Document of The World Bank Public Disclosure Authorized Report No: 18989 CO

PROJECT APPRAISAL DOCUMENT

ONA Public Disclosure Authorized

PROPOSED LOAN

IN THE AMOUNT OF US$85 MILLION

TO THE

DISTRICT OF CARTAGENA

WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA

Public Disclosure Authorized FOR THE

CARTAGENA WATER SUPPLY, SEWERAGE AND ENVIRONMENTAL MANAGEMENT PROJECT

June 28, 1999 Public Disclosure Authorized

Finance,Private Sector and InfrastructureDepartment Colombia,Ecuador and VenezuelaCountry Managing Unit Latin Americaand the CaribbeanRegional Office CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 1999) Currency Unit = Peso ($) $1682.12 = US$1.00 $1 million = US$594.5

FISCAL YEAR January I - December 31

ABBREVIATIONS AND ACRONYMS

ACUACAR Aguas de Cartagena (the water and sewerage company of Cartagena) AGBAR Aguas de Barcelona (The water and Sewerage company of Barcelona) BOD Biochemical Oxygen Demand CARDIQUE Corporaci6n Autonoma del Canal del Dique (the regional environmental authority in Cartagena) CAS Country Assistance Strategy CIOH National Oceanographic Institute CRA Comisi6n Reguladora de Agua (Water Regulating Committee) DAMARENA The Municipal Environmental Department of the District of Cartagena DAP Direcci6n de Agua Potable y Saneamiento (Water and Sanitation Directorate) DIMAR Marine and Port Directorate DNP Departamento Nacional de Planeaci6n (National Planning Department) DTF Deposito Termino Fijo (interest rate of a fixed term deposit) EPD Empresas Publicas Distritales (the previous water and sewerage utility of Cartagena) FINDETER Financiera de Desarrollo Territorial (a second tier financial intermediary for regional and local infrastructure investment established in 1990) HDPE High Density Poly Ethylene Km Kilometer Kw Kilowatt M Meter MCM Million Cubic Meter Mm Millimeter M3/d Cubic meter per day M3/s Cubic meter per second NGO Non Governmental Organization PIU Project Implementation Unit PLC Programmable Controller PMR Project Management Report PSP Private Sector Participation RCCP Reinforced Concrete Cylindrical Pipe SS Suspended Solids SSPD Superintendencia de Servicios Publicos Domiciliarios (Superintendency of Domestic Public Services) WSS Water and Sewerage Sector

Vice President: S. Javed Burki Country Management Unit Director: Andr6s Solimano Sector Management Unit Director: Danny Leipziger Task Manager: Menahem Libhaber Colombia Cartagena, Water Supply Sewerage and Environmental Management Project

CONTENTS

A. Project Development Objective ...... 2...... 2

Project development objective and key performance indicators ...... 2

B. Strategic Context ...... 2

1. Sector-related CAS goal supported by the project ...... 2 2. Main sector issues and Government strategy ...... 2 3. Sector issues to be addressed by the project and strategic choices ...... 3

C. Project Description Summary...... 7

1. Project components...... 7 2. Key policy and institutional reforms supported by the project ...... 8 3. Benefits and target population...... 9 4. Institutional and implementation arrangements...... 10

D. Project Rationale ...... 1

1. Project alternatives considered and reasons for rejection ...... 11 2. Major related projects financed by the Bank and/or other development agencies ...... 12 3. Lessons learned and reflected in proposed project design ...... 12 4. Indications of borrower commitment and ownership ...... 14 5. Value added of Bank support in this project ...... 14

E. Summary Project Analyses...... 15

1. Economic ...... 15 2. Financial ...... 16 3. Technical ...... 17 4. Institutional ...... 19...... 19 5. Social...... 19 6. Environmental assessment ...... 21 7. Participatory approach ...... 23

F. Sustainability and Risks ...... 24

1. Sustainability...... 24 2. Critical risks . 25 3. Possible controversial aspects...... 26

G. Main Loan Conditions . 27

1. Effectiveness conditions .27 2. Other .27 H. Readiness for Implementation...... 28

I. Compliance with Bank Policies ...... 28

Annexes

Annex 1. Project Design Summary .29 Annex IA Key Performance Indicators .31 Annex 2. Detailed Project Description.33 Annex 3. Estimated Project Costs .45 Annex 4. Cost-Benefit Analysis Summary.50 Annex 5. Financial Assessment of Project Entities .63 Annex 6. Procurement and Disbursement Arrangements.77 Table A. Project Costs by Procurement Arrangements .82 Table Al. Consultant Selection Arrangements ...... 83 Table B. Thresholds for Procurement Methods and Prior Review .84 Table C. Allocation of Loan Proceeds.85 Annex 7. Project Processing Budget and Schedule.86 Annex 8. Documents in Project File.87 Annex 9. Environmental Assessment Summary .89 Annex 10. Social Assessment Summary Country at a Glance.102 Annex I 1. Statement of Loans and Credits .109 Annex 12. Country at a Glance.111

Maps Section:

IBRD 30299 Project Location IBRD 30300 Secondary Sewerage Networks IBRD 30301 Primary Sewage Collection System IBRD 30302 Main Wastewater Conveyance System, Treatment Installations and Submarine Outfall IBRD 30303 Parallel Water Pipeline Dolores-Albornoz IBRD 30304 Water Supply Works Colombia Cartagena Water Supply, Sewerage and Environmental Management Project Project Appraisal Document

Latin America and the Caribbean Regional Office Colombia, Ecuador and Venezuela Country Managing Unit (LCC4C)

Date: June 28, 1999 Task Team Leader/Task Manager: Menahem Libhaber Country Manager/Director: Andres Solimano Sector Manager/Director: Danny Leipziger Project ID: CO-PE- Sector: Water Supply & Program Objective Category: Environmentally Sustainable 44140 Sanitation Development Lending Instrument: Sector Investment Loan Program of Targeted Intervention: [X] Yes [ ] No ProjectFinancing Data [X] Loan [ Credit [] Guarantee [] Other [Specify]

For Loans/Credits/Others:

Amount (US$m): 85.0 Proposed terms: [ Multicurrency [X] Single currency, specify US Dollar Grace period (years): 5 [] Standard [] Fixed [X] LIBOR-based Variable Years to maturity: 17 Commitment fee: 0.75% Service charge: N/A% Front-end Fee 1% Financing plan (US$m): Source Local Foreign Total Government 20.0 0.0 20.0 District of Cartagena (Municiplaity) 7.6 0.0 7.6 ACUACAR (the water company of Cartagena) 4.6 0.0 4.6 IBRD including Front-end Fee of 1% 28.0 57.0 85.0

Total 60.2 57.0 117.2

Borrower: The District of Cartagena Guarantor: The Government of Colombia Responsible agency(ies): Aguas de Cartagena (ACUACAR)

Estimated disbursements (Bank FY/US$M): 1999 2000 2001 2002 2003 2004 Annual 6.0 17.3 27.5 17.7 13.0 3.5 Cumulative 6.0 23.3 50.8 68.5 81.5 85.0

Project implementation period: 5 years Expected effectiveness date: October 30, 1999 Expected closing date: December 31, 2004

OSD PAD Form: July 30, 1997 Page 2

A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The project development objectives are to: (i) improve the water and sewerage services of Cartagena and the sanitary conditions of the city's poorest population, by expanding water and sewerage coverage, particularly in the city's poor neighborhoods, (ii) facilitate the environmental cleanup of water bodies surrounding the city (Cartagena Bay, Caribbean beaches and Cienaga de la Virgen lake) by providing adequate collection, treatment and disposal of the entire flow of the city's wastewater; and (iii) improve the sustainability of water and sewerage services in Cartagena by leveraging Bank support to shore up the private sector participation (PSP) model pioneered by ACUACAR, the city's mixed-capital water and sanitation utility, against the prospect of political interference.

The key performance indicators for the project development objectives are: (a) "environmental indicators which measure sewerage coverage rate and volume of sewage treated; (b) ) "utility-based" indicators which measure the operational and financial efficiency of ACUACAR; and (c) financial indicators of the District of Cartagena. Details on the performance indicators are provided in Annex IA.

B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 17107-CO Date of latest CAS discussion: November 6, 1997

Improve sustainable infrastructure services. The project would address part of the CAS agenda by focusing on: (i) improving infrastructure services and (ii) ensuring sustainable development. Colombia's poor and deteriorating infrastructure has long been identified as a critical constraint to faster economic growth. The new government's strategy to improve the quantity and quality of water supply, sewerage and sewage treatment infrastructure emphasizes increased private sector participation. At the same time, the project supports the CAS goal to reduce environmental health risks, while incorporating environmental considerations and sustainable development incentives into the provision of public services. Increased collection, treatment and adequate disposal of sewage in Cartagena under the proposed project will reduce pollution of the Cartagena Bay, the Cienaga, and the Caribbean beaches, and hence reduce environmental health risks faced by the population, particularly the urban poor.

2. Main sector issues and Government strategy:

Sectoral Context. A maJorrestructuring of the water and sanitation sector took place in 1991. The right of municipalities to provide water and sanitation services was confirmed in the constitution. In 1994 a new law was enacted (Law 142 ) which established a legislative and regulatory framework for the sector that emphasizes efficiency of service provision through the introduction of competition in the sector.

The Vice Ministry of Water, Housing and Urban Development in the Ministry of Economic Development is responsible for the water sector. The responsibilities for the sector have been assigned to different institutions within the Vice Ministry. The Potable Water and Sanitation Directorate (DAPS) oversees the water and sanitation sector, formulates sector policies and plans sector development. The Water Regulatory Commission (CRAS) promotes competition among service providers, controls monopolies, approves tariffs based on standard formulas and on investment plans submitted by the operating companies and sets service quality and technical standards to be followed by utilities. In addition, the Superintendency of Domestic Public Services (SSPD) is responsible for monitoring and supervising the adequacy and efficiency of the operations, for establishing uniform accounting systems, supervising the administration of subsidies and monitoring the general administration of public services companies. Apart from these agencies within the Ministry of Economic Development, environmental regulation is handled by Autonomous Regional Corporations. Page 3

Colombia, with a population of about 37 million, has made impressive progress in the expansion of water and sanitation services in urban areas over the past decade. Approximately 88% of the urban population of 27 million were connected to public water supplies in 1996. About 75% were either connected to public sewerage or had individual septic tanks in 1996. Rural coverage was lower with about 31% of the 10 million rural population connected to public water supplies in 1996. Some 10% of the population in rural areas was connected to sewerage systems in 1996. However, the increase in coverage rates does not reveal the quality of service, which lags behind. Water rationing and intermittent supplies are common in most water supply systems. Only slightly less than 50 percent of all drinking water is treated, and as a result the drinking water quality in many systems is sub-standard. Sufficient pressure in the water supply system is lacking, adding to the risk of bacteriological contamination. Sewage collection systems do not have sufficient hydraulic capacity to handle wastewater flows especially in poor neighborhoods, resulting in overflow problems. The share of collected sanitary sewage receiving any treatment whatsoever is below 5%, which is low for a middle-income country as Colombia.

Despite significant progress in the water and sanitation sector in the recent years, some major issues remain unsolved. A more detailed description of the major sectoral issues can be found in a recent water and sanitation sector policy note prepared by the Bank recently (see Project Files). The main sector issues are: (i) the need to improve the quality of the water and sewerage services; (ii) the need to improve financial and operational efficiency in the provision of the water and sewerage services; (iii) the large investment financing needs; and (iv) slower than expected improvements under the new institutional framework of Law 142.

Government Strategy

The new Government has pledged to deepen the sector reforms outlined above and to move aggressively on WSS service expansion as part of a concerted effort to improve living conditions and to prepare the ground for national reconciliation. Improved coverage, service quality and environmental sustainability of water supply and sanitation services figure prominently in the Govemment's program "Change for Construction of Peace 1998-2002" (Cambio para Construir la Paz, 1998-2002)which contains a chapter on the policy for the water and sanitation sector, designed to buttress the material basis for political moves to end the country's long-running civil war. The plan emphasizes environmentally sustainable development, improved sewerage coverage for unserved urban areas and the need to attract private capital for the WSS sector. In addition, the new Government has specifically committed itself to developing PSP in urban service delivery in cooperation with the Bank ("Programa de Modernizaci6n Empresarial", 1998-2002).

The objectives of the water and sanitation policy are to: (i) create regulatory and control conditions which would permit the public service companies to increase the coverage of water and sewerage services and improve the water quality, focusing on benefiting primarily the population of limited resources; (ii) advance, in cooperation with the environmental policy, in deternining the water resources balance and the vulnerability of water supply sources; and (iii) advance in implementing a plan for wastewater treatment based on economic, social and environmental viability.

The means which the Government proposes to undertake for achieving its goals are the following: (i) strengthen the mechanisms of regulation and control so as to provide the public service companies with a clear framework of rules, regulations and incentives; (ii) strengthen the technical assistance programs; (iii) provide Govemment financial support to promote the modemization of the sector companies and improve management efficiency; and (iv) improve the coordination between Government agencies.

Local Sector Issues

Background: The District of Cartagena de Indias has a population of about 750,000 inhabitants, which has been growing at 2.5% p.a. in recent years. It is surrounded by water on almost all sides - the Page 4

Caribbean Sea in the north and west, Cartagena Bay in the south and the Cienaga de la Virgen lagoon (a in-city large coastal lagoon hereafter denominated the Cienaga) in the north-east, as well as traversed by several interconnected water courses (cafios y lagos). Thanks to its historical landmarks and spectacular natural scenery, Cartagena is Colombia's largest tourist area, as manifested by its name: Distrito Turistico y Cultural (Turistic and Cultural District), with a large annual influx of about 700,00 national and foreign visitors drawn by its tropical climate, natural beauty and historical sites. A floating population of thousands of tourists can be encountered in the city all year long, with peak numbers during vacation seasons and holidays. UNESCO declared in 1984 the Old City, Fortresses and Group of Monuments in Cartagena as Cultural Heritage Site of Humanity. The city's economy is heavily dependent on the tourism industry which generates an estimated US$315 million in annual revenue. Cartagena has also a thriving industrial sector with important petrochemical, beverage and seafood processing industries, most of which are located in the Mamonal industrial estate, and is an important port city and a gateway for supplies, goods, lumber, and general merchandise imports to the country The port moves over 10 million tons of cargo per year. The city and its surroundings represents a complex area particularly from the socio-economic and ecological perspectives. Cartagena is a destination for rural Colombians displaced by violence in the countryside looking for better economic opportunities, making it one of Colombia's most rapidly growing cities. Cartagena has doubled its population in the past 20 years. As a result of high immigration to the city of poor population from other parts of Colombia, 84% of the fixed population is of low and medium-low income, 31% of which is extremely poor. About 14% of the population is of medium and medium-high income and less than 2% is of high income.

The city's water resources contribute significantly to the quality of life of its residents by providing venues for both leisure (swimming, water sports) and commercial activities (fishing, commerce). Unfortunately, the water bodies surrounding Cartagena are severely befouled by wastewater as they are the repositories of the untreated municipal and industrial liquid wastes of the city, with a current total flow of 145,000 m3/day, 30% of which is discharged into the Cartagena Bay, other 60% into the Cienaga de La Virgen.and 10% into the in-city water courses. Overflows from the overloaded sewage collectors in the wealthy neighborhoods of the city contaminate the beaches and further contaminate the in-city water courses, while industrial wastes from the Mamonal industrial estate area contribute additional contamination loads to the Cartagena Bay. The population residing in the poor neighborhoods around the cienaga suffers from the worst sanitation conditions, since as a result of lack of sewerage networks in these neighborhoods, raw sewage is flowing in its streets. As the city grew rapidly, water and sanitation infrastructure lagged behind. Whereas the rich parts of Cartagena, including the hotel areas, have high coverage of water and sewerage, the poorer parts of the city have low coverage of these services. The present situation has generated severe public health, sanitation and environmental problems, which, in addition to their direct impact on the population in deteriorating quality of life, are posing a serious restriction to sustainable economic development of Cartagena, especially in the tourism sector, which is the main income source in the city.

Up until June 1995, the water and sewerage services in Cartagena have for a long time been under the responsibility of Empresas Publicas Distritales (EPD), an overstaffed and extremely inefficient public utility, which suffered from continually increasing financial problems, resulting in poor and ever deteriorating performance leading to a low level of service delivery.

Key local sector issues : The water and sanitation sector in Cartagena faces the following challenges:

* Insufficient water supply coverage: In spite of the continuous major efforts and investments carried out by ACUACAR and the District of Cartagena to expand the water coverage and improve service, the current water coverage rate of about 80% is still insufficient and needs to be increased. Most of the areas lacking water distribution networks are the poor neighborhoods in the southwest part of the city, located in the vicinity of the Cienaga. Page 5

* Insufficient sewerage services: The sewerage coverage level in the city is currently about 65%, leaving over a third of the population, especially in the poorest areas around the Cienaga and in part of the southwestern zone adjacent to the Cartagena Bay, without sewerage services. In these areas raw sewage flows in open channels in the streets. Since the Cienaga itself is heavily polluted and open canals carrying sewage from other parts of the city cross poor neighborhoods on their way to the Cienaga, Cartagena's poor population is exposed to about 60% of the city's untreated sewage. The sewage collection system is particularly deficient in the southeast and southwest sections of the city. The network in other parts of Cartagena is very old and many sewers are hydraulically constrained, particularly during the peak tourist seasons. In view of deficient sanitation services, city authorities are forced to restrict construction of new buildings in order to avoid a further deterioration of services. Sewage collection and disposal problems represent a major obstacle to Cartagena's overall economic development.

* Inadequate wastewater management system: Cartagena has no sewage treatment facilities and liquid wastes from municipal and industrial areas are discharged without treatment to the Cartagena Bay (receiving 30% of the discharge), the Cienaga (receiving 60%), and the in-city water courses that eventually reach the bay and the Cienaga (receiving the balance 10%). Projections for 2025 indicate that Cartagena will generate about 305,000 m3/d of sewage. The discharge of raw wastewater is creating serious environmental and health problems and also hampering activities such as swimming, fishing, and shellfish harvesting.

* Industrial wastewater discharges in Mamonal: The industrial zone of Mamonal is located in the outskirts of the District. It consumes an estimated 20,000 m3/d of potable quality water and 61,800 m3/d of raw water for process and cooling requirements. The industrial zone is not connected to and does not discharge its wastewater to the municipal sewerage network but rather discharges its wastewater to the Cartagena Bay, part of it only after partial or minimal treatment.

Local Government Strategy

The District of Cartagena was one of the first municipalities in Colombia to introduce private sector participation in the sector. In October 1993, following many years of chronic inefficiency, political interference and poor quality of service, the Mayor of Cartagena decided to liquidate the municipal water and sewerage utility to create a new public-private mixed capital enterprise. The Bank, through a previous Bank loan (Loan 2961-CO for the " Colombia Water Supply and Sewerage Sector Project"), provided technical assistance to help the process. In December 1994, after a public bidding process, Aguas de Barcelona (AGBAR, the privately owned water company of Barcelona), was selected as the partner of the municipality, and the mixed enterprise ACUACAR was created with an initial capital of US$ 4 million and took over the responsibility for the provision of the water and sewerage services in June 1995. Under a contract similar to lease agreements, the District is responsible for future capital investments to expand the existing water and wastewater system, while ACUACAR is responsible for capital expenditures to improve the existing system and has the right to use existing and future assets at no cost during the contract life. The creation of ACUACAR improved the service quality and operational efficiency substantially, as discussed later in Block E, section 4.

