Mexico - Lazaro Cardenas Conurbation Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7006 PROJECT PERFORMANCE AUDIT REPORT MEXICO LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT (LOAN 1554-ME) November 9, 1987 Operations Evaluation Department This document has a restricted distribution and may be used by recipients oniv in the perfomiance of their official duties. Its contents mav not otherwise be dir d wit *i Wfre I P - Wt I '7 t'  Country Exchange Rates (Yearly Average) Currency and (Abbreviation) Peso (Mex$) Year Mex$ per US$ 1975 (Project Preparation Started) 12.50 1976 (Project Appraised) 15.43 1977 (Project Re-appraised) 22.57 1978 (Project Approved) 22.77 1979 (Project Becomes Effective) 22.81 1980 22.95 1981 24.51 1982 (Expected Closing Date) 56.40 1983 (Loan Account Closed) 120.09  FOR OUV1a1 L u ONLY THE WORLD BANK Washington. DC 20433 US^ Oce CA Ovcohvc..f4al Op..aeumw bvaklub' November 9, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Mexico Lazaro Cardenas Conurbation Development Project (Loan 1554-ME) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Mexico Lazaro Cardenas Conurbation Development Project (Loan 1554-ME)" prepared by the Operations Evaluation Department. Yves Rovani by Ram K. Chopra Attachment 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.  I~~~~2  PROJECT PERFORMANCE AUDIT REPORT MEXICO LAZAPO CARDENAS CONURBATION DEVELOPMENT PR( (LOAN 1554-ME) TABLE OF CONTENTS PaRe No. Preface ...........i Basic Data Sheet ...................................... . .ii Evaluation Summary ................................................ v PROJECT PERFORMANCE AUDIT MEMOPNDUM I. BACKGROUND ................ 1 II. PROJECT IMPLEMENTATIOI . . ................................ 5 III. PROJECT RESULTS ....... 7 IV. CONCLUSIONS .. ....... 12 TABLE Project Progress . . . 15 ANNEX Borrower Comments . . . 18 PROJECT COMPLETION REPORT I. Introduction .. . ........ 27 II. r--ject Identification, Preparation and Appraisal ....... 28 III. Project Description and Implementation .................. 29 IV. Operating Performance . . ... 30 V. Economic Re-evaluation .. ........................... 35 VI. Conclusions .... 36 ANNEX I Table 1 Population of the Lazaro Cardenas Region ....... 38 Table 2 Physical Achievements and Final Project Costs.. 39 Table 3 Implementation Arrangements .................... 40 Table 4 Comparative Income Statements .................. 41 Table 5 Project Benefits ............................... 42 Table 6 Internal Rates of Return ....................... 43 Table 7 Disbursement Allocations ....................... 44 Chart 1 Implementation Schedule .... .. . 45 MAPS IBRD 12489R IBRD 13455 IBRD 17795 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.  ,,of~ 6 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  PROJECT PERFORMANCE AUDIT REPORT i"IEXICO LAZARO CARDLNAS CONURBATION DEVELOPMENT PROJECT (LOAN 1554-ME) PREFACE The following is an Audit report on the performance of the Lazaro Cardenas Conurbation development project in Mexico. This was one of the earliest Bank projects to address uirban development, and the first in Mexico. A loan to assist in financing the project was approved in April 1978 (Loan 1554-ME, US$16.5 million); however, it did not become effective until February 1979 because Mexico had difficulties ir. meeting an effectiveness condition. The loan was expect-d to be fully drawn down and the account to be closed in June 1982, it was closed, and the loan fully disbursed, only a year late in June 1983. The project was followed by the Second Urban and Regional Develop- ment Project approved in May 1981 (Loan 1990-ME, US$164.0 million). This report consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Latin America and Caribbean Regional Office (Li.). The PPAM is based on a review of the Staff Appraisal Report (SAR), tuLe President's Report (PR), the legal documents on the project, the Minutes of the E~,ecutive Directors' Meeting at which the loan was approved, the PCR, Bank records and files, interviews with Bank staff familiar with the project, and a field visit in March 1987. The PCR is based on a Borrower Completion Report (BCR) prepared by consultants hired by the Borrower and financed partly under the follow-up project, and on a field mission in Septem- ber 1985. The assistance of the Mexican Government, the Borrower (Banco Nacional de Obras y Servicios Publicos, BANOBRAS) and the Executing Agency (Fideicomiso Lazaro Cardenas, FIDELAC) are gratefully acknowledged. The PCR presents a succinct factual account of the project. It acknowledges that project goals and objectives were only partially achieved (para. 4.1), but does not continue to explain in detail why this was the case. The PPAM examines the reasons for the shortcomings more fully, it reviews the background and history of the project, and draws lessons from the event. The draft PPAR was sent to the Borrower and other Governm.ent agen- cies for comments, they are reproduced as Annex I to the PPAM.  -/'~2  .Li PROJECT PERFORMANCE AUDIT REPORT MEXICO LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT (LOAN 1554-ME) BASIC DATA SHEET Key Project Data Appraisal Actual or Item Expectation Reestimate Project Costs (US$ mln) 36.1 1/ 68.4 Cost (Underruns) or Overruns (Z) 0 90 Loan Amount (US$ mln) 16.5 '6.5 Disbursed (US$ mln) 16.5 -.5 Cancelled (US$ mln) 0 0 Repaid (US$ mln)(02.28.87) 5.7 Outstanding (US$ mln)(02.28.87) 13.8 2/ Project Completion Date 12/81 12/83 2 Completed by Expected Date 100 65 Economic Rate of Return (Z) 24 23 3/ Other Project Data Original Actual or Plan Reestimated First Menti3n in Files 06/75 Government's Application - 11/76 Appraisal 10/76 11/76 Negotiations 03/78 03/78 Board Approval 04/78 04/78 Loan Agreement Date 07/78 09/78 Effectiveness Date 12/78 02/79 Closing Date 06/82 06/83 1/ A project worth US$91.0 million was originally appraised and a loan worth US$50.0 million was intended to be made to assist in its implementation. After appraisal the project was considerably restructured and eventually it was reappraised. The figures shown refer to the revised, cut down project. 2/ Includes a positive foreign exchange adjustment of US$3.0 million. 3/ Lack of information prevented the Audit from verifying the rate of return expected at appraisal and a review of the rate estimated on completion revealed that the estimate was questionable (PPAM, paras. 