Mexico - Second Solid Waste Management Project

Document of The World Bank FOt omF AL US 0OY ;-/I 3 7<i2 -) Repm?t N. P-6301--N MEMORAM D RECOMMENDTIO OF T PRESIDENT OF THE INTERNATIONAL BANK FoR RECONSTRUCTIOl AND 1EVEPNT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIEVAENT TO US$200 MILLION BANCO NACIOL DE OBRAS Y SERICIOS PUBLICOS WITH THE GuARANTEE OF THE uNITED MICAN STA1ES FOR A SECOND SOLID WASTE MANGMT PRJECT MAY 16. 1994 MICROGRAPHICS Report No: P- 6301 MX Type: MOP This document has a resticted distribution and may be used by recipients only in dte perfonce of dhr officia dutes. Its contents may not odtewe be disclosed without Wwrld Ban auoatdon.  CURRENCY EQUIVALENS Currency Unit = Peso (Mex$) US$1.00 = 3.3 Pesos (as of Ma 1, 1994) FISCAL YEAR January 1 - December 31 UNIlS OF WEIGIS ND MEASURES Metric US Equivalent 1 meter (m) = 3.28 feet (ft) 1 Idlometer (Ian) = 0.62 mile (mi) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton (m ton) = 2,205 pounds Qb) I liter (1; = 0.26 gallons (gal) 1 cubic meter (m) = 1,000 liters (1) ABBREVIATIONS AND ACRONYMS BANOBRAS Banco Nacional de Obras y Servicios Pdblicos (National Bank oi Public Works and Services) CAS Country Assistance Strategy CETES Certificado de la 1esorerfa de la Federaci6n (Mexican Government reasury Bill) CONAPO Consejo Nacional de Poblaci6n (National Population Council) CPP Costo Porcentual de Captaci6n Bancaiia (Average Cost of Funds Index) GOM Govenment of Mexico ICB Intenational Competitive Bidding INE Instituto Nacional de Ecologfa (National Ecological Institute) LCB Local Competitive Bidding NGO Non-Governmental Organization NTP National Training Program PAR Performance Audit Report PCR Project Completion Report PFPA Procuradurfa Federal de Protecci6n al Ambiente (Office of the Attorney General for the Protection of the Environment) SEDESOL Secretarfa de Desarrollo Social (Ministry of Social Development)  FOR OFFICIAL USE ONLY MECO SECOND SOID W.WSTE MANAGEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Obnas y Semicios Pdblicos (BANOBRAS) Guarantor. United Mexican Sta;es Executing Agenqy & Benefciaries: BANOBRAS, Secetarfa de Desarrollo Social (SEDESOL), and states and municipalities. Amount: US$200 million equivaent. Temis: Repayment in 15 years, including five years of grace, with interest at the Bankes standard varable rate. elnding Trmins: BANOBRAS would onlenid loan proceeds to participating municipalities and stames in Mexican pesos at the Mexican Govemment Ukeasury Bill (CETES) rate or the banking system's average cost of funds (CPP), whichever is higher, plus two percentage points, with maturities of up to 15 years, including grace periods of up to three years. Fimancing Pin: Local Foreign. Total -135$ millions- Bank 34.7 165.3 200.0 Government of Mexico (GOM) Contribution 155.5 - 155.5 Local Government Contnbution 6p.Q - 60.0 Total 250.2 165.3 415.5 Economic Rate of Return: Not applicable. All subprojects would be subject to least cost analysis. Staff Appraisal Report: Report No. 12848-ME dated May 16, 1994. hMp: IBRD 25666 Fbverty Category: Not applicable. The project is expected to have a significant iWpact on povert through the extension of service to marginal areas in cities which otherwise would not be able or willing to provide garbage collection. The project also includes schemes to improve the living and working conditions of garbage scavengers, one of the poorest and most vulnerable sectors of urban society, many of whom are women with children, through: (i) their resettlement from open dumps or inadequately maintained landfills which will be closed or rehabilitated under the project; (ii) irwestment3 for more ognized recycling activities; and (iii) training to open up other employment opportunities. LThis document has a resticted distruton and may be used by recipients only in the pefoman of their offlcl dutes. Its contents may not oeise be disclosed withou Woild Bank auhonzo  MEMORANDUM AND RECOMMENIDTION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMVNT TO THE EXECUTIVE DIRECWORS ON A PROPOSED LOAN TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS FOR A SECOND SOLID WASTE MANAGEMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to Banco Nacional de Obras y Servicios Publicos (BANOBRAS) with the guarantee of the United Mexican States for the equivalent of US$200 million to help finance a Second Solid Waste Management Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 15 years, including five years of grace. 2. Background. During the last several decades, Mexico has been urbanizing rapidly. Approximately 61 percent of the population now lives in urban communities with a population greater thar. 10,000 inhabitants. Urban growth rates h-ave been particularly high in many intermediate and secondary cities, partly as a response to changes in the location of economic activities. At the same time, successive Mexican administrations have initiated reforms to enhance the participation of state and municipal govemments in the provision of basic services and the protection of the environment. These developments have placed greater demands on municipalities. Nowhere is this pressure greater than in the solid waste sector. 3. Collection, transfer and disposal of solid waste are inadequate in most cities in Mexico. Collection is often erratic, coverage is limited and equipment fleets are antiquated and poorly maintained. Of total solid waste generated (over 60,000 tons per day), it is estimated that only 15 percent is properly disposed of, primarily due to poor management or absence of sanitary landfills. Of the 97 existing controlled final disposal sites, only 11 can be considered as technically functional landfills and these face important operational problems. Uncollected waste is burned, left in the streets or discarded in open land or waterways. Clinical wastes, including infectious wastes, are also improperly collected, treated and disposed of, presenting serious public health risks. 