Since the take over of the responsibility for the water and sewerage services by ACUACAR, the District of Cartagena and ACUACAR have made significant investment for expanding the water and sewerage coverage in the city. The current strategy of the District is to continue improving the services and to resolve environmental problems through the implementation of the proposed project, which is aimed at addressing the outstanding problems of the water and sanitation sector in Cartagena. In terms of water supply the proposed project would support the completion of the second stage of the water supply master plan. i.e., provide the installations required to satisfy the needs up to the year 2010. It would increase the water supply coverage from the current value of about 80% to 89%. In terms of sewage collection treatment and disposal the proposed project, jointly with other efforts undertaken in parallel (the IDB Page 6

project under implementation and investments by the District and ACUACAR from their own sources), would increase sewerage coverage from 75% to 88%. In addition, the proposed project would result in the cleanup of the water bodies to which the Cartagena's wastewater is currently being discharged (Cartagena Bay, the Cienaga, the beaches and the water courses crossing the city), while discharging treated wastewater into the Caribbean sea without negative environmental impacts.

3. Sector Issues to be Addressed by the Project and Strategic Decisions.

The proposed project is aimed at addressing the outstanding problems of the water and sanitation sector in Cartagena. With the privatization of the water and sewerage services in Cartagena completed and with good prospects for continuing success from the institutional standpoint, the Cartagena Water Supply, Sewerage and Environmental Management Project would address three significant sector issues: (i) insufficient water and sewerage coverage; (ii) change in investment pattern that will reflect changes in priority, putting additional emphasis on the treatment and adequate disposal of wastewater to reduce water pollution; and (iii) support PSP arrangements targeting at improving the financial and operational efficiency of the water and sanitation services. On a strategic level it is worth noting that some of the major institutional changes (primarily, creation of ACUACAR as a mixed capital utility) have already been front-loaded under a previous loan with physical investments deferred to the project currently under preparation.

The components of this project have been strategically selected to complement investments under implementation with funding from the District of Cartagena, ACUACAR and IDB in areas that currently discharge to the Cartagena Bay, in the hotel area of Bocagrande, and in the southwestern part of the city. The investments financed by these sources do not, however, include the southeastern part of the city, areas draining to the Cienaga, or wastewater treatment and disposal facilities of any kind. The proposed Bank project would complete the sewage collection program of the city while providing treatment and disposal for all wastewater generated city-wide. It is therefore key to capturing the full health and environmental benefits from investments made by all sides. Page 7

C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown).' Component Category Cost Incl. % of Bank- % of Contingencies Total financing Bank- (US$M) (US$M) financing A. Expansion of the Water Supply System Physical 9.9 8.4 7.3 74 B. Expansion of the Sewerage System in Physical 35.7 30.5 26.2 74 the Cienaga Basin C. Construction of the Main Wastewater Physical 28.1 24.0 20.6 74 Conveyance System D. Construction of the Wastewater Physical 6.8 5.8 5.0 74 Treatment Installations E. Construction of the Submarine Outfall Physical 22.8 19.5 16.6 74 F. Industrial Wastewater Discharge Institutional 0.6 0.5 0.6 100 Control Building G. Environmental and Social Component Environmental 3.3 2.8 3.3 100 H. Project Management, Technical Project 9.1 7.7 4.5 49 Assistance, Studies, design and Management Supervision

Front-end Fee 0.9 0.8 0.9 100

Total 117.2 100.0 85.0 73

Component A - Expansion of the water supply system: This component includes the following subprojects: (i) expansion and improvement of the water production system; (ii) increase of the water coverage in the city; (iii) replacement of primary distribution mains; (iv) mitigation of environmental impact of water treatment sludge; (v) remote control systems; and (vi) Unaccounted For Water (UFW) reduction plan.

Component B - Expansion of sewerage system in the Cienaga Basin: This component includes the following subprojects: (i) enhancement of conveyance capacity of existing sewage collectors in the southwest, southeast, and central parts of the city that currently drain to the Cienaga; (ii) expansion of secondary sewerage network in the southwest, southeast, and central parts of the city, as well as the Boquilla area, that currently drain to the Cienaga; (iii) construction of new pressure lines and pumping stations; and (v) construction of new gravity collectors in residential areas.

Component C - Construction of the main wastewater conveyance system: This component includes the following subprojects: (i) upgarding of the Paraiso pumping station; (ii) construction of the pipeline from Paraiso pumping station to the,treatment plant site; and (iii) construction of the effluent pipeline from the treatment plant to the submarine outfall at the Caribbean shoreline. The conveyance system would consist of a 72" reinforced concrete cylindrical pressure pipe (RCCP) with a total length of 23.85 km.

Component D - Construction of the Wastewater Treatment Installations: The Preliminary treatment Installations will remove floatable materials, grease, oil, sand, and grit. Treatment facilities will include six rotary screens (1.5 mm clearance) followed by two vortex-type grit chambers. The rotary screens will remove rags, floatable material, and large solids. The expected volume of screenings generated by the rotary screens is about 8.5 m3/d. In addition. The vortex-type grit chambers will remove about 5.1 m3/d of sand and grit. Page 8

Component E - Construction of Submarine Outfall: This component consists of construction of the submarine outfall for the safe discharge of the pre-treated effluent to the Caribbean sea near Punta Canoas. The main conveyance system will connect the treatment plant with the submarine outfall. The outfall would be constructed using a 72" reinforced concrete pipe. Total outfall length would be 2,850 m and the discharge point (diffuser area) will be submerged at a depth of 20 m. The diffuser will have a length of 540 m, with a riser spacing of 20 m, i.e., a total of 27 risers. Each riser will be made of a 12" diameter pipe, 2 m long. The upper end of each riser pipe will be sealed by a welded plate, and it will have 2 openings close to the plate, each of 8" diameter, i.e., the total number of discharge ports will be 54. In the surf zone between the shoreline and the 3 m-depth contour, outfall pipes will probably be laid using a trestle built over the water. At greater depths, a barge-mounted crane would probably be used for construction.

Component F - Industrial Wastewater Discharge Control: This component would address the issues related to industrial wastes discharged to the municipal sewerage network, and includes the following activities: (i) carrying out a survey to identify key sources of industrial pollution in the city of Cartagena; (ii) establishing a system for regulating the discharge of industrial wastes, either to the sewerage system or to receiving bodies; (iii) establishing a system for auditing the status of industrial wastes discharge; (iv) defining strategies to control small and dispersed sources of industrial pollution discharging to the sewerage networks (gasoline stations and mechanical repair shops); and (v) providing technical assistance in selection and design of pretreatment processes.

Component G - Environmental and Social Component: This part of the project seeks to implement mitigation measures of the environmental and social impacts of the project. The environmental management program includes: (i) environmental supervision during construction; (ii) restoration and conservation of the Cienaga de la Virgen nature reserve; (iii) carrying out a monitoring program before and after construction of the marine outfall to study the fate of pathogenic coliforms and other contaminants discharged through the outfall; and (iv) environmental instututional strengthening program. The social management program includes: (i) organization and Strengthening of the community; (ii) construction rehabilitation and equipping of community centers; (iii) support to in house basic sanitation in La Boquilla; and (iv) strengthening of the Community Relations Unit of ACUACAR.

Component H - Project Management, Technical Assistance, Studies, design and Supervision: This component would support and partially finance the following activities: (i) project management; (ii) design and supervision of the water supply systems works; (iii) design and supervision of the sewerage systems works; (iv) design of the main wastewater conveyance system, treatment installations and submarine outfall; (v) supervision of the main conveyance system works; (vi) supervision of the treatment installation and submarine outfall works; and (vi) procurement audits.

Additional details regarding the project and a more detailed project description are provided in Annex 2. 2. Key policy and institutional reforms supported by the project. This project supports two key institutional reforms. First, the consolidation of the sector reform process in Cartagena's water and sewerage sector and second, the implementation of a national policy to finance environmental infrastructure investments, especially wastewater treatment infrastructure.

Consolidating the sector reform . The privatization process in the water and sanitation sector in Cartagena was supported by the Bank under a previous project ("Water Supply and Sewerage Sector Project", Loan 2961-CO) and was the first PSP process carried out in the water sector in Colombia. As discussed in Block E Section 4, the creation of a mixed enterprise has brought notable improvements in quality of service provision. Despite the substantial improvements, the reform process is still fragile. Since the District owns 50% of ACUACAR's shares, the company and the contract may be subject to political interference by future mayors. The Bank's participation in this project at this critical juncture will help consolidate the sector reform and establish a much needed credibility of the mixed enterprise Page 9 model adopted in Cartagena, where the public sector is responsible for financing major infrastructure investments. One of the loan conditions is to maintain the private sector participation in the provision of water and sewerage services in Cartagena.

A national policy for environmental infrastructure investment financing. This project supports the National Government's policy to provide capital investment subsidies for a large environmental infrastructure, with clear externalities. This project would support Cartagena's efforts to be the first city in Colombia to achieve broad coverage in wastewater collection and environmentally-safe treatment and disposal of the wastewater. In many of the developed countries such as the U.S., Japan, and members of the EU, there is a clear policy for the central government to provide investment subsidies ranging between 50-100% of total cost for wastewater treatment and disposal infrastructure. The ability to cover the investment costs for sewerage and wastewater treatment and disposal in cities like Cartagena using only internally generated revenues based on tariffs is very limited. Furthermore, as a significant portion of the pollution in Cartagena is generated by sources from outside the region (i.e., by visiting tourists and by the population living upstream in the Magdalena river, whose contamination arrives to Cartagena through the Canal del Dique), there is a justification for participation of the central Government in the financing of Cartagena's environmental infrastructure. Currently, the Government uses oil production royalties to provide grants for environmental infrastructure. As part of the financing for this project, the Government has agreed to provide a grant of US$20 million which will serve as part of the project's counterpart funds. 3. Benefits and target population: The project is expected to bring significant public health benefits in terms of sanitation services especially in the city's poor and marginal areas. It will also improve overall standards of living in the city, especially in poor neighborhoods around the Cienaga, and reduce urban pollution city-wide. Finally, the project will enhance the socio-economic development of the region which is dependent on tourism and by reducing environmental pollution and public health risks will provide great benefits to the tourism industry. The achievement of project objectives will also alleviate environmental problems, particularly pertaining to water and beach pollution.

In the city's poorest neighborhoods (especially in the San Jose de Los Campanos, El Poz6n, Villa Estrella, La Boquilla, Paseo Bolivar, Zona Suroccidental and Zona Suroriental sub-basins which currently discharge their sewage to the Cienaga), approximately 80,000 people will directly benefit from project investments in increasing sewerage and water supply coverage. In Cartagena as a whole, about 750,000 inhabitants will benefit from the improvements in the reliability of the water supply service and especially from the environmental improvements that wastewater collection, treatment and safe disposal systems will bring to the Caribbean beaches, the Cienaga, the Cartagena Bay and to other water courses which cross the city. Finally, the 700,000 tourists that visit Cartagena annually will benefit from the environmental improvements brought about by the project. While tourism and associated economic growth depend on a variety of factors beyond the direct control of this project, the promotion of Cartagena's tourism industry and its impact on the city's economic growth are major indirect benefits that are expected to accrue to Cartagena' s population as a whole.

In a larger sense, by strengthening ACUACAR and the reform process, the project will also benefit the water and sanitation sector in Colombia as a whole, since ACUACAR serves as a model for the transformation of public utilities nationwide. Given that ACUACAR is the first mixed-capital water and sanitation utility created under Law 142, its success has important repercussions on overall sector development. Page 10

4. Institutional and implementation arrangements. Implementation Period: FY00 - FY05 (5 years)

Project administration and coordination: The Borrower is the District of Cartagena. The Project Implementation Unit (PIU) will be located in ACUACAR. The PIU will implement the project with the funds made available by the District. The PIU, which operates under the joint auspices of the District and ACUACAR's board of directors, is already in charge of the entire investment program for all projects financed by ACUACAR, the District, and IDB. The PIU has been working efficiently with the Bank under the previous loan and during project preparation, and is familiar with the Bank's procurement guidelines as well as project preparation and implementation procedures. The PIU enjoys the support of the technical department of ACUACAR, which is composed of highly qualified staff. The PIU also has access to technology and support of the AGBAR group. The PIU will be assisted by consulting firms for the design and supervision of highly specialized works such as wastewater treatment facilities and submarine outfall installations. It will also be assisted by a highly qualified panel of experts who would serve as a project steering committee. The PIU will be in charge of design and supervision of routine works, and its staff would have access to substantive training on various aspects of project management, should a need for such training be detected.

Legal Agreements: In addition to the three legal agreements which would be signed by the Bank, i.e., the Loan Agreement between the District and the Bank, the Project Agreement between ACUACAR and the Bank, and the Guarantee Agreement between the Government and the Bank, two agreements between the Colombian parties need to be signed: (i) a subsidiary agreement between the District and ACUACAR, regarding: (a) transfer of the earmarked funds and Government contribution to counterpart funds from the District to ACUACAR as a counterpart contribution; (b) transfer of the Bank funds from the District to ACUACAR to be used for project implementation; (c) contribution of US$ 4.6 million of ACUACAR to the counterpart fund on a non reimbursable basis, by carrying out or paying for the services required for the detailed design and supervision of works under parts A and B of the project and for the overall management of the project; and (d) payment of US$ 15.4 million by ACUACAR to the District during the years 2005-201 1 as a contribution to the debt service of the Bank loan; and (ii) a fiduaciary agreement to establish a special account under a trust fund agreement (Contrato de fiducia irrevocable) for purposes of ensuring availability of counterpart funds for the project. Such an account will be fed w-iththe earmarked funds (20% of National Government transfer and 18% of property tax, complemented by royalty funds - fondo de regalia - and environmental fees -tasa retributiva - in case of shortfall) and the proceeds of the Government contribution to the counterpart funds. This Government contribution will be secured through the issuing by the Government, prior to effectiveness, of a Certificado de VigenciasFuturas providing for budgetary contributions of US$ 20 million equivalent for the Project, to be made available to the District during the years 1999-2004 according to an agreed schedule as required by the project.

Flow of funds: Bank funds will be used by ACUACAR through a special account. The District's contribution to counterpart funds, which will be fed from the earmarked funds (20% of Law 60 transfers and 18% of the municipal property tax, petroleum royalties and environmental fees) according to the required schedule of the counterpart funds, and the funds of the Government contribution to counterpart funds, will be deposited, during the five years of project implementation, in a fiduciary account and be used by ACUACAR exclusively to finance project activities, according to needs. The District will also establish another separate account under the fiduciary agreement, in connection with the counter-guarantee agreement to be signed between the District and the Government of Colombia, for purposes of depositing therein the funds necessary for the interest charges and debt service of the Loan. This account will be fed from the remainder of the earmarked funds. The trust fund management will also repay from this account any previous commitments of the District referred to the earmarked funds. This account will remain open until the completion of servicing the debt to the Bank. During the years 2005-2011, ACUACAR will deposit in the second separate fiduciary account a annual amount of US$ 2.2 million (totaling US$ 15.4 million), as a contribution for servicing the debt to the Bank. Page 1 1

Procurement: Works wholly or partly funded by IBRD will be procured in accordance with the Bank's Guidelinesfor Procurement under IBRD Loans and IDA Credits (published in January 1995; revised in September 1997 and January 1999). Consulting services wholly or partly financed by IBRD will be procured in accordance with the Bank's Guidelines for Selection and Employment of Consultants by World Bank Borrowers (published in January 1997, revised in September 1997 and January 1999). The PIU will use Standard Bidding Documents published by the Bank for preparation of bidding documents for works and goods to be procured under International Competitive Bidding (ICB), and for Requests for Proposals and consulting services contracts. Detailed project procurement arrangements are given in Annex 6. A procurement capacity assessment of the PIU has been carried out and it was classified as type "A". A few recommendations to improve filing and will be provided to the implementation agency.

Project Financial Management and Auditing: A project financial management assessment was carried out by a LAC Financial Management Specialist (FMS). The FMS concluded that ACUACAR has all the necessary capacity to manage the financial affairs of the project in accordance with Bank standards. ACUACAR's key management positions are occupied by seasoned professionals with a record of tangible accomplishments since the new management took over the Company three and a half years ago. Project management expressed preference to avail themselves to PMR based disbursements, as they already have the installed capacity to produce quarterly progress reports together with fluent budget formulation and routinely prepared cash projections. Other than minor guidance on PMR format and close monitoring of the initial disbursement process, there would be no other specific attention needed from the Bank for ACUACAR to be in full compliance with Bank financial management standards. Shortly after effectiveness, an independent accounting firm would be engaged to carry out the covenanted yearly audit, in accordance with terms of reference approved by the Bank.

Monitoring and Evaluation: The Bank will devote approximately 40 staff weeks to supervision through FY 2004. In addition to the implementation of physical works, supervision missions will focus on water quality monitoring of the water bodies surrounding and bisecting Cartagena as well as on the District's effort to enforce compliance with industrial effluents discharge standards. Complementary investments by the District and ACUACAR will also be monitored. The PIU will provide updates on key performance indicators as part of its PMR. A mid term review will be carried out three years after signing the Loan Agreement.

Retroactive Financing: Retroactive financing of up to 10% of the loan amount was agreed upon. The retroactive financing will be provided for eligible expenses incurred after a date of twelve months before the signing of the Loan Agreement, and conditioned on following Bank procurement guidelines. It is required in order to: (i) enable completing the ambitious program before closing date; and (ii) help the Government to ease the economic crisis by generating employment in the poor Caribbean coastal zone of the country.

D: Project Rationale 1. Project alternatives considered and reasonsfor rejection.

In assessing the options for continuing Bank support the water and sanitation sector in Cartagena, we considered the possibility of terminating the support to the sector, considering the fact that the previous Bank project (Water Supply and Sewerage Sector Project, closed on December 31, 1996) was successful in bringing in a private operator to manage and operate the system. However, as discussed before, the reform process is still at its early stage, and the participation of the Bank at this juncture would reinforce the credibility of the mixed (public and private) capital enterprise model, when any formnof PSP, especially in the water sector, is still under public scrutiny. Furthermore, ACUACAR's negotiations with IFC for the latter to finance a part of the investment program were not successful, because of ACUACAR's ownership structure, i.e., 50% owned by the public sector. Page 12

A sector reform project: Past water and sanitation sector projects in Colombia have had mixed success in trying to implement major institutional reforrns in parallel with physical investment measures. In light of this experience, the project team pushed hard for the creation of ACUACAR, a mixed capital enterprise, during the latter half of the previous Bank project, by leveraging the prospect of additional Bank financing for Cartagena's WSS sector under the proposed operation. Institutional reforms have therefore been front-loaded, i.e., the reform was a pre-condition for this project, which supports a major environmental infrastructure investment.

