Doumt of

The World Bank

FOR OFFCIAL USE ONLY

Repon No. 12039

PROJECT COMPLETION REPORT

COLOMBIA

VILLAGE ELECTRIFICATION PROJECT(LAN 1999-CO)

JUNE 18, 1993

MICROFICHE COPY

Report No.:12039 CO Type: (PCR)Title: VILLAGE ELECTRIFICATION PROJECAuthor: BARBU, ALAINExt.:31710 Room:T 9102 Dept.:OEDD3

Trade, Finance, Industry and Energy OperationsCountry Department IIILatin America aja4 the Caribbean Regional Office

This document has a restricted disrbution and may be ued by rocpieWts only In the perfornnue ofthei official duties. Its contents may not odtrwie be dicosed without World Rank athorizato

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ABLREVIATIONS

CONPES - Consejo Nacional de Politica Econ6micaCORELCA - Corporaci6n El6ctrica de la Costa Atl}nticaCVC - Corporaci6n Aut6noma Regional del Valle del CaucaDNP National Planning DepartmentEEB - Empresa de Energia de BogotAEM - Empresas Publicas de MedellinFEN - Financiera Electrica Nac'onalGTZ - Deutsche Gesselachaft fur Technishe ZusammernarbeitICEL - Ixtituto Colombiano de Energia ElectricaIDB - Inter-American Development BankIERR - Internal Economic Rate of ReturnIRR - Internal Rate of ReturnISA - Interconexi6n Electrica S.A.JNT - Junta Nacional ae TarifasMME - Ministerio de Minas y EnergiaPESENCA - Programa Especial de Energia para la Costa

Atl4nticaPNR - Plan Nacional de Rehabilitaci6nSENA - Servicio de Entrenamiento Nacional

CURRENCY EQUIVALENTS

Currency Unit - Colombian Peso (Col$)Col$620 (date 12/31/91) - US$1

FISCAL YEAR - CALENDAR YEAR

FOR OFFICIAL USE ONLY

THE WORLD BANKWashkng, D.C. 20433

U.SA

Office of Director-GeaeralOperotiou. Evaluation

June 18, 1993

MEMORANDUM TO THE EXECUTIVE DIRECTORS AID TEE PRESIDENT

SUBJECT: Project Completion on ColombiaVilleag Electrification Project (Loan 1999-CO)

Attached is the "Project Completion Report on Colombia - VillageElectrification Project (Loan 1999-CO)" prepared by the Latin America and theCaribbean Regional Office, with Part II contributed by the Borrower.

The project achieved its main objective which was to supply power tothe rural populations of Colombia's underdeveloped northern coastal region.Indeed significant cost savings enabled the project scope to be considerablyexpanded, although implementation lagged much behind the original schedule.

The project was not as successful on the institutional and policyfront: the training component failed and the financial performance of theborrower and its subsidiaries did not improve as expected. The latter resultedprimarily from the Government's inappropriate tariff and financial policies,which affected not only the project entities but the sector as a whole.

In retrospect, it appears that the Bank was not realistic in itsassessment of the Government's commitment to tariff reform. In spite of recentprogress on this front, considerable political obstacles remain and the project'slong-term financial sustainability is considered uncertain at this point.

Overall, the project is rated satisfactory, its institutional impactpartial and its long-term sustainability uncertain. The Project CompletionReport is thorough and informative. No audit is planned.

Attachment

This docusent has a restrfcted dfstribution and may be used by recipfents only in the performance oftheir official duties. Its contents may not otherwis. be disclosed wifthout World Sank authorfzation.

FOR 0MCAL USE ONLY

PROJECT COMPLETION REPORT

COLOMBIAVILLAGE ELECTRIFICATION PROJECT

tLOAN 1999-CO)

TABLE OF CONTENTS

Paite No.

PREFACE

EVALUATION SUMARY ii

I. PROJECT REVIEW FROM BANM'S PERSPECTIVE

1. Project Identity 12. Background 1

- Benk Lending to the Sector 1- Electric Power Sector Organization 1- Development of the Sector 1970-1939 2- Role of the Bank 3- CORELCA'S Installations and Market 3

3. Identification, Preparation, and Appraisal 4- Background 4- Project Issues and Decisions 5- Project Objectives 8- Project Description 8- Project Design and Organization 9- Project Cost Estimate and Financing 10- The Village Electrification Loan Documents 11- Environmental Issues 11

4. Project Implementation 12- Effectiveness 12- Procurement 12- The Village Electrification Component 12- Training Component 13- Power Losses Study 14- Fixed Assets Revaluation Study 15- Timetable and Costs 15- Financing 16

5. Project Results 166. Project Sustainability 177. Bank Performance 178. Borrower Performance 189. Project Relationships 1910. Performance of Consultants 1911. Project Documentation and Data 2012. Conclusions and Lessons to be Learned 20

- Conclusions 20- Lesson to be Learned 20

I This documnt has a resticted distribution and may be used by recipients only in the performaneof their ofllcil duties Its contents may not otherwise be disclosed without World Bank authorization.

Table of Content - Cont.

"age No.

II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE 22

III. STATISTICAL AND OTHER PROJECT INFORMATION 24

1. Related Bank Loans 242. Project Timetable 243. Loan Disbursement 254. Comparison of SAR and Actual Project Costs 265. Internal Economic Rate of Return Computation 276. Use of Bank Resources 28

Mission Data 297. Status of Compliance with Major Covenants 30

PROECT COMPLETION REPORT

COLOMBIAVILLAGE ELECTRIFICATION PROJECT

(LAN 1999-CO)

1. The Prcject Completion Report (PCR) for the Village ElectrificationProject in the North Atlantic region in Colombia is presented in tthis paper.The main component of the project --the village electrification scheme --wascompleted successfully in 1991 with an internal rate of return of 23 percentcompared to 13.3 percent at appraisal, even though it took about 5 years morethan anticipated at appraisal. The training component has not been completedand no decision has been taken so far as to its final outcome.

2. The project was partially financed with World Bank Loan 1999-CO(approved Kay 21, 1981). The borrower is the Corporaci6n Elictrica de laCosta Atlintica (CORELCA), a government-owned electric power utility in chargeof generation and bulk electric transmission of electricity in the NorthAtlantic region. The loan was closed on June 30, 1988, two years late. Exceptfor US$5.94 million which was canceled, the proceeds of the loan were 'ullydisbursed, and the last disbursement was on Narch 31, 1989.

3. The draft of this report was discussed with the borrower and itscomments have been set forth in Part II of the PCR.

4. The Trade, Finance, Industry and Energy Division, Country DepartmentIII of the Latin American and Caribbean Regional Office (LA31E) prepared PartsI and III of the PCR based, among other sources, on the Issues/DecisionsPaper, the Staff Appraisal Report, the Loan and Guarantee Agreements, recordsof the World Bank and of the borrower and interviews with borrower's staff inBarranquilla.

v ii -

ZEOJCTg COMPEION REPOR

COLOMIAVILLAGE ELECTRIFICATION PROJECT

-LOAN 1999-CO)

1. The loan for the Village Electrification Project was the tenth Bankloan to Colombia's power sector since 1970, and the first and only loan so farto CORELCA and the only one for rural electrification in Colombia. It helpedto finance a project consisting of: (a) a village electrification scheme overseven stateq in the North Atlantic region of the country; (b) a trainingcomponent; and (c) a power losses study. Later on were added to the projectscope an assets revaluation study and a power losses control component.

2. The project was estimated at appraisal to cost the equivalent ofUS$68.7 million. World Bank financing for the project amounted to US$36million, the proceeds of which were fully disbursed, except for US$5.94million which was canceled. CORELCA provided financing amounting to US$15.7million, while Government only financed US$11.5 million instead of the US$13.7million it had undertaken to furnish. The two other sources of finances wereCORELCA's subsidiaries (US$0.3 million) and the beneficiaries (US$1.1million). Both these sources contributed far less than agreed originally.Final cost of the project -- US$58.7 million -- was about 15 percent belowproject cost estimated at appraisal.

3. Albeit with long delays, caused mainly by problems with obtaininglegal sanction for contracts to procure goods and services for the projectbecause of cumbersome legal clearances, and delays in receiving the Governmentcontribution to the project, the village electrification scheme wassuccessfully implemented. The project's main objective of supporting theGovernment's efforts to integrate the country's poorest and most backwardregion, the North Atlantic regional rural population, into national life, wasfully achieved. In fact, due to significant savings in the procurement ofmaterials and equipment, CORELCA was able to expand considerably the scope ofthis component. The expanded project reached 68,700 rural consumers insteadof the 33,000 foreseen at appraisal. Moreover, using the transmission andsubtransmission infrastructure built in the project, CORELCA was able toextend electric service to another 53,000 consumers in 412 villages. Fundingfor these additions came from the National Rehabilitation Plan (PMR). Theevident success of the village electrification component of the project owesmuch to the flexible approach taken by the Bank staff vis-a-vis the manydifficulties encountered by CORELCA in implementing the project, particularlyin the contracting process for procurement of goods and services and in thevery complex problem of dealing with the electrificadoras. All in all, theproject successfully achieved and exceeded the physical targets established atappraisal. The recomputed rate of return of the village electrificationscheme is 23 percent, compared to 13.3 percent calculated at appraisal.

^ iii -

4. The training component failed, after encountering various obstacles,and presently, no action is underway to solve the situation and complete thiscomponent.