4. Solid waste services have generally been cffered free to households by the municipalities although payment of gratuities to collectors is widely pract.-d. Over-staffing of municipally- managed services is common and operating and maintenance costs are rarely disaggregated from the costs of other municipal services. One consequence of limited resources is that some poor and marginal areas do not receive solid waste collection service. Inadequate facilities and management as well as scavenging for recyclable materials adversely :mpact landfill operations as well as waste collection. Scavenging also presents serious health risks to the scavengers and their families. Preliminary estimates indicate that approximately 4,500 persons are engaged in garbage scavenging in the twenty-three cities expected to be covered under the project. Their activity is low in productivity and operates in the informal sector without federal or local policy guidance or planning. Formal sector recycling efforL are minimal. A number of municipalities have turned to private firms in order to improve service but the municipalities have little or no experience in arranging service contracts, awarding concessions and monitoring compliance with  -2 - contract conditions. Consequently, performance standards under such arrangements are neither satisfactorily established nor adhered to and the expected levels of effic;ency are rarely if ever achieved. 5. Development of the legal and regulatory framework for solid waste management is not as advanced in Mexico as in other sectors such as water and sanitation. At the federal level, responsibility for sector pianning, policies and enrvironmental regulation and enforcement rests with the Secretariat of Social Development (SEDESOL) and its autonomous agencies: the National Ecological Institute (INE) and the Offlce of the Attomey General for Protection of the Environment (PFPA). SEDESOL's recent restructuring in early 1993 helped place in a single organizational unit the primary responsibility for solid waste management issues. Comprehensive standards for the sector do not exist, with current federal standards limited to toxic and hazardous wastes and incineration air quality. BANOBRAS, the urban infrastructure development bank, plays an important role in channeling financing to municipalities and providing technical assistance. Article 115 of the Mexican constitution, as modified in 1983, gives municipalities i=ir alia the responsibility for management of public services, iiicluding the collection and disposal of solid waste. The states, nevertheless, retain authority for approving tariffs, establishing autonomous operating agencies, granting concessions and other commitments superseding the three-year period of municipal administratiot- 6. The extent and quality of solid waste services vary from city to city, but most are affected by common problems. These inciude: (a) weak institutions at the federal, state and local levels; (b) limited availability of professional staff with adequate technical, financial and managerial skills; (c) insufficient service coverage and lack of controlled final disposal which has led to clandestine dumping and surface and groundwater pollution; (d) little or no cost recovery which has not permitted sustainable investments; (e) an undeveloped regulatory framework and inadequate analysis and monitoring of environmental impacts of solid waste investments; and (f) scavenging by individuals and fiamilies for reusable materials which has made movement to modern waste systtms difficult because of the inefficiencies caused during the collection and final disposal processes. 7. In its broadest form, the Government's strategy for halting environmental degradation and remedying past problems is articulated in its Plan Nacional de Desarrollo: 1989-1994 and Prorana Nacional ara la Proecci6n del Medio Ambiente. More specifically, the Government has decided to embark on a national program of financial ana technical assistance to medium cities for improving solid waste management and has requested the support of the Bank for this program. The major elements of the Government's policy towards the sector ir.clude: (i) development of federal standards and their adequate enforcement; (ii) continued support for the process of decentralization and encouragement of an integrated approach to municipal investments in the sector; (iii) increasing local technical and administrative capacity and developing autonomous operating agencies; (iv) the use of federal grant financing as an incentive to encourage municipal participation in the national program and offset the impact on tarift of the high investment cost of immediate movement to complete and integrated municipal solid waste systems; (v) full cost recovery through tariffs or other user charges adequate to cover  - 3 - operating and maintenance costs, debt service for solid waste investments and contribution to future capital needs, with an emphasis on sustainability of investments; (vi) addressing the problem of scavengers on system efficiency and minimizing the social impact of system modernization; and (vii) promoting greater private sector involvement in the delivery of solid waste services. 