General financing support to ACUACAR's investment program: This alternative was rejected since ACUACAR can achieve full cost recovery from its investments in rehabilitation and extension water supply in affluent neighborhoods and hotel areas. The project's financial support, therefore, is targeted to those which full cost recovery is hard to achieve, namely, sewerage networks for low-income neighborhoods surrounding the Cienaga, wastewater conveyance, treatment and disposal systems.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed

Water Supply & Sanitation 2470-CO: Cficuta Water Supply & S (completed in U Sewerage Project 1995) Water Supply & Sanitation 2637-CO: Barranquilla Water HU (cancelled HIU Supply Project in 1991) Water Supply & Sanitation 2512-CO: Fourth Bogota Water S (completed in S Supply Project 1993) Water Supply & Sanitation 2961-CO: Water Supply and S (completed in S Sewerage Sector Project 1996) Water Supply & Sanitation 3952-CO/3953-CO: Santa Fe I Water S S Supply and Sewerage Rehabilitation Project Water Supply & Sanitation 4345-CO -Urban Infrastructure S S Services Development Project

Urban Environment 3973-CO: Urban Environment S S Technical Assistance Project Urban Environment Urban Environment Management In preparation In preparation Investment Project

Other development agencies

IDB Cartagena Sewerage Project Under implementation

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) Page 13

3. Lessons learned and reflected in the project design: Background. Since 1975, the Bank has made 13 loans totaling approximately US$707 million for water supply and sewerage development in Colombia. About 60% of these funds were lent to five municipal water companies, Bogota, Cali, Barranquilla, Cucuta and Plamira, through ten separate operations. By far, the largest borrower has been the Bogota Water and Sewerage Company (EAAB) which alone has borrowed over US$400 million under five separate operations. In addition to loans for large cities, the Bank has also supported sector investment through a multi-city lending operation through the intermediary for municipal development FINDETER, involving sublending for over 300 subprojects in medium and small size communities. This line of activity continues under a new operation with FINDETER.

The Bank's overall experience in Colombia's water and sanitation sector is mixed, with satisfactory achievement of physical objectives but inadequate progress towards the institutional and financial performance goals set at appraisal. The lesson's learned from the past experience are summarized below:

Front-loading institutional change. The most important lesson is that key institutional and financial reforms should be front-loaded. This key finding is reflected in the design of the present project in as much as significant institutional reforms have already been sought and achieved during project preparation.

Safeguards against political interference. Cartagena and Barranquilla represent two successful cases of institutional improvement through private sector participation in water and sanitation services. This suggests that PSP is the most promising strategy for achieving institutional improvement in Colombia's WSS sector companies. Past and present Bank experience in Colombia point to a consistent pattern of political interference in the WSS sector. In Barranquilla, a new Mayor, who succeeded the Mayor who awarded and signed the PSP contract, recently tried to cancel this contract after taking office. Though not successful, his behavior highlights the potential risks of political interference and non-compliance of commitments on part of the public sector. Consequently there is an overriding need to protect the PSP model pioneered in Cartagena against the prospect of interference from future District authorities. To this end, one of the project conditions specifically requires District authorities to maintain private sector participation in the provision of the water and sewerage services in Cartagena.

Appropriate design standards. On a technical level, past Bank projects in the sector have often fallen victim to chronic overestimation of water demand and frequent implementation delays, which, in an inflationary environment, have resulted in cost overruns for most of the projects. The focus on sewerage services in unserved areas that already have water services, as well as the careful design of wastewater treatment and disposal facilities, through a strategy of minimum cost that is protective of the environment, will minimize the risk of over-design in the proposed project.

Focus on sewage collection and treatment. The June 1994 Colombia Poverty Assessment Report (Report No. 126730-CO) concluded that lack of access to water and sewerage is mostly a problem for the urban poor. The report makes the following recommendations: (i) current neglect of wastewater treatment raises serious environmental concerns, and points to the need for concerted action at all levels to deal with the health and economic welfare of all residents, especially the poor, who live in marginal settlements along polluted waterways; (ii) an urgent priority is the need to design and restructure tariff systems that provide incentives to improved public awareness of the true cost of water and sewerage services and to targeting social subsidies in such a manner that they reach the poor; and (iii) in areas with near-universal coverage, focus should be directed to reducing UFW and improving quality in such areas. These recommendation have been reflected in the proposed project design in the following form : (i) wastewater collection in poor areas and treatment/disposal of sewage produced city-wide account for the vast majority of physical investments; (ii) tariff increases in parallel with ACUACAR's water and sewerage Page 14

expansion measures will enhance public awareness of the true cost of water and sanitation investments; and (iii) activities to reduce UFW are an integral part of the project.

4. Indications of borrower commitment and ownership: Borrower commitment is high as evidenced by the privatization reform process initiated by the District of Cartagena, which is considered the most successful experiences in public utilities privatization in Colombia. In part, the District moved on PSP because it was convinced that it was the key to continued donor involvement in Cartagena's WSS sector. At the federal level, improved coverage, service quality and environmental sustainability of water supply and sanitation services figure prominently in the government's "Water and Sanitation for Peace Plan" ("Plan de Agua y Saneamiento par la Paz", 1999-2002) which is designed to buttress the material basis for political moves to end the country's long-running civil war. The plan emphasizes environmentally sustainable development, improved sewerage coverage for unserved urban areas and the need to attract private capital for the WSS sector. In addition, the new Government has specifically committed itself to promoting PSP in urban service delivery in cooperation with the Bank ("Programa de Modernizaci6n Empresarial", 1998-2002).

ACUACAR and the District as its majority owner, have invested significantly in expansion of water supply and sewerage networks using funds granted by the District, cash internally generated by ACUACAR and loans contracted by ACUACAR. This suggests a long-term commitment by both the private partner and, more importantly, the District, to making their mixed-capital enterprise a success. The District has also taken a loan from the IDB (which will be fully repaid by ACUACAR) to extend the sewerage network as part of a comprehensive investment program of which the proposed project is an integral part. ACUACAR and the District have strongly supported the preparation of this project and the PIU has effectively coordinated the preparation of all technical, environmental, social, financial, and economic preparatory studies for this project. ACUACAR has also financed from its own resources a significant part of studies associated with project preparation. 5. Value added of Bank support in this project. Consolidating the Sector Reform (Private Sector Participation): The Bank's role in the process of privatization of the water and sewerage services in Cartagena and in the creation of ACUACAR has been pivotal. The Bank has helped attract private sector participation in Cartagena and played a crucial role in ensuring the success of the privatization by promoting ideas, providing a framework for considering different PSP options, extending technical assistance, convincing the political decision makers to support worthwhile institutional changes, acting as an important catalyst to accelerate process implementation and serving as a mediator in the negotiations. The Bank provided and continues to provide stability to the ACUACAR contract, which still operates in a volatile environment, by protecting it from political risks at the local and national levels. In view of the achievements of ACUACAR it is important that it continues to thrive and provide good service to its customers. For that it deserves all the support it can get to protect it from political interference. The continuing Bank involvement in the Cartagena water sector through the proposed project would diminish political risks to ACUACAR.

Provision of long term financing for environmental infrastructure: The District of Cartagena is currently unable to comply with its obligation to finance the expansion of the water supply and sewerage systems. Non compliance by the public sector of its obligations, financial and others, under PSP contracts is known to be one of the major problems in utility refonn and the cause of failure of many operations. The Bank's involvement would provide much needed long term financing which is not easily available in local capital markets, enable the public sector to comply with its investment commitments and facilitates the involvement of other domestic and intemational lenders on improved financing terms.

Poverty focus : In addition, the Bank's participation would provide an important poverty focus to the project and ensures that ACUACAR's efficiency gains benefit the poor. Bank-financed investments in Page 15 water supply and especially in sewerage infrastructure in the impoverished sub-basins that drain to the Cienaga would have a direct impact on improving the quality of life of the poor.

Technical leadership: The borrower has sought Bank assistance because of its worldwide experience with environmental protection and coastal zone management and its ability to deliver technical support for environmentally safe and cost-effective wastewater treatment and disposal strategies. Though internationally well-established as a disposal option for coastal cities, modem marine outfalls are new to Colombia and Bank support has been instrumental in ensuring that engineering consultants considered a full range of wastewater management alternatives, of treatment options and, subsequently, of outfall construction sites. A panel of experts hired by the Bank provided guidance in carrying out the feasibility studies and in selecting the most appropriate solution. Bank participation in the proposed project would ensure the continued involvement of top level experts during the detailed design and implementation stages of the works and would provide the required quality assurance, for complicated works as the design and construction of a large outfall, for which there is limited experience in Colombia.

Bank involvement is the only way to ensure, within a reasonably short period, the environmental cleanup of the water bodies surrounding Cartagena and application of sound environmental management practices of liquid wastes, as well as the improvement of the quality of life of the poor, while providing a boost to the economy.

E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): [X] Cost-Benefit Analysis: []Cost Effectiveness Analysis: [] Other

Type of Indicator Total Project NPV (C$ billion) 14 IRR 16% Benefit - Cost Ratio (BCR) 1.17 Fiscal Impact (C$ billion) 48

The economic feasibility of the Cartagena Water Supply, Sewerage and Environmental Cleanup project was determined by evaluating all infrastructure subprojects, that account for more than 88 percent of the total project costs. The project will finance water supply, sewage collection and treatment subprojects.

The results show that most subprojects are economically viable as they will generate positive net benefits. Two water supply subprojects in Falda de la Popa and Zonas de Invasi6n were dropped from the project due to their lack of viability. The project in Zona de Norte was dropped because of its high financial profitability should be easily financed privately by ACUACAR. Two other water supply projects are not meeting the cut-off rate of 12 percent, and it is possible that with adjustments in the technical design these projects would become feasible (El Poz6n and Plan Barrios). In case, adjustments in the design will not result in feasible projects, these subprojects should also be dropped from the Project.

As for the sewage collection subprojects, two subprojects (El Poz6n and Paseo Bolivar) just do not meet the cut-off rateof 12 percent. However, as these projects are situated in very poor neighborhoods and the willingness to pay for sewerage services only partially captures the environmental and public health benefits relatedto this service, there could be a social rationale to include these subprojects in the Project. However, it is recommendedthat these subprojects will be redesigned to ensure their viability.

The differences between financial and economic costs have been summarized in conversion factors. The economic benefits forthe sewage collection and treatment projects are estimated to be equal to the Page 16 willingness to pay for these services. For the water supply projects, detailed willingness to pay data was not available, and hence economic benefits are estimated to be reflected by the current water rates, which are adjusted for the impact of shadow pricing.

The fiscal impact of the Project is negative at C$48 billion due to the large capital subsidies for the sewage collection and treatment infrastructure. Although the overall fiscal impact is negative, the Central Government is actually benefiting from the project, and most of the costs of this project are hence being borne by the District of Cartagena. The distributive analysis shows that especially the consumers will gain from the implementation of the project. Also ACUACAR will substantially benefit from this project, especially the water supply sub-component will generate substantial incremental revenues.

The risk analysis shows that there is a direct relationship between the viability of subprojects and the risk profile of the subprojects. The less viable a project, the higher the risk profile. Hence, it is recommended that the subprojects that currently have an internal rate of return of 12 percent or lower will be redesigned so as to decrease the risk associated with the implementation of these subprojects. 2. Financial (see Annex 5): The proposed US$117.2 million project will be financed jointly by the Bank, District of Cartegena, ACUACAR, and the National Government. The repayment of the Bank loan of US$85 million, will be the responsibility of the District of Cartagena, with a partial contribution from ACUACAR of US$15.4 million between years 2005 and 2011. The National Government, the District, and ACUACAR will provide the counterpart funds of US$20 million, US$7.6 million, and US$4.6 million, respectively. We carried out the financial assessment (past and current performance assessment, financial projections, risk and sensitivity analyses) of the District of Cartagena and ACUACAR, in particular, of their capacity to provide counterpart funds and debt service. The analyses showed that the proposed financing scheme is robust with nearly 80% probability that there will be no financial shortfall. The details of the analysis are presented in Annex 5.

Until 1996, the District of Cartagena suffered low tax collection rates (less than 30%) and high personnel costs, which left them with nearly US$50 million of accumulated deficits at the end of 1996. The financial situation of the District of Cartagena, however, improved considerably since 1997. A series of actions contributed to the improvements: (i) the self declaration system (autoaval-uo)for tne property tax; (ii) a more severe penalty system for non-payment; (iii) the withholding system for industry and business taxes; and (iv) sale of its telephone company, among others. Thanks to these improvements, the District of Cartagena collected about 44% of property tax base and reported a small current surplus in 1998. Based on the past trend and the expected performance improvements, we prepared financial projections for the District. Under the base case scernario,the District wiii be able to provide counterpart funding in a timely manner and pay the debt service fully, given US$20 million contribution from the National Government.

The sensitivity and risk analyses showed that the project's financial success - i.e. timely provision of counterpart funding and debt service coverage -- is largely dependent on the district's capacity to improve tax collection rates and the stability of the exchange rate. To minimize the risks, the district's tax collection performance will be closely monitored through the project's monitoring system. The tax collection rates is one of the financial covenants which is included in the Loan Agreement. In addition, we obtained the District's commitment to use all earmarked funds (20% of National Government transfer and 18% of property tax) to finance this project during the project implementation period, complemented by royalty funds (fondo de regalia) and environmental fees (tasa retributiva), in case of shortfall.

The operational and financial performance of the water company improved since 1995 when the mixed enterprise ACUACAR was established. Thanks to a major cost reduction brought about by the private management, the company reported a positive net income for years 1996, 1997, and 1998. Although the company reported net profit, the cash flow situation of the company worsened in 1998, mainly because Page 17 the company took on local loans for investments. The company, however has been adopting an aggressive commercial policy, including metering, disconnection, and identification of illegal connection, which is expected to produce results in the coming years.

Under the base case scenario, ACUACAR's financial situation will improve only gradually. Because the company carried out a high level of capital investments, and took on local commercial bank loans to finance these investments in 1997, the debt service will remain high until 2004. It will take until 2001 for the company to generate sufficient internal cash to cover its debt service requirements. Nonetheless, by the time ACUACAR becomes responsible for operating and maintaining the system and for repaying a part of the Bank loan (both in 2005), the company's financial situation is expected to improve. 3. Technical: The feasibility study for treatment and disposal of the wastewater of Cartagena identified and analyzed a comprehensive set of alternatives related to the final location for the sewerage collection system, the level of wastewater treatment, the alignment and exact location for an ocean outfall, sites of major pumping stations, sewerage pipe material and size, and underwater depth of the outfall diffuser pipe. The main options for the final disposal of the domestic sewage of Cartagena analyzed in the feasibility study were (i) the Cartagena Bay; (ii) the Cienaga de La Virgen; (iii) the Caribbean Sea; and (iv) reuse and irrigation. Local and regional environmental authorities have established the clean up of the Bay and the Cienaga as a top regional priority. Continuing the discharge of sewage to the Bay was found unsustainable because of its limited assimilating capacity. Discharge of treated effluent to the Cienaga resulted highly expensive, since treatment before such discharge should include nutrient removal. Wastewater reuse for irrigation is not feasible at the present time in the Cartagena region given the lack of suitable areas to receive the entire wastewater volumes both during the dry and rainy seasons. At any rate, any wastewater reuse scheme should be coupled with installations of alternative discharge of the wastewater during the seasons that irrigation is not required and in emergency situations. A submarine outfall may very well serve as such alternative discharge option. The project does not exclude future partial reuse initiatives for the Cartagena wastewater and the conveyance and submarine outfall systems could well support any such initiatives in the future.

Alternatives for the final disposal options and treatment levels of wastewater included a combination of the following:

Disposal Options

* Continuing wastewater discharges into the Cartagena Bay and the Tesca Lagoon in the same current proportion (40% to the Bay, 60% to the Cienaga); * Elimination of the Bay discharge and disposal of all wastewater into the Cienaga; * Elimination of both Bay and Cienaga discharges and disposal of all wastewater into the Caribbean Sea; and * Reuse for irrigation.

Treatment Options

* Preliminary treatment: microstrainers and settling tanks for the removal of solids * Primary treatment: settling tanks, and anaerobic digestion and drying of sludge; * Conventional secondary treatment: activated sludge plants, anaerobic digestion and drying of sludge * Advanced treatment: biological and chemical removal of nutrients.

Over fifteen alternatives combining different treatment levels and final disposal sites were considered. In addition, four different outfall alignment and discharge sites into the Caribbean Sea were identified. All alternatives were evaluated from technical, economic, environmental and social perspectives. Water Page 18 quality, initial investment costs, operation and maintenance costs, and land uptake were the main comparison criteria. However, other environmental and social criteria were used as well. The comparison alternatives indicated that disposal of all the wastewater to the Caribbean sea is the most feasible option. Having identified the receiving water body of the Cartagena wastewater, intensive oceanographic studies including current measuring efforts were carried out for over a year across the ocean front area of Cartagena. These measurements constituted the main input to hydrodynamic and water quality mathematical models. Fatal flaw analysis (considering simultaneous adverse conditions for wind, current velocity and direction, coliform concentrations, and low bacterial decay rates) for all outfall alternative sites at the end of the design period proved that some outfall sites would not meet adopted standards. However, outfall location would be feasible at three of the proposed sites. Additional multi- objective analysis was necessary to select the final alignment of the outfall. The selected discharge site at Punta Canoa, located some 20 km north of Cartagena, will guarantee a minimum 1:100 dilution ratio in the mix zone with a current velocity of 0.20 m/s (a very conservative estimate). However, prevalent average velocities (measured for over a year at the outfall site) will reach dilution levels higher than 1:300 at the outfall exit. The outfall site of the selected alternative is located furthest to the north of the city in relation to all the alternative sites considered. Although located at the greatest distance from the city, it resulted in minimum cost because the sea next to the city has a very mild bottom slope, which means that a very long outfall (of about 9 km) is required in this area to reach deep enough water. In Punta Canoa the sea bottom is steeper, so the length of an outfall that reaches comparably deep water at that site is only 2.85 km, and the combined cost of on shore and off shore pipes resulted lowest for the Punta Canoa site. The main conveyance, treatment and wastewater disposal installations would consist of:

e expansion and improvement of the existing Paraiso pumping station e land conveyance system, a 23.85 km long pipe of 72" diameter - preliminary treatment works consisting of micro-strainers and two vortex-type settling tanks e submarine outfall, 2850 m long, 72" diameter, discharging at a seawater depth of 20 m, with a total capacity of 4 m3/s at the year 2025 * a 0.5 km long diffuser with 27 vertical riser pipes and 2 ports each for a total of 54 ports

After a five-year project construction period (1999-2004), the operation of the outfall will be implemented in 2 phases: Phase 1 (2005-2015) and Phase 11(2015-2025). The first phase, which is constructed under the project, would include the pumping station, land conveyance system, preliminary treatment and submarine outfall. For the second phase, which would be constructed towards the year 2015, an aerated flow-equalization basin at the Paraiso pumping station site, would be added, as well as an additional transfer pumping station to convey wastewater to equalization basin.

Although the technical solution selected offers significant advantages over competing alternatives, it will require careful monitoring. Computer models using very conservative assumptions about the propagation of the effluent plume emanating from the outfall's diffuser have confirmed the environmental viability of this disposal option. Nonetheless, a monitoring program will be set up under the environmental component of the project to ensure that pathogenic coliforms discharged through the outfall do not reach bathing beaches. Should outfall performance fall short of expectations, additional sewage treatment systems can be retrofitted at the treatment plant site prior to discharge. This approach constitutes a cost-effective strategy that minimizes investments to achieve the environmental and health objectives of the project, and ensures that unnecessary over-investments are not undertaken.

