PROJECT INFORMATION DOCUMENT (PID) Report No.: AB 3263 Water and Sanitation Departmental Restructuring Horizontal APL Project Name Umbrella Operation and Phase 1: Tolima, Norte de Santander, and Sucre Region LATIN AMERICA AND CARIBBEAN Public Disclosure Authorized Sector General water, sanitation and flood protection sector (100%) Project ID P106143 Borrower(s) DEPARTMENTS OF TOLIMA, SUCRE, AND NORTE DE SANTANDER Implementing Agency Gobernación del Departamento de Tolima, Colombia; Gobernación del Departamento de Norte de Santander, Colombia; and Gobernación del Departamento de Sucre, Colombia Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 27, 2006 Date of Appraisal September 27, 2007 Authorization Date of Board Approval December 18, 2007 Public Disclosure Authorized 1. Country and Sector Background Despite major improvements in the delivery of urban water and sanitation services over the last decade, Colombia faces continuing challenges in meeting its sector development needs. Service deficiencies persist – potable water coverage is insufficient, service quality is highly variable and plagued by rationing and intermittent supply, less than half of all water supply is treated, and sewerage facilities in poor areas are woefully inadequate – and less than 10% of municipally generated wastewater is subjected to any kind of treatment. Rural water supply and sewerage coverage is poor; only 44% of the population is connected to a public water supply system and less than one quarter have access to basic sewerage infrastructure. In terms of solid waste, the needs are great, and although many intermediate-sized cities have seen marked improvements in service quality in recent years in terms of street cleaning, collection, and transport, solid Public Disclosure Authorized waste management services have disproportionately benefited the wealthy and left many of the poor unserved and underserved. In order to meet its sector development needs – which include ambitious sector targets which go significantly beyond the Millennium Development Goals – the Government has a series of key challenges: Increasing investment in both urban and rural areas. The Government estimates that [TBD] is needed to diminish the regional and urban-rural service coverage disparities over the next 10 years. Not surprisingly, investment needs for water supply and sewerage concentrated in poor rural and peri-urban areas and wastewater treatment infrastructure (which often suffer from a disconnect between those who bear the financial cost of investment, operation, and maintenance and those who reap the economic and environmental benefits of improved environmental health) are most pressing. Public Disclosure Authorized Improving performance of water companies. Service quality issues in Colombia are primarily the result of the low price / low quality equilibrium at which many utilities deliver water supply and sanitation. Tariffs are often well below operation and maintenance cost-recovery levels, political interference in public utility operation is widespread, and the management capacity to deliver high 1 quality service lacking. Improving performance, while maintaining affordability for Colombia’s poor, is a key sector need. Improving the use of subsidies. While cross subsidies are an inherent aspect of the nationally-set tariff structure and have proven an effective mechanism for supporting service expansion in large urban areas, they have proven an insufficient tool to expand service delivery in many peri-urban areas or provide sufficient financing in municipalities with predominantly poor populations. The approach begun under several previous Bank-supported operations to provide capital investment subsidies with a direct linkage to performance improvement has proven successful and is now being ramped-up on a national scale. Making investment sustainable and efficient. The Government recognizes the need to improve service delivery sustainability through the use of commercially independent and financial sustainable utilities. The improvements in service quality which have resulted from the involvement of such “specialized operators” – be they public or private – is well established. Public departments, on the other hand, (which account for more than 90% of water and sanitation enterprises) are too often characterized by ineffectiveness, poor quality of service, low coverage, and lagging performance. The Government is challenged by the need to bring quality services to all Colombians and to provide incentives for utility improvement. Nonetheless, the Government has shown leadership in the sector seen in few other countries in the region or worldwide, intervening in cases of poor performance and in some cases (e.g. Quibdo and Cali), placing utilities in receivership and implementing programs for utility restructuring. Reducing sector fragmentation and moving towards regional solutions. While the Colombian regulatory and institutional framework, which divides service delivery and regulation between municipal and national entities, is well developed and soundly designed, there is growing realization of the need to involve Departments – the intermediary level of public administration akin to provinces or states – as an articulator of regional strategies and as a potential important source of investment resources. The clarity in terms of “rules of the game” for providing financing by the central government through the “Ventanilla Única” have been successful in imposing a sound set of investment criteria for subsidy-financing investment, and role out of a similar approach, combined with financial incentives for local governments to champion sector reform is now needed. The Government’s New Strategy: The Departmental Plan Approach. Colombia is remarkable among Latin American countries in that it has maintained a consistency of policies for the last decade. Recent developments include (a) a clearly articulated strategy to improve coverage and services in rural and urban areas and to achieve the ambitious goal of universal service coverage for potable water; (b) a further commitment to the policy approach imitated under earlier Governments and supported by Bank loans related to utility “modernization,” the incorporation of commercially independent competent operators under long-term concession agreements; (c) the scaling up of the use of transparent and well- designed capital investment subsidies linked to performance improvement; and, a particularly important innovation to (d) leverage departmental resources to simultaneously increase investment, provide incentives for regionalization and modernization, and improve the use of public resources, many of which have been ineffectively used by local governments. This policy approach is laid out in clear detail in the already-approved document of the Consejo Nacional de Política Económica y Social (CONPES) number 3463. Specifically, the CONPES document includes and is based upon five key tenets: A major investment program with clear and transparent subsidies. The recently-prepared National Development Plan (NDP) for 2007-2011 has identified a bold medium-term investment program to expand coverage and improve service quality in both urban and rural areas. The approach is wholly 2 consistent with that supported under Bank Loan 7281-CO which provides capital investment resources – allocated at the departmental level based on poverty- and technically-weighted criteria – to be utilized to support investment in sector needs based on the eligibility criteria and methodologies developed during the preparation of 7281-CO. Simply put, the Government has adopted the detailed technical work of the earlier Bank loan as national policy and will continue to support it through the new NDP. A deepened and broadened approach to improving utility performance. The CONPES document (see Annex 1) lays out the Government’s formal policy: the adoption of specialized operators for managing municipal utilities. This approach – which does not discriminate for or against either public or private capital – is effectively the culmination of a policy initiative which began in 1994 with the Water Sector Modernization Project (Loan 7077-CO). The Government’s program now aims to align incentives and use resources from both higher levels of the public administration to leverage reform at the municipal level. The use of implementation arrangements developed under the La Guajira Project. The Government’s program aims to take the pilot approach developed under three cases – Magdalena, Sucre, and La Guajira – and bring it to scale nationwide. Specifically, the approach involves (a) the pledging of multi-year public resources from departments and municipalities for counterpart financing and loan repayment; (b) the use of “convenios de apoyo financiero” which codify responsibilities and commitments of active institutions; (c) the use of 20- to 30-year concession contracts; (d) the use of independent technical management at the department level for the structuring of concessions; and (e) a fiduciary approach which focuses on transparency, accountability, and results. The Government has asked the Bank to be involved – rather than other donors – particularly because the La Guajira operation is seen as the flagship of the three pilot projects already prepared. The clear and transparent use of subnational resources in a fiscally responsible manner. A core part of the approach involves the use of the Government’s rigorous