8. Rationale for Bank Involvement. The proposed operation is consistent with the Banlks Country Assistance Strategy (CAS) for Mexico to be presented to the Board with the Northern Border Environment Project (Report No. 6287-ME) on June 9, 1994 in parallel with this project. The strategy aims at assisting Mexico to keep its economic restructuring process on track, while supporting programs that contribute to poverty reduction, improved environmental management and long-term sustainable economic growth and development, particularly through investments in human resources, infrastructure and natural resource management. The strategy also aims to push the reform process downward to the subnational (state and municipal) level and support the further devolition of expenditure and revenue responsibilities to these local governments. The proposed project responds to the Govemment's increased priority for taclding Mexico's serious environmental problems, especially in the context of greater decentralization of decision- maling and local spending authority. The project complements and reinforces Bank operations such as the Environment Project (approved 1992) and the proposed Northem Border Environment Project in their institutional support for key agencies involved in environmental protection activities. The project is also closely linked with the Medium-Cities Urban Transport Project (approved February 1993), the proposed Second Water and Sanitation Project and a State and Municipality Management Project under preparation which support the strengthening of local goveinments to design and implement urban infrastructure investments and to develop adequate management and financial capacity. The Bank is well-placed to provide assistance because of its failiarity with local government and environmental issues and its past experience in the sector and its ability to support, through its country dialogue and project financing, the rfborms needed to improve solid waste services and safeguard the environment. 9. Project Objective& The main objectives of the proposed project would be to: (a) improve solid waste services and extend their coverage in participating medium size and priority cities; (b) strengthen the capacity of BANOBRAS and SEDESOL to appraise and supervise solid waste projects and provide technical assistance to municipalities and states; (c) increase technical, administrative and regulatory capacity at the state and local levels to improve sector management and operations; (d) improve the legal and regulatory framework and cost recovery mechanisms of the sector to encourage greater private sector involvement and safeguard the environment; (e) correct environmental problems and reduce health hazards caused by inadequate collection and disposal systems; and (f) mitigate the social impact .'n garbage scavengers of the establishment of modern waste collection and disposal systems. 10. Project Description. The project would have three main components: (i) strengthening of federal institutions, local governments and operating agencies which play a key role in development of the sector; (ii) supporting the investment needs of participating cities through implementation of comprehensive and integrated solid waste management plans; and (iii)  - 4 - providing support for scavengers and informal workers impacted by the prqect through a social component. TWenty-three cities with an aggregate population of about 11 million are expected to participate in the project. 11. The Institutional Strengthening Component (US$24.7 million) would finance technical assistance to improve the capacity of federal agencies involved in the development and implementation of sector policies and regulations; of states to regulate solid waste services and of municipalities to strengthen their management and regulatory capacity as well as to fulfill eligibility criteria for investments subloans. The SEDESOL subcomponent (US$14.2 million) includes the financing of consulting services and equipment to: (a) strengthen SEDESOL's capacity to promote, evaluate and supervise subprojects and assist municipalities and states in system design and operation and preparation of social action plans; (b) implement a strengthening progrm for environmental management of solid waste to: (i) develop federa standards for solid meste; (ii) introduce state and municipal regulations for solid waste through preparation of model regulations, and technical assistance to three states on a pilot basis; (iii) develop manuals for state and municipal environmental assessment and control of solid waste disposal systems; and (iv) strengthen federal environmental enforcement capacity; and (c) carry o';t studies to: (i) develop a national recycling strategy through analysis of markets, prices and incentives for recycling, the downstream environmental impact of recycling and a public awareness campaign; and (ii) prepare integrated solid waste management plans. The BANOBRAS subcomponent (US$0.9 million) would finance consultants, training and p'irchase of equipment to strengthen the capacity of the Solid aste Subdivision and state delegations to review the financial and economic viability of subprojects, assist municipalities in financial management and monitor subproject execution. The local government subcomponent (US$9.6 million) would finance: (a) technical assistance to municipalities or states to improve their solid waste planning and management capacity and prepare final engineering designs and environmental impact assessments; and (b) development and implementation of a National Thining Program (NTP) to increase state and local government technical, environmental, regulatory and administrative capacity. 