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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 13453

PROJECT COMPLETION REPORT

COLOMBIA

POWER SECTOR ADJUSTNENT LOAN(LOAN 2889-CO)

AUGUST 17, 1994

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

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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COLOMBIA


POWER SECTOR ADJUSTMENT LOAN (2889-CO)

CURRENCY EOUIVALENTS. ABBREVIATIONS AND ACRONYMS

Currency Unit = Colombian Peso (Col$)

AVERAGE EXCHANGE RATES (Col$/USS)

198 129 1987 1988 1989 1990142.3 194.3 241.4 299.2 382.6 502.2

FISCAL YEAR = CALENDAR YEAR

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

k (kilo) = 103 (thousand)M (Mega) = 10' (million)G (Giga) l0' (billion)T (Tera) = 1012 (trillion)P (Peta) = 10' (quadrillion)E (Exa) = 10" (quintillion)CASEC = Comite Ambiental del Sector Electrico ColombianoCHB = Central Hidroel6ctrica de BetaniaCONPES = Consejo Nacional de Polftica Econ6mica y SocialCORELCA = Corporaci6n Electrica de la Costa AtlanticaCVC = Corporaci6n Ad1tonoma Regional del CaucaDNP = Departamento Nacional de PlaneacionECOPETROL = Empresa Colombiana de PetroleosEEB = Empresa de Energfa de BogotAEMCALI = Empresa Municipales de CaliEPM = Empresas Plblicas de MedellfnESMAP = Energy Sector Management Assistance ProgramFEN = Financiera Electrica NacionalFODEX = Fondo De Monedas ExtranjerasFONADE = Fondo Nacional de DesarrolloICEL = Instituto Colombiano de EnergiaIDB = Inter-American Development BankIRR = Internal Rate of ReturnISA = Interconexion Electrica S.A.JNT = Junta Nacional de Tarifas (National Tariff Board)LRMC = Long Run Marginal CostMCPS = Monitoring Committee of the Power SectorMME = Ministerio de Minas y EnergiaMHCP = Ministerio de Hacienda y Credito PNblicoPSAL = Power Sector Adjustment LoanSCPS - Superior Council of the Power SectorSINSE - Sistema de Informacion del Sector ElectricoTAP = Tariff Adjustment Program

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

August 17, 1994

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on ColombiaPower Sector Adjustment Project (Loan 2889-CO)

Attached is the "Project Completion Report on Colombia - Power Sector Adjustment Project(Loan 2889-CO)", prepared by the Latin American and Caribbean Regional Office. Part II wasprepared by the borrower.

This was the first Bank adjustment operation in the power sector in Colombia after twodecades of close involvement through 15 loans totalling US$1.9 billion. The US$300 million loan wasto help the government implement the 1987-1990 Financial Rehabilitation and Investment Plan forthe Sector. The project, approved in 1987, aimed further at broadly removing many inefficiencies notpreviously addressed in the traditional investment projects. The third tranche of US$75 million wascancelled at the Borrower's request to pursue alone a deeper financial consolidation of the utilities.

The project went through several redesigns to achieve a balance between quick disbursementsand inducements to sector adjustments. Eventually, general financing of imports was split into threetranches, each conditioned upon specific measures. Those associated with the first two tranches weremostly met. They included the rationalization of the planning of investments and the readying ofseveral utilities for the rationalization of the planning of investments and the readying of severalutilities for the restructuring that followed. Bank assistance helped Colombia secure US$1 billion inparallel cofinancing from Japan for the power sector. Disappointments included the delayed creationof the Commision Nacional de Energia, shortcomings in pricing policy adjustments leading to weakfinancial performance and inadequate follow-up to studies.

The PCR gives a satisfactory account of the circumstances leading to the partial cancellation.Overall, the project is rated as marginally satisfactory, its sustainability as uncertain, and itsinstitutional impact as negligible.

An audit is planned.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLYCOLOMBIA



Preface ..................................................... (i)

Evaluation Summary ............................................. (ii)Loan Objectives ........................................... (ii)Loan Results ............................. t .(ii)Lessons Learned .... ...... .............. (iii)Future Bank Support ..... ..... .............. (iv)

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

1. Background ............................... 1

2. Bank's Experience with the Power Sector ............................... 2Bank Lending to the Sector, 1970-87 ............................... 2

3. Preparation of the PSAL:. 2Macroeconomic and Sector Circumstances. 3Main Objectives of the Sector Loan: Macroeconomic and Sector. 5Comments from Executive Directors. 5

4. Implementation of the PSAL ........................................ 6Release of the First Tranche . ................................... 6Release of the Second Tranche . ................................. 6Cancellation of the Third Tranche . ............................... 6

5. Results of the PSAL ......................................... 7Political and Economic Background ............ ................... 7Macroeconomics Objectives . ................................... 7Investment ......................................... 8Institutional ......................................... . 8Environmental and Social ...................................... 8Financial ......................................... 8Weighted Overal Results ...................................... 9Impact and Sustainability of the PSAL and

Other Parallel Processes . ................................. 9

6. Conclusions ......................................... . . 10Performance of the Government .................................. 10Performance of the Bank ..................................... 10

7. Comments to the Government's Evaluation of the PSAL ...... ................ 12

8. Lessons Learned ......................................... 13

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

9 Future Bank Support ............................................ 15

PART I:PROJECT REVIEW FROM BORROWER'S PERSPECTIVE17-32

PART Im: SUPPLEMENTAL INFORMATION

TABLE 1: Related Bank Loans ...................................... 33TABLE 2: Loan Data .......................................... 35

A. Total Disbursements . ................................. 35B. Project Timetable . ................................... 35C. Cumulative Loan Disbursements ....... ................... 35

TABLE 3: Use of Bank Resources .................................... 36A. Staff Input ........................................ 36B. Mission Data ....................................... 36

TABLE 4: Main Conditionalities of Loan Agreement ........................ 37TABLE 5: Schedule of Disbursement Actions ............................ 39TABLE 6: PSAL's Success Expectation as of 8/31/88 ....................... 43TABLE 7: PSAL's Estimated Weighted Success as of 9/30/90 .................. 44

ANNEXES

ANNEX 1: A Brief Recapitulation of Economic and PoliticalBackground 1987-1990 ......... ........................ 45

ANNEX 2: Financial Performance ................................. 48ANNEX 3: Environmental Components of the PSAL .60ANNEX 4: Resettlement and Social Components of the PSAL .65ANNEX 5: Objectives and Results of the PSAL .68

Table 5.1 Comparative Investment Program .69Table 5.2 Guavio Hydroelectric Project - Comparative

Financing until Completion .76Table 5.3 ICEL - Action Plan . 77Table 5.4 CORELCA - Action Plan .80Table 5.5 Results of Electricity Loss Reduction

Program .4Graph 5.1 System Total Energy Losses .85Graph 5.2 EEB's Energy Losses .86Graph 5.3 EPM's Energy Losses .87Graph 5.4 CVC's Energy Losses .87Graph 5.5 CORELCA's Group Energy Losses .88Graph 5.6 ICEL's Group Energy Losses . 88

(i)

COLOMBIA



Preface

This is the Project Completion Report (PCR) on the Power Sector Adjustment Loan 2889-CO;US$300 million) which supported the Power Sector Financial Rehabilitation and Investment Plan for1987-1990. Loan 2889-CO was approved on November 1987 and was disbursed in two tranches (2889-CO). At the Government request, the third tranche for US$75 million was cancelled effective September30, 1990. The last disbursement (Second Tranche) was on August 31, 1989. The Borrower was theGovernment; the executing agency was Financiera Energetica Nacional (FEN); and the beneficiaries were:Empresa de Energfa de BogotA (EEB) and the Instituto Colombiano del Energfa Electrica (ICEL) andCorporacion Electrica de la Costa Atlantica (CORELCA).

The report was jointly prepared by the Trade, Finance, Industry and Energy Division of theLatin America and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and M), andthe Borrower (Part II).Preparation of this PCR was started during June 1992, and is based, inter alia, on the Presidents Report;the loan; supervision reports, correspondence between the Bank and the Borrower, and internal Bankmemoranda.

(ii)

COLOMBIA



Evaluation Summary

Loan Obiectives

The PSAL was intended to address both macroeconomic and sector issues. With this Loan,the Government and the Bank sought to support Colombia's overall adjustment program and catalyze themobilization of external funds. The Government regarded the PSAL as a key element of its foreign debtstrategy. The mobilization of external funding to the power sector was to release resources towardssectors with lower foreign capital and import requirements.

Sectorwise, the PSAL was to support the Government's reform programs whose principalobjective was to improve the supply and demand efficiency in the power sector. The objective was tobe achieved by: (i) rationalizing planning policies and investments in the energy sector; (ii) improvingthe regulatory framework and management of the weaker utilities; (iii) improving the technical capacityto monitor the environmental and social aspects of the sector in line with international standards; and notleast (iv) improving the self financing capacity, capital structure, debt terms, and operational, commercial,and pricing efficiency of the sector.

Loan Results

The PSAL was successful in helping secure the target amount of external funds (US$1.03billion) for the power sector, including parallel cofinancing investment loans from the Eximbank of Japanand the IDB. However, the expected release of funds from the power sector to other sectors did notmaterialize. Lower than expected internal sector savings, and lower disbursement levels from the externalsources, caused the Government to borrow a substantial amount of funds totalling some US$793 million,at short term commercial terms, to meet the financing needs of the sector during 1987-90 (para. 5.2).

In relation to the adjustment objectives, there have been some significant achievements.Through the PSAL and the preparation of the proposed follow-up operation, the Bank supported theconsolidation of a fundamental sector restructuring process which over the last two years has alreadyproduced several significant and practical reforms (paras. 9.2-9.6).

The rationalization of the planning policies of the power sector was carried out satisfactorily.But, progress in the implementation of integral energy sector planning was impaired by the delayedcreation of the Comision Nacional de Energia (CNE). As to the investment objectives of the sector,while the overall dollar targets were met the physical targets were not, particularly at the distribution leveland the Guavio project, due to continuing financial and institutional constraints (para. 5.3).

The studies required to support the introduction of institutional and financial improvementsto the utilities were largely completed on time. In contrast, the recommendations of the studies were

(iii)

largely ignored because of insufficient regional and municipal commitment and conceptual ownership(para. 5.4).

The ambitious number of environmental and social institutional goals for the sector weresuccessfully met beyond expectations. Also, the action plans set for the Guavio project were carried outsatisfactorily (para. 5.5).

The major objective of achieving substantial financial rehabilitation of the Power Sector by1990, was not realized. After 1987, there was slow but steady progress with respect to levels andstructure of tariffs; but in real terms this progress during the years 1987-1990 was 17% below thatexpected at appraisal (Feb/1987), mainly due to circumstances outside the control of the sector. Noneof the financial targets (tariff levels, self financing, indebtedness, accounts receivable, and energy losses)was fully achieved. On the revenue side these shortfalls were due to lack of mechanisms to deal withthe higher inflation and devaluation of the Col$ than expected. On the expenditure side, costs werehigher mainly because of the pliant budgetary framework of the sector (para. 5.6).

On an overall weighted basis this report estimates that about 65% of the objectives of thePSAL were met (para 5.7).

As the Government had overall responsibility for influencing, enhancing and monitoring theenvironment of the sector, this report concludes that until September 1990, the Government was unableto accord the institutional, financial, and commercial rehabilitation of the sector sufficient prioritynotwithstanding its commitments under the reform program. Thus, the influence of the Bank onColombian policy, during the implementation of the PSAL was less than anticipated (paras. 6.1-6.4).

Lessons Leamed (section 8)

Most of the shortcomings resulted from having structured the PSAL without the support ofwhat are now standard Bank requirements for adjustment operations: (a) clear and complementary countryand sector strategies; (b) strong ownership of the reform objectives; (c) tailoring the operation to theavailable implementation and regulatory capacity; (d) avoiding excessive conditionality; (e) obtainingupdated financial information; (e) effective creation of a monitoring system; and (f) obtaining appropriateup-front conditionality.

An active dialogue with the Borrower should have been maintained to ensure coordinationbetween macroeconomic and sectoral policy dynamics. Also, a clear technical and politically phasedstrategy should have been defined before proceeding with the project. These points are particularlycritical to the success of infrastructure sector adjustment operations.

To improve regulatory transparency a competent auditing firm should have been engaged toassist the Government in reviewing the SINSE initiative (paras. 7.5, 8.4) and propose proper regulationsfor the timely production of reliable and consistent sector financial statements based on uniformaccounting standards.

Sectoral strategy papers are an important tool for maintaining institutional memory over time.It allows awareness of key sectoral shortcomings to be maintained during changes of staff assigned to thesector.

(iv)

Changing the nature of the operation late in the processing pipeline should be avoided. Ininstances where the form of the operation must change for internal bureaucratic reasons, the integrity ofthe project and the consistency between the form and substance of its implementation strategy merit closereevaluation.

Unless there is substantial up-front policy action including an effective reporting andmonitoring system, it is impractical to enter into quick disbursing operations in a sector whose problemsrequiring medium to long term solutions have not been strategically sequenced, or where accurate andreliable information is not timely available (para. 8.4). The sector approach requires comprehensiveconsideration of all significant aspects of sector performance phased over a realistic period of time.

Future Bank Support

Should the disappointing adjustment performance of the sector during the implementation ofthe PSAL, which continued the existing pattern of incomplete compliance with covenants, lead to theconclusion that the Bank should discontinue support for Colombia's power sector?

The answer should be no, provided that the proposed reforms and effective regulatorytransparency (including SINSE) are implemented, for two principal reasons. First, the increasedcommitment of Colombian officials of the need to reform the power sector and develop an adequatepolicy and regulatory framework, triggered by the difficulties in implementing the PSAL, and theoccurrence of significant local and international sectoral events (para. 5.8); this commitment representsa positive change in the environment for future power projects, and a reduction of the unfavorableconditions that hindered the PSAL. Second, the Bank can offer important comparative advantages inassisting the sector reform which is needed to permit continued economic growth in Colombia. The Bankcould bring to the reform process experience across countries in the power sector, coordination andconsensus building skills, and positive working relationships developed with counterparts through previousprojects such as the PSAL.

The effectiveness of the Bank's continued support and technical assistance immediately afterthe PSAL has been demonstrated. Since the closing date of the PSAL to date, the Bank's participationin institutional reform has matured into a well developed process. It is already showing tangible resultssuch as the creation of the Energy Regulatory Commission, the unbundling of the generation andtransmission assets of ISA, and a firm commitment to setting up a workable competitive market forelectricity generation.

Effective Government action has also materialized in the area of private sector participationthrough (i) the installation of 95 MW (Mamonal) of private generation in an industrial complex inCartagena, (ii) a 150 MW BOO contract (La Sevillana) with a foreign contractor, (both of these projectsare already in operation), (iii) a 750 MW BOO contract (Barranquilla) awarded and currently beingnegotiated, (iv) invitations to bid for a 200 MW BOO (Termovalle) and (v) the ongoing divestment ofBetania, a 500 MW hydro power plant. The generation capacity of these plants totaling 1695 MWrepresent 17% of the total installed capacity in Colombia today. These developments are to be followedshortly by the organization of the open access network operated by an independent transmission company.

In retrospect, the above achievements should be seen as the consequence of the Bank'scontribution to the definition of a new vision for the power sector by (a) supporting the diagnosis of thesector's problems - ESMAP 1986, OED 1990; (b) attempting ambitious adjustment targets for addressing

(v)

them - PSAL 1988; (c) fostering consensus on systemic deficiencies, the need for reform action, andthe design of a reform program starting with the power subsector -OED seminars and ESMAP TA in1991; and (d) by supporting the implementation of this program (PERL 1992, and the proposed TA loan -- para. 9.4).

Under present circumstances, Bank support for carrying out the ongoing reform of the powersector (para. 9.2) should rely on commitment lending for technical assistance and normal projectinvestments that disburse over realistic time periods. The minimum necessary objectives for further Banksupport should be to improve regulatory transparency; financial, economic and environmental efficiency;and the increase of effective competition through private sector participation. These objectives shouldbe achieved by the implementation of the SINSE (para. 7.5), the enactment and implementation of theElectricity Law, consistency with a least-cost investment program of all investments not undertaken bythe private sector, achievement of loss-reduction and energy conservation targets, and consolidation ofthe environmental and resettlement-social policies of the sector.

COLOMBIA



PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE

Proiect Identit

Project Name: Power Sector Adjustment Loan (PSAL>Loan Number: 2889-CORVP Unit: Latin America and Caribbean Region LA3TFCountry: ColombiaSector: EnergySubsector: Electric Power

1. Backgrund

1.1 The Power Sector Adjustment Loan (PSAL) for US$300 million, approved in 1987, was the latestand most comprehensive effort by the Government and the Bank to reverse the deteriorating trend inpower sector efficiency and finances which began in the late 1970s. Its outcome must be judged in thecontext of several important and interrelated factors:

a. the Bank's relations with Colombia, particularly its experience under previous operations inthe power sector since 1978. During this period, a primary objective of the Bank was to helpimprove the sector's efficiency and finances. Also, a pattern of incomplete compliance withagreements by the Colombian authorities (para. 2.3) had been indirectly encouraged by recurrentunrealistic optimism by the Bank in expecting that the next investment operation would reversethe deteriorating trend of the sector;

b. the record of the effort to process the Power Sector Loan, its objectives and conditionalitydesigned for an investment rather than for an adjustment loan, compliance with effectiveness andrelease conditions, and needed amendments therefor (paras. 3.7 and 3.8);

c. the adaptation of the sector dialogue to the new modus operandi resulting from the 1987reorganization of the Bank which inter-alia required a more strict and timely compliance withcovenants, particularly of quick disbursing adjustment operations; and

d. the sharp deterioration of performance that came with the financial difficulties in the mid-1980s, when Government did not allow the sector to adjust its tariffs for the effects of themassive devaluation of the Col$, which paradoxically coincided with a successful dialoguebetween Government and the Bank on changes required in Colombia's economy (paras. 3.1-3.3;and Annex 1).

2

Subsequent sections evaluate the impact of the operation in relation to its objectives (Section 5, and Annex5) and the performance of the Bank and the Borrower (Section 6); and identify lessons learned from thisexperience relevant to future operations (Section 8).

1.2 It may be helpful to state at the outset that despite the difficulties and tensions experienced inimplementing the PSAL, the situation would have been significantly worse had the Loan not been made.While logical substantiation for this 'what if' type of conclusion is not possible, it is a reasonableinference based on the fact that various actions were taken by Colombian authorities to strengthen sectorperformance mainly due to continued dialogue with the Bank and (at times) the Bank's insistence on theneed for action. For example. according to sector authorities, the urging of the Bank played a positiverole, in convincing the Government of the need to restructure the sector, and to raise tariffs in real termsduring the last calendar quarter of 1990. Bank participation in underlining the need for sector reformas a prerequisite for resolving the pervasive sector problems on a sustained basis, and in providing funds,has had a positive impact compared to the expected evolution of the sector had this Loan and subsequentTechnical Assistance support not been made.

2. Bank's Experience with the Power Sector'

Bank Lendin2 to the Sector. 1970-1987

2.1 During 1970-87, the Bank made 15 loans to Colombia for electric power, including the PSAL,totalling US$1.9 billion. These loans were equivalent to 40% of the long term gross borrowing of thesector, some US$5 billion equivalent in 1987. The Inter-American Development Bank (IDB), the othermain source of foreign financing for the sector, had contributed another US$1.9 billion in 22 loans. Thiswas a period of rapid growth in installed power capacity and in coverage of the fast growing Colombianpopulation. As of 1987, the total amount of Bank loans to the power sector equalled about 37% of totalBank loans to Colombia, and about one third of the outstanding power sector debt was owed to the Bank.

2.2 Based on the lessons learned from the previous five completed operations since 1970, most ofBank lending over the period supported major sector initiatives such as: the creation of stronger regionalutilities, with the existing main companies as a nucleus; the preparation of a development master plan;systematic generation and transmission planning, based on least-cost analysis; balancing investmentbetween generation and transmission on the one hand, and distribution, on the other; reduction of systemlosses; a unified presentation of financial data and progress toward compatible financial accounting in theutilities; marginal cost pricing; and a reasonable contribution to investment from sector revenues.

2.3 Although substantial success in some of these endeavors was achieved, it had not been possibleto bring it to a satisfactory and sustainable level. A pattern of incomplete compliance with institutionaland financial understandings and agreements with multilateral agencies had evolved because concertedaction among the Government, sector agencies and utilities was lacking. For example, although decidedat the highest level of government the creation of new regional aggregations of utilities did not proceed.

' As perceived in 1986-1987. For a more recent in-depth evaluation see OED's Report No. 8893,'Colombia - The Power Sector and the World Bank 1970-1987," June 28, 1990.

3

Preparation of a sectoral development master plan was drastically curtailed. Generation and transmissionplanning carried out by ISA, though vastly improved, could not eliminate the flaws stemming from ISA'sshareholders tendency to introduce untimely project preferences at the expense of nationally-orientedconsiderations. And not least, financial and operational efficiency continued in a critical downtrend.

2.4 Despite all efforts, by 1987 the investment program remained quite unbalanced at the expense ofdistribution. Overall system losses had increased by about 50% to an average of 24%, while those insome utilities had roughly doubled (EEB, and CORELCA's Electrificadoras). Internal cash generation,which had persistently fallen short of targets, never contributing more than 10% to the sector'sinvestments (after a momentary peak of around 15% in 1976) compounded by an increasing level ofaccounts receivable from municipal and government owned entities, failed to ease the heavy burden thesector had been imposing on government finances.

2.5 By 1986, the Colombian Government, sector authorities and utilities had accepted the principleof pricing according to average long run incremental costs, but its implementation remained slow, leavingthe sector far from the goals set. Substantial tariff distortions and subsidies persisted, implying very largesubsidies to residential consumers (particularly to high income, high consumption residential subscribers),partly at the expense of industry and commerce.

2.6 The PSAL was the first Bank operation which explicitly attempted to address the sector issuesas a whole through a program of concerted actions involving all the principal players in the sector.

3. Pregaration of the PSAL:

Macroeconomic and Sector Circumstances

3.1 During 1984-86 the Colombian Government had put in motion a stabilization program to correctthe severe fiscal and external imbalances of the early 1980s. Following up on this successful effort, inearly 1987 the Government defined a medium term program for 1987-90 aimed to consolidate itsadjustment progress and to ensure sustained growth at about 4% p.a. An important element in the overallstrategy was the public expenditure program which was at a major turning point. The Governmentpriorities had shifted from a focus on infrastructure development towards social concerns and the needto restrain the level of total public expenditure.

3.2 The Bank had worked closely with the Government in helping to define a plan in support of thepublic sector medium term investment program. Public sector investment for 1987-90 averaging US$2.7billion p.a. was approved by the National Economic Policy Counsel (COMPES) in July 1987.Maintaining consistency with macroeconomic and sectoral objectives, the program entailed overall cutsand specific reductions in investments for the energy related sectors of electric power, petroleum andcoal, and increases in expenditures on social programs.

3.3 Colombia's external resource mobilization strategy was an essential element of the medium termprogram. It had important implications for the power sector adjustment program because of the highlevel of power sector debt and heavy financing needs. The basic strategy was to rely on voluntarylending. The Government's objective was to maintain debt to commercial banks at roughly the current

4

levels then, but at the same time to open possibilities for new lending in the future by broadening accessto new financial markets and using a wider range of financing instruments.

3.4 To cope with the heavy bunching of maturities during 1987-90 Colombia had reached agreementin principle with commercial banks on a voluntary financing operation totalling US$1,060 million whichreflected the country's strong economic performance. As part of this operation, US$200 million wereincluded as parallel cofinancing for the Power Sector Adjustment Program. Even with a scaled-downinvestment program, the financing needs of the power sector were large and the PSAL, including itsquick disbursing features, was an essential part of the overall financing package. This package togetherwith likely new lending from multilateral sources were to provide the funds which Colombia needed toachieve its growth targets during 1987-90.

3.5 The reduction to the power-sector program was substantial. From a peak of USS1 bilion p.a.in 1982-84 when it made 35% of the investment program, power sector investment during 1987-90 wasto decline to an average of US$516 million p.a., reducing its share to 19% of the total program. Theprogram included completion of ongoing generating plants, high priority transmission and distributionprojects, and advances in rural electrification supporting social objectives.

3.6 Preparation of the operation began in January 1985 when the Government requested the assistanceof the Bank in the formulation, implementation, and financing of a sector rehabilitation program toaddress long-standing financial, regulatory, and efficiency issues of the sector. Prior plans to restoresector finances through tariff increases and efficiency measures had failed due to relatively high levelsof ColS devaluation and inflation, the weak accountability and regulatory frameworks, and deficienciesinherent in the plans or delays in their implementation. It was expected that a more systematic approachwhich had Bank support could attract substantial amounts of cofinancing from other sources over the nexttwo years. Bank staff cooperated closely with the staff of FEN, ISA and the Ministries of Finance andof Mines and Energy to: (a) diagnose sectoral problems; (b) define policies for the medium and long-termdevelopment of the sector; (c) identify investment priorities, financial requirements, and possible sourcesof financing; and (d) draft the PSAL's Program covering the period 1987-90, based on a least-costinvestment program and a corresponding financing plan.

3.7 In February 1985, the operation was originally conceived as a quick disbursing sector adjustmentloan. By the time of the final project brief in July 1986, prior to the preappraisal mission of November1986, the operation was being prepared as a more conventional sector investment loan to be tranched overthe 1987-90 period. This conception prevailed through the appraisal mission of February 1987, and untilthe yellow cover SAR of May 1987, where the idea was to provide about 90% of the loan for financingboth the Government's equity investments in troubled utilities, and interest during construction on pastBank loans.