27 and 28).  iii Other Project Data (Continued) Borrower Banco Nacional de Obras y Servicios Publicos Guarantor United Mexican States Executing Agency Fideicomiso Ciudad Lazaro Cardenas, FIDELAC Fiscal Year of Borrower January 1 to December 31 Follow-on Projects Second Regional and Urban Development Project (Loan 1990-ME, US$164 million, May 1981) Cumulative Estimated and Actual Disbursements (US$ million) FY79 FY80 FY81 FY82 FY83 Estimated 3.2 9.0 13.2 16.5 - Actual 0 1.8 4.3 8.5 16.5 Actual/Est. (Z) 0 20 33 52 100 Staff Input (Staff-Weeks) FY76 FY77 FY78 FY79 FY80 FY81 Preparation 18.9 42.8 .7 Appraisal . 83.1 64.5 Negotiations . . 5.1 Supervision . . 1.0 27.1 15.8 23.3 GRAND TOTAL 18.9 125.9 71,3 27.1 15.8 23.3 FY82 FY83 FY84 FY85 FY86 TOTAL Preparation . . . . . 62.4 Appraisal . . . . . 147.6 Negotiations . . . . . 5.1 Supervision 18.1 5.9 11.0 5.6 9.3 117.1 GRAND TOTAL 18.1 5.9 11.0 5.6 9.3 332.2  iv Field Mission Data Month/ No.of No.of Staff Report Item Year Weeks4/ Persons Weeks Date Identification 06/75 0.4 2 0.8 - Preparation 07/75 1.0 3 3.0 08/75 Preparation 11/75 0.4 1 0.4 - Preparation 03/76 0.4 1 0.4 07/76 Preparation 06/76 2.0 3 6.0 07/76 Preparation 08/76 0.2 1 0.2 - Preparation 09/76 1.5 4 6.0 10/76 Preparation 09/76 0.4 3 1.2 - Appraisal 11/76 3.0 9 27.0 _ Post-appraisal 02/77 0.5 1 0.5 - Post-appraisal 02/77 2.0 1 2.0 03/77 Post-appraisal 05/7, 1.0 2 2.0 05/77 Reappraisal 06/77 2.0 4 8.0 07/77 Post-reappraisal 08/77 0.4 1 0.4 08/77 Post-:eappraisal 08/77 0.4 1 0.4 08/77 Post-reappraisal 10/77 2.0 5 10.0 11/77 Post-reappraisal 10/77 0.2 2 0.4 - Supervision I 10/78 1.0 4 4.0 01/79 Supervision II 01/79 2.0 4 8.0 03/79 Supervision III 10/79 1.4 4 5.6 11/79 Supervision IV 05/80 1.0 2 2.0 06/80 Supervision V 09/80 1.0 2 2.0 10/80 Supervision VI 06/81 1.0 3 3.0 07/81 Supervision VII 12/81 1.0 2 2.0 12/81 Supervision VIII 02/82 1.0 2 2.0 03/82 Supervision IX 03/82 0.2 1 0.2 04/82 Supervision X 04/82 1.0 2 2.0 05/82 Supervision XI 10/82 1.0 2 2.0 10/82 Supervision XII 12/83 1.0 3 3.0 - Completion 04/84 1.0 2 2.0 C6/84 Completion 06/84 0.2 1 0.2 07/84 Completion 09/85 2.0 4 8.0 08/86 GRAND TOTAL 114.7 a/ Many missions included the simultaneous supervision of other projects; figure shown is estimate of time spent on this project only.  (qk, 4'/  v PROJECT PERFORMANCE AUDIT REPORT MEXICO LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT (LOAN 1554-ME) EVALUATION SUMMARY Obiectives The town of Lazaro Cardenas came to face a chaotic social, environ- mental and urban planning situation as a result of the installation of a large steel mill (SICARTSA), which the Bank helped to finance under Loan 934-ME (PPAM, para. 1 to 10). The Government approached the Bank to assist in find- ing a solution to these problems (PPAM, para. 11). The project that followed was one of the earliest Bank projects to address urban problems, and the first of that nature in Mexico. It included (i) a shelter component (upgrading of 5,582 plots, preparation of 1,790 serviced plots, and self help shelter cons- truction loans); (ii) a productive activities component (construction of 5 industrial workshops buildings, 4 community centers, and loans for small enterprises and artisans); (iii) an infrastructure component (feeder roads and water control works on the Balsas river); and (iv) studies and technical assistance (PPAM, para. 15). The Fideicomiso Ciudad Lazaro Cardenas (FIDELAC) was the executing agency in charge. The project was to strengthen FIDELAC's finances and to be a catalyst to clear up a large debt owed it by SICARTSA. Under the project, FIDELAC was expected to turn into a self-sufficient, competitive developer, an example to be followed elsewhere in Mexico in implementing a new spatial policy and regional development strategy for the country (PPAM, paras. 2, 11, 12, 16, 35 and 36). Implementation Experience Loan effectiveness was delayed quite considerably by the Govern- ment's difficulty in complying with the condition that the loan owed to FIDELAC be paid off. Notwithstanding the delay, according to Bank supervision reports, the project appeared to get off to a good start and continued to progress much better than expected during execution (PPAM, paras. 19 to 25). On completion, however, it was realized that it had not been all that success- ful in achieving its objectives. Of the 5,582 plots to be upgraded only 2,858 were done; of the 1,790 serviced plots that were to be prepared only 1,319 were done; of the 5,300 self-help shelter construction loans only 1,803 were made; of the 176 small business loans only 134 were made at a cost of US$1.0 million, instead of the planned US$5.0 million; of the five industrial work- shops buildings none was done but a commercial shopping center was financed instead; the four community centers were built, but they were much larger than planned; of the seven feeder roads three were claimed to have been done but only one was completed, another was missing 10 km and the third was not built;  vi finally, the river control structures were not constructed as planned and had to be completed with funding outside the project (PCI, para. 4.1 and Annex 1, 3 Table 2; PPAM, para. 26 and Table 1). Project Results Despite the project's failure to produce but a portion of the re- sults expected, the PCR estimates the ..ate of return to have been 23? (PCR, para. 5.3 and Annex 1, Table 6), compared to a rate of 242 expected at apprai- sal. The Audit has reviewed the calculations and concludes that the estimate is questionable (PPAM, paras. 28 to 33). In addition, the project did not achieve the financial and institutional objectives expected (PPAM, paras 34, 35 and 36). Although the project fell significantly short of providing the benefits promised at appraisal, it did provide, in the face of great diffi- culties, housing and other services to a considerable number of people. Costs may have been high (PCR, paras 4.2 to 4.4) and the economic yield comparative- ly low (PPAM, paras. 34 to 36), but Lazaro Cardenas and the nearby town of Guacamayas are, in spite of their many remaining problems, better off now than they would have been without the project (PPAM, paras. 