FIE, COY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FIE, COY RESTRICTED Report No. P-548 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA NACIONAL DE TELECOMUNICACIONES COLOMBIA May 24, 1967

2 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA NACIONAL DE TELECOIMUICACIONES (TELECOM) COLOMBIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$16 million to Empresa Nacional de Telecomunicaciones (TELECOM). PART I - HISTORICAL 2. After several years of discussions with the Bank commencing in 1963 and a number of appraisals, negotiations took place in June 1966 with the Government of Colombia and TELECOM for a Bank loan of US$23 million equivalent. At that time, it was agreed that presentation of the loan documentation for approval of the Bank's Executive Directors would be postponed until TELECOM had obtained authorization for and made effective certain tariff increases. The implementation of the new tariffs, together with a reduction of the external financing required and other changes in the expansion program originally proposed, made it necessary for TELECOM to revise and update its financial forecasts. This work was completed in January A final appraisal mission visited Colombia in February. 3. Renewed negotiations on the proposed loan took place in Washington on May 8-10, TEIECOM was represented by the Director-General, Dr. Francisco Lozano Valcarcel; the Government was represented by Dr. Jose Camacho. 4. The proposed Bank loan for the revised program would be US$16 million. This would bring the Bank's total lending to Colombia to US$h46 million, in addition to an IDA credit of US$19.5 million made in The status of previous Bank loans and the single IDA credit, as of April 30, 1967, is summarized below: Loan Amt. Credit (US$ Million) Year No. Borrower Purpose Bank IDA No. Undisbursed Loans fully disbursed Republic of Colombia Roads Republic of Colombia Roads Emp. de Medellin Power Emp. Electrica de Bogota Power CVC and CHIDRAL Power Electribol Power Ferrocarriles Nacionales Railways Paz del Rio Steel

3 -2- Loan Amt. Credit (US$ Million) Year No. Borrower Purpose Bank IDA No. Undisbursed 196L 369 Emp. de Medellin Banco de la Power Republica Industry Rep. of Colombia Agriculture L Total (less cancellations) of which has been repaid 86.5 Total now outstanding Amount sold 16.3 of which has been repaid Total now held by Bank and IDA 3L Total undisbursed Delays in disbursements have been experienced with Loan/Credit 295 Co/5 CO for highways which resulted in the Closing Date being twice extended. The present Closing Date is June 30,1967. The delays have largely been due to poor organization and to cumbersome legal and administrative procedures in the awarding and paying of contracts. The project was also adversely affected by delays in the provision of adequate local funds. However, in the past few months certain steps have been taken which are resulting in an improved administration and execution of the project. The Ministry of Public Works is undergoing reorganization and new senior personnel have been appointed; management consultants are being contracted to advise on organizational matters; a semi-autonomous National Highway Fund has also been established which has made possible the reduction in administrative delays, and which assures availability of local funds for highway construction and maintenance. 6. It is expected that in the near future a proposed loan of US$9 million to the Colombian Institute for Agrarian Reform for an irrigation project will be presented to the Executive Directors for approval. 7. IFC has made 18 investments and underwriting commitments in Colombia totalling US$15.3 million. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrower: Empresa Nacional de Telecomunicaciones (TELECOM). Guarantor: Republic of Colombia. Amount: The equivalent in various currencies of US$16 million.

4 Purpose: To finance most of the foreign exchange costs of the program to expand and improve the telephone, telex and telegraph facilities of TELECOM. Amortization: 20 years, including 4 years of grace; 3 4 semiannual repayments beginning on April 15, 1971 and ending on October 15, Interest Rate: 6 percent. Commitment Charge: 3/8 of 1 percent. PART III - THE PROJECT 9. An Appraisal of the Project (No. TO 529b) is attached. 10. There is an urgent need for the presently planned expansion of telecommunication facilities in Colombia. Colombia's telephone density of 2.4 telephones per 100 inhabitants may be compared with 5.9 for the entire world and 30 to 4 8 for the most highly developed countries. The existing national long-distance circuits are not sufficient to meet the demand for service. Since an analysis of calls shows that nearly 50 percent of the usage of long-distance telephone service is for the purposes of commerce and industry, it may reasonably be expected that the attainment of a satisfactory standard of service will be reflected in the increasingly efficient operation of private and government organizations. As for international service, it is estimated that the annual rate of growth in telephone use will be 20 percent in 1969 (when additional high frequency facilities come into operation), and 15 percent thereafter; and that telegraph traffic will increase at least 10 percent annually. 11. TELECOM is an autonomous government utility organized in The Minister of Communications is Chairman of the Board and all members of the Board are appointed by the President. The Director-General is the Chief Executive of TELECOM and is responsible for the day-to-day operations. With the assistance of its consultants, together with assistance of the German Bundespost and UNDP, TELECOM is expected to carry out its program satisfactorily. 12. The project proposed for Bank financing would principally consist of: A. Principal Long-Distance Telephone Systems: (i) microwave systems interconnecting principal cities; (ii) short coaxial and voice frequency cable systems; (iii) recovery and reinstallation of existing VHF radio equipment; (iv) carrier equipment; (v) toll switching equipment in 83 cities and towns.