5. The power lose study has been the basis for a serious drive tocontrol power losses, which is achieving some degree of success. Adequatelystaffed and equipped power loss control units have been established in eachelectrificadora and in CORELCA. ID addition, the Goverment has authorizedthe application of strong measures to control power theft.

6. Although CORELCA achieved in 1991 an 11 percent rate of return onrevalued net fixed assets, the electrificadoras had a consolidated negativenet income from operations in 1990 and only slightly positive in 1991.Besides their poor operating resultst the electrificadoras are affected byvery large arrears from consumers that have reached the equivalent of US$86million at end of 1991, of which governmental entities owed about half. Theelectrificadoras' problem with arrears has been transferred to CORELCA whichhas accounts receivable for the equivalent of US$161 million at end of 1991.Currently, the Government has decided to take strong measures to try tocorrect this situation. Whether these measures will be successful will dependon the political will to enforce them.

7. Lessons to be Learned. The following lessons can be derived from theimplementation of the project:

(a) Although there was no previous Bank experience with ruralelectrification in Colombia, the implementation schedulefor projects involving rural electrification should bebased on the Bank's general experience and should adhere toavailable implementation profiles, unless it can be shownthat the project can be completed in a shorter time span.

(b) The different steps needed to obtain legal sanction forcontracts to proture goods and services for the projectshould be clearly determined during project preparation, inorder to avoid ?ster problems during projectimplementation. If necessary, specific actions should bediscussed during negotiations to accelerate the procurementprocess.

(c) During preparation of projects of the nature of the VillageElectrification Project, a detailed evaluation should bemade of the procedures for the collection of contributionsof beneficiaries, as well as of their legal implications.

(d) The Bank should make use of the existing institutionaltraining infrastructure instead of having borrowers take onresponsibilities that lie outside their key ones.

(e) With hindsight, the objectives set In the SAR concerninginstitutional reform of the electrificadoras andimprovement of their financial position proved optimistic,partly because of the politicized onvironment of the Regionbut also in large part because the Central Government didnot fulfill its agreements under the Loan to: (a)

- iv -

authorize tariff increases as scheduled; (b) makeprogramed budgetary contributions to CORELCA's investmentprograms and (c) carry out a program to settle arrears tothe electrificadoras for electricity sales. These risksvere not anticipated in the President's or Staff AppraisalReports, and such assessmen's should be made and reflectedin those reports.

(f) The project clearly demonstrated the value of having theProject Unit set up and adequately staffed early-in thiscase it was functioning by appraisal. This contributed toefficient implementation despite many problems that emergedalong the way; and

(g) Supervision staff should work closely with borrowers,especially new or relatively week ones, to assist them toanticipate and deal with lmplementation problems. In thecase under review, this approach helped in shaping theproject to changing circumstances.

PROJEC CMPLETON REPOR

COLOMIAVILLAG ELECTRIFICATION PROJECT

PART L; PROJECT REVIEW FROM BAMK'S PERSPECTIVE

1. Proje¢t Identity

Project Name I Village ElectrificationLoan Number s 1999-CORVP Unit s Latin America and the Caribbean

Department; Trade, Finance,Industry and Energy Division

Country s ColombiaSector s Energy, Electric PowerLoan Amount I US$36 millionAmount Disbursed s US$30.06 millionAmount Canceled s US$5.94 millionYear of Approval s PY81Borrower I CORELCA

2. Backgrand

2.01 Bank Lending to the Sector. The World Bank has supported thedevelopment of the power sector in Colombia since 1970 with 15 loans for overUS$1.9 billion . The Bank's contribution represented about 40 percent ofthe long-term foreign borrowing of the sector of some US$5 billion. The tenthBank loan to the sector since 1970, 1999-CO (May 1981; US$36 million) to theCorporaci6n El6ctrica de la Costa Atlintica (CORELCA), helped to finance a

Village Electrification Project which is the subject of this ProjectCompletion Report.

2.02 Electric Power Sector Ortanization. During the 'projectimplementation, regulation of the electric power sector has been theresponsibility of the Ministry of Mines and Energy (M0E), which is chargedwith formulating national policy for power generation, transmission anddistribution. Regarding investment priorities, it shares responsibilitieswith the National Planning Department (DNP) and Interconexion Electrica, S.A.(ISA), a generating and transmission utility. ISA owns and operates thenational interconnection system. Its shareholders are the main

/j The Inter-American Development Bank (IDB), the other multilateral sourceof foreign finance for the sector, contributed another US$1.9 billion in 22loans.

2-

government-owned electric power utilitiese1 and the two largest municipalutilities 11. ISA is supposed to define the generation and bulk transmissionexpansion program; after approval by DNP, this would bec.me the Ratioual PowerExpansion Program. But the Individual interests of ISA's shareholders wereoften at odds with those of ISA itself, and prevented ISA from achieving itsoriginally envisaged aims. ISA's shareholders tended to introduce theirpreferences at an unduly early stage in ISA's planning, at the expense ofnationally oriented considerations. This impeded a proper assessment of thecost to the economy of the shareholders' preferences and a transparent choiceof the most advantageous solutions. These interferences, moreover, preventedISA charging for its supply bulk tariffs reflecting economic costs. Further,ISA's operational rules have been deformed in such a way as to provide for thedispatch of energy more on the basis of financial than economic criteria.Unfortunately, these negative developments vere not prevented by the "sE,which was often staffed mainly with personnel insufficiently versed in powersector matters. More recently, in 1989, an Energy Board was set up, toformulate policies, to regulate the use of energy resources, and to approveinvestment plans for the various eubsectors. A committee reporting to the MNEis supposed to monitor all the power sector utilities. The Energy Board ismade up of the Minister of Mines and Energy, the Director of the DNP andrepresentatives of energy agencies. Whatever is the outcome of the EnergyBoard's activities, the power sector sorely needs an organization tocoordinate the regulation functions exercised by the ME,, the DNP and to someextent by ISA. Faced with the extremely serious financial and managerialcrisis of the power sector, the Government has lately introduced to Congressan Electricity Law to restructure the sector and to allow for privateparticipation in setting up generation, transumission and distributionutilities. Whether this Electricity Law would be approved by Congress withoutmajor modifications appears rather doubtful given the currenc politicalclimate in Colombia and the pressure of regional and labor unicn interests.

2.03 Develonment of the Sector 1970 - 1989. The past two decades have- been a period of rapid growth in installed power capacity and in service

coverage. Generating capacity just about quadrupled, from 2,200 MW in 1971 to8,400 MW in 1989. Sales of electricity grew at a rate of 7.7 percent per yearduring that same period, from 6,700 GWh to 24,600 GWh, while electric servicecoverage increased from 1.4 million to 4.5 million subscribers. Thepopulation with access to electricity went up by some 15 percentage points toover 60 percent, and In rural areas from 15 to 45 percent. However, the powersector is burdened by many shortcomings which remain unresolved, particularlyits unwieldy and cumbersome institutional structure, its poor financialperformance, inadequate and distorted electricity tariffs, and poormanagement. A net result of the large power sector investment program andpoor Internal resource generation has been to make the sector one of the maincontributors to increasing public sector fiscal deficits, since it had to turnto the Government to cover substantial cash deficits. Concurrently, largeexternal borrowing by the power sector increased substantially the sector's

X/ Instituto Colombiano de Energia Electrica (ICEL), Corporacion AutonomaRegional del Valle del Cauca (CVC), and CORELCA.

I/ Empresas Publicas de Medellin (RPM) and Empresa de Energia de Bogota(EB).

- 3 -

foreign debt not only in absolute terms but ̂ 1so as a share of the Country'stotal public external debt, to about one third of outstanding debt. Interestand principal payments on the power sector's foreign debt reached such amagnitu.'i that they could not be met by internal cash generation. Theresulting financial crisis forced the Government into stopgap measures toassist the power sector, without actually solving the basic problems affectingthe sector.

2.04. Role of the Bank. In broad terms the role of the Bank in supportingColombia's power sector went through two phases during the past two decades.In the 1970s, the emphasis was on interconnection and on ISA's role, for whichthe Bank envisaged a virtual monopoly of building and operating all majorcapacity additions to the interconnected system. In the 1980s, the Bank'semphasis shifted to distribution and village electrification and to issuesassociated with individual utilities, and with sector issues being dealt within a somewhat indirect manner. Only lately, towards the end of the 1980s, thecritical condition of the power sector set the stage for a Power SectorAdjustment Loan (2889-CO; 12187) and a new phase in the Bank's role, focusingon broad sectoral issues. This loan had limited success, and the finaltranche was canceled by mutual agreement. Overall, the Bank was unrealisticin not acknowledging that the Bank's objectives and those of the major powerutilities did not necessarily match, particularly concerning ISA's role. TheBank's setback owes much to its difficulty in dealing with Colombia's acuteregionalism, rather than adjust its role to this strong fact, the Bank choseto ignore the large weight it actually plays in the Government's decisionprocess. A more positive approach to this political fact would have beer.certainly helpful in orienting the Bank's approach in addressing, with abetter chance of success, the difficult institutional and financial issuesfacing the Colombian power sector.

