Mexico - Water supply and sewerage sector study (Vol. 1 of 2) : Main report

Report No. 1278-ME mnLE COPY Water Supply and Sewerage !A Sector Study Mexico (In Two Volumes) % * \ ( Volume 1: Main Report August 16, 1976 WHO/IBRD Cooperative Program Latin America and the Caribbean Regional Office RETURN TO LA. & C. FILES FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENT Currency Unit Peso (Mex$) US$1.00 Mex$12.50 Mex$1.00 US$0.08 Mex$1 million US$80,000 ABBREVIATIONS AND MEASURES 1 mm = millimeter 0.04 inches 1 cm = centimeter 0.39 inches I m = meter 3.28 feet 1 km = kilometer 0.62 miles 1 1 = liter 0.26 US gallons 1 m3 = cubic meters 264 US gallons I m3/sec = cubic meters 31.5 million cubic meters per second per year or 22.8 million US gallons per day  FOR OFFICtAL USE ONLY MEXICO WATER SUPPLY AND SEWERAGE SECTOR SURVEY TABLE OF CONTENTS VOLUME ONE REPORT Page No. INTRODUCTION I. SUMMARY . ........................................ Action Plan ................. "I ................ 4 II. PRESENT SITUATION .............................. 6 Population . .................................. 6 Public Health .................................. 8 Water Resources ............................. 10 Institutional Aspects .......................... 13 Recommendations .............. , 21 Water Supply and Sewerage Services .... ......... 23 General ................................... 23 Urban ..................................... 24 Rural ..................................... 28 Financial and Economic Situation .... ........... 30 Past Investments .......................... 30 Past Operations ........................... 32 Recommendations .......................... 34 Pricing Policy ................................. 34 Recommendations ........................... 38 Manpower and Material Resources .... ............ 38 Manpower .................................. 38 Material and Equipment .................. 39 Recommendations ........................... 40 III. SECTOR PLANNING ................................ 41 Recommendations ................. -, ........... 43 IV. ELEMENTS OF A SECTOR INVESTMENT PROGRAM ........ 44 Development Policy ............ I ................ 44 Investment ..................................... 45 Analysis of Proposed Sector Investment Program . 46 Recommendations .............. 50 This document has a restricted distribution and may be used by recipients only in the performanc of their official duties. Its contents mnay not otherwise be disclosed without World Bank authorizatio  TABLE OF CONTENTS (Continued) VOLUME TWO APPENDICES Map of Mexico: Water Resources Regions and Zones Appendix A: Programme Data Sheets; 4 projects Appendix B: Public Health; Mortality and Morbidity, Tables 3-4 Appendix C: Water Resources; Water Usage and Availabilty, Tables 5-7B Appendix D: Institutions; Organization Diagrams; 8 Charts and 1 Project Cycle and Information Flow Diagram Appendix E: Latin American and Caribbean Water Supply and Sewerage Coverage Levels; Table 8 Appendix F: Tariff and Financial; Water Costs, Revenues and Expenditures, Tables 9-10.1 Appendix G: Sector Goals, Past and Future Investment; Tables 11-17 Appendix H: Manpower and Material Resources; Tables 18-19  MEXICO WATER SUPPLY AND SEWERAGE SECTOR SURVEY INTRODUCTION i. Within the framework of the WHO/IBRD Cooperative Programme, a mis- sion visited Mexico, from January 28 to March 1, 1974, at the invitation of the Government of Mexico and with the assistance of Government officials to conduct a sector survey in water supply and sewerage. The present report is based on the findings of the mission. ii. The mission worked closely with the Government Secretariats of Water Resources, Health and Social Assistance, and Finance as well as with the Presidential Secretariat, the National Water Study Team and the IBRD Urban Survey Mission, the latter especially in regard to the medium-size cities water supply and sewerage project. During the course of the sector survey the WHO/IBRD mission and counterpart personnel visited 26 cities (10,000 - 100,000) and 13 rural communities, February 5-16, and earlier, January 15-26, the IBRD Urban Mission visited 29 cities (100,000 and over). iii. The WHO/IBRD Mission was composed as follows: Mr. J. Robinson, WHO/Geneva, Mission Leader Mr. A. Vogel, WHO/Geneva Mr. G. Morales, Consultant, WHO/Geneva Mr. L. Jeurling, IBRD/Washington Mr. H. Correal, PAHO/Mexico Mr. U. Kuffner, IBRD/Washington (PNH) Mr. R. Casanueva, Consultant, IBRD/Mexico (PNH) Mr. K. Ringskog, IBRD/Washington iv. The Mission expresses its gratitude to the Government and its various Secretariats and their personnel for the excellent support and assist- ance provided during the conduct of the sector survey.   I. SUMMARY 1.01 Demographic data and water supply and sewerage service levels in the urban and rural areas as taken from the 1970 Census are summarized in the following tables: Demographic Data - Table 1 Urban ql.rtin- 11 2B.177 Sb lourl Population I/ 20.725 421 No. of Coniti.. 2,179 A40 2t 6.57. No. of Conitie. 95,401 ACe 2/ 0.91 Water Supply SeCroe Water Supply Se-erage 4/ Pop. Se-vd 19.775 Pop. Served 11.460 Pop. Served 4.177 Pop. S-rvod 0.605 Urb-n Pop. 69.n Urban Pop. 40.4 Reural Pop. 20.27 Rural Pop. 2.91 otal lPop. 40.37 Total Po. 23.41 Total Pop. S.57 Total Pop. 1.21 No. of Conn. 3.350 No. of Conn. 2.021 Pop. Served by Coo. 0.605 Irobabitants Sehabitont, per Cono. 5.9 per Coon. 5.7 No. of Conn. 0.100 Prod-utlon 31 Pop. Served Avg. Ip.d 350 by P.Y. 3.571 Coasoption 3/ No. of P.R. 3/ NA A.S. ipud 245 I/ All pepuletfee nd Ionnootlon / Se. Urban Table. figure. are express d in S bllions. r ~~~~~~~~~~~~~~~~~/ See Urban Table. I/ Anl Grooth Rate of population. 3/ Publie bydrant.: Data OD nurber not &gvdlable. 3/ Fra 37 City s=ple data only. Al Rara n-r.e. defi-d an ng-ined sewerage cy:t-ro in rcoenunities ,.ith poblic voter upply nyoteas (712 'oI-e -omec.ted). Infor,uation on eXcr.ta diupo..l not -vailable. Total Popolation 1/ Annual Growth Rate 3.57 49.100 1970 CCnsu- Noobor of Conunities 97.580 j l Popolation Distribotioo R-et No. of CrCnitie Popalation % of Total 100 or I*$. 55,624 1.470 2 100 * 500 27.996 7.577 16 500 2.500 11.7S1 11.678 24 subtotal 95.401 20.725 42 2.500 - 20Q000 1,996 11.350 23 20.000 - 40.000 96 2.571 5 40.000 - 100.000 53 3.214 7 100.000 - 500.000 30 5.707 12 500,000 and ever 4 5.535 11 Subtotal 2.179 28.377 58 Grand Total 97,580 49.102 100 Water Supply Sewerag. Population Served 2/ 2 Populaito Serv-d 2 23.950 49 12.065 25 I/ All population figure. are -opre.eed in nillions. 2/ Of thl, ppulaton, 20.4 nillion are o-nerd throogh boose nonenuttone L. both urban sod rural arean.  - 2 - 1.02 Much of Mexico's population is concentrated in water scarce areas, especially the central plateau, resulting in high and rapidly increasing costs of expanding urban water supplies. Water for urban supply must often be brought long distances, and competition with agricultural use is becoming more and more of an issue. Since water shortages are an increasing problem in many regions, strong measures are needed to conserve the use of water, and in the next decade water reuse will become an economical solution in many locations. 1.03 Commendable progress in service coverage has been made in the sector over the past twenty or more years, with water supply increasing by 25 and 15 percent in urban and rural areas respectively, and sewerage increasing slight- ly less. By the end of 1973, coverage in water supply and sewerage was esti- mated at 70 and 40 percent in the urban area and at 20 and 3 percent in the rural area. This has taken place in face of radical changes in the urban/ rural population mix with a heavy trend toward the urban area. The urban/ rural ratio in 1950 was 43/57, today it is 58/42, and by the year 2000 is pre- dicted to be 80/20. This will call for an increased flow of resources into the urban area, and, at the same time, heavy investments are needed to bring the rural population to a satisfactory standard. Water supply and sewerage investments could be one of the policy instruments used by the Government to influence the direction of urbanization towards, for instance, small and medium-sized cities. The effectiveness of the instrument depends largely on the pricing policy adopted, more specifically the extent to which water tariffs reflect the full cost of producing and distributing additional volumes of water. A continued policy of subsidization will lead to increasing economic distortions and is likely to contribute to uneconomical urban growth. 1.04 In spite of progress in service coverage, there are increasing prob- lems in the quality of service and in systems' operation and maintenance. Such problems stem principally from financial, technical, and more generally, institutional weaknesses in the present organization. The institutional con- straints are mainly found in the internal SRH organization and in the local and regional administration of water supply and sewerage systems, parti- cularly in the sytems outside SRH control. Technical and administrative problems at the local as well as central levels are due largely to the lack of training of most water supply and sewerage personnel. The financial problems result from inefficient operations and low tariffs in most water systems. 1.05 Sector planning is ad hoc at best, being hampered by the lack of an adequate information system. The sheer size of the country and the magni- tude of cities and rural communities with which Government agencies must deal make development of a comprehensive data system a precondition for good sec- tor planning. Long-term goals have not been established, and past sector activities have been carried out in successive six-year plans developed mainly by SRH and SSA, the urban and rural agencies. In the present pro- gramme, 1971-1976, although investments have been quite high (M$8.8 billion in 1971-74) it is conservatively estimated that, at the current pace, urban water supply and sewerage will fall short of 1976 targets by 10 and 15 percent  - 3 - respectively, and over 20 percent in rural water supply. There were no goals set for rural sewerage and sanitation. Long-term sector goals are now being examined by the National Water Planning Study (PNH) at the request of SRH. 1.06 A financial analysis of sector activities in the urban area for the period 1971-1974, based on a representative 37 city sample 1/, revealed that sector revenues are low and, on the average, are barely sufficient to meet administration, operation and maintenance expenditures. They would be totally inadequate in meeting debt service for capital investment, which presently is almost entirely subsidized, and could not finance any part of the future extensions. No attempt was made to similarly analyze the rural area since sufficient data for this purpose was not available. 1.07 The mission agreed with SRH that the period 1975-1980 is appropriate for realistic sector investment proposals. The following table shows the re- commended goals, upon which investment proposals would be based. Table 2 RECOMMENDED SECTORS GOALS 1975 - 1980 Area Population to be served by 1980 (%) Urban Water Supply 80 Sewerage 50 Rural Water Supply 50 /1 Sewerage 20 /2 Sanitation 10 /1 40% Public Hydrants; 60% House Connections. /2 Calculated on the basis of providing sewer- age service to rural communities with water supplies having 70% house-connected consumers. 1/ Also used for the financial analysis of proposed sector investment, 1975-1980.  - 4 - 1.08 An investment program for the period 1975-1980 has been outlined in this report (Chapter 4) that would achieve the recommended goals. The programme could be used as a guildeline in analyzing the financial conse- quences of attempting to achieve a given objective. 1.09 The proposed total investment amounts to M$16.13 billion at 1973 prices or approximately M$2.7 billion per year, an annual increase over 1971- 1974 sector investment of 23 percent. The urban/rural mix of the investment, percentage-wise, is similar to past years. The proposed investment over the 1975-1980 period would be 3.3 percent of the projected public sector capital expenditures against 3.8% during 1971-74. 1.10 The financial viability of the M$12.84 billion urban program has been analyzed assuming that current expenditures and debt service would be covered and that, in addition, internal cash generation would finance 25 per- cent of the capital investment (M$3.21 billion). Tentatively, revenues per connection would have to be increased at least 50% in real terms to attain this objective. Given the present high level of losses and unaccounted-for water, part of the increase in revenues could be achieved by improving the efficiency of the operation. The main part of the revenues will, however, have to be obtained through increased tariffs. Proposed rural capital in- vestment amounting to M$3.3 billion, with few exceptions, is assumed fully subsidized by Government; current expenditures, however, are supported by revenues from tariffs. 1.11 In addition to recommending a nationwide sector investment pro- gramme, its study and use as a guideline for developing and implementing a more specific programme, other recommendations for improving the sector are made. The following "Plan for Immediate Action" is a summary of the most urgent actions implied by the recommendations. Action Plan The following represents a summary of those recommendations considered appropriate for immediate Government initiation. Clearly in some cases even though action is immediate, the full impact may only be felt in the intermediate term. The suggested order of priority may change in the course of formulating the action program. All items are considered of highest priority. 1. Conduct studies of the administrative and technical efficiency of local operations and programmes to improve efficiency (establishment of stan- dardized administration, accounting, billing and collection procedures, leak detection programmes, metering programmes, etc.). Success of these plans will depend on the timely and efficient implementation of the training program. The study should comprise communities of all types whereas the implementation would initially concentrate on the SRH and SSA systems. SRH and SSA would be jointly responsible for the study and programmes (paras. 2.28.5 and 2.50).  2. Prepare and implement a national training programme to improve local administration and operation at all levels. A training officer in SRH should be responsible for the programme which, however, should also cover the systems outside SRH control at the request of other sector organizations and the Government. The training program should initially concentrate on accounting, billing and collection procedures (para. 2.44) as well as operation and main- tenance of water supply and sewerage systems. 