12. The component foi Investment Support for Implementation of Integated Solid Waste Managmn Plans (US$384.7 million) would finance a line of credit through BANOBRAS for onlending to participating municipalities or their states for implementoolni of integrated solid waste management plans. Such plans would support: (i) full collection coverage, including marginal areas; (ii) waste storage in high density polyethylene containers with lids; (iii) a modern and appropriate collection vehicle fleet; (iv) least cost final eisposal facilities, including a minimum life span for sanitary landfills of 10 years when that is the selected alternative; (v) strict environmental pollution control measures, including landfill impermeabilization, leachate drainage and treatment, biogas control systems, vegetation buffer zones, separate handling and treatment of hospital wastes, and monitoring wells and surface runoff collection for water quality sampling and analysis; and (vi) closing of current dumpsites and their integration into the surrounding landscape. Th.e component would specifically finance: (a) civil works, such as construction of transfer stations, landfills, incineration plants, containment cells for hospital wastes, recycling and composting plants, access roads and dumpsite closing; (b) purchase of  - 5 - equipment, vehicles and spare parts for collection, transport and final disposal of solid waste, including hospital waste handled by the municipality; and (c) the construction and equipping of recycling stations near sanitary landfills to provide a sanitary, safe and efficient environment for garbage scavengers. Eligibility criteria for investment subprojects would be: (a) the municipaiity has established within its administrative structure an area responsible for managing solid waste services with separate accounts with independent auditing; (b) the municipality has committed to apply service charges to achieve full cost recovery; (c) existence of final engineering designs and a satisfactory social action plan; and (d) a satisfactory environmental impact assessment. Iechnical assistance to help municipalities in meeting the above eligibility criteria would be provided by SEDESOL and through technical assistance subloans, for which the eligibility criteria are that: (a) the municipality has a population greater than 80,000 inhabitants or has been identified as a strategic priority; and (b) the municipality has expressed interest in the program through a letter of intention to comply with project conditions. 13. The Social Component for Scavengers (US$6.1 million) would finance: (a) training in basic slklls, specialization in reccling and in other vocational areas, and basic health, nutrition and child care; (b) provision of basic infrastructure and building materials for self-help construction for families currently living in dumps which will be closed or transformed Lito sanitary landfills under the project; and (c) city-specific marlet studies for recycling. 14. Project Costs and ianalcing. The Bank loan is expected to finance about 48 percent of total project eosts. The remaining 52% would be funded through federal grants and municipal contributions. HANOBRAS would onlend the loan proceeds to subborrowers in Mexican pesos at a vanable interest rate not loaer than the Government Treasury bill rate (CETES) or the banking system's average cost of funds (CPP) plus 2 percentage points, whichever is higher, with a loan term of up to 15 years, including grace periods of up to three years. To partially offset the costs of the necessary supervision, BANOBRAS will include in the financing of each subloan an amount equivalent to four percent of the cost of civil works for each subproject, of which 70% would be retained by the municipality for supervision and 30% would be aaable to SEDESOL for the same purpose. Subborrowers would be eligible for separate subloans for technical assistance and investment. Funds provided through federal and municipal contributions, in cash or in kind, would be combined with loan funds and would be allocated according to a Poverty Index developed by the Government's National Population Council (CONAPO). Poorer municipalities will receive a higher proportion of funding as grants. The grants would allow tariffs to be set at a lower level and are reasonable given the high cost of immediate movement to comprehensive and integrated municipal solid waste systeims. The financing percentages would be reviewed and adjusted if necessary at the time of the project's mid term review to improve the project's targeting of federl grants to the poorer municipalities. Federal grant financing, which is expected to average about 35% of the program, is justified by environmental benefits arsing from expected improvements in solid waste management which tanslate in external economies that benefit the community at large. Retroactive financing of up to UTS$5.0 million is proposed for expenditures incurred after February 15, 1994. It will be used to finance consulting services for SEDESOL, and BANOBRAS for institutional gtrengthening and preparation of final engineering designs necessary for initial project start up. The breakdown  - 6- of estimated costs and the proposed financing plan are provided in Schedule A. The amounts and methods of procurement and the proposed alocation of loan proceeds are provided in Schedule R A timetable of key processing events and the status of Bank Group operations are presented in Schedules C and a. Also attached is the Staff Appraisal Report No. 12848-ME dated May 16, 1994. 15. Project Implementation. BANOBPRAS, the borrower and financial agent of the Mexican Government, would be responsible for carrying out the project. BANOBRAS would review and approve investment lubloans, be responsible for the financial aspects of procurement and for processing and negotiating subloan agreements. BANOBRAS would also be responsible for final evaluation of subpwojects. SEDESOL would serve as the normative and regulatory environmental agency and would be responsible for: (i) developing and applying sector policies and regulations; (ii) assisting municipalities in project preparation, construction and supervision of works; (J;i) providing technical assistance to municipalities to establish operating entities and administer newly developed solid waste systems; (iv) developing and implementing the national training program; and (v) implementing the strengthening program for environmental management. SEDESOL would contract the services of a consulting firm to assist in the evaluation and management of