Report No. PID6229 Project Name Colombia-Private Infrastructure (@) Financing Facility Region Latin America and the Caribbean Sector Privatization Project ID COPE52681 Borrower BANCOLDEX Guarantor Republic of Colombia Implementing Agencies BANCOLDEX Date PID Prepared March 12, 1998 Project Appraisal Date April, 1998 Project Board Date December, 1998 (actual date depends on demand for the Foreign Refinancing Commitment offered by BANCOLDEX) Background: The Project was conceived and designed to support private sector participation in key infrastructure sectors where markets alone cannot guarantee economic supplies and where Government support is required. This applies to sectors which involve externalities or public goods, such as roads, where tolls charged directly to users may not cover the full cost of the service. It was also conceived as a transitional measure to encourage long-term financing through market-driven mechanisms where sufficient private support is not likely to be forthcoming due to uncertainty regarding Government commitments and future market conditions. This section provides a general overview of issues related to private sector participation in infrastructure projects in Colombia and a review of specific sectors to identify where the Project's instruments would be demanded. Past Performance and Issues Colombia has implemented an "Economic Modernization Program" to improve resource allocation by attracting private sector investment in infrastructure [energy, water supply, sanitation and sewerage, public works (roads and major works for irrigation and drainage), and other transport sectors (railways, urban transport, ports, waterways and airports)], whilst concentrating state resources in social subsectors. A number of laws passed between 1993 and 1995 explicitly support this policy in the transport, energy, telecommunications, and water and sanitation subsectors. Regulatory commissions for energy, telecommunications and water and sanitation have been operating since 1994. Initial results for the implementation of these policies has been successful as evidenced by over 25 private developments in roads, ports, power generation, oil and gas pipelines and cellular telephony. These projects have mobilized over $3 billion, one third of which has come from international bond markets. The Government's target for 1994-98 was to develop infrastructure which would require financial resources amounting to US$32 billion; 40- of this amount was expected to come from the private sector. The principal issues regarding the feasibility of this program are: - Public goods, as in the case of road projects, where economic pricing may not recover project costs, and externalities, as in the case of water supply and sanitation projects which justify undertaking them despite not always being attractive as purely private sector projects. - Government support for sectors where private participation has yet to take place will require public/private partnerships to attract private investors, as well as developing the institutional capacity at both the central and regional/municipal levels to implement the privatization and concession process. - Regulation: Government agencies, municipal authorities or regulatory commissions control the prices or tariffs for most infrastructure services; investor concerns center around the risk of not having timely price adjustments which were agreed at project inception. - Sponsor duties: contracts for infrastructure projects can include specific covenants with a Government agency which may not be honored or could be delayed; investors are likely to avoid funding projects where there may be concerns regarding the willingness and credibility of the authorities in complying with their commitments to a project on a timely basis, such as environmental permits and acquisition of rights of way. - Lumpy investments and large sunk costs which are often unavoidable, thereby creating a mismatch between capacity and demand, particularly during the first years of operation of a project. In these cases, the private sector can be brought in through public/private partnerships whereby the public sector provides revenue support during the initial "ramp up" period. - Lack of long-term financing: infrastructure projects are usually long-lived (over 20 years) but available financing rarely extends over 7 years (e.g. most projects to date in the transport subsector have been small and have been financed through debt with short term maturities of 5 to 7 years); projects therefore require periodic refinancing which may not be obtainable; this could turn away both investors and developers from projects which involve a risk of financial disruption. - Liquidity concerns associated with the desire of local investors to be able to sell debt instruments in a secondary market if they so require: such a market is not developed in Colombia and its absence could deter investors from expressing interest in funding infrastructure projects. - Colombia's Budget Law is inadequate for supporting risk sharing arrangements between the public and private sectors; the Bank has been assisting the Government in redesigning the budgeting procedure to take into account contingent liabilities and manage Government guarantees. A proposal for amending the Budget Law will soon be submitted to Congress. Project Description 1. Project development objectives: Improve the quantity and quality of infrastructure services in Colombia through - 2- private investment. Reduce Colombian Government exposure to risk through private financing, construction, and operation of infrastructure facilities. Encourage debt providers to extend maturities and improve the terms of debt financing, thus reducing the prices of infrastructure services. TABLE AVAILABLE IN THE INFOSHOP Project Implementation. Bancoldex will be responsible for implementation. Bancoldex will (i) disseminate information to potential bidders on the availability and general terms and conditions of the instruments, (ii) evaluate, structure and negotiate the terms and conditions of the instruments, (iii) service outstanding instruments including disbursements to project companies and collection from project sponsors, and (iv) manage the Facility's portfolio (e.g. resale of securities in case of an exercised put option). Project Sustainability. The Facility is not meant to be sustained indefinitely; the instruments are being provided because they are unavailable on the financial markets; once they become available on the market, the Facility will stop offering them and will shut down. Lessons Learned from Past Operation Country/Sector - Explicit Government support and commitment by word and action to private participation in infrastructure is critical. Mobilizing and sustaining private finance and private participation for long term projects requires an appropriate policy and regulatory framework. - Project design and pricing instruments need to be continually monitored and flexibly designed to accommodate unforeseen constraints and/or changes in market conditions. - The project will internalize the lessons from other projects, such as the Mexican toll road program where short concessions were partly motivated by a concern that only short-term financing would be available and resulted in high toll levels which held down road use. Program Objective Category. Privatization (PV) Environmental Aspects. Subprojects to be supported by the Loan will comply with all normal Bank requirements and guidelines. The Bank will review project tender documents and concession contracts, including the obligations related to resettlement and environmental protection to ensure that the subproject promote sustainable development. Based on the diagnosis of existing framework, the project's Environmental Assessment (EA) provides an Action Plan that recommends institutional responsibilities for environmental review of sub-projects supported by the Facility, sets out review procedures for the Facility, sectoral ministries, Ministry of Environment and other entities, defines any needed criteria for such reviews, and provides a set of good practices as guidance for concessionaires to follow during construction. The EA also recommends changes/ additions to the regulatory framework to fill any existing gaps, and measures for institutional strengthening. Implementation plan, sequence and budget for the Action Plan are also specified. In line with Bank guidelines, the Environmental Assessment, with the approval of the regions, will be made available to the Public Information Center and for public inspection in -3 - Colombia. It is expected that toll-road projects, sponsored by INVIAS, will be the first candidates for Facility support. The environmental management capacity in INVIAS has reached a high level of quality and ownership. The recently closed Third National Road Sector Project required and supported the strengthening of an Environmental Unit in the then existing Ministry of Public Works; this Unit was later transferred to INVIAS and placed at the highest hierarchical level as Sub-directorate for Environment and Social Affairs, with three Sub-units: environment, social and community affairs, and land acquisition. Through a 52-member multidisciplinary team of environmental engineers, ecologists, social scientists, regional planners, and lawyers, the work of the Unit has evolved from the simple preparation of environmental impact studies and management and control of construction impacts, to an integrated approach to road planning which includes indirect or induced impacts. The approach also includes social assessment of affected population and analysis of vulnerable populations as part of an adopted resettlement policy which includes social parameters in land assessments. At the same time, INVIAS has initiated a program o environmental enhancement and repair of past environmental liabilities of the road network (for instance, INVIAS is co-financing the recuperation of the Salamanca National Park whose mangrove was affected by road construction in the early 1960s). Right now, the Sub-directorate is working on the establishment of regional partnerships with relevant government and non-governmental organizations in order to integrate transportation corridors with regional sustainable development planning. INVIAS has also started a program of ISO 14000 certification. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending September 25, 1998. - 4 -