3.8 The need to change the operation into a sector adjustment loan to provide 100% financing againstgeneral imports, subject to a negative list, arose because direct financing of interest during constructionon past Bank loans was too close to actual refinancing of said loans and thus not appropriate. The restof the $3 billion 1987-90 power investment program was largely covered by ongoing loans alreadycommitted to physical components of the program, and of proposed new financing such as from Japan'sEximbank and the 1DB, which could not disburse'against general imports. The Bank's decision toproceed with the loan as an adjustment operation was based on the linkage between this loan and theUS$1.06 billion loan which the Government was negotiating with commercial banks to support its 1987-

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90 overall adjustment program; on Colombia's satisfactory macroeconomic performance indicators; andon the very significant sectoral policy content of the loan.2

Main Objectives of the Sector Loan: Macroeconomic and Sector

3.9 The Sector Loan intended to address both macroeconomic and sector issues. With this Loan, theGovernment and the Bank sought to support Colombia's overall adjustment program and catalyze themobilization of funds from commercial banks, the IDB, and the Eximbank of Japan. The Governmentregarded the PSAL as a key element of its foreign debt strategy. The mobilization of external fundingto the power sector was to release resources towards sectors with lower foreign capital and importrequirements.

3.10 Sectorwise, the PSAL was to support the Government's reform programs in the power sectorwhose principal objective was to improve the supply and demand efficiency of power generation,transmission, and distribution. The objective was to be achieved by: (i) rationalizing planning policiesand investments in the energy sector; (ii) improving the regulatory framework and management of theweaker utilities; (iii) improving the technical capacity to monitor the environmental and social aspects ofthe sector in line with international standards; and not least (iv) improving the self financing capacity,capital structure, debt terms, and operational, commercial, and pricing efficiency of the sector.

3.11 Specifically, the adjustment program (summarized in Annex 5) consisted of action plans on thefollowing areas:

a. sector investment, including: investment policies; the 1987-1990 investment program; the1991-2000 investment program; and the Guavio project.

b. institutional, including: management and financial improvement of ICEL, CORELCA andEEB.

c. environmental and social aspects of the sector and the Guavio project; and

d. financial adjustment program, including: tariff, energy loss reduction and accounts receivableimprovement programs.

Comments from Executive Directors

3.12 When the Sector Loan was presented for the approval of the Executive Directors on December8, 1987, two Directors opposed it and expressed severe criticism concerning two principal aspects: (i)on the justification of the loan, underlining that the Bank should not lend to a sector that wasoverinvested, and that the US$300 million should be part of concrete investments in say education,training, or to give access to electricity to the 40% of the colombian population not yet having it; and(ii) on the timing of the loan, submitting that it would have been more appropriate for the Board toconsider the loan in the light of the then impending reports on country economic work and the new Bankvolicy on Energy.

2 GrCn Cover review meeting - Minutes, August 12, 1987.

6

3.13 Although the Loan was strongly endorsed by a large majority of the Executive Directors somemade comments principally stressing: (i) the perceived vague conditionality of the loan; (ii) the need tohave more ambitious targets for the electricity loss reduction program; (iii) the need to reduce thedistortion of electricity rates; and (iv) the viability of securing cofinancing funds for US$1,030 million.All points made by the Executive Directors were adequately addressed by staff in their response. (Fora fuller statement, see the Summary of Board Discussions of December 8, 1987).

4. Implementation of the PSAL

Release of the First Tranche

4.1 Weaknesses relating to the readiness and ownership of the adjustment program by the sector andgovernment agencies, and to the prompt establishment of monitoring mechanisms to ensure timelycompliance with dated and tranching covenants, surfaced soon after loan signing on March 16, 1988.Through an early amendment, a number of dated covenants due by March 30, 1988 were postponed toJuly 30, 1988 (Part m, Table 4). This amendment allowed the disbursement of the first tranche of theloan (US$150 million) on June 6, 1988, just before June 16, 1988, the original deadline for effectiveness.

Release of the Second Tranche

4.2 The second tranche (US$75 million) due before March 1989 could not be released on timebecause of general delays in meeting disbursement conditions (Part HI, Table 5) in particular the targetsof the loss reduction program (Annex 5, paras. 28-34) and the legal establishment of the CNE (Annex5, paras. 5-7). A second set of amendments, revising the loss reduction targets and making theestablishment of the CNE a third tranche condition, was agreed upon to enable disbursement of thesecond tranche to take place on August 23, 1989. Also, the closing date of the loan (June 30, 1989) wasextended until January 31, 1990. After the exchanges that took place between the Government ofColombia and the Bank leading to this second set of amendments, the Bank made it clear that it wouldbe very difficult to agree to any further amendments before the release of the third and last tranche.Also, it had become clear that quick disbursing adjustment loans were not suitable instruments to supportthe Colombian power sector.3

Cancellation of the Third Tranche

4.3 Undoubtedly the establishment of the Consejo Superior del Sector Electrico in charge ofmonitoring, inter-alia, compliance with the PSAL program, improved significantly the monthlysupervision of the various action plans, in particular those relating to the preparation of studies, andreduction of energy losses and receivables of government-owned utilities. The improved monitoringsystem could not, however, ensure the compliance with targets requiring more fundamental institutionaland policy actions.

I Minutes of meeting of June 26, 1989 between Colombia's Minister of Finance and the Bank's LACRegion Vice President.

7

4.4 In January 1990, the closing date of the PSAL had to be postponed a second time until September30, 1990, because of continuing difficulties in the following three areas: (a) closing a large gap of thesector 1990 financing plan; (b) reduction of energy losses and meeting revenue and efficiency targets ofsector utilities; and (c) delays in the annual audit report for the 1989 PSAL accounts.

4.5 By June 1990, satisfactory compliance with two main targets were still pending: (a) the sectorfinancing plan for 1990 was still showing an unresolved gap of some US$280 million; and (b) the lossreduction targets for the sector as a whole were off the mark and in particular those of EEB were movinginto an increasing deteriorating trend (Annex 5, paras. 28-34). Also, substantial delays in the audit reportof the PSAL'a special account, and non-compliance with the specific accounts receivable commitmentsof the Empresas Publicas Municipales de Barranquilla (EPMB), were two more easily solvable issues thatiieeded to be addressed before disbursement of the third tranche.

4.6 The new Government administration that took office in August 1990 was convinced of theimperative need to restructure the sector as a prerequisite to a sustainable solution of the critical sectorproblems. It established a Task Force to recommend immediate actions to improve sector finances andan action plan with different and more fundamental objectives than those of the PSAL (para 6.4). Basedon the recommendations of the Task Force, by mid September 1990 the new Government increasedtariffs, established a faster Tariff Adjustment Program (Resolution 90 superseded Resolution 86covenanted under the PSAL), and begun an in-depth analysis to solve the structural financial andAccounts Receivable problems of the sector by capitalizing the government-owned utilities.

4.7 Realizing that full compliance with the release conditions for the third tranche will require a newset of amendments and one more extension of the closing date of the PSAL, and reasoning that thereform needed by the power sector could be supported more appropriately in the context of the PublicEnterprises Reform Loan (then being processed by the Bank), and of a future sector investment operation,by letter of September 25, 1990, the new Government informed the Bank its decision to relinquishdisbursement of the third tranche and let the PSAL expire on its closing date of September 30, 1990.

5. Results of the PSAL

Political and Economic Background

5.1 Throughout the period 1985-1990, the processing and implementation of the Sector Loan, andthe efforts of the Bank and sector authorities to restore the operational, commercial, and financialconditions of the sector were complicated and delayed by economic difficulties and by political andinstitutional factors: a series of internal and external shocks, high levels of inflation and devaluation,increasing fiscal deficits, and a falling rate of economic growth. Annex 1 provides a brief recapitulationof these factors and their economic impact as they occurred in a continuous chronological sequence.

Macroeconomic Objectives

5.2 The objective of improving current savings and mobilizing external funds to the power sector torelease internal resources towards other sectors, was not met. Lower than expected internal savings fromthe power sector, and lower disbursement levels from external sources, forced the Government to distract

8

a substantial amount of funds totalling some US$793 million (from FODEX and commercial banks) tomeet the financing needs of the power sector during 1987-90 (Annex 2, paras. 6-9).

Investment

5.3 The overall 1987-90 investment target in dollar terms was met, and significant improvementswere introduced to the long term planning methodology of the power sector. But, because of delays increating the CNE, the deteriorating financial and commercial base of the sector, and the unresolvedinstitutional constraints, the physical targets of the investment program were only partially met. TheGuavio project incurred additional substantial cost and time overruns, 257% and 15% respectively (Annex5, paras. 5-16).

Institutional

5.4 The goal of introducing sustainable institutional improvements in the sector was not met, despiteconsiderable efforts by the Government agencies and the team of high level Government officials incharge of coordinating the implementation of the PSAL. The studies required to support the introductionof the institutional and management improvement were largely completed on time. In contrast, therecommendations of the studies were largely ignored. The principal reason being the lack of regionaland municipal commitment to change, which rendered the institutional reform goals of the programunrealistic. (Annex 5, paras. 17-34).

Environmental and Social

5.5 The ambitious number of environmental and social institutional goals for the sector weresuccessfully met. Noteworthy was the creation of an effective weighting system of critical parametersto rank the environmental and social impact of hydropower and thermal projects, and its introduction intothe planning process of the sector. The targets specifically associated with the Guavio project, which wasbeing implemented under weak financial and managerial conditions, were also satisfactorily carried out(Annexes 4 and 5).

Financial

5.6 As measured by key indicators for the years 1987-1990, the actual tariff and other financialpolicies implemented during the PSAL led to a sector performance substantially below its forecast.During 1987-90, rates deteriorated in real US-dollar terms by about 17%. The self financing ratio,expected to increase from minus 12% up to 15.7% by 1990, dropped to minus 73.9%. Similarly, otherkey ratios also deteriorated, or improved but significantly below expected targets. The financialrestoration of the sector was undermined by: lower rates in real terms; higher operating costs withresulting considerably lower debt service capacity; insufficient progress in both the energy loss reductionprogram, particularly in the case of EEB (Annex 5, para. 28-34) and in the collection of receivables owedby Government or regional agencies (Annex 2, para. 14); and by the shifting priorities of the Governmentin its effort to combat inflation and a falling rate of economic growth (Annex 1, paras. 2-5). The actualand forecast performances of the sector are set forth in Annex 2.

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Weighted Overall Results

5.7 An attempt has been made to provide and integrated assessment of the PSAL - lest the aboveimperfect outcomes, when viewed piecemeal, may not do justice to the substantial achievements of thePSAL, notwithstanding its implementation tensions and difficulties. The allocation of weights to theexpected and reported results of the principal components of the PSAL, renders a weighted overallperformance of 65%. Table 7 of Part III shows the criteria, individual weights, and arithmetic used.While it would be difficult to reach consensus on the criteria and all the individual performance weightsused, a deliberate conservative approach was used in formulating and assigning values to them.

Impact and Sustainability of the PSAL and Other Parallel Processes

5.8 The catalogue of results reported in Annexes 1 through 5 does not reflect the overall contributionof the PSAL and other ongoing events to the reform process of the sector. One of the most importantresults was the increased consensus among the Government, sector officials, and public opinion on theneed for fundamental reform to address the sector problems on a sustainable basis. While the need forsector reform had been felt for a number of years, the results of four processes could be regarded ashaving been instrumental in helping focus the restructuring objectives of the ongoing reform of theColombian power sector:

- First, the high level of tension experienced during the implementation of the PSAL underlinedwith conclusive clarity the growing ineffectiveness of the sector's accountability and regulatoryframework.

- Second, the energy pricing study prepared by the Bank (LA31E) in June 1990, pointedeloquently to the pricing problems of the overall energy sector, to the serious inefficienciesderived from the pervasive maintenance of a series of implicit subsidies in the power sector, andin particular to the existence of a substantial amount of regressive subsidies to large residentialconsumers - the study left no doubt that the ongoing tariff adjustment program under Resolution086 had to be revised.

e Third, the results of the OED report on the Evolution of Colombia's Power Sector (para. 9.2)highlighted the need for structural sector reform and a new legal and regulatory framework.

* Finally, the power sector reform and privatization processes in the UK, Spain, New Zealand,and in particular that of Chile which towards the end of 1990 was already showing measurablepositive results, abetted strong emulating forces (para.9.2).

5.9 The impact and sustainability of the sector improvements resulting from the PSAL were doubtfulat the time of the cancellation of the third tranche. However, the significant sector achievements sincethen (paras. 9.2-9.6) triggered by the above mentioned processes, provide a basis for cautious optimism.The sustainability of these achievements, and their further consolidation, would depend on the successof the recommended commitment-lending by the Bank (para. 9.7).

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6. Conclusions

Performance of the Goverrunent

6.1 The expectation that the PSAL would increase the capacity of the Government to ensure thetimely carrying out of all the specified measures to rehabilitate the power sector proved to be unfounded.The Government placed a higher priority on the implementation of macroeconomic policies (includinga faster devaluation of the ColS) which were devoid of actions to allay likely unfavorable impacts on thesavings capacity of the power sector. These policies, and the lack of mechanisms to ensure commitmentto the objectives of the adjustmnent program by the municipal and regional utilities, had and adverse effectand resulted in increased contributions by the power sector to the public sector deficit.

6.2 Part II, paras. 186-192, underline specific shortcomings of the Government's performance. Itis clear that those related to the design of the PSAL also apply to the performance of the Bank, namely:unrealistic goals more suited to investment than to quick disbursing operations; overestimation of theGovernment's capacity to ensure commitment to the PSAL from the regional and municipal utilities;underestimation of the effect of agreeing to financial targets based on optimistic assumptions and poorfinancial estimates; and insufficient knowledge of all pertinent institutional constraints.

6.3 Due note should be made of the larger amount of intellectual and executive resources deployedby the Government and sector agencies, particularly during those times approaching the scheduleddisbursement dates of the various tranches of the PSAL.' These efforts were instrumental not only inthe preparation of the two amendments that were required to effect the first two tranches of the PSAL,but also in the creation of consensus on the need for sector reform.

6.4 Convinced of the need for reform, the new Government that took office in August 1990, withBank support, and an ad-hoc high-level Working Group carried out a substantial action plan (para. 9.2).By December 1991, the Working Group had drafted an electricity Bill to introduce a new sector policyaimed at: (a) fostering competition by creating a wholesale market for electricity and an open-accesstransmission network with possible participation by the private sector; (b) introducing regulation of thesector in order to prevent monopolistic behavior and ensure economic pricing where market mechanismsare ineffective; (c) disengaging the Government from direct participation in electricity production throughdivestment of power plants; (d) undertaking the development of new power plants with private sectorparticipation; (e) rehabilitating deteriorated utilities with the ultimate view of privatizing them; and (f)creating a Grid Operator Company to manage the transmission system and to act as a clearing house inwholesale market transactions.

Performance of the Bank

6.5 As for the Bank's performance, there were also strengths and weaknesses. The strengths of theBank were in providing support in: (a) developing a comprehensive approach toward investment

' During the implementation of the PSAL three specific missions from the Government visited theBank Headquarters for about one full week each, during February and March 1989, December 1989, andAugust 1990. These missions consisted of delegations of high Government and sector officials, led bythe Vice-Minister of Mines and Energy.

11

programming in line with macroeconomic, environmental and social parameters; (b) attempting tostrengthen the financial planning and reporting capabilities of the sector; (c) fostering review of theorganizational and ownership structure of the sector; and (d) strengthening the regulation of environmentaland social aspects of the sector and addressing important environmental problems resulting from theinvestment program, in particular those of the Guavio project.

6.6 The sector's financial performance fell short of what was expected at appraisal. Given thisshortfall, was the loan justified or timely as doubted by some EDs (para. 3.12)? The answer is clearlypositive. At the time there was an urgent need for external loans to support Colombia's overalladjustment program if there were to be a chance that it would succeed, and the Sector Loan plus theparallel cofmancing investment loans it helped attract from the Eximbank of Japan and the MDB servedto meet this need (Annex 2, para. 6). The subsequent extent of the Government's difficulties inaddressing macroeconomic problems (Annex 1, paras. 3-5) as well as the extent of the problems inrelation to inflation, public sector deficits, foreign exchange problems, and those caused by fasterdevaluation of the ColS to producers of non-tradeables like the power sector, could not have been fullyforeseen.

6.7 At appraisal the President's Report (PR) recognized risks associated with: (i) possible failure totimely secure the envisaged cofinancing levels; (ii) regional resistance to more centralized planning andstronger monitoring and regulation; (iii) market volatility; (iv) the pace of tariff increases particularly inthe event of adverse developments in expected inflation; and (v) the forthcoming increase in municipalityindependence from the central government that might affect the tariff adjustment program. Only the firstand fourth risks had assurances that the Government would take all necessary measures to cover them.The remaining risks, clearly outside the direct control of the Government, were only flagged in the PRbut no plan, strategy or up-front conditionality was given as an indication that they had been reasonablycovered. Three important risks were not anticipated: Devaluation of the Col$ faster than inflation (Annex1, para. 7), protracted Government commitment to monitor the PSAL (Annex 5, para. 18), andconstraints to effective supervision due to lack of timely and consistent sectoral financial data (para. 8.4).

6.8 Soon after loan-signing implementation of the PSAL became extremely difficult. The identifiedrisks turned into certitudes, further complicated by the effect of the unanticipated risks. In retrospect,these risks were not hedged adequately. It was not sufficient to point out that the risk of deviations willbe addressed through specific yearly measures to be defined during the annual reviews of the updatedinvestment and financial plans for the sector and by reference to the Bank's intention to superviseimplementation of the PSAL closely.

6.9 The PR did not indicate the performance status of the Bank's active power sector operations, anddid not evaluate properly its effect on the design of the PSAL. When preparing the PSAL there werenine investment loans to the power sector, approved since 1978, at various implementation stages,totalling US$1.3 billion, and equivalent to 81% of the historical total to the sector: three to EEB, threeto EPM, one to CORELCA, one to ISA, and ONE to 'FEN (Part III, Table 1, items 22-30). While thephysical aspects of these loans, with the exception of Guavio, were being implemented largely withoutmajor problems, there was a critical pattern of increasing non-compliance with most of the institutional,financial and operational efficiency aspects (loss reduction, accounts receivable, return on rate base,contribution to investment).

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6.10 Faced with the above situation and the need to continue having commitments for remedial actions,the Bank opted for an approach based on proliferation of conditionalities.' This approach addedconsiderably to both the time and effort required to prepare, appraise and negotiate the PSAL, and to thedifficulty in verifying satisfactory performance as a condition of releasing the various tranches of sucha loan. This ambitious attempt at correcting a serious status of non-compliance with multiple operationswithout updating their respective covenants, and improving sector performance by tying disbursement totranches at relatively short intervals, did not work out satisfactorily (para. 4.2).

6.11 The Bank placed too great a reliance on the Government's ability to provide either equitycontributions from its own resources to cover any shortfalls in cofinancing funds, or in its resolve todepart from the Tariff Adjustment Program (TAP) of Resolution 86 to make up for any shortfalls in fundsto be generated internally. In fact and until September 1990, the Government and the utilities regardedthe TAP of Resolution 86 as non-negotiable, and expected to make up for any shortfalls, regardless ofcause, exclusively through additional borrowing from FODEX and other types of long and short-termborrowing (Annex 2, para. 8)

6.12 The Bank was also unrealistic to assume that ownership of the considerable amount of actionplans, and rehabilitation and reform targets of the adjustment program would automatically be adoptedby the municipal and regional utilities under the incentive of obtaining financing from FEN if they didperform. The results indicate that, in the absence of mechanisms to ensure performance (Part II, para.192, 2nd. bullet) the utilities preferred to do without FEN financing than to comply with the morefundamental conditions of the PSAL. As a result considerable amount of development financing throughFEN, for investments in distribution and loss reduction programs, remained undisbursed during theimplementation of the PSAL (Annex 5, para. 9).

6.13 As the Government had overall responsibility for influencing, enhancing and monitoring theenvironment of the sector, this report concludes that until September 1990, the Government was unableto accord the institutional, financial, and commercial rehabilitation of the sector sufficient prioritynotwithstanding its commitments under the reform program. Thus, the influence of the Bank onColombian policy, during the implementation of the PSAL was less than anticipated.

7. Comments to the Government's Evaluation of the PSAL

7.1 Through FEN, the Government prepared a comprehensive and well documented completion reportof the PSAL. Part II reproduces complete translations of the most pertinent sections. They conveyimportant insights and capture quite eloquently the sentiment of the counterpart Government officials thatwere involved in the design and implementation of the PSAL. While it may be difficult to reconcile thenumerous differing perceptions on the multiple stages and complex aspects of the PSAL, in general theBank agrees with the results and the conclusions presented in the Government's report. The operation

I In an effort to properly size the resources required by the sector and help establish an effectivemonitoring system to implement the PSAL, the supervision mission of October 1988, determined thatsome 139 tasks, actions and complex activities had to be carried out in order to implement the adjustmentprogram and comply with disbursement conditionalities of the PSAL.

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was by no means perfect, but there is a clear agreement that a large number of impressive achievementswere made under the PSAL (Part II, paras. 182-184). The following clarifications, however, bear noting:

7.2 The flexibility of the Bank (Part II paras. 179-180) was shown through out. Duringimplementation the Bank agreed to amend the PSAL targets and conditionalities twice to enabledisbursement of the first two tranches, and extend the closing date of the PSAL also twice. It is clearthat any more flexibility would not have been prudent in the context of an adjustment operation.

7.3 The information requested by the Bank was in line with normal supervision requirements tomonitor the large number of complex undertakings of the adjustment program. The tensions on thisaspect of the PSAL reflect the failure of both the Bank and the Borrower to establish up-front all therequired reporting resources and systems.

7.4 The technical assistance (TA) provided by the Bank (Part II, para. 181) was substantial. Itincluded the TA components of the eight ongoing Bank loans to EEB, GUAVIO, EPM, ISA, FEN, andCORELCA (para. 6.9). In addition there was substantial indirect TA transferred during the supervisionof the PSAL in the areas of pricing (an energy pricing study was delivered to the Government in June1990) environment, resettlement, planning, loss reduction monitoring, and in the strengthening of thereporting hardware and software capacity including through the SINSE. Therefore the assertion regardinga dearth of technical assistance is unfounded. Further, the PSAL did not include a significant sector-wideTA component to supplement the ongoing project specific TA linked to outstanding loans because thequick disbursing adjustment operation is not a suitable vehicle for TA. The medium to long term timeframe needed for a TA program does not match the accelerated disbursement format of adjustmentoperations. Had a need for sector-wide TA been justified, a TA loan parallel to the PSAL could havebeen processed. Both, the Government's and the Bank's preparation teams, however, deemed that nocomplementary TA loan was necessary to the success of the PSAL.

7.5 The ESMAP program sponsored the SINSE project (Sistema de Informacion del Sector Electrico).It was designed to enhance the regulatory transparency of the sector by producing a reliable and consistentManagement Information System including a uniform system of accounts - a long felt need of the sector.It was launched in February 1989, and its design tardily completed in April 1991. Unfortunately theneed, impact and sustainability of the SINSE were not tied to the covenants of any of the ongoing loans-'the Bank. Not being part of the reform objectives of the sector it now appears that the important

SINSE initiative has been shelved.

8. Lessons Learned

8.1 The long list of pertinent lessons indicated in Part II (paras. 196-212) result from havingstructured the PSAL without the support of what are now standard Bank requirements for adjustmentoperations: (a) clear and complementary country and sector strategies derived from in depth country andsector work; (b) strong internalization of the reform objectives and implementation sequence; (c) tayloringthe operations to a comprehensively appraised regulatory institutional capacity to implement the reformprogram; (d) avoiding complex operations with excessive conditionality; (e) obtaining updated financialinformation; (e) effective creation of a monitoring system; and (f obtaining appropriate up-frontconditionality. These requirements were derived from the lessons of some 99 adjustments operations

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carried out by the Bank during 1980-1991 in 42 countries.6 Although some concepts may be repeated,the following paragraphs refer to lessons which are particular to this PSAL operation.

8.2 The experience under this loan demonstrates the importance of carefully evaluating the politicaland economic context in which a project will take place. The conditions of political and economictensions that prevailed throughout the implementation of the PSAL severely limited the ability of the Bankto influence the decisions of Colombia's policy makers. An active dialogue to ensure coordinationbetween macroeconomic and sectoral policy dynamics is particularly critical to the success ofinfrastructure sector adjustment operations.

8.3 The policies and regulatory framework of the sector should also be assessed with a view todetermining whether the sector context is conducive to the successful completion of the project underconsideration. Because the policies and regulatory framework of the Colombian power sector werefragmented and ineffective, progress in implementation was hampered. A clear technical and politicallyphased strategy should have been defined before proceeding with the project.

8.4 Historically, there had been considerable difficulties, including during the implementation of thePSAL, in obtaining reliable and consistent financial information of the many power companies whichmake up the sector (Annex 5 paras. 17, 20).' The PSAL did not attempt to address this fundamentalregulatory shortcoming that had been identified under Loan 1582-CO in 1980 and forgotten until the 1989ESMAP-supported SINSE project (para. 7.5). The SINSE would have enabled the Government toimprove the regulatory transparency and monitoring effectiveness of the sector. To this end, a competentauditing firm should have been engaged to assist the Power Sector Regulatory Agency to review theSINSE initiative, and propose proper regulations for the timely production of reliable and consistentsector financial statements based on a uniform system of accounts for the sector.

8.5 The lack of a long term sectoral strategy paper updated at regular intervals contributed to theinadequacy of institutional memory. It allowed awareness of key sectoral shortcomings such as theabove, to be lost in the change of staff assigned to the sector. Sectoral strategy papers are an importanttool for maintaining institutional memory over time.

8.6 Changing the nature of the operation late in the processing pipeline should be avoided. It is clearthat the PSAL changes from adjustment to investment and finally back to adjustment operation had animportant effect in the complex design of the PSAL (paras. 3.7-3.8). In instances where the form of theoperation must change for internal bureaucratic reasons, the integrity of the project and the consistencybetween the form and substance of its implementation strategy merit close reevaluation.

8.7 The significant difficulties experienced in applying the quick disbursing adjustment approach toa sector with complex structural problems that will take a long time to assess, much less untangle andinternalize, should be recognized. For example, in releasing the first and second tranches of this loanin June 1988 and August 1989, reliance was placed on estimates of sector performance to determine

6 Report No. 10870, World Bank Structural and Sectoral Adjustment Operations: The Second OEDOverview - June 30, 1992.

7 This shortcoming has also been underlined in the OED Report No 8893: Colombia The PowerSector and the World Bank, 1970-1987, Vol I, paras. 29, 30, 114, 115, 133, and 139.