2.05 CORELCA's Installations and Market. CORELCA's market comprises theNorth Atlantic region of Colombia. The region covers seven departments andcontains about 12 percent of the country's population. About 70 percent ofthe estimated 6 million inhabitants live in cities and large towns. The ruralpopulation in this region tends to live in small towns and villages,travelling back and forth to the land they work. Ihe ports of Barranquilla,Cartagena and Santa Marta are the nuclei of the region's industrial andcommercial activity and, consequently, about 25 percent of the populationresides here.

2.06 CORELCA is a decentralized corporation under the jurisdiction of theMinistry of Mines and. Energy, which began operations in 1972. At that time,the North Atlantic region was plagued by chronic shortages and unreliablesupply of power provided bz local utilities corresponding to the sevendepartments of the region l. Responsibility for regional generation andtransmission expansion was shifted to CORELCA and, in 1975, CORELCA acquiredmajority ownership of the local utilities.

2.07 Energy sales in the CORELCA system increased from 2,100 GWh in 1979to 4,200 GWh in 1989 at an average annual growth rate of about 7.2 percent,

A/ Electrificadoras of Atlantico, Bolivar, Cesar, Cordoba, Guajira, Magdalenaand Sucre.

-4-

considerably lower than the 14.2 percent forecast at appraisal. At appraisal,CORELCA's 220 kV trunk transmission system covered practically the entireBorth Atlantic region while the total effective capacity (all thermal) vas 830MW, of which 600 MW belonged directly to CORELCA. Except for the 150 MWThermo-Guajira power station which uses coal, practically all the othergenerating facilities presently burn natural gas. By 1983, CORELCA wasintegrated into the national interconnected power grid by means of a 500 kVtransmission line. This line enables substitution of fuel-based generation byhydro-based energy fsom the Central System, as well as providing support tomeet the demand in the North Atlantic Region beyond the effective capacity ofCORELCA's system.

3. Identification. Prenaratlon and Ap2ralsal

3.01 Background. The justification for rural electrification was one ofthe main subjects examined by a rural energy planning mission which visitedColombia in mid-1977 1t. The Bank mission confirmed the desirability ofextending electric power to villages that could be reached from existing gridsystems. The North Atlantic region was identified by the Bank early in 1978as one of the areas where a village electrification program could bedevelopedil. This was followed by a formal request from CORELCA to the Bankto consider a village electrification project in that region V,.

3.02 CORELCA had prepared a prefeasibility study and consultants' terms ofreference for feasibility and design studies, which were submitted to the Bankin March 1978 and May 1979, respectively. Both documonts were incomplete, andthe assumptions underlying the areas to be served, the demand forecast, thegrid design and the project costs needed to be examined further. A Bankpreparation mission visited CORELCA's headquarters in Barranquilla in July1979 to help define the project prior to the preappraisal mission. Thismission, among other matters, clarified the consultants' terms of referencefor carrying out the feasibility study. In addition, three Bank missionsvisited Barranquilla in November 1979, Pebruary 1980 and June 1980, to reviewprogress on the preparation of the project. CORELCA had signed a contractwith a local consulting firm in early Rovember 1979, although preliminary workhad been initiated by the consultants at the beginning of October 1979. Thepreliminary findings of the consultants showed that the previous villageelectrification program prepared by CORELCA was only a very rough estimate.In June 1980, the consultants prepared an intermediate report entitled"Alcance y Presupuesto" (Scope and Budget) which showed preliminary new costestimates for a first stage of the Village Electrification Project. Theproject as proposed in this document consisted of several sub-projects whichwere included in the new cost estimate. The sub-projects were initiallyselected based on cost per beneficiary; final selection to be based on an

I/ The proposal for this rural energy planing exercise was put forward by theBank in a letter to the DNP dated April 22t77. This letter was followed by aformal note dated June 8/77 to DNP requesting preparatory actions for theproposed mission.

6/ Letter from Bank Resident Mission, March 1/78.

71 Letter from CORELCA to Bank, March 2/78.

-5-

Internal rate of return (IR) ranking. Although the results of thefeasibility study were known at the time the Bank decided to appraise theproject, it was considered necessary to wait for the final conclusions of thefeasibility study to establish the definite scope of the project and theamount of the proposed Bank loan.

3.03 Project Igsues and Decisions. In November 1980 the Bank decided toappraise the project. The appraisal mission, which took place betweenNovember 25 and December 15, 1980, dealt with and resolved all outstandingIssues unmely V':

(a) Project definition

(b) Project financing

(c) CORELCA'S relationship with its subsidiaries, especially withregard to the arrangement under which the facilities to be builtunder the proposed project would be transferred to theelectrificadorao

(d) Institutional arran8ement for project execution

(e) General financial situation of CORELCA

(f) General financial situation of the electrificadoras.

3.04 The resolution of these project issues was presented in theIssues/Decision Paper (January 22, 1981) in the following manner:

(a) Project Definition: It was decided that the project would:(i) provide electricity to some 120 low-income rural villageslacking these services; (ii) rehabilitate distribution systemswith serious deterioration in six villages; (iii) improveservice to 25 villages which depended upon unreliable andhigh-cost diesel-electric generation by interconnecting themwith the CORELCA system; (iv) establish a training program tostrengthen the technical capability of CORELCA and theelectrificadoras; and (v) carry out a study to help minimizeheavy power losses in the electrificadoras' distributionsystemse

(b) Proiect Financinas The estimated project cost of US$68.7million (52 percent in foreign cost) was to be financed by aproposed Bank loan (US$38 million, which would include up toUS$2 million in local currency to finance consultant services)and contributions from: the Goverrment (US$11.7 million),CORELCA (US$3.5 million), the electrificadoras (US$3.5 million)and the beneficiaries (US$12 million). The beneficiaries'contribution would be made up of a 30 percent down payment anddeferred payment for the balance. The electrificadoras wouldassume the bridge financing needed to cover these deferred

l/ Project Brief issued August 12180.

-6-

payments, amounting to US$8.4 million. The Bank's position withrespect to the cost-sharing in power projects in Colombia, hadbeen over the years to cover only up to the amount of foreignexchange cost; however, by the time the project was appraised,considerably less Bank financing was thought advisable sincecofinancing had become Increasingly available. In the case ofwell-established power utilities, the approach had been to goeven further and require them to finance a share of the foreignexchange costs from their own resources. CORELCA, on the otherhand, was a relatively new utility serving a rather low incomemarket, had limited funds, and the type of project underconsideration was not suitable for suppliers' credits. All inall, it was an appropriate case for full Bank funding of thefull foreign exchange cost of the project. Funding with loanfunds of local consultants services was considered advisable toensure selection of qualified and experienced firms for thesupervision of the project. It was thought that quality ofsupervision was a critical determinant of project success,especially in view of the numerous subprojects spread over aseven-department area with varying degrees of participation bythe electrificadoras in the works. In order to ensure thatbridge financing from the electrificadoras to cover the deferredcontributions of the beneficiaries would be available, it wasagreed that prior to negotiations, the Bank would receiveconfirmation of this bridge financing, together with CORELCA'sproposal for determining the amount of beneficiaries'contributions based on income level. Tnis proposal was to takedue consideration of the Government's social welfare policy withrespect to low income groups.

(c) Arrangements for Transfer of Project Facilities to thelectrificadorass It was agreed that subsidiary agreementswould be finalized prior to loan effectiveness to effect thetransfer of 50 percent of project sub-transmission anddistribution facilities upon completion to the electrificadorastas equity contributions from CORELCA, and 50 percent aslong-term loans from CORELCA (on Bank terms). Thesearrangements were expected to enhance CORELCA's planning,coordinating and administrative role with the electrificadoras.

(d) Institutional Arranasments for Prolect Execution: It wasessential to have a unified project management set up since theproject was dispersed over a wide area. This was recognizedearly on during project preparation, and at appraisal, it wasagreed that prior to Board presentation, CORELCA would obtainfinal Government approval (agreement in principle had alreadybeen secured) to establish a Project Implementation Unit toenable administration of the project. In addition, duringnegotiations, agreement would be reached on theelectrificadoras' responsibilities for the carrying out of theproject, which would be based upon capability. The details ofthese responsibilities were to be formalized in the subsidiaryagreements.

-7-

X() Finanges of CORLCA: It was recognized at appraisal that themagnitude of the difficulties to be overcome by CORELCA in thefinancial area were such that it would take some years beforeCORELCA could attain financial viability. Those difficultiesincluded: tariffs substantially below the relatively high costof thermal generation; and constraints on the electrificadoras'ability to pay for power purchases because of huge electricitylosse8s large arrears from major consumers -- principally localgovernment agencies -- and a fairly poor power market.Nevertheless, significant progress Was thought feasible underthe project. A program of financial strengthening was mappedout aiming at CORELCA's being able to cover its operatingexpenses, including depreciation and debt service, and togenerate a reasonable proportion of its investment requirements.Essentially, the following measures were decided upon:

(i) Tariffs and Rate of Return: In order to avoid furtherworsening of CORELCA's finances given its investmentrequirements, it was agreed with Government and CORELCAthat tariff increases of 45 percent per year were neededduring 1981-83 (in effect a 69 percent cumulative in realterms). These increases represented 13 percent per annumover the 2.5 percent per month already authorized.CORELCA and the electrificadoras undertook to obtain,prior to negotiations, the Government's formal approval toenact such increases and, prior to loan effectiveness, toput into effect the 1981 tariff adjustment. It wasexpected that with these tariff increases CORELCA couldachieve in 1983 and thereafter, a rate of return on fullyrevalued assets of no less than 9 percent.

