PROJECT INFORMATION DOCUMENT (PID) Report No.: AB 3263 Water and Sanitation Departmental Restructuring Horizontal APL Project Name Umbrella Operation and Phase 1: Tolima, Norte de Santander, and Sucre Region LATIN AMERICA AND CARIBBEAN Public Disclosure Authorized Sector General water, sanitation and flood protection sector (100%) Project ID P106143 Borrower(s) DEPARTMENTS OF TOLIMA, SUCRE, AND NORTE DE SANTANDER Implementing Agency Gobernación del Departamento de Tolima, ; Gobernación del Departamento de Norte de Santander, Colombia; and Gobernación del Departamento de Sucre, Colombia Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 27, 2006 Date of Appraisal September 27, 2007 Authorization Date of Board Approval December 18, 2007 Public Disclosure Authorized

1. Country and Sector Background

Despite major improvements in the delivery of urban water and sanitation services over the last decade, Colombia faces continuing challenges in meeting its sector development needs. Service deficiencies persist – potable water coverage is insufficient, service quality is highly variable and plagued by rationing and intermittent supply, less than half of all water supply is treated, and sewerage facilities in poor areas are woefully inadequate – and less than 10% of municipally generated wastewater is subjected to any kind of treatment. Rural water supply and sewerage coverage is poor; only 44% of the population is connected to a public water supply system and less than one quarter have access to basic sewerage infrastructure. In terms of solid waste, the needs are great, and although many intermediate-sized cities have seen marked improvements in service quality in recent years in terms of street cleaning, collection, and transport, solid

Public Disclosure Authorized waste management services have disproportionately benefited the wealthy and left many of the poor unserved and underserved.

In order to meet its sector development needs – which include ambitious sector targets which go significantly beyond the Millennium Development Goals – the Government has a series of key challenges:

Increasing investment in both urban and rural areas. The Government estimates that [TBD] is needed to diminish the regional and urban-rural service coverage disparities over the next 10 years. Not surprisingly, investment needs for water supply and sewerage concentrated in poor rural and peri-urban areas and wastewater treatment infrastructure (which often suffer from a disconnect between those who bear the financial cost of investment, operation, and maintenance and those who reap the economic and environmental benefits of improved environmental health) are most pressing.

Public Disclosure Authorized Improving performance of water companies. Service quality issues in Colombia are primarily the result of the low price / low quality equilibrium at which many utilities deliver water supply and sanitation. Tariffs are often well below operation and maintenance cost-recovery levels, political interference in public utility operation is widespread, and the management capacity to deliver high

1 quality service lacking. Improving performance, while maintaining affordability for Colombia’s poor, is a key sector need.

Improving the use of subsidies. While cross subsidies are an inherent aspect of the nationally-set tariff structure and have proven an effective mechanism for supporting service expansion in large urban areas, they have proven an insufficient tool to expand service delivery in many peri-urban areas or provide sufficient financing in municipalities with predominantly poor populations. The approach begun under several previous Bank-supported operations to provide capital investment subsidies with a direct linkage to performance improvement has proven successful and is now being ramped-up on a national scale.

Making investment sustainable and efficient. The Government recognizes the need to improve service delivery sustainability through the use of commercially independent and financial sustainable utilities. The improvements in service quality which have resulted from the involvement of such “specialized operators” – be they public or private – is well established. Public departments, on the other hand, (which account for more than 90% of water and sanitation enterprises) are too often characterized by ineffectiveness, poor quality of service, low coverage, and lagging performance. The Government is challenged by the need to bring quality services to all Colombians and to provide incentives for utility improvement. Nonetheless, the Government has shown leadership in the sector seen in few other countries in the region or worldwide, intervening in cases of poor performance and in some cases (e.g. Quibdo and Cali), placing utilities in receivership and implementing programs for utility restructuring.

Reducing sector fragmentation and moving towards regional solutions. While the Colombian regulatory and institutional framework, which divides service delivery and regulation between municipal and national entities, is well developed and soundly designed, there is growing realization of the need to involve Departments – the intermediary level of public administration akin to provinces or states – as an articulator of regional strategies and as a potential important source of investment resources. The clarity in terms of “rules of the game” for providing financing by the central government through the “Ventanilla Única” have been successful in imposing a sound set of investment criteria for subsidy-financing investment, and role out of a similar approach, combined with financial incentives for local governments to champion sector reform is now needed.