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whether the PSAL was being carried out satisfactorily. Those estimates proved to be misleading (Annex2, Table 3 and Graphs 1-8. Unless there is substantial upfront policy action including an effectivereporting and monitoring system, it is impractical to enter into quick disbursing operations in a sectorwhose problems requiring medium to long term solutions have not been strategically sequenced, orwhere accurate and reliable information is not timely available (para. 8.4). The sector approach requirescomprehensive consideration of all significant aspects of sector performance phased over a realistic periodof time.

9. Future Bank Support

9.1 Should the disappointing adjustnent performance of the sector during the implementation of thePSAL, which continued the existing pattern of incomplete compliance with covenants, lead to theconclusion that the Bank should discontinue support for Colombia's power sector? The answer shouldbe no, provided that the proposed reforms (Electricity Law) and effective regulatory transparency(through a SINSE) are implemented, for two principal reasons. First, the difficulties in implementingthe PSAL helped to convince Colombian officials of the need to reform the power sector and increasedtheir commitment to developing an adequate policy and regulatory framework. This commitmentrepresents a positive change in the environment for future power projects, and reduction of theunfavorable conditions that hindered the PSAL. Second, the Bank can offer important comparativeadvantages in assisting the reform of the power sector, which must occur to permit continued economicgrowth in Colombia. The Bank could bring to the reform process experience across countries in thepower sector, coordination and consensus building skills, and positive working relationships developedwith counterparts through previous projects such as the PSAL.

9.2 The effectiveness of the Bank's continued support and technical assistance immediately after thePSAL has been demonstrated. The reform process, which followed a phased approach, was designed bythe Government and the Bank in December 1990. The first phase, sponsored with ESMAP funds, wasformally launched in March 1991 at a sector wide seminar in Santa Marta where the results of the OEDevaluation of the power sector', presented by the Bank, were widely debated. Immediately thereafter,a high level task force staffed with representatives from the sector agencies and supported by consultants,reviewed and sharpened the issues and options for institutional reform, and recommended a new sectorstructure and implementation program. The first phase ended in July 1991 with a seminar and aworkshop where the Government, backed by sector authorities, firmly endorsed the power sectorrestructuring program. The second phase (between August and December, 1991), led by a larger taskforce with considerable consulting support, produced a draft Electricity Bill currently being discussed inthe Congress. A third, much more resource-intensive phase, initiated by the end of 1992, aims atproducing the detailed power sector regulations based on the Government's policy and the findings ofPhase 2. The consultants hired for the development of phases 2 and 3 have been financed by the Bankthrough the Public Sector Reform Loan.

' OED, Colombia-The Power Sector and the World Bank. 1970-1987, Report No. 8893 (June 28,1990). This report, developed during a two year period with the participation of Colombian experts,identified many of the structural weaknesses of the power subsector and recommended its reform throughthe introduction of adequate regulation and private sector participation.

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9.3 Since the closing date of the PSAL to date, the Bank's participation in institutional reform hasmatured into a well developed process. It is already showing tangible results such as the creation of theEnergy Regulatory Commission, the unbundling of the generation and transmission assets of ISA, anda firm commitment to setting up a workable competitive market for electricity generation.

9.4 To continue supporting the implementation of institutional reforms to introduce marketmechanisms and efficiency incentives in the energy sector, the Bank is currently processing a US$15million Technical Assistance operation. It will further facilitate private sector participation, pricingreform, effective regulation, demand side management and environmental protection.

9.5 Effective Government action has also materialized in the area of private sector participationthrough (i) the installation of 95 MW (Mamonal) of private generation in an industrial complex inCartagena, (ii) a 150 MW BOO contract (La Sevillana) with a foreign contractor, (both of these projectsare already in operation), (iii) a 750 MW BOO contract (Barranquilla) awarded and currently beingnegotiated, (iv) invitations to bid for a 200 MW BOO (Termovalle) and (v) the ongoing divestment ofBetania, a 500 MW hydro power plant. The generation capacity of these plants totaling 1695 MWrepresent 17 % of the total installed capacity in Colombia today. These developments are to be followedshortly by the organization of the open access network operated by an independent transmission company.

9.6 In retrospect, these achievements should be seen as the consequence of the Bank's contributionto the definition of a new vision for the power sector by (a) supporting the diagnosis of the sector'sproblems - ESMAP 1986, OED 1990; (b) attempting ambitious adjustment targets for addressing them -- PSAL 1988; (c) fostering consensus on systemic deficiencies, the need for reform action, and thedesign of a reform program starting with the power subsector -OED seminars and ESMAP TA in 1991;and (d) by supporting the implementation of this program (PERL 1992, and the proposed TA loan -para. 9.4).

9.7 Under present circumstances, Bank support for carrying out the ongoing reform of the powersector (para. 9.2) should rely on commitment lending for technical assistance and normal projectinvestments that disburse over realistic time periods. The minimum necessary objectives for further Banksupport should be to improve regulatory transparency, financial, economic and environmental efficiency,and the increase of effective competition through private sector participation. These objectives shouldbe achieved by the implementation of the SINSE (para. 7.5), effective competition through increasingparticipation of private investors, consistency with a least-cost investment program of all investments notundertaken by the private sector, achievement of loss-reduction and energy conservation targets, andconsolidation of the environmental and resettlement-social policies of the sector.

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PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE

Backgouxnd

1.01 In compliance with Section 1.01 (b) of the Loan Agreement, the Borrower preparedand sent to the Bank a completion report of the project. Based in part on this first report, the Bankprepared a draft PCR and sent it for comments to the Borrower. By fax of May 13, 1994, theBorrower through FEN sent a no comments letter.

1.02 The completion report prepared by the Borrower is entitled "COMPLETIONREPORT FROM THE BORROWER'S PERSPECTIVE - POWER SECTOR ADJUSTMENT LOAN2889-CO." This comprehensive and well-documented report gives an account, from the standpoint ofthe implementation agencies, of the evolution of the sector economic indicators and of the preparationand implementation stages of the project. For future reference, the Borrower's report has beenincluded in the project file.

1.03 To reflect the Borrower's views on the main achievements and lessons learnt, thissection contains English translations of the cover; the Table of Contents; and highlights of thefollowing key sections: Introduction; Results and Limitations: Design and execution of the program;Conclusions; and Lessons.

2.0 Translation of Selected Sections of the Borrower's Report

2.01 Borrower's Report - Cover

COLOMBIA


PROJECT COMPLETION REPOR

PART II

COMPLETION REPORT FROM THE BORROWER'S PERSPECTIVE


FINANCIERA ENERGETICA NACIONAL S.A. "FEN"(LUIS BERNARDO FLOREZ ENCISO - Consultant)

Santa Fe de Bogota, May 1992

18 Part II - Borrower's Perspective

2.02 Borrower's Report - Table of Contents

[Nt: From the following table of contents, only the salient parts of items shown in bold(1,6,7 and 8) have been translated and included in this Part II of the report]

TABLE OF CONTENTS

1. INTRODUCTION

2. GENERAL ECONOMIC FRAMEWORK 1987-1990

2.1 The Economic and Social Plan 1987-1990- Fiscal Policy- External Policy- Public Spending

2.2 Principal Results- Balance of Payments- External Financing- External Debt- Fiscal Deficit- Inflation, Employment and Growth- The Modernization Program 1990

3. THE POWER SECTOR ADJUSTMENT PROGRAM AND THE WORLD BANKSECTOR LOAN

3.1 The Power Sector Adjustment Program 1987-1990

3.2 The Sector Adjustment Loan 2889-CO- Background- Objectives and Actions- Conditions and Commitments- Benefits and Risks- Disbursements and Times

4. RESULTS AND LIMITATIONS: INVESTMENT PROGRAM AND FINANCINGPLAN

4.1 The 1987-1990 Investment Program- The Goals and Attainment of Them

4.2 The Financing Plan- The Obstacles and the Results of the Plan- FODEX and the Contingent Plan- ISA as Source of Financing

4.3 The Expansion Plan 1991-2000

4.4 Rate Policy


5. RESULTS AND LIMITATIONS: INSTITUTIONAL AND ADMINISTRATIVEASPECTS

5.1 General Institutional and Regulatory Changes5.2 Accounts Receivable Recovery Plan5.3 Loss Reduction Program5.4 Rehabilitation Plan, ICEL and CORELCA Groups5.5 EEEB Reorganization Plan5.6 Guavio Project5.7 Environmental and Socioeconomic Programs5.8 Adjustment Program Monitoring

6. RESULTS AND LIMITATIONS: DESIGN AND EXECUTION OF THEPROGRAM

6.1 Most Important Changes Relating to the PSAL

6.2 Design and Execution of the Program- Commitments and Conditions- lNon-compliance with the Financing Plan and its

Implications

6.3 Relations Between the Bank and Colombia

7. CONCLUSIONS

8. LESSONS

ANNEXES

A. Background: General Development 1980-1986B. Financing Plan: Attainment of GoalsC. Development of the Investment ProgramD. Policy Letters From the Minister of Finance and the Minister of Mines and Energy

(Summaries)E. Summary of Principal Government CommunicationsF. Summary of Principal Bank CommunicationsG. Summaries of Aide-Memoires, World Bank MissionsH. GraphsI. Bibliography

TABLES

1 Financing Plan 1987-90: Comparison Based on Reports (US$ Millions)2 Financing Plan 1987-90, CONPES Estimates of 1987, Cash Flow (USS Millions)3 Principal Assumptions for Projections and Profits and Losses4 Financing Plan: Comparison between Proposed and Actual Results5 Projected Status in January 1989 (USS Millions)

20 Part 11 - Borrower's Perspective

6 Profit and Loss Statement (US$ Millions)7 Origin and Use of Funds (US$ Millions)8 Actual Cash Operations 1987-90 (USS Millions)9 Energy Sales and Current Payments: Differences Due to the Exchange Rate (USS

Millions)10 Actual Cash Operations ($ Current)11 Actual Cash Operations ($ 1987 Constant)12 Adjustment Plan Disbursements: Comparison Between Proposed and Actual Results13 Development of Long Term Debt (US$ Millions)14 Principal Financial Indicators: Comparison Between Proposed and Actual Results15 Loss Reduction Program: Goals and Actual Results

21 Part 11 - Borrower's Perspective

1. INTRODUCTION

1. This project completion report contains the ex-post evaluation of the power sectoradjustment Loan 2889-CO for US$300 million from the World Bank to the Republic of Colombia, asone of the actions taken under the Power Sector Adjustment Program carried out between 1987 and1990. Pursuant to the contract signed by the consultant and Financiera Energetica Nacional 'FEN,"this report was prepared in accordance with the methodological guides provided by the World Bank.

2. This loan operation was approved by the Board of Executive Directors in November1987. Its estimated disbursement period was 15 months, but from the very start, ongoingcontroversies and lengthy delays occurred. Loan effectiveness and the first disbursement of US$150million did not take place until the loan agreement was amended in June 1988 to change the timetablegoverning several of the actions agreed by the Government and the Bank. The second tranche, forUS$75 million, was not disbursed until August 1989, following an extension of the deadline andanother contract amendment. The deadline was extended for a second time until September 30, 1990,but in view of the inability to reach agreement on the level of compliance with the conditions, theBank did not disburse the final tranche of US$75 million. In September 1990, the new governmentrequested cancellation of this disbursement and in January 1991, the Bank agreed to that cancellationand closure of the loan effective September 30, 1990.

3. The Power Sector Adjustment Loan (PSAL) bore novel characteristics in contrast withthe traditional loans that the World Bank had extended to finance investments in power sectorcompanies. Two areas stand out in this connection: one, a new approach to issues in this sector,which attached importance to supporting reform policies aimed at resolving the structural, institutionaland financial problems of the electricity sector; and two, their contribution to the fiscal, foreignexchange and external debt objectives set out in the country's macroeconomic program.

4. As discussed in this report, the results in terms of making substantial changes in keypolicy and sector management areas were limited: the wide array of actions undertaken during theperiod did not advance the reorganization and financial recovery of the companies; and controlling theimpacts that the crisis in the sector had on the macroeconomic situation was based on the applicationof alternative financing plans not provided for in the loan.

5. To prepare this report, a detailed review was made of the principal documents,memoranda and letters relating to development of the operation (Annexes D, E, F and G includesummaries of these materials). Furthermore, the consultant had the opportunity to exchange opinionswith the senior government officials and advisors of the 1987 to 1990 period who participated in thenegotiation, approval and execution of this loan. These interviews enabled the consultant to have afuller view of the situation and were extremely useful in analyzing the complex matters that had comeup during execution of the loan.

6. This report has eight chapters, this included, and nine annexes. Chapters 2 and 3delve into the analysis of the general economic framework for the period 1987-1990 and theobjectives and policies of the sector adjustment program and the operation of the loan covered in thisevaluation. Chapters 4 to 6 evaluate the results and limitations of the loan, focusing on three majorthemes, in order: financing plan and investment program; administrative and institutional aspects;and design and global execution of the program. The last two chapters summarize the principalconclusions and the lessons that this loan has taught the Colombian government. The annexes,besides the topics mentioned in the preceding paragraph, cover the following areas: analysis of


general economic and sector conditions prior to adoption of the adjustment plan (Annex A);evaluation of fulfillment of the goals projected in the financial plan, with pertinent comparativeinformation (Annex B); description of the investment prograrn as executed (Annex C); andpresentation of several illustrative graphs on developments during the period (Annex H); bibliography(Annex I).

7. Finally, the consultant wishes to give his special recognition to Dr. Carlos Garcia forhis valuable and timely collaboration in preparing this report. Thanks also go to Dr. AlbertoRodriguez, the FEN Lending Vice President, for his cooperation and Dr. Teresita Alvarez, aprofessional staff member of FEN, for her very effective assistance in obtaining the documents andpreparing the financial information required for this report.

6. RESULTS AND LIMITATIONS: DESIGN AND EXECUTION OF THE PROGRAM

156. This chapter intends to evaluate the results and accomplishments of the PSAL from abroader perspective than that of the preceding chapters. It examines the concept and development ofthe principal policies and actions to which the Government of Colombia committed itself to secure theloan support of the World Bank.

157. The principal conclusions drawn here relate to the design of the PSAL and theviability of the objectives it sought to achieve in those four years. In particular, it would appearexcessive to say that this program was oriented toward adopting structural reforms in the power sectorat all levels despite the intentions and willingness of those who participated in preparing it. It wouldbe more appropriate to underscore that what this program sought was less ambitious, but necessarynonetheless: that the sector should deal as best as it could with the fmnancial difficulties of the period1987-1990; that it should nitia a series of actions that would lay the groundwork for more efficientperformance in the future; and especially, that the negative effects on the exchange and fiscal stabilityand the macroeconomic policies of the country should be kept to a minimum.

158. It is possible that the lack of a common ground of understanding on the scope of thework among the different players, both internal and external provided a weak base for a cleardialogue between the parties. Likewise, this factor could have added to the difficulty of redesigningthe program and finding other effective and better timed solutions. As a consequence, in the end, thegovernment was forced to commit significant additional resources to the sector far beyond thoseoriginally planned.

6.1 MOST IMPORTANT CHANGES RELATING TO THE PSAL

159. The most novel component of the adjustment plan approved by the Government ofColombia and in the operation of the World Bank loan was the shift of emphasis made by both partiesand the renewed focus on the diagnosis of the financial crisis affecting the electricity utilities. Ineffect, when the program and the loan were designed, the emphasis was on sectoral issues. Also,discussions were started about how all the components involved in the development of the financialcrisis were interacting, and the potential that each had to resolve this crisis on a solid footing.

160. The issues on the new agenda of discussions had the common denominator ofeconomic efficiency and modernization of business management. These issues had surfaced in arelatively isolated fashion during earlier discussions when direct loans were negotiated for the utilities.


The most significant dealing with the sector, from the standpoint of World Bank action, came in 1967which ultimately led to the creation of ISA.

161. From the standpoint of the Colombian government, several times it had attempted todeal with the sector in a way that would go beyond handling the recurring financial crises of theelectricity utilities. However, it was not until 1985 that some consolidated financial statements for thepower sector became available, along with a system to monitor the cash financial management of theutilities, both of which made it possible to study the evolution of sector finances in fuller detail.

162. However, the general redirection of the less optimistic approach to the problems inthe power sector lacked a more objective reading of the Colombian government's ability to control allthe utilities, and also missing was an evaluation about the risks of further deterioration of the financialsituation in both the national and international arenas.

163. Furthermore, it was not possible to factor in the effect that on-going evaluationswithin the World Bank, especially the evaluation being conducted by OED (Operations EvaluationDepartment) and the review of the Third World electricity loans policy, and what effect they couldhave on the follow-up of a loan such as 2889-CO and on the position Bank staff took in theirassessment of the actions that the Government of Colombia was taking.

6.2. DESIGN AND EXECUTION OF THE PROGRAM

164. The body of matters discussed and agreed between the Government of Colombia andthe World Bank corresponded in fact to what could be considered essential medium and long termobjectives to carry out the structural reform of the sector (chapter 3). However, one observation herewould be that the actions established to achieve those objectives proved insufficient for thosepurposes:

(i) In regulatory matters, the mechanisms set out in the PSAL did not trulyconstitute a new framework of rules and procedures for coordination andoperation of power sector companies.

(ii) In institutional issues, the creation of the National Energy Commissionrepresented a substantial step forward to include power sector planning as partof energy policy. However, there was no clear redefinition of theresponsibilities and functions held at other planning and control levels. That,for example, was the case of ISA, in which precedence was given to theBank's insistence on centralizing within this company the ownership andconstruction of new generating plants. In addition, no progress was made indeveloping a new design for the organizational and market structures of theregional utilities.

(iii) In connection with the rehabilitationpla of the weakest companies (ICELand CORELCA groups), it can be stated that the emphasis of the action planwas oriented to improve their critical finances and their administrativemanagement rather than to assess the need for strategies for structural reform.This was the case despite the agreements on the need to define the long-termobjectives and policies of these groups.


165. The sectoral and aggregated approach of the financing plan and its goals, which wasnot only a novel element but also an essential one to deal with the complex cross-relations andintertwined conditions among the power sector utilities, was not supported in the end by asimultaneous approach to deal with the individual problems and specific solutions for them. In thisrespect, four difficulties stem from that lack of supplementary support:

(i) Not enough emphasis was put on the different nature of the financialproblems that each of the utilities in the sector faced and that they alsoneeded different solutions. As was revealed in the ex-post analysis, financialsolutions that would have been viable for companies facing lack of liquidityproved totally inadequate for problems of insolvency.

(ii) The projections could not reflect in all their magnitude the impacts that thelong-running failure to meet energy payments by almost all the memberutilities would have had on the financial situation of ISA.

(iii) Computations of the sector's aggregate deficit systematically underestimatedthat deficit since they assumed implicitly that there would be transfers fromthe surplus entities to the deficit entities, a transfer that was in no wayguaranteed since there were no legal mechanisms or procedures in place forthat purpose.

(iv) The impact of the many and complex interrelations among the powersector's utilities was underestimated in terms of their operational andfinancial relations.

166. During the process of executing the program and the loan, internal divergences aroseamong the different parties regarding the critical areas and solutions: for the economic authorities,the most important were issues of macroeconomic order and financial discipline among the utilities;for the power sector authorities, it was important to balance the aspirations of the utilities against thecommitments assumed in the area of action measures (pricing, receivables, energy losses), but theydid not have available to them effective mechanisms to secure compliance with the goals; and for theutilities, the essential matter related to fullest execution of the investment program.

167. Into this environment a certain disassociation of responsibilities came about. Thegovernment assumed much of the burden of ensuring, no matter how, the funds needed to meet theutilities' external debt obligations. These companies, in turn, largely free of that basic financialresponsibility, did not see it as necessary to be more tightly disciplined in generating more incomeand controlling current expenditures. To a certain extent, then, the country's successes in maintainingits credit-worthy status and an adequate macroeconomic environment were achieved at the cost ofwhat, for some, was financial and institutional disorder in the power sector. It is symptomatic, forexample, that the 'forced compliance' agreements signed by the utilities with the Ministry of Mineshad no real practical effect since noncompliance did not triggered any difficulties for the companies.

168. Differences in policy priorities and the ranking of commitments were evident in therelations between the Government of Colombia and the World Bank. For the Government, as saidbefore, it was essential to bring to a happy end the debt strategy it had adopted and to control theimpact that the sector was having on aggregated indicators of external debt, investment and fiscaldeficit, so that it could reorient public investment into new social and infrastructure programs within aframework of stability. On the other hand the Bank, which shared those priorities in the program


design, exerted pressures on each of the actions and the commitments which it viewed almostindividually, during execution of the program and, in any event, it did so without giving dueconsideration to the development of the macroeconomic situation. From this perspective, the Bankmissions did not share the government's urgency to receive timely payment of the fund disbursementsstipulated in the financing plan.

Commitments and Conditions

169. A review of the commitments signed and the conditions accepted by the Governmentof Colombia reveals, among others, the following traits: (i) a considerable number of actions to takeand a variety of ambitious goals to be achieved in very short terms; (ii) a complete lack of prioritiesfor this variety of action measures and commitments in which policies with very different scopes andimpacts were all put on the same level: thus, to agree to disburse the loan tranches or not, it was allthe same for the Bank to have approved a least Cost Expansion Plan or to have received thepreliminary administrative enhancement program for CORELCA and ICEL; (iii) the relations amongthe objectives, the actions and the goals stipulated in the PSAL were not spelled out clearly; (iv) toomany studies were made that did not necessarily lead to immediate adoption of action measures, nomatter how important they might have been. In this context, it is obvious that not all therequirements established to ensure the disbursements were related to the central objectives pursued inthe program and the loan.

170. In looking at the correspondence between the government and the Bank, it is not easyto see the underlying causes that led to the delays in the second disbursement and the ultimatecancellation of the third (Annexes E and F). It does not appear to be a simple matter of decidingwhich of the two was right. In effect, many letters from the Government of Colombia noted thesubstantial progress made on the actions and that it considered them highly satisfactory. For theirpart, the responses from the World Bank focused steadily on details regarding the failure to achievesome of the many action steps required to release the disbursements. The context actually appears tosuggest another interpretation: the dialogue between the parties turned increasingly troublesome andneither the Bank missions nor staff responsible for supervising and monitoring the loan helpeddevelop a more productive understanding that would clear the way for the loan and make it easier tofind additional agreements.

171. Consequently, it appears reasonable to argue, in connection with the partial or totalcompliance with the loan commitments, that an increasingly wider gap developed in the issues of thedialogue. The government's analyses emphasized the fiscal and exchange implications of thefinancing gaps of the sector and verified the advance of program actions in terms of the overalltrends. The Bank's studies emphasized microeconomic aspects and details of timetables and thedeadlines for each action or commitment. In this perspective, naturally, grounds for noncompliancecould always be found. Ihis debate was present throughout most of the period but it becameincreasingly more intense.

Non-compliance with the Financing Plan and its Implications

172. Annex B examines in detail the assumptions and goals set in the program and theresults obtained during the period. It clearly shows major differences between the principalassumptions adopted for the projections and the final figures. The analysis shows that, with theexception of the projected investment levels, the financing plan's goals were not achieved, when onetakes into account each of its major components (internal fund generation, financial deficit, sectordebt). The process of executing the loan, in summary, entailed enormous differences between what


was programmed and what was achieved. All in all, as chapter 4 indicates, this should come as nosurprise, considering that since the end of 1987 and in a number of CONPES documents of 1988 and1989, there had been insistent warnings on these matters2.

173. The wide gap left by lower internal fund generation and very low execution of theUS$1.330 million from the sector loan (disbursements equivalent to only 42% of programmedamount) meant that the government had to raise money that it had not budgeted amounting toUS$1.240 million (Annex B), both to replace sources and to cover added deficits.

174. This significant additional effort, totaling more than 2.5 points of GDP in 1990, wasfunded by mobilizing domestic savings (through FODEX) and channeling new external debt that couldbe transferred to the power utilities. The most important implication of this phenomenon was theinability to meet in full the financing priorities for the physical and social infrastructure worksincluded in the poverty relief programs and the national rehabilitation plan. This situation generatedan extremely high opportunity cost and economic and social costs for long term developmentprograms in exchange for maintaining-by ways other than those defined in the PSAL-relativestability on the exchange and fiscal fronts.

6.3 RELATIONS BETWEEN THE BANK AND COLOMBIA

175. In connection with the 1987-1990 Power Sector Adjustment Program itself, at firstglance it might appear that the government went too far in accepting the large number ofcommitments and conditions set in the PSAL, given the relatively low percentage of fundingcommitted by the Bank to the sector. However, the importance of Colombia's relations with theBank went beyond quantitative considerations:

(i) General Bank support for economic and social policies has been consideredfundamental in dealings with the international lending community. Furthermore,Bank support (and from the International Monetary Fund) in managingmacroeconomic policy has been one of the necessary elements of the external debtstrategy adopted by Colombia, especially to secure new loans from commercialBanks.

(ii) The resources provided by the Bank are used as a lever to secure other sources of co-financing and they play a multiplier role in this way.

(iii) Traditionally, the Bank has been a standing source of financing for power sector investmentprograms.

(iv) Internally, the agreements between the government and the Bank constitute, to acertain extent, one additional pressure mechanism that can prove useful inaccelerating compliance with sector commitments.

22. See, among others: CONPES, 'Situacion Financiers de; Sector Electrico a Mediano Plazo [Medium TermFinancial Status of the Power Sector]'. Document DNP-2.408, Bogota, January 11, 1989.

23. A detailed evaluation of these historical relations between the Bank and the power sector for the period1970-1987 appears in the OED report entitled, 'Colombia: The Power Sector and the World Bank 1970-1987,'op. cit.


176. With this as the general context, the relations between Colombia and the Bank duringthis period experienced, however, difficulties of different types. In the dialogue on macroeconomicaspects and the structural reforms undertaken by the government, several discrepancies aroseregarding the scope and the speed of the reforms. From Colombia's standpoint, there appeared to bea resistance by the Bank to its proposals that was inexplicable. These facts, in addition, manifestedthemselves in an extremely slow pace in defining agreements and processing new operations that wereto support the reforms in progress. That also led to a slower pace in the disbursements of on-goingloans.