3. Establish a task force work group at the decision making level which consists of Government authorities from SRH, SSA and other public sector enti- ties to study and make recommendations on how to coordinate existing sector agencies and how to establish a system of regional offices responsible for water and sewerage systems in their respective regions. The task force should define responsibilities both at the central and regional levels, deterimine the appropriate level for regional offices (state, watersheds, etc.) and re- commend whether to use existing SRH or SSA regional offices (paras. 2.28.2 and 2.28.4). 4. Review of SRH's internal organization to clearly define responsibili- ties and eliminate overlapping. In the initial stage, the review should con- centrate on the coordination of the construction and operation departments. An office should be established for planning and project preparation, which would integrate the project design functions of the construction department. This office could be a first step towards the creation of a national water supply and sewerage agency. In addition, at the level of the subsecretariats and their respective Directorates General, a permanent work group should be established to find ways and means of providing planning and coordination with- in SRH and be responsible for the study and implementation of a reporting and management information system (paras. 2.28.1 and 2.28.5). 5. Conduct a tariff study to determine the level and structure of tariffs in different types of communities. The study should also recommend metering and connection policies. The information on losses and unaccounted- for water from the study mentioned as action No. 1 above would be a necessary input into the tariff study (para 2.57). As a part of the tariff studies, socioeconomic informatin should be gathered to determine the capacity to pay for water and sewerage. 6. Prepare a plan for a data retrieval system encompassing systems outside SRH's control. They system would assure that key financial and tech- nical indicators are collected for all systems at regular intervals and consolidated (para. 2.18.3). 7. Prepare a plan for organizing the financial procedures of the sec- tor (condition of funds provided by the central government, establishment of a revolving fund to absorb cash surpluses, etc.) (para. 2.57).  - 6 - II. PRESENT SITUATION Population 2.01 Mexico, with a land area of almost two million square kilometers, the fifth largest country in the western hemisphere, has in the last ten years experienced one of the highest demographic growth rates in Latin America. Its average growth rate of 3.5 percent is equalled by Venezuela and surpassed only by El Salvador whose growth rate has reached 3.7 percent. It is pre- dicted by the Government that the present estimated population of appproxi- mately 52 million would double in the next 20 years and by the year 2000 exceed 141 million inhabitants. 2.02 The 1970 National Census 1/ shows the Mexican population had reached 49.1 million of which 28.4 million or 57.8 percent resided in the urban area, and 20.7 million in the rural sector. In forcasting future populations, the Government has taken into account the current trend in Mexico of populations in rural communities and villages 2/ migrating to the larger cities and towns. Tables 3 and 4 show this trend. Table 3 - Population Growth: 1940 - 1970 (millions) Year Rural % Urban % Total 1940 12.76 64.9 6.89 35.1 19.65 1950 1h481 57.4 10.97 42.6 25.78 1960 11.22 49.3 17.71 50.7 34.93 1970 20.72 42.2 28.37 57.8 49.09 Table 4 - Population Projection: 1970-2000 (millions) Year Rural a Urban % Total 1970 20.72 42.2 28.37 57.8 L19.09 1980 22.64 31.8 48.55 68.2 71.19 1990 26.93 26.4 75.21 73.6 102.14 2000 30.31 21.5 110.73 78.5 141o.4 1/ Taken from the WHO/IBRD Water Supply and Sewerage Sector Mission's Questionnaire completed by the Government. 2/ Communities having 2,500 inhabitants or less.  - 7 - 2.03 In the 30 year period between 1940 and 1970, the urban population grew at an average rate of 2.7 times that of the rural population, with an urban over rural rate of 2.0 from 1940 to 1950, 2.8 from 1950 to 1960, and 3.1 from 1960 to 1970. The growth rate in the urban population from 1970 to 1974 is approximately 10 times that of the rural population and based on this type of accelerating rate, the Government has predicted that by the year 2000 the urban area will be growing at a rate of over 8 times the rural sector. This would result in an urban population 290 percent higher than that which existed in 1970 or an average annual growth rate of close to 10 percent. The rural area by comparison would have reached 30.3 million by the year 2000, a percentage increase of 46.2 over its 1970 population, an average annual growth rate of only 1.5 percent. 2.04 The following table shows the number of urban and rural communities in the country classified by population. Table 5 - Urban and Rural Communities 1970 Population Range Number of Comnunities Populatinns (millions) 1 - 100 55,624 1,470 100 - 500 27,996 7,571 500 - 1,000 7,496 5,228 1,000 - 2,503 14,285 6,45o Total Ruiral 95,401 20,725 2,500 - 5,000 1,205 4,140 5,000 - 10,000 541 3,775 10,000 - 20,000 250 3,435 20,000 - 30,000 66 1,555 30,000 - 40,000 30 1,016 40,000 - 50,000 19 85B 50,000 - 75,000 21 1,242 75,000 - 100,000 13 1,114 100,000 - 250,000 24 3,735 250,000 - 500,000 6 1,972 500,000 and over 4 5,535 Total Urban 2,179 28,377 Total Country 97,580 49,102  -8- Public Health 1/ 2.05 Over the past two decades, there have been problems in reporting nationwide health statistics, which makes it difficult, if not meaningless, to attempt to establish and assess the present public health situation. It is generally accepted, however, that reporting has improved and is more efficient today than it was in the late 1950's and early 1960's. 2.06 It is estimated that only 60 percent of the deaths are reported or registered, and of these only 75 percent are certified by the medical authori- ties of which 15 percent are badly defined causes of death. Morbidity statis- tics are even more difficult to secure and to verify as to their reliability. While these facts pertain to the nation as a whole, it may be assumed that reporting on rural health is a good deal less accurate than urban health due to its dispersed population, lack of health services and physicians, communi- cation, etc. 2.07 As evident from examination of Table 6 below and Tables 3 and 4 Appendix B, enteritis and other diarrhoeal diseases (especially thyphoid fever) are sensitive and realistic indicators of the state of sanitation in Mexico. These diseases occupy second place in the all-age group and first place in the 1-4 year age group among the ten leading causes of deaths. It is apparent that the provision of a safe and adequate supply of water and the improvement of sanitation for the population should be a major element in the government program to improve the public health. 1/ Information from the Biostatistics Department, Division of Epidemiology, Health and Assistance Secretariat, and by PAHO/WHO, Zone 2, Zone Epidemio- logist.  -9- Table 6 Mortality Figures for Enteritis and Other Diarrhoeal Diseases Area Years 1963 1970 1971 1972 United States of Mexico Population (1000's) 38,665 49,090 50,830 52,600 Number of Deaths 46,089 69,410 64,307 66,864 Mortality Rate/100,000 119.2 141.4 126.5 127.1 Urban Area NA A. Total Population (1000's) 20,498 28,377 30,239 Number of Deaths 39,326 40,928 37,755 Mortality Rate/100,000 191.9 142.0 124.9 B. Excluding the Federal District NA Population (1000's) 15,279 22,078 23,245 Number of Deaths 32,181 31,928 28,692 Mortality Rate/100,000 210.6 110.8 94.7 Rural Area NA Population (1000's) 18,168 20,725 20,900 Number of Deaths 16,763 28,482 26,547 Mortality Rate/100,000 92.3 140.5 128.9 1/ Statistics only available on countrywide basis, not separated as to urban and rural.  - 10 - Water Resources I/ 2.08 About three-fourths of Mexico is arid or semi-arid, and its water resources are unevenly distributed. It has been determined that 85 percent of the surface water resources are below elevation 500 meters while 75 per- cent of the country's population and 80 percent of its industry are above that elevation, thus further aggravating the situation. As a result, water is very frequently in scarce supply and/or costly, and conflicts among agri- culture, urban and rural domestic consumers, and hydroelectric water users have arisen. This is especially true in the Central Plateau where the coun- try's two principal cities, Mexico City and Guadalajara, as well as ten medium- sized cities ranging from 60,000 to 500,000 inhabitants, are located. Another area of water conflict lies in the region surrounding Monterrey, the country's third largest city. In addition, water sources of urban use are nearing ex- haustion in the cities of Tijuana and Mexicali in the northwest. Ground- water resources, the source of supply for Mexico City, Monterrey and many smaller communities, have been studied intensively in certain localized areas only, and there remains a great need for more comprehensive nationwide know- ledge of this resource. 2/ 2.09 Water resource usage is distributed among four major categories as follows: industrial, irrigation, energy and domestic. Extraction, consump- tion, and water usage by category for 1970 are shown in Table 5, Appendix C. A forecast for the various uses for 1980 is shown in Table 6, Appendix C, and Table 7, Appendix C provides information on the total amount of water avail- able in each of the 13 Regions. 3/ An examination of these data reveals the disparity or uneven distribution of the available water resources 4/ in the various Regions. It can be seen for example that the Central Zone (C), em- bracing three Regions (IV, XII, XIII) having 49.4 percent of the total po- pulation, has only 14.2 percent of the total available water, while the Gulf I/ The National Water Planning Study (PNH), UNDP/IBRD, in its 2-1/2 year program initiated in September 1972 has produced to date considerable material on the water resources in Mexico. It is from this source that the WHO/IBRD Water Supply and Sewerage Sector Study Mission has extracted much of the water resource information and data used in this report. 2/ PNH is conducting a nationwide groundwater survey which to date covers the northern half of the country. 3/ The Hydraulic Resources Secretariat (SRH), for purposes of study and development of Mexico's water resources, has established regions based on the country's 13 major watershed areas. This report, whenever prac- tical, follows the same procedure in discussing sector activities. A map showing the 13 Regions appears in Volume II of this report. 4/ Figures referred to do not include groundwater resources.  - 11 - and Southeast Zone (GS), containing five Regions (V, VII, VIII, IX & X) with only 26.4 percent of the population, has 72.6 percent of the total available water. The remaining two zones, the North Pacific Central (NPC, Regions I, II & III) and the North Zone (N, Regions VI and XI) have together 24.2 per- cent of the total population and only 13.2 percent of the total available water. 2.10 The 1970 estimated consumption 1/ of almost 31,000 million cubic meters represents 8.0 percent of the total water available of over 392,000 million cubic meters. Of this amount 95 percent was utilized for irrigation, 3.0 percent for domestic use, 1.3 percent for energy and 0.7 percent for in- dustry. The estimated extraction 2/ for 1970 utilized approximately 30 per- cent or 112,300 million cubic meters of the total available water. Of this amount 66.7 percent was extracted for energy, 29.0 percent for irrigation, 2.6 percent for industry and 1.7 percent for domestic use, 2.11 While these data reveal impending problems for the country in se- curing adequate water supply for its total needs, certain Regions are facing very serious, if not critical, problems in the decade ahead, and even today face difficulties in localized areas. Table 7A and 7B, Appendix C, provide information on Regions with the most critical conditions. 3/ 2.12 From the information and data as presented, a preliminary analysis 4/ of the main characteristics of each Zone has been made: (a) North Pacific Central Zone (NPC) is fully utilizing most of the surface water resource in the northern area. Due to ex- pected population increase, industrial growth and agricul- tural expansion in this area, considerable deficiencies of available water are expected within the next decade, and the possibility of transferring to this area some of the avail- able surface water resource in the southern area is to be considered. A deficit exists in the groundwater balance due to over-exploitation. The mining of groundwater has already caused some salt water intrusion in aquifers. Region I is the third most critical of the 13 Regions in terms of available water resources. (b) North Zone (N) has the most arid climate of the entire country with average precipation of only 300 mm per year. This Zone 1/ Consumption: As defiend by the National Water Planning Study (PNH). 2/ Extraction: As defined by the National Water Planning Study (PNH). 3/ The Gulf-Southeast Zone (GS) is included for comparison purposes. None of the five Regions in this Zone face any foreseeable problems in terms of available water resources. 4/ The National Water Planning Study (PNH).  - 12 - has only 2.6 percent of the total available water to serve the needs of livestock, agriculture and, in industrial areas, a population which is expected to increase in the future. The groundwater resource is presently overexploited. The Zone shares with the Central Zone the dubious distinction of being one of the two most critical of the four Zones in terms of available water resources. Its two Regions (VI & XI) are the fourth and fifth most critical of the 13 Regions. (c) Central Zone (C) has 49.4 percent of the country's population and only 14.2 percent of its total available water. There is mass migration from rural areas to "poverty belts" around the nation's largest cities. The groundwater basins of the Valle de Mexico and the Upper Lerma have been overutilized resulting in the creation of negative water balances and the necessity of facing complicated and costly problems of water transfer from adjoining basins. In addition, there are severe pollution problems in the Valle de Mexico and Lerma basin. Regions XIII and XII are the first and second most critical of the 13 Regions in terms of water demands and water resource availability. (d) Gulf-Southeast Zone (GS) has, in comparison to the other Zones, relatively few problems in terms of available water. It has the largest potential for land, water and hydropower development in the entire nation since it contains 72.6 percent of the total available water with only 13.2 percent of the population. How- ever, related to other matters, these are problems arising in irrigation, drainage, flood control and pollution, especially in the areas of petro-chemical industrial development. 