The component of expansion of sewerage system in the Cienaga Basin is aimed at providing sanitation services to the poorest neighborhoods of Cartgena who currently lack these services and live in precarious conditions, with raw sewage flowing in open channels in the streets. It is of the type of investments that the Bank should be supporting. This component also includes the investments for interconnection and diversion of the Bay basin wastewater to the main conveyance system which will carry it to the treatment installations and to the outfall. These investments are a prerequisite for investing in the sewage treatment and disposal systems. Page 19

In summary, the combined effect of the sewage collection, conveyance, treatment and disposal, which would be carried out under the project, would be the recuperation of the water quality in the main water bodies surrounding Cartagena, i.e., the Cartagena beaches, the Bay and the Cienaga, coupled with a controlled and safe discharge of effluent to the Caribbean sea through a submarine outfall located about 20 km north to the city, which would discharge the effluent into the sea at a distance of 2.85 km from the shore.

The water supply systems component of the project is aimed at increasing the reliability of supply and reducing vulnerability through: (i) expansion and improvement of the water production and treatment systems; (ii) increase of storage capacity and pressures in the system; (iii) replacement of dilapidated primary distribution mains, and reconstruction of pressure mains on top of which houses have been built and present risks to the population; (iv) reduction of UFW; and (v) installation of a remote control system. It also aims at increasing the water coverage service, exclusively in the poorest neighborhoods of the city. 4. Institutional: In a conventional water and sewerage projects which is implemented by public utilities, the main challenge is to ensure the sustainability of investments, in view of institutional weaknesses. In the case of the proposed project, institutional problems have been dealt with up-front through the creation of ACUACAR, a public-private mixed enterprise with private management. ACUACAR is a well-managed water and sewerage service company, the operational performance of which compares well with the best international standards. Corporate operation has developed along ultra-modem partnering lines. The ACUACAR model brings together a private operator and a public authority in a service company under transparent corporate governance rules, providing an opportunity for disciplined activity and accountability before customers and shareholders. The two major stock holders of the company, the District of Cartagena and Aguas de Barcelona, work well under partnership conditions.

During its first three and a half years of operation, ACUACAR has achieved significant improvements in operational performance. Achievements include putting the business on a sound commercial footing, increasing efficiency and staff commitment, creating a credit-worthy public/private company, providing customer satisfaction and dialogue, and increasingly reliable information. Management and staff are well-qualified and trained and demonstrate a high degree of competence, motivation and commitment. More specifically, improvements made by ACUACAR include: (i) increasing water supply, in production, treatment and coverage; (ii) increasing sewerage coverage; (iii) improving water quality; (iv) introducing modem commercial and recognizable management information systems; (v) installing water meters on practically all its customers connections; (vi) improving continuity of service; (vii) rationalizing labor force; (viii) putting in place a staff training program and creating an enabling and encouraging working environment; (ix) investing heavily in Technology/Information Systems; (x) introducing an environment of maintenance of assets; (xi) introducing automated control of processes and operation; (xii) improving efficiency and financial performance; (xiii) undertaking significant investments for expansion of services by borrowing from local banks and multilateral donors, although such investments are not mandatory under the ACUACAR contract, (xiv) improving relations with customers; and (xv) creating relations of trust with suppliers.

These efforts resulted in: (i) ISO 9002 accreditation for its quality of operations and laboratory (the first water utility in Latin America which obtained such accreditation); and (ii) high customer satisfaction demonstrated in customer surveys. 5. Social. Social assessment: A social assessment was carried out during project preparation. Its main objectives were to: (i) assess the social impact of the project; (ii) assess social and economic conditions of the target population and establish a base-line for social monitoring and evaluation; (iii) consult beneficiaries about Page 20 their priority needs and views about the project; (iv) identify community-based organizations willing to support project implementation; (v) identify social obstacles and risks; and (vi) prepare a mitigation program, as required.

Socioeconomic conditions The socioeconomic analysis revealed that the majority of the population lives under lowest levels of poverty conditions (strata 1 and 2 according to Colombian classification); which correspond to a monthly per capita income of between US$ 20-60 for stratum 1 and US$ 100-270 for stratum 2.

Social impact: The social assessment proved that the project will benefit the poorest communities in Cartagena which currently lack sanitary services. No resettlement or other negative impact would result from the project. The results of the consultation process indicated that the majority of the households agreed that the project will improve their living standards. However, they expressed concern that once the improvements are completed, property prices might increase and they might be forced to leave their neighborhoods, that might force them to abandon their neighborhoods. This has been the general trend in Cartagena, spurred by tourism investments and wealthy urban residential growth, affecting particularly the communities in the north corridor. These communities, though in favor of the project, claimed not to receive any concrete benefit from it, but rather the negative impact during the outfall construction period. To relieve their concerns, a condition that the District of Cartagena would ensure that, within four years from loan signing, piped water supply service will be provided to the north zone communities, has been incorporated in the loan agreement.

One positive outcome from consultation was that all communities surrounding the Cienaga expressed concern about its contamination and agreed to collaborate in its rehabilitation. In the Willingness to Pay survey which was carried out under the economic analysis of the project it was found that the Cienaga is much more important to the population than the beaches and the Cartagena bay. The reason for that is that the majority of the population resides in the vicinity of the Cienaga, far away from the beaches and the bay.

Impact mitigation and community development program: The Mitigation and Community Development Program aims at addressing the social impact of the project by strengthening community organizations to face the changes and consolidate their neighborhoods, contributing to the project through participation. To this effect the project would include: (i) support for urban rehabilitation, improvement of sanitary conditions and clean up activities; (ii) strengthening and development of community organizations to promote participation and social control (veedurias); and (iii) promotion of community development to consolidate communities, avoid or reduce conflicts and recover cultural heritage, mainly by rehabilitating the Cienaga.

Urban Rehabilitation: From the social point of view the main mitigation measure is to ensure that communities will not be displaced, once the benefits of the project are accomplished, under the pressures of urban growth and speculation. This situation is spurred by the insecurity of land tenure, the uncontrolled squatting process around Cienaga and the deficiency of public services. To address this situation the project will support the efforts of the District's urban rehabilitation program through the following actions: (i) promoting community participation in the urban rehabilitation program; (ii) supporting a pilot program to introduce sanitary facilities in selected households; (iii) supporting the establishment and consolidation of community centers to be the focal point of community activities and urban rehabilitation programs.

Strengthening Community Organizations: This activity is intended to promote local leadership and provide community organizations with the capacity for self-development. It comprises three main areas of training and specific actions: (i) strengthening capacity of community organizations; (ii) establishing of social control mechanisms to monitor the project's social and environmental impact (veedurias); and (iii) promoting better sanitary conditions as well as a culture of payment for services and social responsibility. Page 21

Community Development: This activity aims at supporting the cleanup efforts of the project by: (i) promoting community participation in cleaning up neighborhoods; (ii) protect and/or develop communal areas; (iii) promote cultural and local sports groups to improve relationships and avoid conflicts; (iv) promote community groups to carry out activities such as recycling solid waste, protecting and developing tourism and other activities related to community development.

Support North Zoner Black Communities: A condition has been incorporated in the Loan Agreement which will result in the undertaking of special program by the District to provide water and sanitary services to the black communities in the North Corridor comprising: Punta Canoas, Manzanillo del Mar and Arroyo de Piedra. This area, including La Boquilla, will also benefit from a pilot program to introduce sanitary services in the poorest households. Moreover, two community centers, one in La Boquilla and other one in Punta Canoa will be built to support the District's urban rehabilitation program to consolidate these communities.

Supportfrom the District of Cartagena: The District of Cartagena will support this mitigation program by: (i) including in its Urban Development Plan a strategy to protect and consolidate the urban integrity of the communities around the Cienaga and the North Zone; and (ii) providing these two areas with priority attention through the Citizens Participation and People Development Program.

Actions by ACUACAR: ACUACAR will implement an Information and Social Communication Program to: (i) inform communities about construction schedules; (ii) provide means to reduce nuisance during construction; and (iii) respond promptly to community complaints. Under the environmental mitigation plan the community will be informed and trained about environmental issues. Additionally, a public relations campaign will be implemented to improve the relations of ACUACR with its customers.

Environmental Concerns: The environmental concerns raised by the communities will be addressed by the establishment of a team of environmental specialists that will monitor compliance with the environmental plan. Additionally, upon request by the community, an independent consultant from OMS would provide external support and advise.

A more complete summary of the Social Assessment is presented in Annex 10. 6. Environmental assessment: Environmental Category [X] A [ ] B [ ] C The proposed project is expected to have significant beneficial environmental and health impacts as it will extend and improve the sewage collection network and will provide a safe wastewater treatment and disposal method that is protective of the environment. Nonetheless, the construction of sewage collection networks and treatment and other ancillary facilities, as well as disposal of treated wastewater through a submarine outfall has the potential to cause, if not properly mitigated, negative environmental impacts. For this reason, the project has been classified as EA Category A. A full EA was commissioned under terms of reference agreed with the Bank. Formal Bank review of the final reports was carried out before appraisal and they were found to conform fully to Bank policy guidelines regarding environmental and social issues.

The environmental assessment process was based on a two-phase approach: (i) a feasibility study analyzed collection, treatment, and disposal options of the wastewater of Cartagena and those were compared on their technical, economic and environmental merits; (ii) once a project scheme was selected, a more detailed environmental assessment designed a comprehensive environmental management plan (EMP). A Bank-appointed panel of five international experts, with broad experience in wastewater management, design and construction of ocean outfalls, water quality and oceanographic modeling, environmental impact assessment and private sector participation provided advice, reviewed technical reports, and participated in public consultation meetings and in a two-day workshop at Bank headquarters in Washington. Perhaps the most important methodological characteristic of the EA was the introduction Page 22

(for the first time in Colombia) of cumulative impact analysis. Impacts on wetland and marine ecosystems, water quality, fisheries, communities and cultural heritage were evaluated and adequate mitigation and compensation measures were identified. The selected outfall site ensures minimum environmental risks. All the above mentioned reports have been made available in the Public Information Center of the World Bank in Washington. A summary of the environmental assessment report is included in Annex 9.

Status of Category A Assessment: EA start-up date: August 1998 Date of first EA draft: December 1998 Current status: Completed and reviewed by the Bank

Proposed actions: The EA report recommends the implementation of an Environmental Management Plan (EMP). The EMP proposes a number of measures to mitigate environmental impacts during the construction and implementation phases and establishes an organizational structure, set of procedures and a budget to implement activities under the EMP. The EMP has also identified a set of priority environmental activities that will enhance environmental conditions in Cartagena and will assure achievement of the project's environmental objectives. The EMP is divided in two parts: (i) management of construction activities; and (ii) environmental enhancement. The goal of these activities is to: (i) improve urban environmental quality; (ii) improve natural resources management, particularly in highly sensitive areas such as the wetlands of the Cienaga; (iii) develop environmental education and public awareness programs for wastewater management and conservation of urban natural ecosystems. A firm will be hired to implement the activities detailed in the EMP related to the construction phase. This phase will also include the implementation of an environmental baseline program to monitor oceanographic, biological and ecological indicators. After construction, this program will be converted to a long-term monitoring program.

The environmental and social component of the project would also include activities designed to improve the overall environmental quality of the city and the area to the city's North and ensure attainment of overall environmental objectives. The most important activities to be implemented include: (i) restoration, conservation and management of the Cienaga de la Virgen wetland ecosystems, to ensure its long-term sustainability. The project will finance legai and technical feasibility studies to create a legally protected area, management plans, environmental education programs in surrounding communities, and awareness programs regarding solid waste disposal in water bodies, mangrove deforestation, and over-fishing.; (ii) activities aimed at assisting in establishing the regulatory framework and providing technical assistance related to pretreatment of industrial and non-domestic wastes for the purpose of controlling existing and future toxic discharges into the sewage system and thereby in the outfall discharge. The project would finance an industrial pollution survey in the sewerage network, establishment of a database on industrial pollution to be updated by both ACUACAR and CARDIQUE, the preparation of regulations for industrial and non-domestic sewerage connections, and the definition and dissemination of pollution control and clean technologies for most significant sectors; and (iii) implementation of an institutional strengthening program, to ensure institutional capacity to implement the EMP. The project would finance training workshops, study tours and specialization courses for DAMARENA and CARDIQUE in topics such as wetland management, pollution control, water quality monitoring and environmental audits.

Final engineering designs would include the preparation of detailed measures to deal with contingency plans (power black outs), additional site-specific environmental guidelines for construction, special construction practices for river and drainage crossing and ocean approach, demarcation of mix zone, undersea construction process and right of way restoration and management. These measures will be included in the bidding documents used in the project.

Local groups and NGOs consulted: J.A.C, JAL Comuna 3, JAL Comuna 5, JAL Comuna 6, JAL Page 23

Comuna 7, Madre Comunitaria, Asociaci6n Civica, Junta de Desarrollo Comunal, Comitd Empresarial, Sayco, Comite Civico, Comite Cultural Zona Sur-Oriental, A.S.E, Cocidepa. Resettlement: No involuntary resettlement is expected to take place as a result of the construction of any component of the facilities to be financed by the project, as indicated by the feasibility analysis and the environmental analysis of alternatives. The EA has provided additional field evidence that no involuntary resettlement will take place. Other project components include the construction of water and sewerage networks, expansion of water storage and treatment systems, pumping stations, and water intakes. All sites were screened for potential sensitive impacts such as affecting wetlands and other ecosystems, resettlement and nuisances for communities. No sensitive issues were identified. An Environmental Data Sheet for each proposed infrastructure site was prepared and was submitted to the Bank. Finally, an environmental manual with specifications for the construction of water and sewerage networks and other water and sanitation infrastructurewill be prepared and included in bidding documents. Borrower permission to release EA: [X] Yes [] No [ I N/A

7. Participatory approach [key stakeholders, how involved, and what they have influenced, if participatory approach not used, describe why not applicable]: a. Primary beneficiaries and other affected groups: The poor population living in the Southeast and North zones of the city would benefit from water and sewerage networks. The entire population of Cartagena would benefit from the sewage treatment and disposal installations. b. Other key stakeholders: The tourism industry, hotels Tourists Fishermnenin the Cartagena Bay and in the Cienaga Community organizations and local authorities

The project has been prepared under a participatory approach that began on February 1998 with a first Stakeholders Workshops and concluded in February 1999 with a Second Stakeholders Workshop, while in between, the social assessment and the environmental impact assessment also included a consultation process with the main stakeholders. As required under Colombia's environmental law, public hearings were held in each community which would be affected by the construction works associated with the wastewater conveyance, treatment and disposal system. The initial series of consultations were held in February 1998 concurrent with the presentation of the first draft of the project feasibility study. At this workshop, the terms of reference for the Environmental Impact Study were discussed and agreed upon with the workshop participants, which included: representatives of the Ministry of Environment, ACUACAR, CARDIQUE, DAMARENA (the Municipal Environmental Department), national and local environmental NGOs, municipal government agencies, community organizations, professional associations, community representatives and private sector representatives.

During preparation of the EA, public consultation meetings were held in those communities that would be most affected by the project: Arroyo de Piedra, Manzanillo del Mar, La Boquilla, Sur Oriental Zone and Punta Canoas. Coinmunity concems were registered and taken into account in the preparation of the Environmental Management Plan. A final public consultation workshop (with the same variety of participants as the first one) to review and discuss the final draft of the feasibility study and the EA report was held in February 1999. The EA report has been made publicly available in Cartagena. The EA report includes an annex that summarizes the consultation process including participants, a record of concerns, and agreements reached during the meetings. Page 24

This participatory approach will continue during implementationthrough the Social Impact Mitigation and Community Development Program as described in Section 5 of Block E.

F: Sustainability and Risks 1. Sustainability: The up-front resolution of the Cartagena water sector institutional issues by the creation of ACUACAR ensures high quality in the provision of services and sustainability of the investments, and provides a sound basis for Bank participation in the proposed project, which would be based on a strong and capable water and sewerage utility. The continued Bank involvement in Cartagena's WSS sector will further enhance ACUACAR's operational independence and will ensure that the utility's installations will continue to be operated with private sector efficiency.

The sustainability of the project is also linked to ACUACAR's financial viability. The works implemented under the project would generate additional income and strengthen the financial position of ACUACAR, thereby contributing to project sustainability.

The selection of the project components is based on least-cost analysis to ensure that the environmental investments will generate the largest impact against the least costs. Consultations with different stakeholders will reduce the risk of objection to the selected option to reduce water pollution in the city.

The financial risk of the project that the District will not be able to provide counterpart funding and pay debt service in a timely manner will be mitigated by: (i) the National Government's commitment to provide US$20 million counterpart funding on a Grant basis; (ii) the District's commitment to use all earmarked funds (18% of property tax income and 20% of National Government transfers - Ley 60) net of existing commitments as well as one million dollar of proceeds from the sale of TermoCartagena for project counterpart funds and debt payments; (iii) use of petroleum royalty income (about US$9 million per year) in case of financial shortfall; and (iv) the establishment of a trust fund, where the aforementioned financial resources will be deposited and monitored. Page 25

2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): Risk Risk Rating Risk Minimization Measure

Annex 1, cell "from Objective to Purpose" _ _ Contamination of water bodies by other sources S The project includes a component for is not eliminated industrial wastewater discharge control, aimed at assisting the establishment of a regulatory framework and provide technical assistance to pre-treatment of industrial wastes. Sewerage works financed through other sources N Most of the sewage investments, financed (IDB, District, and ACUACAR) are not through other sources, are already under implemented implementation. Annex 1, cell "from Outputs to Objective" Consumers are not willing to pay for water S Improved water supply and sewerage supply and sewage services services would result in higher customer satisfaction and consequently, consumers would be willing to pay for the services Future mayors are not supportive of the M The project's success in the initial years institutional model and political objections arise should be ensured so that it would be hard for future mayors to withdraw their support to the institutional model Annex 1, cell "from Components to Outputs" Counterpart funding will not be available on M A great part of the counterpart funds is time provided by the Government and the risk associated with its provision is lower. In case of shortfall of the District earmnarked fund, it was agreed that they will be complemented by petroleum royalty funds, which are a secure source, independent of internal generation by the District Cost overruns during implementation, because S Macroeconomic stability will need to be of higher than projected currency devaluation maintained by the Government. In case of and interest rates, will be incurred. cost overruns, the District, ACUACAR or the Government would need to provide the additional required funds

The District does not have sufficient capacity to M The mayor of Cartagena is the Chairman of control the ACUACAR contract and follow up the Board of ACUACAR and an additional on project implementation activities Board member is a representative f the District. This facilitates follow up and control. In case of problems, the mayor may nominate a full-time controller, as permitted under the ACUACAR contract. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) Page 26

3. Possible Controversial Aspects: The two main potential controversial aspects of this project are those related to the use of a submarine outfall as part of a wastewater treatment and disposal system, and the planned increase in tariffs.