177. These circumstances also affected the financing plan of the power sector. Apart fromthe considerable delays in the PSAL disbursements and the cancellation of the last tranche, thefinancing proposed by the government for 1990 included resources from a proposed loan supportingpublic sector reforms that the government had discussed at length with the Bank. The expectationwas to secure disbursements amounting to US$200 million in 1990 which would go to the powersector. The Bank thought, however, that this was not acceptable 'because it does not appear realisticto count on those resources during this period' (see letter dated June 27, 1990, Annex F).

178. During this process, the government also explored the possibility of securing a newloan for the sector. This loan would cover the missing large financial sums projected for the period1990-1992, amounting to US$1.5 billion. A joint IDB-World Bank mission indicated therequirements in terms of medium and long term policies and requested a large volume of financialand technical information which was provided by the government2 '. This operation did not makemuch headway, however.

179. The general and sectoral relations during much of the period can be considered quitecritical and tense, on the whole. The Colombian side perceived a mounting rigidity in consideringother practical ways of dealing with the fast development of the financial crisis. Both the events interms of the general dialogue as well as the possible internal effects on the Bank that the findings ofthe OED report could have produced must have been among the reasons behind this state of affairs.

180. The requested information consumed large quantities of human resources. As a rule,the analysis by the Bank stuck to the letter of the contract regarding the goals which were known inadvance to be unattainable in such a short time.

181. The Bank only offered and put into progress one technical assistance project to createthe National Power Sector Implementation System (SINSE) which progressed very slowly and did notyield results until 1991. The Bank offered no type of technical assistance within the framework of thePSAL that could be considered either relevant or timely even though several study drafts had been inthe hands of ESMAP since 1987. As in the case of the expansion plan, unfounded expectations grewwith regard to financing some of these studies which were offered systematically by ESMAP staff ontheir many visits. The funds for these studies appeared under the annual programming in the reportsof this joint World Bank-UNDP programn but were never committed during the period of the loan.

24. World Bank and IDB Mission, *Prestamo Propuesto de Inversion Sector Electrico [Proposed Power SectorInvestment Loan].' Aide-Memoire, October 26, 1989.


7. CONCLUSIONS

182. The PSAL represented an undeniable advance in dealing with the problems ofColombia's power sector by shifting the emphasis to a medium term proposal of sector reform thattook up central issues relating to regulatory, institutional and pricing matters, rationalizing investment,administrative management and financial restructure. From the standpoint of the country'smacroeconomic goals, it was considered strategic for the objectives of reorienting investment intosectors that were less intensive in capital and imports, supporting the external debt policy, boostinginternal fund mobilization, starting with appropriate pricing policies, and upgrading management ofthe utilities.

183. The PSAL had three important areas which need discussion because of their positiveimpacts: (i) it served as a way of mobilizing additional co-financing resources to cover the financinggap by having an implicit World Bank endorsement to display to commercial lending establishments;(ii) it introduced environment and socioeconomic issues to the work agenda of the Govermnent ofColombia and the World Bank, and to the basic criteria for national electricity planning; (iii) it shiftedthe emphasis from building the generating, transmission and distribution facilities of each utility to amore comprehensive sectoral analysis.

184. In general terms, the principal actions to which the Government of Colombiacommitted itself were largely complied with, although with delays and imbalances compared with theagreed timetables: (i) the pricing policy stipulated in JNT Resolution 086 of 1986 was applied; (ii)the National Energy Commission was created and went into effect, and the program follow-upmechanisms were developed; (iii) the investments were within predefined goals; (iv) the governmentprovided the loans and contributions to capitalize the utilities; (v) the minimum cost expansion planwas approved; (vi) the utilities as a group, and several as individuals, complied with the lossreduction goals; (vii) the principal targets agreed with respect to reducing the portfolio in arrears wereachieved; (viii) the rehabilitation plans for the ICEL and CORELCA groups were prepared; (ix) theaction plan developed for Guavio was advanced; (x) the action measures for the environment andsocioeconomic plans were developed.

185. Contrary to the plans laid out in the PSAL, the preceding impressive record did nothave positive implications on boosting the efficiency or improving the sector's finances. On thecontrary, these actions moved in tandem with a considerable additional deterioration in internal cashgeneration, rising deficit and maintenance of high debt levels, all of which are indicators of poorsector performance during the period.

186. The foregoing statements lead to the conclusion that the objectives set were not fullyin line with and expressive of the wide and varied array of policies and actions agreed by theGovernment of Colombia and the Bank to be carried out in very short times. Under thesecircumstances, as a result, the assumptions of substantial improvement of the indicators and thefinancial projections made for the period proved entirely too optimistic, especially in view of theconsiderable cumulative deterioration of the sector.

187. In particular, the final figures show that, despite the new pricing policy that wasapplied, earnings from energy sales were much lower than the projections. This, coupled withoperating expenses that were going beyond the projected amounts, was reflected in generation ofequity resources that was much lower than the projected amount and, as a consequence, in the greaterneed of external funds.


188. The development of the financing plan was likewise affected by the substantial delaysin the loan disbursements programmed for the sector. The World Bank operation itself was conceivedand agreed as a fast disbursement loan that would not take more than 15 months. Nevertheless, asdescribed throughout this report, the prior conditions for the disbursements covered such a long list ofissues, actions and goals that in practice, it was foreseeable that the funds would be very slow inexecution.

189. To a large extent, the financial strategy to meet the massive commitments of externaldebt proved inadequate; this was clear virtually at the very moment the loan received the approval ofthe World Bank's Board of Executive Directors. However, none of the parties attached sufficientimportance to the empirical evidence that came from the new financial projections and whichsuggested that the PSAL, as formulated, had little financial viability. In the follow-up of the loan, theBank missions did not conduct a systematic evaluation of these problems and were even lessconcerned with developing alternatives that would have implied a redesign of critical areas in thePSAL.

190. The government did not draw either from its own warnings all the requiredimplications: if the new projections were showing an intense and growing financial deteriorationwithin the power sector, it was obviously important and urgent to amend the PSAL and to proceed torenegotiate the entire financial support package. This course of action, however, was never explicitlyraised.

191. In practice, the remedy turned to was applying a new and costly short term financingplan. In effect, to cover the new financing gaps, the government was forced to allocate the equivalentof more than 2.5 points of GDP of 1990, using resources drawn from domestic savings (throughFODEX) and new external loans. This significantly limited the financing of priority programs set outfor the plan to combat poverty and the national rehabilitation plan. It also generated an extremelyhigh opportunity cost for long term development programs in exchange for maintaining-by waysother than those defined in the PSAL-relative stability on the exchange and fiscal fronts.

192. The governrment did not give careful consideration to a variety of factors that in thelong run would affect the viability of executing the plan:

- First, several of the agreed goals outstripped any realistic possibility of beingachieved within such short times. This was particularly true of goals relating toreducing electricity losses and adjusting the pricing structure of EEEB, a job in whichthe Bank had failed in its own direct action.

Second, appropriate value was not given to the fact that the Ministry of Mines andEnergy did not have effective instruments to ensure that the utilities *met theircommitments, or the technical capacity to conduct supervision and coordination.

Third, the new focus on the sector's problems was not grounded on a careful analysisof the government's ability to control all the utilities or on a less optimistic evaluationof the risks in both the international and the national environments, in terms of anyadditional deterioration of the financial situation.

Fourth, the emphasis on the sectoral nature of the loan operation lost sight of theindividual peculiarities of each of the utilities that had to be involved in achieving thegoals.


193. The PSAL stirred too many expectations which proved totally unfounded regardingthe financing of the Electricity Generation Expansion Plan. This amounted to a waste of the utilities'technical and human resources to deal with the ongoing demands for information and simulations ofexpansion sequences.

194. The requirement to give ISA exclusive responsibility for building all generating plantslarger than 100 MW and the acceptance of this condition by the Government of Colombia contributedeven more to the worsening relations between ISA and its members. This took the form ofuncontrolled growth of accounts receivable for energy and a campaign within the region to undermineISA's monopolistic control over all the generating works. Both parties were incapable of evaluatingfully the consequences that this condition had on the sector's ability to adjust.

195. The dialogue between the Government of Colombia and the World Bank wasdistressed by the differences in the policy priorities and the priorities among the commitments. Forthe former, it was essential to control the impact that the sector was having on the aggregatedindicators of external debt, investment and fiscal deficit. The latter, which shared those priorities inthe design of the PSAL, turned its attention during the process of execution to each one of the actionsand the commitments and did not attach major importance to developments in the macroeconomicsituation.

VIII. LESSONS

196. A loan operation such as the one reviewed in this report leaves a body of usefulteachings for the process of relations between the Government of Colombia and the World Bank. Theprincipal components of these lessons have been pointed out over the length of this report and referessentially to the inadequate consideration of the critical situation the sector was experiencing, thelack of a close coherence between the structural reform objectives and the numerous and scatteredaction measures to be carried out in a very short time and the optimistic appraisal of the financialscenario projected for the period.

197. Concept of the Adiustment Program and the Sector Loan: The adjustment programdesigned in 1987 for the Colombian power sector suffered from three basic flaws: (i) its scope didnot square with the magnitude of a massive financial crisis such as that which occurred between 1987and 1990; (ii) the program was unrealistic in terms of goals and times, bearing in mind thedeteriorated state of the indicators taken as references and the low level of government regulationover the electricity utilities; (iii) a lack of priorities among the conditions, leading to an undesirableconfusion between strategic actions and short term actions of little impact.

198. The conditions agreed within the framework of the PSAL proved virtuallyunattainable in the context of a fast disbursement loan. Since no plans had been made for any type ofcontrol over attainment of the goals that went beyond the original horizon of the loan, the almostinevitable result was extending the disbursement periods in order to watch over the compliance withthe conditions.

199. The loan should have been conceived as support for the phases of a broader sectorreform program, using follow-up loan operations that would guarantee the continuity of actions thatconstituted only the first phase of development in this period. In this way, the existing barriers couldhave gradually been brought down, the institutional and regulatory changes could have been made on


a graduated basis and both government agencies and the utilities could have been strengthenedtechnically.

200. The concept of the PSAL almost as a 'terminal operation' barred a fruitful dialoguewith the government and made more remote the possibility of reaching new agreements on a commonway of dealing with the sector's problems.

201. Executive Capacity of Colombian Government Agencies: The leadership assignedlegally to the Ministry of Mines and Energy was not in line with the dimensions of the programadopted or the technical capacity that prevailed at that time among the different internal offices of theministry. This aspect was not dealt with adequately in the risk analysis that the Colombiangovernment had to make.

202. The rest of the government agencies had very low technical ability to control theelectric utilities and supervise their performance. In the end, these agencies did not exercise majorcontrol but designed other mechanisms for offsetting the effects of the deterioration. The PSAL didnot provide any modification of central Colombian government agencies and for this reasonenhancement of their technical skills did not appear among the basic conditions for the developmentitself of the program.

203. The government lacked a management strategy for in-house conflicts which wouldhave put to positive use the technical and administrative potential that was available, both at thecentral government level and within the utilities. The conflicts grew out of what could be called a"zero-base game," which viewed that whoever yielded space did so to the benefit of another playerwithin the government and therefore 'lost" some part of his prerogatives. The need for a purposefulstrategy in this area became evident in the fact that no agency could impose any specific policy onothers but was, at the same time, unwilling to have any imposed upon itself.

204. The design of the program control process was not very effective since it dependedon data produced very slowly within the utilities. In addition, effective control capacity over thedepartmental utilities was not developed. These utilities remained discreetly on the sidelines of theefforts to make sector adjustments since they did not have many external debt commitments thatwould force them to tap resources allocated by the Ministry of Treasury or to FODEX.

205. Priority Items on the Agenda of Bank Missions: Those who participated in theSector Adjustment Plan share a widespread opinion that the predominating factor in this aspect wasthe continuing shift of emphasis on what items should be controlled. The emphasis varied frompricing, to the accounts receivable portfolio, to the environment, to the CNE, to losses and so forth.Also perceived was an emphasis on matters that proved irrelevant over the short run, especially thediscussions on the expansion plan.

206. As a result, it was not possible to start a dialogue on new issues or advance towardnew proposals. Most of the discussions dealt with the discrepancies regarding progress made on theactions and their completion timetables, as well as the preparation of varying financial projectionscenarios. These action, however, did not constitute a good basis for the evaluation of theprolongation of the crisis or a better understanding of the situation of FODEX and its high cost forthe economy.

207. Institutional and Regulatory Changes Announced: The most positive institutionalchange during this period was the creation of the National Energy Commission. This new


commission gave the government a legal instrument to coordinate and study all aspects of integratedenergy planning involving all resources. The newly created CNE went beyond the traditionalimpotence of government agencies, at different levels, to manage a long term concept in the energyarea.

208. This transformation, however, was isolated from the complex and vast network ofnational and regional agencies engaged in the electricity sector. For these no new regulatoryframework was designed nor their institutional interrelationships redefined. The new level ofcoordination, the Consejo Superior del Sector Electrico [Higher Electricity Sector Council], whileuseful in the dialogue between the sector and the economic authorities, lacked the legal andenforcement powers to carry out its responsibilities.

209. Establishment of Goals and Understanding of the Utilities: The most critical goal ofthe adjustment program were reducing electricity losses which had been established on the basis ofseveral existing studies. The benchmark level selected for several utilities were quite optimistic.These goals were set without a thorough understanding of the true state of the technical andcommercial structure of the utilities. In this area, the operating capacity of the distribution area,which must have been very weakened by the pronounced worsening of the loss rates, wasoverestimated as was the ability of the Ministry of Mines and Energy to orient and control theprocess.

210. In particular, the goals for EEEB (energy losses) and EPMB (portfolio recovery)were accepted without major evaluation by the Government of Colombia since they came from twoWorld Bank loan operations engaged shortly before and were being disbursed in 1987. Theimpossibility of controlling these two utilities became an obstacle that surfaced during development ofthe adjustment loan.

211. Evaluation of Benefits and Risks: Based on the president's report to the Bank Boardof Executive Directors, the principal benefit of the loan was to come from its positive effect on theeconomy by reducing public spending through enhanced efficiency, planning, price setting and thedecision-making process. While a considerable drop was recorded in annual levels of investmentduring the period, the attainment of this benefit does not appear to have been correlated very closelyto the attainment of those parameters.

212. Among the central risks, the report of the president to the Bank Board of ExecutiveDirectors had emphasized the uncertainties regarding the procurement of additional resources, both interms of amounts planned and their timely disbursement. This risk occurred fully with thedisbursements themselves of the World Bank loan, as well as with those from the IDB andEXIMBANK. For that reason, the government was forced to raise additional funds from commercialbank loans and domestic public savings, with the attendant disruptive effects on other publicinvestment programs.

PROJECT COWPLETION REPORT

COLOMBIAPOWER SECTOR ADJUSTMENT LOAU

(LOAN 2889-CO)

PART 111. SUPPLEMENTAL INFORMATION

TABLE 1. RELATED BANK LOANS

Amount Year Dis-(in USS of bursementmill- Apro- as of

Number and Title ion) val Borrower 12/31/93 Purpose

1. 38-CO: Achicaya Hydro-electric 3.53 1950 CVC/CHIDRAL 100X Anchicaya units 1 and 2 (2 x 12 MU hydro)

2. 39-CO: La Insula Hydro-electric 2.6 1950 CHEC 100X The Insula units 1 and 2 (2 x 10 MU hydro)

3. 54-CO: Labrija Hydro-electric 2.4 1951 LABRIJA 1001 Palmas units 1 and 2 (2 x 4.4 MU hydro)

4. 113-CW: Anchicays Yumbo Power 4.5 1955 CHIDRAL 100X Anchicaya unit 3 (20 MU hydro) and Yumbo unit1 (10 NU thermal)

5. 215-CW: Yumbo Extension 2.8 1958 CHIDRAL 100X Yumbo unit 2 (10 NW thermal)

6. 217-CD: La Esmelalda 4.6 1959 CHEC 1002 La Esmeralda units 1 and 2 (2 x 13.3 MU hydro

7. 225-CD: Guadalupe 12 1959 EPH 1001 Guadalupe units 1 and 2 (2 x 45 NW hydra) andTroneras unit 1 (18 MU hydro)

8. 246-CD: Bogota Power 17.6 1960 EEEB 1001 Laguneta unit 4 (18 MW hydra) and Zipaquiraunit 1 (33 MU thermal)

9. 255-CD: Yumbo III Calim I Poaer 25 1960 CVC/CHIDRAL 1001 Yumbo unit 3 (33 MW thermul) and Calti unitsI and 2 (2 x 30 NW hydro)

10. 282-CD: Second Guadalupe 22 1961 EPH 1001 Troneras unit 2 (18 MU hydro) and GuadaLupewnits 3, 4 and 5 (3 x 45 MU hydro)

11. 313-CD: Second Expansion 50 1962 EEEB 1001 Zipaquira unit 2 (37.5 MU hydro) and Colegiounits 1, 2 and 3 (3 x 50 MW hydro)

12. 339-CO: Power ExpansIon 8.8 1963 CVC/CHIDRAL 100X CalIm units 3 and 4 (2 x 30 Mu hydro)

13. 347-CD: Cospique Power 5 1963 ELECTRIBOL 1001 Cosplque units 2 and 3 (2 x 12.5 MU thermaL)

14. 369-CD: Nare 45 1964 EPH 1001 Guatape units 1, 2, 3 nd 4 (4 x 70 MU hydro)

15. 537-CD: Third Expansion 18 1968 EEEB 1001 El Colegio units 4, 5 and 6 (3 x 5) MU hydroand Canoes (1 x 50 Mu hydro) ^

00

Ii =

TABLE 1: Related Bank Loans (Continuation)

Amount Year Dis-(in USS of bursementmill- Apro- as of

Number and Title ion) val Borrower 12/31/93 Purpose

16. 575-CO: Power Interconnection 18 1968 ISA 100% Central System Interconnection (230 kV trans-mission line and Substation)

17. 681-CO: Chivor Hydroelectric 52.3 1970 ISA 100% Chivor 1 (4 x 125 hydro)

18. 874-CO: Guatape 11 Hydroelectric 56 1973 EPH 100% Guatape 11 units 1, 2, 3 and 4(4 x 70 MW hydro)

19. 1582-CO: San Carlos I Hydro Power 126 1978 ISA 100% San Carlos I (4 x 155 MU hydro)

20. 1583-CO: 500kV Interconnection 50 1978 GOVERNMENT 100% 500 kV Interconnection Central System/Atlantic System

21. 1628-co: Mesitas Hydroelectric Powe 84 1978 EEEB 100% El Paraiso 3 x 90 MW; La Guaca 3 x 100 NWpumping 3 x 10 MHP; Sesquile dam strengthenin

22. 1725-CO: San Cartos 1I Hydro Power 72 1979 ISA 100% San Carlos If (4 x 155 MW hydro)

23. 1807-CO: Bogota Power Distribution 87 1980 EEEB 100% Bogota distribution

24. 1868-CO: Guadalupe IV Hydro Power 125 1980 EPM 100% Guadatupe IV (3 x 71 MW hydro)

25. 1953-CO: Playas Hydro Power 85 1981 EPH 100% Playas (3 x 67 MW hydro)

26. 1999-CO: Village Etectrification 36 1982 CORELCA 100% Attantic coast village electrification

27. 2008-CO: Guavio Hydro Power 359 1982 EEEB 100% Guavio (5 x 200 MW hydro)

28. 2401-CO: Power Development Finance 170 1984 FEN 100% Power development finance

28.2 1984 FEN 100% Power development finance (Cofinancing)

29. 2449-CO: Rio Grande Multipurpose 164.5 1984 EPH 70% Rio Grande Hydro (3 x 100 MW hydro)

30. 2634-CO: Bogota Distribution II 171 1986 EEEB 70% Bogota Distribution II

31. 2889-CO: Power Sector 300 1988 GOVERNMENT 75% Power Sector Adjustment

File: 2889\report\P3-TBI.WKI

0

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35 PART IIIPage 3 of 12

TABLE 2: LOAN DATA (US$ millions)

A. TOTAL LOAN DISBURSEMENTS Original Disbursed Cancelled Outstanding(as of closing date: September 30, 1990)l

Loan 2889-CO 300 225 75 225

B. PROJECT TIMETABLE a/ Original Actual (12/30/85)

Initial Project Brief 12/30/85

Final Project Brief 10/24/86

Pre-Appraisal 11/86

Appraisal 02/87

Negotiations 11/87

Board Approval . 12/08/87

Loan/Credit Agreement 03/16/88

Effectiveness (1st tranche) 06/16/88 06/06/88

Effectiveness (2nd tranche) 03/30/89 08/31/89

Effectiveness (3rd tranche) 06/30/89 09/30/89 (cancelled)

Loan/Credit Closing 06/30/89 09/30/90

C. CUMULATIVE LOAN DISBURSEMENT FY88 FY89 FY90

(i) Planned 150 150

(ii) Actual 150 75

(iii)(ii) as % of (i) l00 50

_/ This operation was transformed from an investment loan to a sector adjustment in May 1987 when it wasagreed that it would be a key element in the overall 1987-90 financing plan for the public sector.

File: P3-TB2

36

PART III

TABLE 3: USE OF BANK RESOURCE5 Page 4 of 12

A. STAFF INP

BankFY 1985 1996 1987 1988 1989 1990 1991 1992 TOal

Preparation 3.1 57.4 74.0 134.5

Apprais 29.4 29 4

Negotiations 4.7 37.7 42.4

Supervision 39.2 72.1 20.9 16.7 0.2 149.1

T otal 3.1 57.4 108.1 76.9 72.1 20.9 0 16.7 0.2 355.4

8. MISSION DAT

Type of Mission Montb I No. of Staff No. of Performance Typ. ofYear Weeks Weeks Persons / Rilng c/ Poblems l

in Field

Preparation I Oct/85 1.5 4.5 2 PE, PA

Preparation 2 Jun/86 3.0 14.0 2 PE, 2FA,LO, CO

Preparation 3 Sep/86 2.0 2.0 ES (Environment)

Preappraisal Nov/86 2.0 11.0 3 FA, PE, LO,Co

Appraisal Feb/87 2.0 8.0 3 FA, PE

Prepamion Post Ap. Ian/Bs 1.0 1.0 ES (Environment)

Preparation Post Ap. Feb/SS 1.0 2.0 2FA (Cofinncing) (Jeximbank)

Supevision I March/88 1.0 1.0 PE 2 F.T.M.

Supervision It May/8s 0.5 1.5 PE, FA, LA N.A.

Supervision m July/83 2.0 9.0 3PE, IE, IES 2 F.T.

Superviion IV Sp/S8 1.0 1.0 IPB N.A. Pros. Repot

Supervision V Oct/S 2.5 9.5 3PE, 3FA, I 2 F.T.

Supervision VI Janl/9 2.0 4.0 IES, IS N.A. ENV

Supervision VU April/89 1.5 3.0 IES, ISE N.A. ENV

Supervision Vm Jun1/89 1.5 1.5 IPE _

Supervision IX Oct/89 1.0 3.0 2PE, I (PA,E) 2 F, T

Supervision X MArchJ90 1.5 4.5 PE, FA, ES 2 F. T

Supervision XI lunc/90 1.0 2.0 PE, PA N.A. F, T

Supervision XU Sept/90 1.5 3.0 2FA Lam mission F, T

|TOTAL 29.5 S5.5

A/ I -Problem-free or minor problems; 2 - Moderate problenu; and 3 - Major problems.b/ F F Fnancial; T - Technical; M - Managemaen.c/ PE - Power Engineer, FA - Financial Analyst; E - Economist; LO Loan Officer, CO - Consultant; LA lAwyer,

ES - Environmental Specialist; SE - Social Specialist.

File: P3-TB3

3 7 PART IIIPage5 of 12

TABLE 4: MAIN CONDITIONALUES OF LOAN AGREEMENT (LA)

Source Condition Compliance Comment

L PARTICULAR COVENANTS

LA 3.01a Both parties should exchange views in progress Yesachieved

LA 3.01b Report on progress required before exchange of views Yes

LA 3.02 Procurement to be carried-out according to Bank Yesguidelines

LA 3.03a Update Sector Investment Program and financing plan Partial By the time of the cancellation of(SIP) 1987-1990 by 12-31-88 & 12-31-89 satisfactory the loan the SIP had still a sub-to the Bank stantial financing gap (text

para. 4.5)

LA 3.03b Exchange of views by 10-31-88 & 10-31-89 Yes

LA 3.04a ISA's action plan by 03-31-88 on solutions for social Yes Amendment of 6/6/88. Date& ecological problems to be carried out satisfactory to changed to 7/31/88Bank

LA 3.04b Satisfactory implementation of ICEL & CORELCA's Partial Management studies and timeta-Financial Rehabilitation & Management Improvement bles were prepared. ActualPlans improvements in the management

and finances of the utilities werebelow program expectations

3.04c By July 31, 1988 furnish full progress report on exe- Yes Amendment 6/6/88. This newcution of financial rehabilitation plans of ICEL and condition was added as a result ofCORELCA utilities the amendment

LA 3.04d EEEB's Management Improvement Plan to be provid- Partial Amendment of 6/6/88. Originallyed by June-30-89 (date was PostDoned to Dec. 31/89 3.04c, this article became 3.04d.on July 14/89) & carry it out according to a satisfacto- The study was done but the actualry timetable management improvement could

not be carried out satisfactorily(Annex 5 paras. 23-27)

LA 3.05 Oril: System to monitor performance of Power ReplacedCo. & compliance with targets should be put intoeffect by March-31-88

The Amendment of June 6/88 replaced original cove-nant as follows:

LA 3.05a by July 31/88, furnish full progress report on compli- Yesance with PSAL objectives and covenants based onsatisfactory monitoring indicators.

LA 3.05b by Sept. 30/88, put in effect system to monitor perfor- Yesmance under the PSAL

LA 3.06a Carry out the loss Reduction Program, satisfactory to Partial By amendment of 8/14/89 thethe Bank. Bank accepted program dated

4/89 and related program reportof 6/89.