2.13 In terms of water resources for domestic use, severe problems exist in at least three of the four Zones. Such problems may be critical in the next decade. Water resources for urban and rural water supplies must com- pete on a sound rational basis, both socially and economically, for an adequate share of the resource with other competitors, namely: irrigation and indus- try. The existing scarcity, which more than likely will become more severe, the costly problems of resource transfers and develpoment, and the magnitude of the capital investment expenditures required, all present a very strong case for the conservation of urban and rural water supplies. Rural water supply, wherever possible,should be geared into integrated rural development and shared water needs with irrigation, the common competitor and the largest consumer of the country's water resources.  - 13 - Institutional Aspects 2.14 The Mexican water supply and sewerage sector is regulated by the Mexican Federal Water Law (Ley Federal de Aguas) of January 1972. 1/ The Hydraulic Resources Secretariat (SRH) has been given complete authority over the water resources of the country, and acts on behalf of the Federal Govern- ment (el Ejecutivo Federal) 2/ to administer the Law. The Water Law leaves intact the constitutional provision that water supply and sewerage are muni- cipal responsibilities and that under this provision agencies such as SRH and SSA plan, design and construct water supply and sewerage projects, while the Federal Government finances such projects only upon specific requests from municipalities. 2.15 While the municipalities legally bear the responsibility to provide water supply and sewerage services, the Federal and State agencies participate in the planning, construction and management of sector activities. Such Federal agencies are: 1/ Ley Federal de Aguas, Chapter II, Articles 28 to 41, inclusive. (Re- ference only: Document too bulky for inclusion). 2/ Organization Chart of Federal Government, Chart 1, Appendix D.  - 14 - Entity Area of Activity in Sector (a) Hydraulic Resources Urban water supply and sewerage Secretariat (SRH) 1/ in communities with population over 2,500 inhabitants. 2/ A channel for Federal budgetary allocations for water supply and sewerage. (b) Health and Assistance Secretariat (SSA) 3/ Rural water supply, sewerage and/ or sanitation in communities with less than 2,500 inhabitants. A channel for Federal budgetary al- locations for rural water supply and sewerage. (c) National Heritage Water supply and sewerage in cities Secretariat (SPN) 4/ which are ports of entry or cities having custom offices. Grant or concessinary loan financing of water supply and sewerage investment. (d) Presidential Secretariat 5/ Review of sectoral planning and final approval of water supply and sewerage programs of the Secretariats. (e) National Bank for Public Works Financing of water supply and sewer- and Services (BNOSP) age investments throughout the coun- try; with conditions almost comparable to those of commercial banks. 2.16 In addition to those agencies, there are Federal Water Supply Boards (Juntas Federales de Agua Potable), as well as municipal and state commissions (Comisiones Estatales) throughout the country which manage water supply and sewerage systems, either as agents for SRH or for their own respective govern- mental bodies. The total number is not precisely known. Of the estimated 1/ Secretaria de Recursos Hidraulicos. 2/ The Directorate of Minor Works of SRH is also responsible for the con- struction of water supply systems in certain selected rural communities with less than 2,500 inhabitants. 3/ Secretaria de Salubridad y Assistencia. 4/ Secretaria de Patrimonio Nacional. 5/ Secretaria de la Presidencia.  - 15 - 1,200 systems for which SRH provides assistance, 1/ about 200 (usually smaller systems) have direct SRH administration, around 600 have Federal Boards, and the remaining 400 have individual municipal or state-operated administrations. 2.17 The National Bank for Public Works and Services (BNOSP) 2/ has acted as a national financing institution to the public works sector, includ- ing water supply and sewerage projects troughout the country. 2.18 The Hydraulic Resources Secretariat (SRH) 3/ is responsible for all water resources in the country with the main part of its manpower and resources devoted to irrigation. It also provides assistance for water supply and sewer- age activities in communities of 2,500 or more inhabitants. Within SRH these activities are further separated for communities of 2,500 to 5,000 inhabitants, referred to as small towns, and in some instances rural villages of 500-2,500 inhabitants. Both of these categories are under the Directorate General of Water Supply and Sewerage 4/ and the systems installed by this Directorate are considered to be rural water supplies. The cities having populations of 5,000 or more are for sectorial purposes considered to have urban characteristics. 2.18.1 The SRH has four Subsecretariats 5/ under the General Secretariat to manage its water resource activities. They are: (a) Planning; (b) Con- struction; (c) Operation; and (d) Administration. However, water supply and sewerage projects are planned, executed and operated mainly by two Director- ates General, one located in the Subsecretariat for Construction 6/ and the other in the Subsecretariat for Operation. 7/ The former is responsible for projects from the community request stage, through the planning, design and 1/ According to Mexican Federal Water Law (Ley Federal de Aguas), wherever investments are made for water supply and sewerage systems with funds or the guarantee of the Federal state, SRH must administer the systems directly or indirectly. 2/ Banco Nacional de Obras y Servicios Publicos. 3/ Organization Chart of SRH, Chart 2, Appendix D. 4/ Direccion General de Agua Potable y Alcantarillado, (construction), Chart 2, Appendix D. 5/ Chart 2, Appendix D shows their place in the SRH Organization and the various Directorates General subordinate to the respective Subsecreta- riats. 6/ Chart 3, Appendix D shows the organization of the Directorate General of Water Supply and Sewerage (Construction) and its various dependent Directorates. 7/ Chart 4, Appendix D shows the organiztion of the Directorate General of Water Supply and Sewerage (Operation) and its various Directorates.  - 16 - construction states to the final delivery of the completed system to the community. The latter is responsible for supervising the operation and main- tenance of SRH systems, their minor expansions and improvements, general administrative activities, and the development and setting of adequate tariff policies and rates. The general procedures for project development are outlined in Appendix D. 1/ The SRH regional offices are mainly devoted to construction and operation of irrigation projects but also supervise the cons- truction and operation of water supply and sewerage projects. 2.18.2 The SRH provides assistance in the form of grants, concessionary and regular loans. The stated policy is to lend and recover the debt service through established tariffs, but political considerations often impede this practice. The loans and projects are administered in accordance with con- tracts between SRH, the community involved and, on certain occasions, State Governments. Usually, the agreements with the community provide for the creation of a Federal Board (Junta Federal) in which the municipality, SRH, the State and other public and private entities are represented. The Board then administers and operates the systems. The required engineering services and feasibility studies for these projects are executed by SRH or its consult- ants. 2/ As can be seen from Table 7, page 25, SRH is directly responsible for water supply and sewerage for only a small fraction of the total popula- tion of the country. 2.18.3 The sheer size of the organization together with its centralized type of operation is causing some problems of communication and coordination between the various Subsecretariats. This in turn is aggravated by a lack of coordination between Directorates responsible for interrelated activities of SRH. The present centralized organization is not equipped to handle "line" functions of construction and operation, and a more decentralized organization should be considered. The accounting and reporting system of SRH is also deficient; in particular, it is impossible to obtain consolidated information system by system. An information system suited to the functions, size and complexity of the SRH system is badly needed. 2.18.4 Project review within SRH theoretically follows the least-cost solution, based on the above mentioned engineering and feasibility studies, and also following a socioeconomic evaluation of the community. Frequently, however, their study of alternatives results in other than the least-cost solution beig selected. And occasionally, final design does not envisage staged construction, which tends to make project costs inappropriately high with less efficient use of capital funds. Certain shortcomings are noted having to do mainly with financial and economic areas, and stem from the fact that financial and economic analysis, if at all made, is carried out in isolation from the technical analysis of the project. The mission iden- tified the following specific problems with SRH: 1/ Document 2, Project Cycle and Information Flow Diagram for Directorate General of Water Supply and Sewerage (Construction). 2/ Table 18, Appendix H, provides a resume of personnel working in sector activities.  - 17 - (a) lack of adequate assistance to and supervision of various local Federal Boards (Juntas Federales) from the Central level in the operation and maintenance of water supply and sewerage systems, a deficiency that is recognized by SRH, particularly as it effects the operation and maintenance of small urban and rural systems; (b) lack of financial and economic planning and analysis, as well as appropriate design criteria, which very frequently leads to oversized projects; and (c) lack of coordination and correlation of demand projections used in technical designs and in calculation of tariffs, employing two completely different methodologies that do not allow for the important linking of technical and financial interests, which must be considered together. 2.18.5 In relation to 2.18.4 (a), the Directorate General (Operation) of Water Suply and Sewerage is planning to reorganize operation and maintenance on a regional basis, giving the regional offices responsibility for the super- vision of systems. 1/ At present, necessary funds and personnel are not available to cover all of the systems, and in the interim, SRH is providing courses to local administrators and preparing manuals for instruction. This latter work is being concentrated at present on the needs of urban systems, but will be extended eventually to cover rural systems as well. 2.18.6 While it is felt that the procedures followed by SRH and the local authorities are sound (para. 2.18.2) the shortcomings and other deficiencies as noted (paras. 2.18.3 and 2.18.4) call for the establishment within SRH of a department adequately and competently staffed to deal with the project ana- lysis and evaluation. This office would play an important role in the prepa- ration and supervision of international laws and could be a first step towards the creation of a national water and sewerage agency. 2.19 The Health and Assistance Secretariat (SSA) 2/ provides assistance for rural water supplies and sewerage/sanitation in communities having 3,000 inhabitants or less, and installs rural systems through the Sanitary Engineering 1/ Plan Nacional de Operacion de Sistemas de Aqua Potable y Alcantarillado, Ing. Gustavo Flores Souza, Director General, Noviembre 1973. This plan may now be superceded by or incorporated into the UNDP/WHO project Organization of Preventive Operation and Maintenance Programme (Programme Data Sheet No. 03, Appendix A). Also the regions referred to are not in the same geographical or watershed areas as the 13 Regions referred to in footnote 3/, paragraph 2.09. 2/ Chart 5, Appendix D.  - 18 - and Construction Commission (CCIS SSA) 1/ that was created in January 1961. Subsequent decrees in April 1966 and September 1971 added responsibility to its original duties. Its main functions, relating to the water supply and sanitation sector, are to: (a) plan, design, construct, modify and/or pro- vide technical supervision for the improvement of the rural area, including rural housing, water supplies and sewerage systems together with the con- struction and improvement of primary systems of sewerage treatment; and (b) provide surveillance and control over both raw and finished water quality in communities of all sizes as required by the SSA. 2.19.1 While the CCIS SSA constructs rural water supplies and sewerage sys- tems, the systems are promoted, operated and maintained by local volunteers social service and health committees formed from local residents. The SSA assists rural communities in forming such committees early in the prepara- tion of the project so that they can assist in the execution. Technical supervision and assistance is provided to the committee by the CCIS SSA local offices, the State Public Works Office, and representatives of public health and agriculture. 2.19.2 Insufficient information prevented a review or assessment of project selection procedures as well as the integration of any financial and/or econo- mic considerations. The main justification and objectives of the water supply and sewerage programme is one of health, sanitation and general elevation of living conditions. The SSA subsidizes 2/ the full cost of construction of water supply and sewerage projects, although part of the project cost is nor- mally covered by municipal contributions or self-help. The local committees, for example, solicit "self-help" labor as a contribution towards systems' con- struction costs in the process of introducing water supply to rural communi- ties, and operation and maintenance expenditures wherever possible are paid by consumers through tariffs. 