subprojects and technical support to municipalities. An NGO or consultants would al3o be contracted to handle implementaion of the social component for scavengers. PFPA would be responsible for initial and annual inspecuon of mnunicipal landfills with respect to environmental control measures for drainage and treatment of leachates and biogas venting and for ensuring enforcement of federal environmental regulations related to solid waste. SEDESOL and BANOBRAS have delegated much of the responsibility for day-to-day operations to their state representatives. Inadequate technical capacity in the state offices has been a problem under an oni,oing pilot project (see parm. 17 below). This issue is being addressed through the NTP to be financed under the project. The project's execution period would be 1994-99. The Bank would approve la an the firt five subproj,xts, subprojects with a total cost greater than US$10 million, subprojects for which states would be subborrowers and any subprojects wbich affect more than 200 scavengers. 16. Project Susanabil ty. Project sustainability depends fundamentally on the Mexica.n Government's continued commitment to environmental protection. It will be achieved by improved regulatory capacity at the national, state and local level, adopting adequate cost- recovery mechanisms, and expanding private sector imolvement, which is expected to result in significantly improved management. The NTP will help increase the technical capacity of local authorties and professionals involved in the sector. Subproject supervision will cover both construction and system operation. Service charges adequate to cover operating and maintenance costs and debt service for inveetments would be both an eligibility criteria for receiving subloans and a condition of default for subborrowse Financial and opeaing targets for the operating agencies vill be included as subloan covenants. 17. Lessons Learmed from Previous Bank Involvement. The Bank's only involvement in the sector to date has been the ongoing Solid Waste Management Pilot Project (Ln. 2669-ME for US$26 million) which was approved in 1986. The main lessons learned from the experience  - 7 - under the pilot project and a review of PCRs and PARs for urban projects in Mexico and urban projects in other countries which contain solid waste co-monents are: (a) the importance of developing integrated plans for municipal solid waste management to avoid a piecemeal approach to irriestment and ensure satisfactory environmental controls; (b) the need to have full cost recovery wo promote t!> sustainability of investments and efi :ent service delivy; (c) the elimination of competing sources of finance for solid wstae investments and provision of adequate counte!part funding; and (d) the avoidance of complex, multi-sectoral, multi- institutional projects. These lessons have been incorporated in the project's design, with particular emphasis on integTated solutions to municipal solid waste management and the use of full cost recovery and sustainable collection mechanisms. 18. Actions Agreed. During negotiations, agreement was reached on the following: (a) eligibility cri(eria for participating municipalities and onlepding conditions; (b) the n-ix of credit, federal grants and local govenment contribution based on the Poverty Index, and the commitment to provide adequate federal budget finance througbout the project; (c) the general content, organizational and implementation arrangements of the NTP; (d) the strengthening program for environmental management of solid waste, including the iming of prepartion and issuance of federal regulations and the inspection of municipal sanitary landfills by PFPA; (e) that all federal financing for municipal solid waste investments for medium size and priority cities would be provided under the same eligibility criteria and financial conditions as the proposed project; and (f) the project's implementation plan, including objective-oriented performance indicators. 19. Conditions of loan effectiveness would be that: (a) the Guarantor and BANOBRAS have provided to the Bank an executed contract, satisfhctory to the Bank, descrbing Guarantor/BANOBRAS transfers and relending procedures; (b) completion of final engineering designs for two non-conurbated cities; (c) hiring of the coordinator for the project's social component; (d) selection of three states for a pilot program of T.A. to establish and implement regulations for solid waste management and environmental assessment of solid waste investments; and (e) preparation of a project operation manual, satisIfctory to the Bank. As a condition of disbursement of investment subloans, all counterpart staff, including consultants, for SEDESOL and BANOBRAS, as described in their rewpective strengthening programs, will need to be in place. 20. Environmeut Aspects. The project has an "A" rating. Complete environmental impact assessments will be prepared as part of the integrated solid waste management plans to identify and include preventive and corrective actions which may be required in each of the financed subprojects to mitigate possible negative impacts. Environmental impact assessments for seven cities and a sectoral environmental assessment were completed and an Evironmental Assessment Summary was submitted to the Board of Executive Directors on February 2, 1994. The proposed project would resuilt in substantial environmental improvements in participating cities, as currently inefficiekit or nonexistent solid waste collection and disposal systems would be replaced by properly designed and operated ones. The project would introduce federal regulations governing the construction and operation of sanitary landfills and initial and annual  - 8 - inspections by the PFPA of environmental control measures. The capacity of SEDESOL and state agencies to r;onitor municipal compliance with envronmental norms would be strengthened through training and technical assistance. 