Submarine Outfall: The use of a submarine outfall as part of a wastewater treatment and disposal system may cause some controversy due to a lack of understanding of the technology. As part of the project, an extensive environmental monitoring program will compare environmental conditions in the coastal areas of the project before and after construction of the outfall and its preliminary treatment system, and will determine whether pathogenic coliforms discharged through the outfall diffuser reach bathing beaches. The use of outfalls for wastewater management in developed countries require -- in some cases by law -- secondary treatment of sewage prior to final disposal in the ocean, regardless of coastal conditions and the assimilation capacity of the ocean environment. Given the oceanographic and bathymetric conditions in the project area, the use of secondary treatment prior to outfall disposal would not achieve a significantly higher level of environmental protection. Furthermore, the levels of toxic substances and heavy metals in the area connected to the sewerage network are small as the larger part of Cartagena's industry is located in the area of Mamonal, outside the city limits and not connected to the sewage network. Finally, one component of the project is specifically designed to support the District's efforts to ensure adequate pre-treatment of industrial wastewater in the city.

The use of secondary wastewater treatment above and beyond the preliminary treatment proposed under this project would make the technical solution financially non-viable. Only if the monitoring program indicates that a significant portion of the pathogenic coliforms discharged through the outfall diffuser reach bathing beaches, or if some other environmental problem emerges as a result of effluent discharge, additional treatment options would be considered and subsequently implemented. Appropriate provisions to reserve land for future additions to the proposed treatment facilities have already been taken.

Tariff increase: Sincethe privatization of water and sewerage services in Cartagena, ACUACAR has been authorized by the CRA to increase tariffs on a yearly basis during the period 1997-2001. Projected percentages of increase are presented in the table below using as a basis the average 1996 tariffs of about US$0.46/m3 for water and US$0.24/m3 for sewerage. With these increases, 2001 tariffs would reach US$0.59/m3 for water and US$0.36/m3 for sewerage. Tariff increases between 1997 and 2001 support ACUACAR's own investments in water supply infrastructure and the repayment of the IDB loan.

The authorized annual tariff increase is a controversial issue, and ACUACAR considers that it will become more and more difficult to generate the corresponding revenues. No tariff increases are planned as part of the proposed project, and ACUACAR will provide its share in the repaymrentof the loan on the basis of the 2001 tariffs. The potential controversy was the reason for avoiding additional tariff increase, over and above the existing authorization of the CRA. As a result, the additional financing will now be paid through the national and municipal government through an implicit policy that will subsidize sewage treatment investments.

Approved Yearly Percentage Increases of Average Tariff Year Water Sewerage 1997 10% 17% 1998 6% 10% 1999 4% 7% 2000 3% 4% 2001 3% 4% Page 27

G: Main Loan Conditions 1. Conditionsfor Negotiations: None

2. Conditionsfor Effectiveness: * Signing of a subsidiary agreement between the District and ACUACAR, in terms acceptable to the Bank, in regard to: (i) transfer of the earmarked funds from the District to ACUACAR and of the Government funds under the Grant Agreement, as a counterpart contribution; (ii) transfer of the Bank funds to ACUACAR, to be used for project implementation; and (ii) payment of US$ 15.4 million by ACUACAR to the District during the years 2005-2011 as a contribution for debt service of the Bank loan;

* Issuing a Certificado de Vigencias Futuras by the Government providing for budgetary contributions of US$ 20 million equivalent for the Project (the Government contribution to Counterpart Funds) to be made available to the District during the years 1999-2004 according to an agreed schedule as required by the project;

* Establishing, through a fiduaciary agreement, a special account under a trust fund agreement (Contrato de fiducia irrevocable) for purposes of ensuring availability of counterpart funds for the project. Such an account will be fed with the earmarked funds (20% of National Government transfer and 18% of property tax, complemented by royalty funds - fondo de regalia - and environmental fees - tasa retributiva - in case of shortfall) and the proceeds of the Government contribution to the counterpart funds; and

* Making an initial deposit of an amount equivalent to at least US$ 1 million in the trust fund account.

3. Other [classify according to covenant types used in the Legal Agreements.]:

* The ACUACAR contract will be maintained, except as otherwise agreed with the Bank;

* The Bank retains the right to suspend disbursements if the IDB loan is suspended, unless the District demonstrates the availability of additional funds to continue works under the IDB project;

* Time bound operational and financial indicators targets agreed upon with the Bank will be used for monitoring and evaluation of the project and the performance of ACAUACAR and the District;

* ACUACAR will consult with the Bank all future changes in tariff level and tariff structure;

* The District shall: (i) increase the rate of collection of the amount due on account of property tax, as estimated by the latest applicable property tax reassessment carried out by it, to at least 49% in the year 2000 and 51% in the year 2001 and each year thereafter; and (ii) maintain a set of financial indicators in accordance with the requirements of the Law governing contracting of debt by municipalities.

* The District shall maintain the special account under the trust fund agreement (Contrato de fiducia irrevocable) during the project implementation period for purposes of ensuring availability of counterpart funds for the project. This account will be fed with the earmarked funds and the proceeds of the Government contribution to the counterpart funds, and its proceeds Page 28

will be made available to ACUACAR as a source of counterpart funds for implementing the project.

* The District will, no later than December 31, 2003, complete or cause to be completed, in a manner satisfactory to the Bank, the construction of a water supply systems to the communities of Punta Canoas, Manzanillo del Mar and Arroyo de Piedras, located in the north zone of Cartagena. Disbursements for construction of the submarine outfall will not be authorized, unless progress, satisfactory to the Bank, has occurred in carrying out the construction of the mentioned water supply systems. This condition complies with to the recommendation of the social analysis of the project, so as to incorporate into the beneficiaries of the project also the poor black communities of the north zone, in which the wastewater conveyance, treatment and disposal systems will be located and which currently do not have a piped water service.

* The District will carry out or cause to carry out an industrial wastes control program in Manonal, according to time bound targets agreed upon with the Bank.

H. Readiness for Implementation [X] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [ ] Not applicable. [X] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [] The following items are lacking and are discussed under loan conditions (Section G):

I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. [ ] [The following exceptions to Bank policies are recommended for approval: . The project complies with all other applicable Bank policies.]

[signature] Task Team Lea ger: Menahem Libhaber

[signature] Sector Manager/Director: n7 L pziger [signature] Country Manager/Director: Aid liman Page 29

Annex 1 Cartagena Water Supply, Sewerage and Environmental Management Project Project Design Summary

Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions Evaluation Sector-related CAS (Goal to Bank Goal: Mission) Expandcoverage of * Increasequality and coverage of Ex-postevaluation * Macroeconomic watersupply, sewerage water supply and sanitation stabilityand growth and sewagetreatment services will allowgovernment and disposalservices to make counterpart * Facilitateprivate sector * Creationof mechanismsto payments participationand private facilitateprivate sector sectorinvestment in participationin the provisionof infrastructureservices urbanpublic services Project Development (Objective to Goal) Objective:

1. Improvethe waterand 1. Decreasein: (i) evacuationof * Periodicreports of * Contaminationof sewerageservices of wastewaterin openchannels on the ACUACAR waterbodies by other Cartagenaand sanitary street;and (ii) dischargeof regarding sources,especially conditionsin the city wastewaterto the Cienagathrough improvementof contaminationof the the stormdrainage system sanitaryconditions CartagenaBay by in problematic industrialeffluent 2. Facilitatethe 2. Reducethe levelof pathogenic neighborhoodsand fromnthe Mamonal environmentalleanup of the coliformcontamination along the calculationof industrialestate, is envirbonmentaclauprofnd the beaches of Cartagena, the Bay and the performance eliminated Cartagena Cienagato meetColombian standards indicators for direct contactrecreational * Inspectionsby fiSewerageworks activities, once the marine outfall has supervision been completed. missionsfor rinancedby other improvementin sources (IDB, District, 3. Enhancesustainability of 3. Performanceindicators of sanitaryconditions ACUACAR'sown waterand sewerageservices ACUACAR and verificationof implemented in Cartagenaby leveraging performance Banksupport to shoreup the indicators PSP modelpioneered by * Reportsof ACUACAR;the city's monitoring mixed-capitalwater and programsof water sanitationutility, against the qualityin the prospectof political receivingbodies interference based on laboratory analysesof water samples * Customer satisfactionsurvey regardingthe water and sewerage services

Outputs: (Outputs to Objective)

* Watersupply systems * Increasein waterCoverage * The PIUwill constructed prepareperiodic Consumers willingto projectoutput and pay for the services * SewerageNetwork in * Increasein seweragecoverage implementation Page 30

Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions Evaluation Cienaga Basin reports * Future mayors constructed and in * Monitoring during continue to be service supervision supportive of the missions institutionalmodel. No * Main conveyance * Surveys to establish political objections system constructed sewerage coverage arise in the Cienaga basin * Treatment installations * All of Cartagena's wastewater and in the entire city constructed treated and adequately disposed of by the mid 2004 * Marine outfall * Dates of signing construction constructed contracts Percentage of works completed each project year, compared with benchmarks

Project Components: Inputs: (Components to * The PIU of Outputs) 1. Expansion of the water 1. US$ 9.1 million ACUACAR will Sufficient Counterpart supply system prepare detailed Funds available, project includingthe 2. Expansion of the 2. US$ 36.4 million implementation Government sewerage in the Cienaga reports on a Go nt basin quarterly basis and 2ontibuion will provide annual 0 million 3. Construction of main 3. US$ 28.1 million audited financial * Currency devaluation wastewater conveyance statements for the and interest rates do system project not exceed forecasted values and do not 4. Construction of treatment 4. US$ 6.8 million 0 Bank supervision result in cost overruns installations missions will visit Cartagena two or * The District has 5. Construction of the 5. US$ 22.7 million three times a year sufficient capacity to submarine outfall depending on the control the volume of works ACUACARcontract 6. Industrial wastewater 6. US$ 0.6 million and unforeseen and follow up project discharge control circumstances implementation activities 7. Environmental and social 7. US$ 3.3 million component

8. Project management, 8. US$ 9.1 technical assistance,studies, design and supervision

See values of monitoring indicators in Annex IA Page 31

Annex IA Cartagena Water Supply, Sewerage and Environmental Management Project Key Performance Indicators

Performance Indicators of ACUACAR Indicator Unit Base TargetValue Expected at Line 1999 2000 200 2002 200 2004 Full Value 1 3 Impact Operational. Water coverage % 80% 80% 80% 82% 86% 87% 89% 89% Volume of water produced 000 m3/d 230 230 234 245 268 280 286 289 Volume of treated water 000 m3/d 194 194 198 207 230 242 246 249 distributed Volume of raw water sold 000 m3/d 36 36 36 38 38 38 40 40 Volume of treated water 000 m3/d 109 109 115 124 142 152 158 164 sold Volume of water loss 000 m3/d 85 85 83 82 87 89 88 85 Unaccounted For Water 44 44 42 40 38 37 36 34 (UFW)* Volume M3/Con/m 26 26 23 22 21 20 19 17 lost/connection/month Volume loss / kilometer M3/ km /m 2750 2750 2600 253 2600 240 2370 2250 pipe/month 0 0 Metered connections % 93% 95% 98% 98% 98% 98% 98% 98% Continuity of service** % 95% 95% 96% 96% 96% 97% 97% 98% Staff on payroll /1000 No. 2.8 2.8 2.9 3.0 3.0 2.9 2.8 2.8 connections Response time to breaks days 1.27 1.27 1.25 1.23 1.21 1.19 1.17 1.15 W. Pipebreaks/1OOkm/year No. 256 256 248 241 234 222 221 200 W$S km with GIS No. 1700 1700 1850 200 2150 225 2300 2350 0 0 Sewerage Coverage % 69% 69% 76% 81% 84% 86% 88% 90% Volume sewage treated 000m3/d 0 0 0 0 0 0 88 149 Km sewerage inspected by Km/year 78 78 82 86 90 95 100 TV No. of sewerage clogging No. 525 525 512 499 487 474 463 450 cleared/100 km

Financial Operating margin % 15.3 9.8 12.3 15.5 13.0 12.4 12.6 Net profit margin % 7.1 0.7 4.6 7.5 6.5 6.6 7.5 Return on equity % 17.3 1.7 11.5 18.0 14.5 13.7 14.4 Current ratio Times 1.26 0.95 0.91 0.92 0.91 0.99 1.14 Debt service coverage Times 1.46 0.77 0.89 1.25 1.22 1.45 3.99 Debt/total capitalization % 68.9 65.3 63.3 58.2 55.0 50.7 45.6 Uncollactables in 18 % 8 8 8 8 8 88 months *UFW: Volume of treated water sold/volume of treated water distributed. **Continuity of service: percentage of users which receive service 24 hours per day. Page 32

Performance Indicators of the District of Cartagena

District performance indicators measure its capacity to repay the loan and to provide counterpart funding, and are not monitored to evaluate development objectives of the District.

Baseline 1999 2000 2001 2002 2003 2004 Earmarked Revenue for Sewerage Investments (US$ million) 18%of PropertyTax 3.5 3.8 4.1 4.3 5.0 5.0 5.0 20% of NationalGovernment 3.4 3.5 3.7 3.7 3.8 3.8 3.9 Transfer Subtotal 6.9 7.3 7.8 8.0 8.7 8.8 8.9 100%of Environmentalfee 0 0.35 0.35 0.35 0.35 0.35 5% of Royalty(Fondo Regalia) 0.26 0.27 0.27 0.27 0.27 0.27 Totalearmarked revenue 7.6 8.4 8.6 9.3 9.4 9.5 Financial Ratios PropertyTax CollectionRates 44% 46% 49% 51% 51% 51% 51%

(%)__ _ _ _ Interestpayment/Net 25% 20% 17% 16% 14% 13% 11% operational surplus /1 (%) Debt balance/currentrevenue /2 56% 56% 57% 68% 70% 70% 64%

(%)__ _ _ _ Net operationalsurplus /3/debt 2.3 3.2 3.5 3.7 5.2 5.7 6.5 service (times) Earmarked funds/debt service 1.4 1.9 2.1 1.8 1.9 2.0 (times) /4 _ /1 Interest payment/Net operational surplus - Maximum allowed by the National Government for approving new debts is 40% /2 Debt balance/current revenue - Maximum allowed by the National Government for approving of new debts is 80%, but 70% is considered high. /3 Net operational surplus: Current Income + Capital Income - Operating Costs - Minimum Social Investments 14 Earmarked funds not including Royalty Page 33

Annex 2 Cartagena Water Supply, Sewerage and Environmental Management Project Detailed Project Description

Background

Water Supply System

The proposed project is a part of the water and sewerage master plan developed by ACUACAR over the past few years. The water and sewerage master plan includes a comprehensive time-bound investment plan to be implemented in the short, medium and the long-terms.

The water supply master plan consists of three stages: a) Rehabilitation stage (1997) which included the preliminary work done by ACUACAR since the take over of responsibility in June 1995 aimed at improving the state of the existing system. During this stage, production capacity (pumping capacity from canal del dique to the city) was increased from 165,000 m3/day to 225,000 m3/day (i.e., from 1.9 m3/s to 2.6 m3/s); water treatment capacity was increased from 165,000 m3/day to 240,000 m3/day (i.e., from 1.9 m3/s to 2.8 m3/s); pressure level and stability in the distribution network was improved as well as the reliability of the electrical supply systems; b) Extension stage (2010) aimed at increasing the production capacity from 225,000 m3.day to 290,000 m3/day (i.e., from 2.6 m3/s to 3.4 m3/s) and increasing the water treatment capacity from 240,000 m3/d to 270,000 m3/day (i.e., from 2.8 m3/s to 3.1 m3/s); c) New production system stage (2021) aimed at increasing the production capacity from 290,000 m3/day to 455,000 m3/day ((i.e., from 3.4 m3/s to 5.3 m3/s) and increasing the water treatment capacity from 270,000 m3/d to 405,000 m3/day (i.e., from 3.1 m3/s to 4.7 m3/s).

The proposed project is aimed at partially financing the second stage of the water supply master plan. i.e., provide the installations required to satisfy the needs up to the year 2010.

Sewage Collection and Disposal

Cartagena consists of two sewerage drainage basins: (i) the Cartagena Bay basin (or the bay basin) which receives about 40% of the city's sewage; and (ii) the Cienaga de la Virgen Basin (or the Cienaga basin) which receives about 60% of the sewage generated in the city. At present, the wastewater is discharged to these water bodies without treatment. A small portion of the raw sewage is also discharged to the water courses crossing the city and to the Cartagena beaches as a result of overflows from overloaded sewerage networks, or discharge from pumping stations during frequent power failures.

The sewerage coverage in Cartagena is currently 65%. Works under implementation, financed by the District of Cartagena, ACUACAR and the IDB would increase the coverage to 75%. The main areas which do not have sewerage networks are: (i) the southeastern zone adjacent to the Cienaga de la Virgen; (ii) part of the southwestern zone adjacent to the Cartagena Bay, and (iii) the higher part of the southern zone (invasion neighborhoods). In addition, the service in some of the areas that have sewerage networks is deficient because of undersized systems resulting from population growth which was not accompanied with systems upgrade. Page 34

To resolve the severe environmental problems resulting from the inadequate collection and disposal of the sewage, and to increase the sewerage coverage in the city, ACUACAR has developed a sewerage master plan, which includes the following projects:

a) The southeastern system: this system is located in the vicinity of the Cienaga de la Virgen, aimed to serve a group of the poorest neighborhoods of the city. At present this zone does not have a sewage collection network and the sewage is flowing in open channels in the streets. ACUACAR has initiated works in this area, financed by the District and own resources, concentrating on the main collection system and pumping stations. However, the majority of the networks still need to be installed.

b) ITheBay drainage system: the objective of this program is to improve the sanitary conditions in the Bay drainage basin. With the implementation of this program the following achievements will be accomplished: (i) increase of the sewerage coverage in the basin; (ii) rehabilitation of old networks and upgrading hydraulic capacity of networks to fit the population growth needs; and (iii) improvements in the sewage discharge from the existing old outfall located in the Cartagena Bay. c) Wastewater treatment and disposal system: This program aims at conveying all the city's wastewater to a treatment plant in which they would undergo appropriate treatment, and subsequently a proper discharge of the treated wastewater into the Caribbean sea for safe disposal. With the implementation of this program the current discharge of the city's untreated wastewater to the Bay and to the Cienaga will be disconnected and these two water bodies will recover from the negative impact caused by the discharge of raw wastewater in them. According to the recommendations of the feasibility study for treatment and disposal of the wastewater of Cartagena, carried out as part of the preparation of the proposed project, the wastewater of the Bay basin will be diverted into the main collection system of the Cienaga basin, and the combined flow of the two basin will reach the Paraiso Pumping station, fom which it will be pumped to the preliminary treatment plant site at the vicinity of Punta Canoa, and from there discharged to the sea via a 2.8 Km. long submarine outfall, discharging at a water depth of 20 m.

The proposed project would finance a part of (a) and (c) of the master plan. Part (b) is being financed by an IDB project of US$ 43.5 million, out of which US$ 24 million is a loan which would be repaid by ACUACAR. Jointly the two projects would complete the sewerage system of Cartagena ( the expected sewerage coverage after completion of the two projects is 88%). In addition, the proposed project would result in the cleanup of the water bodies to which the Cartagena wastewater is currently being discharged (Cartagena Bay, the Cienaga, the beaches and the water courses crossing the city), while safely discharging treated wastewater into the Caribbean city without negative environmental impacts.