37 and 38). Findings and Lessons The Audit agrees with the PCR that the project was over-ambitious in its objectives. In the process of reaching for the larger objectives with which the Bank approached the project, the immediate tasks at hand were ne- glected, their execution was supervised leniently and, as a consequence, the whole project veered off course (PPAM, paras. 38 and 45). FIDELAC's institutional instability contributed significantly to the project's difficulties. While in general the Bank usually seeks the greatest institutional stability for project agencies, this is not always possible, particularly with strong and important Borrowers (PPAM, para. 47). Moreover, because of structural shortcomings, FIDELAC does not seem to have been the best institution with which to reach the goals set for the project. In the view of the Audit these inadequacies should and could have been foreseen by the Bank before engaging in the project (PPAM, para. 48) 5/. 5S The Government and the Borrower, in general, agree with this assessment although they point out that FIDELAC had no control over the institu- tional and political events that contributed to the project's difficult- ies. They also point out that the Bank shares in the joint responsibili- ty for the results observed (see Annex I, General Comments, para. 2).  I PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT (LOAN 1554-ME) I. BACKGROUND A. The Environment 1. Lazaro Cardenas, named after Mexico's president from 1934 to 1939, is located on the mouth of the Balsas River, the borderline between two of Mexico's least developed states - Michoacan and Guerrero. It used to be a small, bucolic, rural town on the Pacific Coast with a hinterland endowed with rich natural resources (iron ore, fertile land, water and forests). 2. In the 1960s a dam (La Villita) and a hydro power plant were built on the Balsas, and plans to exploit the iron ore deposits were drawn up. The closeness of the ore (19km), the existence of a natural harbor at the mouth of the Balsas, and plentiful water from the river and power from the new plant were strong inducements to undertake the development. But, exploiting the iron ore was to be more than that. The Government intended to process the ore at a steel mill which would be the first, and key, industrial concern to be placed in the area and would trigger the development of other industries which, together with the construction of a deep water industrial harbor and employment in the service sector, would propel the area into becoming one of Mexico's principal growth poles. Growth poles were the cornerstone of a new Government spatial strategy to attract development away from established urban centers. They would be new cities provided with a substantive industrial base and with industrial parks for future development. The strategy was expected to relieve congestion in Mexico City, Guadalajara and Monterrey, and distri- bute living standards more homogeneously among regions. 3. The steel industry project was ambitious, not so much because of its size (although it was the largeet irndustrial pruject underraken in Mexico to that date), but because the plant was to be erected in a remote and undevelop- ed area, in a town that lacked most, if not all the infrastructure needed for such a complex undertaking. 4. The Bank first became involved with the steel industry project in 1971, when the newly created Siderurgica Lazaro Cardenas-Las Truchas S.A. (SICARTSA) had completed pre-feasibility studies and was seeking financial assistance to carry out the multi-million dollar project. The Bank appraised the project in late 1972 after a number of additional studies were completed. The appraisal was centered on the technical, financial and economic feasi- bility of the project. Despite the massiveness of the undertaking, little attention was devoted to its social, environmental and local implications.  2 5. The project included the development of the iron ore and limestone mines, construction of a crushing and concentrating plant near the mines, construction of a slurry pipeline to transport the concentrate from the plant to the steel works, a pelletizing plant, a battery of coke ovens, a blast fur- nace for the production of pig iron, a steel making plant with two oxygen converters, three billet casting machines and two rolling mills. It was estimated that over 7,000 workers would be needed to build the mill and that a work force of about 4,000 would eventually be employed permanently. All these people were to be accommodated in a sparsely populated and unserviced town. It could therefore have been foreseen that the pressure for housing and social services would become severe. However, these matters were not perceived as directly related to the steel project and were consequently disregarded. The feeling at the time was that shelter and other urban services would either be generated without intervention, or could eventually be taken care of through conventional programs. 6. To carry out one of these conventional housing programs the Federal Government created a Trust Fund in 1973, the Fideicomiso Ciudad Lazaro Carde- nas (FIDELAC). It was made responsible for planning and constructing houses on a 696 ha lot ceded to it for the purpose. FIDELAC was also to ensure that other services were provided (water, sewerage, power, streets, refuse collect- ion) in a coordinated way. However, responsibility for the respective servi- ces remained with the line agencies. 7. The steel mill project was completed somewhat behind schedule in 1976. FIDELAC's housing program, however, was not carried out as expected, by 1976 only 25Z of the houses were completed. The reason was FIDELAC's poor management, weak planning, poor accounting practices, lack of internal infor- mation, coordination and control. Simi'ar constraints affected the provision of the other urban services as each agency took actions on its own without much concern for the overall goal. Moreover, housing programs in Mexico had traditionally not been well tailored to the means of the intended beneficia- ries, and FIDELAC's was no exception. The few houses that FIDELAC built catered mostly to middle income households and not to the large numbers of low income workers that flocked into the area. As a result, large squatter set- tlements, lacking services and minimal hygienic facilities, sprung up. 8. Operation of the steel mill compounded the urban problems of Lazaro Cardenas. The rather primitive road system of the area became grossly inade- quate for the traffic intending to access the steel mill, and congestion became widespread in Lazaro Cardenas, and in the neighboring communities of Guacamayas, La Orilla and other little towns along the way to SICARTSA. SICARTSA, in turn, paid no land, territorial or property taxes and made no effort to help defray the increasing costs of public services and housing for the thousands of workers who were attracted to the mill and the area general- ly. 9. This disorganized, degraded urban environment caused widespread dissatisfaction in the population, including SICARTSA's own employees. Absen- teeism and staff turnover in the comra:ny, at all levels, became (and still  3 are) very high, and as a result SICARTSA has had to maintain a iach la*x. wor-kforce than expected, further contributing to the housing shoriage 6/. 