The Government’s New Strategy: The Departmental Plan Approach. Colombia is remarkable among Latin American countries in that it has maintained a consistency of policies for the last decade. Recent developments include (a) a clearly articulated strategy to improve coverage and services in rural and urban areas and to achieve the ambitious goal of universal service coverage for potable water; (b) a further commitment to the policy approach imitated under earlier Governments and supported by Bank loans related to utility “modernization,” the incorporation of commercially independent competent operators under long-term concession agreements; (c) the scaling up of the use of transparent and well- designed capital investment subsidies linked to performance improvement; and, a particularly important innovation to (d) leverage departmental resources to simultaneously increase investment, provide incentives for regionalization and modernization, and improve the use of public resources, many of which have been ineffectively used by local governments. This policy approach is laid out in clear detail in the already-approved document of the Consejo Nacional de Política Económica y Social (CONPES) number 3463. Specifically, the CONPES document includes and is based upon five key tenets:

A major investment program with clear and transparent subsidies. The recently-prepared National Development Plan (NDP) for 2007-2011 has identified a bold medium-term investment program to expand coverage and improve service quality in both urban and rural areas. The approach is wholly

2 consistent with that supported under Bank Loan 7281-CO which provides capital investment resources – allocated at the departmental level based on poverty- and technically-weighted criteria – to be utilized to support investment in sector needs based on the eligibility criteria and methodologies developed during the preparation of 7281-CO. Simply put, the Government has adopted the detailed technical work of the earlier Bank loan as national policy and will continue to support it through the new NDP.

A deepened and broadened approach to improving utility performance. The CONPES document (see Annex 1) lays out the Government’s formal policy: the adoption of specialized operators for managing municipal utilities. This approach – which does not discriminate for or against either public or private capital – is effectively the culmination of a policy initiative which began in 1994 with the Water Sector Modernization Project (Loan 7077-CO). The Government’s program now aims to align incentives and use resources from both higher levels of the public administration to leverage reform at the municipal level.

The use of implementation arrangements developed under the La Guajira Project. The Government’s program aims to take the pilot approach developed under three cases – Magdalena, Sucre, and La Guajira – and bring it to scale nationwide. Specifically, the approach involves (a) the pledging of multi-year public resources from departments and municipalities for counterpart financing and loan repayment; (b) the use of “convenios de apoyo financiero” which codify responsibilities and commitments of active institutions; (c) the use of 20- to 30-year concession contracts; (d) the use of independent technical management at the department level for the structuring of concessions; and (e) a fiduciary approach which focuses on transparency, accountability, and results. The Government has asked the Bank to be involved – rather than other donors – particularly because the La Guajira operation is seen as the flagship of the three pilot projects already prepared.

The clear and transparent use of subnational resources in a fiscally responsible manner. A core part of the approach involves the use of the Government’s rigorous subnational creditworthiness criteria to determine eligible borrowing amounts and financial structuring of the program at the Department level. Specifically, the program uses the criteria established in Law 358 of 1997, Law 819 of 2003, and Decree 696 of 1998 to determine eligibility of departments to access credit sources. The program will also include efforts to minimize the use of public indebtedness by (a) rightsizing investment; (b) incorporating a facility for carbon finance; and (c) shifting as much responsibility for investment as is politically, financially, and technically possible onto operators and consumers.

The mainstreaming of the clear and transparent “rules of the game” for investment developed under 7281-CO. The program is wholly based on the harmonized and publicly disseminated set of procedures for investment developed within the MAVDT under Loan 7281-CO which currently guides all subsidy-financed investment in Colombia and provide technical, financial, economic, and environmental and social screening criteria for investment selection and implementation.

2. Objectives

The objective of the proposed project (APL Phase I) is to improve the quality of water supply and sanitation services in urban, peri-urban, and rural areas of the three participating departments, moving towards complete coverage with continuous supply of potable water for urban areas and significant improvement in the coverage and quality of service in rural areas for water supply. Specifically, the proposed operation will increase service coverage for water supply, sanitation, and wastewater treatment in urban areas by (a) consolidating a model for improved utility management under the Government- supported specialized operator model; and (b) delivering the necessary water and sanitation infrastructure.

3 The project will be structured around the establishment of operator-based management arrangements in participating municipalities in large part through multimunicipal concessions.

In concrete terms, it is expected that by the end of implementation of the operation, the Project will have: (a) established management under long-term operation with investment contracts for the urban areas in the majority of both department’s municipalities through multi-municipal concession arrangements; (b) achieved [85]% coverage of piped, treated water supply services for urban residents in participating municipalities and [75]% coverage to potable water in rural areas; (c) achieved [65]% connection to sewerage networks and basic wastewater treatment of [50]% of municipally-generated wastewater treatment services for the urban population in participating municipalities.