38 PART IIIPagc 6 of 12

TABLE 4: MAIN CONDMONALITlES OF LOAN AGREEMENT (LA)

Source Condition Compliance Comment

LA 3.06b The amendment of June 6/88 added the following Yea see text para. 4.1covenant: by July 31/88 furnish a full progress reportand satisfactory timetable on execution of loss reduc-tion program by each utility

LA 3.07a Ogiinal: Partial Complied with for 2nd tranche.Arrears Reduction Plan satisfactory to Bank Partially complied with for 3rd

tranche

LA 3.07b The amendment of June 6/88 added the following (i) Yes See text para. 4.1covenants: (i) by July 31/88 the Borrower will com-pensate adequately Electrificadora del Caribe; and (ii)ensure timely payment of current billings by EPMB (ii) No

LA 3.07c Date for payment of departmental arrears stated inGovt. policy letter of March 30/88 was extended to YesSept. 30/88

LA 3.08a Separate records of expenses financed by Loan to be Yesmaintained

LA 3.08b Records to be audited each fiscal year & submitted to Yesthe Bank along with relevant data

LA 3.08c Records and accounts of expenses out of Loan to be Yesmaintained & retained for at least one year; Bankdelegates to be enable to examine them & ensure theirinclusion in annual audits

LA 3.09 Taking account of Bank comments, carry out recom- Yes Through Miniterial Decree No.mendations of study on legal mechanisms for the 1303 from MME. Governmenttreatment of ilegal uses of electricity instructed utilities to carry out

recommendations.

IL EVENTS OF SUSPENSION X_______

LA 4.01a Occurrence of events or situations obstructing Program n.a.

LA 4.Olb Significant am-dment to Programs obstructing achiev- n.a.ement of goals

LA 4.01c Repeal of Resolution 86 or failure to implement its n.a.provisions

LA 4.02 Notice to be given by Bank if events defined in Section n.a.4.01 shall occur & continue for a period of 60 days

m. EFFECTIVENESS _ _ _____________________

LA 5.01 Secure from external lenders additional $200,000,000 Yesfinancing

File: P3-TB4

TABLE 5: SCHEDULE OF DISBURSEMENT ACTONS

REPORTED REPORTEDFOR RELEASE OP COMPUANCE FOR RELEASE OP COMPLtANCE

POLICY AREA OBJECTlVES ACTlON SECOND TRANCHE YES/NO THIRD TRANCHE YES/NO

A. INVESTMENT POLICIES (Nok: After tdeAND DECISIONS Amendment of June 6/tS,

conditions of effectiveneusI. lnvehmeni Policies To samme dia mapr werc ret and tde Is Completion, in a manner Yes Leag-cost program Yes

irvemt deciions ae Tranche was disbured on uttisfactory to the Bank, fibn version,sconomnicaUy sound ud tune - text par. 4.1) of a draft least cost approved by Energyfinncially viable program for gcneration Board (or MME)

and associated & Sched. 4B No Ia)transmission throughyear 2000, apprtoed byISA (Sched. 4A. No. 2)

2. Level of Invedsmen To keep level of power Level aNd cosyoents of Compliance with Yes Submission of Noinvegmeo5s cmartibk 1987-90 sector iavetmei Pgram execution updated 19S8-90with mcerccoaomc progam Nd financing (ached. 4A. No.3) rmvemnm programexpectatiom pan 1987-1990 ad reled funcing

pan satisfactor toYeady updatin ofdie yes the Binkinveeunet3 program andreective fi ing pblaan joint reviews of dies

Joit revie in Oct. 19U Yesand Oct. 1939 (Soct.3.03e) Updating in Dec.1938 and Dec. 1989)(Set. 3.03b)

3. Project Specific (Guavio) To addres the oeial InVleamem proge on Compliance with the Yes Coapiance with the Yesdisruption caused by ocial imes in Guavio Guavio Progrmm (Sched. Guavio PfogrmGuwvio 4A. No. 4) (Sched. 48 No.4)

To enure satisfactory Fiunacing pln nd new Satisfactory progres in Yea Satisfactory progreu Yecompktioa of the project mgement stutr, the implerentaio in their

including schedule for (Sched. 4A. No 4) implerastio.their implementation (Sched. 48 No.4)(Annex 3. action program)

REPORTED REPORTEDFOR RELEASE OF COMPLIANCE 'FOR RELEASE OF COMPLUANCE

POLICY AREA OBJECTIVES ACTION SECOND ThANCHE YESfNO THIRD TRANCHE YES/NO

B. INSTrTUTIONAL ISSUES

I. Power Sector Policy To impnowe coordintion Govenunent bha Converted ito Governtent to give Yes

of the pow'er subector esablished intuiutional condition for ISA authority to

wiLh other energy arrangenents to improve 3rd. tranche own, conamuct and

subecton and instil a ector coordination release operate all future

national focua to (Energy Board BiU mnjor generation

investment decision approved by Congrea and tranamiaeionor Satisfactory prxjects (Sched. 4B.alternative adopted). No.2)(Scbed. 4A. No.1)

2. Reguistion (a) to naws *tiag of Goavernment to establish Compliance Compli ace

performance indi and aitoring conmittee to:nonitor compliance (I) establish and monitor (I) Yes (I) Yes

performance indicators for(b) to easure proper linkc all sector utilitiesbetween tariff seuing and (2) etblish proper (2) Partial (2) Partial

operating efficiency linkage between tariffssetting and compliancewith performnanceindicaton

Monitoring system to be Yes in Sept/lS

effective March 31, 19S7(Sect. 3.05) _

3. Management and Efficiency (a) to emmre conpliance Management improvement No; postponed Submisaion of EEBs Yea

with agreed performnnce action plan for EEB will till Junc 1990 managemnent

indicators be subntitted for Bank and delivered in improvement plan

apprival, by December OctJ1990 (Sched. 4B No.3)

31, 198S

Managemnt imnproveent Subninuion of daft Yes Submiiaion of final Yes

action plans for ICEL and management management

CORELCA will be improvement plana for improvement plans

submitted on: Oct. 31, ICEL and CORELCAs for ICEL,

19SS all eletrificdonas electrificadoras CORELCA and

Feb. 25, 1959 ICEL and (Schedule 4A No.5) EEEB (Schedule 4B

CORELCA parent No. 3)

conpanies

(b) to enure eontinuation By December 31, 1987 Satisfactory progress in No (see text Satisfactory progres Partil (see text

of los reduction program submission of mdy on schieving lo reduction par. 4.2) in achieving loss pars. 4.3)

kgal fmervork ad targets (Sched. 4A reduction targets

00policies against electricity No.4) (Sched. 4B No.4)co;theft (Sect. 3.09)

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 . iQ

REPORTED REPORTEDFOR RELEASE OF COMPUANCE FOR RELEASE OF COMPUANCE

POLICY AREA OBJECTIVES ACTION SECOND TRANCHE YES/NO THIRD TRANCHE YES/NO

4. Environmental and Social To ensure application of Reforetation in the Compliance (Sched. 4A Yc Compliance (Sched. YesIssues sound environrnental and Chivor reservoir No.4) 4B No. 4)

social sandards, beforeprojects re siected and Action plan to reinfomte Yesduring project ISA's envinmuenutal unitimplemncltstion

By March 31, 193f,submision of action Compliance (Sched. 4A Yes Compliane (Sched. Yeprogam, including No 4) 4B No. 4)

staffing plan, budgt andtraining progrmstisfactory to the Bank

C. FINANCING

1. Sector Finaers To *nr viability of Fnancing plan for 1917- Compliance Yes Addioal S250 Yeafinancing plan 1990 and resourc,e million of

($200 million of mobilization targeCI (see cofinancing fundscofinanciang funds whould A.2 above) committed or

have been cominined, or equivwlentequivIlent contingency contingency plans

plan impiemented (Sect, implemenated.5.01 a). Tbis condition of (Sched. 4B No.5)

Effetivenes wascomnplied with) Detailed contingency Compliance Yes Updated financial No (see teal

finaneial plan in case plan satisfactory to paras 4.3-4.5)

cofinancing does not the Bank (See A.2

develop as expected above)

2. Utility Finances (a) To ensure adequate Commitment from the Compliance (Sched. 4A Yes CompliAnce (Sched. Yesflow of funds for power Governmcat regarding its No.4) 4B No.4)

subsector equity contributions toICEL AND CORELCA.(USS240MILL+ 150

MILL) (Action Progrm,Annex 3)

(b) to ensure the financial Implemeat the fin ncial Satisfactory progress in Yes Satisfactory progres Yesviability of ICEL & rehabilitation plans for the implementation of (see Annex 5 in the (see Annex S

CORELCA utilities and ICEL and CORELCA the rehabilitation plans paras. 21-22) implementationof pams. 21-22)

help them improWe their (Sect. 3.07 and Action for ICEL and the rehabilitationefficiency Pogrm) CORELCA (Sched. 4A plans for ICEL and

No.4) CORELCA (Sched.4B No.4)

a g

TABLE 5: SCHEDULE OF DISBUIRSEMENT ACTIONS

REPORTED REPORTEDFOR RELEASE OF COMPLIANCE FOR RELEASE OF COMPUANCE

POLICY AREA OBUECTIVES AClION SECOND TRANCHE YESINO THIRD TRANCHE YES/NO

3. Public Sector Anrars To achieve financial Govemmneat plan to Satisfactotr progress in Yes Satisfactory progrec Panial

discipline and eonsur that eliminate public weto" eliminating the public in eliminating thethe required fDw of armrea within 24 months sector arrea (Sched. public ector arrears (Text pars. 5.6)

resources to the ector is (Sect. 3.07 and Action 4A No. 4) (Sched. 4B No. 4)

provided Program)

D. Pricing To enaute chievement of Adverse changes to Compliance with Action Yes Compliance with Panial

financial urgets nd to legisation setting LJMC Program Action Program

improwe tariff tucte by framewor or failure toaligning it with LRMC uinpkment i to be

condition of defaul (Sect.4.01c)

Consution block forbasic needs to be reducedfion 0-200 to 0-100

kwh/month: before June30, 198S Governmentdefines timing and criteria for block reduction

Household rates toconaunmpion up to 400kwhimonth to reach targetlevels by 1993 in Bogoti

Fil: P3-TB5

ao

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43 PART 111Page II of 12

Table 6: PSAL's SUCCESS EXPECTATION AS OF 8/31/88 (in %) a/Agency Responsible IWeight Factor b/] Probability ExpectationActions/Programs _ _ _

National Government and Congress lNational Energy Commission 12 75 9

National GovernmentInvestment Policy & Program 12 67 8Cofinancing I I 100 11Monitoring Committee 5 100 5

National and Local GovernmentsTariff Adjustments Program 13 67 9Arrears Reduction Program 10 67 7ICEL and CORELCA Manag Improv 6 67 4

Electric CompaniesLoss Reduction Program 11 50 6Guavio Program 7 75 5Environmental and Resettlement 6 100 6ICEL and CORELCA Financ Rehab 7 75 5

Total 100 74

a/ Back-to-Office Report, October 6, 1988. __

b/ Relative importance determined on the basis of average opinion of staff involved in theappraisal and supervision of the program. _

File: P3-TB6.exl

4

PART IlIPage 12 of 12

TABLE 7: PSAL's ESTIMATED WEIGHTED SUCCESS AS OF 9/30/90 (in %)Estimated Com pliance/Success Levels

Agency Responsible OverAll CornpiUne with scilon Plahr Success of reform Coals Overall RelativActios/Prognums Weight Wieighte WWeight weih Weitdgh IRem

Factor Actions Factor Complianc Succes Factor Success Success Conpliance NOTES,fastonsl Government and Congres

National Energy Commrtission 12 20 50 1.20 90 50 5 40 6.60 55 rI Nadtonal Governmeast

Investment Policy & Program 12 70 50 4.20 50 50 3.00 7.20 60 (2CofinaneinrrT' 75 40 41 6 50 3 0 7 4 68 (JIMonitoring Comrninee 5 ~ *! 6 0 1 ~F51 75 50 1 88 * T1 68

Notlonsl and Lcaf 6overnrientiTariffAdjustentm Progam 13 80 50 5.20 S0 50 5.20 10.40 S0 (5IArears Reducion Progrm 10 60 50 T 60 6 0 3 00 60 ,ICEL and COR LCAMiggmanFncial Rehabltn 6 7T -; T7 22 Z ! . _

'Jectic Compan_sLo" Reduction Progrm 11 60 50 3.30 81 50 4.46 7.76 71 AiGuavio Investmenm Program 7 703 2. 470 50 2 44 70 ;Environmenual *nd Re3etniement 6 2 6 8 5 0 -2eICEL and CORELCA Financ ial R=ehsblt 7 75 2 6 20 50 0 70 3-3 48

Total JI 100 32 4 3 62 65

a/ Relative inportance determined on the basis of average opinion of stff involved in the appmisal and supervision of the program.

Note: The basis for this estimate explained in the notes below is not the only one possible. While many different criteria could beused to produce better or lesser results, not one could have a claim on perfection. The above flgures are only Intended to present afair representation of the success of the Reform Program based on expected and reported results

(1) Had it been timely created, the CNE would have been effectively active for 18 months (March 89 through SepL 90). Slnce itbecame fully staffed and operational only in June 90 (4 months) timely compliance was only 22%. However, its effectiveness for thelong term Improvement of the sector is assessed at 90% (Annex 5, pars. 6).

(2) Even though the overall investment target was met, the physical targets of individual utilities were noL The financing plan,particularly of 1990, was only 70% funded. Also no effective institutional improvement was achieved to ensure the timely execution offinancin plans and physical implementation of sector projects However, because of the Impnroved planning poUcies developedduring the PSAI. reform goals are deemed to have been 50% achieved. (Annex 5, parlL 5-12).

(3) Of S1,330 milUlon to be mobilized under the PSAL (contracted and disbursed) about 75% were contracted on tdme and only 60%(USS796 million) were dlsbursed from the original intended sources (Annex 2 parL 6-7).

(4) In terms of timeliness the Monitoring Committee operated effectively 60% of the time from Apr11 89 Instead of March 88 (18months out of 30). Its impact is assessed at 75% on account that it had diMculty in coordinating the development of a system totimely monitor the consolidated finances of the sector (Annex 5, paris. 17-20).

(5) The mechanics of Tariff Adjustment Program (TAP) according to Resolution 86 was largely complied with although withapglicatlon flaws In the smaller cities responsible for about 30% of demand. Also, actual revenues expressed in U.S. doUar terms were17/. under the forecast. Hence in terms of actions and impact TAP compliance is considered to have been 80% in both cua(Annex 2, paas. 11-12 and 17-21).

(6) Arrears Reduction Program (ARP). Sector receivables were to be reduced to 66 days equivalent of sales. OveraU compliance isconsidered to be 60% because of the way the program was implemented (Annex 2, paras 14-16) and the fact that at the end of 1990sector receivables were equivalent to 100 days of sales.

It is diMcult to assess the amount of success of both the management and financial rehabilitation programs of ICEL andCORELCA. Most of the studies were completed largely on time, but the implementation of recommendations was not carried outsatisfactorily. A 75% compliance Is given to actions and a 20% to success of reform goals (Annex 5, parts. 21-22).

(8) Under the Loss Reduction Program (LRP), the sector reduced losses by 2.1% Instead of the 2.6% tarzet (Annex 5, Table 5.5, lines26 and 38). Compliance was equivalent to 81%. Since the program only began in earnest after the CONES resolution of April 89, itwas operative only for 18 months Instead of 30, compliance with the timeliness of the action plan was only 60% (Annex 5, pars.28-34).

(9) The Guavio Investment Program Incurred further cost (25%) and time (20%) overruns during the PSAL Also, Its managementImprovement tariets were only partially met and its accounts payable also increased above reasonasble commercial levels. It isdifrlcult to visualize a success factor greater than 70% (Annex 5, pares. 13-16).

(10) The sectoral environmental and resettlement commitments have been 100% compiled with by ISA. Those for Guavio onaccount of the reported results (Annexes 3 and 4) could be considered to be 70%, with a weighted average of 88% /f a weight of 60% isgiven to the sector and 40% to Guavio.

Ftlc:p3-tb7 cxl

45

ANNEX 1Page 1 of 3

COLOMBIA


PROJ.ECT COMPLETION REPORT

BRIEF RECAPITULATION OF THE ECONOMIC AND POLITICAL BACKGROUND, 1987-90

1. Background. In late 1984, following the collapse of the coffee boom of the late 1970s andsharp increases in inflation and the fiscal deficit, the Colombia Government introduced an economicadjustment program designed to achieve stabilization with growth. The 1984-86 adjustment program,together with higher coffee prices and rapid expansion of petroleum and coal exports, substantiallyimproved both fiscal and balance of payments performance. Nontraditional exports and privateinvestment grew rapidly. As a result, the rate of GDP growth recovered from an average of only1.6% during 1980-83 and 3.3% during 1984-85 to 5.8% in 1986.

2. Initial Years of the Barco Administration. The economic adjustment program was maintainedby the Barco administration which took office in August 1986. Despite a sharp decline in coffeeprices, GDP growth was kept at 5.4% in 1987. The effect of the drop in coffee prices on the balanceof payments was offset by a large increase in private transfers and rising non-coffee exports,particularly petroleum and coal. The current account showed a small deficit of 0.1 % of GDP in1987. On the fiscal side, however, the strengthening of Central Administration revenues resultingfrom the tax reform of the program was not able to compensate for the drop in coffee prices. Thefiscal balance deteriorated, registering a deficit of 1.8% of GDP. After difficult negotiations theGovernment succeeded in obtaining a quasi-voluntary US$1 billion "Concorde" loan from thecommercial banks.

3. While the 1984-86 economic adjustment program was able to restore some degree ofmacroeconomic stability, particularly external balance, and economic growth by 1987, inflationstarted to accelerate at the end of 1985. From 20% in 1986, the rate of inflation increased to 24% in1987 and 28% in 1988. The authorities responded by reducing credit expansion and increasingpermitted agricultural imports. As a result of tighter monetary policy, more restrictive quotas oncoffee exports, and guerrilla attacks on oil pipelines, economic growth slowed in 1988 to a rate of4.1%. The current account deficit rose to 1.0% of GDP in 1988 and the fiscal deficit increased to2.7% of GDP.

4. As the slowdown in economic growth continued into 1989, two developments occurred in themiddle of the year which further darkened the economic outlook for Colombia. First, the demise ofthe International Coffee Agreement reduced international coffee prices by half, sharply cuttingearnings from Colombia's main export industry. Second, the assassination of presidential candidateLuis Carlos Galan triggered a generalized conflict between the drug traffickers and the Government,with adverse effects on the investment climate, increased fiscal pressures from the security effort, andreduced drug-related revenue. The economic authorities responded quickly to the coffee-drug shockby tightening credit policies and cutting investment and subsidies. As a result, the fiscal deficit wasreduced to 2.0% of GDP in 1989, and the inflation fell from its high of 28.1% in 1988 to 26% in1989. Economic growth, however, continued to decelerate to 3.4% in 1989.

46

ANNEX 1Page 2 of 3

5. Thus, after the initial recovery of economic growth in 1986-87 that followed the economicadjustment program, the rate of GDP growth diminished indicating a deterioration in overallmacroeconomic performance. GDP growth fell from an average of 5.6% in 1986-87 to 4.1% in1988, and 3.4% in 1989. Part of the slowdown in economic growth can be explained by the series ofinternal and external shocks that occurred during the period and required continued stabilizationmeasures. Clearly, swings in international coffee and oil prices had a dominant and volatile influenceon both the balance of payments and the consolidated public sector deficit. The slow economicgrowth of the G-5 countries in the late 1980s and the increase in global interest rates also influencedthe position of the balance of payments. However, the other major explanation of the deterioratingeconomic performance was that the growth response to the correction in macroeconomic imbalancesin the mid-1980s could not be sustained without structural reforms to address microeconomicefficiency issues. Indeed, by the end of 1989, the Colombian authorities had recognized thateconomic stabilization measures alone would be insufficient to raise longer term productivity andgrowth in the economy.

6. The Economic Modernization Program. To address the longer term structural problems ofthe Colombian economy the Barco Administration announced, in February 1990, an EconomicModernization Program (EMP) to improve the efficiency of resource allocation and use. The EMPcontained a set of structural reforms and accompanying macroeconomic policies designed to raiseeconomic growth to 5% per year, bring inflation below 20%, and reduce the incidence of poverty.The centerpiece of the EMP was a substantial trade reform program aimed at increasing thecompetitiveness of the tradeable goods sector. Complementary financial and public sector reforms,and industrial restructuring policies were designed to enhance factor mobilization, improve efficiencyin the use of resources and ensure an adequate supply response of the productive sectors. Thesestructural reforms were to be underpinned by fiscal and exchange rate policies to maintain internaland external balance.

7. Growth in 1990 was strong at 4.1 %, due mainly to exports, but inflation accelerated sharply.From late 1988 through 1990, the Government had pursued an aggressive policy of devaluation tocounter the potentially adverse effects of the coffee-drug shock and of the trade liberalization on thebalance of payments. The Colombian peso in real terms was devaluated by 20% during 1989-90.The slow response of imports to the trade liberalization program, together with the higher thanexpected energy exports due to the Gulf crisis, resulted in a current account surplus of 1.5% of GDPin 1990. International reserves grew by US$600 million, putting pressure on the money supply.Along with a fiscal deficit close to 3% of GDP in the first half of 1990, this contributed to raiseinflation to 32.4% in December 1990, the highest level observed since the 1970s. Upon assumingoffice in August 1990, the Gaviria administration announced its intention to reduce inflationsubstantially during 1991. Fiscal policy was tightened in late 1990 and, aided by higher petroleumprices, the fiscal deficit fell to 0.1 % of GDP for 1990 as a whole. In all, the acceleration of inflationin 1989-90 seems to have been due to the aggressive devaluation by the Government. TheGovernment's exchange rate policy was inconsistent with fiscal and monetary policies and the initialspeed of trade reform.

8. Importantly, the structural reform program initiated by the Barco Administration andaccelerated and expanded by the Gaviria Administration marked a significant break from the inward-oriented development model of the past. The challenges now are to prevent backtracking, to

47

ANNEX IPage 3 of 3

strengthen institutional capacity, to monitor the supply response of the private sector and removeremaining barriers to that response, and to continue to adopt complementary policies.

48

ANNEX 2Page 1 of 12

COLOMBIA



FINANCIAL PERFORMANCE

1. The Colombian Power Sector did not accomplish the financial objectives set forth inthe 1987-90 Adjustment Program. Its weak regulatory framework prevented it from responding to theheavy burdens imposed by the effects of higher than anticipated internal inflation, and devaluation ofthe Col$ with respect to the USS. At the end of the Program the sector as a whole, although wiseras to the need for fundamental regulatory and structural reform, was financially weaker. Seriousliquidity and solvency problems prevented it from servicing its debt and contribute to the relativelylarge investments needs.

2. The Government's long term objectives articulated in the Adjustment Program wereto: (i) improve the sector financial structure, by reducing the debt portion within the total financingmix; (ii) lengthen the average term of the sector's debt, and gradually increase the sector's selffinancing capacity through a sound pricing policy, based on economic principles; (iii) reduceprogressively, and eventually eliminate, Government contributions to the sector; and (iv) improvefinancial discipline by ensuring prompt payment of electricity billings by Government and regionalinstitutions. At the end of 1990, the sector was still bearing a heavy debt service, as these objectiveshad not been met.

3. The final results of the most relevant financial parameters from 1987 to 1990, isexhibited in tables 1 and 2, and depicted in graphs 1 through 8 for the period 1983-1992. Table 3summarizes the evolution of the comparative financial projections and investment programs. Alltables and graphs compare actual results against those projected at the time of the Loan's appraisal.The graphs also show proforma results for 1991 and 1992 as they were expected towards the end of1990.1"

I/ Actual data was gathered from the financial tables of Annex B of the Loan Completion Reportprepared by FEN in May 1992. In this report FEN has made an admirable effort to present theconsolidated sector finances on a cash and accrued basis from COMPES and sector sources,underlining that while the limitations of the data cannot support exact auditing precision, it providesreliable orders of magnitude, sufficient to draw meaningful conclusions about the evolution of sectorfinances and performance indicators. The data of the report is in turn based on the report 'FinancialStatements for Colombian Power Utilities - 1983 to 1990", formulated by FEN, dated January 1991.The 1990-1992 data was taken from financial projections updated by FEN. Forecast data for theAdjustment Program was taken from Annex 6 of the "Report and Recommendation from the Presidentof the International Bank for Reconstruction and Development to the Executive Directors on a PowerSector Adjustment Loan to The Republic of Colombia", November 10, 1987. (Report No. P-4676-CO).

49

ANNEX 2Page 2 of 12

First Objective

4. Graphs I and 2 show that the expected improvement of the sector's capitalizationstructure was not achieved. Actual total liabilities, short and long term, for 1990 were US$1.4 billionhigher than expected. This caused the debt over debt plus equity ratio to be actually higher at 62%in 1990 than the actual value of 58% in 1987, and considerably higher than the expected 1990 valueof 47%.

5. By the end of 1987, when the Adjustment Sector Loan was presented to the ExecutiveDirectors, total liabilities of the power sector had already increased by some US$1.24 billion over thevalue estimated during the appraisal mission of February 1987. At about US$5.9 billion, the debtwas already 27% higher than the starting value estimated under the Adjustment Program. AboutUS$0.8 billion of the increase were due to currency revaluations for the years 1986 and 1987.Failure to update the principal parameters of the financial projections for the negotiations of the loan,did not allow a proper revision of the financing plan of the Adjustment Program.

6. During 1988-90, lower internal cash generation and lower levels of disbursementsfrom the external loans forced the Government to obtain larger disbursements from commercial banks

TABLE 1: COLOMBIAN POWER SECTOR ADJUSTMENT LOANComparative Disbursement Program 1987 - 1990

(US $ Million)

Forecast Actual Variation

Existing Loans 1,120 1499 379

FEN Local Borrowing 402 n.a. -402

Other Local Sources 204 n.a. -204

Cofinancing Loans 1,330 1,589 259

I.B.R.D. 300 225 -75

I.D.B. 300 141 -159

Eximbank Japana 300 3/ -300

Comm.Banks and Suppliers 430 736 306

FODEX 0 487 487

Total Disbursements 3,056 3,088 32

_/Because the Eximbank loan, intended to finance lengthy investments, had not been secured at thetime of negotiations of the PSAL (November 1987), it was unrealistic to have forecast the fulldisbursement of that loan during 1987-90.