Cii) Fuel Plices: As agreed under the earlier 500 kVInterconnection Project, in order to make marginally moreattractive to CORELCA the purchase of bydro-based electricpower through the 500 kV line then under construction, theGovernmont had been increasing fuel prices paid by CORELCAconsiderably (by 51 percent in 1979 and a further 26percent in 1980). However, at appraisal, severe rationingin the central system was under way due to underinvestmentduring the mid-1970s and delays in plant construction,combined with adverse hydrological conditions. It wasforeseen that power rationing would have to be continued,and perhaps intensified, for several years. No surplus ofhydro-based energy was therefore available for sale toCORELCA and it was necessary to re-consider the matter offuel pricing. Consequently, it was agreed to discuss thisin detail with Government during negotiations.

(iii) Receivables from Energv Sales: Since large receivablesfrom energy sales, particularly from governmentdependencies, had constrained CORELCA's (and theelectrificadoras') finances, it was decided to request theGovernment during negotiations to confirm formally itsstated determination to take all possible actions to

ensure timely payment of arrears. As the main delinquentaccounts were those of the water supply utilitios, withwhich the Bank was involved through lending, it wasthought appropriate for the Bank to address this matterdirectly with these water utilities prior to negotiations.

(f) Finances of the Kiectrificadoras: Besides endeavoring to reduceoverdue accounts from energy sales it was considered essentialto undertake the following actions concerning theelectrificadoras' finances:

(i) Tariffs: Prior to negotiations, the electrificadoraswould have to increase their tariffs to the levels alreadyapproved by Government.

(ii) Procedure for Tariff Increases: During negotiations, theGovernments would have to agree that, in future, theelectrificadoras would be authorized formally to increaseautomatically their tariffs in conjunction with CORELC&'sincreases.

(iii) Financial Targets: Prior to negotiations, CORELCA wouldpresent to the Bank a feasible program of financialstrengthening of the electrificadoras, including rate ofreturn targets, which were to be incorporated Into thesubsidiary agreements. During negotiations this programwas to be agreed in detail.

(iv) Distribution Lossess The electrificadoras were toundertake in the subsidiary agreements to reduce powerlosses. Targets for this losses reductiou were to be setin the subsidiary agreements, and would be adjusted asnecessary in accordance with the losses study which was tobe provided for under the project.

3.04 Prolect Obiectives. The project, which represents the only loan sofar to CORELCA, was aimed at supporting the Government's effort to integratethe North Atlantic rural population into the modern economy by provision ofbasic infrastructure. The main objective, therefore, was to assist CORELCAand the electrificadoras in improving and extending power service to ruralareas in that region, in order to promote economic activity, employmentopportunities, and welfare. A second objective of the project was to effect ag;adual improvement of the financial capability of the North Atlantic paversystem, which would enable the extension of reliable electric service to ahigher proportion of the area's population at reasonable cost. Concomitantwith these objectives, the project was geared to strengthen firtber CORELCA'soperations and those of its subsidiary electrificadoras by the provision oftechnical training for staff, as well as the execution of a power lossesstudy. Both studies were needed to improve CORELCA's and theelectrificadoras' technical and financial performance in support of CORELCA'institution-building objectives.

3.05 Project Descrintion. CORELCA had identified considerable scope forexpanding power service In rural areas in the North Atlantic region, since, as

-9-

pointed out in para 2.05, rural inhabitants in this part of Colombia tend tolive in villages instead of being dispersed in the countryside. This ledCORELCA to devise a village electrification program to be developed before theend of the century, and which was to ultimately bring electricity toagroindustrial and rural commercial enterprises, and to some 215,000 villagehouseholds (representing about 1.4 million people). The cost of the programwas estimated at about US$150 million (at June 1980 prices). The project wasdesigned as the first tranche of this program. In order to carry out theproject it was necessary to construct:

(a) transmission facilities mainly for subprojects in Magdalena,Cesar and Bolivar South, comprising 220 km of 110 and 66 kVtransmission lines; and transformer capacities of: 30 MVA for220/110 kV; 15 MVA for 220134.5 kV; 41 MVA for 10/34.5 kV; 22MVA for 66/34.5/13.8 kY; and 22 MVA for 110/13.8 kV;

(b) subtransmission facilities, consisting of about 1,150 km of 34.5kV and 13.8 kV lines, and 48 MVA in transformer capacity for34.5/13.8 kV; and

(c) distribution facilities comprising about 470 km of distributionlines and about 35 NVA of distribution transformer capacity.These works were expected to extend and improve power service toabout 33,000 village households initially and to enable 14,000future connections over a 15-year period.

The training component was Seared to handle about 1,500 participants and 1,500man-months per year. This involved the equipping of a training center whichwas to be constructed by Electrificadora of Atlantico. The training programwas to cover courses not available in other training centers and to focusparticularly on the areas of critical importance to the electrificadora.Concerning the loss reduction component, it comprised a study to identifydistribution losses (techbical losses, billing deficiencies and theft), andthe formulation of a loss-reduction program.

3.06 Project Desian and Oraanization. At the time the SAR was prepared,the final design and bidding documents for the transmission, subtransmissionand distribution components were under preparation and well advanced. In theSAR, it was stated that about 40 percent of the design work was to beavailable at the time of negotiations. This would have permitted putting outto bid at least 60 percent of the distribution, transmission andsubtransmission equipment, and would have allowed the project to be carriedout in accordance with the agreed implementation timetable. The latter calledfor completion of the village electrification component in mid-1985 i/. Thedesign work was entrusted by CORRLCA to the same consultants that bad preparedthe feasibility study. Theso consultants started their task by presenting areport to CORELCA defining the technical design parameters of thetransmission, subtransmission and distribution components of the project andthe unit-costs estimated. The design parameters were based on nationalguidelines prepared by ICEL for rural areas, modified to take account of

i/ Nowever, In the President's Report and Recommendation completion of theproject is foreseen in December 31, 1985.

- 10 -

conditions in the Atlantic Coast region, particularly salinity, and theelectrificadoras' experience, including lowering the quality of service inlow-consumption areas.

3.07 The training program had been prepared by consultants forElectrificadora of Atlantico. This included the configuration of a trainingcenter and the design of the training program and courses.

3.08 The SAR indicated that overall supervision, administration andcoordination of the project was to be entrusted to a special Project Unitunder the responsibility of CORELCA. At the time the SAR was prepared,CORELCA's Board had already approved the establishment of this unit, and infact the unit had been operating since mid-1980 using personnel transferredfrom other departments of CORELCA. In the SAR it is stated that the chief ofthe unit was an engineer with adequate experience in distribution projects,who had been previously in charge of technical assistance to theelectrificadoras in the execution of rehabilitation programs of distributiongrids and small rural distribution projects. The SAR also indicated that theunit was adequately staffed to perform its functions of supervising the workof the consultants to be employed to carry out supervision of the works.These consultants were to be selected under terms satisfactory to the Bank nolater than November 30, 1981.

3.09 Proiect Cost Estimate and Financing. The project cost estimate in theSAR coincided with that shown in the Issues/Decision Paper and amounted to theequivalent of US$68.7 million with a foreign exchange component of US$36million (521). This cost estimate was based on June 1980 prices readjusted toDecember 1980 levels. It included 15 percent physical contingencies forvillage electrification and 10 percent for training, as well as priceescalation provisions amounting to 23 percent over base-line costs plusphysical contingencies. The $AR indicated that transmission andsubtransmission costs were obtained from recent contracts and bids for similarprojects under construction by CORELCA and other power utilities, whiledistribution costs were based on electrificadoras' and ICEL's experience.Regarding the training costs, the SAR stated that these were those prepared inthe study made by a consulting firm and reviewed by a Bank specialist.Finally, the SAR indicated that the provision for physical contingencies andprice escalation were considered adequate given the advanced status of projectdesigns.

3.10 Concerning project financing, the SAR dissented from theIssues/Decision Paper by lowering Bank financing from US$38 million to US$36million, which, nevertheless, covered the full foreign cost estimate of theproject. In the SAR the financing plan was also somewhat modified from thatof the Issues/Decision Paper and was presented as follows:

- 11 -

USS million Percent

Bank 36.0 52.3Government 13.7 20.0CORELCA 3.5 S.1'Electrificadoras 3.5 5.1Beneficiaries 12.0 17.5

6.7 100.0,

3.11 The Village Electrification Loan Documents. In April 1981,representatives of the Bank, the Government, and CORELCA completednegotiations for the Village Electrification Project. On May 21, 1981, theExecutive Directors approved Loan 1999-CO (US$36 million) to help finance theproject. The Village Electrification Loan Agreement and the GuaranteeAgreement were signed about a year later on May 14, 1982. The agreementsreached during negotiations, which were incorporated in the Loan Agreement andwhich are shown in Part III of this report, were essentially those spelled outin the SAR. Special conditions of effectiveness were that satisfactorysubsidiary agreements with the electrificadoras would be finalized and thatarrangements would be made for CORELCA's 1981-82 financing requirements.Concerning this last condition, it was stated in the President's Report andRecommendations that, although CORELCA's finances were expected to show agradually improving situation, the Government was still required to supportCORELCA during the project execution period (1980-85), because it was foreseenthat CORELCA would be able to generate only a modest portion of its investmentrequirements. The Government had, therefore, undertaken in the GuaranteeAgreement to ensure that the required funds would be made available to CORELCAin a timely manner. Lastly, to ensure adherence to CORELCA's financing planas well as to the national least-cost power expansion program9 CORELCA agreednot to undertake, until project completion, without prior concurrence of theBank, investments In any one year not related to its power operations, northose that would exceed in aggregate one percent of the value of its net fixedassets in operation other than for: (a) the project; (b) generation expansionincluded in the national power expansion program, provided that adequatefinancing was available; and (c) the balance of items included in its agreed1981-85 program of investments.

