the ex-post evaluation reports, views gathered during the preparation of this ICR indicate that intervention by regional and local politicians in the decision-making process related to the infrastructure works carried out, as well as intervention in the municipal affairs and in the management of the service companies, did occur. This feature of the institutional environment cannot be overlooked, yet is difficult to eradicate as long as the operation of services does not have sufficient autonomy, ideally through privatization. This interference occurs in many different ways: generally, electoral concerns or private interests are allowed to take precedence over technical, economic and community welfare considerations. Politically elected officials - mayors  -8 - and municipal council members - tend to manage and direct resources allocated from the cofinancing system to specific municipal works that are of personal interest to them. They all intervene, in one way or another, in appointing municipal and service company staff. As a result of this atmosphere, regional politicians play an active role in investment decisions, since they are able to assign cofinancing funds to projects in regions or municipalities of particular interest to them. Moreover, since the time required to prepare and execute many of the subprojects exceeds the lifetime of a single civic administration, the subprojects may frequently be interrupted or changed when a new mayor with different interests and priorities is elected and seeks to redirect municipal funds to other works. In other cases, if the mayors belong to different political groups from those that approved the cofinancing resources in congress, or if the projects that have been selected are not of particular interest to them, they can hold up execution by refusing to release counterpart resources for them. Political intervention also interfered with FINDETER's performance in the early years of its operation, FINDETER's management was guided by technical criteria, and was supported by expert staff transferred from FFDU. Unfortunately, during the last two years of the project this situation changed: key, experienced personnel were withdrawn, and FINDETER was used as a political instrument, probably because of its role in handling large amounts of cofinancing grants. (e) Failure to changes the focus with respect to strengthening the service providing entities: During project prcparation, the main focus of the institutional strengthening programs was on personnel training and building up the administrative and financial capacity of the existing service companies. Involvement of the private sector was not recognized at that time as an institutional development strategy and the project was not designed to promote private sector participation. In recent years it was recognized that the traditional approach to institutional development was not effective and the Bank's overall approach to institutional improvement in the water sector has been changed to focus on promoting private sector participation. In several subprojects the Bank succeeded in inducing the incorporation of private operators into the service companies. Such are the cases of Cartagena and Barranquilla. In its later stages the project, however, was not modified to adjust to Law 142 (which came in effect in mid 1994), i.e, to assist private sector participation in a significant number of companies. 4. PROJECT SUSTAINABILITY 13. Frequent institutional changes within the sector led to the loss of institutional memory, staff and technical and operating capacity. At present, the availability of capable managers, technical and operating staff to run and maintain the water supply and sanitation systems is insufficient. Sector sustainability is therefore uncertain. 14. Despite the successes achieved in executing the project works, frequent personnel changes in the sector companies, resulting from political intervention, particularly at times of change of municipal administrations, and the frequent interference of local politicians in the companies' management decisions, are causing the continuous loss of competent, knowledgeable personnel. This casts doubt on the sustainability of the systems that have been constructed. 15. The sustainability of the project will depend primarily on the attitude and commitment of local leaders, mayors, governors and politicians to cooperate in the future, during a period in which the provision of services has ceased to be the obligation and responsibility of the Government but rather the obligation and right of the community to ensure that these services are provided efficiently, and that the systems are properly operated and maintained. Community participation is a prerequisite for institutionally stable and financially self-sufficient sector companies and is also required for the effort of UFW reduction. Sustainability will ultimately  -9 - depend on more effective and efficient administration, which will be put in place when consumers recognize that they have the right to demand high quality services when they are required to pay adequate tariffs. 16. The following are essential elements for ensuring that the institutional setup is consolidated and that the works executed under the project become sustainable: (a) providing advisory services to the municipal companies about their obligations and responsibilities; (b) providing information for the communities on their rights and duties as consumers; (c) continuous monitoring and control by the new supervisory entities recently created under Law 142 (the CRAS and the SSPD) in regard to compliance with preparation of management and results programs and over adequate performance of the companies; (d) handling effectively technical, human and financial resources; (e) implementing regular tariff adjustments to ensure financial self- sufficiency; and (f) ensuring compliance with programs to reduce UFW. Adoption of strategies for promoting private sector participation in the provision of services is also a key element for the future sustainability of the sector companies. 5. BANK PERFORMANCE 17. The identification, preparation and appraisal of the project by the Bank was based on previous familiarity with the sector in Colombia, in which it had already carried out 13 lending operations with INSFOPAL, EAAB (the water company of Bogota) and the Municipalities of Cali, Cuicuta, Barranquilla and Palmira. During project identification and preparation, the Government initiated a profound institutional reform to decentralize governance, for the purpose of enhancing efficiency and contributing to poverty reduction. A key element of the sector strategy was the provision of infrastructure services, with an investment program of US$ 600 mnillion in the water supply and sanitation sector during the period 1988-1992. As a result of the unsatisfactory performance of the water sector during the previous two decades, the Government has been implementing, with the active participation and advisory services of the Bank, an important program of institutional reform to improve sector management. Through the project, the Bank assisted in financing a portion of the Government's investment program in water supply and sanitation. 18. The staff appraisal report (SAR) clearly identified the sector priorities, defined the strategies and established the specific conditions for carrying out the project and for assisting with restructuring the sector. It also identified the risks and proposed remedies to mitigate them. The size of the loan was appropriately dimensioned. There is no doubt that the loan significantly contributed to changing the financing and execution culture of projects in the sector. 19. The main risks identified in the SAR were the following: * Inadequate levels of counterpart funds caused by Government delays in disbursing contributions to BCU/FFDU, or inability of BCH/FFDU to raise sufficient funds from domestic sources;