10. Environmental degradation could only be expected to worsen with further development. At the time, expansion of the port, construction of an industrial park for small and medium industries, installation of a fertilizer plant were already decided, and several other industries were known to be considering moving to the area. Finally, growth in the service sector was expected to compound the housing, water supply, sanitary, waste disposal and other problems. The Bank, as a major financier of the steel mill first, and some of the other projects later, notably the port expansion and the fertili- zer plant, failed to foresee in time the urban problems which would flow from the development of the mill. B. The Project 11. To cope with this chaotic situation, the Government approached the Bank for assistance in finding a solution 7/. To the Bank this appeared as an interesting opportunity, as it had growing concerns about Mexico's spatial (regional development) policies, in particular about Mexico City's urban congestion. At the time, the Bank was in the process of studying this prob- lem, and the reasons why decentralization had not, up till then, been very successful 8/. Accordingly, the Bank saw the project more as an opportunity to improve the spatial distribution of growth in the country, than as an answer to the plea for help from one community. Spatial policy was emphasized 6/ The Government and the Borrower do not agree with the view that absente- eism was a factor in generating the housing problem. They believe that the rural urban migration was at the root of the problem (see Annex I, Specific Comments, para. 2). 7/ The Government and the Borrower point out that the Bank was invited to participate in the project in order for it to share in the experience of the first urban development program in Mexico and in order to rely on the technical assistafiCe Llhe BDuLk could offer (Annex I, Specific Comments, para. 4). 8/ Three significant pieces of research were completed about that time: "Economic Development of the Isthmic Region of Mexico' (World Bank Report 1080-ME, March 1976) which was a review of regional development policies and how they could be applied to a specific region; 'Urban Development in Mexico' (World Bank Report 1449-ME, January 1977); and "Spatial Develop- ment in Mexico' (World Bank Report 1081a-ME, January 1977). The reasons for the lack of success of decentralization policies were reviewed in 'Spatial Development in Mexico." The conclusion was that the industrial parks and new cities program was not as powerful an instrument of decen- tralization as expected. Unfortunately the reviews did not produced ex- plicit recommendations on what to do and, therefore, despite the conclu- sions of the study, preparation of the project continued.  4 4wa;n proajct preparation and the contents of the regional plan for the Lazaro Cardenas Area as well as institutional arrangements to carry out the plan featured high in it. Two other concerns of the Bank were housing stan- dards and cost recovery policies. Both became important aspects in the pro- ject's design (SAR, Chapter I, section D and para. 6.14). 12. The Mexican Government, for its part, saw the project in a much more practical light. It wanted to use the project to (i) reduce housing plot sizes and construction standards, to build cheaper houses for families that, so far, had been excluded from shelter programs in Mexico; (ii) make loans to those who could still not afford the cheaper dwellings; and (iii) broaden the economic base of the area by building industrial premises and financing loans to small enterprises and artisans. These two sets of concerns (the Bank's and the Government's) were eventually married in the project which became an urban development project in a regional development context. 13. Project preparation proceeded swiftly. Project components were tailored to take care of the housing backlog in the area, and the demands of an expanded steel mill (SICARTSA Stage II was about to be initiated, again fi- nanced partly by the Bank, under Loan 1308-ME, June 1976 9/). The project was to comprise four major components (i) basic infrastructure (upgrading of existing plots and building of more serviced plots including water, sewerage, electrification, and access roads); (ii) social infrastructure (health and nutrition centers, training centers, community centers, aad erosion control works on the Balsas river); (iii) productive investments (industrial premises and small business loans); and (iv) technical assistance and studies. Project costs were estimated to be about US$91.0 million and a loan of about US$50.0 million was recommended. 14. However, plans to expand SICARTSA fell through. The Ministry of Public Works then proposed to trim down the project quite considerably giving priority to urban upgrading, the serviced housing plots, industrial loans, and infrastructure that did not depend on SICARTSA's expansion. After the SICARTSA expansion was dropped the Bank was unconvinced of the need for the project. But, the problem of providing shelter and urban services for the more than 30,000 low income families that had migrated to the area remained critical. 