3.12 Environmental Issues. No environmental problems were anticipated inthe SAR. Apparently CORELCA had carried out previous transmission projectswith due regard to environmental aspects. The routing of transmission lineshad been selected across rural areas with low population density, and clearingof rights-of-way was to be kept to a minimum; people affected were to becompensated for damage to property and crops. Regarding the subtranesmissionlines, their routes, according to the SAR, were generally chosen to use theexisting rights-of-ways of roads. It also indicated that in designing thedistribution systems, due attention had been taken to reduce visual pollutionwith special attention to safety. Obtaining rights-of-way for transmissionlines Was not considered troublesome since CORELCA had the right of eminentdomain for its works. The SAU stated, moreover, that CORELCA's establishmentdecree gave it the right to use rights-of-ways along roads.

- 12 -

4. Prolect ImSlementation.

4,01 Effectiveness. As indicated in para 3.11, loan signing was delayedone year. This was due to the need to obtain congressional approval forraising the foreign borrowing level available to Government. Due to delaya inexecuting the subsidiary loan agreements between CORELCA and theelectrificadoras and in fulfilling the other effectiveness conditions, theVillage Electrification Loan did not became effective until February 15, 1983,about 9 months after loan signing. Delayed effectiveness did not adverselyaffected commencement of the procurement process for the project because thetender documents for bulk procurement of line materials were preparedopportunely.

4.02 Procurement. Although the procurement process went on generally withfew major problems, nevertheless, obtaining final approval for supplycontracts was often a lengthy and cumbersome task. The main problem arosebecause CORELCA organized tender documents for large contract packages inorder to obtain price advantages, which were actually achieved. However,Colombian legislation governing contracts required that any contract in excessof Col$150 million had to be approved by the Colombian Cabinet through thegood offices of the MKE. The approval process was even more cumbersome forcontracts in excess of Col$250 million, which had to be cleared by the highestadministrative tribunal in Colombia, "the Consejo de Estadto". Unfortunatelythis tribunal is usually overloaded with cases and final decisions oncontracts for the project sometime took many months; in one extreme case ittook 15 months for the tribunal to issue a decision.

4.03 There were only two instances where difficulties arose betweenCORELCA and the Bank concerning the award of supply contracts. In one case(for materials), CORELCA decided to award the contract to the second lowestbidder, a decision to which the Bank objected. Nevertheless, CORELCAproceeded with execution of a contract with the selected bidder. In the othercase (for training modules), CORELCA decided to rebid the supply contract,because one of the tenders had been submitted by the same consulting firm thathad prepared the tender specifications. This raised strong objections fromother tenderers claiming that the tender specifications were biased in favorof that consulting firm. As no decision could be reached finally on award ofthe contract, the Bank suggested direct procurement from the consulting firmthat had assisted CORELCA in the training program and claimed that they couldonly perform this assistance using their own training modules. However,CORELCA9s Board did not accepted the Bank's suggestion and the procurement ofthese items was postponed indefinitely. All this led the Bank to cancel anamount of US$1.8 million from the loan. The procurement problems, among othersetbacks, seriously affected the implementation of the training component ofthe project and led ultimately to its complete failure, as will be discussedfurther along in para 4.05.

4.04 The Villa&t Electrification Com2onent. Albeit with long delayscaused mainly by the procurement problems signalled in the precedingparagraph, and delays in the supply of funds from Government and theelectrificadoras (see para 4.10), the village electrification component ws8successfully implemented except for one transmission line, the 110 kV 50 kmloug Valledupar - Codazzi line. Cosutruction of this line, at an estimatedcost of Col. 606 million equivalent to US$0.87 million, is expected to begin

- 13 -

soon. Due to significant savings in the procurement of materials andequipment, it was possible to expand considerably the scope of this componentof the project X8. The magnitude of the expanded project compared to itsoriginal extent can be judged by the following comparative figures:

Original Expanded UnderProiect Prolect Construjctio

Transmission Lines, length 230 km 230 km 50 kmSubtranamission Lines, length 1,150 km 1,312 kmSubstation's capacity 186 MVA 174 MVADistribution Systems, length 470 km 1,238 kmConsumers' connection 33,000 68,700

What is more striking is that the project infrastructure (transmission,subtransmission and substations) has allowed CORELCA to extend electricservice to a total of 563 villages with 121,000 consumers, that is, 412villages and 52,000 more users than were included in the expanded villageelectrification component. Funding for these additions, which made good useof the infrastructure facilities built by the project, was obtained from thePNR (National Rehabilitation Plan) and from municipalities. Currently, onlyone municipal capital and a few remote hamlets are still not connected toCORELCA's system. All in all, the project successfully achieved and exceededthe physical targets established at appraisal.

4.05 Traiuina Component. As indicated in para 4.03, implementation of thetraining component was an outright failure. A number of setbacks finally ledto the abandonment of this component of the project. The problems startedwith the construction of the buildings for the training center at SantaVeronica. Because of poor performance by the construction contractor, itscontract was rescinded. This prompted CORELCA to re-examine the sitting ofthe center, since the selected location was rather remote from habitations andrequired the construction of accommodations for trainees. In addition, it wasfouad that there were problems with the foundation, due to swelling of soilsin the area. CORELCA decided then to refurbish training facilities owned bythe National Industrial Training Organization (SENA), located at the town ofSabanalarga near Barranquilla's airport. These facilities had been set up formechanical training and at the time, had been shut-down. CORELCA obtainedfrom SENA a 25-year free hold and proceeded with the refurbishment andenlargement of the existing buildings. Subsequently, the procurement processfor the center's equipment was undertaken and orders placed for laboratoryequipment. Unfortunately, as explained in para 4.03, procurement of thetraining modules, which included equipment for the thermal power plant9soperation simulation as well as for substations' operation, was made moot byCORELCA' Board action. CORELCA then tried to interest SENA in taking over andcompleting the training center. This approach was unsuccessful; SEAindicated that its training philosophy had changed, in the sense that it wasgoing away from large training facilities in favor of smaller and more compact

1l/ Schedule 2 of the Loan Agreement was amended on November 11, 1986 by: (a)substituting "1,400 km" for "1,150 km" in Part B(1); and (b) substituting"1,300 km" for "470 km" part B(2).

-14 -

training centers closer to users. The latest approach by CORELCA was done toPESENCA (Special Energy Program for the Atlantic Coast), a cooperative effortbetween GTZ (Deutsche Gesselschaft fur Technishe Zusammernarbeit, Gmbh) andGovernment to develop low-coot non-polluting sources of energy in the NorthAtlantic region. However, PESENCA thought the training center at Sabanalargawas a venture too large for its resources and declined to take care of it.CORELCA, on the other hand, currently considers that its business is togenerate and supply electric energy to the region and not to operate atraining center, which should be done by a specialized agency such as theSENA. In fact, both CORELCA and the electrificadoras had been and still areusing SENA's training center for electric utility personnel at Cucuta.

4.06 With hindsight, it would appear that if a training center was neededfor the North Atlantic region's electric utilities' personnel, it would havebeen more appropriato to have enlisted SENS's assistance during projectpreparation. SENA had the required capability to handle such a trainingcomponent of the project and was highly regarded as a competent trainingorganization. Altogether, it would seem that there was an overestimation ofthe proper role of CORELCA vie a vis training, as opposed to its keyresponsibilities for power supply and intra-Regional coordination, facts whichCORELC&'s Board finally came to grips with.

4.07 Power Losses Studt. The power losses study component of the projectwas successfully conducted by consultants under terms of reference approved bythe Bank. The equipment recomended by this study, to effect a close controlof losses, was procured with loan funds; this included watt-hour meter controlstands for each eloctrificadora and special high precision watt-hour meteringequipment for substations, as well as portable instruments.

4.08 The power losses control program established under the study has beenimplemented by CORILCk and the electrificadoras, although certain featuresconcerning technical losses, which required splitting of feeders and additionof substations, are still underway in tune with the arrival of material andequipment (the Bank agreed on March 7, 1986 to cover up to 100 percent offoreign and local expenditures for power losses control equipment). Meteringof consumers' service drops has been practically fully covered, as well asimprovements in substations' metering. Special units have been set up in eachelectrificadora to carry out an effective control of power theft and to checkaccuracy of meters. Monthly meetings are held at CORELCA's headquarters bythe heads of these power losses' control units, which are always attended bythe general managers of all CORELCA's subsidiaries. All these actions haveresulted in significant lowering of power losses, more or less on line withGovernment directives. Overall losses in CORELCASJ' and the slectrificadoras'system have been reduced from an average of 23.7 percent of energy deliveredto the system in 1988 to 20.5 percent in 1991. It should be pointed out thatGovernment directives in the same period required power losses to be reducedfrom the level of 23 percent in 1988, to 22 percent in 1989, and 20.2 percentIn 1991. Altogether, a reduction of 3.2 percentage points or 14 percent gainin reducing power losses in a 3-year span is a very creditable achievement.These good results were greatly helped by the Government's decision toauthorize the application of heavy fines and the suspension of power serviceto consumers found with fraudulent connections or damaging power meteringapparatus.