Project Description

Part A: Expansion of the Water Supply System - US$ 9.9 million

In terms of water supply the proposed project is aimed at completing the second stage of the water supply master plan. i.e., provide the installations required to satisfy the needs up to the year 2006. Works include construction of pumping and conveyance lines of raw water, construction of a sludge treatment plant, expansion of storage, interconnection of distribution networks, installation and replacement of primary and secondary networks and optimization of existing networks. Page 35

The water supply component contains subprojects for:

* Expansion and improvement of the water production system; * Increase of the water coverage in the city; * Replacement of primary distribution mains; * Mitigation of environmental impact of sludge; * Remote control systems; * Unaccounted For Water (UFW) reduction plan; and

Expansion and improvement of the water production system

This component includes several subprojects: (i) solution to crossing of creeks by the artificial channel Juan Gomez- Dolores; (ii) construction of a parallel pipeline Dolores-Piedrecitas- Albornoz (second stage); (iii) expansion of the storage tank at Albornoz pumping station; and (iv) construction of a new power line for Albornoz pumping station. The respective works are the following:

Solution to crossing of creeks by the artificial channel Juan Gomez- Dolores: Construction of two sedimentation tanks, each 50 m long, 30 m wide and 2 m deep with respective concrete lined overflow weirs, in the confluence of the creeks to the artificial channel that connects de Cienaga Juan Gonez with the pumping station Dolores, for the purpose of reducing the amount of sediments which these creeks carry to the channel, and which during the rainy season inflict additional costs for the water treatment.

Construction of a parallel pipeline Dolores-Piedrecitas-Albornoz (second stage): Continuation of the construction of the parallel new pipeline that conveys raw water between the pumping stations Dolores-Piedrecitas-Albornoz, for which the supply and installation of 4526 m of a 1000 mm diameter pipeline is required, distributed as follows: (i) 1100 m between Dolores pumping station and the point at which the pipeline previously installed start, and from which it already reaches Piedrecitas pumping station; and (ii) 3426 m between Piedrecitas pumping station and the point at which the pipeline previously installed start, and from which it already reaches Albornoz pumping station. With this work implemented, the raw water conveyance capacity will reach 290,000 m3/day and the vulnerability of the system, resulting from frequent breaks in the existing pipeline, will be reduced.

Expansion ofAlbornoz reservoir: Construction of a new reservoir in Albomoz pumping station next to the existing reservoir, with a volume of 96,000 m3, including the respective connection structures to the system. This would increase the storage capacity of the intake in the Albornoz station, allowing 8 hours of pumping in albornoz without receiving water from Dolores, thus reducing the vulnerability of the raw water conveyance system and increasing its reliability.

Construction of a new power line lo Albornoz: Installation of a new three phase power line of 13,200 V from the Temera substation to the Albornoz pumping station, made of a AAAC No. 4/0 cable insulated at 34.5 KV, with concrete posts of 12.0 m. With this work, the Albornoz station will have two alternate power supply sources. This would reduce the vulnerability of the raw water conveyance system and increase its reliability. Page 36

Increase of water coverage in the city

This component consists of investments for increasing the water coverage in the low income neighborhoods, by implementing the following subprojects: (i) water networks in El Pozon; and (iii) completion of water networks in the Southeastern zone.

Water networks in El Pozon: This work consists of supply and installation of 21,400 m of High Density Polyethylene (HDPE) pipes of 11O mm diameters and 3500 house connections. This work would provide an additional coverage to 60% to EL Pozon, which, with the current coverage of 40% would ensure a 100% coverage in this poor neighborhood.

Completion water networks in the Southeastern zone: This work consists of supply and installation of 1280 m of HDPE pipes of 200 mm diameter and 7445 m of HPDE pipe of 110 mm diameter, to complete the water networks in the neighborhoods of La Maria, San Francisco and Paraiso, located in the extreme right of the southeastern zone of the city. This work, jointly with the work currently implemented by ACUCAR will increase the water coverage in this zone to 92%.

Replacement of primary distribution mains

This component consists of relocation of parts of the main pressure distribution pipelines because houses were built right on these pipelines and this imposes a risk for the population in the event of pipe breaks. Works included consist of: (i) relocation of the 30" Amberes pipeline; and (ii) connecting the Colinas tank to the Alcalis system.

Relocation of the 30 " Amberes pipeline: This work consists of supply and installation of 1100 m of ductile iron of 800 mm diameter in Amberes, at Madrid street, for the purpose of relocating the existing pipe, over which 20 houses have been built, since the current situation poses a risk to the community.

Connecting the Colinas tank to the Alcalis system: This work consists of supply and installation of 1900 m ductile iron pipeline of 600 mm diameter from the Colinas tank along the Henequen road, crossing the neighborhoods of Antonio Jose de Sucre, 20 de Julio and Villa Barazza, connecting to the 24" pipeline to Mamonal. With this work it will be possible to supply treated water to the Mamonal industrial zone through the Colinas tank, increasing the reliability of supply to the inductrial zone and reducing operating costs

Mitigation of environmental impact of sludge

This work is aimed at mitigating the negative environmental impact of the sludge produced in the water treatment plant, i.e., converting the partial treatment currently carried out to efficient mechanical treatment. Work consists of construction of two concrete sludge thickening tanks of 35 m diameter and 3.5 effective depth, supply and installation of the pumping system of the supernatant (50 KW installed power), supply and installation of the sludge pumping station (45 KW installed power), improvement of the existing sludge sedimentation lagoons and construction of concrete sludge drying beds (total area of 2,500 m2). With this works, adecuate management would be provided to 9 tonlday of sludge produced by the water treatment process, thereby improving the environmental conditions around the El Bosque treatment plant and the evacuation channel of the filters wash water and of the underflow from the sedimentation tanks, which are evacuated to the Cartagena Bay.

Remote control systems Page 37

This component is aimed at providing remote control systems for operating the principal wastewater pumping stations and introduce measurement and control instruments in strategic points of the water and sewerage networks, with which an optimization and control of operation of these systems can be reached. The remote control program includes the following 5 components:

(a) Raw water: supply and installation of electromagnetic flow meters. Design supply and installation of the systems for local automatic operation of each station, interrelating the pumping between stations with the water level at the treatment plant raw water tank.

(b) Water distribution network: supply and installation of electromagnetic flow meters in El Limbo, installation of 13 control points at different sites of the network, installation of control valves and automatic chlorination at El Carmelo, Installation of automatic postchlorination at Colinas tank, installation of remote control for pumping station Santa Lucia, installation of flow and pressure measurement a well as residual chlorine measurement for the north zone system and installation of remote control for the free trade zone.

(c) Water treatment plant: Completion of the remote control system of the treatment processes at El Bosque Plant.

(d) Remote control center: update and improvement of the software and hardware systems of the remote control center and of the Programable controllers (PLCs). Construction of a new remote control center.

(e) Wastewater system: implementation of a remote control system in the seven wastewater pumping stations.

Unaccounted For Water (UFW) reduction plan

This plan is aimed at reducing UFW by means of sectorization and optimization of the distribution networks and through the water networks plan barrios. It contemplates the installation of 2000 m of HDPE pipelines of 300 mm diameter, 4430 m of HDPE pipelines of 110 mm diameter and 860 m of HDPE pipelines of 63 mm diameter in various neighborhoods. These works will improve the hydraulic performance of the existing water networks in El Prado, san Isidro bajo, Cartagenita, Altos del Nuevo Bosque and Villa Estrella, which would reduce UFW.

Part B: Expansion of the Sewerage System in the Cienaga Basin - US$ 35.7 million

In terms of sewerage works the project aims at improving sanitation conditions in the areas of the Cienaga drainage basin which do not have at present sewerage systems or which receive a deficient service. This would achieved by: (i) increasing the coverage of the sewerage network, and (ii) replacing, rehabilitating and enhancing the conveyance capacity of collectors and networks in certain parts of the city in which the sewerage system is currently undersized or obsolete. Works include construction of main collectors, pressure pipes and pumping stations, as well as construction of new secondary networks and optimization of existing networks.

The Cienaga basin sewerage component contains subprojects for:

* enhancement of conveyance capacity of existing sewage collectors in the southwest, southeast, and central parts of the city that currently drain to the Cienaga; Page 38

* expansion of secondary sewerage network in the southwest, southeast, and central parts of the city, as well as the Boquilla area, that currently drain to the Cienaga; * construction of new pressure lines and pumping stations; and * construction of new gravity collectors in residential areas.

Enhancement of conveyance capacity of existing collectors

This subproject involves expanding the capacity of the existing collectors in the south-west, south-east, and central parts of the city which currently discharge sewage to the Cienaga. This would include reinforcing and optimizing the existing sewers in order to eliminate current deficiencies and carry the sewage to a common site for treatment and final disposal. The following table summarizes the main features of the sewers included under this component.

Works for Capacity Enhancement of Existing Collectors

Collector Name Neighborhoods Served Length Diameter (km) (mm) Paseo Bolivar- El Cabrero, Torices, La Espafiola, Urbanizacion 4.45 300-700 Cabrero-Marbella Tequendama, Santa Rita, Pedro Salazar, Canapote and ______Crespito Crespo-EI Oro Crespo 1.48 300-400 Pedro Romero-Maria Las Brisas, Andalucia, Galan, La Gloria, 19 de Abril, 2.55 300-700 Auxiliadora Espafifa,Las Lomas, Junin, Amberes, Maria Auxiliadora, Alcibia, La Esperanza, Las Flores, La Maria, and El ! ______Cielo Tabu Zaragocilla, La Campinia,Armenia, El Cairo, and La 0.77 300-600 Villa Blas de Lezo Santa Lucia, Los Alpes, Trece de Junio, and El Carmen 0.97 300-400 Derecho-Santa Lucia- Chapacua Bias de Lezo Las Gaviotas, Chiquinquira, La Casteilana, Las Gavias, 2.33 300-800 Izquierdo Contadora, Republica de Venezuela, Los Ejecutivos, Los Angeles, Villa Sandra, Paseo de la Castellana, Los Calamares, Los Almendros, Buenos Aires, Las Delicias, and El Rubi Socorro-Blas de Lezo El Socorro, Blas de Lezo, Los Caracoles, Los Jardines, 3.73 300-600 La Victoria and Altos de los Jardines San Fernando- Medellin, Berlin, Los Ciruelos, San Fernando, Alameda, 4.36 300-700 Medellin-Los La Victoria, Nazareno, Villa Rubia, La Consolata, El Ciruelos Educador, and Maria Cano Ternera-Recreo-EI Ternera, Siboney, Beirut, Urbanizacion el Eden, 2.08 300-600 Eden Valencia, El Recreo, Mayorga, Urbanizacion Baru, and La Concepcion _

Secondary sewerage networks

This subproject includes expansion of the sewerage network in the south-west, south-east, and central areas, as well as the Boquilla sector, all of which currently drain to the Cienaga. The following table summarizes the main features of the networks to be included in this component: Page 39

New Sewerage Networks to be Constructed Under the Project

Name of Work Neighborhoods Served Total Length Diameter (km) and (mm) Characteristi Cs Pozon and Villa Poz6n and Villa Estrella, located on the eastern 34 km of 200 Estrella shore of the Cienage secondary collectors 5.12 km of 300-400 primary collectors Southeastern Olaya Herrera, Rafael Nuiez, Libano, Playas 9.3 km of 200 Zone de Acapulco, and other neighborhoods located secondary around the Cienaga collectors La Boquilla La Boquilla 7.2 km of 200-300 secondary collectors San Jose de los San Jose de los Campanos 9.0 km of 200-400 Campanos secondary and primary collectors Southwest Zone Maria Cano, El Educador, San Fernando, and 15.5 km of 200 Cesar Fl6rez secondary collectors Falda de la Popa Loma Fresca, Paraiso, Pablo VI, Repuiblicadel 11.7 km of 200 Caribe, Palestina, Paraiso II, and San Bernardo secondary collectors

Pumping stations and pressure lines

This subproject includes investments for expanding and renovating pumping stations and pressure lines, which would permit conveying the sewage of the Cartagena Bay basin tho the Cienaga basin system and connect all areas in the Cienaga basin with a central collection system, i.e., either with the San Francisco collector or the Cordialidad Collectors, both of which would convey the wastewater to the central collection point of all the wastewater of Cartagena at Paraiso pumping station. It includes the following facilities:

* Pumping station El Oro and pressure line from El Oro to San Francisco (length 2.0 km, diameter 1000 mm);

* Pumping station Cielo Mar and pressure line from Cielo Mar to Crespo (length 1.5 km, diameter 500 mm);

* Pumping station Blas de Lezo and pressure line from Blas de Lezo to Cordialidad (length 2.5 km, diameter 1200 mm);

* Pressure line from El Bosque to Amberes (length 0.8 km, diameter 1000 mm) draining towards Ricaurte; and

* Pressure line from Ceballos to Buenos Aires (length 1.5 km, diameter 800 mm). Page 40

New gravity collectors

This component would support the construction of gravity collectors which receive the sewage from the above-mentioned pressure lines. The new sewers included under this subproject are:

* Amberes-Ricaurte collector: This collector with a length of 3.06 km and a diameter between 1300 and 1600 mm would receive sewage from the El Bosque-Amberes pressure line. * Buenos Aires-Blas de Lezo collector: This collector with a length of 1.14 km and a diameter of 900 mm would receive sewage from the Ceballos-Buenos Aires pressure line.

Part C: Construction of the Main Conveyance System-of the Wastewater to the Treatment Plant - US$ 28.1 million

One of the project objectives is to cleanup the water bodies surrounding Cartagena (the Bay, the Cienaga, the beaches and the water courses crossing the city) from the raw wastewater currently discharged to them. This would be achieved by collecting all the wastewater of Cartagena, conveying them to a treatment plant and discharging the effluent into the Caribbean sea in a controlled and safe fashion. Part C of the project comprises the construction of the main conveyance system of the collected wastewater of the city to the treatment plant and from there to the Caribbean shore. This component includes the following subprojects:

* Upgrading of the Paraiso pumping station; e Construction of the pipeline from Paraiso pumping station to the treatment plant site; and Construction of the effluent pipeline from the treatment plant to the submarine outfall at the Caribbean shoreline.

Upgarding of the Paraiso pumping station

Currently, the Paraiso pumping station discharges part of the wastewater of the Cienaga basin into the Cienaga. As a result of the project works, all the wastewater from the Cienaga Basin and the Cartagena Bay basin service areas, i.e., all the city's wastewater, would be collected and transported via trunk sewers to one point, the Paraiso pumping station, from which it would be conveyed to the treatment plant site, located at a distance of 18 km from Paraiso. The project would finance modifications to the Paraiso pumping station, so as to upgrade its function from that of discharging part of the wastewater to the nearby Cienaga to that of pumping the entire flow of the city's wastewater to the remote treatment plant site. The pumping station will require 8 new submersible sewage pumps, 8 new starters, new valves and pressure pipes and accessories as well as a variety of electrical, mechanical, structural and architectural modifications in the existing pumping station to accommodate the design year (2015) average flow (Qa)of 227.000 m3/d (2.6 m3/s), with a peak hourly flow (Qmax)of 341,000 m3/d (about 4 m3/s, using a peak factor of factor of 1.5).

Construction of the pipeline from Paraiso pumping station to the treatment plant site

From the Paraiso pumping station the wastewater would be pumped to the treatment plant site north of Cuchilla Canalete (between the "Corregimiento de Punta Canoas" and the "Arroyo Guayepo") by means of a 18 km (2000 mm, i.e., 72" diameter) reinforced concrete force main. The construction of the 72" pressure main would be financed and implemented under the project;

After the year 2015, retention basins would have to be added next to the Paraiso pumping station to regulate peak wet season flows in excess of 341,000 m3/d, while still allowing to operate the Page 41 system with the same 72" force main. The addition of these retention basins (which does not form part of the present project, but rather would be constructed at a later stage) would allow the force main to handle flows through the year 2025.

Construction of the effluent pipeline from the treatment plant to the submarine outfall at the Caribbean shoreline

After undergoing preliminary treatment, a conveyance gravity reinforced concrete pipe section of 2.85 km length of the same diameter of the pressure pipe, i.e., 72", will channel the treatment plant effluent to the shoreline where it will connect to the submarine outfall. The construction of the 72" effluent gravity line would be financed and implemented under the project.

Part D: Construction of Treatment Installations - US$ 6.8 million

According to the project strategy, a pretreatment consisting of preliminary treatment installations would be provided for the wastewater treatment prior to its discharge to the Caribbean sea through a submarine outfall. The submarine outfall has been designed to provide safe disposal of the effluent of the preliminary treatment plant. As part of the project strategy, an intensive monitoring program of sea water and sea bed at the outfall vicinity would be carried out. Should it indicate that coliforms discharged through the outfall are reaching bathing beaches, or should it point to any other water quality problems resulting from the effluent discharge, additional treatment trains will be added at a later stage to ensure meeting water quality targets. A 20 ha site will be reserved to accommodate future treatment installations, if needed.

The Preliminary treatment Installations will remove floatable materials, grease, oil, sand, and grit. Treatment facilities will include six rotary screens (1.5 mm clearance) followed by two vortex- type grit chambers. The rotary screens will remove rags, floatable material, and large solids. The expected volume of screenings generated by the rotary screens is about 8.5 m3/d. In addition. The vortex-type grit chambers will remove about 5.1 m3/d of sand and grit.

The total percentages of contaminants removal by the treatment facility are: (i) reduction of suspended particles with diameter larger than 0.75 mm by 100% which corresponds to the effect of primary treatment in a settling tank; (ii) reduction of other undissolved materials by 80-90%; (iii) reduction of BOD by 10-20%, and (iv) reduction of all grease and oil by 30% to 40%.

Part E: Construction of the Submarine Outfall - US$ 22.7 million

This subproject consists of construction of the submarine outfall for the safe discharge of the pre-treated effluent to the Caribbean sea near Punta Canoas. The main conveyance system will connect the treatment plant with the submarine outfall. The outfall would be constructed using a 72" reinforced concrete pipe. Total outfall length would be 2,850 m and the discharge point (diffuser area) will be submerged at a depth of 20 m. The diffuser will have a length of 540 m, with a riser spacing of 20 m, i.e., a total of 27 risers. Each riser will be made of a 12" diameter pipe, 2 m long. The upper end of each riser pipe will be sealed by a welded plate, and it will have 2 openings close to the plate, each of diameter 8", i.e., the total number of discharge ports will be 54.

In the surf zone between the shoreline and the 3m-depth contour, outfall pipes will probably be laid using a trestle built over the water. At greater depths, a barge-mounted crane would probably be used for construction. Page 42

Part F: Industrial Wastewater Discharge Control - US$ 0.6 million

This part of the project would address issues related to industrial wastes discharged to the municipal sewerage network. It is not aimed to provide investments for treatment installation but rather to assist in establishing the regulatory framework and provide technical assistance related to pretreatment of industrial wastes. It would support the following activities: (i) carrying out a survey to identify key sources of industrial pollution in the city of Cartagena, i.e., establishing a baseline inventory and data base for industrial pollution within the city areas served by the sewerage networks (based on preliminary assessments, most of these are expected to be small industrial and commercial establishments, such as restaurants and car shops, since larger industry is located in Mamonal, outside the city's sewerage networks limits); (ii) establishing a system for regulating the discharge of industrial wastes, either to the sewerage system or to receiving bodies; (iii) establishing a system for auditing the status of industrial wastes discharge; (iv) defining strategies for control of small and dispersed sources of industrial pollution discharging to the sewerage networks (gasoline stations and mechanical repair shops); and (v) providing technical assistance in selection and design of pretreatment processes.