2.19.3 While the CCIS SSA is responsible for providing technical assistance and supervision to the various local Boards in operation and maintenance, it often provides no follow-up, and the Boards are not competent in their own right to deal with the problems. The local Board's communication with CCIS SSA is often tenuous to non-existent, and systems' operation consequently suffers, especially in the very small communities as the mission noted during its visit to rural systems. This, of course, should be corrected, but will be difficult to do from the central level. The SSA through the CCIS SSA must provide closer and more convenient sources of assistance and supervision to the local rural Boards, relying largely on decentralized regional offices. 1/ Comision Constructora Ingenieria Sanitaria is involved with communities having a population range of 300-3,000 and, in cases as required, coor- dinates its work with SRH (Directorate of Minor Works). Table 18, Appendix H, provides a resume of personnel working in sector activities. 2/ The SSA (Federal Government) funds are supported with funds from "Coopera- ciones"l. Chapter 7, Aqua Potable y Alcantarillado in Mexico, Rural Area, CCIS SSA (figures are for 1974).  - 19 - 2.19.4 In the future, the extent to which SSA will continue to function in rural water supplies is not yet defined. While the Mexican Federal Water Law, which as previously stated (paragraph 2.14), gives authority over the country's water resources to the SRH, it appears reasonably certain that SSA will coninue to be active in rural water supply and sewerage for at least the next few years. 2.20 The National Heritage Secretariat (SPN) 1/ provides assistance for water supply and sewerage systems in cities which are ports of entry (sea ports, etc.) and/or cities which have border customs control offices. This applies to both urban and rural communities regardless of the population. The network of 45 cities 21 with which the SPN is concerned had a 1970 population of 5.789 million or approximately 12 percent of the nation's total population. Of this number, an estimated 4.152 million reside in the urban area or about 15 percent of the total urban population. The SPN, in addition to water supply and sewerage, is engaged in a wide gamut of activities, such as communications, electric light and power, urban development, public markets, schools, recrea- tion, etc. 2.20.1 The SPN provides construction plans for extensions and improvements to water supply and sewerage systems in its 45 city network with its own technical and admininstrative staffs at the Central Government level. The works are executed through the local Federal Boards (Juntas Federales de Mejores Materiales). During the period 1964-1970, some 26 cities were given assistance in water supply and 29 cities in sewerage system improvements at capital investment expenditures of M$131.98 million and M$141.62 million, respectively. 2.20.2 While time did not permit a detailed review of project criteria or of other data relating to the planning, execution and operation of projects, it is known that special emphasis is placed on technical aspects with little attention paid to financial or economic considerations. The SPN has a consi- derably smaller technical staff than either the SRH or the SSA, and conse- quently cannot give adequate attention to even the most basic sector require- ments. Even though the SPN has over the past years shared financing with SRH, the State Governments and local Water Boards, there is no permanent expertise. This shortcoming only further complicates the existing duplication of techni- cal, financial and administrative activities. 2.20.3 This situation should not be continued, and it is doubtful that real and required coordination of activities can be achieved through a committee or other body formed for this special purpose. The present functions of SPN (para. 2.20.1) should be taken over by SRH and the funds for the execution and operation of systems continue to be provided by SPN. 1/ Secretaria del Patrimonio Nacional, Chart 6, Appendix D. 2/ Direccion General de Juntas Federales de Mejoras Materiales, A Summary of Activities, 1964-1970.  - 20 - 2.21 The Presidential Secretariat 1/ reviews sectoral planning and assists in establishing program goals in the sectors. It works closely with the SRH and SSA in the planning process and approves the annual pro- grams of the above mentioned agencies, as well as the program developed by SPN. This Secretariat provides only a very general study of the programs of the other secretariats, due principally to its shortage of personnel qualified to make such studies; its work is then frequently confined to only the more technical aspects, rather than dealing with economic and financial considerations. 2.22 The National Bank for Public Works and Services (BNOSP) 2/ is a publicly-owned institution which finances Federal, State and municipal public works as well as loans to construction companies for public works, for the development of low-cost housing, and credits for transportation. It lends to the public works sectors, 3/ especially water supply and sewerage, at terms somewhat easier than commercial banks, and manages a soft-loan fund in the same area. The Bank acts as a channel for domestic and foreign loans and from these loans secures its main sources of financing. It also issues pub- lic bonds as another source of funds for financing projects. 2.22.1 The major beneficiaries of BNOSP financing are State and municipal governments for construction of water supply and sewerage sytems, providing loans at interest rates lower than the commercial banks and for average amorti- zation periods of 15 years. The loans are secured by signed agreements be- tween the Bank, State Government and/or municipalities, and with SRH if the latter is also financing the system. Prior to loan signature the recipient must have agreed to a tariff structure that permits generation of sufficient cash through water sales, etc. to repay the Bank's loan, and possibly to re- pay any funds provided by SRH, if this agency is involved. However, in such agreements, the Bank has first priority in the recuperation of the money lent to any other Federal, State or municipal agency. 2.23 It must be noted that among the three major institutions involved in the sector (SRH, SSA and SPN), their activities in rural and urban areas over- lap or are duplicated to some extent. In the rural area this is especially true with two of the urban agencies (SPN and SRH) executing rural projects. In the urban area the SPN also provides assistance in water supply and sewer- age projects in port and customs cities. Since, as already pointed out, agency goals are often different and coordination of activities between the agencies is poor, the current duplication tends to complicate the task of establishing rational sector policies. Consideration should be given at an early date to define more clearly the functions and work areas for SRH and 1/ Chart 1, Appendix D shows the place occupied by the Secretaria de la Presidencia in the overall organization of the Federal Government, and Chart 7, Appendix D the organization of the Presidential Secretariat. 2/ Chart 8, Appendix D shows the general organizational plan of the BNOSP. 3/ In the period 1971-1974, BNOSP financed 16% and 14%, respectively, of the urban and rural sector investment.  - 21 - SSA in sector activity. It would appear appropriate for the SPN to rely on the SRH and SSA to execute works construction, while retaining its role of providing funds for new or improvement projects. 2.24 Quite evident during the course of the mission's work was the lack of relevant sector information and data at the central or Federal level, or if existing, the lack of ready access to it. When such information is avail- able, there is also some concern as to its reliability and currentness. This refers particularly to the systems outside the control of SRH, SSA, and SPN for which information is almost non-existent at the central level. Conse- quently, the mission has not analyzed the situation in these systems other than on a limited sample basis. In order for sector agencies to function efficiently and to respond effectively to the demands for their services, there must be a system for the collection and centralization of information as well as for its dissemination and retrieval between the central Government level, regional centers, and municipalities. At the central level such data should be readily available to all sector agencies. 2.25 It is quite apparent that the sector agencies cannot function in an effective manner solely from the central Government level. The problems in both the urban and rural areas are too great and diverse, the lines of communication too poor and thinly drawn, and the lack of knowledge regarding current conditions and activities of the sector in the country as a whole too critical, to run the local operations in an efficient manner from the central level. 2.2Fh There should be an immediate effort toward decentralization of oper- ations of both sector agencies, but certainly and especially SRH which carries prime responsibility under the Federal Water Law. The most appropriate regions (watersheds, states, etc.) should be identified and offices be established which would have direct responsibilty for project preparation, construction and operation. In other words, the regional offices would have the "line" func- tions in the organization. The central office would have "staff" functions and would be responsible for the establishment of national sector policy, short, medium and long-term planning, overall review of project preparation, construction and operation, financial development and budgetary control, setting of standards, the provision of consultative assistance to regional offices, etc. 2.27 Whether the present sector agencies are the proper vehicles to per- form the "staff" functions or whether an autonomous National Water Supply and Sewerage Authoritv sYruld be created has to be determined through a thorough investigation. An investigation is also needed to determine whether the actual SRH regional offices can be developed to perform the functions suggested above (para. 2.26). Recommendations 2.28 The mission makes the following recommendations:  - 22 - SRH Organization 2.28.1 SPIH should review the organization of its water supply and sewerage activities and implement an organization where the responsibilities for plan- ning and supervision, construction and operations are clearly defined and overlapping functions eliminated. Such review should also be made in accor- dance with SRH's responsibilities in the rural sector which have been delegated to SSA. Also, the relationship among SRH's Commissions (e.g., Comision del Papaloapan) working in this sector should be defined. Interagency Coordination 2.28.2 The responsibilities of the Federal or local agencies working in the sector should be clearly defined, especially between SRH, SSA and SPN. SRH should be responsible for formulating overall sector programs. SPN would gradually phase out its water supply and sewerage activities although it could continue to provide financing for such projects. Regionalization 2.28.3 SRH and SSA should decentralize present "in-line" functions of their water supply and sewerage activities to the local levels. These local levels should be defined as being regional, watersheds, state or a combination of them depending on the availability and use of water resources. The number of offices to be set up at each level should be a function of need for SRH and SSA supervision of "line" activities. 2.28.4 SRH and SSA central offices should be responsible for proposing ob- jectives in the sector in coordination with the presidential Secretariat, planning and budgeting, reviewing project feasibility studies, supervising construction (including procurement) and operations, establishing technical, financial, economic and administrative norms and procedures for the sector, establishing financial and tariff policies for the sector, managing the over- all finances in the sector in accordance with the policies established by the Ministry of Finance, and preparing the consessionary agreements to be signed with the communities where works are being undertaken. The regional offices would be responsible for direct supervision of project preparation, construction and operation. Accounting Systems 2.28.5 A uniform accounting system should be developed and used in all the systems under SRH or SSA responsibility. Concurrently, SRH and SSA should improve their present informtion and accounting systems so that: (1i consolidated financial statements of water supply and sewer- age activities in the country could be prepared for all SRH and SSA operated systems;  - 23 - (ii) relevant information could be prepared for all ongoing proj- ects and operations on a partial and consolidated basis (i.e., by region or city size). Special problem projects could be reported separately; and (iii) a special study could determine the information needs at various levels of the SRH and SSA; moreover a reporting and management information system based on the indicators mentioned in (i) and (ii) could be developed. Water Supply and Sewerage Services General 2.29 General service levels in water supply and sewerage for 1970 are shown in the table in the Summary, paragraph 1.01, and estimations for 1973 in both the urban and rural areas are shown in Tables 7 and 8, paragraph 2.33 and 2.40 respectively. Substantial progress has been made, especially in the urban area, in the provision of public water supply service over the past twenty years. In 1950, approximately five million urban residents or over 45 percent of the urban population were served by piped distributed supplies. In 1970, some 70 percent of the urban inhabitants or almost 20 million were being served, a commendable overall increase in service levels of nearly 25 percent. This has been accomplished in the face of a rapidly growing urban area and considerable change in the urban/rural mix. In 1950, the urban/rural mix ratio was 42.6/67.4 and in 1970 almost exactly the reverse 57.8/42.2. 