- 15 -

4.09 Fixed Assets Revaluation Study. With a delay of five years, a fixedassets revaluation study Was completed for CORELCA with the assistance oflocal consultants financed by loan funds. The terms of reference for thisexercise were cleared by the Bank and were based on a study prepared for theEmpresa de Energia de Bogota (EEB). CORELCA is currently applying themethodology developed in this study to the revaluation of its fixed assets.

4.10 Timetable snd Costs. Overall implementation of the VillageElectrification Project took 9 1/2 years from July 1981 to December 1990. Inthe SAR, project implementation was expected to require only 4 years (in thePresident's Report the time-frame for project implementation is given as 4 1/2years). This means that carrying out the project took at least 5 years morethan anticipated at appraisal. The basic reasons for the considerable timeoverrun were: (a) cumbersome and length7 contract processing procedures forprocurement of goods and services in Colombia's contracting legislationt (b)nonfulfillment of the Government's agreed contributions for the project in atimely manner; (c) delays in the electrificadoras' bridge-financing; and (d)the sixteen-month delay in loan effectiveness. The difficulties withobtaining legal sanction of contracts for supply and construction have beensignalled in para 4.02. The Government did not comply with its financialobligations with the project; by end 1985 (at a time the project should havebeen completed), it had only contributed the equivalent of US$5.2 million oronly 38 percent of the US$13.7 million the Government had undertaken formallyto contribute to the project. As a censequence of this, CORELCA faced with alarge number of construction contracts with insufficient funding. The endproduct of this Government action was to cause bankruptcy to a good number ofsmaller contractors who did not have access to lines of credit. Obviously,considerable delays occurred in carrying out the works in the areas wherecontractors had failed. Concerning the electrificadoras' contribution, themain problems were the poor financial situation of these utilities,particularly their cash position throughout the project implementation period,and difficulties collecting overdue accounts receivable for electricity salesand in the application of tariff increases which were iplemented withoutprior authorization from the tariff regulating body, the National TariffsCommission (JUT). The electrificadoras were sued by consumers and had tosuspend the tariff increases.

4.11 Whichever were the problems that arose during implementation of theproject, it is quite clear that the time schedule estimated at appraisal wasoptimistic. Although there was no previous Bank experience with such projectsin Colombia, the Bank's current implementation profiles for ruralelectrification projects run between 7 and 9 years.

4.12 The final cost of the project as of December 1991 was the equivalentof US$58.7 million compared to US$68.7 million estimated at appraisal.However, the figures cannot be readily compared, because the villageelectrification component of the project was greatly expanded, as explained inpara 4.04, and the training component was never implemented. On the otherhand, expenditures for power losses control equipment sad for a fixed assetsrevaluation study amounting to US$3.2 million, which had not been foreseen atappraisal, are included in the final cost. Part III of this report shows asumnary comparison of the original project cost est4mAte with the actualproject expenditure per major items of the project.

- 16 -

4.13 ginancgna. Contribution to the project expenditures by theelectrificadoras and the beneficiaries was minimal. It amounts in total toonly the equivalent of US$1.4 million or 2 percent of the final project cost,instead of the 23 percent that was assumed in the SAR. The Governmentcontribution was smaller and provided later than agreed upon, US$11.5 millionagainst the US$13.7 million it had undertaken to cantribute according to theGuarantee Agreement (Section 2.02). In fact, CORELCA had to cover theunderfunding of the project caused by the failure of Government,electrificadoras and beneficiaries to honor their co-intments. CORELCAprovided US$15.7 million of project fimancing, compared to the US$3.5 millionoriginally planned. In Part III of this report there is a tabulation of thesources of funds for the project as foreseen at appraisal and as actually madeavailable.

5. Proiect Results

5.01 The project fully achieved its main objective which was to develop anextensive village electrification scheme in the North Atlantic region ofColombia. In fact, the project exceeded the expectations at appraisal bycovering a much larger rural population than anticipated. The power lossescontrol objective seems to be developing along the lines agreed withGovernment, and the institutional infrastructure to continue the effort is nowin place. In this context, it is important to mention that the Governmentfinally realized that only through strong measures, including heavy fines, itis possible to attain some degree of control over the widespread theft ofelectric energy. Nowadays the electrificadoras have the legal tools todisconnect fraudulent consumers, to impose heavy fines, and to prosecute theworst offenders. However, as explained in para. 4.05, the training objectivewas not met and, at this time, there seems to be little prospect that it willbe.

5.02 During project implementation the financial performance of theregiou's power sector utilities was generally poor. Concerns about thefinancial situation of CORELCA and the electrificadorss appear throughout theBank's supervision mission reports. Their financial performance has notimproved noticeably, particularly in the case of the electrificadoras; in1990, the consolidated net income from operations was Col $866 millionu-sat4v,i and for 1991 it might be slightly positive. Beoides their pooroperating results, the electrificadoras' accounts receivable at end of 1991reached a total of Col$60,500 million (equivalent to US$86 million), of whichgovernmental agencies owed Col$33,350 million. Currently, the Government hasdecided to take strong measures to try to correct this situation.Accordingly, a plan for settlement of arrears was recently approved by theNational Council of Economic Policy (CONPES). It calls for governmentagencies tos

(a) pay all arrears to the electrificadoras following agreedpayment schedules;

(b) include the item "Payment of Electric Power" in their annualbudgets, with an amount at least equal In real terms to theirpower billing for the preceding year;

-17 -

(c) produce financial or real assets guarantees to back up paymentof electric energy billst

(d) accept that the slectrificadoras can collect the guaranteesand suspend service in cases of not ensuring timely payment ofelectricity bills. The Energy Finance Corporation (PEN) willbe in charge of monitoring compliance with the above measures.

Whether there will be the political will to apply these measures,appears uncertain, giving the highly politicized condition of theelectrificadoras and past reluctance of the Government to support lastingsolutions.

5.03 Although CORELCA managed in 1991 to achieve an 11 percent rate ofreturn on average revalued net fixed assets in operation, accounts-receivablenevertheless, reached Col$1129529 million (equivalent to US$161 million), atthe end of the year, or 412 days of power sales. Of this amount, Col$71,799million represented unpaid power billed, Col$77,025 million, penalty interestson arrears and Col$5,705 million, refinancing of interest. In other words,the arrears problem of the electrificadoras has been transferred to CORELCA,and further increased.

5.04 The recomputed internal rate of return (IRR) for the villageelectrification component is 23 percent compared with 13.3 percent atappraisal. This favorable result is due mainly to the considerable increasein the number of consumers over those initially contemplated (see Part TII).

6. Priiect Sustainability

6.01 The major benefit realized from the project is the badly neededsupply of electric power to the population of vast rural areas of Colombia'sunderdeveloped northern coastal region. The availability of electricity isnow enhancing the standard of living of the rural population in the projectvillages. This benefit will endure for all the useful life of the project,which would be about 30-40 years.

6.02 The second benefit is the revenue from the sale of energy through theproject facilities. Of course, this benefit depends on the level of powertariffs applied during the life of the project.

7. Bank Performance

7.01 The project's main objective of supporting the Government's effortsto integrate the country's poorest and most backward region, the NorthAtlantic regional rural population, into national life, was an integral partof the Bank's strategy of using the Bank resources to meet Colombia's mostpressing development needs. The Bank played in this regard a discreet butvital role in trying to ensure that the project management was efficient. Theevident success of the village electrification component of the project owessuch to the flexible approach taken by the Bank staff vis-a-vis the manydifficulties encountered by CORELCA In implementing the project, particularlyin the contracting process for procurement of goods and services and in thevery complex problem of dealing with the electrificadoras.

- 18 -

7.02 With hindsight, the objectives set in the SAR concerninginstitutional reform of the electrificadoras and improvement of theirfinancial position could have been rather optimistic. Nevertheless, the Bankstaff pursued with tenacity the goals of maintenance of an adequate level oftariffs and to push for adjustments in the institutional aspects of theregion's power sector. Unfortunately, failure in achieving the project'sfinancial and institutional objectives was in large measure due toGovernment's lack of support for the required adjustments because of politicalor regional considerations.

7.03 On the other hand, the setback on the training component of theproject was certainly ultimately due to misjudgment by the Bank on thesuitability of CORELCA to Implement it, instead of having recourse to theexperienced and competent national industrial training organization. In fact,the search for other training organizations to assume responsibility for thetraining center and for training, which took place once it was evident thatthe training component had failed, is a good indication of the realization bythe borrower of its concern that it would not have the breadth to incorporatetraining responsibilities into its already demanding mandate.

7.04 Finally, the very large overrun in the time employed to Implement theproject compared to appraisal estimates is difficult to explain, since therewas considerable experience Bank-wide on actual implementation time-spans forprojects such as the Village Electrification Project. Fortunately, the Bankexhibited flexibility in extending the closing date of the loan from theoriginal date of June 30, 1986 to June 30, 1988 (in fact, the last loandisbursement took place on February 2, 1989). Nevertheless, about US$4.2million of the loan funds were canceled on that date, in addition to theUS$1.8 million that had already been canceled (para. 4.03).