50

ANNEX 2Page 3 of 12

and from FODEX totalling US$793 million. Compensated in part by higher disbursements fromolder existing loans (US$379 million), actual total disbursements under the program were close to thecofinancing targets. However, the higher portion of borrowing at commercial terms at the end of1990 resulted in a debt stock with shorter maturities and higher interest costs2'. Table 1 comparesplanned vs. actual disbursements under the programn:

7. The slow progress of the IDB loan reflects delays in compliance with disbursementcovenants. Although approved in 1989, effectiveness of the loan from the Eximbank of Japan wasdelayed until the last quarter of 1991: first, by the negotiations of the sovereign guarantee of the loan,and second, by the effects of the colombian financial reform of 1990-91 which modified the legal andinstitutional frarnework of the borrower -- Financiera Energetica Nacional (FEN).

TABLE 2: COLOMBIAN POWER SECTOR ADJUSTMENT LOANComparative Financing Plan 1987-1990

(US$ Millions)

Forecast Actual Variation

Investment Prgrm-excl.idc 2062 2102 40

Working Capital & Other Uses 234 -57 -291

Total Uses 2296 2045 -251

Gross Cash Generation 3128 2684 -444

Less Total interest incl.idc 1878 1655 -223

Net Cash Flow A 1250 1029 -221

Gov. Contrib. & Others B 453 449 -4

Total Non Borrowed A+B 1703 1478 -225

Gross Borrowing 2,756 2863 107

Less Amortizations 2163 2296 133

Net Borrowing C 593 567 -26

Total Sourcs A+B+C 2296 2045 -2S1

a/ This seemingly logical conclusion appears to be at variance with the actual interest expensesreported as being 12% lower than estimated at appraisal. Only a full audit could determine whetherthe source of the inconsistency lies with the 1991 consolidation of estimated actual results or with theappraisal forecast figures (Table 2, line 5: and Table 3, lines 31 and 55).

51

ANNEX 2Page 4 of 12

Second Objective

8. The second objective '... lengthen the average term of the debt stock and increase selffinancing capabilities," was not achieved. The 1987-90 financial evolution of the sector (Table 3)shows that, gross internal cash generation fell 14% below the target. This shortfall in sectorrevenues, equivalent to USS 444 million, worsened an already poor record of compliance withfinancial targets covenanted with multilateral financial institutions, and slowed both the disbursementof recently approved loans, and the processing of new ones. These two outcomes produced a largegap in the financing plan of the PSAL which, as pointed out above, the sector and the Governmentacquiesced to fund through the traditional soft-budget-constrain mechanism. The latter was based onemergency financing plans based on short term obligations, mainly Government funds throughFODEXY and direct Government loans. Contrary to the macroeconomic objectives of theadjustment program, the diversion of these funds to the power sector contributed to the depletion andcurtailment of national budget resources earmarked for other sectors.

9. The individual results of the large number of less efficient utilities were more dramatic thansuggested by the consolidated shortfall in net cash flow of US$221 million during 1987-90. This isbecause of the lack of mechanisms enabling the transfer of resources from the surplus to the insolventutilities.

10. Table 3 shows that the main components of the US$444 million shortfall in gross cashgeneration were: (a) US$347 million from lower than expected income from sales, mainly becauseaverage prices in real terms did not reach the proposed targets; (b) US$107 million from OtherOperating Income did not materialize; (c) US$164 million from higher operating expenses; and (d)US$139 million from lower Other Income and Expenses not related to operations. These negativeoutcomes were partially off-set by relatively lower depreciation costs and net exchange rate gains ofthe dollar vs the currency basket of the sector (Table 3, line 63). Graph 3 depicts the sector's GrossInternal Cash generation which except for 1987, fell below expected targets. Similarly, Graph ,illustrates the negative trend of the Net internal Cash Generation which was US$860 million belowthe financial plan estimate; the actual yearly values of this item have to be viewed with caution sinceit depends on an arbitrary estimate of the interest during construction (idc).

11. Groh 5, shows the historic variation of actual prices in current dollars; Graphshows it in constant Colombian pesos of 1985; and Graph 7, expresses it as an index related to the

4/ The Fondo de Monedas Extranjeras (FODEX) was an account of transitory use managed by theBanco de la Republica under a Government contract. Its purpose was to ensure the timely payment ofthe foreign debt under sovereign guarantee. The growing financial problems of the power sectorprompted the Government into an increasing use of FODEX as a sort of automatic financingmechanism to cover the debt service of the power sector. Faced with the inability of the power sectorto fund its debt service, the Government placed short and medium term securities with public entitieshaving surplus generation of foreign exchange (Ecopetrol, Telecom, National Coffee Fund), andchanneling these funds through short term loan agreements to the power utilities, at relativelyexpensive commercial terms. The original goal of channeling internal savings to avoid temporarymonetary and macroeconomic misalignments, was debased when the power utilities begun defaultingon a massive scale in its obligations to FODEX.

52

ANNEX 2Page 5 of 12

average price forecasted in the financial plan. Average prices, expressed in Col$ of 1985, wereslightly under forecasted. However, since devaluation of the national currency was higher thananticipated, average prices expressed in dollars were 17% under the forecast for 1990.

12. Graph 8, correlates total income projected versus actual sales figures. Total sales inGwh were only 0.5% higher than expected at the time of the appraisal, even though loss reductiontargets were not met. It is estimated that sales for 1987-1990 would have been US$347 millionhigher, should sector utilities had complied with the proposed tariff increases in real terms,particularly in relation to dollar equivalent values.

Third Objective

13. The Government was unable to attain the third financial objective of reducing andeventually eliminating government contributions to the sector as expected under the PSAL program.During 1990, Government contributions were greater than expected particularly through the long andshort term funds borrowed from the FODEX facility. Massive capitalization programs continuedduring 1991 and 1992 as part of the more realistic financial and institutional restructuring of thesector approved by the new administration that took office in August 1990. In 1991, for instance, theGovernment capitalized ISA by an amount equivalent to US$579 million by paying the accruedreceivables owed to ISA by the Government-owned utilities, in exchange for the ISA shares owned bythe utilities. As part of the sector restructuring strategy developed during 1991-92, the Governmentdeveloped a program to capitalize CHB, ICEL, CORELCA and subsidiaries in amounts over US$ 1billion.

Fourth Objective

14. The expected performance, in terms of number of equivalent days of sales representedby the volume of Accounts Receivables, was far from satisfactory. The lack of updated accountinginformation once again produced false expectations at the time of appraisal estimates, and largediscrepancies between forecast and actuals begun as early as 1987 (Table 3, line 75). The result wasthat the 66 days of receivables expected by the end of 1990 were in fact 100 days.

Accounts Receivable Reduction Program

15. The actual Government commitment under the PSAL was to settle in full the sector'sreceivables owed by the central and regional governments and agencies. These receivables totalledCol$10.6 billion (US$49 billion equivalent) at December 31, 1986, as follows: (a) 39% in actual cashpayments during 1988 (28%) and 1989 (I 1 %); and (b) 61% in payments or payment agreements.About two third of the latter figure corresponded to arrears from the municipally-owned EmpresasPublicas Municipales de Barranquilla (EPMB). The commitment under the PSAL also included thatthe current electricity consumption of these official entities be paid on average within 66 days ofbilling. These commitments became conditions of disbursement for the second and third tranches ofthe PSAL.

16. Full compliance with the cash payment targets was not met. The Bank howeverregarded as satisfactory compliance for the disbursement of the second tranche, that the cash shortfalls be added to the long term payment agreements. Despite the existence of a number of legal,

53

ANNEX 2Page 6 of 12

fiscal and budgetary instruments (retention of the value added tax due to the municipalities, off-settingelectricity billings with accrued debt owed by the utilities to FODEX) the pervasive problem ofGovernment and official accumulating arrears to the power utilities did not improve in any materialway. By the time of the third tranche, current billings had accumulated yet again. Also, mostagencies were delinquent in the payments due under the long term agreements signed to settle theoutstanding arrears at end-1986, and the Government was about to meet the letter of the arrears'covenant through a new set of long term agreements. At the time of cancellation of the third tranche,the long term objective of the PSAL to a reach satisfactory sustainable level of receivables had clearlynot been met.

Tariff Adjustment Program (PAT)

17. In 1986, through Resolution 086 (R086), the Government had assumed control of thetariff policy for electric power service by eliminating the utilities' discretionary faculty to request andapply authorized rates. The main technical feature of R086 was the setting of targets based on thestructure of cost of service, social considerations and ability to pay. The residential tariff consisted offixed and variable charges. Fixed charges, depending solely on the ability to pay of each of six strata(income brackets) in June 1987, ranged from Col$36.45/month to Col$1678.81 for the highestbracket. The variable consumption charge was to reach the following LRMC targets gradually by1994:

- 20 - 30% of LRMC by the subsistence block (0-200 Kwh/month)* 50 - 80% of LRMC by the basic block (201400 Kwh/month)* 90 - 125% of LRMC by the intermediate block (401-800 Kwh/month)- 100 - 125% of LRMC by the high block (over 801 Kwh/month)

18. Additionally, under R086, the TAP included the following principal commitments tomeet the above targets:

* the reduction of the residential subsistence block from 200 to 100 Kwh/monthwhenever on-going gas and LPG electricity replacement programs approached 85%coverage.

* the value of Residential rates would be increased according to the minimum wageindex plus 4%; and those of non-residential rates, according to the power sector costindex plus 5%.

19. For the particular case of EEB whose tariffs had the greatest distortions from LRMCstructure and levels, a program of gradual adaptation to R086 with the following main features wasagreed:

* the fixed charge for its residential rates was set at 50% of the national value to beraised to 75% in 1988 and 100% in 1989.

* to lower the impact of converting to the new tariff structure a new block coveringconsumptions from 200 - 300 kwh/month was introduced; it was agreed that thisblock would be gradually phased out before 1993.

54

ANNEX 2Page 7 of 12

* any rate reductions required EEB's non-residential rates that were higher thanLRMC were to be introduced so as to preserve the company's overall revenues in realterms.

20. With the exception of EEB, the TAP was implemented in the larger cities in line withR086. In most of the smaller cities, however, despite the carrying out of social stratification studies,the implementation was flawed. It turned out that most of the residential consumers in the smallercities were classified as belonging to the lowest strata having the smallest fixed monthly charge. Thisflaw was being looked into by the JNT at the end of the PSAL (9/30/90).

21. Initially EEB did not comply in full with the gradual implementation of R086. Itdelayed the adaptation to the national fixed charges by one year. It begun to reduce rates in realterms to industrial and even to residential consumers, with resulting negative effects to its alreadycritical cash generation capacity. However, by the time of the third tranche, EEB had reportedlycaught up with its commitments under R086.