15. The view that the project was still necessary eventually prevailed in Mexico and Washington. A more modest project with a total cost of US$36.2 million was designed and appraised. It included (i) a shelter component (up- grading of 5,582 plots, preparati..n of 1,790 serviced plots, and self help 9/ That project too was appraised without much regard for its local impact. It was expected that the urban project being discussed concurrently would take care of the additional needs imposed by the expansion of the mill. The Bank's involvement with the urban project was considered assurance enough that problems in the provision of social services would be taken care of.  - b- eltet enttruction lo*nls) 1f; fit) a productive activities component (cons- truction of 5 industrial workshops buildings, 4 community centers, and loans for small enterprises and artisans); (iii) an infrastructure component (feeder roads and water control works on the Balsas river); and (iv) studies and technical assistance. 16. Despite FIDELAC's poor track record it was felt preferable to im- prove it than to create a neat Master Trust as proposed earlier. However, a new General Manager, a financial manager and an invc ment specialist were hired, and operational and administrative changes wer. wiade to correct past deficiencies. In particular, FIDELAC was directed to become a self-financing developer, rather than just a channel for disbursing Government funds. It was also mandated to recover all project costs from beneficiaries. Thus, the costs of shelter upgrading, serviced plots, construction loans, small enter- prise loans, and of the industrial pr>mises were all to be recovered through charges and fees. The Agency was not expected to repay the funds provided it by the Government or by the pro' -t; instead, the revenues were to create a fund to continue activities after the project was completed. 17. FIDELAC as executive agency in charge of the project was to carry out directly the shelter and productive activities components (about half the total expected costs), and contract the feeder roads and the studies not rela- ted to the Lazaro Cardenas region with the Ministry of Works (SAHOP), the river control works with the Ministry of Agriculture and Hydraulic Resources (SARH), and the studies directly related to the region with the Lazaro Carde- nas Conurbation Commission (CONURBAL). Because the project was expected to be a model for national programs based on similar premises, particular emphasis was placed on the creation within FIDELAC of a monitoring and evaluation unit to keep continuous track of field progress and experience. 18. A US$16.5 million loan to support the project was approved in April 1978. II. PROJECT IMPLEMENTATION 19. Loan effectiveness was delayed by Government difficulties in com- plying with a condition that a large loan owed to FIDELAC by SIrA.RTSA be paid off. Financial projections prepared in the Bank indicated that this was necessary to ensure FIDELAC's financial soundness and independence from Go- vernment budgetary contributions. After eight months of dela,y the Bank accep- ted instead assurances that the debt would be paid off later. The loan was then made effective in February, 1979. However, even though the Bank 10/ There is a minor discrepancy between Table 2 in Annex 1 of the PCR and the Audit's accounting of what was to be done (PPAM, Table 1). In the PCR all plots for which titling regularization was to be done were coun- ted as plot upgradings; however, there were 1,178 more regularizations than actual plot upgradings. Thus, the total number of upgradings was only 5,582 and that of regularizations 6,760.  6 threatened to suspend loan disbursements, and FTDTLACs external audltors made numerous criticisms about the situation, SICARTSA has, to date, not paid the debt. 20. The delay notwithstanding, the project was reported to have made a good start. Even before the loan became effective significant progress was noted in Bank superviiion reports on all components. In November 1979, a year and a half after project approval, progress was said to have been "better than expected.' In June 1980, the first supervision report with comparative fi- gures vis-a-vis appraisal expectations (see PPAM, Table 1) showed better than anticipated progress for the shelter component, the feeder roads, the communi- ty centers and the CONURBAL studies. Delays were reported in the industrial premises component, the small business loans, the river control works and the SAHOP studies, but things were said to be improving. Shortly after that, in October 1:80, progress figures on the more active components (the urban upgra- ding and the construction loans) were downgraded somewhat, but the project was still considered to be making very satisfactory progress. It was noted in the supervision report that FIDELAC's external auditors had refused to certify the 1978 statement of accounts partly because of deficient controls over the construction loans, but the issue was downplayed. The construction loans com- ponent was described as the most successful in the project, one that the Porrower wanted to expand. 21. In December 1980, FIDELAC's top management and most of the senior staff were replaced. A supervision mission in July 1981 reported that as a result of the staff changes significant improvements were being introduced in FIDELAC. Although there was confusion about the number of serviced plots completed and those for which costs would be recovered (863 vs. 122 respec- tively), about the cost of the feeder roads (on which little progress had been made beyond some studies), and about the river control works (which had not yet started but on which cost estimates had already more than doubled), the project was considered to be making good progress. 22. In December 1981 the project was considered to be progressing well. Some components were reported to have exceeded targets (urban upgrading in particular), others previously delayed were said to be making good progress (e.g. small enterprise loans), and accounting deficiencies (the reason of the auditor's challenge) were being corrected. Yet, in March 1982, FIDELAC's top management and key staff ware changed again. 23. In May 1982 a supervision mission reported that targets had been reached or surpassed, and that most project components were nearly or fully completed. Yet, the report also said that the community centers, the small enterprise loans component, the SAHOP and CONURBAL studies and the river control works were behind target. 