21. Program Objective Category. The project is expected to have a significant impact on poverty through the extension of service to maginal areas in cities which othervise would not be able or willing to provide garbage collection. Thie project also includes schemes to improve the living and working conditions of scavengers, one of the poorest and most vulnerable sectors of urban socidAy, many of whom are women with children, through: (i) their resettlement from open dumps or inadequately maintained landfills which will be closed or rehabilitated under the project; (ii) investments for more orgnied recycling activities; and (iii) training to open up other employment opportunities. 22. Project Benefits. The project will improve solid waste services for an estimated 11 million people in the 23 cities which are expected to participate on a first-come first-served basis. The main benefits of the project will be better collection practices, improving urban environmental quality, and the replacement of open dumps with controlled sanitary landfills which will eLiminate leachate contamiation of surface and ground water resources, reduce possible public health effects and control disposal of dangerous commercial and industrial wastes in municipal sanitary landfills. Improved management of hospital wastes through specialized collection, equipment, appropnate disposal and training of municipal personnel will lower publhc health consequences from uncontrolled disposal of infectious and pathological wastes. The project will also strengthen the overall framework for solid waste management in the municipalities, establish norms arnd develop a regulatory and enforcement capacity in SEDESOL and promote full cost recovery, including operatons and maintenance, resulting2 in the sustainability of the investments. Private sector participation, which is expected to help to improve th1 efficiency of solid waste service, wwld be encouraged and supported through the investments made under the project, an improved regulatory framework, increased municipal experience with tariffs and concession agreements and the preparation and use of model bidding and contract documents. 23. Risks. The technology involved in the investments required for solid waste management is standard and does not present any unusual risks. The main risks to the project are: (a) weak institutional capacity at the local government level to op. rate and maintain the investments and the inherent difficulties which municipalities will face in introducing and maintaining adequate tariffs where previously none existed; (b) failure by SEDESOL and BANOBRAS to ensure that subprojects are of good technical quality and that subloan eligibility conditions and covenants are met in the face of pressures from state and municipal -wemments to lend; (c) resistance from scavengers in adapting to new solid waste systems; and (d) insufficient annual budgetary allocations to SEDESOL which would delay subloan commitments and technical support to municipalities.  - 9 - 24. The Government's commitment to develop and reform the solid waste sector serves as the over-arching element for mitigating the identified risks. In addition, these risks have been reduced through the project's design and the loan's conditionality. To address the risks related to execution of investments and operation of the new systems by the municipalities, the project includes a strong technical assistance component, extensive capacity building through the National Training Progrnam and support to municipalities and states for establishing and implementing regulations for solid waste under the strengthening program for environmental management. 'l ensure subproject technical quality and enforcement of eligibility criteria the project incl- es instituional strengthening progams for SEDESOL and BANOBRAS. The use of the integi4ted plans that take into account all components of municipal solid waste services, technical assistance to help municipalities meet the project's eligibility criteria and the operating and financial parameters to be agreed for sublo3n agreements for each city would all serve to reduce this risk further. The risk related to the role of scavengers in the new systems is mitigated by the social action plans to be prepared and assistance to be provided under the project's social component as well as a strong public participatory process. The risk related to adequate federal budget for the project will be addressed through annual consultations prior to the Government's budget cycle to identify federal financing requirements for the following year and through usage of budget monitoring indicators. Inadequate counterpart funds would be a condition of default of the Bank loan. Close supervision combined with the annual ana mid term reviews will permit the Bank to address implementation difficulties and any budgetary issues that may arise. Given the above actions and loan conditionalities, the above risks are acceptable in view of the substantial project benefits. 