1/ This has required a major concentration of the nation's sector resources 2T in the urban area. The demographic trend forecasts a constantly increasing urban/ rural mix reaching 78.5/21.5 in the year 2000, thus continuing the demand for increasingly higher expenditures and emphasis in the urban area not only to keep pace with population growth but to clear up an important backlog of projects. 2.30 Similar progress has been accomplished in the rural area. Public water supply coverage increased from approximately 15 percent in 1965 to slightly over 20 percent in 1970, an increase in service levels of around five percent. Approximately 88 percent of the 95,400 rural communities or around 83,600, each having populations of 500 or less, represent almost 44 percent of the rural total. Experience has shown that provision of organized commu- nity water supply systems to this rural segment on a nationwide basis is for the most part rarely feasible owing to difficulties in engineering, eco- nomics and management. Other forms of water supply must be provided to this group and different methods of management and finance have to be used. On the other hand, provision of water supply systems to rural communities in the population range of 500 - 2,500 totaling less than 12,000 and representing over 55 percent of the total rural population is much more feasible in both management and finance. There are many factors influencing this, which are 1/ Table 1, paragraph 2.02. 2/ Water supply and sewerage.  - 24 - not discussed here but which must be taken into consideration in dev\etlping urban/rural investment and establishing realistic sector goals. 2.31 Sufficient information is not available to provide more than rough estimates of service coverage levels by the end of 1973. Representative in- formation, however, covering some 150 citites and 50 rural communities has been examined which indicates that such coverage in both water supply and sewerage has kept pace with net population growth. It has, therefore, been assumed that, on a percentage basis, 1973 coverage of water supply and sewer- age in both the urban and rural areas is essentially the same as that of 1970. 2.32 Table 8, Appendix E shows comparative population coverage of water supply and sewerage/waste disposal service in 12 Latin American and Caribbean countries, including Mexico. Mexico is seventh in water supply and ninth in sewerage. Compared with three other countries of comparable size (Argentina, Brazil and Colombia) Mexico, even though ranking fourth, compares favorably with Brazil and Argentina in water supply and with Brazil in sewerage. Ac- cording to these statistics, of the four countries mentioned above, only Colombia in urban water supply and Argentina in rural waste disposal have met or exceeded the 1980 service level goals in water supply and sewerage as established at the October 1972 meeting of the Latin American Ministers of Health in Santiago de Chile. Urban 2.33 The present service levels of coverage in urban water supply and s-werage are shown in Table 7, as follows:  - 25 - Table 7 URBAN WATER SUPPLY AND SEWERAGE COVERAGE 1973 (Population and Connection Figures Expressed in Millions) Item No. of % of Population % of Population % of No. of % Cities Total Total Served Total House Conn. Water Supply Total 2/ 2,179 100 34.119 100 24.015 70.3 4.07 100 SRH 554 25 6.149 18 3.633 10.6 .636/ 15 Municipalities 3/ 1,625 75 27.970 82 20.382 59.7 3.44 85 Sewerage Total 1/ 2,179 100 34,119 100 13.648 40.o 2.39 100 SRH 91 4 2.927 8 1.171 3.4 .21 9 SRH 118 6 1.206 4 1483 1.4 .08 3 Municipalities l,970 90 29.986 88 11.994 35.2 2.10 88 1/ Projected from 1970 Census statistics; see Tables in Summary, paragraph 1.01 2/ Systems operated by SRH (Federal Boards and Direct Administration) 3/ Of which about 400 systems have received financial assistance and are administered by the Municipalities under SRH's supervision. 4/ Systems operated by SRH in cities where SRH has responsibility for water supply 5/ Systems not operated by SRH, but in cities where SRH has responsibility for water supply 6/ 56.4 percent or 0.355 million house connections are metered  - 26 - 2.34 There are about 20 sewage treatment plants in operation in Mexico. Seven plants located in Mexico City produce treated sewage for irrigation of the parks in the city. Most of the city's waste water is disposed of un- treated into an open canal. Three sewage treatment plants are in Monterrey and produce treated sewage wholly for industrial use. In water scarce areas which are at the same time major population centers, like the Valley of Mexico, the Lerma Basin and Guadalajara, sewage treatment and consequent reuse for human consumption is likely to soon become an economical source of water supply. Studies need to be initiated to determine alternative techniques and costs of sewage treatment and reuse in various regions of the country. 2.35 Within the percentages of coverage as shown, there are certain common problems in water supply not only effecting systems operation and maintenance, water quality and quantity considerations, but also undermining financial questions like tariffs, unaccounted-for water, and the control and measurement of production and consumption. Such matters are discussed in general terms on the basis of data provided by SRH and by mission visits to 55 cities, ranging in population from 7,500 to over 100,000 inhabitants and representing around five percent of the cities in that population range. 2.36 The management of water supply and sewerage systems varied in accor- dance with the type of local responsible agency or organization as well as the technical and managerial experience and capacity of its personnel. Wide varia- tions in management were evident in the basic records maintained on general operations. In poorly organized systems, for example, it was often difficult to secure financial records or statements concerning current revenues and expenditures, water production and consumption data. In cities where both water supply and sewerage were operated by the municipality, it was not an uncommon practise to utilize water revenues for other urban public works. Furthermore, there was an apparent lack of sufficient guidance and supervision in operational procedures. But it was generally observed that, where SRH is directly involed, a more efficient and well ordered organization resulted. The Federal and State Boards operating under outdated laws usually functioned well and efficiently, but it is becoming increasingly difficult for SRH to be appropriately represented on a nationwide basis due to the great number of systems and its limited number of technical personnel. 2.37 Financial records or statements sufficiently complete to enable some kind of analysis or assessment were available in very few cities visited, generally those over 100,000 inhabitants. Records from some 37 cities were obtained from the Federal Government (SRH) upon return of the mission teams to Mexico City. 1/ Few cost accounting sytems were found to exist and at 1/ The official IBRD/WHO Mission and counterpart personnel were divided into five teams and simultaneously visited 26 urban cities (10,000 - 100,000) and 13 rural communities (February 5-16, 1974). Earlier (January 15-26, 1974) the IBRD Urban Mission visited 29 urban cities (over 100,000 population).  - 27 - best this covered current expenditures of administration, operation and maintenance. But more often, current revenues were insufficient to maintain adequate systems' operation and, in particular to carry out total required repair and improvement work. The financial records, however, give a distorted picture of this sitation since they indicate an annual operations surplus. Yet, in at least 40 percent of the cities, records do not include debt service and/or depreciation. If these were to be included, operation deficits would probably appear. The socioeconomic ratio 1/ used in the determination of ability to pay a reasonable portion of the-real cost of water was found to be only 3.6 2/ against a ratio of 12 considered to be reasonable in Mexico. 2.38 Various problems were noted in operation and maintenance. The difficulty in making proper and timely repair to systems' networks was prob- ably the most common problem. The networks are, in many cases, deteriorating rapidly from age, corroding pipe lines, etc., and in other cases poor original construction is considerably reducing the useful life of works and appurte- nances. Such delays in providing proper repair were usually found to stem from lack of sufficient funds and/or a lack of adequate technical guidance and supervision, either within the local agencies themselves or from SRH. 2.38.1 Unaccounted-for water ranging from 20-65 percent is evidence of poor, inadequate operation and may stem from various factors, including systems' deterioration from age and corrosion, poor control and measurement, illegal connections, defective meters, etc. In many cases, unaccounted-for water also represents potential available water sources. Thus, a major em- phasis should be placed on programmes designed to reduce unaccounted-for water, especially by correcting network system leakage and providing more effective control of consumer consumption and waste. 2.38.2 It was generally observed that operation in sewarage systems was inferior to that in water supply, even though in some cities the needs were more urgent. It was further evident that water supply received higher priority, and consequently scarce repair funds were first applied to water supply to the detriment of the usually much older and more deteriorated sewer- age systems. Examples of this usually occur in cities where user service charges were billed on the same statement. 2.39 The need for new and additional water sources is a critical problem in cities over 100,000 inhabitants which are located in certain Regions of 1/ Studies have indicated that a range of ratios of 8 to 20 could be considered as adequate, averaging 12. This means that one day's minimum wage would pay one month's water bill. ratio = minimum annual tariff minimum daily wage 2/ Ratio in 26 cities visited (10,000 - 100,000).  - 28 - the country as discussed in Water Resources, paragraphs 2.08-2.13. In addi- tion, the larger cities have a common concern for network improvement, water losses, production and consumption control, and in some instances, improved water treatment facilities and updating of equipment. Rural 2.40 The present service levels of coverage in rural water supply and sewerage are shown in Table 8, as follows: Table 8 RURAL WATER SUPPLY AND SEdERAGS - COVERAGE 1973 (Population and Connection Figures Expressed in Millions) Item No. of % of Population % of Populaticn % of No. of % Villages Total Total Served Total House Conn. Water Supply .Total 2/ 95,401 100 20.767 100 4.195 20.2 .101 100 S&A _/ 95,178 99+ 20.358 98 3.968 19.1 .o62 61 SR4 223 nil .409 2 .227 1.1 .039 39 Sewerage Total _ 95,401 100 20.767 100 .631 3.1 SSA Y 95,371 99+ 20.715 99+ .594 2.9 SRH 44 nil .007 nil .005 nil SRH 5/ 26 nil .045 nil .032 .2 1/ Includes only pu'blic sewerage; insufficient information available on coverage or adequacy of rural excreta disposal for reporting purposes. 2/ Prcjected from 1970 Census statistics; see Table in Sector Brief. 3/ SSA responsible for planning, design and const in via CCIS; local Boards or Juntas operate and maintain majority of systems. L/ Systems constructed and operated by SRHi (Direccion De Pequenas Obras); population range 500 - 2,500; 11,781 communities; 11.8 million population. 5/ Systems not operated by SRLI, but in communities where SRH has responsibility for water supply.  - 29 - 2.4i The operational problems found in the urban area are generally found in the rural area but with greater severity. The local Boards, consisting mainly of local citizens and receiving technical assistance and supervision from SSA (CCIS) and from various State Boards, still have problems with systems' operation and maintenance. While such outside assistance is provided wherever possible, it is often too infrequent to be of real and sustained value, and frequently supervision from CCIS is suspended after delivery of the system to the community. This was also apparent in some of the rural systems under the supervision of SRH. Rural communities, that are located close to cities and experiencing many of the same problems, advantageously receive some assistance from those cities. 2.42 Eighty-five percent of the rural population served is provided water service by public hydrants, and consequently water demand and consump- tion are relatively low with very simple systems. The problem of existing and future water source needs in the rural communities visited was not serious. Estimated consumption ranged rather widely from 25 to 200 lpcd, and averaged about 100 lpcd. It was only possible to estimate unaccounted-for water in one system visited (30%); the remaining systems were not aware of water losses, if any. In all systems, recorded revenues were sufficient to support current expenditures. The operations surplus ratio averaged 1.4 (current revenues/current expenditures) and ranged from a low of 1.0 to a high of 8.1. The socioeconomic ratio 1/ regarding tariffs and minimum daily wage for the rural systems visited averaged 3.9. This seems low, especially in comparison with the urban standard of 12, but since rural water supplies are expected to generate only sufficient revenues to support current expendi- tures, tariff structures may require only minor modification. It was also noted that there was no control or surveillance of water quality or, perhaps more important, the location of raw water sources and construction of water intakes. This, however, may not be representative of the other rural systems, but should be checked. 2.43 As Table 8 indicates there was insufficient information available to enable a definition of the present situation in rural excreta disposal. Public sewerage exists only in those rural communities having public water supplies with minimum house-connected service of 70 percent. This amounts to a population of 0.631 million or approximately 3.1 percent of the total rural population. There were no public sewer systems in any of the rural communi- ties visited by the mission. The vast majority of the rural population, over 20 million inhabitants, must rely on individual waste disposal facilities, i.e. latrines and water-borne systems, such as septic tanks, seepage pits, etc. In the rural communities visited, large percentages of the population practice open defecation. 2.43.1 A strong effort must be made by SSA to survey the existing condition of sanitation in the rural area, especially the situation of excreta disposal in those communities ranging in population from 500 to 2,500 inhabitants, 1/ Page 27, Footnote 1.  - 30 - and, where possible, in rural population conglomerates of 100 to 500 inhab- itants. The former group offers greater possibilities for organized sani- tary latrine programmes and for some type of organized water-borne disposal when the communities have water supply systems. The latter group, however, is best suited to organized sanitary latrine programmes on a self-help basis. The present situation is not good, and steps to remedy it should be taken as soon as possible. Approximately M$340 million is proposed by the report to be invested in rural sanitation for the period 1975-1980, which would provide individual excreta disposal facilities to ten percent of the rural popultion by 1980. In addition, approximately M$1,070 million is recommended for rural water-borne sewerage during the same period and would, by 1980, attempt to serve up to twenty percent of the rural population. Both coverage levels would meet recommended sector goals. 2.44 It is recommended that training programmes as well as administra- tive and technical assistance in systems' operation and maintenance should be provided to local Federal Boards and municipalities from the Central and regional levels of the Operation Subsecretariat of SRH, concentrating on a pilot area of small urban systems where serious deficiencies exist, and continuing to expand assistance to smaller and larger urban systems; similar assistance should be provided by SSA (CCIS) to local Boards in the rural area. Financial and Economic Situation Past Investments 2.45 Past investment in the water supply and sewerage sector during the period 1971-1974 has been developed from an examination of available records and is shown in Table 9. 1/ The investments for the years 1971, 1972 and 1973 were actual expenditures and the expenditures for 1974 are those authorized or allocated for that year. The total sector investment of M$8,846 million 2/ was approximately 5.2 percent of the total public sector capital expenditures during the same period. 1/ Table 12.1, Appendix G, details past investment in sector by agency and years 1971 - 1974. 2/ Corresponds approximately to the investment in 1973 prices.  PAST INVESTMENT IN SECTOR 1971 - 1974 (Mexican 1973 Pesos, Millions) Agency Expenditures and Percentage Area Total SRH FED. DIST.-/ SPN BNOSP SSA States IDB Misc2f Urban % % % % WS 14093.3 1614.3 39.4 537.2 13.1 75.0 1.9 651.8 15.9 _ 795.7 19.4 100.6 2.5 323.7 S 2795.0 609.6 21.8 1044.1 37.4 50.9 1.8 434.5 15.6 - 453.8 16.2 42.9 1.5 159.2 Rural WS 1649.5 49.0 2.9 162.9 9.9 1437.6 87.2 - - - S 303.1 33.9 11.1 1o8.6 35.8 160.6 52.9 - - - Total 8845.9 2223.9 1581.3 208.8 1357.8 1598.2 1249.5 143.5 482.9 1/ Financed through domestic borrowings, budgetary contributions and internal cash generation. 2/ Additional Investment in sector by local municipalities; internal cash generation estimated at 5% of the urban investments. CD '.  - 32 - 2.46 Of the total investment, 98 percent was financed from Mexican sources through Federal and various State and local Governments, the BNOSP and commercial banks. The only external source of record was M$143.5 million provided as a loan from the Interamerican Development Bank (IDB) for water supply and sewerage facilities for the City of Monterrey. 2.47 The total investment was financed with budgeted funds or contribu- tions from Federal agencies, the Federal District, State Governments and local municipalities 1/ in the amount of about M$6.3 billion or about 70 percent of the total, the remaining 30 percent coming from loans (BNOSP, IDB, etc.) and, to a very small amount, internal cash generation. The urban/rural mix of the investment was 78 and 22 percent respectively, with approximately 65 percent of investment funds expended for water supply. Past Operations 2.48 It was not possible with the information available to determine precisely the sector operating surplus/deficit for the period 1971-1974. However, from a study of financial statements and other records obtained, covering 37 representative cities, 2/ average per capita water revenues 3/ and expenditures were calculated (for the year 1972-73), weighted according to city size and region and then used to estimate total revenues and current expenditures from 1971 through 1980 on the basis of the population served (actual or projected) in each of these years (see Table 11, paragraph 2.52). Table 10 provides summary data from the 37 city sample of water costs, revenues and current expenditures: 1/ Federal agencies, 70 percent, State Government, 20 percent; and local municipalities, 10 percent. The Federal agencies are SRH, SSA and SPN. 2/ Paragraph 2.37 and Table 9, Appendix F. 3/ Meaningful sewerage revenues and expenditure data could not be obtained. The scattered data available, however, suggest that sewerage revenues are extremely low, probably not even covering operations and maintenance costs. For the financial analysis in this report, it is assumed that sewerage revenues are equal to sewerage operations and maintenance costs.  - 33 - Table 10 Water Costs and Revenues in Sample Cities Summary 1/ ~~~2/ 3 TE4' __ ___/8 PRC/ No. of lpcd-- rpcd= TE-4 TI5/ MY R7_/ Average-/ Cities P B or C E)M (P) M3(P) 3 (B) RP 1 3 285 241 0.566 0.445 0.483 0.743 51.63 2 4 333 232 0.345 0.432 0.598 1.308 55.48 3 15 365 238 0.391 0.494 0.648 1.309 60.34 4 13 300 200 0.679 0.651 0.976 0.970 84.66 5 2 488 415 0.543 0.548 0.645 1.009 93.03 Total of 37 cities, 13 Regions in 4 Zones 1/ Population Range Code 1 = 10,000 - 20,000 2 = 20,000 - 40,000 3 = 40,000 - 100,000 4 = 100,000 - 500,000 5 = 500,000 and over 2/ Liters per capita per day of population served P = water produced 3/ Liters per capita per day of population served B or C = water billed or consumed 4/ Total Current Expenditures per cubic meter of water produced 5/ Total Income per cubic meter of water produced 6/ Total Income per cubic meter of water billed 7/ Ratio of 5/ divided by 4/ 8/ Average Revenue expressed $M/yr/capita of population served Table 9, Appendix F.  - 34 - 2.49 Some tentative conclusions can be drawn from studying Table 10. To reach more definite conclusions, the accuracy of the basic data will have to be checked further, and it is suggested that these tentative conclusions be taken as indications of areas where further investigation may be needed. (i) It appears that water revenues per m3 are low for the smallest and largest categories of urban areas. Low revenues in small locales could be justified by the low average income of the people living in these areas, but the justification of the low revenues in large areas should be further investigated, particularly since they are not balanced by proportionately lower costs, and the operating surplus (R) is consequently very low. Is it that tariff levels in large cities are unusually low in relation to what the population could pay, and/or could costs and unaccounted-for water be reduced in these places? (ii) Another area to investigate further may be the high water losses, especially in medium-size cities. Are there particular operation and maintenance problems in these cities? Recommendations 2.50 SRH should initiate: (i) A special study as soon as possible to determine losses and unaccounted-for water for various types of cities and regions; (ii) On the basis of the findings of the study, SRH should undertake appropriate programs (metering, leak detection, etc.) to improve efficiency where it is most urgently needed and implement the tariff recommended by the tariff studies. Pricing Policy 2.51 In the past Government policy has been to finance capital invest- ment in the sector mostly by grants. Government contributions to the sector have always been free of interest with very long amortization periods. In practice, many contributions are not paid back at all since the amortization rate is determined by the excess of revenues over operation and maintenance costs of the individual systems. This formula in fact encourages the local water boards to set tariffs so that no surplus is generated. The State Governments have provided grant funds to the sector in a manner similar to that of the central government. As the central (SRH, SSA, SPN), state and local government contributions to the overall sector investments have been quite substantial (about 70%), the total sector investments have been largely grant financed.  - 35 - Estimated Sector Operating Surplus/Deficit 1971 - 1974 (Billions of 1973 Msxican Pesos) Table 11 Item 1971 1972 1973 1974 A. PUBLIC SiCTOR 1/ 1. Current Rayenues 65 77 78 84 2. Current Expenditures 45 55 63 72 3. Capital Expenditures 30 44 55 52 B. WATER SUPPLY & S3WERAGE SECTOR Revenues from Tariffs (Urban Only) 4. Current Revenues_./ 1.3 1.4 1.4 1.5 . Current Expenditures/ (AOM) 1.0 1.0 1.1 1.2 6. Oper. (Surplus/Deficit) .3 .4 .3 .3 after AOM 7. Debt Service (De)3/ .1 .2 .2 .5 8. Oper. S/D after De .2 .2 .1 (.2) Cash Available for Investmet (CAI) 9. Accumulated CAI .2 .4 .5 .3 10. Capital Investment'/ 1.3 1.7 2.3 1.6 11. CAJ/Cap. Inv. 8/10 (%) 15 12 4 (13) Sector B Relative Sector A 12. Investment 10/3 (%) 4.3 3.9 4.2 3.1 13. Surplus 6/1 - 2 (%) 1.5 1.8 2.0 2.5 1/ Consolidated Public Sector - Federal Government, the Federal District, the social security agencies and 23 important enterprises and organizations (PEMEX, CFE, the railroads, etc.). State Governmenta, any partially-owned enterprises and scores of small decentralized agencies excluded. Source: IBRD. 2/ Table 14.2, Appendix G 3/ Table 15.1, Appendix G 4/ Represents urban area only: Period 1971-74, Table 12.1, Appendix G * The revenue and expenditure figures are estimated from the 37-city sample where the figures usually refer to 1972 or 1973.  - 36 - 2.52 Table 11 indicates that current revenues were estimated to cover current expenditures in urban areas 1/ for all the years 1971-74. However, when estimated debt service payments 2/ are subtracted, the surplus is turned into a deficit in 1974. If revenues and costs are projected (Table 16, page 46) with present tariffs and revenue effectiveness index, 3/ the deficit takes alarming proportions. The conclusion is that, without a radical revision of the present tariff policy and improvements in the revenue effectiveness index, not even future operation and maintenance expenditures will be covered. The analysis of the proposed investment program in paragraphs 4.07 - 4.12 indi- cates the magnitude of the increases in revenues needed. 2.53 The Mexican Government has recently indicated that it is prepared to review its water and sewerage tariff policy and the following guidelines are recommended for such review: (i) As a general objective, tariffs should reflect as closely as possible the long-run marginal cost of expanding water supply and sewerage in each community; this objective is particularly important to pursue in Mexico, where the scarcity of water imposes a real constraint on development in many regions. (ii) Given the above general objective, it is recognized that tariffs below the marginal cost may be needed in low-income communities. In line with the ideas presently being developed in SRH, it is suggested that: (a) the communities be classi- fied into socioeconomic groups; (b) a desirable maximum per capita investment be determined for each socioeconomic group; (c) investments up to the desirable maximum may be grant financed, the amount of the grant being determined on a per capita basis depending on the socioeconomic level; (d) invest- ments above the desirable maximum would not be grant financed; 1/ Table 11 has been prepared on the basis of the 37 city sample as if it were representative for the entire urban part of the sector. This assumption can be criticized; the smallest cities, for instance, are clearly underrepresented. The weights that have been used partly correct the deficiencies of the sample. The calculations should be seen as a first crude attempt to determine the overall sector financial position. 2/ The basis for estimating debt service is given in Appendix G, Table 15.1. Because of the risk element of grant financing, the estimated actual debt service is very low. Even if revenues were made to cover current expenditures and debt service, a positive rate of return on the assets invested in the sector would not be the result, i.e. debt service is less than depreciation. 3/ The relation between the potential revenues which could be collected with existing tariffs and revenues actually collected.  - 37 - (e) investments in communities at the highest socioeconomic level would only be financed by loans carrying interest. (iii) In urban areas, the tariffs should be high enough to assure that total revenues cover at least operation, maintenance and depreciation expenditures of each system. For all urban systems together, the financial result should exceed these requirements. 1/ In rural areas tariff revenues should cover at least operation and maintenance expenditures. However, in these areas a community contribution towards the investment of 10%-20% should also be required. (iv) The present practice of cross-subsidization (through a pro- gressive tariff) between consumers in one community should be continued both to assure that the low-income population has access to water and to discourage excessive consumption by heavy users. The above formula has the advantage of assuring the financial viability of the sector. At the same time, it would result in a more economical pricing policy where price could provide an effective signal to future investments. The formula also has the advantage of making grants explicit and expressed on a per capita basis. In the present system, the grants to the sector are not clearly shown and the amount of a grant varies not only with the socio- economic level of the beneficiaries (as should be the case), but also with the cost of the system expansion and the ability of communities to bargain with central and state governments. 2.54 Higher tariffs are usually resisted by the consumers and should be preceded by programs of public education in the various regions of the country, explaining the reasons for increased tariffs. 2.55 The metering policy of the country is apparently well established. However, in cities betwen 2,500 - 10,000, the predominant amount of revenues is produced from fixed monthly rates. The trend is to eventually install meters in all systems in cities in this category. Of the water supply systems in cities with 10,000 or more inhabitants the great majority of the connections are said to be metered 2/ and tariffs are based on metered consumption. In spite of this, in a number of the cities visited, poor and 1/ When analyzing the finances of the overall sector, the recommended financial policy has been expresed as annual revenues covering opera- tion, maintenance, debt service plus 25% of projected annual invest- ments. In the Mexican context this policy would not likely correspond to a positve rate of return. 