55 ~~~~~~~ANNEX 2Page 7 of 11

* ~~~~~~~09-Jun-93 TABLE 3: COLOMBIAI ~~~~~~~~POWER SECTOR ADJUSMENT LOAM (2a89-CO) - PROJECT COMPLETION REPORT

2 COMPARATIVE FINANCIAL PROJECTIONS SUMMKARY (Current USS mitLLion) 1/3 (FiLe: ANX2TBL3.wkil4 ... 1987---- --- 198.8---- --- 1989---- --- 1990 --- ACUN 1987-1990 Differ.S ECONOMIC ASSUMPTIONS S.A.R. ACTUAL S.A.R. ACTUAL S.A.R. ACTUAL S.A.R. ACTUAL S.A.R. ACTUAL 1987-906 -- - - - - - - - - --- - -- - -- - .. . .. . .. . .. . -- - - -- - -- -.. . .7 INFLATION RATE 20.0% 24.01 ¶9.0% 28.1% 18.0% 26.1% 18.0% 32.4%8 DEVALUATION RATE 20.0% 20.4% 13.9% 27.4% 14.0% 29.2% 15.0% 31.0%9 AVERAGE EXCHANGE RATE (CoLS) 241 241 281 299 320 38 366 502

10 EXCHANGE RATE (Year End) 263 26.4 299 336 341 434 392 5681112 GENERATION (Gwh) 1/ 29150 29493 30669 31152 32096 32575 33976 34319 125890 127539 1,64913 ENERGY LOSSES (Ci'?) I/ 6938 7113 7054 7571 7029 7491 7169 7295* 28189 29470 1,28114 1 ENERGY LOSSES 1/ 23.8% 24.1% 23.0% 24.3% 21.9% 23.0% 21.1% 21.3%is16 SALES (Gw'?) 22212 22536 23615 23714 25067 25202 26807 26786 97701 98239 53817 AVERAGE RATE (USS cts/Kwh) 3.95 4.28 4.23 4.20 4.52 4.2.3 4.84 4.03 4.11 3.74 -0.381819 SALES CUSS MilLions) 852 867 935 847 1052 904 1182 1055 4020 3673 -34720 OTHER REVENUES 64 41 71 46 79 49 88 58 301 194 -10721 TOTAL REVENUES 916 908 1006 893 1130 953 1270 1113 4321 3867 -4542223 OPERATING EXPENSES 545 551 589 631 620 673 653 716 2407 2571 16424 OPERATING INCOME 371 357 417 262 510 280 617 397 1914 1296 -6182526 OTHER NET INCOME 64 87 57 85 45 93 41 -196 208 69 -13927 INTEREST CHARGED TO OPERATIONS 251 265 267 222 236 315 194 429 947 1231 28.428 NET IkCONE 184 179 207 125 320 58 464 -228 1174 134 -104029 -------------------- I----------------------------------------3D GROSS INTERNAL CASH GENERATION 650 721 719 669 819 750 940 544 3128 2684 -"4431 Less: INTEREST CHARGED TO OPER. 251 265 267 222 236 315 194 429 947 1231 283233 CURRENT SAVINGS 399 456 453 447 583 435 747 115 2181 1453 -7283435 GOVERNMENT CONTRIBUTIONS 150 lOS 130 85 - 100 38 10 123 390 351 -3936 From own resources 150 105 -20 -65 -50 -37 10 123 90 126 3637 From IBRD's PSAL 0 0 150 150 150 75 0 0 300 225 -7538 CONSUMERS CONTRIBUTIONS 20 18 14 27 14 4415 9 63 98 3539 TOTAL OWN FUNDS 569 579 597 559 697 517 772 247 2634 1902 -7324041 TOTAL DISBURSEMENTS 699 538 685 609 681 893 691 823 2756 2863 1074.2 Existing Loans (foreign & Local) 443 538 318 310 20? 409 152 242 1120 1499 37943 LocaL Loans: FEW 97 ne 79 ne 105 na 121 ria 402 0 -402

44 ~~~~~FWOEX-Lorig term 0 0 101 196 190 0 487 48745 Other 59 na 858 na 39 na 18 na 204 0 -20446 LOANS TO COVER FINANCIAL GAP 100 0 200 198 330 288 400 391 1030 877 -15347 0 0 048 Less: AMORTIZATION 486 458 499 512 549 795 629 531 2163 2296 1324950 NET BORROWINGS 213 80 186 97 132 98 62 292 593 567 -255152 TOTAL SOURCES 782 659 78 656 829 615 8133 539 3226 2469 -7575354 INVESTMENTS 502 526 554 634 550 475 456 467 2062 2102 4055 INTEREST DURING CONSTRUCTION 205 106 198 127 237 95 290 96 930 424 -50656 VARTN WORKING CAPITAL+OTHER USES 74 27 31 -105 42 45 87 -24 233 -57 -2905758 TOTAL USES 782 659 782 656 829 615 8133 539 3226 24,69 -75759.-- - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - -60 - DEBT EVOLUTION61 INITIAL BALANCE 2/ 3868 4355 4102 5021 4301 4845 4442 5063 3868 4355 48762 + NET BORROWINGS 2/ 213 277 186 281 132 406 62 336 593 1301 70863 + EXCHANGE RATE LOSS (GAIN) 21 389 13 -457 9 -189 5 34 48 -223 -27064 FINAL BALANCE 4102 5021 4301 4845 4442 5063 4509 5433 4509 5433 92465 OTHER LIABIL. (SHORT £ LONG TERM) 553 877 543 1242 526 895 495 99966 TOTAL LIABILITIES 4655 5898 4844 6087 4968 5958 5004 643267 TOTAL ASSETS 8075 9224 8950 9795 9801 10269 10562 1034668 -----------------------------------------------------------69 - ANUAL TARIFF INCREASE 3/ 5.81% 13.83% 7.09% -1.87% 6.86% 0.71% 7.082 -4.73%70 RATE OF RETURN ON REV. ASSETS 5.2% 6.1% 5.1% 4.3% 5.8% 5.3% 6.6% 5.5%71 NET INTERNAL GENERAT. CUSS Mill.) -87 -2 -47 -65 34 -360 117 -416 18 -843 -86072 2 INTERN.GEN./CONSTRUCT. -12.3% -0.3% -6.2% -8.5% 4.3% -63.2% 15.7% -73.9%73 DEBT SERVICE COVERAGE 0.88 1.00 0.94 0.91 1.04 0.68 1.14 0.5774 DEBT / (DEBT + EQUITY) RATIO 57.6% 63.9% 54.1% 62.1% 50.7% 58.0% 47.4% 62.2%75 COLLECTION PERIOO 82 116 79 99 71 116 66 10076 -- - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -- - -77 - 1/ Consolidate-d figures excludes data of Empresas municipales de CaLi - EMCALI, except for rows 16, 17 arnd 18.78 2/ Includes short term debt with FOOEX.79 3/ Calculated in equivalent current USS.

56 ANNEX 2Page 8 of 11

Graph 1COLOMBIA POWER SECTOR

Total Liabilities (US$ Mill.)7000

6000 0

5000 - ---

4000

2000 _

1000 _

O' 'I I I1983 1985 1987 1989 1991

Adjustment Plan Actual


Debt / (Debt + Equity) __t__Lt_

70%

0%r

1983 1985 1987 1989 1991

Adjustment Plan $ Actual

57ANNEX 2

Page 9 of 11


Gross Internal Cash Gener.(US$ Millions) _________

1200 -

1000

600 1

400I1983 1985 1987 1989 1991

- Adjustment Plan Actual


Net Internal Cash Gener. (US$ Mill.) ______t_d

200 =-

-200

-400

-600\ /.

--00V

-1000' I 'I' i'I1983 1985 1987 1989 1991


58ANNEX 2

Page 10 of 11


Average Price (Current US$ / KWH) Estimted

0.055

0.045-0.040

0.035, ,l l l1983 1985 1987 1989 1991



Average Price (Col$1985 / KWH) E_at_d_ i

8.5

7.5-

6.5 -

5.5-

4.51983 1985 1987 1989 1991

- Adjustment Plan * Actual



Adjustment Loan Average Prices = 100 Estimated

115-

105-

95 -

85 1985 1987 1989 1991

4 Adjust.Loan ° Actual (Curr.USS) ^ Actual (Col$85)


Sales (US$ Millions) Extim,t*d

1700 -

1500

1300 /

1100 /

900 _

700I1983 1985 1987 1989 1991

- Adjustment Plan + Actual

60

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COLOMBIA

POWER SECTOR ADJUSTMENT LOAN (2889-CO


ENVIRONMENTAL COMPONENTS OF THE PSAL

1. This Annex summarizes the generally high extent of compliance by the Borrower withenvironrmental conditionality in the Colombia Power Sector Adjustment Loan (PSAL). The PSALincluded several innovative environmental features which may make it a useful model for the Bank'spower sector lending to other countries. This Annex does not address involuntary resettlement orrelated socioeconomic issues which are reviewed separately in Annex 4.

Environmental Conditionality in the Power Sector Adiustment Loan

2. In broad terms, the US$300 million PSAL (approved December 1987) had threemajor environment-related conditions:

a. Preparation of a Least-cost Investment Program acceptable to the Bank, whichwould guide the selection of all new power generation projects during the years 1991-2000. The definition of "least-cost" was specifically intended to includeenvironmental costs;

b. Preparation and implementation of the ISA Social and Ecological Program, whichwas indented to (i) strengthen the Colombian power sector's capability for effectiveenvironmental planning, assessment, and management of its projects and (ii) addressseveral specific environmental problems in the sector; and

c. Satisfactory implementation of the Guavio Program, a series of activities intendedto correct the environmental (as well as social, financial, and managerial) problemsassociated with the implementation of the Guavio Hydropower Project (Loan No.2008-CO, approved in 1981).

Environmental Considerations within the Least-cost Investment Program

3. Efforts by the Colombian power sector to incorporate environmental considerationswithin the Least-cost Investment Program were both innovative and important. Electric powergeneration in Colombia is predominantly hydroelectric (about 70 percent) and coal-fired thermal. Todate, less than 10 percent of Colombia's potential hydroelectric power capacity has been developed,while most of the country's electric power service is connected to a national grid. As a result, thereremain many different options for future hydroelectric project sites, some of which would be muchless environmentally problematic than others, per unit of electricity produced. For example, therecently-completed 1,600 MW Guavio project floods only about 1,500 ha of already mostlydeforested land; on the other hand, the proposed 860 MW Urra II project would inundate about69,000 ha, most of which is tropical forest. To a lesser but still considerable degree, careful projectsiting is also important for minimizing the environmental damage from thermal power projects.

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4. Under the PSAL, ISA developed an innovative methodology for partially internalizingenvironmental costs within the process of power expansion planning throughout Colombia. Phase I ofthis methodology involves the ranking and rating of each possible new hydroelectric project,according to a list of some 75 different quantitative environmental indicators (which are normalized sothat all hydroelectric projects can be compared on the same scale). Although ISA's choice of specificenvironmental indicators can be questioned, the indicators tend to be self-reinforcing, so that more orless the same projects get consistently high (negative) environmental ratings, almost regardless ofwhich combination of indicators is used. For example, projects with very large, relatively shallowreservoirs tend to get high (environmentally negative) scores according to a wide range of indicators,including forest area flooded, cropland flooded, number of people resettled, susceptibility to earlysedimentation, water quality problems, effects on native fish populations, etc. ISA also developed asimilar Phase I methodology, involving about 19 different indicators, for environmental rating andranking of various possible new thermal power projects (though not for quantitatively comparingthermal versus hydroelectric projects).

5. ISA's more ambitious Phase II methodology approved by CASEC(Annex 4, para.7) which quantifies the anticipated environmental costs of various proposed newpower projects in economic terms, was used in the Least-cost Investment Program prepared by ISA inJune 1992.

6. The next three hydroelectric projects chosen for the 1992-2000 Least-cost InvestmentProgram have relatively low (Porce II, Miel II) or moderate (Urra I) environmental impacts. If theprocess initiated by ISA for incorporating environmental considerations in power expansion planningcontinues to be refined and seriously implemented, it is likely that the most potentiallyenvironmentally damaging hydroelectric power projects in Colombia (including Urra I, San Juan,Upia, and La Gabarra) will continue to be deferred indefinitely, in favor of those having lowerenvironmental impact. Taking into account the difficult methodological issues involved, the progressachieved by ISA for incorporating environmental costs in selecting new projects is highlycommendable.

Implementation of the ISA Social and Ecological Program

7. Under the PSAL, the preparation and implementation of the 1988-1990 ISA Socialand Ecological Program was indented primarily to strengthen the Colombian power sector's capabilityfor effective environmental planning, assessment, and management of its projects. The principalenvironmental (not including resettlement-related) institutional strengthening achievements of the ISASocial and Ecological Program were:

a. Through a partial reorganization, the hierarchical status of the in-houseenvironmental units of ISA and EPM (the Medellin electric utility) was significantlyelevated. ISA's environmental unit now has the status of an Office which answersdirectly to the Director General. Also, new environmental units were created withinseveral regional electric power companies (CORELCA, ICEL, CHB, and CHEC);

b. The number of environment-related professional and technical staff within ISA andthe other electric power companies increased substantially. According to the ISASocial and Ecological Program, the number of environment-related (including social)

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ANNEX 3Page 3 of 5

staff in all of the Colombian power sector agencies was to increase from about 142 to230 during a 3-year period;

c. The Power Sector Environmental Coordinating Committee (CASEC) wasestablished to exchange views and develop sector-wide environmental standards,guidelines, and procedures. CASEC is comprised of all of the power sectorcompanies, as well as INDERENA (Colombia's principal natural resource agency),the Ministry of Mines and Energy (MME), and the National Planning Department(DNP). CASEC apparently continues to function effectively today. It hassubstantially improved coordination on environment-related issues between the variouselectric power companies, as well as between the power sector and other Colombianagencies; and

d. A 3-year (1988-90) environmental training program for the staff of ISA and otherColombian power companies was prepared under the PSAL. This program involved atotal of 12 courses, ranging from 5-day (or shorter) workshops to 2-month universitycourses. No assessment has been made yet as to the success of the training program.

8. The ISA Social and Ecological Program also sought to address several specificenvironmental problems in the Colombian power sector. In the context of the PSAL, the mostnoteworthy of these actions to correct specific environmental problems were the following:

a. ISA continued to implement a large-scale pilot program to improve watershedmanagement for the Chivor (La Esmeralda) reservoir in Boyaca, which is sufferingfrom accelerated sedimentation attributable to deforestation and poor land usepractices. This US$29 million program involves the reforestation of about 50,000 haof large and small private landholdings (over a 10 year period), physical soilconservation works, and protection of remaining natural forest areas. The Chivorprogram is intended to serve as a model for how ISA or other electric powercompanies can promote improved watershed management around those reservoirswhich are at risk from accelerated sedimentation. Evidence provided by ISA indicatesthat the program has been quite successful in promoting improved land use practices,including a substantial increase in tree cover in critical areas of the watershed. Theprogram continues at a reforestation rate of 1,500 ha p.a. funded by a 2% earmarkedtax on all hydroelectricity sold from the Chivor basin.

b. To identify a long-term solution for the management of ash (environmentally safedisposal or recycling) from Colombia's coal-fired thermal power plants, ISA initiateda detailed study of the Termo-Zipa (EEB) and Termo-Paipa (ICEL) plants, to befollowed by a pilot implementation program. These two power plants wereconsidered to have the most serious ash management problems. In 1989, theGovernment reassigned the elaboration of the studies to ICEL to be carried out in twophases. Phase I, completed in March 1992 characterized the various types of ashes,and Phase II to be completed in July 1993 will recommend productive uses underwhich the ashes could be disposed of, as well as mitigatory action plans.Implementation of the recommendations are expected to be supported by the proposednew power sector loan which the Bank is currently processing.

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Implementation of the Guavio Program

9. Adequate implementation of the Guavio Program was a condition of the PSAL. Inaddition to activities intended to correct the serious financial, managerial, and resettlement-relatedproblems of the Guavio Hydropower Project, the Guavio Program under the PSAL included a varietyof environmental management activities, most of which were outlined in the 5-year (1988-1992)Environmental Management Plan. Because the initial version of this Plan did not meet Bankrequirements, EEB (the Bogota Electric Power Company) revised and improved the Plan in 1988.

10. Principal components of the revised Environmental Management Plan, andimplementation results, can be briefly summarized as follows:

a. Reforestation on private lands in the Guavio watershed has been remarkablysuccessful, with large numbers of trees planted and maintained by smallholders, aswell as by larger farmers. Supervision visits to the Guavio watershed confirmed thatrecently-planted trees were thriving on many farms, particularly on the steeper partsof those properties;

b. By contrast, efforts at reforestation of EEB-owned lands along the margins of thereservoir were much less successful. Much of the reforested EEB-owned land hasbeen invaded by local people; there has also been much illegal grazing and theft ofbarbed wire. According to the December 1990 supervision mission, these problemshad largely been avoided in those limited areas where EEB had hired local people asfull-time guards. Interestingly, manual reforestation of these areas was not reallynecessary, since the natural regeneration of secondary forest vegetation was quiterapid in those areas where cutting, burning, and grazing had been effectivelyprevented;

c. Physical erosion control measures (such as gabions) had been successfully installedin critical erosion-prone areas of the Quebrada El Moral; and according to theEnvironmental Management Plan, a much larger area, encompassing steep lands alongseveral other streams, was to be treated in a similar manner.

d. Protection of the existing natural forest and paramo vegetation in the upper Guaviowatershed was never implemented with any real success by EEB. EEB placed mostof the responsibility for this work with INDERENA, which lacked the staff andbudgetary resources to do more than a cursory job. Despite the writtenrecommendations of several Bank supervision missions, EEB never contracted withlocal municipalities to hire forest guards (as ISA had successfully done in the Chivorwatershed); and

e. Erosion control measures along the newly-constructed Gachala-Gama road becamenecessary after landslides and heavy erosion threatened to increase substantiallysedimentation in the Guavio reservoir. As of the December 1990 supervision mission,reasonably effective erosion control measures had been implemented in the roadsegment between Gachala and the Rio Farallones, but similar measures were stillneeded along the road between the Rio Farallones and Gama.

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11. In addition to the activities included within the 1988-1992 Environmental ManagementPlan, the Guavio Program required that EEB prepare a biomass clearing program for the reservoirarea by March 31, 1988. EEB did not meet this deadline. However, the July 1988 and January 1989supervision missions reported that biomass removal from the reservoir area did not appear necessaryfrom the standpoint of water quality or other environmental considerations.

Main Lessons Learned

12. As the above information indicates, implementation of the PSAL has generally beenhighly positive from an environmental standpoint. In many respects, the Colombian power sector hasbecome a leader within the LAC Region in incorporating environmental considerations within theplanning and management of its hydroelectric and thermal power projects in a relatively routine andsystematic manner. It appears that some of the environmental features of the PSAL could besuccessfully incorporated within the Bank's electric power (investment or adjustment) lending forother LAC countries.

13. The PSAL illustrates the importance of including environmental considerations inleast-cost power sector expansion planning. Despite the methodological complexities involved, thisprocess is necessary for avoiding those hydroelectric project sites which would inevitably be highlydamaging from an environmental standpoint (notwithstanding any environmental mitigation measureswhich may be taken after the site selection is made). The generally positive experience of theColombia PSAL demonstrates that including environmental concerns in power expansion planning isboth desirable and feasible, for hydroelectric as well as other types of new generating capacity.

14. The PSAL also shows that sector adjustment loans can provide important opportunitiesfor environmental institutional strengthening of key sectoral agencies. The capacity of the Colombianpower sector to address environmental planning, assessment, and mitigation issues in a competent andsystematic manner has improved substantially in recent years, apparently largely due to the incentivesprovided by the PSAL. Even though sector adjustment loans are not subject to the sameenvironmental assessment requirements in the Bank as are sectoral or project-specific investmentloans, they nonetheless often merit attention in terms of opportunities for environment-related policyreforms or institutional strengthening.

15. The relatively mixed record of environmental management in the Guavio Projecthighlights the importance of having a well-developed and detailed environmental management plan(with a specific budget, timetable, and implementation targets) before project construction begins.(An acceptable Environmental Management Plan for Guavio was produced in 1988, long afterconstruction had begun.) The Bank's environmental assessment procedures (as codified in OD 4.01)now require that (for "Category A' environmentally sensitive projects) a draft environmentalmanagement plan be prepared prior to the start of appraisal.

16. The Bank's experience with the environmental aspects of Guavio also points to theimportance of adequate Bank supervision. The quality of EEB's environmental work at Guavio(while never satisfactory) appeared to improve significantly during the 1988-1990 supervision of thePSAL. The Bank's relatively frequent supervision visits to Guavio in recent years have helped toreduce environment-related problems in the Project area.

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ANNEX 4Page 1 of 3

COLOMBIA



RESETTLEMENT AND SOCIAL COMPONENTS OF THE PSAL

1. Three points on social concerns come through from the restrospective evaluation of the resultsof the PSAL. The first is that under the PSAL Colombia developed one of the most advancedplanning capabilities for addressing social concerns among Bank borrowing countries. The second isthat the Guavio program under the PSAL was a corrective action on a major problem missed duringBank appraisal of the Guavio project (Loan 2001-CO) and inherited by the PSAL. The third is thatthe development and improvement owes a lot to the very active Bank supervision throughoutimplementation of the PSAL. Bank insistence on implementing the resettlement policy (OMS 2.33,OPN 10.86, and OD 4.30) and the project's legal understandings, as well as the provisioning oftechnical assistance through specialized staff and consultants, were essential elements in followingthrough on the PSAL's social objectives. They are important lessons (paras. 9, 10) because thegeneral role played by the Bank extends well beyond this project.

project Background

2. The Guavio Prosram - The Guavio Hydro Project (Ln. 2001-CO) was appraised in 1981.Project appraisal stated that 'since only some 250 scattered families live in the entire project, EEEBwill simply purchase the land; no resettlement would be necessary" (SAR para. 4.24, emphasisadded). This assumption turned out to be incorrect. More than 6,000 people lived in the project'ssubmergence and construction zone who would be involuntarily displaced. Compensation foracquired lands was managed by the project's land acquisition office, which provided cashcompensation against proof of land title. Because of widespread fear, mistrust, and lack ofinformation about legal entitlements, outside middlemen were able to move in and acquire titles atbelow market rates from the legitimate owners. As a result up to a third of the affected populationtook what money they could and left the project area. Because no baseline surveys of the projectaffected population were conducted, it is not known how many of the displaced people were tenantsor sharecroppers who, despite Bank policy (OMS 2.33 'Social Issues Associated with InvoluntaryResettlement, 1980), lost their means of livelihood but received no compensation or resettlementbenefits.

3. A 1986 Bank-wide resettlement review identified Guavio as a project with serious resettlementissues that were not being adequately addressed by the borrower. At the same time that Guavio'sproblems were revealing themselves, a Bank consultant's sectoral review noted that the sector lackedthe institutional capabilities needed to deal with the diverse social problems confronting the sector.Y'

1/ See "Social and Environmental Planning in the Colombian Electrical Sector,Project files.

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ANNEX 4Page 2 of 3

PSAL Obiectives

4. The Power Sector Adjustment Loan (PSAL) contained two major objectives. First, underISA's guidance a sectoral social strengthening program would be prepared that would include astaffing plan, budget, and training program. Second, under the 'Guavio programn", EEEB wouldcomplete the resettlement of families affected by the dam, establish an office of community relations,prepare a regional development plan jointly with the surrounding municipalities, and monitorimplementation of all programs. A third objective was subsequently added: the development of asocial methodology to incorporate all social costs into the environmental least-cost expansionmethodology that was being prepared.

Achievements and Continuity

5. The project's social strengthening program has been very successful. An internal analysis ofstaff needs proposed 33 professionals. These were hired and trained through the project, and by thetime of project closure all member utilities had social units staffed by trained professionals. Theclearest indicator of the success of this program is that all three (URRA-340MW, Miel-385MW,Porce-390MW) of the projects prepared for financing under the 1991-2000 construction programprepared resettlement programs that, unlike Guavio, had social programs that met or exceeded theBank's resettlement policy requirements.

6. ISA's social and environmental unit provided overall coordination for the development ofsectoral policies through the Power Sector Environmental Coordinating Conunittee, an inter-agencyworking group made up of all member utilities, the Ministry of Mines and Energy, Natural ResourceSecretary (NDERENA), and the National Planning Department (DNP). Despite some internaldifferences, this committee has been an effective coordinating body and vehicle for developingsectoral policies. In 1991, after two years of discussion, CASEC approved a binding sectoral policyon involuntary resettlement that parallels the Bank's resettlement policy. Social concerns, includingrequirements for local participation and consultation, have been incorporated into the EIAmethodology adopted by the sector.

7. CASEC has adopted a methodology prepared by ISA which incorporates social as well aseconomic, technical and environmental costs into the least cost expansion program. The methodologyincludes a stepped set of information requirements and generic terms of reference for the studies thatshould have been completed at each stage of the project development cycle. Despite a certain amountof arbitrariness (i.e. one tribal member 'counts' as much as two peasants) that requires furtherrefinement, the methodology is a unique and valuable planning innovation that should be incorporatedinto the national planning guidelines.

8. Implementation of the Guavio program has been erratic, although substantial improvementsare noted. EEEB's overall financial crisis produced periodic cutbacks that required repeated Banlkintervention to ensure timely implementation of the resettlement and community developmentprograms. The Office of Community Relations formed an effective field team that made significantprogress towards redressing a difficult situation. A regional development plan acceptable to EEB andthe Bank was developed and has been underway since 1991. Three-hundred-thirty families that wereeither displaced or seriously affected by the project are being treated by new programs designed toensure that their incomes are restored or improved through production based resettlement, healthservices, and community development activities. After a two year delay, EEB agreed to make

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available surplus lands for outstanding resettlement cases. Finally, a legal assistance programprovides special counsel to the affected population that is attempting to seek redress through thecourts. It should be noted, however, that a substantial percentage of population adversely affected bythe project has left the project area.

Lessons learned

9. Three lessons stand out from the PSAL's experience with social issues. ELrt, the projectpoints clearly to the value of a sectoral approach to project planning. The sectoral policy and theleast cost expansion methodology introduced consistency of approach and basic planning standardsinto what previously had been an arbitrary and highly unsatisfactory set of procedures. Second, thesector's experience with social planning under this loan compared with the Guavio project reinforcesthe Bank's requirement to prepare resettlement plans as part of an overall project package.Throughout implementation, the Guavio program suffered from being a rearguard, ad-hoc action thathad to overcome resistance both from within the project and, of course, from the inadequatelyresettled communities. Finally, the project's emphasis on strengthening the sector's institutionalcapabilities by hiring and training experienced social scientists, increasing their access to projectdecision making, and introducing a mechanism for inter-institutional coordination produced majorimprovements in how social issues are handled in the sector.

10. The appraisal and implementation of the Guavio project itself also has many lessons to offerthe Bank. The Bank's failure to appraise the Guavio project adequately and continued failure tosupervise the social program in the early years of implementation sent a signal to the projectmanagement that these issues could be left aside, which they were until they reached crisis levels. Bythe same token, the rigorous conditions and increased supervision under the PSAL produced acorresponding increase in the attention paid them by the borrower. Since strengthening the sector'ssocial policies and institutional capabilities were defined as a project objective from the outset,relations between the Bank and borrower remained constructive throughout project implementation.Today the Colombian power sector is among the Bank's most advanced borrowers in its ability tomanage social issues, and the PSAL rightfully deserves to be considered a major success in thisrespect.

63 ANNEX S

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COLOMBTA



OBJECTIVES AND RESULTS OF THE PSAL

1. This Annex summarizes the objectives and the results actually achieved during the implementationof the 1987-90 Adjustment Program, and the principal issues associated thereto.

Macroeconomic objectives

2. The Sector Loan was intended to address both macroeconomic and sector issues. With this Loan,the Government and the Bank sought to support Colombia's overall adjustment program and catalyze themobilization of funds from commercial banks, the IDB, and the Eximbank of Japan to the power sector.The Govermment regarded the PSAL as a key element of its foreign debt strategy. The mobilization ofexternal funds to the power sector was to release resources towards sectors with lower foreign capital andimport requirements, enhance resource allocation through more rational pricing policies, and improve themanagement and efficiency of public enterprises.

3. The Governrment, with support from the multilateral institutions, was successful in mobilizingfunds from commercial banks pursuant to its overall foreign debt strategy. The objective of mobilizingexternal funds to the power sector to release internal resources towards other sectors, however, was notmet. Lower than expected internal savings from the power sector, and difficulties in meeting conditionsof effectiveness of cofinancing loans, forced the Govertiment to distract a substantial amount of fundstotalling some US$793 million (from FODEX and commercial banks) to close the financing gaps of thepower sector during 1987-90 (Annex 2, paras. 6-9).

Sectoral obiectives

4. The PSAL was to support the Government's reform programs in the power sector whose principalobjective was to improve the supply and demand efficiency of power generation, transmission, anddistribution. This goal was to be achieved by (i) rationalizing investments, (ii) bringing electricity pricingin line with LRMC, (iii) financing a larger share of future investments from sector cash generation andthereby reducing pressure on other public sector investments, and (iv) improving the regulatoryf-ramework and utility management. Specifically, the reform program consisted of action plans toimprove critical areas as summarized in the following paragraphs.

Investment and imDlementation policies

5. To coordinate planning across all energy subsectors and to ensure that the use of the country'svast energy resources and investrnent plans took due account of Government policies, the PSAL included(a) the creation of an Energy Board (Comision Nacional de Energia - CNE); and (b) the strengtheningof the implementation role of ISA by granting it the authority to construct, own and operate all futuremajor generation and transmission projects.

6. Belatedly, Law 51 of October 24, 1989 created the Energy Board which became operational onlyin mid 1990. Although it was unable to influence the implementation of the PSAL, the Energy Boardrapidly became instrumental in developing an approach to integral energy planning, in liaising the energy

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subsectors, and most importantly, in gathering and coordinating the required consensus to initiate andcarry out the drafting of a new electricity law to fundamentally reform the sector.

7. In January 1990, after difficult internal discussions, the GOCOL complied perfunctorily withassigning ISA the sole right of builder, constructor and owner of all major generation and transmissionfacilities in the sector. This condition of the PSAL was strongly resisted by all the regional utilitieswhich were loath to relinquishing the option of building their own facilities regardless of size. It alsoproved to be ineffective in the context of a sector in need of substantial reform to become independentfrom Government support, operate competitively and attract private investors.

The 1987-1990 investment program