8. Borrower Performance

8.01 At project appraisal, CORELCA, during its short period of operations,had made remarkable inroads towards overcoming the power problems of the NorthAtlantic region, which depended entirely upon thermal-based generating plants.In addition to providing incremental electricity supply from the generatingfacility, it had developed and interconnected the systems of theelectrificadoras. Purthermore, to achieve a less costly use of non-renewablefuels, it gradually replaced generation from their old and fuel-inefficientoil-fired plants with energy generated from CORELCA's more economic and bettermaintained facilities. CORELCA's management staff was considered highlydedicated and capable; in less than nine years, the corporation hadconstructed 500 MW of thermal generating plant and about 500 km oftransmission lines. It is therefore not surprising that the villageelectrification component of the project was so successfully Implemented andconsiderably expanded in scope, all within the original budgeted amount. Allin all, CORELCA's performance can be considered satisfactory in implementingthis component with little help from the electrificadoras and faced with theinflexibility and inefficiency of the contracting process in Colombia.

8.02 As indicated in para 7.03, the failure of the training component ofthe project cannot be ascribed to CORELCA but to a mistaken conceptualapproach during project preparation. It certainly would have been desirable

- 19 -

for the Bank to have sought the opinion of an independent consultant beforepressing CORELCA to include this component in the project sCope.

8.03 CORELCA complied generally with loan covenants although in some casesbelatedly. On the other hand, CORELCA made determined efforts to improve theadministration of its subsidiaries and their financial management,particularly the problem of arrears, albeit with not much success. In thiscontext, it should be stressed that CORELCA received little help fromGovernment. There were a number of statements of good intentions but actuallyfew governmental actions that could be enforced.

9. Prolect Relationshing

9.01 The Bank resumed lending to the power sector in 1978, after a longabsence due to key issues that took several years to agree on. Sincereturning, it had focussed its lending on large projects (and the mainutilities) to help reduce the economic and social impact of pastunderinvestment. This gave rise to a perception that the Bank interest wasconfined to the largest and mainly urban, utilities, to the exclusion of theless developed regions of the country. The Village Electrification Projectdid much to dispel this perception of the Bank's intentions. Here was aproject, which genuinely would be assisting the Government's efforts in favorof a large segment of the country's population, smong the poorest and mostbackward. This project together with other projects which touched the ruralpopulation reinforced an atmosphere of mutual confidence with the Government.

9.02 The Bank received very close cooperation from the borrower duringproject preparation and appraisal. This cooperative attitude establishedearly during the project cycle made possible to resolve satisfactorily thecomplications that normally occur during implementation of a project of thenature of the Village Electrification Project.

10. Performance of Consultants

10.01 Although the Village Electrification Project was not a complexproject in the technical sense, it did require great care in establishingappropriate technical-economic and cost parameters in order to avoid seriouspitfalls that have befall other similar projects. It was therefore essentialto have the assistance of qualified consultants both during the feasibilityand design stages. This assistance was satisfactorily provided by a localconsulting firm.

10.02 Construction supervision was carried out by a number of localconsulting firms that performed generally in a satisfactorily manner. Only afew cases occurred where the consultants were apparently more interested increating difficulties in order to extend their contract as much a possible.Some of these contracts cost as much as 80 percent of the cost of the worksbeing supervised.

10.03 The consultants for the power losses study performed creditably incarrying out a well-founded study and in designing the measures needed tocontrol this problem. Likewise, the consultants for the revaluation of asetsstudy, performed satisfactorily and the proposed methodology is now being

- 20 -

applied by CORELCA. The osme cannot be said of the performance by theconsulting firm for the training component. In fact its performance wastainted by their insistence in participating in the tendering for the trainingmodules for which it had prepared the technical spezifications adjusted to thecharacteristics of its cown modules. This behavior was the final blow to thetraining component of the project.

11. Pro1ect Dogumentation and Data

11.01 The SAR was comprehensive document, which provided a usefulfrsmework for the Bank and CORELCA during implementation. The project's legalagreements reflected the Bank's interest in the satisfactory execution of theproject and in achieving the development objectives of the Government in theNorth Atlantic region rural areas. Supervision reports gave generally a goodindication of the project status at any time and of any major incident duringproject implementation. These reports together with the progress reportsprovided the basic documentary information for judging the project results.

12. Conclusion and Lessons to be Learned

12.01 Conclusions. The Village Electrification Project was a well preparedproject in its rural electrification component, which achieved its mainobjective of extending electric service to a vast area in the North Atlanticregion of Colombia, reaching a large number of households and businesses. Thefact that project implementation took much lonter than anticipated, does notdetract from the evident successful outcome of zhe endeavor. On the otherhand, failure of the training component could have been foreseen from thestart, since it was beyond the scope of CORELCI's main responsibilities.

12.02 The sorely needed power losses control exercise got to a good startwith a sharp reduction in these losses. This confirms the well designedprogram derived from the power losses study component of the project.

12.03 The project was less successful in achieving its aim of improving thefinancial and institutional aspects of the power sector in the North Atlanticregion of Colombia. However, recent measures by Government open thepossibility of progress in these areas. How successful these initiatives willbe, depend ultimately on the political will to carry them through, which isnot too clear given the political climate prevalent in the Country.

12.04 Lesson to be Learned. The principal lessons learned fromimplementation of the Village Electrification Project can be summarized asfollows5

(a) Imnlementation Time-Schedule. The implementation schedule forprojects of this sort should be based on the Bank's experienceand should adhere to available Implementation profiles, unlessit can be demonstrated clearly that the project can be developedin a shorter time-frame.

(b) Contracts' Legal Clearances. The different steps needed toobtain legal clearance for contracts to procure goods andservices for the project should be clearly established duringproject preparation in order to avoid later problems during

- 21 -

project implementation. If necessary, specific actions shouldbe discussed during loan negotiations to accelerate theprocurement process.

(c) Contribution of Beneficiaries. During preparation of projectsof the nature of the Village Electrification Project, a detailedevaluation should be made of the procedures for the collectionof contributions of beneficiaries, as vell as of their legalimplications.

(d) Trainina. The Bank should consider making a greater use ofutilizing the existing institutional training infrastructure.It should avoid having borrowers take on responsibilities beyondtheir key ones.

(e) Institutional and Financial Aims. With hindsight, theobjectives set in the SAR concerning institutional reform of theelectrificadoras and improvement of their financial positionproved optimistic, partly because of the politicized enviromentof the Region but also in large part because the CentralGovernment did not fulfill its agreements under the Loan tot(a) authorize tariff increases as scheduled; (b) make programmedbudgetary contributions to CORELCA's investment program; and(c) carry out a program to settle arrears to theelectrificadoras for electricity sales. These risks were notanticipated in the President's or Staff Appraisal Reports, andsuch assessments should be made and reflected in those reports.

(f) The project clearly demonstrated the value of having the ProjectUnit set up and adequately staffed early-in this case it wasfunctioning by appraisal. This contributed to efficientimplementation despite many problems that emerged along the way;and

(g) Supervision staff should work closely with borrowers, especiallynew or relatively weak ones, to assist them to anticipate anddeal with implementation problems. In the case under review,this approach helped in shaping the project to changingcircumstances.

- 22 -

PRJET OMLETIO REP,ORT

COLOMBIAVILLAGE ELECTRIFICATION PROJECT

fLOAN 1999-C)Q

PART II- PROJECT REVIEW FRON THE BORROWER'S PERSPECTIVE

Set forth below are the Borrower's comments on the projectimplementation, the project results, and the performance of the World Bank.These comments have been edited to achieve stylistic consisteucy with Part I.

1. CORELCA shares the positive assessment of the Bank about thesuccess of the Village Electrification Project, which in factexceeded considerably our expectations by permitting coverage ofa much larger rural population using as support the transmissionand subtransmission infrastructure developed by the project.

2. CORELCA is also proud of the progress achieved in the power lossreduction program, and would endeavor to adhere as closely aspossible to the Government directives on this aspect of poweroperations. In order to be able to exercise a close control onpower losses, particularly on power theft, CORELCA and itssubsidiaries have organized power losses control units, whichhave the responsibility of detecting power losses problems andeffect their correction.

3. The difficulties that arose in Implementing the trainingcomponent of the project cannot be ascribed to CORELCA but to aninitial misassessment of CORELCA's role. In fact, CORELCA'sbusiness is the generation and the bulk transmission of electricpower and not of developing and managing training centers. InColombia there is an experienced and highly respected nationalindustrial training organization, the "SENA", which operatestraining centers covering the entire spectrum of the powersector's operational needs. In retrospect, both the Bank andCORELCA should have oriented this project component towards somefarm-out arrangement with SERA. Nonetheless, CORELCA willre-examine this matter with the intention of resolving it assoon as feasible.

4. CORELCA has endeavored actively to improve both the financialand institutional areas of its subsidiaries. However, it shouldbe recognized that in many cases CORELCA cannot take certainactions vithout due consideration for the social and politicalclimate and without having the wholehearted support of theGovernment. For instance, in the matter of power tariffs it hasto abide by the decisions of the National Tariff Commission

- 23 -

(JNT). On the arrears problem, the Government is taking stepsto redress the current unhealthy situation. COULCA expectsthat the application of the Government's objectives on thismatter will certainly go a long way in correcting the problem.