24. In the October 1982 supervision report, a considerable downgrading of achievements was shown, particularly in the number of plots upgraded, the serviced plots completed, the number of construction loans made, and the number of small enterprise loans made. The studies component was said to have made little headway, particularly the SAHOP studies, and the river control  7 ort**. while underway, were reported to be still far from finished. Yet, the project was declared substantially completed. 25. In June 1983, a guideline for the preparation of the Completion Report was sent to FIDELAC, and by November a draft report had been produced. A Bank mission visited Mexico to review the draft. It concluded that defi- ciencies in the information collected for the report made it necessary to hire a consultant and prepare an improved version. In May 1984 a follow-up mission found that the consultant had not been hired for lack of funds to pay for the services. Eventually the consultant was hired under the subsequent Bank project (the Second Urban Project, Loan 1990-ME) and paid partly with proceeds of that loan and partly by PACDU, the program financed under that Loan. By November 1984 the consultant had written a detailed report. That report was later submitted to the Bank as the Borrower's Completion Report (BCR) and was the basis on which the Bank's Project Completion Report (PCR) was drafted. 26. There was, thus, considerable difficulty throughout the period of project execution in establishing the exact status of the project. Supervi- sion reports in particular, gave a somewhat conflicting, and perhaps unduly sanguine picture of the situation as against the salient features of it. Such limitations may well have affected the capacity of the Bank to react to prob- lems as they arose 11/. III. PROJECT RESULTS Physical Achievements 27. According to the PCR the project did not achieve its physical objec- tives: of the 5,582 plots to be upgraded only 2,858 were done; of the 6,760 plots for which titling was to be regularized only 2,858 were done (in fact, the same ones that were upgraded); of the 1,790 serviced plots to be prepared only 1,319 were done; of the 5,300 self-help shelter construction loans only 1,803 were made; of the 176 small business and artisan loans 134 were made and US$1.0 million instead of the planned US$5.0 million was spent on them; of the five industrial workshops buildings none was built but a commercial shopping center was financed instead; the four community centers were built but they were much larger and expensive than planned; of the seven feeder roads three were claimed to have been done; and the rivet control structures were insuffi- cient and only partially done (PCR, para. 4.1 and Annex 1, Table 2; see also PPAM, Table 1). These findings were essentially confirmed by the Audit. However, during the field visit the Audit also found that of the three feeder 11/ The Government and the Borrower point out that the scheduling of Bank supervision missions was poor and that frequently their terms of refer- ence were not known to the Borrower. This, in their view, affected the success of the missions because the information on the status of the project was not always readily available (Annex I, Specific Comments, para. 5).  8 road;s claihed to have been built fPCR, pera. 4.5) only one *e &etuelly completed (La IJnion-Coahuayutla), another was partially built (Los LLanos-La Cuadrilla of which the last lOkm are missing) and the third (Los Coyotes- Guacamayas) was never put in place 121. The Tabachines shopping center claim- ed to have been constructed under the project had, in fact, been built earlier with FIDELAC's own resources. Although the building did not fit the descrip- tion of the Project Agreement, the Bank agreed to have the funds used to refinance part of the costs of the center when loan proceeds intended to finance the industrial workshops could not be used for that purpose (because FIDELAC had problems finding land on which to put the buildings). Finally, according to the Borrower Completion Report (BCR), the vehicles purchased with loan proceeds (an afterthought not included in the Loan Agreement), could not be located or were not being used for the intended purpose. Economic Impact 28. At appraisal project components with a significant amount of civil works (urban upgrading, sites and services plots, feeder roads, river control works) were estimated to be likely to yield an average economic rate of return of 24Z (Staff Appraisal Report para. 7.10). Yet, the lack of documentation on how the rate was calculated (the Report does not explain and there are no records on the subject) does not allow to audit the project in similar terms. 29. On completion, despite the evident failure of the project to produce the results expected, the PCR estimates the rate of return to have been 23? (para. 5.3 and Annex 1, Table 6) citing the Borrower Completion Report as source. The economic analysis of the PCR was based on the BCR and not on its own independent calculations. The Audit has reviewed the estimate in the PCR and concluded that it is questionable. 30. A rate of return of 26% was estimated in the PCR for the housing component of the project (urban upgrading and preparation of serviced plots) based on costs and benefits valued at local market prices. The fact is, howe- ver, that there is no active local real estate market in the Lazaro Cardenas area as FIDELAC holds a tight, monopolistic control over the ownership, use and disposal of land once it is built up. Indeed, it is the sole landowner of about 860 ha around Lazaro Cardenas and 225 ha in Guacamayas, and was given exclusive right to subdivide, develop and build up these large pieces of real estate. It has held to this privilege by allowing citizens to be eligible for just one property in a lifetime, and by not selling any part of its holding to 12/ The Government and the Borrower have requested that a reference to the condition of what exists instead of the road not be included (Appendix I, General Comments. para. 4). The fact remains though, that what exists is a natural track which cannot be travelled regularly by motorized vehicles.  