8. To minimize future excess generation, utilize to the extent possible current installed capacity, andtake account of the financial restrictions of the sector and of the public investment program, theadjustment program involved (i) postponing construction of new hydroelectric projects totalling 3200 MWand equivalent to US$ 1.3 billion during 1987-90; (b) completing all ongoing generation and associatedtransmission projects, with delayed schedules when feasible, in particular completion of the Guavioproject (1000 MW) was delayed to 1992; and (iii) limiting investments in distribution to those intendedto reducing energy losses, and maintaining electric service coverage in urban areas and the currentinvestment pace in rural areas. The resulting 1987-90 investment program would total US$2,062 millionbroken down into 42% in generation projects, 23% in transmission, 31% in distribution, and 4% instudies and other.

9. The dollar amount of the 1987-90 investment program was met fairly closely. Actual resultsexceeded the target by only 2%. The overall figures, however, hide the following important results (table5.1): (a) the tight liquidity of the sector and particularly qf EEB caused an increase in investrnent payablesof some US$314 million (15 %); (b) the investment programs of EPM, ISA, and CORELCA, principallyin transmission and distribution were reduced (postponed) considerably by the delay of the US$300million cofinancing loan from the Eximbank of Japan, which became effective in late 1991 instead of inmid 1988; (c) the USS80 million loss reduction component of the loan signed with the IDB in 1987 couldnot disburse because the target borrowers did not meet the required covenants; and (d) EPM's importantRio Grande II Hydro power project (300 MW) was delayed by two years because of difficulties inobtaining import licenses from INCOMEX for key components of the project.

10. The results of the 1987-90 investmnent program indicate that while the macro target was met,important individual targets at the project level having an important bearing on the reliability of thesystem, were not.

The 1991-2000 investment program

11. It would be defined during the execution of the PSAL based on an improved least-cost planningmethodology. Also, the Government would not start new investments in generation unless included inthe least-cost program, and investments in rural electrification beyond those contemplated in the 1987-90program would proceed exclusively on the basis of secured additional financing.

12. After some initial difficulties with the new parameters and objective functions, the above goalswere successfully met. The least cost methodology developed by ISA under the supervision of the PSALintroduced a number of innovative features used for the first time in Latin America. It took into accountconstraints imposed by the (a) transmission system; (b) national and sectoral financial limitations; and (c)environmental and social factors. In the latter context a remarkable methodology was developed tointernalize the costs and benefits of the ecological and social impacts of the various types of projects

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(hydroelectric, and thermal - coal, fuel oil, diesel, gas) ranking them according to impact indices. Also,for the first time the effects of a possible interconnection with Venezuela, as well as the replacement ofgas for electricity for domestic consumption were taken into account in the planning process. Based onthese methodological improvements, in June 1992, ISA prepared the first indicative least-cost investmentplan for the power sector based on several probable scenarios oriented to attract private investment.

The Guavio project

13. The 1000 MW Guavio hydroelectric project, the largest ever in the power seetor which was beingexecuted under a partnership agreement among EEB and ISA's shareholders, was having extensive timeand cost overruns. EEB had primary management and financial responsibilities for the project whose sizeand complexity had placed major strains on its management and finances. Under the PSAL, theGovernment sought to ensure satisfactory completion of the project through an updated financing planand a revised more effective management structure.

14. Table 5.2 summarizes Guavio's financing plan as proposed under the PSAL. It also shows thesummary yearly grand totals of a revised financing plan prepared in 1991 based on real data through1990. The figures suggest that Guavio's continuing difficulties, while declining, still prevented meetingthe PSAL financial and physical and targets. The main results were (a) a US$129.2 million (16%)underinvestment during 1987-90; (b) some USS410 million (25%) additional cost overrun; and (c) onemore year delay postponing its completion date until 1993.

15. The principal problems affecting the smooth implementation of Guavio, which had a criticaldependence on financial contributions from ISA's shareholders, were the sector's continuing illiquidityand growing uncommercial practices, particularly those of EEB. The traditional strong municipal andtrade union influence, prevented EEB's management from following a proactive rational tariff policy andintroducing long overdue operational efficiency improvements. ISA'a shareholders were also unable tomeet planned contributions to Guavio because of similar liquidity problems. To ameliorate the acutefunding constraints of the project EEB resorted to extreme current liability financing by increasing itsaccounts payable related to purchased energy (from ISA) and contractor's billings. These practicescaused a deterioration in the compliance with financial covenants of existing multilateral loan agreementswhich in turn delayed the processing of new multilateral and linked commercial financing operationsincluded in Guavio's financing plan.

16. In June 1988, the Governmnent created a Management Steering Committee for Guavio composedof management representatives from the shareholding companies. The Steering Committee had asignificant positive effect in the overall management of the project. Its mandate of issuing 'prior formalopinions' on all fundamental project matters improved the implementation transparency of the project.But, handicapped by the above mentioned financial constraints, the improved management frameworkfailed to demonstrate its effectiveness.

Institutional framework

17. Establishing appropriate mechanisms for monitoring the efficiency and performance improvementplans of the sector utilities on an accrued basis had proven to be a historically intractable long termproblem. Under the adjustment prograrn the Government had approved the establishment of a MonitoringCommittee for the Power Sector (MCPS) to be comprised of top representatives of the MME, MHCP,and DNP. Reporting to MME and with the technical support of FEN, the MCPS was to monitor thebudget execution, financial operations and yearly expenditure allowances of the power utilities.

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18. In particular, the MCPS was to monitor compliance with all the targets of the adjustment programthrough an ad-hoc monitoring system negotiated to be in place by December 31, 1987. Before Boardpresentation, this date was renegotiated to March 31, 1988. Lack of compliance with this key conditionwas the main cause for amending the loan agreement to enable loan effectiveness to take place just beforethe due date of June 16, 1988. The new amended date of September 30, 1988 was complied with,although the system did not become fully operational until April 1989. By Supreme Decree of June 21,1989, the status of the MCPS was upgraded and its name changed to Superior Council of the PowerSector (SCPS) to enhance its effectiveness and carrying out increasing monitoring responsibilities.

19. Once the MCPS was properly staffed and equipped, it begun producing the much awaitedreports assessing progress and the true extent of the adjustment program. In its first report of July 30,1988, the MCPS, underlining the extreme complexity of what was supposed to be a quick disbursingadjustment operation, identified over 130 conditions relating to the covenanted targets of the PSAL.Based on this report and using relevance indices and probability weights the Bank made, for the firsttime, a reality check on this adjustment operation (Part III, Table 6). It concluded that the PSAL'schances of success under normal conditions were only 75%1. This prognosis proved to be fairlyaccurate. In September 1990, when the Government decided to cancel the last tranche of the PSAL,accumulated disbursements had reached 75% of the original amount of the loan.

20. At the end of 1990, the frequency, quality and timeliness of the financial and operationalinformation of sector utilities remained largely similar to their 1987 status. In the absence of anevaluation study It is difficult to assess the extent in which the PSAL's goal of strengthening the overallmonitoring system of the sector was met. The goal of monitoring the PSAL targets, particularly of theelectricity loss and accounts-receivable reduction programs, were partially met by the MCPS/SCPS. Itis also acknowledged that the MCPS/SCPS brought about a significant improvement in sectorcoordination, institutional dialogue, follow up of key operational and commercial individual andconsolidated sector performance indicators, and a greater awareness of the weaknesses of the sectorregulatory framework. One lesson evolves. If the SCPS and the monitoring system had been createdmuch earlier in the preparation phase (a condition of preappraisal perhaps) the design, targets rationale,overall ownership and implementation of the PSAL would have been significantly improved.

Utility manazement

21. ICEL and CORELCA. The Adjustment Program included (a) the definition of the long termpolicies and institutional settings of the ICEL and CORELCA groups; and (b) the rehabilitation of themanagement and finances of ICEL and CORELCA (as parent companies) and of its 22 subsidiary utilities.Based on strategic and management studies, action plans were to be defined and implemented in asatisfactory manner. Also, the Government was to make equity contributions of US$240 million to thesetwo groups.

22. Through a considerable effort made by the Government, sector agencies, and the Bank, threeconsultant groups carried out the studies and defined the action plans largely on time. The Banksupervision team, based on estimates contained in progress reports, indicated that satisfactory progresswas being achieved before the disbursement of the second tranche. Similar satisfactory progress wasreported prior to the disbursement of the third tranche. Yet, the final operational and financial results(ANNEX 2) indicate that most of the management and financial rehabilitation goals and targets were notmet. Equity contributions of only US$197 million were made by the Government instead of the US$240

1. Back-to-office report, October 6, 1988.

72ANNEX 5

Page 5 of 21

million2. Furthermore, the long term policies for ICEL and CORELCA were not formally defined bythe Government, even though the strategic study on long term policies was timely completed anddelivered to the Bank in January 1988. The study recommendations on integration of markets and needto reform the ownership structure of the utilities, while largely subscribed by the Govermment, could notbe formalized because such action required regional consensus (MME's letter of January 18, 1988).Also, important productivity targets were not met. For instance, ICEL's work force, agreed to remainfrozen, increased by 1,450 (18%) during 1987-90. Tables 5.3 and 5.4, summarize the level ofcompliance with the rehabilitation action plans of the ICEL and CORELCA groups and of itselectrificadoras as reported by the supervision missions of the Bank.

23. Ea's acute and deteriorating management and financial problems were a source of deep concernto the Government and multilateral institutions. The statutory municipal control of EEB's corporateactivities, and ensuing low level of management discretion were regarded as the major hurdles to solvingEEB's overall problems. The Adjustment Program therefore included a comprehensive corporate studyto help identify acceptable solutions to the Government and municipality. Based on the study'srecommendations a management improvement action plan to be submitted by December 31, 1988, becamea condition for the PSAL's third tranche.

24. A management change in mid 1988, introduced initial delays in the implementation of EEB'sprogram. The new management, however, with the help of a hands-on management consultant introducedsome effective changes, such as the creation of a Commercial Division and Internal Control Groups. ButEEB's own financial problems, compounded many times over by those of GUAVIO, proved once againoverwhelming, even to the new and capable management team because it lacked the minimum autonomyrequired to overcome them.

25. Eventually, EEB contracted two corporate management studies: one with Electricite de France(EdF) under the on-going 2634-CO Distribution loan from the Bank, to provide long term structuralsolutions; and the other, under the PSAL, with and individual consultant to define an action plan toimplement immediate management solutions. After considerable delay, the studies were ready in mid-1990. EdF's main recommendation, that full corporate and budgetary independence be given to EEB'smanagement, was not implemented. The action plan for short term solutions was delivered to the Bankin October 1990, after the cancellation of the PSAL's third tranche.

26. The small, though visible, management improvement that took place in EEB was deemedsatisfactory by the Bank before disbursement of the second tranche of the PSAL. On this basis the datedcovenant relating to the presentation of the management studies was waived until mid-1990. Prior to thethird tranche, the presentation of the EdF study was also regarded as satisfactory progress although asatisfactory action plan to implement the study recommendations, nor the action plan for the immediatemanagement solutions had been presented to the Bank.

27. The important PSAIPgoal of improving EEB's management was not met. This conclusion stemsfrom EEB's deplorable financial and operational results and poor performance under most on-goingprograms during 1987-90. Substantial under-performance by EEB led to the partial suspension of loan2634-CO in October 1991, and became the principal obstacle in mobilizing existing and new funds fromthe multilateral institutions to the sector.

2. FEN's report of February 16, 1994.

73ANNEX 5

Page 6 of 21

Electricity losse

28. Since 1976, consolidated electricity losses had soared from 17% to 24% in 1987. At some ofthe individual utilities losses were as high as 40% (Narifio). The largest contributors to the high losseswere EEB, and the electrificadoras of CORELCA and ICEL. Losses in the EPM and CVC systems hadalso increased to unacceptable levels topping the 20% mark. Through the adjustment program, theGovernmnent wanted to ensure the implementation of the various loss reducAtion programs covenanted withthe utilities under loans 2634-CO from the Bank to EEB US$150 million) and 237/IC-CO from IDB toCORELCA, ICEL and CVC (US$80 million) through FEN.

29. At the time of negotiations of the PSAL in October 1987, the existing loss reduction programswere already over 20 and 15 months late in EEB and the rest of the sector respectively. Yet, the targetsof the original programs were replicated under the PSAL, ostensibly: without an in depth evaluation oftheir technical validity and political rationale; and, in an unusual complication for an adjustmentoperation, the targets were agreed on an individual basis for EEB, EPM, CVC and ISA, and only as agroup for the utilities of ICEL and CORELCA. The agreed targets became conditions for the secondand third tranches of the PSAL.

30. The first supervision mission of March 1988, and the first progress report prepared by the MCPSin July 1988 took exception at the covenanted targets. In the case of EEB, they were clearly overoptimistic; losses were to decrease from a theoretical 24.6% in 1987 (26% real) down to 16% in 1990.Whereas in the case of EPM CORELCA and ICEL, the targets were too soft. After a reassessment ofthe program at each utility, the Bank agreed to amend the targets to more realistic values prior to thedisbursement of the second tranche.

31. Table 5.5 and Graphs 5.1 through 5.6 show the original and arnended targets, together with themonthly evolution of the program during end-1988-90 At September 1990, except for EEB, compliancewith all the individual targets were regarded as satisfactory by the Bank. Both CORELCA and ICEL hadexceeded their targets by 6% and 0.5% respectively; EPM and CVC were under by less than 5%; andEEB was nearly 17% under.

32. It could be argued that the loss targets should have been properly evaluated before the negotiationof the PSAL. However, the renegotiation of the targets prior to the disbursement of the second tranchewould indicate that the contracting parties, to avoid undue processing delays of the loan, were amenableto revise mutually agreed targets for those that proved unrealistic during the implementation of the PSAL.

33. EEB was unable to comply with the renegotiated targets because of lack of institutionalcommitment and management weaknesses (para. 27). EEB's compliance was also affected by aprocurement problem, outside its control, in the purchase of 100,000 electricity meters from a Rumanianfirm.

34. Even considering that US$80 million from IDB supporting the loss reduction programs of ICELand CORELCA remained undisbursed during the implementation of the PSAL, the rapid reduction oflosses experienced by the CORELCA and ICEL groups (graphs 5.5 and 5.6) is not unusual.Govermnent-owned utilities operating with soft-budget constraints, selling a substantial amount of powerto other non-private regional or Government-owned consumers (water companies, public lighting, publicbuildings) who do not pay their electric bills, find it cost-effective to stop billing this type ofconsumption. Such a policy has the effect of showing larger electricity losses and smaller accounts-receivable in their financial statements than is really the case. Conversely, as soon as they resumebillings, the corresponding unaccounted-for electricity is statistically recovered, energy losses aresuddenly reduced, and accounts-receivable increased. It is believed that this phenomenon together with


the reported actual measures to reduce losses are responsible for the rapid improvements shown. Oncethe reported results of the PSAL are technically and financially audited, it would be possible to ascertainthe actual performance of each utility.

Ecological and social aspects

35. See Annexes 3 and 4.

Financial adiustment program

36. See Annex 2.

5ANNX 575 Page 7 of 20

1 TABLE 5.12 Comparative Investment Program3 (Current USS miLLion)4 ---------------------...............................56 Adjustment Plan 1/ 1987 1988 1989 1990 1987-19907 ------------------ .... .... .... .... ---------8 E E B 197.5 213.9 177.1 127.3 715.89 E P N 86.2 131.6 78.8 33.9 330.5

10 C V C 7.5 16.7 16.1 10.7 51.011 I C E L 40.1 38.5 59.5 55.6 193.712 ICEL Subsidiaries 19.8 29.9 34.9 36.6 121.213 C O R E L C A 48.7 16.3 33.1 47.3 145.414 CORELCA Subsidiaries 15.0 17.6 23.8 24.9 81.315 C N B 31.8 0.0 0.0 0.0 31.816 I S A 55.5 84.3 121.7 84.0 345.517 FUTURE GENERATION 0.0 1.0 4.1 42.6 47.71819 Total (accrued basis) 502.1 549.8 549.1 462.9 2063.92021 Actual Investment (unaudited figures)22 -------2.........23 E E S 183.0 203.8 119.3 219.4 725.524 E P N 70.6 61.0 50.9 76.2 258.725 C V C 9.7 10.7 25.8 15.2 61.426 I C E L 31.9 31.7 7.3 24.9 95.927 ICEL Subsidiaries 54.1 69.2 63.2 38.6 225.228 C O R E L C A 15.5 35.1 19.4 26.0 96.029 CORELCA Subsidiaries 21.1 25.6 15.8 12.1 74.730 C H B 32.9 40.4 7.2 20.2 100.731 1 S A 31.8 46.9 49.7 21.1 149.532 FUTURE GENERATION 0.0 0.0 0.0 0.0 0.03334 Total (cash basis) 450.7 524.3 358.7 453.8 1787.635 Est. unpaid accruals 75.3 109.7 116.3 13.2 314.43637 TotaL (accrued basis) 526.0 634.0 475.0 467.0 2102.0383940 Actual vs Planned 2/41 ----- . -42 E E B -14.5 -10.1 -57.8 92.1 9.743 E P N -15.6 -70.6 -27.9 42.3 -71.8 3/44 C V C 2.2 -6.0 9.7 4.5 10.445 I C E L -8.2 -6.8 -52.2 -30.7 -97.8 3/46 ICEL Subsidiaries 34.3 39.3 28.3 2.0 104.047 C O R E L C A -33.2 18.8 -13.7 -21.3 -49.4 3/48 CORELCA Subsidiaries 6.1 8.0 -8.0 -12.8 -6.6 3/49 C N B 1.1 40.4 7.2 20.2 68.950 I S A -23.7 -37.4 -72.0 -62.9 -196.0 3/51 FUTURE GENERATION 0.0 -1.0 -4.1 -42.6 -47.75253 Variation (cash basis) -51.4 -25.5 -190.4 -9.1 -276.354 Variation (accrued basis) 23.9 84.2 -74.1 4.1 38.1555657 1/ Report P-4676-CO, Recomwndation to the Executive Directors,58 Novefber 1987. (Attachment 5)5960 2/ Since most of the inordinate increase In estimated payables to61 contractors can be attributed to EEG, the results for the other62 utilities reflect accrued differences fairly closely6364 3/ These shortfaLLs refLect delays in transmission and distribution65 investments caused mainly by the deLay of both the USS300 million66 loan from the JEXIMBANK, and the USS80 miLLion loan from IDB (see67 annex text pare. 9)6869 26-Jan-9470 FiLe:ANXSTSL3.WK1

76 ANNEX 5FAL9 8 of 20

1 TABLE 5.22 Guavio Hydroelectric Project3 Coqmarative Financing Plans Until conpletion4 (Current USS million)

6 Real b/7 accumul PSAL - Tfe Slice TOTAL8 tilL \- ------------------------- s Ince Grand9 1986 1987 1988 1989 1990 1991 1992 1993 1987 TOTAL10 ....... ....... ........................... ..........................11 AS FORECAST UNDER THE PSAL '/12 Shareholders' contributions 43.9 74.6 77.1 71.0 77.4 51.2 0.0 395.213 ExIsting looa 141.6 70.7 21.3 18.1 16.8 24.9 0.0 293.414 Future loans secured 5.5 15.0 23.8 19.0 8.1 0.0 0.0 71.415 EEB own funds 23.1 75.2 75.5 35.1 40.7 6.0 0.0 255.61617 Total Investment 1036.5 214.1 235.5 197.7 143.2 143.0 82.1 0.0 1015.6 2052.1 bl18 Accum. yeerly investment 1036.5 1250.6 1486.1 1683.8 1827.0 1970.0 2052.1 2052.11920 AS FORECAST IN NOV/1991 bf21 Real accumulated investment till 1990 1697.822 Forecast investments till completion 343.3 317.2 103.7 764.2 2462.023 Accum. yearly investment 1697.8 2041.1 2358.3 2462.02425 DIFFERENCES IN ACCUltLATED INVESTMENTS -129.2 71.1 306.2 409.9

27 SOURCES:28 a/ Report P-4676-CO, Recommendation to the Executive Directors29 November 1987 (Attachment 2)3031 b/ 10 preappraisal estimate - Completion loan for GUAVIO - Perfil III (CO-215a)3233 03-Feb-9434 File: 2889\report\AN5-tb52.wkl

Page I of 3TABLE 5.3: ICEL ACTION PLAN

REPORTEDENTITY COMPUANCE

POLICY AREA OBJECTIVE ACTIONS DATES RESPONSEBLE YEStNO COMMENTS

A. Institutional Define long-term policy Prepare baaic document December 31, 19S7 MME, Deparamentos Yec Study completed but lack of regionaland institutional setting of defining Govwemment consenwuc prevented Govermnrentthe ICEL group objectives for the ICEL formal definition of LT policies.

group

hnprove mat gemet Prepare managenent Ready October 31, 19SS ICEL and Yes Studies were carried out but keyperformance imnproventent action plan, (elect.) and February 21, Electrificadoras, performance targets were not met.

including: 19S9 (ICEL) consultants monitoring ICEL study scnt to Bank in Ian/90.

* perfomnance by DNP, MMEindicators (aee notebelcow)* infornstion systcms

B. Financial Inprove financial situation a) review block tariffs Yearly, in Jauaery DNPIISA/ICEL Yesthrough rate incremaae uad between ISA, ICEL and ELECTRIFICADORASrestructuring electrificadoms.

b) tudy and aply ocial Strt Dec. 1, 19S7 Yeastratification criteria in End Dec. 30, 19U Ekctrificadoasamnin cities.

c) check tatff kvels Every year (June) JNT, DNP Yes

compared with Rcs. 0S6and LRMC kvels.

Recover accounts a) from private ector: Start Feb. 1, 1918 ICEUElectjificadorms Yesreceivable to improvefinancial situation 0 Publicity campaign

* Increase crews for Start Dec. 1, 19S7 Electificadoras Yesdisconnecting delayedconsumwers* Discontinue special Start Dec. 1, 19S7 ICEUElectrificadoras Yesrates (pumping) todelayed consumers* Tentative joint billing Start Dec. I, 1917 ICELJElectrificadoras Yec Where feasiblefor pouwcr tnd telephoneconsuners in selectedarea"

b) from public ecCtOt:

* through combined Started in Sept. 1987. MME/MHCP Yes Ameara at Dec./t6 were settled butaction of MHCP, New *cnt,um when I k- II #,. *.urmrn arrears continued toDepartamentls and ne,casery I ,. .'=,. . st *s,un ltaetMuna.,:p"" it g %t

ReItu-lu, W3 t241

of 3TABLE 5.3: ICEL. ACI1ON PLAN

ENThrY COMPIJANCEPOLUcY AREA O ACK1OtIS DAMES RUSPONSIBL: YEslNO -MEN13

Se,curc mure for rw a) cere RBWl Start Feb. 1, 19M StS (Dep namen(o Yeinvcamcus Elecuiagilo StsNy tgaialors)

b) capkarb Depends a bic Depa _o, Yes SPN fepors do not D w "eciSc daue.seijadoress Soqgh document. Sea A abore. -ci- (ICEL) to estimate Cosyomapa.

Improve raw. basn c) iacorpoee asst buik Star Jan. . 191 ICEL/lectuificadoras Yesby nsew rubcribe aspiuvde per Dec. 2545.

C. Eectric L1aws Coedml Reduce thef and tchnical a) incease inflahtion of Start Jan. 1, 191 Electificadoas Yeslosse meters n seiected aras

b) discontinue the Start Jan. 1, 1987 Electriucadoras Yes*esimoted biliang ayim

c) gBMW efficiency in Stott Jan. 1, 19 Electrificadoi Yesappyitg saiom forfrmAuleti eomcAioi s Co

d) legliz etimivq Saft Jsn. 1, 191 Elecr a Yescou.ewtioaa in low

a) iscra pesdoe to St Js. 1, 19" Eleeil_cadom Yerasnibeg tanA reductionand desectioa of

I) inylmeti rdedcdau Racduc, loane waccdims to Elecinicadosas yea_ _ _ _ _ _ Plogr I eaofblided yeady targets

0

O tn

Ue

of 3TABLE 5.3: ICEL ACMION PLAN

-NTrY COMMUCEPOLICY AEA BJE VE ACIONS DATES l E!PONSIBLE YES/NO COMMEN7S

D. InveImcnt Poicy Ratiosmlizatis of Review annually ICEL's Sauit Jan. 1, 19SS, vith ICEL, MME, DNP Yeiaveitmedu invesmAct progrm for anual revisioo of the Electrikicadoras

the next four years. iurememt program.

E. Other FreeA adinidraliv No peronne admniiom From 1931 to 1990 ICELElectifcadotas. No According lo 'CosrAct Plan' ageedexpe_a in raw lerem for the group as a whole Monitored by with FEN, tarses were not nat.

oei adio MME/DNP. Personnel increaewd by 1,454 (Il%).

Impng,rate base Exam criteria for th san ia. 1, I 98 ICEL, Coaslants Yeure_ouatio of fixed Ekctrificadsand iaveniorie

Electricity aving Publicity campaign for Stait Jan. 19U ICEUElectrificadors Yea Performance tarssc wemt onlyaving pouer partialy met.

Now; The Pcrfomnee iodicaor for be WM sW aI s folbwing: (aD taknfrom 'Pnogma dc Recuperuo. F_ianciers, dc ItR hn Finl, M. RsmieGomw4 ftog, Ago 1917) ( -Note; TMe nioring sysem of energy loes and acaounts receivble becamc scd4fctomy In April 1989. The

onitoring of tariffs by he JNT vsI also astialctory but that of accounts pssbk and finsacial performance weorTamr Cuadr 2.3.2 pae40 :o(.jE6gy _ n. Custodo 2,3.3 p 42Accauts receible Ctadto 23.4 pa 46Aots payb Cuadro 234 and 23.6g 45 iwd 49Fincbal i_tox cn CuWro 2.5.1 pWge 122-125

Tbe cioica VlW be revieweder lb. rvesoip of the 19t7-9°O c:._-IlvstmenPn,g -.- ' ..... ,

Faik ANS-Th53

0

tO

I.)

O w

Page I of 4TABLE 5.4: CORELCA - ACTION PLAN

REPORTEDENTTTY RESPONSfBLE COMPLIANCE

POUCY AREA ORJECTIVE ACTIONS DATES YES/NO COMMENTS

A lnslitutional Define long-term policy Prepare basic document December 31. 1987 MME Yes Studies completed but lack ofand institutional seling for defining Govemmeni and regional consensus prevented

the Atlantic coast regional objectives for Govemment formal definition ofelectrificalion CORELCA and its LT policies.

clectriticadoras

Improve nanagement Prepare management Ready October 31. 19118 CORELCA and Yes Studies were ca rried out but key

performance improvement action plan, (elect.) and February 2t. Electrificadorasl performance targets were not met.including: 1989 (CORELCA) consultanis Monitoring by CORELCA study sent to Bank in

* performance DNP. MME Jan/90.

indicators* (see notebeiow) 3o* information systems 0

B. Financial Imnprive financial situation a) review block tariffs Yearly in June INT/ISA/CORELCA Yes

through rate increases and between ISA, CORELCA ELECTRIFICADORASrestfucturing and clectrificadoras.

b) study and apply ocial Start Dec. 1, 1987 Electrificadoras Yesstratification criteria in End Dec. 30, 1988main cities.

c) check tariff levels Every year (June) JNT, DNP Yescompared witb Res. 0U6and LRMC levels.

Po

H,a

XNO tn

of 4TABLE 5.4: CORELCA - ACTION PLAN

REPORTEDENTrlrY RESPONSIBLE COMPLUNCE

POLICY AREA OBJECTVE ACTIONS DATES YES/NO COMMENTS

Recover ccounts a) rorm private sector: Stan Feb. 1, 198S CORELCA/Electrificadorac Yesreceivable to inprovefinancial itutfion 0 Publicity campaign

* Increase crews for Stan Dec. 1. 1987 Electrificadoras Yesdisconnecting delayedconsumers

* Discodinue pecial Stan Dec. 1. 1987 CORELCA/Eiectrificadoras Yesratee (pumping) todelayed consumers

* Tentaive joint billing Stan Dec. I 1987 CORELCA/Electnlicadousr Yes Where applicabkfor power and tekphone Goconsumers in selctedareas

b) from public sector:

* through comnbined Staned in Sept. 1987. MME/MHCP Prian Armarn at Dec./36 were settedaction of MHCP, New actions when lectrificadors but current arfears continued toDepananentos and necessary Depanamentos and accurubateMunicipios (e.g., MunicipiosResolution 03324)

Secure resources for new a) create Rural Stan Feb. 1, 198S State (Depanumentos Yesinveitnernt Electrification Stamp legislators)

b) capitalize Depends on basic Depanamentos, nunicipioselctrificadores through document. See A above. (CORELCA)depaanmentos ansnunicipalities

Improve ate baae c) incorpornte asuets built Stan Jan. 1, 1988 CORELCA/Electrificadora Yeaby new subscribers asprovided per Dec. 2545. __

out

of 4TABLE 5.4: CORELCA - ACTION PLAN

ENTITY RESPONSIBLE CObMPIPACPOUCY AREA OBECllVE ACTIONS DATES YESMNO COMMEN7S

C. Electrkc LoAes Conrl Reduce the sd tea hnical a) iumcee iallwtmon of Stan Oct. I 1987 Ekhieficadoraslbssec eterst in elected areas

b) dicodtinue the Stan Oct 1, 1987 Electrificadoras Yee

estiwAled billing sysetm

..) greater efficiency in Stan Jan. 1. 1988 Electrificadorasapplying sanctions forfraudulkn connections

d) legalize existing Stan Jan. 1. 19U Electrificadtiras Yea

cwoectiona in lowincae *reas

e) increase penonnel to Start Oct. 1, 19S1 Electrireadoras Yea

monitor theft reductionand detection offraudukn mneters

f) in nktent loss Reduce losses ccording to Electrificadorss Yesreduction progam established yeady targets

g) iniplementationof January 19S8 Ekectnficadurspublic trtaaoners' for

low income constuners in

sceleted areas

D. Investmndt Pdlicy Rationalization of Review annually the Yeady in January CORELCA, DNP, MME Yea

investmeai Cot AdtsteicainvesIment program kwrthe next four years.

PC%)

0 i

maPtU

xsu

of 4TABLE 5.4: CORELCA - ACrION PLAN

- ENTrrK Y REPONSIBLE COMPLANesPOUJCY AR:A ACiIMIO A2f..NS YFS.NDAO: - II

r. Other Elimiase prce didoctio Ratio.elize fid subsidy Define plan for MME(gas) to CORELCA inpliemnatioo in Msrch

_ ~~~~~~~~~~~ss

Coayly with loan 1999-CO Inpl_awiEt rvalado of Stan Nov. 1, 19t7 CORELCA, Cona Yealxed astrs ad End Dec. 31, 19U Electrificadocasinventories

Electricity aivug Pubficity canpaign for Sti Jan. 19u CORELCA/Electihcadoms yes Perfonmae targets wPr onlyaaving P-er partially mat.co"aiupon

Note Th.X . . w ;; i :Baana:0: i0.do:m:ac 1.dceie0o Iani: CO.LC pom .t-: Ibon i 0 Uai'PI4snde Rseuperacima Phacieea del Sigama cO;0012 Pase II (Metasy (Noe The uu.Jtaring aseo ot*aer-y losses sad acounuis receivable rm hiactory in Apnil 1989. Te co

~o.mpdnc~an.MOMq No. 2.9' 112.151 MIA40 ~21. Thee040**w b o*tq(ad.yu.INwsaacaiacoWMy bu th5 tof acqtxzps pybl and fijuncias p rfotianc. werereviewed tSar the r vi of she 1937-90 Seotogof Jaawy Wm ed w aso s nitap

File ANS-1BS4

Pu

.

OIJi

84 ANNEX 5

1 TABLE 5.5 Page 16 of 202 Reults of the Etectricity Loss Reduction Program3 Energy Lost/Energy generated (%)

456 OriginaL Targets 1/ 1986 1987 1988 1989 1990 1987-19907-8 E E B 24.7 24.6 21.0 18.0 16.0 -8.79 E P M 21.2 21.2 21.2 20.6 20.1 -1.110 C V C 17.7 17.7 17.7 17.4 17.0 -0.711 I C E L 24.0 24.0 24.0 23.3 22.7 -1.312 C O R E L C A 23.1 23.1 23.1 22.6 22.1 -1.013 1 S A 1.7 1.6 1.7 1.7 1.7 0.01415 TOTAL SYSTEM 23.9 23.8 23.0 21.9 21.1 -2.81617 Amended Targets18 ---------19 E E B 24.8 22.0 19.0 -5.720 E P M 20.2 18.5 18.0 -3.221 C V C 20.8 19.0 18.5 0.822 I C E L 24.2 22.7 21.5 -2.523 C 0 R E L C A 23.6 22.0 20.6 -2.524 I S A 1.7 1.7 1.7 0.02526 TOTAL SYSTEM 24.4 22.7 21.3 -2.6272829 Actual Losses 2/30 ------31 E E B 24.7 26.0 24.8 22.3 22.8 -1.932 E P M 21.6 19.1 20.2 19.6 18.5 -3.133 c V C 17.6 19.2 20.8 21.0 19.3 1.734 1 C E L 25.2 25.2 24.2 21.8 20.3 -4.935 C O R E L C A 22.9 23.7 23.6 22.3 20.5 -2.436 1 S A 1.7 1.6 1.7 1.7 1.7 0.03738 TOTAL SYSTEM 23.8 24.0 24.4 23.0 21.7 -2.1394041 CompLiance with originaL targets 3/42 -----43 E E 8 94.6% 84.7% 80.7% 70.2%44 E P N 111.0% 105.0% 105.1% 108.6%45 C V C 92.2% 85.1% 82.9% 88.1%46 1 C E L 95.2% 99.2% 106.9% 111.8%47 C 0 R E L C A 97.5% 97.9% 101.3% 107.8%48 1 S A 100.0% 100.0% 100.0% 100.0%'950 TOTAL SYSTEM 99.2% 94.3% 95.2% 97.2%515253 Comptiance with amended targets 2/54 ---55 E E B 100.0% 98.7% 83.3%56 E P M 100.0% 94.4% 97.3%57 C V C 100.0% 90.5% 95.9%58 I C E L 100.0% 104.1% 105.9%59 C 0 R E L C A 100.0% 98.7% 100.5%60 I S A 100.0% 100.0% 100.0%6162 TOTAL SYSTEM 100.0% 98.7% 98.2%636465 1/ Report P-4676-CO, Recoemendation to the Executive Directors,66 November 1987. (Attachment 3)6768 2/ Progress report, Superior CounciL of the Power Sector (SCPS)6970 3/ Relation between Targets and ActuaL Losses.7172 26-Jan-947374 FfLe:ANX5TBL3.WK1

I IfLJ -vn--- UUN3W *-.-- 1VNIDI?1O_

066T laqTuoa(l - 886T ,-q-uIaoa

a l l l l l f l l IN a f a l l l l l l -IZxa

' . ...... '... '. '' ' ... .. .. .. .. .. .. .....'.' . .. ..' ' ' ' .. .. .. .. ... .... ... .... ... .. ... .. .. ..

.......... - _.-.5.£Z

................................... ........ ............ ......... ..... ........ .- t

SHSSOrl ADUHNH rivi1 INHISAS

OZ 3° LT s6edS XSNNV SR


Graph 5.2

EEB'S ENERGY LOSSES

25 -

24-

23

22

21i

20

1 9

18

17

D23 MAMJ 0 N D J_ F M

December 1988 - December 1990

ORIGINAL -AMENDED ACTUAL


Graph 5.3

EPM'S ENERGY LOSSES

D215 S -ORINAL |AME -- AM NAL

2 1 .. . ... .. - . . . . . . . . . . .. . ... '

2 0 .5 - . ...... ......... ..-

2 0 - . .... .... ............ .......... ..... . . . . ........ ...........

19~~~~~~~~~~~~~~. 5 ...... -.' ...... ......... - ... .

D J F M A M J J A S 0 N D J F M A M J J A S 0 N D


Graph 5.4

CVC's ENERGY LOSSES

24

2 1 , ... .. ... ...... .. . . .. _._._. .. ... .... ....... .. ........ . . . . . . .. ....

1 8 - - I . .. . .... ... .. . .. ..I .. .

17D J F M A M J J A S 0 N D J FMA M J A S ND



Graph 5.5

CORELCAts GROUP ENERGY LOSSES

7V.

24

23 .=

22 ... .... .. ... .

21 ... . . . _ . . .. ........__.__

|_ ORIGNAL - AMENDED -) ACTUALA

D J F M A M J A S O N D J F M A M J J A S O N


Graph 5.6

ICEL's GROUP ENERGY LOSSES7.

D J F M A M J J A S O N D J F M A M J J A S O N D


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