3. Rationale for Bank Involvement

The rationale for the Bank’s involvement is clear: the Bank, more than any of the other development financing institutions, is best positioned to support the Government’s program in large part because the policy foundation on which the program rests is the result of 15 years of Bank engagement in the water sector. The Bank was asked by the Government to support the entire program – despite the great interests of other financiers in leading all or part of the department interventions – principally because an analysis was undertaken by the Government of the three pilot cases (Magdalena, Cesar, and La Guajira) and the design of the La Guajira operation (7434-CO) was seen as the best technical option for scaling up nation- wide. In addition, the Program is fully consistent with the Bank CAS PR’s stated objectives of “Achieving Sustainable Growth” and “Improving Infrastructure Services” and further represents a rapidly-scalable model for providing investment financing to middle-income countries like Colombia with a proven track record of sector performance. It is also consistent with the Bank’s broader water and sanitation engagement in LAC and elsewhere as the operation would support the Government’s efforts at public sector reform through the design and implementation of a transparent mechanism for transferring grant resources to local utilities, linking investment with reform, and establishing transparent and uniform rules for grant-based financing throughout the public sector.

In addition to the linkages to other lending operations, the proposed operation is directly linked to ongoing informal AAA being prepared jointly between the Bank and sector institutions, namely the CRA, Superintendency of Public Services, and MAVDT. The ongoing work, which is expected to be completed in early FY08 (August) and published in both English and Spanish, aims to (a) undertake a comprehensive empirical analysis of the water and sanitation sector from an institutional perspective; (b) undertake a series of case studies (of 8 utilities) to better understand the details of successes and failures in operation with investment contracts; (c) support benchmarking efforts for water utilities; and (d) develop a program of impact evaluation of the department plans.

The Horizontal APL Approach. Consistent with other horizontal APLs, the Bank would present to the Board of Executive Directors the first phase of a multi-phase APL to support the Government’s overall program of department-level interventions. The Board would approve (a) the overall program concept up to an aggregate amount of US$ 400 million; and (b) the first phase of the APL for Norte de Snatander, Tolima, and Sucre for an amount of US$ 120 million. Subsequent loans, up to the aggregate approved by the Board, would be submitted to the RVP for approval and distributed to the Board on a no objection basis. Table 1 identifies the expected program of departmental plans, though their phases and grouping (each phase is expected to have multiple departments) will be determined during the initial phase of preparation.

4. Description of Components

4 Project Components. The operation would consist of three loan agreements, one for each department, each with three core components:

1. Urban Water Supply and Sanitation Services Improvement Component. The core element of the operation would be the consolidation of the urban and peri-urban areas under a series of contracts with specialized operators and the provision of the required injection of departmental resources for expanding basic infrastructure and improving service management. The basic model for contracting of specialized operators would be the negative concession / least-subsidy approach, which has been well established in Colombia and is currently supported under three Bank-financed Projects. The operation would, in principle, work in all 40 municipalities of Norte de Santander1, the 25 municipalities of Sucre,2 and the 476 municipalities of Tolima3. In cases where specialized operators are already in place\, the operation would support, if necessary, the restructuring of the concession agreement to advance investment and meet outcomes in a shorter period of time than initially estimated at the time of the concession establishment. In municipalities where no specialized operator exists, mayors who choose to enter the program would be supported by the department-level management unit in the structuring of a medium-term concession arrangement using the already-in- place model contract, tariff models, and supervision and oversight mechanisms used in the La Guajira operation, 7077-CO, and 7281-CO. During the Appraisal mission, the specific municipalities which are expected to participate in the initial stage of Phase I would be identified and finalized. The component would allow management-driven investment decision making by local private operators based on clearly established performance criteria to (a) improve the quality of drinking water; (b) improve the coverage of water supply and sanitation services; and (c) improve the continuity of service, with a medium-term goal of achieving continuous water supply service for the significant majority of the Department’s urban residents. Investments financed would be typical for the sector and would include water sourcing works and basic treatment infrastructure, primary and secondary water supply networks including household connections and meters for water supply, primary and secondary sewerage networks, and basic wastewater treatment infrastructure. Component funds would also be used to finance management tools – including commercial systems, cadastres, etc.