Part G: Environmental and Social Component - USS 3.3 million

This part of the project seeks to implement mitigation measures of the environmental and social impacts of the project. The environmental management program includes: (i) environmental supervision during construction; (ii) restoration and conservation of the Cienaga de la Virgen nature reserve; (iii) carrying out a monitoring program before and after construction of the marine outfall to study the fate of pathogenic coliforms and other contaminants discharged through the outfall; and (iv) environmental institutional strengthening program. The social management program includes: (i) organization and Strengthening of the community; (ii) construction rehabilitation and equipping of community centers; (iii) support of in house basic sanitation in La Boquilla; and (iv) strengthening of the Community Relations unit of ACUACAR. The social plan includes also supply of piped water to the communities of Zona Norte, which would be undertaken by the District and forms a condition of the Loan.

Environmental management program

Environmental supervision during construction: this task would be carried out by a consulting firm which would ensure that the contractors comply with environmental requirements. The consulting firm would also non-construction related components of the environmental management plan, such as providing information to the public and implementing the social communication program, providing environmental education to the community and providing institutional support to DAMARENA.

Restoration and conservation of the Cienaga de la Virgen nature reserve: this activity include: (a) carrying out of legal, technical and land tenure studies and the preparation of management and operational plans for the Cienaga protected area with the assistance of a consulting firm; and (b) providing support to institutional and community initiatives to preserve the Cienaga (solid wastes collection, prevention of liquid wastes discharge in the area, preparing a decree declaring the Cienaga sa a protected area), with the aid of and under the responsibility of the Secretaria de Participacion Communitaria of the District of Cartagena, which would be in charge of community initiatives, and of DAMARENA, which would be in charge of the Cienaga preservation program.

Monitoring program before and after construction of the marine outfall: this activity includes the carrying out of a comprehensive program for monitoring the quality of sea water and sea bed before and after the construction of the outfall, so as to determine the fate of pathogenic coliforms Page 43 and other contaminants discharged through it, establish its impact and provide basic information which would help in formulating a decision regarding the need for upgrading the treatment facilities.

Environmental institutional management program: this activity is aimed at ensuring institutional capacity to implement the environmental management program. It includes the financing of training workshops, study tours and specialization courses for DAMARENA and CARDIQUE in topics such as wetland management, pollution control, water quality monitoring and environmental audits.

Social management program

Organization and Strengthening of the community: this activity includes support to organize the community, strengthen its organizations and promote participation in the project. It would be carried out through the Secretaria de Participacion Communitaria of the District of Cartagena. This activity will include Rehabilitation of poor communities which would promote community participation in the ongoing Urban Rehabilitation Program carried out by the District of Cartagena to consolidate the urban development of these communities. It will also include Promoting Community Development which would support community's activities to improve sanitary conditions in their own neighborhoods, support the project's clean-up efforts, mainly around La Cienaga and promote integration of community-based groups to develop income-generating activities related to the project such as solid-waste recycling.

Construction rehabilitation and equipping of community centers: this activity would provide financing for construction of three new community centers, rehabilitating three existing, deteriorated community centers and equipping of all six centers. These community would be the focal point for community activities, social integration and amelioration of urban conditions centers would provide the facilities required for community organization, support and participation in the project. The construction activities would be managed by the project implementation unit of ACUACAR.

Support of in house basic sanitation in La Boquilla: this activity would finance house connections, internal piping and bathrooms to selected extremely poor households (stratum 1) to benefit some 500 families in the north zone and around the Cienega. It wold serve as a demonstration pilot to educate and promote sanitary services among poor communities which have never had piped water and sewerage services. This activity would be carried out by the District of Cartagena through its housing agency CORVIVIENDA (Fondo de Interes y Reforma Urbana Distrital de Catagena, created by and agreement of the Municipal Council in 1991).

Strengthening of the Community Relations unit ofACUACAR: this activity would provide assistance to the Community Relations Unit of ACUACAR in dealing with the increased number of poor customers and in improving its performance. It would also support carrying out a public communication campaign to keep population in Cartagena informed about the progress on project implementation. It will be carried out with the assistance of the consulting firm in charge of the environmental supervision and public information.

Part H: Project management, Technical Assistance, Studies, Design and Supervision of Works - US$ 9.1 million

This component would support and partially finance the following activities: (i) project management; (ii) Design and supervision of the water supply systems works; (iii) design and supervision of the sewerage systems works; (iv) design of the main wastewater conveyance Page 44 system, treatment installations and submarine outfall; (v) supervision of the main conveyance system works; and (vi) supervision of the treatment installation and submarine outfall works.

The project management activities which would be carried out by the PIU, the unit in charge of project implementation, include: financing of consultants to the PIU, assistance in completion of detailed engineering designs as required, preparation of bidding documents for purchase of equipment and execution of works, preparation of letters of invitation and corresponding packages for hiring consultants and carrying out all the procurement processes as required, assistance in supervision of all works and carrying out the financial management activities of the project. The other activities under this part of the project are mainly design and supervision activities, which would be carried out by consulting firms. Page 45

Annex 3 Cartagena Water Supply, Sewerage and Environmental Management Project Estimated Project Costs

Project Component Local Foreign Total ------US $ million------1. Expansion of the Water Supply System 6.41 2.20 8.62 2. Expansion of the Sewerage System in the Cienaga Basin 15.82 14.34 30.16 3. Construction of the Main Wastewater Conveyance Systm 11.84 10.97 22.81 4. Construction of the Wastewater Treatment Installations 2.73 2.88 5.61 5. Construction of the Submarine Outfall 5.08 13.03 18.11 6. Industrial Wastewater Discharge Control 0.50 0.00 0.50 7. Environmental and Social Component 2.75 0.00 2.75 8. Project Management, Technical Assistance, Studies, 4.40 3.20 7.60 Design and Supervision

Total Baseline Cost 49.54 46.63 96.16 Physical Contingencies 4.65 4.66 9.31 Price Contingencies 5.15 5.70 10.85 Front -end Fee 0.85 0.85

Total Project Cost 59.34 57.84 117.18 Page 46

Annex 3 Cartagena Water Supply, Sewerage and Environmental Management Project Estimated Project Costs (Details) (US$ Million Excluding Front-end Fee)

Materials Component Equipment Works Studies Total Cost Local Foreign %Foreign %Base Cost

A. Water Supply Systems 2.81 4.61 7.42 5.44 1.98 27 8.2 Al. Canal Juan Gomez 0.00 0.22 0.22 0.22 0.00 0 0.2

A2. Parallel line Dolores-Albornoz 0.72 0.44 1,16 0.48 0.68 59 1.3 A3. Expansion of Albornoz Reservoir 0.02 0.37 0.39 0.39 0,00 0 0.4 A4. New Power Line to Albomoz Pump Station 0.15 0.05 0.20 0.06 0.14 70 0.2 A5. Sludge Treatment El Bosque Stage I 0.12 0.61 0.74 0.62 0.12 16 0.8 A6. Relocation of Amberes pipe 30' 0.35 0.41 0.76 0.43 0.33 44 0.8 A7. Connecting Colinas Tank to Alcalis System 0.52 0.64 1.15 0.66 0.49 43 1.3

A8. Water Network El Pozon 0.47 1.57 2.03 1.99 0.04 2 2.3 A9. Water Network Plan Barrios 0.08 0.12 0.20 0.19 0.01 6 0.2 Al0. Completion of Networks Zona Suroriental 0.13 0.18 0.31 0.30 0.01 5 0.3 All. Telecommand 0.27 0.27 0.12 0.15 56 0.3 B. Cienaga Basin Sewerage 18.86 9.74 28.60 14.25 14.35 50 31.7 B1. Collectors Enhancement 5.49 2.16 7.65 3.83 3.83 50 8.5 82. Sewerage Networks 7.04 3.16 10.20 5.10 5.10 50 11.3 B3. Pressure Pipes 3.48 2.31 5.79 2.90 2.90 50 6.4 B4. New Collectors 1.73 0.68 2.41 1.21 1.21 50 2.7 B5. Pumping Stations 1.12 1.43 2.55 1.22 1.33 52 2.8 C. Main Conveyance System 10.32 10.59 20.91 9.94 10.97 52 23.2 Cl. Paraiso Pump Station 1.40 0.38 1.78 0.37 1.41 79 2.0 C2. On Shore Pipeline, 1A, 2A, 2B and 3A 4.66 5.77 10.43 5.21 5.21 50 11.6 C3. On Shore Pipeline, 38, 3C, 3D and 3E 4.26 4.45 8.70 4.35 4.35 50 9.6 D. Treatment Installations 2.88 1.56 4.44 1.55 2.88 65 4.9 E. Submarine Ouffall 1.42 16.58 18.00 5.04 12.96 72 20.0 F. Industrial Wastes 0.50 0.50 0.50 0.00 0 0.6 G. Environmental and Social Component 0.60 2.15 2.75 2.75 0.00 0 3.0 Gl. Env. Supervision 0.50 0.50 0.50 0.00 0 0.6 G2. Cienaga Conservation 0.40 0.40 0.40 0.00 0 0.4

G3. Coastal Waters Monitoring 1.00 1.00 1.00 0.00 0 1.1 G4. Community Org. Support 0.25 0.25 0.25 0.00 0 0.3 G5. Construction Community Centers 0.40 0.40 0.40 0.00 0 0.4 G6. La Boquilla Basic Sanitation 0.20 0.20 0.20 0.00 0 0.2 Page 47

Annex 3 Cartagena Water Supply, Sewerage and Environmental Management Project Estimated Project Costs (Details) - Continued (US$ Million Excluding Front-end Fee)

Materials Component Equipment Works Studies TotalCost Local Foreign %Foreign %BaseCost

H. ProjectManagement, TA and Studies 7.60 7.60 4.40 3.20 42 8.4 Hi. ProjectManagement 1.00 1.00 1.00 0.00 0 1.1 H2. Design& Supervisionof Water SupplySystems 0.80 0.80 0.80 0.00 0 0.9 H3. Design& Supervisionof SewerageSystems 2.60 2.60 2.60 0.00 0 2.9 H4. DesignConveyance Treatment and Outfall 1.50 1.50 0.00 1.50 100 1.7

H5.SupervisionConveyance 0.80 0.80 0.00 0.80 100 0.9 H6. SupervisionTreatment and SubmarineOutfall o.9o o.9o 0.00 0.90 100 1.0 Total BaseCost 36.28 43.69 10.25 90.22 43.87 46.35 51 100.0

PhysicalContingencies 3.63 4.37 1.03 9.02 4.39 4.63 51 10.0 Price Contingencies 10.85 5.15 5.70 53 12.0 Total ProjectCost i`o.0g 53.41 56.68 51 122.0

Land Acquisition 2.62 2.62 0.00 0 2.9 Duties and Taxes (VAT) 3.61 3.61 0.00 0 4.0 Total Investment 116.32 59.64 56.68 49 128.9 Page48

Annex 3 Cartagena Water Supply, Sewerage and Environmental Management Project Project Components by Year - Totals Including Contingencies (US$ Million Excluding Front-end Fee)

olombia artagena rojectComponents by Year-- TotalsIncluding Co US$Million) TotalsIncluding Contingencies 1999 2000 2001 2002 2003 2004 Total 1. Water Supply System 2.07 7.84 - - 9.91 2. Cienaga BasinSewerage 3.88 10.11 21.74 - - - 35.73 3. MainConveyance System - 1.17 7.91 11.98 7.00 - 28.05 4. Treatment Installations - 1.23 - 3.70 1.88 - 6.81 5. SubmarineOutfall - - 5.01 6.96 7.18 3.58 22.73 6. IndustrialWastes - 0.12 0.12 0.12 0.13 0.13 0.62 7. Environmentaland SocialComponent 0.40 0.94 0.72 0.37 0.38 0.53 3.34 8. ProjectManagement 1.02 3.03 1.98 1.36 1.15 0.59 9.14 otalPROJECT COSTS 7.37 24.43 37.49 24.50 17.72 4.83 116.33 Page 49