private developers. The ostensible reason for these limitations is to prevent the use of the subsidized properties for speculation 13f. 31. Thus, in assessing the cost of the housing component, for purposes of calculating the economic rate of return, land was valued nominally at just US$50 per plot, as the real economic value of the plots was not known. Simi- larly, in the absence of concrete information about the benefits of this com- ponent it was measured by proxy as the difference in the rent of improved vs. unimproved plots assuming that the former was more than seven times higher than the latter on account of the project (1978Mex$1500 per month vs. 1978 Mex$200). Thie PCR gives no background to substintiate the estimate. Given the shortage of housing in the area, the Audit estimates that benefits are likely to be higher than estimated. Thus, since both costs and benefits are likely to be highe,t than accounted for in the PCR, there is no certainty that the rate oS returr on the investments in urban shelter was in fact what was estimated in the PCR. 32. A rate of return of 19Z was estimated in the PCR for the investments in feeder roads based on assuming that all roads were built, and that 35Z of lands within 10km on each bide of the roads would benefit from theit construc- tion. The fact is, however, that only one of the roads was completed, that another is missing 10 km. and that the thifd was not done. The two roads that were fully or p.-tially built are along narrow valleys in mountainous terrain. The valleys are scarcely a couple of kilometers wide, and no significant eco- nomic activitv takes place in them. This not only makes suspect the benefits claimed to be associated with the roads, but makes questionable the rationale for building them in the first place. The attempt to reach La Cuadrilla from Los Llanos seems to have been particularly questionable as the locality was already connected to the trunk network via El Zapote, a shorter and better road than the project would have built. Judging from traffic estimates on the Coahuayutla to La Union road (less than 10 vehicles per day) few benefits have been derived from that investment. This project component, therefore, appears unlikely to have an acceptable rate of return. 33. The Audit finds that, rather than the roads that were built under the project, it might have made more sense to build the road from Guacamayas to Los Coyotes to connect Guacamayas' hinterland to the town. Because FIDELAC owns the urban land in Guacamayas and has not developed it at the pace of demand growth, newcomers have had to opt for settling, legally or otherwise, beyond the town limits. If the road had been built, it would have been these settlements that the road would have served. In addition to these, mostly illegal settlements, thle road would have traversed smallholder properties which produce the basi staples for Guacamayas and Lazaro Cardenas and are presently only accessile crosscountry, in good weather, and then at a very high cost Not building this road was a missed opportunity; it would have had 13/ The Government and the Borrower point out that FIDELAC's control over land in the area was established because (i) no other company could compete with it in this field, and (ii) the limited purchasing power of the population in the area made subdividing unattractive to private developers (Annex I, Specific Comments, para. 6).  : ~~~~~~~~~~~~10 a sizeable impact and FIDELAC, centinuously short of funds, is not likely to be aTble to build the road in the near future. 34. A rate of return of 23Z was estimated in the PCR for the river control works on the assumption that the works carried out under the project (construction of a culvert dike and some dredging of the right bank of the river) were the only ones necessary to stabilize the flow of water on the river and ensure a regular supply for SICARTSA (the planned benefits, SAR, para. 7.16). However, as it turned out, additional works were indispensable to reach that objective. These additional works (notably, another dike be- tween the La Palma and El Cayal islands, and a control structure to channel water to the steel mill) and those that were planned but not done under the project (e.g. redirecting the El Barco creek), were subsequently undertaken without project firancing at an unknown cost. Yet, only costs financed under the project were included in the economic analysis; thus, the total investment that was necessary to reap the benefits was much larger than accounted for, and the rate of return, therefore, significantly lower than estimated in the PCR. Financial Impact 35. The project was expected to be a catalyst to clear up FIDELAC's receivables, in particular the large debt owed it by SICARTSA. The debt has not been paid and, thus, the project failed to achieve this objective. 36. Together with reducing the outstanding receivables, the project was also expected to help strengthen FIDELAC's finances by setting up adequate mechanisms for recovering costs. This would turn the agency into a self- sufficient real estate developer. The project failed in all these tasks. FIDELAC's financial position has continued to be weak, mostly because no effort was mad-, during project implementation or subsequently, to recoup investment costs. It has therefore continued to depend on Government allo- cations for its activities, and, as such funds have been limited, FIDELAC has been unable to keep up with the needs of the area. Institutional Achievements 37. Finally, the project was not successful as a model for regional development: it did not produce an improved institutional set up for regional development, and it failed to create a model for a self-sustained decentrali- zation and urban improvement process. 38. Nevertheless, the project did help the area. By supporting FIDELAC, the project supported the only institution in a position to provide housing and other social services in Lazaro Cardenas and Guacamayas. FIDELAC was, in fact, the alternative created by the Federal Government to bypass the lack of capacity and financial expertise of the local Municipality. The political and economic support FIDELAC received from the Federal Government turned it, rightly or wrongly, into the most powerful local institution, one that over- shadowed all others (municipal or state) and to which the local population  turned in their plight for housing and other services (water, **"rag. tEreets, trash collection). Although far short of expectations, FIDELAC succeeded, with the assistance of the project, in providing houses and basic services for many people. 