2. Rural Water Supply and Sanitation Services Component. In all three of the departments which are expected to participate in Phase I, and typical for Colombia, the performance of rural and small-town water supply and sanitation services is particularly weak. The operation would thus include a specific component dedicated to the financing of low-cost, appropriate solutions to bring potable water supply and basic sanitation to rural areas. The approach would include the rollout of the existing national programs for rural water supply and sanitation which include (a) the constructor- operator model, in which capable construction firms are contracted to build and operate simple water supply and sanitation systems; (b) the microempresas comunitarias approach, which involves the development of community-based micro-systems for providing basic services; and (c) for hinterland areas of

1 Cúcuta, Abrego, , , , Cácota, Cachirá, Chinácota, Chitagá, Convención, , , El Carmen, , , , Hacarí, Herrán, , La Esperanza, La Playa, , Lourdes, , Ocaña, Pamplona, , Puerto Santander, , Salazar, , San Cayetano, Santiago, , Silos, , Tibú, Toledo, Villa Caro, and Villa del Rosario 2 Buenavista, Caimito, Chalán, Coloso, Corozal, Coveñas, Galeras, Guaranda, La Unión, , Majagual, , , Palmito, Sampués, , San Juan Betulia, San Marcos, San Onofre, San Pedro, Sincé, , Sucre, Tolú, and 3 Alpujarra, Alvarado, Ambalema, Anzoátegui, Armero - Guayabal, Ataco, Cajamarca, Carmen de Apicalá, Casabianca, Chaparral, Coello, Coyaima, Cunday, Dolores, Espinal, Falan, Flandes, Fresno, Guamo, Herveo, Honda, Ibagué, Icononzo, Lérida, Líbano, Mariquita, Melgar, Murillo, Natagaima, Ortega, Palocabildo, Piedras, Planadas, Prado, Purificación, Rioblanco, Roncesvalles, Rovira, Saldaña, San Antonio, San Luis, Santa Isabel, Suárez, Valle de San Juan, Venadillo, Villahermosa, and Villarrica

5 concessioned municipalities, basic management arrangements with urban operators to provide training and basic operation and maintenance expertise on a pay-for-service basis.

3. Concession Structuring, Monitoring and Evaluation, and Project Management Component. The operation would include a component for the establishment of project management capacity at the departmental level particularly in regard to (a) structuring and/or renegotiating existing concessions; (b) project monitoring, supervision, and evaluation; and (c) ensuring implementation of the safeguard policies. The Government program is based on the use of independent program management services, and in principle the operation would support this approach, though some departments may have the in-house capacity to manage implementation.

Table 2: Project Components and Financing Sources Components Indicative % of Bank- % Bank- Costs Total financing financing (US$M) (US$M) Department of Tolima 1. Urban Water Supply and Sanitation [TBD] [TBD] [TBD] [TBD] Services Improvement Component 2. Rural Water Supply and Sanitation [TBD] [TBD] [TBD] [TBD] Services Component 3. Concession Structuring, Monitoring and [TBD] [TBD] [TBD] [TBD] Evaluation, and Project Management Component Subtotal Tolima 64.6 56.0 Department of Sucre 1. Urban Water Supply and Sanitation [TBD] [TBD] [TBD] [TBD] Services Improvement Component 2. Rural Water Supply and Sanitation [TBD] [TBD] [TBD] [TBD] Services Component 3. Concession Structuring, Monitoring and [TBD] [TBD] [TBD] [TBD] Evaluation, and Project Management Component Subtotal Sucre 63.6 31.0 Department of Norte de Santander 1. Urban Water Supply and Sanitation [TBD] [TBD] [TBD] [TBD] Services Improvement Component 2. Rural Water Supply and Sanitation [TBD] [TBD] [TBD] [TBD] Services Component 3. Concession Structuring, Monitoring and [TBD] [TBD] [TBD] [TBD] Evaluation, and Project Management Component Subtotal Norte de Santander 74.4 33.0 Total Project costs 202.6 100% 120.0 100%

5. Financing

6 Table 3: Financing Plan (US$m)

Source Local Foreign Total Department of Tolima [TBD] [TBD] [TBD] Department of Sucre [TBD] [TBD] [TBD] Department of N. Santander [TBD] [TBD] [TBD] Local Municipal Counterpart [TBD] [TBD] [TBD] Financing Republic of Colombia [TBD] [TBD] [TBD] INTERNATIONAL BANK [TBD] [TBD] FOR RECONSTRUCTION AND DEVELOPMENT 120.0 Total 202.6

6. Project Phases and Implementation

The Bank support to the Government would aim to finance the implementation of the program of departmental plans set out in CONPES #3463.4

Bank support would be structured around a multiple-phase horizontal APL (non-consecutive and overlapping), with Phase I (the proposed Project) focused on three departments, Norte de Santander, Tolima, and Sucre5 with components aimed at improving basic services in urban, peri-urban, and rural areas of the Departments through the specialized operator approach and through the Government’s programs for microempresas comunitarias and rural water supply and sanitation, respectively. The Program would bring to a national scale programs already supported under existing Bank Loans (Water Sector Modernization 7077-CO, Water and Sanitation Sector Support 7281-CO, and La Guajira Water and Sanitation Infrastructure and Management 7434-CO). Individual phases representing departments ready for implementation would be brought forward on a case-by-case basis and would be prepared in a rapid way with marginal incremental resources. Though each departments would have its own Loan agreement, participating departments would be grouped (usually 3-5 departments per Phase) and presented to the RVP for approval together.