25. Recommendation. I am satisfied that the proposed loan would comply with the Article of Agreement of the Bank and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. May 16, 1994  - 10- Schedule A Page 1 of 2 Mexkto Second Solid Waste Management Project Estimated Project Costs 'US$ millions) iLocal DMei!o L Instiutional Strengthening SEDESOL Capacity Building 5A 2.5 7.9 Strengthening Program for Environmeatal Management 2.0 0.2 2.2 Studies 0.9 1.6 2.5 BANOBRAS Capacity Building 0.5 0.2 0.7 Local Government Strengthening Technical Assistance 3.8 1.5 5.3 National Traing Program 1.5 1.0 2.5 SUBTOTAL Part I 1. Zu I Inves*ment Support for Implementation of Integrated Solid Waste Managment Plans Civil works 122.3 88.7 211.0 Equipment 41.0 47.4 88.4 Land 5.1 - 5.1 SUBTOTAL Part 11 AU4 136.1 304.5 mL Social Component for Scavengers Infastructure 2.3 - 2.3 Technical Assistance, Training 2.9 - 2.9 and Studies SUBTOrAL Part m _ TOTAL BASE COST 187.7 143.1 330.8 Physical Contingencies 18.7 14.4 33.1 Price Coningencies 12.2 7.8 20.0 TOTAL (excluding taxes) 2l8.6 165.3 383.9 Taxes 31.6 - 31.6 TOTAL COST 2S02 , , _  - 11 - Scbhdule A Page 2 of 2 Mexico Second Solid Waste Management Project Phoect Flnancing Plan (US$ millions) Bank 34.7 165.3 200.0 48.1 GOM Contribution 155.5 - 155.5 37.4 Local Government 60.0 - 60.0 14.5 Contribution TOTAL 250.2 165.3 415.5 100.0 % of Tbtal 60.2 39.8 100.0  - 12 - Page 1 of 2 Mexico Second Solid Waste Management Project Procurement Ageme (US$ miions) Works A. Civil Works 52.0 220.2 6.1 278.3 (52.0) (11.5) (1.0) I/ (64.5) iGood B. Equipment/Materials 102.7 S.0 4.8 112.5 (102.7) (S.0) (4.8) 2/ (112.5) Tebica;el Asdstasee C. (J) Engine.riAg Design - - 5.8 5.8 (5.8) (5.8) (!i) Institut Strengthening - - 13.4 13.4 (11.7) (11.7) (i) Studies - 2.7 2.7 (2.7) (2.7) (iv) Training Con- ltant1 - 2.8 2.8 (2.8) (2.8) Ibtal 154.7 225.2 35.6 415.5 (154.7) (16.5) (28.8) (200.0) NOTE. Figures in parenhws are anounts to befinanced by ihe propsed Bank Loan 1/ To be procured uing local shopping. 21 Incudes US$0.3 miton uang locd shopping and US$4.5 milWon axung Lmitd Inlterona Rn8g X/ Cows:ung services to be provided in accordance wit Bank guielines.  - 13 - Schedule B Page 2 of 2 Mexico Second Solid Waste Management Project Allocation of Loan Amount and Percentage to be Filnanced 1. Equipment and Matedals for 650,000 90% Institutional Strengthening 2. Subloans for Implementation of 160,000,000 in the case of subloans, Integrated Solid Waste 50% of the amounts Management Plans disbursed by BANOBRAS 3. Consulting Services, Thaining and 17,000,000 100% Studies, including Subloans for Telchnica! Assistance 4. Unallocated 22,350,000 I btal: 200,000,000 Disbursement Schedule Bank Fiscal Years (IJS$ millions) 1~~ 19 Annual 0.0 10.31/ 42.5 46.7 57.1 33.2 10.2 Cumulative 0.0 10.3 52.8 99.5 156.6 189.8 200.0 1/ Includes US$5 million in initial deposit to Special Account and up to US$5 million in retroactive financing for eligible expenditures incurred after February 15, 1994.  - 14- Schedule C Mexico Second Solid Waste Management Project Ilmetable of Key Project Proceing Events (a) ISme taken to prepare: 14 months (b) Prepared by: BANOBRAS, SEDESOL and consultants with Bank assistance (e) First Bank mission: March 22, 1993 (d) Appraisal mission departure: February 2, 1994 (e) Negotiations: May 11, 1994 (1) Planned date of Effectiveness: September 1994 (g) List of relevant PCRs and PARs: Loan No. PCRJPAR Date HOpWt No. 1990-ME Second Urban Development Project. Jan. 93/June 93 12087 1186-ME Medium Cities Water Supply and Sewerage Project Dec. 92/June 93 11448 1913-ME Second Medium Size Cities Water Supply and Sewerage Project Dec. 92/June 93 11448 2281-ME Third Medium Size Cities Witer Supply and Sinaloa State Water Project Dec. 92/June 93 11448  -15 - Schedule ) Page l of3 Mexico Second Solid Waste Management Project Status of Bank Group Operations in Mexico A. Statement of Bank Loans (As of March 31, 1994) 107 loans fullydrbumaed134. Of which SECALS, SA,sb Pramm Loans, and Interest Support ' La 1929-ME 1981 BANOBRAS RaiaylV149 La- 2331-ME 1983 BANCOM8EXT 34xpot Dvelopnent3 La 2882-M8 1988 BANCOMEXT TradePolhcyLoanll 500. Lu. 2918-ME 1988 NAFIN Agrcultual Sector Loan 300.00 La 3159-ME 1990 BANCOMXT Ineest Support Loan 1.260.00 ILa 3207-ME 1990 BANOBRAS Road Transport & Telecom 380.00 Lu- 3087-ME 1989 NAFIN Industrial Sector Policy 497.51 Lnu 2745-ME 1987 BANCOMEXT Trade Policy Loan 498.63 La 3086-ME 1989 NAFIN Public Etrse Refonn 499.39 L 2m-ME 1987 BANCOM8XT Expot Development II 246.37 Ln- 2919-ME 1988 NAFIN FartilizerSecto, 240.20 Lu- 3309-ME 1991 BANCOMEXT Export Sector 25.0 Lu. 3357-ME 1991 NAFIN Agicltral Scto Adjutntw 1 400.0 Subtotal 5.346.31 Lu- 2526-ME 1985 NAFIN Chiapas Agriculual Dev. 58.00 3.22 Lu- 2575-ME 1985 BANOBRAS Railways V 300.00 3.28 Lu- 2658-ME 1986 NAFIN Agricultural Dev. Prodeith n 88.30 39.38 Lu- 2666-ME 1986 BANOBRAS Municipal Strnhning 40.00 17.34 Lu 2669-ME 1986 BANOBRAS SolidWasteManagtPilot 25.00 10.91 Lu- 2824-ME 1987 BANOBRAS UrbanTransport 90.98 24.49 Lu- 2858-ME 1987 NAFIN Small/Medium-Scale Indstly IV 100.00 20.14 Lu- 2875-ME 1987 BANOBRAS HighwyMaintenance 135.00 2.78 L 2916-ME 1988 NAFIN Steel Sector Restructuring 321.01 69.21 Lu 2946-ME 1988 BANOBRAS Pots Rdabilitafion 50.00 4.17 Lua 3047-ME* 1989 NAFIN Intral Restruring 250.00 33.51 Ln. 3083-ME 1989 NAFIN Hyrelectric Development 460.00 89.95 Ln. 3085-ME 1989 BANCOMEXT Fin l SecorAdjustment 487.14 0.73 Lu- 3115-ME 1990 NAFIN Fores-tyDevelopment 45.50 35.98 Lu- 3140-ME 1990 BANOBRAS Low-lncm Housing 350.00 40.13 Lu. 3141-ME 1990 NAFIN Agicultral Mketing I 100.00 0.49 Lu- 3189-ME 1990 NAFIN Transmission&Distribution 450.00 108.65 La 3208-ME 1990 BANOBRAS Tdeonmm Technical Assistance 22.00 3.5 Ln 3271-ME 1991 BANOBRAS WaterSupply&Sanitation 300.00 21.217 Lit 3272-ME 1991 NAFIN Basic HealthCare 180.00 94.18 La. 3310-ME 1991 NAFIN DeoR ntralization&Rgonal Develp. 350.00 111.89 La 3358-ME 1991 NAFIN Technical Training in 152.00 101.42 Lt- 3359-ME 1991 NAFIN Mni-gSectrR--tor _g 200.00 114.39 Lta 3407-ME 1992 NAFIN PnmaryEducatio 250.00 148.29 La 3419-ME 1992 NAFIN Irlgation & Drainage Sector 400.00 234.84 La 3461-ME 1992 BANOBRAS En lronmna 50.00 37.84 Lu. 3465-ME 1992 NAFIN Agricultural Techlnologr 150.00 141.21 Lu- 3475-ME 1992 NAFIN Science & Tec diloinflauucture 189.00 167.42 Lu- 3497-ME 1992 BANOBRAS Ho-ingMaket 450.00 231.13 Lu- 3518-ME 1993 NAFIN 8nha Education S0.00 71.98 Lu- 3542-ME 1993 NAFIN Labor Masket & Prod. Enhancment 174.00 145.76 Lu- 3543-ME' 1993 NAFIN TranspoctAirPollutionControl 220.00 220.00 Lu- 3559-MEw 1993 BANOBRAS MedmmnCitesTrasport 200.00 188.01 L 3628-ME 1993 BANOBRAS HihwayRhab. & Traffic Sfety 480.00 405.65 La. 3704-ME h 1994 NAFIN On-Farm and Minor Irigat Newok 200.0 200.0 La. 3722-MEn 1994 NAFIN PrimaryEducation 412.0 412.0 Total 21,224.65 3,554.4 Of which has been repaid 6,490.43 Total now held bythe Bank 14,734.22 Amount sold& 92.34 Ofwhichhasbeenrepaid 92.34 3,554A 3,554.4 Total Undisbused # Appoveddringor after FY80 * SAL, SECAL, or Progrn Loan  - 16- Schedule D Page 2 of 3 Mexico Second Solid Waste Management Project Status of Bank Group Operations in Mexico B. Statement of IFC Investments (As of March 31, 1994) ...