Kappa Project Kappa Energy Holdings (BVI) Limitied (Kappa), a holding company registered in the British Virgin Islands, holds oil and gas exploration companies, one of which is Kappa Energy Colombia Limited S.A. This company has been operating in Colombia since 1997 and holds exploration and production licenses. Its main production assets are the Abanico oil field in the Upper Magdalena Valley and the Cerrito gas field in the Catatumbo Basin near the city of Cucuta. Kappa has requested the IFC to provide a corporate revolving credit facility and the IFC is also considering an equity investment, which will provide the company with financing required to grow its operations. IFC is also working closely with Kappa to help the company develop best practices in corporate governance, environmental and social management systems. The World Bank Group''s current strategy in Colombia, as described in the Country Assistance Strategy (CAS) Progress Report dated September 9, 2005, proposes to support Colombias quest for peace through:     -  achieving fast and sustainable growth;    -  sharing the fruits of growth; and    -  building efficient, accountable and transparent governance.     The World Bank assistance has been centered on development policy loans to support the governments reform agenda in the fiscal, financial, environmental and social sectors. Complementing this, the World Bank has also provided investment lending and grants in education, water, transportation infrastructure, rural development, renewable energy, urban services, assistance for forcibly displaced populations, and environment and natural resource management.     IFC support includes:     -  the strengthening and deepening of financial sector institutions and local financial markets;    -  the development of infrastructure, including potential public-private partnerships and support to sub-national entities in the provision of infrastructure, in coordination with the Bank as warranted;    -  investment in extractive industries; and    -  the modernization of Colombian businesses to help improve their competitiveness and support their expansion both domestically and abroad.     IFCs strategy for oil and gas aims to support local medium sized companies via equity and long term financing, while assuring that the projects meet high environmental, social, governance and transparency standards.    Project Development Impact:    The project will support the continuing development and growth of one of the few local companies with a presence in the Colombian oil and gas industry, where multinationals such as BP, Occidental and Petrobras, as well as Ecopetrol, the state owned oil and gas company,  currently dominate the oil and gas sector. Through the exploration and development of its existing licenses and acquisition of additional acreage, Kappa will contribute to the development of Colombia''s hydrocarbon natural resources and assist the country in maintaining it''s self-sufficiency.  Specifically, the project is anticipated to have the following developmental impacts:      Creation and Preservation of Direct and Indirect Employment and Training:    In 2005 Kappa employed directly and trained over 60 nationals. Over 200 jobs have also been generated via local services and suppliers. The Project will benefit the local community through increased employment opportunities, both directly and indirectly.      Direct    Benefits to Local Communities:       Kappa places importance on sustainable development and quality of life improvement for    those people affected by its operations. The Company is engaged in several social development and infrastructure projects, including supporting childrens education, medical services, water sanitation and infrastructure projects.      Benefits to the Government:       It is expected that the Government of Colombia will receive substantial receipts from royalties, production sharing and corporate taxes, generated by the project.     Gas Flaring Reduction in Abanico:       Kappas development plan for the Abanico field includes the utilization of the associated gas, which is currently being flared, to generate electricity for use in the field oil production process. The company may have excess gas production or electricity generation, which will be supplied to local consumers via an electric transmission line connecting to the national grid and a gas pipeline connecting to the gas distribution system.     Gas Reserves Monetization in Cerrito:   The projects gas exploration and production in Cerrito supports the monetization of stranded natural gas reserves in Colombia and secures an important uninterrupted source of clean energy to the residents of Cucuta, a city with a population of over 300,000 people, located in the State of Norte de Santander.      The key development indicators that are proposed to be monitored during the life of the IFC investment are:    -	direct employment levels of Colombian nationals;   -	implementation of community development programs;   -	revenue payments to the Government of Colombia (GOC);   -	gas flaring reduction in Abanico.     Transparency and Governance Context     In coming to a view of whether to support this Project, IFC has considered the value of the projects benefits, and governance and other risks to these benefits. As mentioned above, the project is expected to generate benefits in a variety of forms. Besides employment, local community development, gas flaring reduction, monetization of stranded gas reserves and uninterrupted gas supply to the city of Cucuta, it is expected that a large share of project benefits will accrue to the GOC in the form of royalties, production sharing and taxes. The Agencia Nacional de Hidrocarburos (National Hydrocarbon Agency, ANH), the state regulatory agency for the oil and gas sector, publicly discloses on its website items such as:     -  recent royalty information on a regional basis; and    -  recent contract awards and term.     Royalties paid on a regional basis are now also disclosed monthly in the local newspapers. Furthermore, to ensure transparency, all payments to the GOC will be publicly disclosed by Kappa in its website.     In respect to governance, a range of governance indicators, including the current relationship between Colombia and the World Bank and IMF, have been considered. Colombia is seen as having relatively strong governance capacity in the Latin American region. In recent years, Colombia has made important progress in its Public Finance systems and improved transparency. Important initiatives include adoption of the 2002 presidential anticorruption plan, improving the administration of publicly owned banks, clarifying responsibilities for managing expenditures among different levels of government, and introducing modern accounting concepts and procedures. These initiatives were supported by the rollout of new information systems covering the budget and local government finances, as well as the monitoring of public procurement. The Government enacted an important Fiscal Transparency and Responsibility Law in 2003, and strengthened the disciplinary code for public servants.     Based on the prevailing governance situations in Colombia, IFC believes the risks to project benefits not being realized, due to governance in Colombia, as relatively small.