7. Sustainability

Like most of the developing world, the key issue to enhancing the sustainability of water and sanitation service provision in Colombia is to move towards greater cost recovery for municipal service providers while maintaining affordability for users, especially the most poor. The national tariff and regulatory framework establishes a mechanism of intra-system cross-subsidies to provide basic services at less-than- full cost to the poor (defined as Strata 1-3). While such an approach has served to keep the unit cost of water service to the served poor at reasonable levels, in many cities, an absence of Strata 4 and 5 (and often 3) households, deficiencies in the existing cross-subsidy scheme and stratification system, given the configuration of demand and lack of proper tariff studies (which the utilities are meant to undertake by law) are a serious challenge/constraint to the financial sustainability of service provision. The Program seeks to directly improve the sustainability of service provision by supporting efforts to put in place capable management of urban utilities and putting those utilities on a direct path towards financial and

4 See http://www.dnp.gov.co/archivos/documentos/Subdireccion_Conpes/3463.pdf. 5 Initial discussions with the Government (particularly DNP and MAVDT) indicate that these three departments will comprise Phase I. This will be confirmed during the preappraisal mission and the teaem will advise management of the final composition of Phase I prior to the QER meeting.

7 operational sustainability. Such management, in part, reduces political interference in the provision of public services and enhances the technical capacity to resolve service problems. Sustainability will be primarily addressed through (a) the incorporation of specialized operators who are capable and interested in maintaining high levels of services; (b) the provision of capital investment subsidies which will ensure the construction of appropriate required infrastructure; and (c) tariffs which will cover operation and maintenance costs.

8. Lessons Learned from Past Operations in the Country/Sector

Project design reflects the Bank’s experience in the preparation and implementation of environmental management and urban water supply and wastewater treatment projects throughout the world, and specifically borrows on the lessons learned from the design of operations involving the financing of local infrastructure and reforms to institutional arrangements for local service provision in the wastewater sector, particularly in Colombia.

Some of the critical lessons learned and applied in this Project’s preparation include:

• The need for clarity in terms of institutional roles and responsibilities among the multiple stakeholders at the Central Government and local levels; • The need for a clear and transparent institutional structure when passing resources between levels of government; • The need for enhanced public consultation in design and public information during implementation of major infrastructure; • The importance of integrating Project activities within a broader context of sectoral reform, with a focus on regulatory and legal issues; • The need for effective coordination with other donors working in the sector; and • The need to accompany investment with appropriate reform measures at a utility level to ensure institutional and financial sustainability of the investment • Tariffs need to be set at such level that revenues will cover at least O&M costs; otherwise, the utilities will not be viable. • The proposed Operation with Investment model is already functioning successfully in Colombia and as such, the principles of institutional reform proposed under the Project have a proven track record in Colombia. • Selected wastewater treatment processes need to be based on appropriate (i.e. low cost, simple to operate and effective) technologies. Experience from Colombia and elsewhere has shown that application of highly sophisticated processes results in systems collapse due to shortage of O&M financing capacity and difficulty of operation. • A significant period is required between signing a contract with a private operator and the improvement of service (the construction period). Public dissemination and outreach is thus critical.

The design of the operation has been undertaken specifically in the context of the ongoing Loans 7077- CO, 4507-CO, 7281-CO, and most importantly, the recently-approved La Guajria operation which established a model for the passing of public subsidies for capital investment to specialized operators working under negative-subsidy concessions.

9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes No

8 Environmental Assessment (OP/BP/GP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [ ] [X] Cultural Property (OPN 11.03, being revised as OP 4.11) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [X] [ ] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [TBD] [TBD] Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X] Projects on International Waterways (OP/BP/GP 7.50) [TBD] [TBD]

10. Contact point Contact: David N. Sislen / Menahem Libhaber Title: Sr. Economist / Lead Water and Sanitation Specialist Tel: (202) 458-0305 / (202) 473-5327 Fax: Email: [email protected] / [email protected]

11. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas

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