39. While the broader objectives with wnich the Bank approached the pro- ject were not achieved (a national decentralization policy, regional develop- ment, cost recovery, model institutions, broadening the economic base of the region), a more modest but certainly meaningful impact has been reached. Cost may have been high (see PCR, paras. 4.2 to 4.4 which shows that costs were considerably higher than expected) and the economic yield comparatively low, but Lazaro Cardenas and Guacamayas are, in spite of their many remaining problems (housing, water supply, refuse collection and others). better off now then they would have been withouS the project. In comparative terms, they are better off than many other small and medium sized Mexican cities which have grown very rapidly in the last few years and have not had the benefit of Bank assisted projects (e.g. Minatitlan, Coatzacoalcos and many others). What went wrong? 40. Why did the project go as far off course as it did. The BCR pro- vides an unusually candid assessment of the subject. According to it, the project never got off to the promising start described in Bank supervision re- ports. From the very beginning, the BCR says, FIDELAC was unable to adequate- 'y monitor its activities, and therefore to identify, much less correct, defi- ciencies. The Audit agrees with the BCR's indictment, that both BANOBRAS (as Trustee) and the Bank (as the periodic overseer of project execution) are responsible for not recognizing this shortcoming. 41. The upbeat supervision reports that the Bank received did not iden- tify the problems which, it is now evident, existed at the time. This, in turn, may have been caused by the inadequate, incomplete, or erroneous infor- mation with which FIDELAC was working. Still, however, Bank missions should have been more careful to reconcile figures with facts. 42. In particular, Bank missions should have been less sanguine about the location of FIDELAC's headquarters in Miexico City, 800 km away from Lazaro Cardenas. In the view of the Audit, this was, for a considerable period of time, until the agency's top executives were moved to Lazaro Cardenas, one of the principal reasons for the poor control which FIDELAC's management exer- cised over the project. 43. The frequent changes in FIDELAC's top management did not help to im- prove the performance of the institution. As it often happens in many coun- tries, these changes were accompanied by a full turnover of most technical and support staff. Institutional instability, appears to go a long way in explaining the failings of the project. 44. However, in addition, FIDELAC had a structural characteristic that further helps explain project results. It was set up as a public monopoly and its management appears to have seen the role of the institution as an exten-  12 sion of the public welfare system, rather than as that of an fnterprioUn developer. FIDELAC's management appears to have perceived its role (and still largely does) more as the administrator of public expenditures and the guar- dian against speculators, than as an efficient provider of the services it was supposed to render. In fact, FIDELAC as a monopolistic public enterprise had no incentive to be any more efficient and effective than it was, either financially or operationally 14/. The only potential check that existed against inefficienev was the Bank's oversight, but this was quite lenient 15/. 45. The net result of the project was the creation of a politically powerful FIDELAC that has overshadowed the Municipal and other local Govern- ment, that has a stranglehold on land and its development, lacks efficiency in dealing with the demand for housing -nd other community services, has genera- ted, but at the same time coped with high levels of discontent in the local population and, thanks in part to the project, has made those favored with houses within the confines of its holding, comparatively better off than they would have been otherwise. IV, CONCLUSIONS 46. The Audit notes that the PCR mission was in Mexico during the 1986 earthquake and that as a consequence, not only did considerable information on the project get lost, but the mission's task was considerably hampered. The Audit was also confronted with data deficiencies which could not be overcome. Inevitably, therefore, reports on this project are more limited than ideally desirable. Nevertheless, the Audit emphasizes that maintenance of reliable project records in the Bank is essential to effective project management and this project would have benefited from better in-house record-keeping. Stili. the record suffices to permit the formulation of several important conclu- sions. 47. The main Audit findings are in line with those of the PCR. Basical- ly, the project did not meet its goal because the main implementing agency, FIDELAC, was not capable of overcoming its institutional and political cons- traints. The framework within which the project had to be carried out was not fully considered and consequently, important actors such as the municipalities and beneficiary groups were left out. However, the project must also be viewed in the context of existing circumstances, in particular, the political and social conditions of Mexico and the critical situation in Lazaro Cardenas. Bank staff take the iew that, under the circumstances, the Bank really cnly had the choice betw en being involved in a difficult project or not being involved at all. 14/ For a more detailed discussion of this subject see PCR paragraphs 4.6 to 4.17. 15/ The PCR has a different view on this issue, see paragraphs 4.20 to 4.22.  48. The Audit does not agree that those were the only alternatives. The Audit believes, as does the PCR (paras. 6.1 to 6.4), that a simpler, less ambitious project would have had a much better chance of succeeding. Instead of keeping goals modest and confined locally, the project was expected to transcend regional boundaries and become a model for the nation. In the process of reaching for this goal, problems with the immediate tasks at hand were not recognized, and as a consequence, the whole project veered astray. 4