5 - 4 - B. Increase in the long-distance circuits between the large capacity microwave system and the communities not served by it. C. New urban facilities. D. Interconnection facilities, mainly automatic equipment. E. Expansion of international service through the addition of five 30 kw high frequency radio transmitters and accompanying equipment. 13. The construction of facilities and installation of equipment is expected to be completed by the first quarter of The total cost of the Bank-financed program is estimated at US$27.6 million equivalent of which US$19.7 million would be in foreign exchange; US$16 million would be covered by the proposed Bank loan and US$3.7 million by supplier credits. Col.$128 million would be in local currency provided by the borrower. In addition, TELECOM is carrying out some routine works and works under outstanding contracts. They are considering the installation of a satellite ground station for which financing from other sources will be sought. Considering TELECOM's overall program during the next four years, 55 percent would be financed from borrowing and 45 percent from internal cash generation. During the negotiations, TELECOM agreed not to incur any debt unless its net revenue was 1.7 times the maximum debt service requirement. 1b. All contracts proposed for Bank financing are to be awarded on the basis of international competitive bidding. Because of the long delay since the original negotiations commenced some financing of past expenditures would be permitted but reimbursements would be limited to payments made within three months of the date of loan approval. 15. The financial results of TELECOM have not been satisfactory in recent years. Substantial tariff adjustments were made in 1965 but their effects were largely offset by increases in costs. However, an increase in domestic long distance tariffs by about 25 percent became effective in October In addition, international tariffs will be adjusted by October 1967 to give TELECOM the benefit of the capital market exchange rate of Col.$16.30 for 1US$. Therefore no further tariff adjustment is expected to be required in the near future. An undertaking was obtained during the negotiations that in the future, tariffs would be maintained at a level such as to produce a return of 9 percent on revalued net fixed assets in operation. On this basis TELECOM should be able to maintain a sound financial position. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and the Empresa Nacional de Telecomunicaciones and the draft Guarantee Agreement between the Republic of Colombia and the Bank as well as the report of the Committee provided

6 for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, are being distributed to the Executive Directors separately. 17. These draft Agreements conform to the general pattern of recent agreements for Telecommunications projects. PART V - THE ECONOMY 18. An economic report entitled "Current Economic Position and Prospects of Colombia" (WH-172a) is being circulated to the Executive Directors separately. 19. The report notes that since September 1965, and particularly since the assumption of office by the new Government in August 1966, economic policy improved appreciably. Persistent fiscal deficits were changed to surpluses in 1966, and the rate of expansion of money supply in 1966 was reduced considerably in comparison to that of the two previous years. After a long period in which the Government had been slow to adjust public utility tariffs, a more flexible policy in this respect was adopted in In the coffee sector, where the Government had previously been reluctant to reduce the domestic support price for coffee in line with the declining international price, a more realistic price policy was initiated in The new Government has given clear evidence of its intention to continue these policies and also to establish the sector policies required for the successful execution of the development program and the realization of its econcmic benefits. Noteworthy in this respect are the incentives for the production of basic foodstuffs already in operation; the eight-fold increase in the gasoline tax, which will, in addition to its fiscal impact, have the effect of permitting a more rational distribution of traffic among different modes of transportation; and the taking of the initial steps towards the interconnection of the major power producers. 20. The financial policies outlined above provide a basis for improving the management of the balance of payments, and in addition the Government has recently adopted measures of exchange rate and import policy directed towards this objective. Colombia's most critical economic problem has been and still is to reconcile her aspirations for accelerated economic development with the existence of a structural disequilibrium in the balance of payments, arising from a large dependence upon coffee exports. In the past, with the international price of coffee declining, export earnings could not finance the imports required to sustain a satisfactory rate of growth. Difficulties in managing the balance of payments have been chronic because of a tendency to maintain exchange rates that were overvalued in relation to the need to provide incentives for non-coffee exports, for petroleum investment, and to restrain the demand for imports. On March 22, 1967, the new Government has undertaken a reorientation of its balance of payments policy by means of Decree-Law 4I4. This Decree-Law created two principal exchange markets; one of them, the certificate market, has a fluctuating exchange rate to be determined by market forces with only limited intervention by the authorifties.

7 - 6 - Although in the first weeks of operation of the new system, exchange rate flexibility has been less than expected, a flexible exchange rate policy is something new in Colombia, and if managed properly, would for the first time provide a basis for encouraging the development of non-coffee sources of foreign exchange. 21. The service ratio on existing debt is estimated at 17 percent in If, as is now expected, the new balance of payments policies are successful in stimulating the development of non-coffee exports and taking account of the new borrowing planned for the period, this ratio would remain at about 17 percent through The Government has submitted to the Bank for distribution to the Consultative Group a project list requiring from US$300 to 350 million of new external commitments frcm the Bank and other members of the Group during the period from July 1967 to June The projects included in the list will become the heart of the development program that the Government is preparing. On the basis of the policy measures which have already been taken and in the expectation that the new exchange system will be managed so as to achieve the objective of making the external sector's prospects consistent with the development effort, Colombia merits full support in its external financing plans. Both external lenders and the Government will, however, wish to observe closely the degree of success in the critical effort to enlarge and diversify Colombia's sources of exchange earnings on which her longterm growth prospects rest. PART VI - COMPLIANCE WITH THE ARTICLES OF AGREEMENT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.

8 - 7 - PART VII - RECOMMENDATION 24. I recommend that the Executive Directors adopt the following resolution: RESOLVED: RESOLUTION NO. Approval of Loan to Empresa Nacional de Telecomunicaciones, in the amount of the equivalent of US$16,000,000 to be guaranteed by the Republic of Colombia. THAT the Bank shall grant a loan to Empresa Nacional de Telecomunicaciones, to be guaranteed by the Republic of Colombia, in an amount in various currencies equivalent to sixteen million United States dollars (US$16,000,000), to mature on and prior to October 15, 1987, to bear interest at the rate of six percent (6%) per annum, and to be upon such other terms and conditions as sball be substantially in accordance with the terms and conditions set forth in-the form of Loan Agreement (Telecommunications Project) between the Bank and Empresa Nacional de Telecomunicaciones, and the form of Guarantee Agreement (Telecommunications Project) between the Republic of Colombia and the Bank, which have been presented to this meeting. George D. Woods President Attachments By S. R. Cope Washington, D.C. Date: May 24, 1967