~ .. .. .... 195V/59 Industrias Perfect Circtle SA/a Industrial Equipmnt 0.80 - - 0.80 1958 Bristol de Meico, SA/a Aircaft Engine Overhaul 0.52 - 0.52 1961 Aceros Solar .SA/a Twist Drills - - 0.28 028 196215/6/8 Fundidora Montemr, SA/a Steel 230 21.44 - 23.74 1963 TubosdeAcerodeMe,Mco StailessSteelPipes 0.71 0.10 0.19 1.00 1963 Quimica del Rey. SA/a Sodium Sulphato 0.07 - 0.68 0.75 1964166 Industria del Hieo, SA Constuction Equipment - 1.96 - 1.96 1970 MtnetadelNorte/a ItonOrfe lning 0.75 - 0.75 1.50 1971 Celanese Mefica, SA /a Textiles 8.00 - 4.00 12.00 1972 Promotoa Papcl Per., SAde CV/a Pulp & Paperlb 0.03 - 0.03 1973t79 Cementos VetaCru, SA/a Cement 1135 4.50 15.85 _ 1974/81 CanounAristos Hotel/a Tourism 1.00 0.30 - 1.30 1975/78 Mexino SA/a Stainless Sted 12.00 3.18 - 15.18 1978/81/84 Papeles Ponderosa, SAl/a Pulp & Paper 6.16 5.00 4.50 15.66 1978 Terefftlatos MCdcanos, SA/a Petocheinicals 19.00 - - 19.00 1979/81/87 Hotel CammnoRealL=apa, SA Tourism - 4.20 - 4.20 4.20 1979/84 Empresas TolteW SA /a Cement 30.00 7.95 138.00 175.95 1979 ConductwesMontmey, SA Elecicalirae& Cable 8A1 - 13.0 21AI 2.56 1980 Indusias Resistol. SA/a Particle Board 8.00 - 17.00 25.00 - 1980 Vidrio Plano de Mexico, SA Flat Glass 15.00 - 99.90 114.90 0.90 1980 Minera Real de Angeles, SA/a Mining 30.00 - 80.00 110.00 - 1981/86 Celulosicos Centauro, SA/a Pulp & Paper 15.50 - 44.00 59.50 - 1981 Corporacion Agroindustial. SA Aiusiness 6.30 3.00 5.00 14.30 - 1984 Capal Goods Facility/a Capital Goods Fancing 34.00 66.00 100.00 - 1984/88 Metalsa, SA Auto Chassis 8.00 1.40 - 9.40 1.88 1985 Proteison. SA de CV/a Agribusiess 2.00 0.77 - 2.77 - 1985 Prom. ialusaes Mecanu SA Petrochemicsj 32.00 4.40 36.40 16.10 1986/88 CdluL y PapeVDurngo, SAde CV Pulp & Paper 10.00 3.07 - 13.07 13.06 1987 Agromax(AESA)/a Veg.&FmitPomcemasig 1.50 0.50 - 2.00 - 1989 Cicasa Constr. Guar. Fac /a Cons't Guantee Facility 20.00 - 20.00 1987 InustriasSulfamex SAde CV s/ Chea. & Petrocheminls 2.00 0.50 2.50 - 1988 Sealed Powe do Mexico Aute Assembly 9.00 - 9.00 2.25 1988 CrescentMarketAggegaes Consbuction Materials 73.00 - - 73.00 48.23 1988 Apasco, SAde CV Cement Const Mals. 46.00 - - 46.00 20.08 1991/92/93 Apasco, SAdeCV/c Cement tCosL Mails. 49.91 - - 49.91 10.00 1994 Apasco, SAde CV /c Cemet & Const MatL 10.00 - 40.00 50.00 10.00 40.00 40.00 1988 Sigma Alim, SA de CV (Salumi) Food A Food Pcessing 20.96 2.00 22.9 5.00 1989/92 Polimir(ABS) SA de CV Petrochmical 19.10 - 19.10 12.49 1989 Grupo Fensa/Visa Consumer Goods 80.00 27.60 107.60 79.08 1989 BaneaSedfin Devopment Fmance 60.00 - - 60.0 56.00 1989 Cementos mxicanos Cement&Coest Mat 60.00 8.00 68.00 15.71 1990/91 Condumex, SAde CV/c Eletomanufturig 35.00 9.54 18.00 62.54 30.63 14.40 1990 Indipro,SAdoCV Petrchemcas 27.00 - 3.00 30.00 27.00 2.25 1990 Banco Nacional de Mexico Development Fnance 60.00 - . 60.00 44.82 7.50 2.40 1990 Bancomer Credit Line DevlopmentFmance 20.00 - - 20.00 17.33 1991 MexicoF und /a Money Capal Markets - - 6.57 6.57 - 1991 Petocel SA Chemt & Petochemicals 32.00 32.00 32.00 - 1991 VitroPlotado,SA deCV Glass &RlatedMn ft 25.00 - 101.00 126.00 25.00 88.38 1991 Vitro,SA Ohlss& RdahdMnftg. - 10.17 8.04 1821 10.17 - 1992 CelulardeTelefonia, SAde CV Telecommunicatios 15.00 1.00 37.00 53. 16.00 37.00 4.00 1992 Grpo Indust.Bimbo,SAdeCV Bakery 25.00 75.00 100.00 25.00 75.00 1992 AislantesLeon,SAdeCV BatteryManu&ctming 10.00 7.03 - 17.03 * 10.00  -17- Schedule D Page 3 of 3 . V .... ... .. .* .. *K u l J 1992/93 Grupo Posadas, SA de CV Tourism 20.00 37.22 57.22 20.00 33.50 1992 Grupo Financ. Probursa, SA de CV Development Fmace - 7.50 7.50 7.50 - 1992 Banco Merntil del Nore SN.C. Development Finnco 20.00 20.00 20.00 10.30 1992 MexzcoCityTohucaTollRoad Trmnsport&Storage 13.75 - 13.7S 9.76 - - 1993 Mastrpak SA de CV TextileslPackaging 12.00 28.00 40.00 12.00 - 2.00 1993 ColulosayDenivados SAdeCV Texliles/Packaging 11.00 26.00 37.00 11.00 1.00 1993194 Grupo Operador de Terminaes Industrsl Services 4.00 2.00 6.00 12.00 6.00 2.24 Martmas. SA (GOTM) 1994 Cidesa Chem. &Petrochemicls 15.00 8.00 42.50 65.50 23.00 42.50 57.50 1994 Airum Holler Financial Services 0.98 0.98 0.98 - - Total Gross Commitments /d 1,062.09 129.21 918.52 2,109.82 Lss: cancelatonso Terminations. Repayment & Sales 501.42 74.71 530.17 1.10630 Net Commitments Now Helde/ 560.67 54.50 388.35 1,003.52 615.17 388.35 119.44 Pending Commitments: Indelpro, SAde CVII Chm. & Perochemicals - 6.00 6.00 Kapta Development Finance 9.85 - 9.85 Bancomer Mgt Dcvelopment Fmance 0.15 - 0.15 Metalsa Auto Chassis 18.00 6.00 24.00 48.00 CTAPV Infiastructure 5.00 2.00 - 7.00 Totl Commitment Held and Pending Commitments 604.67 72.50 435.85 1,113.02 Total Undisbunsed Commitments 29.58 0.00 43.86 73.44 a/nvesments which have been ifuly cancelled, tetminated. wn oft sold, redeemed, or repaid. b/USS25,000. c/Excludes placments of S30.0 millioa (Apasco) $20.0 million (Vitro) and $19.8 milion (Condumex) d/Consists of approved and signd projects (including undorwiting, but axluding swap nsacsions i.e.a Banca Sedin US6.5 million, Indelpro $6.0 million, Banamex S40.0 milion and Grupo Posadas 11 S6.5 million). adHeld Commitments consist of disbused and undisbursed inwestnts.  I RD 2566d i .xica~ ' K wUNITED STATES OF AMERICA tS~~~~~~~~ . H. V.--- -%~~~~~~~~V ~ - > t ) w 8,f,, ' gO1N COr\R , <1> t ((t XHmJ