2/ House connections. Also para. 2.33, Table 7. Urban water supply systems operated by SRH.  - 38 - inefficient record-keeping blunted the usefulness of employing metering as a control in production and consumption and in the determination of more precise measures of unaccounted-for water. However, this may or may not be representative of water supplies in the rest of the country. Efficient metering is a precondition for applying marginal cost pricing and for charg- ing consumers according to a progressive rate besides helping to improve management. 2.56 In the rural area, very few water supply systems are metered, and tariffs are based on monthly fixed rates. Of the estimated 100,000 connec- tions in systems in communities of 500-2,500 inhabitants, only slightly more than 9,000 are metered. 1/ However, meters have been installed on all house connections in recently constructed systems and will be installed in systems now under construction. Recommendations 2.57 It is recommended that: (i) Tariff studies be implemented, based on the guidelines in para. 2.53. The studies should also establish appropriate tariff structures, metering and connection policies which would assure low-income people access to water while generat- ing average revenues sufficient to meet financial and economic objectives. (ii) A financial mechanism be established (i.e., a revolving fund) through which cash surpluses and debt service payments in individual systems could be effectively absorbed and channeled to meet priority investment needs in the sector. Manpower and Material Resources Manpower 2.58 A precise assessment of the manpower resources in the country is not possible since information concerning the number and general capability is fragmentary at best. Any assessment would have to be confined to the two major agencies, SRH and SSA (CCIS), each having major activities in the urban and rural areas, respectively. Table 18, Appendix H, shows the number of professional, technician and administrative personnel provided by SRH and SSA (CCIS). The professional and subprofessional personnel engaged in water supply and sewerage/sanitation activities in State Govern- ments and local municipalities is not shown, nor are there satistics avail- able as to the number of other skilled workers engaged in sector activities. 2.59 The technical competence and experience of the professional group, civil and sanitary engineers among them, appears to be adequate, as many 1/ Rural water supply systems operated by SRH.  - 39 - existing engineering and feasibility studies have demonstrated over the past years. Further, according to the Federation of Mexican Universities and in terms of current and future production of civil and sanitary engineers, there should not be problems arising in this field in the foreseeable future. The present number of professional personnel working for the Government apparently is adequate for the execution of sanitary works under Government responsi- bility. In some of the more highly specialized areas, consulting firms are available to assist in design and project construction. The Government also indicates that local contractors are adequately qualified to undertake systems' construction at present. The mission did not observe any delay in the progress of water supply and sewerage projects due to lack of consultants for project design or contractors for project execution. However, in regard to technician and administrative personnel employed by Federal agencies, there appears to be a serious need for training and upgrading of skills. The SRH is conducting short courses of instruction and training for some of their personnel in various disciplines, but there probably remains a large corps of staff requir- ing in-service training and other job preparation. 2.60 Time permitted the mission to make only superficial observations on this important matter, nor has an attempt been made, with such scarce information on hand, to forecast future sector needs in the professional and subprofessional categories. 1/ The entire field of manpower development must be investigated, which may require considerable time and the assistance of very competent consultant and specialists in this matter. Material and Equipment 2.61 Mexican industry produces most of the materials and equipment necessary for the construction, operation and maintenance of water supply and sewerage systems, with the exception of certain specialized equipment required in water and sewage treatment processes. The Government has esti- mated that 95 percent of the equipment and material required is manufactured nationally, the remaining 5 percent must be imported. 2.62 Practically all of the pipe used in urban water supplies, i.e., distribution networks, transmission mains, etc., is asbestos-cement (AC), while the prevalent type of pipe used in the rural area is plastic (PVC). Sewerage systems in general employ various quality concrete pipe. Table 19, Appendix H 2/ provides information on the production capacity of various pipe manufacturing plants. It is estimated that AC and concrete pipe pro- duction can meet the present demands of water supply and sewerage system construction, while PVC pipe production would be flexible enough to meet rural demands for the foreseeable future. 1/ The PNH, in its preliminary study, has suggested various criteria to assist in the determination of the number of engineers, technician and administrative staff, as well as skilled and unskilled workers who will be required in future years. 2/ Preliminary Report, Water Supply and Sewerage (PNH).  - 40 - Recommendations 2.63 It is recommended that: (i) a study be undertaken of the present situation of manpower resources in the sector to determine immediate and future needs for professional, technician and administrative personnel, systems operators, skilled labor, etc; to outline, in so far as possible, academic and practical training require- ments for their development; to prepare an inventory of insti- tutions which could provide such training, and to establish a program directed toward a countrywide training capability for all personnel involved in the sector.  - 41 - III. SECTOR PLANNING 3.01 Mexico does not have long-term goals nor an established national sector plan in water supply and sewerage, but plans its sector activities on successive short-term plans developed by SRH and SSA. Substantial progress was made in the provision of urban water supply service during the period 1950-1970 and in rural water supply from 1965-1970. 1/ During the 1960's, the country subscribed to the Punta del Este Charter Goals as established for Latin America, and in relation to these goals, closely approached the urban water supply targets. The country fell short of those goals in urban sewer- age in addition to water supply and sanitation in the rural area. 3.02 At present, the country has established national goals for the period, 1971-1976, as follows: Table 12 New Population Improved Existing Investment to be Served % Service Planned (million pesos) Urban /1 Water Supply 10.0 80 4.6 5,000 Sewerage 5.5 45 2.5 2,000 Rural /2 Water Supply 8.2 50 - 2,200 Sewerage/Sanitation /3 - - Note: All population and financial figures expressed in millions. /L SRH. /2 SSA. /3 Goals were not clearly defined. 3.03 At approximately the halfway point in the period and from an exami- nation of past coverage and investment in the sector, service levels of coverage by 1976, at the present pace, will fall short of the national goals by 10 and 15 percent in urban water supply and sewerage respectively, and over 30 percent in rural water supply. 1/ Paragraph 2.29.  - 42 - 3.04 The Governemnt (SRH), in efforts to develop long-range planning in the sector, recently requested the National Water Planning Board (PNH) to study and suggest long-term goals in water supply and sewerage for both the urban and rural areas. To date, time has only permitted preliminary studies to be made by PNH in response to the request. Table 17, Appendix G, shows proposed sector goals for service coverage to the year 2000, as devel- oped by PNH. At present, meaningful sector planning is seriously hampered by the very scarce information available on the sector, particularly for the systems outside SRH's responsibility. 3.05 The mission and Government, in discussions on sector planning and the establishing of appropriate and realistic achievement targets, were in basic agreement in subscribing to some of the goals for the 1970's as set forth at the 1972 Meeting of the Latin American Ministers of Health in Santiago de Chile. It was felt that the Government's 1971-1976 program was perhaps too ambitious in terms of its goals coupled with the lack of a well organized plan to achieve them. Further, it was agreed that while long- term goals should be established, policies fixed and plans developed to act as guidelines for future action, a definite investment plan should not go beyond 1980. This approach appears sound. 3.06 In discussions with the Mexican Government, it was agreed that the following goals would be used to prepare a tentative investment program for the period to 1980: Table 13: RECOMMENDED SECTOR GOALS Population to be Served Area by 1980 (%) Urban Water Supply 80 Sewerage 50 Rural Water Supply 50 /1 Sewerage 20 /2 Sanitation 10 /1 40% public hydrants; 60% house connections. /2 Calculated on the basis of providing sewerage service to rural communities with water supplies having 70% house-connected consumers. 3.07 The recommended goals are the same as those established in the Health Ministers' meeting in Santiago for both urban and rural water supply, but are substantially lower in urban and rural sewerage. They  - 43 - are also the same as the PNH goals for urban water supply and urban and rural sewerage, but are higher in rural water supply. While the recommended goals are considered to be reasonable in terms of increased and improved service to the nation's inhabitants, they are not likely to be achieved without im- provements and modifications in certain institutional, financial and techni- cal areas. The implementation of the recommendations of this report should therefore be seen as a necessary condition to achieve the recommended goals. Recommendations 3,08 It is recommended that: (i) a national sector plan be prepared, comprising an investment program as well as a plan for the institutional and finan- cial development of the sector. As a guide for establishing the investment program, the methodology outlined in Chapter 4 of this report could be used. The programming of water supply and sewerage/sanitation activities would rest with SRH in collaboration with SSA; and (ii) studies be implemented to develop a comprehensive data and information recording, retrieval and reporting system to provide the basis for orderly and adequate planning of water supply and sewerage programs, the system to be coordinated among relevant Government agencies at the central, regional and municipal levels, providing readily available informa- tion to all agencies concerned. 1/ These studies are closely related to the accounting and information systems recom- mended for SRH and SSA (para. 2.28.5), but would also comprehend systems outside the responsibility of these institutions. 1/ Paragraph 2.24.  - 44 - IV. ELEMENTS OF A SECTOR INVESTMENT PROGRAM Development Policy 4.01 An investment program for the development of the water supply and sewerage sector has been made for the period 1975-80, based on the goals recommended in Table 13. The program could be used to generally guide pre- paration of the detailed program and to indicate the orders of magnitude of the financial resources required to achieve the recommended sector goals. No attempt has been made to establish priorities within the program. 4.02 A more specific program has been developed for the urban area con- sisting of 111 selected cities suggested by the Federal Government (SRH). These are cities which, according to SRH, need immediate attention in water supply and sewerage. This program is not an addition to the 13-Region program but a specific integral part. The selected cities have populations ranging from 7,500 to over one million inhabitants. The SRH is also consid- ering an improvement and expansion program in water supply and sewerage to 14 selected cities all having populations over or approaching 100,000. The 14 cities have not been included in the above-mentioned 111-city program. 4.03 The urban program has been developed on the assumption that all urban water supply and sewerage systems should be financially self- supporting in administration, operation and maintenance expenditures as well as depreciation of capital investment. For purposes of analyzing the finan- cial and economic viability of the program, it is expected that the urban areas as a whole would generate at least 25 percent of the cost of the urban investment program through internal cash generation. In the rural area, it has been decided that, with few exceptions, capital investment would be grant-financed by the Government, but that administration, operation and maintenance expenditures would be supported by internally generated revenues from tariffs, connection charges, etc. 4.04 The urban/rural mix of the total capital investment is 82 and 18 percent, respectively; the urban area is expected to be financed 60 percent with national or internal cash generation and 40 percent with external funds, and the rural area totally from internal budgetary sources. The apparent heavy investment in the urban area as compared to the rural, even to the point of appearing greatly disproportionate, results from the coverage goals selected which take into account, among other factors, the increasing urban/ rural population ratio and the higher per capita costs of urban systems resulting from increasing problems of finding cheap water sources. The popu- lation projection underlying the investment program may change in favor of smaller cities, thus reducing the total cost of the program if the govern- ment's effort to curb the growth of the big cities would be successful. The pricing policy recommended in paras. 2.51-2.56 would be one of the instru- ments to influence urban growth.  - 45 - Investment 4.05 The following Table 14 1/ provides a summary by years, 1975-80, of the investment required in the 13-region program of water supply and sewer- age. 2/ Summary and detailed information on the 111 selected city program is provided in Tables 13.1, 13.2 and 13.3, Appendix G. Table 14: INVESTMENT PROGRAM ANNUAL CAPITAL EXPENDITURES, 1975-1980 (Millions of 1973 Mexican Pesos) Area 1975 1976 1977 1978 1979 1980 Total Water Supply Urban /1 1,357.8 1,357.8 1,538.8 1,538.8 1,629.3 1,628.5 9,051.0 Rural 313.0 313.0 313.0 313.0 313.0 316.7 1,881.7 Total 1,670.8 1,670.8 1,851.8 1,851.8 1,942.3 1,945.2 10,932.7 Sewerage Urban /1 539.9 585.4 649.7 649.7 682.0 681.9 3,788.6 Rural 160.5 160.5 181.9 181.9 192.5 192.5 1,069.8 ED 51.0 51.0 57.8 57.8 61.2 61.2 340.0 Total 751.4 796.9 889.4 889.4 935.7 935.6 5,198.4 Grand Total 2,422.2 2,467.7 2,741.2 2,741.2 2,878.0 2,880.8 16,131.1 /1 Of total investment in water supply and sewerage (urban) 15% has been allocated to 1975 and 1976; 17% to 1977 and 1978; and 18% to 1979 and 1980. 4.06 In determining the investment funds required for the 13-region and the 111-selected city programs, per capita costs were developed based upon data provided and used by the various relevant Government agencies. Even though it was desirable to adjust per capita costs on a regional basis, reflecting different socioeconomic levels, costs of water and availability, varying construction costs, etc., it was not possible since the information was insuf- ficient in depth or scope to permit such adjustment. The estimated per capita costs for improvements and expansion of existing works in urban and rural areas were weighted to ratios of the cost of new systems. 1/ Table 12.2, Appendix G, details the investment required by regions in the 13-region program. 2/ Table 12.3, Appendix G, provides information on past and projected investment in the sector.  - 46 - Analysis of Proposed Sector Investment Program 1/ 4.07 To estimate the financial viability of the proposed water supply and sewerage program, the following procedures and assumptions were used: (i) Urban areas only were considered since rural area revenues were assumed to cover operation and maintenance only, and their cash contributions to new investments would be zero; 2/ the cash contribution in urban areas was assumed to be at least 25% towards urban water and sewerage investments. (ii) Incremental revenues and expenditures were projected yearly on the basis of the incremental population served with water, based on the RP's (average water revenues) and EP's (average water expenditures), calculated from the 37-city sample. 3/ (iii) Present sewerage revenues were assumed to equal sewerage operation and maintenance expenditures. 4/ (iv) Three alternatives were used to project revenues: (a) con- stant per capita, (b) increasing 50% per capita, (c) in- creasing 75% per capita. (v) Debt service for past and projected investments was estimated. The assumed interest rates and amortization and grace periods for past and future loans are given in Table 15.1, Appendix G. 4.08 The analysis covers the urban area of the 13-region program with a capital investment of M$12,840 million. The 111 selected cities programme at an estimated cost of M$3,770 million and the 14 selected cities programme at a cost of M$700 million are well within the cost of the 13-region programme. 1/ All investment figures are in 1973 prices. 2/ This refers to the cash contribution through tariff revenues. Rural communities would be expected to contribute 10 to 20% towards the invest- ment costs through self-help or out of general revenues or special assessments. 3/ Para. 2.48 and Tables 9 and 10, Appendix F; Tables 14.1 and 14.2, Appendix G. 4/ As a matter of policy, charges for sewer service should follow the same general criteria as for water. The fact that the assumptions used for projection purposes do not include capital recovery should not be interpreted to mean an endorsement of the policy.  - 47 - Estimated Urban Sector Operating Surplus/Deficit 1975 - 1980 with Revenues from Bxisting Tariffs Table 15 (Billions of 1973 Mexican Pesos) Item 1975 1976 1977 1978 1979 1980 A. PUBLIC SECTOR 1/ 1. Current Revenues 109 117 128 145 161 181 2. Current Expenditures 66 71 75 82 91 97 3. Capital Expenditures 62 66 75 86 92 102 b. WATER SUPPLY & SEWERAGE SECTOR (Urban Only) 4. Current Revenues 1.7 1.8 1.9 2.0 2.2 2.3 5. Current Expenditures 2 (AOII) 1.3 1.4 1.5 1.6 1.7 1.8 6. Oper. (Surplus/Deficit) .4 .4 .4 .4 .5 .5 after AOM 7. Debt Service (De) -/ .6 .6 .7 .9 1.0 1.1 8. Oper. S/D after De Cash Available for Investment(CAI) (.2) (.2) (.3) (.5) (.5) (.6) 9. Accumulated CAI .1 (.1) (.4) (.9) (1-4) (2.0) 4/ 10. Capital Investment 9/ 1.9 1.9 2.2 2.2 2.3 2.3 11. CAI/Cap. Inv. 8/10 (%) (11) (11) (14) (22) (22) (26) Sector B Relative Sector A 12. Investment 10/3 t%) 3.1 2.9 2.9 2.6 2.5 2.3 13. Surplus 6/1 - 2 (7) 0.9 0.9 0.8 0.6 0.7 0.6 1/ Consolidated Public Sector - Federal Government, the Federal District, the social security agencies and 23 important enterprises and organizations (DEMEX, CFE, the railroads, etc.). State Governments, any partially-owned enterprises and scores of small decentralized agencies excluded. Source: Thomas Hutcheson, IBRD. 2/ Table 14.2, Appendix G 3/ Table 15.1, Appendix G 4/ M$ 3.21 billion accumulated internal cash generation is required by 1980 in order to finance 25 percent of the urban capital investment programme proposed for the sector in the period 1975-80. (Total Inv. 1975-80: 12.8396 x .25 = 3.2099) It can be seen that with existing tariffs, an accivulated deficit of M$2.0 billion (16% of the urban investment programme) would accrue by 1980, if the proposed urban capital investment programme was carried out. 5/ Represents urban area only: Period 1975-80, Table 15, Appendix G.  - 48 - 4.09 Tables 15 and 16 summarize the annual urban operating surplus/ deficit and the urban sector financial situation in relation to Federal Government expenditures for the period 1975-80, with different assumptions about revenues. Tables 15, 16 and 17, Appendix G, provide details of the analysis. 4.10 The above tables indicate that existing revenues per capita are in- sufficient to support the proposed water and sewerage investment program. There will be operating deficits in each of the projected years, 1975-80, after recurrent expenditures, amortization and interest have been paid. The deficit is relatively low in the beginning of the period, reflecting the grace period of the loans financing the proposed investment program. The full impact of the debt service will only be felt after 1983 (Table 15.1, Appendix G), at which time the annual deficit is going to exceed M$1 billion if revenues are not increased in real terms. 4.11 Table 16 shows the amount of revenues that need to be generated and the percentage increase required. A 50 percent increase in revenues per capita (in real terms) would produce accumulated cash available for invest- ment over the 1975-80 period amounting to about 25 percent of the cost of the urban investment programme. However, by 1983, when the full impact of the debt service payments will occur, the cash available for investment would drop almost to zero on an annual basis. A 75 percent increase in revenues would produce accumulated cash available for investment of about 50% of the investment program cost. However, by 1983, the annual cash available would have dropped far below M$1 billion (in 1973 prices). Considering that an estimated M$2 billion of the system's upgrading investments will be needed between 1975 and 1980, a 75% increase would be desirable at least towards the end of the period. 4.17 The proposed 13-region sector investment for the period, 1975-80, calls for a 23 percent annual increase in the urban/rural area compared to the annual sector investment during 1971-74. The projected sector investment in the period 1975-80 would average M$2,700 million per year as against an average M$2,200 million per year in 1971-74, all in 1973 prices. As a percent of projected public sector investments, the proposed program would imply a decrease from about 3.8% in 1971-74 to 3.3% in 1975-80. With an increase in revenues of 50% to 75%, the sector's current surplus would increase from 0.3% in 1971-74 to at least 1% in 1975-80. The proposed sector program is there- fore considered to be consistent with the projected macroeconomic development over the period, provided that revenues are increased 50-75%. According to the assumption, 25% of the urban investment programme (M$3.2 billion) would be financed through internal cash generation. At the present time, no more than 15-20% of the investment program (US$30-40 million annually) can be expected to be financed by international lending agencies. However, interna- tional financing would be greatly facilitated if the Mexican Government adopted a development program including the establishemnt of appropriate financial and institutional policies. The remaining 55-60% of the invest- ment program will have to be financed through SRH and its commissions, SSA, BNOSP, the Federal District and state governments. However, the annual  Estimated Sector Operating Surplus/Deficit 1975 - 1980 with Increased Revenues From New Tariffs (Billions of 1973 Mexican Pesos) Item 1975 1976 1977 1978 1979 1980 1975 1976 1977 1978 1979 1980 A. PUBLIC SECTOR - 1. Current Revenues 109 117 128 145 161 181 109 117 128 145 161 181 2. Current Expenditures 66 71 75 82 91 97 66 71 75 82 91 97 3. Capital Expenditures 62 66 75 86 92 102 62 66 75 86 92 102 B. WATER SUPPLY & SEWERAGE SECTOR 50% Increase in Per Capita Revenues 75% Increase in Per Capita Revenues (Urban Only) 4. Current Revenues 2/ 2.5 2.7 2.8 3.0 3.2 3.5 2.9 3.1 3.3 3.6 3.8 4.1 5. Current Expenditures 2/(AOM) 1.3 1.4 1.5 1.6 1.7 1.8 1.3 1.4 1.S 1.6 1.7 1.8 6. Oper. (Surplus/Deficit) after AOM 1.2 1.3 1.3 1.4 1.5 1.7 1.6 1.7 1.8 2.0 2.1 2.3 7. Debt Service (De) 3/ 0.6 0.6 0.7 0.9 1.0 1.1 0.6 0.6 0.7 0.9 1.0 1.1 8, Oper. S/D after De 0.6 0.7 0.6 0.5 0.5 0.6 1.0 1.1 1.1 1.1 1.1 1.2 > Cash Available for Investment(CAI) 9. Accumulated CAI 0.6 1.3 1.9 2.4 2.9 3.5 4/ 1.0 2.1 3.2 4.3 5.4 6.6 4/ 10. Capital Investment -/ 1.9 1.9 2.2 2.2 2.3 2.3 1.2 1.9 2.3 2.2 2.3 2.3 11. CAI/Cap. Inv. 8/10 (%) 32 37 27 22 22 26 83 58 50 50 48 52 Sector B Relative Sector A 12. Investment 10/3 (%) 3.1 2.9 2.9 2.6 2.5 2.3 3.1 2.9 2.9 2.6 2.5 2.3 13. Surplus 6/1 - 2 (%) 2.8 2.8 2.5 2.4 2.1 2.0 3.7 3.7 3.4 3.2 3.0 2.7 1/ Consolidated Public Sector - Federal Government, the Federal District, the social security agencies and 23 important enterprises and organizations (DEMEX, DFE, the railroads, etc.). State Governments, any partially-owned enterprises and scores of small decentralized agencies excluded. Source: Thomas Hutcheson, IBRD. 2/ Table 14.2, Appendix G 3/ Table 15.1, Appendix G 4/ M$ 3.21 billion accumulated cash generation is required by 1980 in order to finance 25 percent of the urban capital investment F programme proposed for the sector in the period 1975-1980. (Total investment 1975-1980: 12.8396 x .25 = 3.2099) 5/ Represents urban area only: Period 1971-1974, Table 12.1, Appendix G: Period 1975-1980, Table 15, Appendix C  - 50 - financing from these sources would be approximately the same as during the 1971-74 period in constant prices, and their share of total public sector financing substantially lower. Recommendations 4.13 The proposed investment program and its analysis should be under- stood as a guideline for financial sector planning rather than as recommenda- tions for a specific program. The mission proposes that the Mexican Govern- ment define the desired service level goals for 1980, determine the cost of carrying out such a programme, and analyze the financial implications follow- ing the analytical framework outlined above. Various investment program alternatives and various targets for the financial viability of the sector should be tested. Tariffs and debt service capacity should be analyzed and the effect on the public sector's financial situation should be spelled out for each alternative tested. A special study should determine which finan- cial targets would be consistent with the economic pricing policy outlined in paras. 2.51-57. In order to pursue this analysis, more reliable cost and expenditure data, also including sewerage revenues and expenditures, need to be collected for a larger number of representative cities. Per capita in- vestment costs should be determined for different regions and cities of different sizes. The spatial distribution of the population to be served should be determined. Information on metered consumption and tariffs paid by metered consumers should be collected to analyze regional and city differ- ences in the revenue effectiveness index (expressing the difference between potential revenues that could be collected and actual revenues collected). Such information should also indicate the scope for improvement in the index. With this data, the financial implications of shifting the mix of the invest- ment program between urban and rural areas and between cities of different sizes could be analyzed, and hence, a clearer picture of the economic costs and benefits of investments in different areas would emerge. 4.14 The analysis of the proposed investment program suggests the follow- ing recommendations for a sector financial policy to be implemented by the Presidential Secretariat and the Finance Ministry (Secretaria de Hacienda y Credito Publico): (i) Revenues per capita have to be increased substantially in real terms (at least 50%) in order to assure the financial viability of the proposed water and sewerage program; (ii) Because debt service payments are increasing throughout the period and only reach their peak in 1983, there is some scope for a gradual increase in revenues which would be more politically acceptable. A gradual increase in real terms (through tariff increases and improvements in the revenue effectiveness index), reaching 50% in 1978 and 75% in 1983, would be consistent with the projections in Table 16, Appendix G. The shortfall of revenues during the  - 51 - beginning of the period would then be compensated by higher revenues towards the end of the period when the revenues will be most needed to meet debt service payments. (iii) It should be understood that the above analysis is made in constant prices and that the suggested increases in revenues are, therefore, in addition to the increases needed to compensate for the inflation occurring during the period. It is recommended that tariffs will be fre- quently reviewed (for instance, whenever the minimum wage changes) and adjusted automatically for inflation.