5. Concerning the considerable overrun in the time span needed toImplement the project, CORELCA would like to note that this wascaused mainly by:

(a) the cumbersome and lengthy procedures to obtain legalsanction of contracts whenever they exceeded Col.$150million and Col.$250 million;

(b) not receiving in a timely fashion the agreed Governmentcontributions for the project;

(c) the difficulties that arose to realize the beneficiaries'contributions for the project; and

(d) finally, the 1984 Government decision to reduce Governmentspending, which affected seriously the project sinceCORELCA could not honor its financial obligations with theproject contractors, given the fact that the Governmentsuspended disbursement of monies for the project.

- 24 -

PROJEC OMEON OT

COLOMBIAVILIAGE ELECTRIFICATION PROJECT

. --(LOAN 1999-C,O

PATIII: TATSTICAL AND OTHER RJMECT INFORMATION

1. Related Bank Loan.

The following loans were related to the projects

Loan Year ofTitle PurMOos AanrovalaP Status

1582-COSan Carlos I Hydro 1978 Completed

1538-CO500 RV Interconnection Transmission 1978 Completed

1725-COSan Carlos II Hydro 1978 Completed

2889-COPower SectorAdjustment Sector Sector's Fiaces 1978 On-going

2. Project Timetable Date Plamned Date Actual

Identification 6179Preparation 11179 11/79Appraisal Mission 5/80 11/80Loan Negotiations 4/81 4/81Board Approval Sl81 5/81Loan Si8ning 7/81 5/82Loan Effectiveness 10/81 2/83Loan Closing 6/86 6/88Project Completion 12/85 12/91

- 25 -

COLOMBIAVILLAGE ELECTRIFICATION PROJECT

(LOAN l999-CQ)

3. Loan Disbursement

Cumulative Estimated and Actual Disbursement(US$ million)

IBRD Fiscal Year Appraisal Actual Actual as Percentmad Semester Estimate Disbursement of Aiaraisal

FY82December 319 1981 --June 30, 1982 2.0

FY83December 319 1982 6.0 -- --June 30, 1983 12.5 3.4 27

FY84December 31, 1983 19.6 8.8 45June 30, 1984 26.6 12.5 64

FY85December 31, 1984 33.5 17.4 52June 30, 1985 36.0 20.1 56

FY86December 31, 1985 22.1 61June 30, 1986 24.5 68

PY87December 31, 1986 26.1 73June 30, 1987 26.1 73

FY88December 31, 1987 26.1 73June 30, 1988 27.8 77

FY89December 31, 1988 28.1 78June 30, 1989 30.1 84

- 26 -

PROECT COMPLITI0N RUPOR

COLOMBIAVILLAGE ELECTRIFICATION PROJECT

(LOA 1299-CO)

PAiRT III

4. Comparison of 8AR and Actual Prolect Costs(US$ million)

-SAR Esimate- -Actwa Costs-

LmIL EmJsT ota LaaL FoI 12

1. Transission 5.7 7.2 12.9 10.2 10.4 20.62. Stanmission 5.5 9.9 1S.4 8.8 3.0 11.83. Distributan 6.0 6.8 12.8 11.6 2.7 14.3

Vilae Electro Component 17.2 23.9 41.1 30.6 16. 46.7

4. Trainin Conponet 1.0 i.3 2.3 0.8 0.5 1.35. Engineering and Administr. 4.9 4.9 6.9 6.96. Electic Power Losses Study 0.3 0.3 0.S 0.57. Power Losses Conol 0.9 2.3 3.28. Revaluation of AJsst Stuidy 0.1 0.1

Base Line Costs 23.4 25.2 48.6 39.3 18.9 S8.29. Physcal Coningeaies 3.5 3.7 7.210. Pice Esclation Prov. 5.8 7.1 12.9

Total Prject Cost s S ; S Al

Sito; Local currency expeditwes have been converted into US$at te aveage official rate of exchangon each quarter.

(US$ Million

In SAR Actua

IBRD 36.0 30.1Govelument 13.7 11.5CORILCA 3.5 15.7Electrificadoras 3.5 0.3Beneficiaries 12.0 1.1

Totas £

- 27 -

5. Internal Economic Rate of Return Comoutation. The SAR evaluated theinternal economic rate of return (IERR) as the discount rate which equalizesthe stream of costs and benefits attributable to the village electrificationcomponent of the project. The 13.3 percent IERR estimated in the SAR wasbased on the following assumptions:

(a) The cost stream comprised:

(i) the capital cost in 1981 prices of the villageelectrification comrnento

(ii) the marginal cost of power delivered with theproject less the marginal cost of the power that would bedelivered without the project; and

(iii) the incremental operational costs related to theincremental sales associated with the project.

(b) As proxy for benefits it used:

(i) income for electricity sales calculated on the 1980 ratefor the Atlantic Coast region plus 20X increment alreadyapproved, lses income from sales without the project

(ii) connection charges;

(iii) saving to the beneficiaries through replacement ofkerosene by electricity for lighting;

(iv) savings on the purchase of ice; and

(v) savings through discontinuing fuel use in townships thathad local generating facilities and in agro-industrialplants.

A similar approach was used in the re-evaluation of the IERR using thefollowing parameters:

(a) The cost stream includess

(i) the capital cost in Col$ of the project plus theadditional investment in distribution in order to connect52,700 more consumers while employing the project'stransmission and subtransmission infrastructure, deflatedeach year to 1981 using the wholesale prices index;

(ii) the cost of power delivered to the system was taken asthe price paid by the electrificadoras to CORELCA forbulk power in 1991 (adding system losses of 201), lessthe cost of power that would be delivered to the systemincluding system losses deflated to 1981; and

(iii) the incremental operational cost associated with theproject.

- 28 -

(b) The benefits stream comprises:

(1) Income from electricity sales calculated on the 1991averaSe rate for the Atlantic Coast region deflated to1981, less Income from sales without the project;

(Ui) connection charges;

(iiI) savings through replacemnt of kerosene for lighting;

(iv) savings on the purchase of ie;l and

(v) savings on fuel through discontinuing of local generatingplants.

Actual average energy usage per annum for rural consumer from 1984 to 1990 wasused for computing energy sales to residential consumers in the project.Between 1990 and up to 1999, average energy usage was assumed to Increase atthe same average rate than in the preceding seven years. Project sales wereassumed to remain constant from 1999 onward. For future increase it vould benecessary to enlarge the facilities.

On the basis set forth above the IER is re-computed to be 23 percent. Thisfavorable result is due mainly to a coniderable icrsase in the number ofconsumers directly stemming from enlarged the project, plus consumersconnected In additional villages electrified using the project's transmissionand subtransmission infrastructure.

6. Use of Bank Resources

6.01 Staf£ nput. Staff Inputs in carrying out the various tasks throughthe project cycle from preparation in FY79 to FY89 were as follows:

TI$k InDuts (Staff WeekaI

Project Preparation 16.2Project Appraisal 18.2Loan Negotiations 4.5Project Supervision 71.9

Total

- 29 -

6.02 MiUis aJsio

Star of

Thloush Aprail:1 17197 1 EBOR2 llt79 3 EGR-FNA-ECN3 7/80 2 EDC-EGR4 11180 3 EOR-FNA-FGR-CHF

Supevioa:S 10/81 2 EOR-FNA 1 F6 4/82 2 EGR-FNA I F7 6182 1 EDC I8 5/84 1 BOR 2 M9 6184 1 FNA 2 F-M10 10/85 2 EOR-FNA 2 F-M11 9186 2 EBR-FNA 2 F-M12 7/87 2 BOR-MOC 2 F-M13 11187 2 BOR-FNA 2 F-M

- 30 -

7. Stata-of Codmplan with Major oeat

Sedo 2.02 Governme undertakes to: Parial (only US$11S5 mli(O contribute US$13,7 million to Project were conbuted after Ing

(0) provided CORELCA wit addidonal funds delags)for Project

SedUon 3.03 Government to proide Pardalfunds to earr out lnvestment

Secion 34 Fbd primto Yesectrificadoras to be same

as for CORELCA

Seion 3.L5 Government to take acdion Only recently Covenent has benso that pubmi edttes pay tailug serious steps on thisII'idommatter

_dIA GovernCment to take acdons Yes although with deaysto mainta tM for CORELCAattaining raft of reur as requfred

Lean~~~~~~~~~~~~~~eSecXoo 3.0 EAter Ino subsday e

Agemet with d-iddw

-}ooLf 4.01B obwer to caty out a Yesstudy of admi sraie and maeialprocedures of CORELCA and subsidaries

Sem 4.01(c) Take acion to strengthen Partthe mangagmet, organization, plannigand opeation of subsiaries

SedoZ fa02(ak Have acoau audited and Yesfunih inanial Wnfomtion

Seetioo 5.b Inform Bank of new gemfating Yescapacy; alow Dank to comment;

dot commit itself to new investments

SeCm o w O.4fbtain Bank'ss avreemeut Yesbefore committg isef to new capial

Secw S.05 No debt slall be rredM YesIf debt service eoerage i lower than 1.S

,ngg S.06 Rate of retu not lwer than Yes in 1111 Perent In 193 and teeafte

ScikuS7 Cary out rme ation of YesaMsIs study for CORELCA and

-rlicadoras

ftbo S.0L Cwy out a pln for seNtg UnsuccesuelecrlfcadraI debt to CORELCA