Annex 3 Cartagena Water Supply, Sewerage and Environmental Management Project Project Implementation Schedule

~~~~~~~~~~~~1199 2000 2W 2002 0T<2= D g04 2t ID Task Name Q21Q31Q4_ _@ QqQ Q Q'IQYQ31Q Q l Q I A. WaterSupply Systems 2 CanalJuan Gomez 3 Paralleiline Dolores- Albornoz 4 Expansionof AlbomozReservoir 5 NewPower Line to AlbornozPump Station 6 SludgeTreatment Ei BosqueStage I 7 Relocationof AmberesPipe 30" 8 ConnectingCoiinas Tank to AicalisSystem 9 WaterNetwork El Pozon 10 WaterNetwork Plan Barrios 11 Completionof NetworksZona Suroriental 12 Telecommand 13 B. CienagaBasin Sewerage 14 CollectorsiEnhancement 15 SewerageNetworks 16 PressurePipes 17 New Collectors 18 PumpingStations 19 C. MainConveyance System _ 20 ParaesoPump Station 21 On ShorePipeline, 1A, 2A, 2B and 3A 22 On ShorePipeline, 3B, 30, 3D and3E 23 D. TreatmentInstallations 24 E. SubmarineOutfail 25 F. IndustrialWastes

26 G. Environmentaland SociaiComponent V 27 EnvironmentalSupervision 28 CienagaConservation 29 CoastalWaters Monitoring 30 CommunityOrgahniiati6n Support 31 ConstructionCommunity Centers 32 La BoquillaBasic Sanitation

33 H. ProjectManagement, TA andStudies __ 34 ProjectManagement 35 Design& Supervisionof Water SupplySys 36 Design& Supervisionof SewerageSystem 37 DesignConveyance, Treatment and Outfal 38 SupervisionConveyanrce 39 SupervisionTreatment and SubmarineOut _ Page 50

Annex 4 Cartagena Water Supply, Sewerage and Environmental Management Project Cost Benefit Analysis Summary

The Cartagena Water Supply, Sewerage and Environmental Cleanup Project, which compromises of a number of subprojects, is financially and economically viable when some of the components of the project will be either redesigned or discarded from the investment program. This is the conclusion of a detailed financial, economic and distributive analysis, enhanced by elaborate sensitivity and risk analyses.

I. OBJECTIVE

The objectives of the Project are: (i) to improve the water supply and sanitary conditions of Cartagena's population by expanding water supply and sewerage coverage, particularly in the city's poor areas; (ii) to facilitate the environmental cleanup of the water bodies located in and around the city through the collection, treatment and disposal of wastewater; and (iii) to improve the sustainability of water and sewerage services in Cartagena by leveraging Bank support to underpin the PSP model pioneered by ACUACAR. On the basis of these objectives, the cost- benefit analysis was used to measure: (i) the financial and economic viability of the investment projects that will be partially financed by the Bank; and (ii) the distributive impact of those subprojects; and (iii) the risk profile of each subproject.

3I. METHODOLOGY

A number of steps was taken to enable us to undertake the cost-benefit analysis of the project. These steps included (i) the definition of the 'with' and 'without' project scenarios; (ii) the identification of separable project components; (iii) the preparation, execution and analysis of willingness to pay studies; (iv) the analysis of the benefits of the water supply proiects; and (v) preparation of the financial and economic analyses of the water supply, sewage collection and treatment subprojects. The evaluated infrastructure components represent 88 percent of the total project cost.

To identify the incremental costs and benefits resulting from each subproject, "with" and "without" project scenarios were built for each subproject. The "with" project scenario considers the proposed investment plan and its associated targets. The "without" project scenario considers that current coverage levels will be maintained over time. This would require some replacement investments in the future, but due to lack of data on the current asset base these are not included in the flow of costs in the "without" project scenario.

Costs and benefits associated with the "with" and "without" project scenarios are projected for 30 years, that is, during the implementation period and until the full impact of the subprojects is obtained. The cash flows were discounted using a discount rate of 12 percent which is estimated to be a proxy of Colombia's opportunity cost of capital. Benefits from the water supply project include the elimination of rationing and intermittent supplies and service coverage increases. Benefits from sewage collection and treatment subprojects include a reduction of water pollution levels through service coverage increases. The improved hygienic and environmental conditions that result from increasing water supply and sewerage coverage will translate into improved hygienic conditions that will result in decreases in infant mortality and a reduction in the incidence of water-borne diseases. Improved environmental conditions contribute to the recovery of Page 51 beaches, enhance tourism activities and other water uses, and increase recreational activities. However, no effort is made to quantify these benefits. Additional benefits, that were not included in the analysis, comprise of a temporary but significant generation ofjobs during project implementation.

The project is evaluated from three different perspectives. Thefinancial viability of each subproject is appraised measuring its flows of costs and benefits in market prices. Under a financial perspective, benefits are assumed equal to the estimated flow of financial revenues. Because of the particular financing structure of this project, a very large part of the investments are actually subsidized. The economic viability is determining the flows of costs and benefits in economic or shadow prices. This is particularly important, because of the project's intangible environmental benefits which are often not efficiently allocated by the market. In the economic analysis, benefits are assumed equal to the willingness to pay (WTP) for sewage collection, treatment and disposal services for each beneficiary household. As no WTP studies were undertaken for the water supply subprojects, as they were added on to the project in a later stage, it was generally assumed that current water rates reflect customers' willingness to pay. The flow of financial cost is transformed into economic costs through the use of conversion factors. The distributive analysis identifies the winners and losers among the different groups with interests and stakes in the project: the central government, the government of the District of Cartagena, the water company and its customers, and the utility's labor force affected by subproject interventions. The sensitivity and risk analysis enhances the accuracy of the financial and economic analyses by incorporating uncertainty into the project analysis. 1II. ASSUMPTIONS

The primary source of data is ACUACAR that has provided data regarding market demand and supply, project specifics, comprehensive cost and investment data, project financing details, expected financial returns, and market distortions. An extensive WTP survey for sewage collection, treatment and final disposal in different areas of intervention was conducted by consultants in April 1998.

Investment costs include the cost of the works and the indirect cost of investment such as the cost of administration, supervision and physical contingencies. "With" and "without" project scenarios include connection cost generated from population growth, but only the "with" project scenario includes the connection costs generated from an expansion of coverage. Because almost all investments are subsidized by the government, the actual financial investment cost are almost negligible. The rest value of the investments is considered zero.

Operational and maintenance (O&Mj costs include the cost of labor, power and maintenance. For the water supply and sewerage investments, they are calculated as 0.5 percent of the cost of civil works, and 3 percent of equipment.

The implementation schedule of each sewerage collection subproject varies from 1 to 2 years depending on its size. The sewage treatment subproject will be implemented in 6 years due to its complexity. The implementation period of the water supply subprojects will take 3 years.

Current and projected population in the project areas are based on the most recent data of the water utility operating in the project area, and the number of households per connection served by ACUACAR. Coverage levels were estimated by the company based on their own planning and resources availability. The annual targets for the installation of new service connections result from projected coverage levels. Page 52

Per capita water and sewage consumption was derived from the surveys that were undertaken in the project areas. Non-residential consumption was based on data provided by ACUACAR, and consultant studies.

Water and sewage billed Water billed for metered connections is based on the volume of water billed multiplied by the average water tariff. Sewage billed is assumed equal to the sewage volume given by the number of connections, and the average tariff for the appropriate income groups. It is assumed that the introduction of sewage treatment will not result into the establishment of a separate tariff for sewage treatment. The collection efficiency rate, defined as sales collected over total sales, was assumed to remain unchanged in the "with" and "without" project scenario and stay at 85 percent.

The tariffstructures and levels were assumed to change for the "with" project scenario. An real tariff increase for water supply and sewerage services is foreseen between 1998 and 2001. On the basis of the surveys conducted in a number of project areas, price and income elasticities were estimated as -0.28 and 0.41, respectively. The annual average household income is estimated to grow at about 2 percent during the lifetime of the project.

Taxes on services applicable to civil works, projects and supervision, materials and equipment are on average 16 percent. Custom duties for heavy machinery, pumps, and PVC pipes are respectively 5, 15 and 20 percent.

Dividend Payments. When profit is made, 50 percent is assigned to reserves for ACUACAR. The other 50 percent is paid out in dividends, of which 50 percent is assigned to the District of Cartagena, 45.9 percent is for Aguas de Barcelona (a foreign water company) and the remainder is for other shareholders. Page 53

IV. FINANCIAL ANALYSIS

The financial analysis of each subproject measures the flow of costs and benefits in market prices. Cost and benefits are measured in market prices and calculated based on the assumptions presented in the last section. In the analysis, the impact of taxes and subsidies are included. Investments are largely subsidized through the particular financing structure of the project. Therefore the financial viability of each subproject is appraised from the investment point of view which, excluding the cost of financing, allows for an assessment of the financial return of the project (Table 1). The project horizon is set at 30 years and the annual cash flows are discounted at a rate of 12 percent, which is assumed to be Colombia's opportunity cost of capital.

Water Supply Subprojects. The system improvement project - aimed at improving the service by the elimination of rationing and intermittent supplies, improvement of pressure, and operation and maintenance cost savings - is financially viable. Because no WTP were available for this component, the benefits are calculated by the financial revenues that will be generated through the elimination of rationing. Based on the data that ACUACAR has provided, rationing currently affects about 21 percent of residential connections. It is assumed that elimination of rationing will result in a consumption increase of about 55 lcd. In addition, the project will generate (energy cost) savings and savings in maintenance through the implementation of a telecommand system.

The benefits of the subprojects aimed at the expansion of water supply to poor neighborhoods is assumed to be equal to the financial revenues that the new customers will generate. Because of a change in the cross-subsidy system, poor customers in strata 1 and 2 'will have to pay substantially more in the next few years - estimated real rate increases of about 90 percent between 1998 and 2001. Even with the sharp increase in water rates, none of the expansion projects - with the exception of that in the Zona Suroriental (which has the lowest per capita investment costs- is financially viable.

The subproject "Zona Norte" is highly beneficial due to the large benefits it generates because of the future development of this area, resulting in the construction of up-scale residences and the construction of hotels to cater the development of tourism (the latter benefit has not been quantified). In addition, the project will benefit households in three poor communities in this area. As a result, net benefits are very high and the internal rate of return of this subproject is 38 percent.

Sewage collection and treatment subprojects. All sewage collection and treatment subprojects, with the exception of the sewage collection project in Crespo-El Oro (which faces very low per capita investment cost) generate insufficient benefits to justify these investments on financial grounds. However, when the investment subsidies that will be provided are taken into account, all sewage collection subprojects generate positive financial returns. The sewage treatment subproject generates no benefits as no treatment charge will be implemented to recover the cost of this project.

IThe currentresidential rate structurehas 6 strata,in whichthe firstthree strata are subsidizedby the highestthree strata. Thecross-subsidy structure will be reviewedin the next fewyears, resultingin smaller cross-subsidiesbetween the differentstrata, and henceresulting in sharp real rateincreases for especially the poor(est)customers. Page 54

Table 1: Results of the Financial Analysis (excluding investment subsidies)

San Jose de los Campanos 2,121 2,432 (311) 11% El Pozon - Villa Estrella 2,412 8,678 (6,266) 1% La Boquilla 714 1,719 (1,006) 4% Crespo - El Oro 1,337 392 945 39% Paseo Bolivar 180 839 (660) 0% Zona Suroccidental 1,101 2,154 (1,053) 5% Zona Suroriental 1,403 2,585 (1,182) 5% Sewage Collection 9,266 18,799 (9,533) 4% (a) Sewage 0 64,291 (64,291) n.a Treatment

System Improvement 11,198 10,658 540 13% Expansion El Pozon 2,803 3,159 (356) 11% Expansion Falda de la Popa 369 2,013 (1,645) n.a. Expansion Plan Barrios 240 323 (83) 9% Expansion Zona Suroriental 723 502 222 17% Expansion Zonas de Invasion 519 1,140 (621) 4% Zona Norte 28,702 6,579 22,122 38% (b) Water Supply 44,554 24,376 20,178 18%

(c) TOTAL 53,820 109,829 (56,009) 3%

However, when the investment subsidies that will be provided are taken into account, all sewage collection subprojects generate positive financial returns. The only exception is the sewage treatment subproject, that as no treatment charge will be implemented will not generate any benefits. V. ECONOMICANALYSIS

The economic viability of each subproject is appraised converting financial cash flows into economic cash flows by using conversion factors and WTP estimates (that include the use and non-use values of water supply and sewerage services), and then discounting these cash flows using a discount rate of 12 percent.

Conversion factors

Conversion factors eliminate market distortions created by taxes, tariffs and subsidies, add a premium on foreign exchange on the tradable components of each input, and account for any changes in domestic prices that may occur as a result of the project. The standard conversion factor was calculated at 0.92. All economic costs of the project inputs are lower than the market costs due to the high taxes and tariffs charged in Colombia that offset the impact of the foreign exchange premium. The project suffers substantially from market distortions as is reflected in the low conversion factors, with labor as the most illustrative example. The land market was assumed distorted with a financial price slightly below the economic price (due to the standard conversion factor of 0.92). Since taxes and tariffs are merely transfer payments from consumers to the Page 55 government, they are not treated as a resource cost to society (they have a conversion factor equal to zero).

Table 2: Conversion Factors

-Iteku - tConversion Factor

Unskilled labor 0.68 Skilled labor 0.75 Local Materials and Equipment 0.86 Imported Materials and Equipment - PVC pipes 0.72 - Heavy machinery 0.82 - Pumps 0.75

Willingness to Pay

A contingency valuation study based on willingness to pay (WTP) surveys was conducted: (i) to capture the non-use value of sewage disposal services, the intangible value that is not captured by the market and does not generate financial returns, including any recreational and environmental benefits that could be attributed to the project; (ii) to study the perceived value of sewerage services vis-a-vis tiheircurrent prices.

The non-use economic value of sewage disposal services is large due to externalities and benefits that are not typically attributed to the service. Externalities to the entire society, such as the benefits that arise from living in a cleaner environment; and benefits to consumers, such as the benefit of maintaining the purity of water sources.

The WTP for sewerage services were estimated based on how the services are expected to improve as a consequence of the projects. Separate surveys were undertaken, due to the differences in the areas that are affected by project interventions, for sewage collection and treatment. WTP surveys for sewage collection were conducted for 500 households in the districts of Campanos, El Poz6n, La Boquilla and Zona Suroccidental. WTP estimates for the three other project areas (Crespo, Paseo Bolivar and Zona Suroriental) were taken from the survey localities most similar to those project areas. The WTP study for sewage treatment was conducted under 500 households in the city of Cartagena as this subproject will benefit the total population of the city. The results of the surveys are summarized in Table 3. Page 56

Table 3: Absolute and Relative Willingness to Pay for Water and Sewerage Services

Sewage Collection San Jose de los Campanos 20,230 2.87 4.8% El Pozon 15,900 2.77 5.7% La Boquilla 14,570 276 4.9% Zona Suroccidental 20,210 3.24 5.2% (d) Sewage 9,227 0.33 1.0% Treatment

The main issue affecting sewage collection and/or treatment, the estimated WTP and the WTP relation to the municipality's average income are identified in Table 3. WTP estimates for provision of sewage collection are about 3 times higher than current tariffs. The average WTP for sewage collection seems very high at about 5 percent of monthly household income. This could be an indicator for the urgent need to undertake sewage collection project in poor neighborhoods. It could suggest that customers are aware of the adverse environmental impacts of the lack of sewerage collection. It is likely that because of the separate surveys, households tend to overlook their budget constraints, and hence have overestimated their overall willingness to pay for water supply, sewage collection, treatment and final disposal. In the sensitivity and risk analysis the very high levels of willingness to pay will be tested in more detail.

The WTP for treatment is more consistent with data found in studies possible that a large part of the public health impacts of improved sanitation are included in the elsewhere in Latin America, and is equal to about 1 percent of household income.

Other benefits arising from improved environmental conditions that will contribute to the recovery of beaches, enhance tourism activities and other water uses, and increase recreational activities have not been quantified. Preliminary studies show that these benefits can be substantially.2

There are no separate WTP studies for improved water supplies and expansion of water supply in the poorest neighborhoods. For improved water supplies, it has been assumed that the willingness to pay of existing customers is equal to the increased financial revenues because of higher monthly consumption as rationing is eliminated. For the expansion of water supply services in poor neighborhoods, water consumption levels in other poor neighborhoods are used as a yardstick, and multiplied by the average tariff levels for the lowest income groups. For the future development of Zona Norte, ACUACAR provided data indicating that at 2015 the equivalent of 77,000 people will have settled in this area, mainly high-income households. In addition, increased development will also result in an increase in water consumption and sewage production of commercial holdings, which have not been included in the analysis due to lack of reliable data.

Results

2 Ana MariaIbanez, Nancy Lozano Garciaand KennethMcConnell, The Benefitsof ImprovingWater Qualityin CartagenaBay, Colombia,September 1998. Usinga travelcost method,the annualbenefits of improvedwater quality by beachusers was estimatedat US$969,000. Page 57

The introduction of willingness to pay and shadow prices to correct the financial flows of benefits and costs improves the financial estimates significantly as presented in Table 1.

Table 4: Results of the Economic Analysis

Projet Net?Pre,$ Vatue (O 0O, s of A 8 . efW -: .: t - aal Rate

San Jose de los Campanos 2,404 2,198 6 12% El Pozon - Villa Estrella 6,130 7,073 (943) 10% La Boquilla 1,970 1,437 533 16% Crespo - El Oro 5,056 695 4,360 171% Paseo Bolivar 487 670 (182) 8% Zona Suroccidental 2,500 1,785 715 17% Zona Suroriental 5,502 2,104 3,398 32% Sewage Collection 24,051 16,163 7,888 16% Sewage Treatment 56,620 52,633 3,988 15%

System Improvement 11,483 10,533 950 14% Expansion El Pozon 2,656 3,048 (483) 9% Expansion Falda de la Popa 337 1,490 (1,152) n.a. Expansion Plan Barrios 220 292 (73) 8% Expansion Zona Suroriental 662 557 103 15% Expansion Zonas de 706 904 (432) 4% Invasion 25,548 9,516 16,031 45% Zona Norte Water Supply 14,929 13,015 1,915 15%*

TOTAL 95,601 81,811 13,790 16%*

Note: * excluding the water supply projects in Falda de la Popa, the Zonas de Invasi6n and Zona Norte and adjustments in system improvement subproject.

Water Supply Subprojects3. The system improvement project generates a positive net benefit of C$910 million, and a internal rate of return of 14 percent. The expansion projects do not generate positive net benefits with the exception of the subproject in Zona Suroriential and hence should not be undertaken in their current form due to lack of benefits. They either should be redesigned to ensure that they will generate a positive net benefit (possibly El Poz6n and Plan Barrios - in case they can not be redesigned successfully, these projects should be dropped) or be dropped of the current project (Falda de la Popa and the Zonas de Invasion)4. The "Zona Norte" project

The economicrate of returnis slightlylower than the financialrate of return due to the use of shadow pricingin benefitsand costs. 4The per capitainvestment costs in Falda de la Popa and Zonasde Invasi6nare US$557and US$212 Page 58

generates large benefits, and has an internal rate of return of 45 percent has been dropped from the project because of the need to scale it down, and as this is a very profitable component, it can be easily financed privately by ACUACAR itself.

Sewage Collection and Treatment Subprojects. For each sewage collection subproject, the economic NPV is higher than the financial NPV, due to the large positive externalities of the project which are not internalized in the market prices of the services provided. However, two of the seven subprojects -El Poz6n and Paseo Bolivar - do not meet the cut-off internal rate of return of 12 percent.

Yet, these two projects have positive internal rates of return, which are very reasonable for sewage collection projects, especially taken into account that they serve the poorest populations of Cartagena. As some of the externalities associated with sewage collection were not quantified in monetary terms, including environmental benefits and public health benefits (that are usually only partially reflected in households' willingness to pay) it is possible that the actual benefits of sewage collection are higher than calculated in Table 4. However, it is recommended that these two projects will be redesigned so as to ensure that they will generate sufficient cash flow.

The sewage treatment project generates a positive net benefit and a rate of return of I5 percent. VI. DISTRIBUTIVEANALYSIS

The distribution of positive externalities , which is defined as the difference between the economic and financial cash flows, is analyzed to determine who benefits and who pays for the costs of the subprojects. The big winners are the customers of ACUACAR, but also ACUACAR and other shareholders that realize benefits in the form of dividend payments. The District of Cartagena which assumes most of the debt service for the loan that is financing the project is providing a very significant contribution to the project. The implicit subsidy policy that the District of Cartagena and the central government have embarked upon results in a negative fiscal impact for the sewerage projects. Labor benefits from premiums on salaries and wages.

Consumption externalities result from the prices that are actually charged a-ndthe WTP for water supply and sanitation services. Consumption externalities for the total projects are positive and estimated at C$68 billion.

There is a sharp difference between the net fiscal impact of the water supply and sewerage projects. Mainly because of the large capital subsidies given to the project (for more details on the financing of the project, see Annex 5), the sewerage subprojects will be a drain on the governments' resources. The negative fiscal impact of the sewage collection and treatment projects is estimated at C$65 billion. For the water supply projects (excluding those of Falda de la Popa ,the Zonas de Invasi6n, Zona Norte and adjustments in the system improvement project), the impact of capital subsidies is offset by the positive impact of incremental taxes, and hence the fiscal impact of these projects is positive and estimated at about C$17 billion. The total fiscal impact is negative at C$48 billion.

Due to the high taxes and custom duties being paid in Colombia, the central government will benefit from the project because of the large tax income it will generate. As a result, the net fiscal impact on the central government will be positive at C$13 billion. The District of Cartagena will benefit from dividend payments it will receive from ACUACAR, but the net fiscal impact for the respectively.The per capitainvestment cost for El Pozonand Plan Barriosare US$116and US$133 respectivelyand couldpossibly be beneficialwhen being redesigned.In case, adjustmentsin the design still resultin negativenet benefits,the subprojectsshould be discardedfrom the project. Page 59

District of Cartagena will be very negative at almost C$61 billion. Hence, the total net fiscal impact will be negative at C$48 billion. The burden on the District of Cartagena is mainly due to the large debt service payments that have to be made in connection with the repayment of the World Bank loan.

Table 5 shows that ACUACAR will benefit from the project especially from the water supply projects. Their net gain is estimated at C$16 billion. The benefits to the employees of ACUACAR are estimated at C$6 billion for the entire project. They are due to the wage premiums that the water utility pays over the fair market price of equivalent labor. Because some subprojects are more labor-intensive than others, labor benefits differ across projects. In addition, other stakeholders will benefit in the form of dividend payments estimated at C$0.4 billion.

Table 5: Distribution of Benefits

N~et*'res~nt;rGjeCt Value (C$ uiIiQr), p of pril 198

C NOtrla D*t i a Labor Othir T

_ _~~~~~~~~~z. ,... i... ,, .._._ San Jose de los 117 383 (1,354) 1,213 192 41 594 Campanos 3,316 (611) (6,531) 677 687 11 (2,450) El Pozon 918 (29) (1,195) 495 127 6 323 La Boquilla 3,111 460 118 1,497 31 34 5,251 Crespo - El Oro 241 (63) (635) 75 65 0 (317) Paseo Bolivar 1,154 (83) (1,563) 398 167 6 80 Zona Suroccidental 3,438 (149) (1,919) 759 201 4 2,335 Zona Suroriental Sewage Collection 12,297 (91) (13,079) 5,115 1,470 103 5,814

Sewage Treatment 56,620 848 (52,965) 0 4,164 0 8,668 System Improvement 285 6,008 3,655 7,064 652 249 17,914 Expansion El Pozon (1,107) 5,114 898 2,621 210 63 7,799 Expansion Plan Barrios (95) 438 69 215 21 5 652 Expansion Zona (286) 1,292 221 702 31 17 1,979 Suroriental Water Supply (1,201) 12,570 4,827 10,847 772 342 28,158

TOTAL 67,716 13,327 (61,216) 15,962 6,405 446 42,640

VII. POVERTY IMPACT

The poverty impact analysis measures how much of the consumer benefits accrue to poor customers. Based on the income data collected for the project areas during the willingness-to-pay surveys, it was impossible to calculate with any accuracy the impact of the project on the poor. Assuming that (i) poor consumers are defined as customers that fit into the first three strata of the tariff structure; and (ii) that most rich households will already been connected to the water supply system, and hence new customers will mainly be poorer households. Page 60

On the basis of these assumptions, poor consumers will receive most of the benefits of the project as can be seen in Table 6

Table 6: Distribution of Consumption Benefits between Poor and Non-Poor (in C$ billion)

Prroiet := - Poor X, Water Supply Projects (1,201) 83 (1,201) System Improvement 203 83 285 Expansion Projects (1,487) 0 (1,487) Sewage Collection Projects 12,297 0 12,297 Sewage Treatment Projects 47,958 8,663 56,621

Total Project 58,970 8,746 67,716

Note *: The negative impact is mainly due to shadow pricing the financial benefits in order to obtain the economic benefits. VIII. SENSITIVITYAND RISK ANALYSIS

The sensitivity analysis defined the following major risk variables: investment cost overruns, project delays, changes in the unaccounted for water, labor productivity, collection efficiency and the willingness to pay for access to new or improved services. Most of these variables are largely beyond management control, with the exception of the willingness to pay for access to or an improvement in water and sewerage services which is based on consumer's preferences and is largely beyond management control.

Table 7: Risk Variables and their Impact and Risk Significance

Risk Variable Impact and Risk Significance Willingness to Pay for Sewerage Services Direct impact on benefits; based on consumer's preferences and hence largely beyond management control Collection efficiency Direct impact on benefits; largely under management control Tourism development in Zona Norte Direct impact on benefits, hence largely beyond management control Rationing Direct impact on benefits; largely under management control. Population