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FILECOPY Documentof The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-2169-CO REPORTAND RECOMMENDATION OF THE Public Disclosure Authorized PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN TO EMPRESASMUNICIPALES DE CALI (EMCALI) Public Disclosure Authorized WITH THE GUARANTEEOF THE REPUBLIC OF COLOMBIA FOR A SECONDCALI WATERSUPPLY AND SEWERAGEPROJECT February 8, 1978 Public Disclosure Authorized This documenthas a restricteddistribution and My be used by recipientsonly in the performanceof their official duties. Its contents may not otherwLsebe disclosed withoutWorld Bank authorization. CURRENCYEQUIVALENTS Average Calendar 1977 January 24, 1978 Currency Unit = Peso - Col$ Col $ US$1 = Col$36.985 38.04 Col$l = US$0.027 0.02629 The Staff Appraisal Report is based on US$1 = Col$51.4 MEASURES AND EQUIVALENTS 1 meter (m) = 3.28 feet (ft.) 1 kilometer (km) = 0.62 mile (mi.) 1 square meter (m2) - 10.8 square feet (sq. ft.) 1 cubic meter (m3) = 35.3 cubic feet (cu. ft.) 1 US gallon (gal) = 3.785 liters (1) 1 million US gallons per day (mgd) = 43.9 liters per second (1/sec) 1 milligram per liter (mg/l) = 0.058 gram per US gallon GLOSSARY OF ACRONYMS EMCALI = Empresas Municipales de Cali IDB = Inter-American Development Bank INAS = Instituto Nacional de Salud INSFOPAL = Instituto Nacional de Fomento Municipal USAID = US Agency for International Development FISCAL YEAR January 1 to December 31 FOR OFFICIALUSE ONLY Page 1 of 3 COLOMBIA SECOND CALI WATER SUPPLY AND SEWERAGE PROJECT LOAN AND PROJECT SUMMARY Borrower: Empresas Municipalesde Cali (EMCALI) Guarantor: Republic of Colombia Amount: US$13.8 million equivalent Terms: Repayment in 17 years, including 4 years of grace; interest at 7.45% per annum. Proiect Description: The project would improve sanitary conditions in Cali by moving the discharge of raw sewage downstream from the city's main intake of water, and by separating domestic sewage from stormwaterrun-off; it would increase utiliza- tion of the installedwater production capacity by supply- ing water to the adjacent Municipalityof Yumbo; it would extend the water supply and sewerage networks to, and reduce flooding in, certain low-incomeareas; and it would increase the area availablefor orderly urban growth. All of Cali's and Yumbo's populationwould benefit from the reduction of the very hazardous level of pollution at the point of water intake from the Cauca River, and about 250,000 people, 70% of which are among Colombia's poorest 40%, would benefit directly from the other components. Although the project faces no special risks, it may not be implementedin the intended period if EMCALI fails to generate sufficient funds through timely rate increasesand betterment levies. EMCALI's and the municipal authorities' commitment to strengtheningthe entity's finances should ensure that funds will be availablewhen needed and that the project will be carried out as scheduled. This documeni hasa rmricweddistribution and maybe usedby recipientsonly in the performance of their official dutig. Its contents may not otherwisebe disclosedwithout World Bank authorization. Page 2 of 3 Estimated Cost: Local Foreign Total -----US$ Million------ (a) Proposed Project: Water Supply Subproject 1.39 1.14 2.53 Yumbo Subproject 1.21 1.98 3.19 Reforestation Subproject 0.35 0.13 0.48 Cauca Interceptor Subproject 3.29 2.49 5.78 Stormwater Subproject 1.71 0.57 2.28 Sanitary Subproject 1.65 0.55 2.20 Sewage Treatment Studies 0.12 0.06 0.18 Maintenance Equipment - 0.82 0.82 Engineering and Administration 0.87 0.88 1.75 Base Cost 10.59 8.62 19.21 Physical Contingencies 1.59 1.29 2.88 Price Contingencies 2.12 1.48 3.60 Total Project Cost 14.30 11.39 25.69 Interest and Other Charges during Construction 5.61 2.38 7.99 Total Funds Required 19.91 13.77 33.68 (b) Other Investments and Working Capital: Other Investments 2.10 - 2.10 Increase in Working Capital 7.10 - 7.10 Total Funds Required for 1978-1981 Program 29.11 13.77 42.9 Financing Plan: Local Foreign Total -----US$ Million-- Net Internal Cash Generation 17.0 - 17.0 Government Loan 5.7 - 5.7 Loan from Banco Central Hipotecario 5.7 - 5.7 Proposed Bank Loan - 13.8 13.8 Other 0.7 - 0.7 Total 29.1 13.8 42.9 Page 3 of 3 Rate of Return: The aggregate internal economic rate of return for the project is estimated to be 22%. Appraisal Report: Report No. 1679c, dated February 8, 1978. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONOF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS MUNICIPALES DE CALI (EMCALI) WITH TIE GUARANTEEOF THE REPUBLIC OF COLOMBIA FOR A SECOND CALI WATER SUPPLY AND SEWERAGEPROJECT 1. I submit the following report and recommendationon a proposed loan to Empresas Municipales de Cali (EMCALI)with the guarantee of the Republic of Colombia for the equivalent of US$13.8 million to help finance a Second Cali Water Supply and Sewerage Project. The loan would have a term of 17 years, including 4 years of grace, with interest at 7.45% per annum. PART I: THE ECONOMY 2. *Thelatest economic report on Colombia (1548-CO)was distributed to the Executive Directors in May 1977. It assesses current developmentsand provides a medium-termperspective of the Colombian economy. Country data sheets are provided in Annex 1. Background 3. During the past two decades substantialstructural transformation has taken place in the Colombian economy. The country has made impressive progress in the transition from a predominantlyrural and agricultural economy made up of largely self-containedregions to a more integratedurban industrial economy oriented increasinglytoward internationaltrade. This broadening of the country's productive base has been accompaniedby rapid growth of nontraditionalexports and developmentof a modern sector which relies to a considerableextent on imported inputs. From 1967 to 1974 GDP rose by an average of 6.5% per annum in real terms, well above the historical average of less than 5% (1950-67). Accelerated economic growth coupledwith a decline in population growth brought about a rapid increase in per capita incomes. Increased investment and relaxation of the foreign exchange con- straint were the major factors responsiblefor this accelerationin growth. Merchandise exports expanded more than four-fold during this period, and, most significantly,nontraditional exports became an increasinglyimportant source of foreign exchange earnings, in large part compensatingthe slow growth of receipts from coffee exports. Much of this increase in non- traditionalexports was the result of both product and market diversifica- tion attributableto the Government'sexport promotion program. Substantial medium- and long-term capital inflows to the public and private sectors for developmentprojects helped sustain investment levels and enabled Colombia to maintain the favorable structure of its external debt. However, despite the substantialprogress made during the past two decades, Colombia still has a long way to go on the road toward modernization;it still is essentially an underdevelopedcountry with a limited modern sector super- imposed on a broad, traditionaland poor base. - 2 - 4. When the present Government took office in August 1974, the country was faced with a generally deteriorating economic situation--weakening balance of payments, loss of self-sufficiency in petroleum production, accelerating inflation, deterioration of the public finances, and reduced public invest- ment. GDP growth showed signs of slowing and unemployment was increasing, especially in the urban areas, reaching a peak of 13% in 1974. As a con- sequence, the new administration moved rapidly to introduce an economic stabilization program along with a set of reforms aimed at restoring the basis for long-term economic growth. In line with these goals, it initiated basic reforms of the fiscal, monetary and price systems. 5. To help strengthen the public finances, the new Government undertook a comprehensive tax reform designed to achieve a substantial improvement in the progressivity and elasticity of the tax system. Steps were also taken to correct major distortions which existed in the price system. Price controls on a number of important agricultural products were removed, thereby providing greater stimulus for increasing farm production. Far-reaching modifications in petroleum pricing policy aimed at regaining self-sufficiency in production of crude petroleum by improving incentives for exploration and exploitation were introduced. Concurrently, measures were taken to reduce the subsidy on local consumption of petroleum products, with the dollar equivalent price of gasoline being raised in successive steps by 150% between August 1975 to January 1977. 6. Economic growth slowed in 1975 and 1976, with real GDP increasing by less than 5% in both years. This was the result of the stablilization measures adopted at the end of 1974, the effects of the world recession, reduced private investment, and, in 1976, a poor harvest stemming from adverse weather conditions. The stabilization program succeeded in reducing inflation from 27% in 1974 to 18% in 1975, but the expansionary impact of rising inter- national reserves caused by higher coffee prices and shortages of basic food items produced an acceleration of inflation to 26% in 1976. Private invest- ment declined in real terms during this period as a consequence of growing investor concern over the deteriorating economic situation and tightening of credit. Public sector revenues and savings were strengthened as a result of the tax reform and of increased revenue from coffee export taxes. The balance of payments improved substantially in 1976, mainly as a result of an increasing trade surplus caused by higher world coffee prices. Consequently Colombia's net international reserves rose by nearly threefold, from US$437 million in 1974 to US$1,166 million in 1976. Recent Economic Performance 7. Growth and employment picked up significantly in 1977, largely as a result of increased internal demand generated by the income effects of exceptionally high export receipts from coffee.